Solid investment strategies vital in environment
In an environment of depressed pricing and low interest rates, insurers seeking risk-adjusted returns are focusing on the agility and responsiveness of both their investment and underwriting strategies to changing market conditions and opportunities.
Execution of such strategies requires efficient risk management and underwriting flexibility. That is the view expressed by a panel of industry experts at the PwC/S&P Bermuda Reinsurance Conference yesterday in Hamilton, Bermuda.
The panel discussed the involvement of hedge funds in the reinsurance arena and highlighted the current focus on investment as a way to make money.
“There is a lot of focus on increasing investment returns – something the markets are focused on when we look at valuations of companies,” said Aurora Swithenbank, managing director and co-head of insured structures finance for Goldman Sachs.
The panel agreed that questions are being asked about whether the hedge funds are involved in legitimate insurance enterprises or whether their focus is simply on the tax benefits.
“What’s become very clear is it’s not easy to come up with a test to decide this,” said John Rathberger, chief executive officer for Watford Re. “On one hand you do have people who seem to think there’s no underwriting risk going on and essentially it’s a tax dodge.
“A lot of people feel the hedge fund owns the vehicle, manages the vehicle, and that hedge funds are short term opportunistic players. All those beliefs are not correct. In our case the hedge fund has no seats on the board, and does not control the underwriting policy.
“In our case we are taking a significant underwriting risk so it’s not a tax dodge but its balanced and there is much less cat risk for instance than you would have with a typical reinsurer. On the asset side there is more risk, but there’s capital there to back that risk and in the end it’s all about matching capital to risk.”
John Berger, chairman and chief executive officer for Third Point Re, added that Third Point Re’s money is not in a hedge fund – it is in a managed account and is always available.
“We came into being to provide permanent capital for a hedge fund. Third Point will invest our money however they think is appropriate. They are going to operate how they operate and we will adjust the underwriting side for the risk they are taking.”
Swithenbank said that while at the outset hedge funds may have labored under a misconception that hedge funds were challenging and reinsurance was easy, they are now adjusting this opinion and their approach.
“There is space for a number of these vehicles and it’s tough putting together a solid management team,” she said, adding that they need to be scaled so that they do not cannibalise the sponsor’s existing book of business.
