Hedge Funds Get Into Reinsurance Biz

Carriers say investment vehicles can complement the existing market

A growing number of hedge funds investment vehicles using as much as billions of dollars of pooled money from ultra-rich investors are jumping into the reinsurance business, lured by the potential of capital returns higher than weakening stocks and bonds.

U.K.-based reinsurance broker Benfield Group noted in its annual review that in 2004, hedge funds were a “growing source” of catastrophe reinsurance capacity.

Additionally, a number of reinsurance buyers interviewed by National Underwriter also acknowledged that they have heard about hedge funds’ growing presence in the reinsurance business, and said they themselves spoke to hedge funds during the recently closed renewal season.

The verdict for hedge funds is mixed, however. Benfield Group assessed that while the extra diversity of capital adds to the reinsurance industry’s strength, the “mettle of the hedge funds” is still untested, and it remains to be seen how durable a source of capacity they would be following large catastrophe losses.

“Hedge funds are offering additional capacity in the property-catastrophe market. There is a lot of hedge fund interest in the reinsurance area it is a growing element in the property-cat market,” said Julienne Jessup, Benfield Group’s head of research. She added that she’s seen hedge funds getting directly involved in underwriting through transformer companies that allow them to write reinsurance, as well as indirect involvements by funding startup reinsurers.

Among U.S. reinsurance buyers, Mike Stone, president and chief operations officer at Peoria, Ill.-based RLI Corp., said he has spoken to a couple of hedge funds about them taking a line on RLI’s catastrophe treaty, although they haven’t been able to come to terms.

“We just couldnt get together on price, terms and conditions. But I think they will be a player as time unfolds. We will see in years ahead that they will start to become a more viable marketplace, which is a good thing for us,” Mr. Stone said. “As hedge funds bring more capacity to the marketplace, they should have some impact on pricing over time.”

Christian Milton, who buys reinsurance for New York-based American International Group, added that at the Risk-Linked Securities Conference, held last October in New York by the Bond Market Association, “there were something like 140 hedge funds, all looking for different opportunities within the reinsurance marketplace.”

Mr. Milton observed that among U.S. hedge funds directly involved in reinsurance, “Citadel Investment is probably the largest one out there, and there are a few other smaller ones.”

Mr. Milton also said he’s seeing some hedge funds considering setting up “special-purpose vehicles” with a view to writing some reinsurance.

In addition, while AIG hasn’t yet purchased any reinsurance through hedge funds or their entities, Mr. Milton said: “We think that at the end of the day, what will happen is they will complement the existing market. Hedge funds can provide a nice alternative.”

Steven Bolland, president of reinsurance broker Gill and Roeser in New York, has also been observing hedge funds’ growing enthusiasm to enter the reinsurance marketplace, but he offered a more critical look.

The issue cited by Mr. Bolland is that there is currently no shortage of capacity. “For 95-to-98 percent of insurance companies, there is no shortage of reinsurance capacity, so the hedge funds are not in there filling a capacity gap,” he said. “They are looking at opportunistic situations. A vast majority of companies are probably better served by maintaining the traditional route of going to reinsurers.”

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.