Pine River sees fixed income opportunities in ILS and reinsurance

Increasing volumes of capital will likely come into the insurance-linked securities (ILS) and reinsurance marketplace from large institutional asset managers and fixed income hedge funds. Pine River Capital Management is one such fund, which shows a growing interest in reinsurance.

Pine River Capital Management, which manages around $14 billion of assets, first showed its interest in the insurance-linked securities (ILS) market earlier this year, when it hired experienced ILS executive and portfolio manager Albert Selius to its team as Insurance Linked Portfolio Manager. Selius had previously worked at Swiss Re, ILS specialists Securis Investment Partners and UBS, all in ILS focused roles. As we understand it, Selius manages a small, but growing, portfolio of catastrophe bonds and ILS at Pine River.

Pine River sees opportunities within fixed income growing at the moment, according to this Reuters article, thanks partly to regulatory changes which have pushed investment banks to withdraw from the space. Regulations such as Dodd Frank, the Volcker Rule and Basel III have all forced the major investment banks to pull back from trading in areas such as fixed income, as they are regulated to focus on core investment bank activities.

According to Pine River’s co-head of fixed income Colin Teichholtz, finds that there is less competition from the large Wall Street firms for the specific trades he wants to participate in. He sees opportunities currently in areas such as residential mortgage-backed securities, commercial mortgage-backed securities, municipal bonds as well as catastrophe bonds.

Teicholtz said that Pine River does see an opportunity in catastrophe bonds, as evidenced by the hire of Selius and the firms appearance at a number of recent ILS industry events. But Teicholtz has clearly seen the growing interest in the space, which has resulted in significant interest in cat bonds from capital sources, contributing to declines in rates. Teicholtz told Reuters that he has some concern about the amount of money flowing into the ILS space.

Pine River had also been cited as a potential buyer for SAC Re, which is currently up for sale after the SAC Capital Advisor hedge fund owned by Steven A. Cohen pulled back from managing external capital due to insider trading charges. Teicholtz refused to comment on that, according to Reuters.

Large institutional hedge fund managers, like Pine River, are increasingly looking at the ILS and catastrophe bond space as a source of low-correlated investments. This brings more capital into the space, but unlike dedicated managers who have to deploy capital raised, these hedge funds have the luxury of being able to watch from the sidelines and invest as opportunities allow.

These hedge fund type investors were heavily invested in cat bonds and ILS in the early 2000’s, but pulled back after the credit crisis. It will be interesting to watch whether their participation will become more permanent now the universe of reinsurance-linked investment opportunities has grown.