Investors more interested in catastrophe bonds and sidecars than new reinsurers: S&P

by Artemis on September 5, 2012

Ratings agency Standard & Poor’s has published a report looking at where investors have been showing the most interest in deploying capital in the reinsurance sector after the catastrophes of 2011. S&P says that despite the record natural catastrophe losses that the re/insurance industry suffered in 2011, financial investors were largely uninterested in supporting a reinsurance ‘class of 2011’, and showed more interest in deploying capital into non-traditional reinsurance alternatives.

After the last record catastrophe loss year in 2005 a new class of Bermudian and offshore reinsurers sprung up, backed by capital market and financial investors who were seeking to capitalise on rising rates and market conditions. S&P say that they believe that investors were uninterested in supporting a class of 2011 group of new reinsurers because rate increases were heavily weighted towards the loss affected regions of the world, in 2005 rate rises were more widespread.

S&P also believe that the performance of the class of 2005 reinsurers from an investment perspective has been below expectations and this contributed to investors wariness of a new class of 2011. Other factors which S&P said helped to push investors towards alternatives were that many publicly listed re/insurers have been trading at or below their book value and that the non-life insurance market has a strong capital position at the moment.

S&P have noticed, however, that despite the reluctance to deploy capital into new reinsurance entities investors have been showing interest in supporting non-traditional alternatives such as catastrophe bonds and sidecars, which S&P note are ‘typically self-liquidating, special-purpose balance-sheet companies’.

“We believe that financial investors are not likely to support a new class of off-shore (re)insurance franchises until the capital position of the market diminishes materially, there is a broad market hardening, and equity valuation return to historic levels,” said Standard & Poor’s credit analyst Doug Ostermiller.

This is interesting as we know that there remains significant interest from institutional investors such as pension funds in putting capital to work in reinsurance via ILS funds and collateralized plays. It’s no surprise in that case that the reinsurers who have sprung up have been hedge fund backed with a mandate to invest premiums aggressively using hedge fund strategies to achieve higher returns.

The fact that investors are not as interested in the more traditional reinsurance model at the moment is perhaps also attributable to the broader financial crisis which has made equity type investments less attractive. Conversely cat bonds, ILS funds, collateralized reinsurance entities and sidecars offer investors a much more attractive returns, a greater level of diversification and a less correlated investment opportunity than a traditional reinsurance entity. It’s no surprise that this has proved attractive in the last year in our opinion.

Subscribers to S&P’s Global Credit Portal can access the full report here.

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