Market Overview

Best's Special Report: Insurers' Pullback From Hedge Fund Investments Persist


The U.S. insurance industry continued to reduce its risk appetite for
hedge fund investments, as holdings declined year over year by 8.5% to
$16.4 billion from $17.9 billion in 2016, according to a new A.M.

The Best's Special Report, titled, "Insurers and Hedge Funds—The
Pullback Continues," notes that it was the second straight year that
insurers pulled back from its hedge fund investments. In particular, the
life/annuity sector halved its hedge fund holdings in the two-year
period, to $7.0 billion in 2017 from $14.2 billion in 2015.

In first-quarter 2018, overall hedge fund performance was volatile,
ending in a 0.35% return. However, insurers' top two strategies,
multi-strategy and long/short equity, posted negative, albeit
marginally, returns for the quarter.

The property/casualty segment also cut back its hedge fund investments,
by 4%, to $8.8 billion in 2017 from $9.1 billion in 2016. The health
segment's holdings have been flat at around $600 million for the last
three years; however, holdings are concentrated, as nearly a dozen
health insurers invest in this asset class. Given the larger scale of
its investment portfolios, the life/annuity segment typically has more
dollars invested in non-traditional assets, but the property/casualty
segment has held more hedge fund investments than its life/annuity
counterparts in each of the last two years.

Individual annuity writers have been the driving force behind the
pullback, with their hedge fund holdings declining by nearly
three-quarters over the last two years.

The report notes that overall hedge fund exposure as a percentage of
capital and surplus for each of the three industry segments is minimal.
Although the life/annuity segment holds the largest exposure, it
declined to 1.8% in 2017 from a high of 3.7% in 2015 in the most-recent
five-year period. Similarly, property/casualty exposure has declined to
1.1% from 1.4% over the same period. Given the sub-par returns in the
past few years, A.M. Best would not be surprised to see a continued
pullback from direct investments in hedge funds as companies try to ride
out the volatility on the sidelines.

To access the full copy of this special report, please visit

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