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Hedge fund reinsurers struggling

Hard times: Robert DeRose, vice-president of AM Best. A report by the company shows that hedge fund-sponsored reinsurers struggling with unfavourable market trends (File photograph)

Hedge fund-sponsored reinsurers were not immune to the adverse market trends of 2015, as premium growth and underwriting performance was unfavourable across a composite of hedge fund reinsurers.

That is the finding of AM Best, the insurance and rating information service.

Its composite of hedge fund reinsurers recorded a combined ratio of 111.5 per cent in 2015, a deterioration of 6.6 percentage points from the previous year, according to the company’s annual special report on the global reinsurance industry.

The new Best’s special report, Innovation: The Race to Remain Relevant, also notes that the start-up nature of most of these entities and related costs, coupled with less than optimal premium volumes compared with fixed expenses, led to an inflated expense ratio of 41.1 per cent for 2015.

AM Best said investment results for the hedge-fund-sponsored composite were similarly disappointing, with a 0.9 per cent investment yield last year, with the most adverse performance in the composite being down 22.2 per cent and the most beneficial in the composite being up 25.9 per cent.

The reinsurers measured also recorded an $279 million net loss and a return on equity of -4.7 per cent for the year.

Despite the poor investment and overall performance, AM Best said it believes it is too early to conclude that the hedge fund reinsurance model does not work.

“The level of investment volatility experienced is expected and is contemplated in AM Best’s various stress tests as part of its stringent start-up requirements,” it stated.

“The success of these strategies has to be evaluated over the long term and through various market cycles. The robust capitalisation of these companies provides the bandwidth to achieve success. It generally takes several years for a strategy to take hold and reach adequate economies of scale.”

Robert DeRose, vice-president at AM Best, said: “It also should be noted that none of the companies in AM Best’s ‘hedge fund re’ composite were able to avail themselves of prior-year reserve takedowns that have been heavily utilised by companies in the US and Bermuda composite.

“For 2015, that represented a six-point benefit to the loss and combined ratios of the US and Bermuda population.”

The report also noted that alternative capacity continues to fuel strong price competition.

AM Best estimates that alternative capital represents approximately $71 billion of capacity, roughly 20 per cent of the total dedicated capacity of the reinsurance market.

AM Best’s annual ranking of the top 50 global reinsurance groups reveals that the top 10 reinsurance groups composed 70 per cent of the overall market. Munich Re, Swiss Re, and Hannover Re occupy the first, second and third spots, respectively, as they have since 2010.