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Hedge funds bet on reinsurance recovery

Hedge funds bet on reinsurance recovery
Hedge funds bet on reinsurance recovery

Reinsurance rates are likely to rise at January 2018 renewals as a result of increased demand, boosting profitability

London, New York: Hedge funds bought reinsurance stocks in the third quarter after prices tumbled on widespread losses after multiple hurricanes in North America, filings showed on Wednesday.

Hurricanes in the United States and the Caribbean in August and September are expected to cause at least $100 billion (Dh367.3 billion) in insured losses, reinsurers and risk-modelling agencies have said. This far exceeds losses of about $74 billion caused by Hurricane Katrina, which hit New Orleans in 2005.

Reinsurance rates are likely to rise at January 2018 renewals as a result of increased demand, boosting profitability and driving the hedge fund interest.

The sector is looking “quite an interesting place to be”, said Nick Martin, manager of Polar Capital’s $1.3 billion insurance long-only fund, adding that years of falling rates have driven down valuations.

“It’s not a surprise that the savvy hedge funds are reassessing the sector.”

Polar Capital’s hedge fund business bought into some reinsurance stocks in the third quarter, including Validus Holdings, according to Symmetric-compiled data from US Securities and Exchange Commission filings.

Although reinsurance stocks were down across the whole of the quarter, they rallied by between 5 per cent and 20 per cent in the last few weeks of the period.

Hedge funds bought 2.44 million Validus shares, equating to 3.3 per cent of its stock, in the third quarter, bringing the industry’s total ownership to 14 per cent, the Symmetric data showed.

Managers with strategies ranging from event-driven to technologies-focused to computer-driven added 1.5 per cent of RenaissanceRe Holdings shares, bringing total ownership to 10 per cent, according to the data.

Hedge funds also bought 628,000 shares in XL Group, 528,000 shares in Chubb, 307,000 in Everest Re and 225,000 shares in Aspen Insurance Holdings.

“Reinsurance has historically been a good uncorrelated strategy that has generated equity-like returns with fixed-income-level risk,” said Kevin Lenaghan, a managing director on the hedge fund team at investment consultant Cliffwater.

“While the strategy can also be cyclical, multiple recent hurricanes and insurance company losses have improved the opportunity set. We believe that this may be a good time for investors to consider a reinsurance allocation.”

In addition to the hurricanes, earthquakes in Mexico and wildfires in California mean that 2017 could be the worst year on record for insurance losses.

Munich Re and Swiss Re, the world’s biggest reinsurers, have said they expect reinsurance rates to rise, with Swiss Re seeing rates rising by up to 50 per cent in disaster-hit areas.

Among hedge fund goliaths betting on a recovery for reinsurance stocks were Britain’s Marshall Wace, US duo Marathon Asset Management and Balyasny Asset Management.

All declined to comment or did not respond to requests for comment.