Bermuda Hedge Fund’s “Peak Risk” Focus
Hurricane and earthquake “peak risks” avoided by reinsurers offer an opportunity for investors willing to fill the gap, according to Bermuda-based Nephila Capital Ltd., a hedge fund specialising in insurance-linked investments.
“Reinsurers are forced to diversify because of rating- agency pressure, resulting in less capacity being allocated to peak-risk coverage and more to diversifying perils than is warranted,” Nephila managing partner Frank Majors said this week in an interview with the Bloomberg financial and business media group. “There is a lot of unmet demand for catastrophe cover in peak risk areas such as US hurricanes, US earthquakes, European wind storms and Japanese earthquakes.”
Mr. Majors said the lack of investment has prevented earthquake insurance from being affordable for enough Californians. Earnings at reinsurers such as Munich Re and Hannover Re, which help primary insurers shoulder risks and are under pressure from credit-rating companies to preserve their capital buffers, have been hurt by catastrophes including the earthquake and tsunami that struck Japan in March. Incidents such as Hurricane Katrina forced Hannover Re to halt its dividend in 2005.
Mr. Majors said Nephila’s catastrophe coverage offers returns that aren’t correlated to capital markets, luring pension funds, who account for 85 percent of Nephila’s investor base, up from less than 35 percent before the financial crisis. The company manages about $4.5 billion and targets “high single digit” percentage returns per year.
“The fact that only one out of eight homeowners in California is buying earthquake insurance tells us that capacity in the reinsurance industry is not flowing efficiently to the real problem,” Mr. Majors said. “We can offer more cost-effective reinsurance to primary carriers due to the lower cost of capital we provide as a result of our business model.”
Nephila, was founded in 1997 by Mr. Majors and Greg Hagood in London as part of reinsurance broker Willis Ltd. Its invests mostly in insurance-linked securities and in direct reinsurance coverage through its own reinsurer.
Man Group Plc, the world’s largest hedge fund, has owned a 25 percent stake in Nephila Capital’s parent, Nephila Holdings Ltd., since 2008.
Natural disasters caused record insured losses of $70 billion in the first six months of the year, according to industry analysts Guy Carpenter & Co., a unit of Marsh & McLennan Cos. At the same time, low interest rates are crimping reinsurers’ investment returns, which typically provide a buffer for earnings when claims rise.
