Platinum to embrace hedge fund investment strategy this year: CEO

by Artemis on October 22, 2014

Bermuda headquartered reinsurance group Platinum Underwriters Holdings is ready to embrace a higher risk, higher return, hedge fund style investment strategy this year according to the firms CEO, as had been suggested earlier this year.

All this year one of the themes we’ve been following is the asset side of large reinsurers. With reinsurance prices continuing to be under pressure, while interest rates remain low, any additional profit that can be made from the asset side of the business can help reinsurers to maintain profitability under challenging reinsurance market conditions.

As a result a number of reinsurers have placed an increasing focus on their investment portfolios to see where a boost to performance can be achieved. Even one of the world’s largest reinsurers, Swiss Re, reported earlier this year that it had re-balanced its investment portfolio, which involved turning over a considerable portion of its investable assets, in search of better investment side returns.

Earlier this year we reported that Platinum Underwriters was looking into taking a more active, or aggressive, strategy on the asset side of its business, in order to continue delivering the returns that its shareholders expect in a lower reinsurance rate environment.

With the outlook for traditional players continuing to look testing, the emergence of hybrid reinsurance strategies, in terms of active asset side management to complement the underwriting side of the business, is one of the responses that we would expect to see more of, particularly if rates remain under pressure well into 2015.

CEO of Platinum Michael D. Price said that the firm was ready to make good its investment strategy promise during the reinsurers third-quarter earnings call recently. “We’ve continued exploring higher risk, higher return investment strategies and anticipate moving forward with an initial investment later this year,” Price explained.

Platinum is now ready to move ahead with its plans to add some ‘juice’ to its investment strategy, however it is not taking a leap of faith and becoming a hedge fund style reinsurer, at least not entirely.

Platinum intends to invest up to a $400m pool of excess capital in hedge fund type alternative investment strategies, to boost returns for its shareholders in the tough market. This sensible approach means that it will maintain its reinsurance

Price said that Platinum is well capitalised which gives it the option to hold riskier assets in its investment portfolio. He explained that the reinsurer would like to deploy this capital into hedge fund assets by the end of the year, citing December as a likely timeframe for beginning the new investment strategy.

Platinum is looking to invest up to $400m initially, as it tries out this higher risk, higher return asset strategy. Price said that the firm would consider deploying more capital into risk assets during the course of 2015 as well.

Price was keen to drive home the fact that this strategy change does not mean that Platinum will be investing reinsurance premiums in higher risk strategies. Rather the firm will use its excess capital and surplus assets to boost returns, at least for the moment.

“At this point we’re thinking about capital and surplus assets, we’re not talking about assets we have that back our reinsurance liabilities. In our view those will remain in high-grade fixed income type assets for the long-term. So we’re talking about how we deploy our capital and surplus base, not the rest of our investable assets,” Price explained.

The new investment strategy is part of a three-pronged approach to navigating the challenging reinsurance market environment, Price explained.

“We think the combination of the reinsurance underwriting, investing in a board array of assets, including fixed income to back our reinsurance liabilities and higher risk, higher return strategies for our capital and surplus base, diversified strategies that are not fully correlated with the equity markets or even with each other, plus the benefit of being able to buy back shares and to actively manage our capital base. Those three tools are what we’re expecting to rely upon to guide us through what we think is going to be a long soft market ahead,” Price said.

Price further explained that Platinum would not use this strategy to adjust its reinsurance pricing. Some might expect that an increase in asset side return could be used to offset reductions in pricing, or even to lower pricing to be more competitive, but Price said that the additional return would be to the benefit of its shareholders not its underwriting side.

Price again said that, for the moment, the assets linked to Platinum’s reinsurance liabilities would remain invested in investment grade fixed income assets as he feels these are better matched with the cash flows expected from reinsurance business.

“Running a reinsurance company is about managing your capital cushion and making sure that you have adequate capital at all times to meet your policyholder obligations. For that to be a comfortable position I think we will likely stop short of going beyond capital and surplus assets in what I have been calling risk assets. The excess would continue to be high-grade fixed income,” Price commented.

So Platinum Underwriters will begin to adopt a riskier investment strategy later this year, or in Q1 if plans run over. This should help Platinum to maintain its return targets for shareholders, at least while investment returns remain positive. Should the investment in risk assets not perform as expected then Platinum could find it cannot meet investors expectations.

Should Platinum decide in the future to more broadly adopt this higher risk investment strategy it will begin to move into the realm of the hedge fund reinsurer, or perhaps more akin to Hamilton Re’s strategy.

It is possible that reinsurers like Platinum might find adding more emphasis and risk to their investment strategies is just the thing to ward off the current soft market blues and as a result we may see other reinsurers looking at how they can juice up their investment returns.

Other article on Platinum Underwriters:

Expect reinsurance market to remain flooded with capacity: Platinum CEO.

Platinum reports results, expects more reinsurance rate pressure.

Platinum Underwriters looks at more aggressive investment strategy.

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