Insurers continue to reduce their investment in hedge funds in a big way, according to a new A.M. Best report.

American International was one of the biggest drivers of the downward trend, with its investment reductions accounting for nearly 45 percent of the industry’s overall decrease.

A.M. Best found that the insurance industry overall cut back its hedge fund investments to $16.4 billion in 2017, an 8.5 percent drop from $17.9 billon in 2016. What’s more, the drop occurred even with total hedge fund asset flows positive again in 2017, after consistent quarterly outflows going back to the end of 2015, the A.M. Best report found.

More of the drop came from the life/annuities side, but property/casualty investments were not immune.

A.M. Best notes that the life and annuities segment had the largest pullback in investments, with its hedge fund holdings plunging from $8.3 billion in 2016 to $7 billon in 2017, a number reflecting half the $14.2 billion the sector produced in 2015. But the P/C segment also saw a noteworthy drop, from $9.1 billion in 2016 to $8.8 billion in 2017 – a 4 percent plunge. The life/annuity segment, due to the larger scale of its investment portfolios, tends to have more money invested in non-traditional assets. But property/casualty insurers over the last two years held more hedge fund investments, A.M. Best explained.

What is driving the decline? That would be individual annuity insurers, which A.M. Best pointed out saw their hedge fund holdings drop by almost two thirds from 2016 to 2017 – from 60 percent to 34 percent.

Another trend at play: There are a small number of insurers now that account for most of the hedge fund holdings. A.M. Best said that the top 20 insurers held 83 percent of industry holdings now, up from 77 percent in 2015. As well, 12 out of the top 20 said they did not report any increases in hedge fund holdings in 2017 (though all were marginal), A.M. Best said.

American International Group arguably drove the decline more than any other insurer. It pulled out another $1.1 billion from hedge fund investments in 2017, 45 percent of the industry’s overall decrease that year, and on top of pulling out more than $4 billion in 2016 or more than 50 percent of that year’s reduction, A.M. Best said. Still, AIG at 14 percent, sholds the most hedge funds in the industry, but that’s down from 30 percent in 2016, the ratings agency noted.

The full report is entitled “Insurers and Hedge Funds – The Pullback Continues.”

Source: A.M. Best