Five years after London-based hedge fund Toscafund ditched the shares it held in insurance companies, the $3.5 billion firm and its peers are flocking back, drawn by sharp premium increases which are lifting the sector’s post-coronavirus prospects.Insurers faced a surge in claims spanning trade credit to event cancellations as a result of the pandemic. Some have pulled out of unprofitable lines of business but for those who remain, the crisis has led to a steep rise in premiums, or a so-called “hardening” of the market, typical after a period of heavy losses.
Commercial insurance rates trose 19% year-on-year in the April-June quarter, says Marsh, the world's largest insurance broker, the most since the firm started compiling data in 2012.
Insurance was a successful part of Toscafund’s portfolios after 2012 as companies shelved expansion plans and started returning capital to shareholders, but that trade had faded by 2015, said Nigel Gliksten, a partner at the fund.
Now though, the sector looks more attractive.
“We’ve gone back into insurance this year. We’ve got (about) 15% weighting in the sector from stocks that we think will benefit from a significant hardening,” Gliksten said, adding that the pandemic had changed pricing levels “meaningfully”.
Share prices have yet to reflect a shift in prospects. A European insurance sub-index is down 25% this year, its worst performance since 2009. Lancashire and RenaissanceRe, two major holdings in Toscafund’s long-short equity fund, still trade at end-May lows, with year-to-date losses of more than 10%.
Funds such as Copper Street Capital are also betting that will change. Its founding partner and chief investment officer, Jerry Del Missier told Reuters he had recently hired an insurance analyst to start at the end of the year.
The recent shocks would throw up “challenges and opportunities” in insurance, he predicted.
NEW PRODUCTS FOR THE NEW NORMAL
Investors reckon that in a world where virus outbreaks and climate disasters may be the new normal, innovative new insurance products such as those providing relief during future lockdowns or when staff sickness hinders business, will prove lucrative.
Even while share prices remain subdued, insurers’ debt sales for the most part have been oversubscribed this year, thanks to strong credit quality, typically in the single-A category.
Alex Eventon, portfolio manager at London-based Resco Asset Management said he also saw higher-yielding restricted tier 1 (RT1) subordinated debt as “an interesting asset class for macro guys like ourselves”, though he declined to provide details.
Issuers of RT1 debt this year include Ageas, Legal & General and Phoenix.
Meanwhile, hedge funds are also said by insurance industry sources to be piling into catastrophe bonds — securities issued by insurers, sovereigns and others to insure against climate risk or natural disasters.
While bondholders don’t get paid in the event of a natural catastrophe, hedge funds are attracted to the high-yielding debt, according to one insurance official whose firm issued such a bond.
Global catastrophe bond issuance hit $6.5 billion in the first half of 2020, surpassing 2019 full-year issuance by 20%, according to insurance broker Aon.
Hedge fund managers say insurance markets started to turn in late spring but it’s only now that COVID-19 risks are clearing.
U.S. courts have begun ruling on business interruption cases — brought by those whose insurers declined to compensate for pandemic disruption — and a British test case, though headed for appeal courts, could provide more clarity.
“Maybe people are feeling more comfortable now with those risks, while also getting the pricing,” one hedge fund manager said.