US insurance industry continues to reduce hedge fund exposure

Written by Adam Cadle

20/05/2020

The US insurance industry has reduced its hedge fund investments for a fourth straight year, by $2.6bn in 2019 to $11.9bn, with the property/casualty segment reporting a year-over-year reduction of 22%, the largest among the major industry segments, according to AM Best.

AM Best's report, entitled Insurers Continue to Reduce Hedge Fund Exposures, stated that the continued pullback leaves the property/casualty segment with $6.3bn of hedge fund investments. The life/annuity segment (L/A) saw a fourth straight year of reductions of more than 10% (11.9% in 2019 to $5.1bn).

The health segment’s holdings also ticked down by roughly $100m to approximately $490m; however, hedge fund holdings are concentrated, as fewer than a dozen health insurers invest in this asset class. The report noted that the 2019 declines occurred despite the hedge fund industry posting a return of more than 11%, just the second time industry returns have exceeded double digits in the last six years.

Insurers’ hedge fund investment trends have followed the broader market, according to the report, as more than $97bn in total hedge fund asset flows were pulled back in 2019.

Companies rated by AM Best account for nearly 96% of the US insurance industry’s total hedge fund holdings. Additionally, hedge funds are held predominantly by larger organisations, with more than 85% of holdings held by companies with $1.25bn or more in capital and surplus.

“Overall, rating units that reduced their holdings did so by almost $2.9bn, while those that increased did so by $1m,” said Jason Hopper, associate director, industry research and analytics, AM Best Rating Services.

“Many insurers continue to say they are not getting the returns needed for the fees and capital requirements costing them in the current environment.”

Insurers continue to modify their hedge fund investment strategies, with some notable changes in 2019. They substantially pulled back from long/short equity hedge funds, with book-adjusted carrying value declining by nearly $2bn, the largest pullback. The health segment all but eliminated its exposure, while the life/annuity segment reduced its exposure by 56%, and the property/casualty segment by 36%. Multi-strategy also saw a decline of over $600m, though it remains one of the two top options for all segments.

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