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Alternative investments provide favourable returns and diversification to US P/C portfolios, says Fitch

July 18, 2013 at 12:35 pm

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US property/casualty (P/C) insurers invest in alternative and other less traditional asset classes, including hedge funds and private equity investments, in an effort to gain portfolio diversification and enhance investment returns, according to a report by Fitch Ratings.

At year-end 2012, alternative investments represented eight per cent of P/C industry invested assets, compared with approximately 70 per cent fixed income securities, and 14 per cent common equities.

In the report, Fitch reviewed the P/C industry's investments in alternative and other invested assets at year-end 2012, compiling information from Schedule BA of US statutory financial statements on 50 P/C groups with the largest holdings of these asset classes.

Analysing 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.

With portfolio yields declining in a period of extended low interest rates, more questions arise whether insurers will increase the allocation to riskier asset classes in an effort to boost returns. Fitch's analysis reveals that growth in unaffiliated alternative investments has been relatively modest over the last several years.

P/C insurers’ interest in alternative assets is tempered by generally lower liquidity relative to publicly traded securities and higher statutory risk based capital requirements relative to common equity holdings. Going forward, the industry's holdings in alternative assets are likely to increase moderately due to market appreciation and existing unfunded commitments.