Brett Hillard, CAIA, CFA, Chief Investment Officer at GLASfunds
The recent wildfires in southern California present investors with an opportunity to not only help impacted property owners continue to secure insurance, but to also realize attractive potential returns based on the dynamics of the current “hard market” in the reinsurance industry.
For background, insurance companies themselves need insurance to make sure they have enough capital to pay out claims in the event of major natural disasters, while also meeting regulatory requirements for sufficient capital reserves, which is where the “reinsurance” market comes to play. Essentially, reinsurance companies (such as Swiss Re Group, Munich Re Group, and Berkshire Hathaway) provide insurance to other insurance companies to cover against catastrophic loss. With an estimated $40 to $50 billion in insured losses resulting from the California wildfires (estimates by Renaissance Re, Swiss Re, and Arch Capital) and being that those losses occurred so early in the year, insurance companies will need to lean heavily on both repricing of premiums, as well as an injection of capital from the reinsurance marketplace.
And that is where the opportunity presents for opportunistic investors and their advisors.
Potential for Attractive Returns
The insurance industry has been in a hard market* since the end of 2022, which refers to capital being relatively scarce. Hard markets typically favor insurance sellers. That need for capital presents an opportunity for investors. Since 2002 through 2024, the Swiss Re Catastrophe Bond Index (catastrophe bonds operate similar to reinsurance) generated an average annualized return of nearly 11.5% during hard markets, and a 3.5% average annual return during soft markets. The total period average annual return was 6.1%. There have been no negative returning years for the Index during hard markets. Private reinsurance investments have a broader range of risk and return profiles compared to cat bonds, with some structures having materially higher return potential. We present the Index to highlight that hard markets have historically led to higher returns.
Diversification From traditional markets
While the potential for attractive returns compared to many traditional public and private investments is compelling, especially for private structures, investing in the reinsurance space offers investors another appealing benefit: diversification. While there is of course an inherent risk in investing in the insurance space (natural disasters are an obvious risk), that risk is very different and uncorrelated from the usual market risks that come with investing in the public markets. Particularly during times of volatility, when traditional financial markets experience downturns, the reinsurance market may not follow the same trends, offering a hedge against those risks.
With the trend toward more frequent and intense natural disasters showing no signs of abating, and with summer storms and the Atlantic hurricane season on the horizon, insurance and reinsurance companies will need to go to the market to secure capital to pay out claims and ensure that their customers can continue to receive insurance.
finding the right opportunities
Simply put, climate change and the increasing frequency of extreme weather events have made alternative reinsurance strategies, which are still a niche yet growing sector, more valuable.
As natural disasters become more common, the demand for reinsurance may continue to increase, creating opportunities for reinsurers who manage their risks effectively, as well as those who invest in them.
Contact us to learn more about emerging opportunities to invest in the reinsurance market.
*Hard markets defined as per the Guy Carpenter Global Property Catastrophe Rate Line Index for years above the average since 2002.
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