Analysis: Investors turning to reinsurance for juiced returns

Tue May 29, 2012 3:16pm EDT
 
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By Myles Neligan and Ben Berkowitz

(Reuters) - Investors globally, from hedge funds to retirement systems, are looking to an obscure corner of the insurance industry to boost returns and avoid some of the swings that have plagued stock and bond markets in recent years.

Their attention is focused on the reinsurance sector, which covers insurance companies looking to unload risk, attracted by its market-beating returns and low exposure to faltering economic growth in the United States and Europe.

Big-name hedge fund managers like Dan Loeb, Steve Cohen and John Paulson are putting money directly into the market by setting up reinsurance companies just in the last six or so months, taking on risks with their own capital in a bid to juice their returns.

More conservative investors like pension funds are fueling booming demand for specialized notes called "catastrophe bonds," which offer an income in return for agreeing to pay some of an insurer's claims if a hurricane or earthquake strikes. No less an investor than PGGM, the Dutch administrator with $154 billion in assets under management, is moving into the sector.

Hedge funds have been starting up reinsurance companies for years, but the recent moves by high-profile managers suggest a fresh influx could be on the way.

"You're going to see a lot more funds enter into this space, it's going to be ones with large amounts of capital. This is just a good place to invest money," said Andrew Schneider, chief executive of consultancy Global Hedge Fund Advisors.

RIDING A WAVE

Investors hope to benefit from rises of up to 100 percent in catastrophe reinsurance prices after disasters including Japan's Tohoku earthquake inflicted a $116 billion loss on insurers in 2011, the industry's second-worst catastrophe year on record.   Continued...