A.M. Best Special Report: Hedge Fund Reinsurers Struggle to Keep Up With Traditional Market Rivals

OLDWICK, N.J.--(BUSINESS WIRE)--

Hedge-fund-sponsored reinsurers were not immune to the adverse market trends of 2015, as premium growth and underwriting performance was unfavorable across A.M. Best's composite of hedge fund reinsurers. This population of reinsurers recorded a combined ratio of 111.5% in 2015, a deterioration of 6.6 percentage points from the previous year, according to A.M. Best'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% for 2015. Investment results for the hedge-fund-sponsored composite were similarly disappointing, with a 0.9% investment yield in 2015, with the most adverse performance in the composite being down 22.2% and the most beneficial in the composite being up 25.9%. This population of reinsurers also recorded an USD 279 million net loss and a return on equity of -4.7% in 2015.

Despite the poor investment and overall performance, A.M. Best 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 A.M. Best's various stress tests as part of its stringent start-up requirements. The success of these strategies has to be evaluated over the long term and through various market cycles. The robust capitalization 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.

"It also should be noted that none of the companies in A.M. Best's ‘hedge fund re' composite were able to avail themselves of prior-year reserve takedowns that have been heavily utilized by companies in the U.S. and Bermuda composite," said A.M. Best Vice President Robert DeRose. "For 2015, that represented a six-point benefit to the loss and combined ratios of the U.S. and Bermuda population."

Other highlights from this year's report include:

• Alternative capacity continues to fuel strong price competition. A.M. Best currently estimates that alternative capital represents approximately USD 71 billion of capacity, roughly 20% of the total dedicated capacity of the reinsurance market.
• A.M. Best's highly regarded annual ranking of the Top 50 Global Reinsurance Groups again reflected the dominance of the companies with top market share, as the top 10 reinsurance groups composed 70% of the overall market. Munich Re, Swiss Re, and Hannover Re have occupied the first, second and third spots, respectively, since 2010.
• The global reinsurance report also includes A.M. Best's analysis of the alternative capital market, along with in-depth reviews of the Lloyd's and life reinsurance markets, as well as geographic regions such as Brazil, Asia/Pacific and Africa.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=253443.

A.M. Best will present a webinar, "The State of the Global Reinsurance Market," on today, Sept. 8, 2016, starting at 10 a.m. EDT. A.M. Best analysts will cover recent developments in the Americas, Europe, the Middle East and Asia, as well as A.M. Best's annual ranking of leading global reinsurers. Register at no charge at www.ambest.com/webinars/reinsurance16.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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