According to data compiled by offshore jurisdiction specialist firm Appleby, private equities are increasing their investments in the insurance and reinsurance market to take advantage of the prevailing high premiums for insurance and reinsurance products. Private equities are acting on the favorable market conditions in this space as the recent effects of catastrophic losses experienced during the Christchurch earthquake and the Hurricane Sandy not only resulted in increased premiums, it also caused poorly capitalized insurers and reinsurers to exit the market on being forced to make large payouts.
Recent Private Equity Natural Disaster Investments
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Private equity firm Kohlberg Kravis Roberts recently bought a 24.9 percent stake in hedge fund Nephila Capital that focuses its investments on reinsurance opportunities tied to natural disasters like hurricanes and earthquakes. Other recent private equity forays into insurance sectors include the acquisition of Cunningham Lindsey Group Ltd., one of the world’s largest insurance-claims adjusters by CVC Capital Partners. Chicago based private equity firm Flexpoint Ford LLC, which focuses on the financial services and healthcare sectors also made a recent investment in the insurance space when it bought GeoVera Insurance Group Holdings, which provides residential earthquake insurance in the Western United States and specialty homeowners insurance in wind-exposed areas across the Southeast United States and Hawaii.
Diversification, Yield Attracting PE Firms
Insurers and reinsurers typically get capital from investment banks. But recent tighter regulatory norms have hamstrung investment banks and the prospect of attractive returns has pulled in private equity funds to the sector. Another incentive for private equity firms to invest in catastrophic risks is the lack of correlation of returns to the equity markets and other asset classes. As a result, some private equity firms are viewing investments in insurance and reinsurance vehicles as an effective way to diversify their investments.
Impact On Jobs
The trend of private equity firms opening up to insurance and reinsurance markets is a net positive for the industry. With more investors turning to private equity and other nontraditional investments for high returns in the face of low interest rates and a volatile stock market, private equity firms are pressured to look for returns beyond M&A deals and buyouts. Private equity firms may continue to actively invest in insurance businesses as new capital requirement norms mandate investment banks to maintain higher level of capital which in turn restrict their ability to lend to insurers.
