Hedge funds and private equity funds increasingly investing in re/insurance: Appleby

Global law firm Appleby, who with their teams in Bermuda and the Cayman Islands have a particular focus on legal services for reinsurance, catastrophe bonds, ILS and the convergence market, said in a recent update that it is seeing increasing levels of investment by hedge funds and private equity funds in insurance and reinsurance vehicles.

The strategy these asset managers who are increasingly looking at the space are employing is dual-pronged in its approach as they hunt for ways to generate attractive yields, which reinsurance and ILS can certainly offer, and diversification of their overall investment portfolios. The asset class has proved itself well able to help hedge funds and private equity funds meet these goals and as our regular readers will be aware this is trend expected to continue.

Appleby cites attractive premiums, in the wake of 2011’s disasters and now the more recent hurricane Sandy, as one reason for the recent increase in interest. Another is that in the wake of large payouts by insurers and reinsurers for these disasters, some less well-funded market participants have withdrawn leaving an opportunity for yield hungry investors to step in and take advantage of these market conditions.

Investment banks have also been providing less capital to insurers and reinsurers, said Appleby, as they are less well capitalised and now operating within tighter regulatory environments, largely due to the fall-out of the global financial crisis. Hedge funds and private equity funds are stepping in according to Appleby.

Appleby is seeing hedge funds becoming more involved in the sector by investing directly in insurance and reinsurance vehicles, establishing their own reinsurers and leveraging platforms to enable hedge funds to profit from reinsurance premiums. This is a change from the tendency for hedge funds to simply get involved in capital markets reinsurance instruments.

On private equity funds, Appleby has seen a number of these funds set up specialist groups to look at the reinsurance and ILS asset class and evaluate investments in both public and private insurance companies, many of which trade at discounts to book value. Of course we also saw clear evidence of this trend when KKR invested in insurance-linked asset manager Nephila Capital recently.

The update from Appleby doesn’t really reveal anything new to us or our readers, but is valuable in that one of the largest legal firms in the sector agrees that this trend for hedge fund and private equity interest in reinsurance looks set to continue.