(Bloomberg) — Hedge fund firms that set up reinsurance companies will struggle because too many rivals had the same idea and investment results have been disappointing, according to a report from S&P Global Ratings.
Money managers entered the reinsurance business to gain access to permanent capital, in some cases more than $1 billion. They also sought a tax advantage by setting up operations in locations such as Bermuda. Reinsurers provide coverage for primary carriers.
“It’s a crowded trade,” S&P analyst Taoufik Gharib said by phone. “Hedge fund reinsurers, they don’t have a long track record, and they’re trying to compete.”
It will be difficult for such ventures to generate sufficient returns because many have yet to post an underwriting profit, Gharib said. Third Point Reinsurance Ltd., which is linked to Dan Loeb’s hedge fund, is trading for less than its initial public offering price and is on track for its third straight annual decline in New York trading, stung by both sub-par investment performance and unprofitable insurance contracts. David Einhorn’s venture, Greenlight Capital Re Ltd., has also posted losses on weak underwriting results and faltering investments.
‘Significantly riskier’
“These strategies tend to be significantly riskier and consume considerably more capital than those typical of traditional reinsurers,” the S&P analysts wrote in the report, adding that some of the firms could become “carcasses on the side of the road,” without specifying which ones.
S&P cited the closing of ventures since early 2015, including ones tied to Paulson & Co. and Cliff Asness’s AQR Capital Management, which shuttered after hedge fund startups pushed down reinsurance pricing. Investors are also becoming more hesitant. Oaktree Capital Group LLC this year scrapped plans to form a reinsurer with XL Group Plc.
Money managers are better off pairing with an existing reinsurer because they can then gain access to a wider class of clients, S&P said. BlackRock Inc. formed a Bermuda-based operation last year with the insurer that is now known as Chubb Ltd. Blackstone Group LP joined with reinsurer Axis Capital Holdings Ltd. to raise money for a venture.
Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader
Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:
- Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
- Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
Already have an account? Sign In Now
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
