Decline in book value of insurers’ hedge fund investments signals shift in market trends: AM Best

A new report by AM Best reveals a significant 9.9% contraction in insurers’ hedge fund holdings over the past year, reversing a two-year growth trend.

The data suggests that insurers are navigating a changing landscape in the face of market volatility and rising interest rates.

According to the report, property/casualty (P/C) insurers reported a 10.7% decline in aggregate book-adjusted/carrying value (BA/CV) for hedge fund investments in 2022. This contrasts with an 8.2% drop for life/annuity (L/A) companies.

The L/A segment’s exposure to hedge funds fell by 8.2% to $5.6 billion, while the P/C segment experienced a 10.7% reduction to $6.0 billion.

The decline is attributed to the negative performance of hedge funds in 2022 after two consecutive years of double-digit gains.

Larger funds with assets exceeding $3 billion were particularly affected. Despite this, hedge funds provided a cushion against 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 drawdownsand less volatility,” Andersen added.

While the industry’s exposure to hedge funds decreased, the number of hedge fund investments in the segment grew from 861 in 2021 to 1,222 in 2022.

The average BA/CV of hedge fund investments acquired in 2022 was roughly a third of the overall average value, reflecting a trend towards smaller purchases.

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

The report includes a detailed list of the insurance industry’s 15 largest hedge fund investors, constituting 80% of the industry’s hedge fund holdings.

Additionally, it provides a five-year breakdown (2017-2022) of hedge fund strategy performance based on BA/CV.

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