Andy Tromans, partner, Corporate Insurance at Clyde & Co explains why the sector has seen a recent spike in hedge fund-backed reinsurers.
While hedge funds, pension funds, sovereign wealth funds, private equity firms and the like have shown an attraction to the insurance market for a while, there has been a recent spike in the number of hedge fund-backed reinsurers. Such reinsurers will typically be sponsored by an asset manager who will manage the investments and have access to a free “float” (ie, the premium income) which can then be invested in accordance with the asset manager’s investment strategy.
In each of these cases, the institutional investors are attracted by the ability to invest in risks uncorrelated to the financial markets, the diversification of their portolios, establishing a tax-efficient platform to manage assets, and to potentially earn better returns than more traditional asset classes. The amount of capital from these sources which has come into the market is pretty staggering. According to a report from Goldman Sachs published last year, assets invested in reinsurance by non-industry investors have grown over the past few years by over 800 percent to around $45 billion. That is impressive growth by any standards. With the level of returns some investors have seen and the continued low interest rate environment, this interest is unlikely to subside.
This is yet another contributor to a substantial overhang of capital in the sector—which is driving prices down and creating keen competition. On the demand side, life is equally tough for sellers, as there are clear indicators that buyers are focusing their reinsurance buyings on providers who can supply capacity that is significant in relation to the overall size of the programme, or where there is a strategic and valued relationship.
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Clyde & Co, reinsurance, funds