James River. Not a hedge fund but maybe a hedge fund insurer?

by Artemis on December 15, 2014

Bermuda domiciled specialty excess and surplus lines insurance firm James River Group Holdings Ltd., has a hedge fund pedigree and employs an investment strategy that sees it allocate assets to alternative investments, but it is no hedge fund the firm insists.

James River is backed by hedge fund firm D.E. Shaw, which has a liking for insurance and reinsurance including having been a provider of fully-collateralized reinsurance and retrocessional reinsurance coverage utilising investor capital. James River is also backed by Goldman Sachs, another firm with a reputation for asset management and an involved in reinsurance through its insurance-linked securities (ILS) and catastrophe bond practice.

D.E. Shaw organised the buyout of James River in 2007, moving the firm to Bermuda. At the time the insurer was valued at around $560m, but the firm has grown since then and has just completed an IPO.

In the IPO which completed yesterday, D.E Shaw and Goldman Sachs have capitalised on their investments in James River, selling 11 million shares in the firm at an IPO price of $21 per share, below the $22 to $24 per share IPO target. This IPO has raised approximately $231m in funds, but as an insider trade the profit will go direct to D.E. Shaw and Goldman Sachs, rather than to James River itself. At the $21 per share IPO price James River would be valued at just under $600m.

The interesting bit of James River to us, however, is its investment strategy. The insurer allocates as much as a fifth of its $1.2 billion asset portfolio into low rated alternative assets, with bank loans that are typically rated at junk the preferred non-traditional asset type, according to Bloomberg.

These bank loan assets offer a higher yield to James River than the more typical investment-grade credit assets that insurers are usually known to invest in. However Bloomberg notes that trading in these assets can be less liquid and they are more difficult to shift if you really need to.

James River noted in the prospectus it published prior to its IPO; “We do not operate like a hedge fund, but we are comfortable allocating a portion of our assets to non-traditional investments.”

So the firm is not a hedge fund, which is actually clear James River is an insurer. But the insurer has definitely learned from D.E. Shaw, which has a track record in the alternatives space, and non-traditional assets as James River calls them are set to remain on the agenda at the insurer.

“We characterize these investments as non-traditional because we do not believe that these types of investments are commonly held by property-casualty insurance companies. Non-traditional investments held at September 30, 2014 and their respective percentage of our total invested assets at such date consist of syndicated bank loans (19.1%), interests in limited liability companies that invest in renewable energy opportunities (1.9%), limited partnerships that invest in debt or equity securities (0.4%), and a private debt security (0.4%). We will continue to actively review opportunities to invest in non-traditional assets and may invest in additional non-traditional assets in the future,” the prospectus explains.

James River is an interesting firm for a number of reasons. The pedigree of backing from hedge fund D.E. Shaw, along with Goldman Sachs, the client base that includes ride-sharing tech firm Uber and the allocation to non-traditional or alternative asset classes of around a fifth of its assets. By only allocating a fifth of its assets to alternatives it can likely ensure it has sufficient liquidity to pay its claims, while the non-traditional assets will provide a welcome boost to the insurers investment returns.

The target will be to outperform, as is the way with the hedge fund reinsurance strategy. By leveraging a higher risk, higher reward investment strategy a few extra points of performance can be added to the re/insurers results. James River is in primary insurance only, so it is a little more unusual to see the non-traditional investment strategy, however with interest rates and asset yields remaining depressed it may not be the last insurance firm to adopt a more hedge fund-like investment strategy.

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