One of the trends which Artemis has been writing about and predicting will increase for a while now, is the gradual adoption of more aggressive or active investment strategies by traditional reinsurers who are struggling to meet return targets on reinsurance rate alone.
With reinsurance rates generally softening, increased competition from well-capitalised traditional players, a growing alternative reinsurance capital market and more asset managers launching reinsurance vehicles and strategies, the outlook for traditional players looks difficult.
The emergence of hybrid reinsurance strategies, in terms of active asset side management, alternative capital sources or an unusual capital mix, partnership approaches, lean business models seeing new reinsurers with sidecar traits and of course a growing catastrophe risk securitization market is a clear response to the pressures being felt.
It is also a clear sign that entrepreneurial reinsurance leaders are not going to let these pressures hold them back and they are willing to change strategy or direction to suit the wider market conditions, something which promises to stimulate further innovation in terms of technology, capital management and business structures.
At its recent earnings conference call, Platinum Underwriters Holdings CEO Michael D. Price said that his firm was now looking into taking a more active or aggressive strategy on the asset side of the business in order to continue delivering returns that its shareholders expected in a lower reinsurance rate environment.
Price said; “It’s difficult to imagine an insurance or reinsurance operation today delivering equity-like returns to shareholders with a high-quality fixed-income only portfolio. Given the rate adequacy of insurance risk that’s available, you just can’t get there.”
Underwriting alone is no longer sufficient to enable Platinum to meet its return targets, without taking on significantly higher risks, so a more aggressive investment strategy, it is hoped, will help it to maintain targets through a softer rate environment.
As well as considering a more active investment strategy, Price said that other options on the table were expanding Platinum’s underwriting or ramping up capital management by buying back more shares.
Taking a higher-risk/return investment strategy is one area that reinsurers are expected to look to make up for softer rates, following the example set by hedge fund backed reinsurers as well as recent start-ups such as Watford Re and Hamilton Re, both of which have hedge fund or asset managers looking after their investment portfolios.
Watford Re is a prime example as it promises to not take the typical hedge fund style low-volatility underwriting approach, preferring to underwrite a similar book of business to parent Arch, while taking a more aggressive investment strategy through Highbridge.
Under questioning on the earnings call Price explained that if companies want to remain publicly quoted and traded they are increasingly likely to need to look beyond fixed-income alone on the investment side of their business. Price noted the need for discipline if this strategy is taken, as riskier investment assets need to be understood with the level of underwriting risk a firm engages in.
When asked whether we are in a soft reinsurance market already, Price explained that he feels that we’re in the middle of a market cycle. The only way is down though, Price suggested, saying; “We’re in the middle of a soft market and the natural evolution is for continued softness as far as the eye can see.”
The comments Price made during the call suggest that the firm is considering handing over a portion of its investable assets to equity or hedge fund asset managers, with investment strategies under consideration including pure equity plays or alternative investment strategies.
Price compared selecting and managing external investment or hedge fund managers to the process of selecting and managing relationships with reinsurance cedents and treaties.
Price expects further price softening, particularly in property catastrophe reinsurance lines of business. However Platinum has also pulled back slightly on casualty lines as it found conditions were too much like a buyers market.
In the Platinum results announcement Price said; “Absent major events in the insurance or capital markets, we expect continued downward pressure on overall reinsurance rate adequacy. Our present balance sheet composition and broad market access leave us well positioned to take advantage of quality reinsurance underwriting, investment and capital management opportunities as they arise.”
If the reinsurance and perhaps insurance market increasingly begins to looks to more active, aggressive or higher reward investment strategies, the investment management community will be delighted. Traditionally the reinsurance and insurance market have been conservative investors, preferring to make safe investments that closely match the duration of their liabilities.
With trillions of dollars of investable assets in the insurance market, many billions in reinsurance, a slight change to the asset side business model and strategy could reap significant rewards for reinsurers. However, shareholders who have invested in reinsurers as they feel them to be a good diversifier away from other financial assets may find the correlation levels increasing.
Also worth considering and a reason that any change to asset side strategy has to be undertaken very carefully, is the question of what would happen if a major reinsurer saw a big loss on its investment portfolio, perhaps big enough to damage its ability to pay claims?
Perhaps this makes the collateralized nature of insurance linked securities and investments look even more attractive to the end-investors in reinsurance. Could such a scenario drive even more money into collateralized and fund based reinsurance players? It’s possible, but in the meantime we are likely to hear an increasing amount of chatter in the reinsurance market about investment strategies.
Read some of our recent articles on similar topics: