In its recent second-quarter earnings conference call Platinum Underwriters Holdings, a Bermuda based provider of property, casualty and finite risk reinsurance coverages to a global client base, CEO discussed the differing characteristics of non-traditional reinsurance capital depending on its source.
As we wrote last week, Platinum Underwriters has been keenly watching developments in the insurance-linked securities, catastrophe bond and collateralized reinsurance space, observing the recent trends in pricing which led it to buy $50m of non-traditional retrocessional reinsurance this year.
This observation of the sector has clearly given Platinum’s CEO Michael Price some insight into the motivations and ambitions of different types of capital, sourced from different types of investors. During the earnings call Price was asked for his opinion on how sticky third-party capital in reinsurance was and what size of catastrophe loss would be required to shake up this growing market.
CEO Price explained that at Platinum they view non-traditional reinsurance capital as having different characteristics depending on its source. So, for example hedge funds might have high-return requirements and be comfortable moving in and out of market, perhaps being a little more opportunistic with their investments. Price explained that hedge funds will likely go where the return is and would tend to move out of a sector if better opportunities presented themselves.
That was seen a number of years ago in ILS when a number of large hedge funds exited the sector both due to the unravelling of Lehman Brothers, but also as there were attractive opportunities elsewhere. Here Price is largely referring to the types of hedge fund who are not specialists in the space, more the mutual fund types who invest across multiple asset classes.
Dedicated hedge funds, so the ILS specialist investment managers, will likely be stickier than the multi-asset hedge funds. However Price isn’t sure that even these dedicated managers are the stickiest capital, partly because their capital is from multiple underlying sources.
He mentions smaller investors such as family offices, who may access the ILS and cat bond space mostly via dedicated specialist investment managers but also in some cases directly. Price said that if you’re a family office, with little experience or expertise in investing in reinsurance risks and you face an unexpected loss, then his opinion is that this type of capital is unlikely to be there for the long haul.
It’s pension funds that Price believes will be stickiest, in particular the type of large pension funds which deploy a tiny percentage of their capital into ILS and reinsurance for the diversification and low-correlated returns. These investors may prove to be the stickiest Price says, although he notes that this is yet to be tested. Pension fund capital is particularly attractive, said Price, as it is perceived to be sticky and to have lower return ambitions that traditional reinsurers and event some non-traditional players.
On the size of event required to cause a market turn, where the stickiness of this third-party capital in ILS and reinsurance would be seriously tested, Price believes it needs to be quite large. He cites over $50 billion but probably approaching $100 billion as a likely size of event that could dislocate the market, but even then notes that a catastrophe event with some unexpected aspect to it may be even more impactful.
Price commented; “There’s always more effect on market pricing when people experience losses that they weren’t expecting to have. Instead the loss comes from a well-known, well-understood quantifiable source, and everyone’s performance in that event was similar to their prior expectations, life goes on. You need some kind of disruption in people’s thinking, or losses bigger than expectations, in order for there to be a big market change.”
This topic is likely to come up regularly until the point at which we experience an event large enough to truly test the stickiness of this third-party capital. Price is correct that pension fund capital may well be the stickiest, it is typically a tiny commitment for a large pension fund and the asset class will continue to offer what pension funds look for in the way of return and correlation even after major events.
Read a recent article we published on pension funds involvement in ILS and reinsurance: Still early days for pension fund allocations to ILS and reinsurance.