Best’s Special Report: Book Value of Insurers’ Hedge Fund Investments Declines

OLDWICK, N.J.--(BUSINESS WIRE)--Insurers’ hedge fund holdings shrank by 9.9% last year to $11.8 billion, reversing a two-year growth trend in this area, according to a new AM Best report.

In its Best’s Special Report, titled, “Book Value of Insurers’ Hedge Fund Investments Declines,” AM Best states that property/casualty (P/C) insurers’ reported a 10.7% decline in aggregate book-adjusted/carrying value (BACV) for hedge fund investments in 2022, compared with an 8.2% drop-off for life/annuity (L/A) companies. The L/A segment’s dollar exposure to hedge funds fell 8.2%, to $5.6 billion, and the P/C segment’s, 10.7%, to $6.0 billion.

The reports notes that after two consecutive years of double-digit gains, the performance of hedge funds turned negative in 2022 amid volatility and rising interest rates. Larger funds with assets above $3 billion were among the worst performers. However, the asset class did protect investors from significant losses in the equity and fixed-income markets.

“Overall, hedge fund investments make up an extremely small portion of invested assets for insurers—less than 1% for each segment,” said Helen Andersen, industry analyst, AM Best. “Given that hedge funds are largely independent of stock market trends, and less correlated with the broader markets, this has enabled insurers to mitigate the adverse impact of COVID-19, including smaller drawdowns and less volatility.”

Although the insurance industry’s hedge fund exposure diminished, the number of the segment’s hedge fund investments grew to 1,222 in 2022, from 861 in 2021 (net of acquisitions and disposals). The average BA/CV of hedge fund investments acquired in 2022 was roughly a third of the overall average value, as insurers made many smaller purchases.

The decline in BA/CV can be attributed to the drop in both new investments and the market values of existing investments. New investments were highly concentrated among a small number of insurers, with five companies accounting for over half of all purchases (based on BA/CV) in 2022.

The special report contains a detailed list of the insurance industry’s 15 largest hedge fund investors, which comprise 80% of the insurance industry’s hedge fund holdings, along with a five-year breakdown (2017-2022) of hedge fund strategy performance based on BA/CV.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=337611.

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 New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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