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U.S. insurers reducing investments in hedge funds: Fitch

Monday, December 17, 2018
Opalesque Industry Update - U.S. insurers' investment position in other alternative investments as reported in regulatory filings is concentrated within a few large insurers and is relatively stable as a percentage of invested assets for the last several years.

The attraction to alternative investments, including hedge funds, private equity investments and limited partnerships, may be waning as higher interest rates make fixed income yield more attractive, and equity markets outperformed many alternative asset classes recently.

In a new report, "U.S. Property/Casualty Insurers' Alternative Investments", Fitch examines the P/C industry's exposure to alternative invested assets, largely utilizing U.S. statutory financial statement data from Schedule BA, and focusing on the alternative investment allocation and performance for 52 insurer groups with the largest alternative holdings at year-end 2017.

P/C insurers' allocation to Schedule BA assets held relatively steady at 9% of invested assets as the industry continues to maintain a conservative asset allocation. P/C insurers' investment strategy typically focuses on high-quality municipal, corporate and government fixed-income securities in recognition of their substantive liability risk.

A large number of industry participants have very limited or no asset allocation to alternative investments.

Industry alternative investment holdings are concentrated with 71% of all Schedule BA assets held within 13 large insurers, and nearly 50% held by Berkshire Hathaway Inc. (BRK). Specifically, Berkshire Hathaway Inc.'s (BRK) National Indemnity Company (NICO), has the largest individual reported BA asset with a $43 billion position in affiliated railroad Burlington Northern Santa Fe, LLC (BNSF).

Over the last five years (2013-2017), insurers' unaffiliated equity holdings outperformed Schedule BA assets excluding BRK. This performance differential is likely contributing to a modest decline in hedge fund and private equity holdings for insurers with large Schedule BA asset holdings over the last two years.

Favorably, investment returns on Schedule BA assets are materially less volatile than the return on unaffiliated common stocks.

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