The attention being paid to the hedge fund reinsurance business model and the fact that others are now looking to leverage bits of it within their own strategies, is validating for reinsurer Greenlight Capital Re, according to CEO Bart Hedges.
There has been an increasing buzz around the hedge fund reinsurer strategy, as other companies begin to look at adding additional risk into their investment portfolios, in search of boosted returns, or as large insurers are rumoured to be establishing hedge fund backed units.
There has been a significant and increasing volume of rumours around new initiatives such as ACE Limited’s captive type hedge fund reinsurer, Axis partnering with asset manager Blackstone and Transatlantic also working on an initiative with a more active and aggressive investment strategy.
At the same time traditional reinsurers, such as Platinum Underwriters, have been looking at their investment strategies and considering ways to add additional juice to their returns. This is one way to offset the declining reinsurance pricing, to a degree, adding a couple of points on the asset side to offset the declining underwriting return.
Then we see initiatives such as Credit Suisse Asset Management’s new Guernsey domiciled venture, Kelvin Re, which sees an ILS investment manager gaining a rated reinsurance vehicle, with third-party capital backing and a hedge fund focused asset strategy.
This is part of the evolution of the reinsurance business model and the hedge fund-backed reinsurer strategy. There is a spectrum of different business models emerging within the hedge fund reinsurer space now, from the longest-standing such as Greenlight to the new breed such as Watford Re. We expect the range of models adopted will expand as insurers and reinsurers look to bring a more active asset management approach into their businesses, to a degree.
For Hedges, of Greenlight Re, the attention is welcome. Hedges said that he wouldn’t see these initiatives typically being in competition with Greenlight, as they are often focusing on different areas of the market to where Greenlight has traditionally operated.
However he appreciates the validation of the business model. Hedges said; “Seeing others utilise part of our model, I think it is a good thing in some ways for us because it is showing validation of what we have been doing.”
Interestingly, Hedges was asked whether Greenlight have been discussing partnering with any of the insurers that might be interested in the strategy. He said that in terms of potential discussion with others; “That’s not something I would feel comfortable commenting on now.”
This is an interesting thought though. An established hedge fund backed reinsurer like Greenlight could enter into an agreement with a large insurer to take a specific portfolio of risk and structure it into a vehicle which would allow them to invest the premium float within the hedge fund strategies.
This would be akin to a quota share, or to managing a captive reinsurer for the cedent. Greenlight could be paid in fees, or the reinsurance could be cheaper, or it could flow a share of the investment return back to the cedent. Arrangements like this could be very attractive for a company like Greenlight and also make it much easier for an insurer or reinsurer to start to realise a greater return from some of their premium assets.
Another stage in the evolution of the reinsurance market. The dynamic keeps moving and new business models are set to continue to emerge, as incumbents and new players adapt to the market and look to leverage the best of the alternative, ILS and hedge fund backed reinsurance models.