Wall Street bets on reinsurance after record Japan earthquake

Wall Street investors who started reinsurers after Hurricane Katrina in 2005 are again increasing bets on the industry to profit from higher rates, this time with a focus on limiting their time commitments.

Money managers are cooperating with reinsurers after Japan’s earthquake this year by supplying funds to back new coverage instead of setting up their own carriers to compete. That strategy may prove profitable to both investors and companies whose returns were crimped since 2007 by price declines, said Peter Hearn, chairman of Willis Group Holdings Plc’s reinsurance brokerage.

“I think the cautionary tale from 2005 is: The easiest thing is to get into the reinsurance business, the hardest is to get out,” Hearn said yesterday at the Bloomberg Link Japan conference in New York. “Permanent capital rushed in, the market spiked and it came right back down in 2007, a fairly short window to benefit from the increased pricing.”

Stone Point Capital LLC, the private-equity firm overseen by Goldman Sachs Group Inc. Director Stephen Friedman, contributed $100 million in April to a pool of funds that reinsurer Alterra Capital Holdings Ltd is using to write new policies. Validus Holdings Ltd. and RenaissanceRe Holdings Ltd each announced deals this month to raise capital from investors.

The funding agreements, known as sidecars, have a limited life span and give investors the opportunity to bet on reinsurance risks in periods of rising prices, Kenneth Pierce, global coordinating leader of insurance at law firm Mayer Brown LLP, said in an April report. First-quarter natural disasters, including the March 11 earthquake in Japan and floods in Australia, may increase their use, he said.

INSURED LOSSES
Total insured losses from catastrophes in the first three months of 2011 may exceed $50 billion, insurance broker Aon Corp. estimated. Matthias Weber, head of property and specialty at Swiss Re, the world’s second-biggest reinsurer, said prices for earthquake coverage rose as much as 60 per cent in Japan on April 1 when contracts were renewed. Katrina, which devastated New Orleans, cost the industry $62.2 billion, according to estimates by Munich Re, the largest reinsurer.

Reinsurers created in the Class of 2005 by banks, private equity and hedge funds have turned to mergers in the past two years to gain scale and return capital to investors. Stone Point became the biggest shareholder of newly created Alterra last year when its privately held Harbor Point Ltd combined with Max Capital Group Ltd. In 2009, Validus bought IPC Holdings Ltd.

Investors seeking to bet on reinsurers may choose to buy catastrophe bonds. The securities pay higher-than-benchmark yields to investors who risk losing their principal in the event of disasters that meet predefined conditions.