A new A.M. Best special report has found that 65% of US life/annuity (L/A) insurers and 60% of US property/casualty (P/C) organizations have cut their investments in hedge funds due to high fees that have been aggravated by below-market returns, and the forced liquidations of many funds.
This situation produced five consecutive quarters of net outflows from hedge funds, the study found.
The Best’s Special Report, “Insurers Continued to Pull Away From Hedge Funds in 2016,” using year-end 2016 data from NAIC statutory financial statements, found that the insurance industry’s investment allocations to hedge funds declined approximately 28% to just under $18 billion in 2016, from $25 billion in 2015.
The shift away from hedge funds by insurers was led by the life-annuity companies, which saw a 42% decline to $8.3 billion in 2016, from $14.2 billion in 2015. While not as drastic, the property-casualty segment fell by about 10% to $9.1 billion from $10.2 billion over the same time period. Meanwhile, the health segment had total hedge fund holdings below $1 billion.
The study found that only five of the top 20 insurers investing in hedge funds increased their allocations from 2015 to 2016.. Of these, one insurer increased its allocation as the result of a reclassification of the investments, as opposed to strategically investing new money in hedge funds.
Of the insurers, American Investment Group (AIG) held the largest hedge fund portfolio, but still liquidated more than $4 billion out of hedge fund investments in 2016. This accounted for more than half of the insurance industry’s reduction. Metlife also cut its hedge fund exposure by eliminating more than $600 million in fund investments.
The A.M. Best report found that hedge fund exposures remain minimal as a percentage of insurance industry capital and surplus for each of the three industry segments. The study found that while most hedge fund investors cited underperformance as a main reason for decreasing their exposures, there are limited attractive alternatives to invest in the current low-return environment. Still, A.M. Best said it expects many of the proceeds from insurers’ hedge fund portfolios will be invested in more traditional investments, such as investment-grade corporate bonds and/or commercial mortgage loans and common stock.
Tags: AM Best, Hedge Fund, insurance