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US life insurers continue to reduce hedge fund investments

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For a third straight year, the US insurance industry as a whole pulled back from hedge fund investments, by roughly USD2 billion in 2018 to USD14.4 billion, with the life/annuity segment reporting a year-over-year reduction of more than 18 per cent, the largest among the major industry segments, according to an AM Best special report.

The new Best’s Special Report, titled, “Life Insurers Continue to Reduce Hedge Fund Investments,” states that the life/annuity segment cut its hedge fund holdings to USD5.8 billion in 2018 from USD7.0 billion in the previous year, and from USD14.2 billion in 2015. The property/casualty segment also shrank its hedge fund investments for a third year, pulling back 7.6 per cent to USD8.1 billion in 2018 from USD8.8 billion in 2017. The health segment’s holdings remained steady, at approximately USD600 million. The decline in hedge funds holdings is due to strategic investment decisions rather than any nuanced reclassification. The pullback has been widespread, as more than one and a half times the number of companies decreased holdings than increased. On a gross basis, companies that reduced their holdings did so by almost USD2.7 billion, while those that increased did so by just USD673 million.

Hedge funds also are held predominantly by larger organisations: Companies in the largest financial size category – those with capital and surplus of USD2 billion or more – hold nearly 85 per cent of hedge fund investments. In contrast, companies with less than USD1 billion in capital and surplus hold just over 3 per cent of industry holdings. Thirteen of the top 20 largest hedge fund investors in the insurance industry cut their holdings in 2018, accounting for more than 56 per cent of the industry’s net pullback. American International Group, Inc. remains the largest holder, accounting for almost one-fifth of the industry’s exposure, and it reduced its holdings to USD2.8 billion in 2018 from USD2.9 billion in 2017 and from USD8.5 billion in 2015. Prudential Financial Inc. is the second largest holder, having continued to increase its holdings, to USD1.6 billion from USD1.4 billion in 2017.

Multi-strategy and long/short equity hedge funds remain the two most popular strategies for all three insurance segments, although to varying degrees, and account for more than two thirds of the industry’s hedge fund holdings. Sector investing also remains an attractive option for insurers, as it remains the third-largest allocation for the life/annuity and health segments, and fourth largest in the property/casualty segment.

Although higher-rated insurers have the capital and expertise to better absorb the risk, AM Best continues to monitor hedge funds trends, as well as alternative investments as a whole. AM Best also regularly reviews capital charges to ensure appropriate treatment of this asset class.

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