Swiss Re Insurance-Linked Fund Management

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Sandy makes reinsurance-linked investments more attractive for Polar Capital


For some institutional and professional investors the occurrence of hurricane Sandy at this time, and the large insurance and reinsurance industry loss that the event will no doubt cause, has the effect of making the sector an even more attractive place to invest. Prior to Sandy, the reinsurance sector was heading for a year of much lower losses than had been experienced recently and reinsurance renewal rates were expected to be flat to declining. Sandy could change that.

The insurance and reinsurance industry losses from hurricane Sandy will bring the 2012 industry loss experience to slightly above the annual global average. This will have the effect of keeping a little pressure on reinsurance rates in the upcoming January renewals, meaning any declines are likely to be smaller and some increases are possible particularly in the loss affected region. The knock on effect of increased demand for insurance and reinsurance that always comes after large catastrophe events, and is still building after the heavy loss burden of 2012 in Asia, will also contribute to improved company valuations. Thus, the net effect of increased pressure on rates and potential for better company valuations caused by a heavier loss experience can make the sector a more attractive place for investment capital to be deployed.

Our regular readers will know that interest from investors in the reinsurance-linked investment and catastrophe bond space has been at a high this year and we don’t expect that to change. But for some sophisticated investors, such as hedge funds, the losses caused by Sandy can help to increase their interest in reinsurance as a sector as they will see the potential for stronger returns.

In this article on the FT Adviser website today, Alec Foster and Nick Martin who manage the £236m Global Insurance fund for specialist investment manager Polar Capital, said that they are considering increasing their allocation to reinsurance as a result of hurricane Sandy. As Sandy has made 2012 a slightly above average catastrophe year, Foster and Martin believe that it could lead to more attractive valuations for the sector.

“This year, up until recently, it had been a low year for catastrophe payouts with only $11bn in the first half of the year compared with an average annual figure of $35bn between 2001 and 2010,” Nick Martin told the FT Adviser. “With Sandy, estimates have come out that the insured losses will be between $10bn-$20bn and assuming that is the region what Sandy does is make 2012 a slightly above-average catastrophe year. We had been reducing our exposure to reinsurance this year and we might look to re-think that.”

The fund currently has 25% exposure to the reinsurance sector but the article says that they are considering increasing that back to the 30% it had been previously.

So, events like Sandy can have the effect of attracting capital to the reinsurance sector. The interesting thing to watch is going to be where that capital flows to. Reinsurer equity is looking like a good bet at the moment, but for those more interested in benefitting from the premiums underwritten, the insurance-linked securities and catastrophe bond space are as attractive as ever.

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