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Alternative Market Briefing

Fitch: U.S. P&C insurers’ investing in alternatives set to increase

Friday, July 19, 2013

Benedicte Gravrand, Opalesque Geneva:

According to a new special report by Fitch Ratings, U.S. property and casualty insurers are investing in alternatives, including hedge funds and private equity, for diversification and higher returns in their portfolios. And this allocation could increase going forward.

Fitch reviewed the property and casualty (P&C) industry's investments in alternative and other invested assets at year-end 2012, by going through the Schedule BA of U.S. statutory financial statements on 50 P&C groups with the largest holdings of these asset classes. By the end of the year, the P&C industry had invested 8% of its portfolios in alternatives, 70% in fixed income and 14% in common equities.

"Analyzing industry long run statutory total investment returns for different asset classes reveals that alternative investments generated significantly higher returns with lower volatility compared with unaffiliated common equities for the period 2008-2012 and 1996-2012," the Fitch statement says.

But as portfolio yields are declining at a time of low interest rates, the insurers could possibly increase the allocation to riskier asset classes to improve returns. Growth in unaffiliated alternative investments has been relatively modest over the last several years, Fitch notes. This is partly due to alternatives’ lower liquidity levels.

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