Hedge funds will remain niche; healthy Bermuda ROE forecast
In the long term, hedge fund-backed reinsurers are more likely to become niche providers of capacity in the market, rather than mainstream players.
This is due to a desire among cedants to form long term relationships with their reinsurance partners, AM Best said in a report this week.
In the report, which focuses on the Bermuda insurance market, the rating agency said that such companies will look to oscillate their capital between the asset and investment sides of the balance sheet depending on where the better returns can be gained. This, in turn, is driven by the hard and soft cycle in the reinsurance industry more generally.
In the past two years a vast amount of capital has entered the industry seeking short-term opportunities predominantly around property-catastrophe risks. AM Best said this is unlikely to represent a model for reinsurance in the future, but may play a niche role for some time to come.
“In a business that still highly values relationships, this model may experience some challenges depending on the degree of the pullback from underwriting and the classes of business written,” the report said. “Then again, it is uncertain as to how large of an underwriting appetite these companies will have when the next hard cycle arrives.”
In terms of the overall performance of Bermuda based insurers and reinsurers, based on third quarter results, it said that even taking Hurricane Sandy into account, 2012 is shaping up to be a solid year in terms of underwriting performance with an average return on equity (ROE) of 10 percent forecast for companies on the island.
It noted that while many companies were posting ROEs closer to 16 percent three years ago and 19 percent six years ago, the financial crisis has changed expectations in the market. With 10 year US Treasuries posting a return of just 1.6 percent, a ROE of 10 percent looks good.
“While people may long for the days of 16 percent or 19 percent average ROEs, 10 percent in 2012 appears relatively attractive,” said the report.
