As some exit, a new crop of investors are rotating in: Share, Oaktree Capital

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While reinsurance and insurance-linked securities (ILS) continues to see a rotation out of certain investors, given macro factors and concerns over volatility, at the same time there is a new crop of investors rotating in that may better understand the fundamentals of the space.

This is according to Greg Share, Managing Director for the Opportunities Funds at investment firm Oaktree Capital Management L.P., who was speaking during a webinar held by Aon’s Reinsurance Solutions yesterday.

Moderating the webinar, Aon’s Head of Capital Advisory Kelly Superczynski explained that there is no shortage of demand for capital in reinsurance and that could actually be increasing.

Superczynski said, “There is a demand for reinsurance in particular. There’s a demand for property reinsurance, there’s a demand for casualty reinsurance right now and so, it’ll be interesting to see how investors contemplate being able to deploy a bit more capacity this year, to meet some of these demands and these needs of the insurance industry.”

Commenting on demand and the ability of investors to fill it, Oaktree Capital’s Greg Share said, “I do think that it is returning, but it’s returning in a way where there’s been a rotation of investors.

“The typical, you know, Japanese pension fund or bank, in a negative interest rate environment, that really liked reinsurance and was participating in reinsurance type vehicles, now, with higher rates and the ability for them to meet their required return with less volatile fixed income securities, they’ve been rotating out and they’ve had a lot of, historic investors have, had tough experiences over the last four or five years.”

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Share went on to say that, “I think a new crop of investors, that really understands not only the difference in price now, but the difference in terms and conditions, the difference in limits, the difference in retentions, is rotating in.

“So I think we are in a cycle, where certain investors are getting out and other investors are getting in.”

He went on to explain that he sees the interest rate environment as a key driver for many investors right now, in moving in one way or the other.

“I do think that, with higher interest rates, there are other interesting opportunities out there,” Share said.

But this means there could be investors waiting for a better view of performance, Share believes.

He said that, “The last four or five years have made it very acute that there’s a lot of volatility, especially in cat, and when investors are looking to manage their portfolios there’s concern about taking the volatility risk and questions they get from their own investors and limited partners about, is the risk worth the volatility. So, without really understanding the detail and understanding the benefits of the improved terms and conditions, I think there’s capital on the sidelines.”

Adding, “I think that’s likely to change in the next year or two, as some above-average returns start flowing through the reinsurance market, as I expect will occur.”

Share went on to say that there is more to investing in reinsurance than just targeting the returns.

On the fund side, he explained that the quality of the management team is critical and an area deserving of more attention.

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Later in the webinar he said, “This is a business and an industry where you have to trust your counterparties and the management team, there’s a lot of leeway in reserving, there’s a lot of leeway and deciding which risks go into one bucket versus the other, so from the investor point of view having that trust is key.

“Once that’s established, there’s lots of flavours that you can participate in the risk and different funds have different focuses, whether it’s more on IRR, multiple of return, or even for real money accounts like pension funds and endowments, they have their own sets of criteria. So I think that the broader the basket to choose from the better.”

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