Best’s Special Report: Hedge Funds Remain an Option for Some Insurers

In 2020, the life/annuity and property/casualty insurance segments increased their exposures to hedge funds, leading to an overall 6% increase in insurance industry investments, according to the latest AM Best report.

The new Best’s Special Report, “Hedge Funds Remain an Option for Some Insurers,” notes that during 2020 the hedge fund market did not fall as far as the public markets and recovered more quickly and efficiently. Several qualities made hedge funds attractive to investors during the pandemic, including risk diversification and a low correlation to other asset classes. The hedge fund industry still lost approximately $44.5 billion in asset flows in 2020, according to the report, but that is nearly half the amount pulled out in 2019. Asset flows were positive under multi-strategy, with an addition of $9.5 billion, and a $2.9 billion increase in equity strategy allocations—the two strategies most popular among insurers. Although the number of insurers’ hedge fund holdings continued to decline in 2020, the book-adjusted/carrying value (BACV) increased for the first time since 2015, to $12.3 billion in 2020 from $11.6 billion in 2019.

The life/annuity segment raised its dollar exposure in hedge funds 5.8%, to $5.4 billion, and the property/casualty segment, 5.5%, to $6.6 billion. However, the health segment continued to pull back on its modest concentration in these investments, leaving with approximately $320 million in holdings, compared with $490 million in 2019.

Twenty rating units accounted for 87.7% of the industry’s hedge fund exposure in terms of BACV.

A majority of those rating units have expanded their holdings since 2019, while seven have continued to pull back. Nevertheless, investments in hedge funds are not that prevalent in the insurance industry as a whole—fewer than 80 U.S. rating units have hedge fund investments.

Just over 95% of the rating units that invest in hedge funds have either an A-level Best’s financial strength rating with the superior (60.6%) or excellent (34.5%) rating descriptor. The remainder fall in the lower-rated categories. Higher-rated companies are better equipped to manage the elevated risk inherent in hedge fund investments and have substantial capital and expertise to manage the risk. Moreover, the hedge fund holdings are significantly concentrated in large organizations, with 86.5% of these rating units having over $2 billion in capital and surplus.

The lingering effects of the pandemic and ongoing market uncertainty in 2021 will determine if the hedge fund market will continue to see renewed interest and greater exposures or revert to being viewed more unfavorably relative to other asset classes.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=309613.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2021 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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