We wanted to bring our readers attention to an interesting article just published by Bloomberg today. In this article they discuss some comments made by Frank Majors, managing partner and one of the founders of Nephila Capital the well-known insurance and risk linked hedge fund and reinsurance firm. The comments are particularly interesting as they support the growing trend for investment backed reinsurance vehicles and funds, as well as reflecting Nephila’s own strategy.
There is a lot of interest from investors and experienced reinsurance market professionals in setting up agile, low-friction providers of reinsurance and retro at the moment. Many have noticed the returns that can be achieved and are now also noticing the premium/rate benefits that can be passed on to carriers by a focused, nimble, investment backed collateralized reinsurance vehicle.
In the Bloomberg article, Mr. Majors from Nephila Capital, says that peak risks, such as hurricane and earthquake offer investors an opportunity as traditional reinsurers are avoiding them. He says that the pressure to diversify means that traditional reinsurers cannot be as competitive or make as good returns as a focused outfit such as his own on these types of risks, or that they cannot even take them on. Majors says there is a lot of unmet demand for peak catastrophe cover as a result of this.
He continues to say that reinsurance capital isn’t flowing efficiently into these peak peril markets and states regarding Nephila Capital; “We can offer more cost-effective reinsurance to primary carriers due to the lower cost of capital we provide as a result of our business model.”
Now this is a very interesting statement! You may have noticed a number of larger reinsurers downsizing their operations to become more agile and to enable them to move with the times of late (just look at Flagstone), you will also have seen significant discussion of new entrants to the retro and collateralized reinsurance space. The returns that can be made by running a catastrophe focused, investment backed reinsurance outfit is one reason for this heightened interest but another is this inability of traditional reinsurers to offer the really peak cover that is required in an effective manner that allows them to abide by their ratings requirements.
Of course, catastrophe bonds could also soak up some of that catastrophe cover, particularly if primary insurers could access the capital markets more cost-effectively and directly (this is likely a future trend that we’re just beginning to see the first signs of). At the moment, with rates not really rising significantly, it looks like these new breed collateralized reinsurance vehicles, and established hedge fund type reinsurers such as Nephila Capital, stand to benefit from the situation the large reinsurers find themselves in.
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