Re Insurance Redux Article From Absolute Return Magazine_11.28.06

Absolute Return Magazine November 28, 2006 Carolyn Sargent Main feature Reinsurance redux The roll of the dice paid off this year, but its still a big gamble As this years U.S. hurricane season quietly winds down, hedge funds that took on windstorm exposure for Florida and the Gulf of Mexico are breathing a sigh of relief – and celebrating a pretty posh payday. Not one of this years five Atlantic tropical depressions reached landfall, leaving the multistrategy firms that reinsured hurricane

Re Insurance Redux Article From Absolute Return Magazine_11.28.06

Re Insurance Redux Article From Absolute Return Magazine_11.28.06

All materials on our website are shared by users. If you have any questions about copyright issues, pleasereport usto resolve them. We are always happy to assist you.

Absolute Return Magazine November 28, 2006Carolyn Sargent Main feature Reinsurance redux  The roll of the dice paid off this year, but its still a big gamble As this years U.S. hurricane season quietly windsdown, hedge funds that took on windstorm exposurefor Florida and the Gulf of Mexico are breathing a sighof relief – and celebrating a pretty posh payday. Notone of this years five Atlantic tropical depressionsreached landfall, leaving the multistrategy firms thatreinsured hurricane losses along the U.S. coast withreturns estimated between 20% and 40%. With such bountiful results – and such paltryreturns in many strategies elsewhere – its nosurprise that some of the biggest hedge fundnames have been attracted to propertycatastrophe reinsurance this past year.Citadel Investment Group, Magnetar Capital,Eton Park Capital Management, FarallonCapital Management, Highfields CapitalManagement and Och-Ziff CapitalManagement have all recently increasedtheir reinsurance exposure. Other major multistrats are understood to be carefully considering the strategy, including the $23.2 billion D. E. Shaw.But were this years outsize results sheer luck, a fortunate turn of the roulette wheel, or have hedge fundsfound a more permanent source of alpha? Standard&Poors estimates that the reinsurance industrysaverage 10-year rate of return is a mere 5.2% – not exactly up to hedge fund standards. The answer, then,depends on which of the many ways a hedge fund firm chooses to play the markets, how big the exposure isrelative to the rest of a firms portfolio and, ultimately, how prickly Mother Nature proves to be.A hedge fund can invest in reinsurance in any number of ways, from catastrophe bonds and sidecars tomore involved techniques such as fronting risk through derivatives contracts to actually setting itself up as areinsurer. While these various strategies can produce a range of returns, hedge funds have shown greatcomfort thus far in assuming the most volatile business from the reinsurance industry, according to GregHendrick, president and chief underwriting officer of Bermudas XL Re. Insurancecompanies get towrite morebusiness, andhedge funds get achance to accessthe insurancebusiness in a way Typically, hedge funds target returns of 15% to 20% for their reinsuranceinvestments. In an industry with such low average profitability, funds canachieve these targets only by writing a narrower subset of riskier policiesfocused on the most capacity-constrained areas, such as retrocessionalreinsurance – reinsurance for reinsurers. Meanwhile, some hedge fund-backedreinsurers are looking for higher returns on the asset side of their balancesheets, by investing capital more aggressively – in, say, long/short equitystrategies as opposed to safer investment-grade bonds.But thats a big gamble. Even though the offshore nature of reinsurance meansthere are few regulations and no mandated capital cushion, hedge funds dont have extra capital to throwaround. Hedge fund-backed reinsurers that take on higher risk on both sides of the balance sheet could bewriting a recipe for big losses.Some funds dabbling in reinsurance have already been singed. D. E. Shaw and Eton Park, for example,were big holders of the stock of Bermuda reinsurer PXRE Group, which suffered sizable losses from the2005 hurricane season.Hedge funds are not new to reinsurance. After all, John Meriwethers Long-Term Capital Man-agement wasa big investor in catastrophe bonds in the 1990s, as was Nephila Capital, a Bermuda-based hedge fund firm.Moore Capital Management set up a reinsurance company, Max Re Capital, in 1999.What has changed, however, is the magnitude of hedge fund interest. Hedge funds want new sources of return to replace other sources of hedge fund return that have been competed away. Further, the fact thatreturns to reinsurance risks are orthogonal to strategies that seek risk premiums from traditional capitalmarket sources makes reinsurance even more attractive, says Andy Sterge, who is responsible for reinsurance risk investments for Magnetar, a $3 billion multistrategy hedge fund firm in Evanston, Ill.The shape and success of the reinsurance industry run in cycles, tracking the pattern of losses and claims.Years that bring costly disasters, such as 1992s Hurricane Andrew, 2001s terrorist attacks on the WorldTrade Center and 2005s Hurricane Katrina, are typically followed by a reduction of reinsurance capacity asreinsurers pull back on their risk exposure. As capacity shrinks, prices rise in what is dubbed a hard market,and new companies form to take advantage of higher premiums.Underscored by Hurricane Katrina and its estimated $80 billion to $90 billion in insured losses, 2005 turnedout to be the busiest and costliest hurricane season on record. In the aftermath of mammoth losses,premium prices rose by as much as 70% to 100% in the most exposed zones, according to Steve Ader, adirector in S&Ps insurance ratings group. Now, more than a year later, S&P says the industry is stillexperiencing substantially improved pricing, particularly in catastrophe businesses such as property, marineand energy. New reinsurance companies are also continuing to form.Hedge funds dont need to be reinsurance companies to get reinsurance exposure. One of the simplest andpurest ways to take on insurance risk is to purchase catastrophe bonds, a market that is estimated to havedoubled in size to about $4 billion over the past year. Cat bonds, risk-linked securities issued by an insurer such as Swiss Re or AXA, began appearing after Hurricane Andrew in the mid-1990s. Generally structuredto mature in two or three years, cat bonds pay out a floating-rate coupon in return for the catastrophe risktransferred to investors. That risk is simply this: If certain conditions are met regarding insured industrylosses, the investor forfeits the bonds principal to cover claims.Yield-hungry hedge funds like cat bonds because their risk premiums, of up to 15%, are generous relative todouble-B-rated corporates, a cat bonds most analogous counterpart. Hedge funds also like the fact that catbond returns emanate from a class of risk, such as Tokyo earthquake or Florida hurricane, that isindependent of the capital markets.Another technique for taking on shorter term insurance risk, and one that has received a lot of attention thisyear, is the so-called sidecar. A sidecar, structured as a special-purpose entity, allows a hedge fund to takeon a pro-rata share of a specific part of a reinsurers business for a fixed period of time, say one or twoyears. Late last year, for example, XL Re formed a sidecar with the $8.4 billion Highfields. Capitalized at that is cheaper than capitalizingand setting uptheir ownreinsurer Christopher McGhee $535 million for a period of two years, Cyrus Re covers the catastrophe excess-of-loss portfolio of XL Re for certain lines of property catastrophe reinsurance as well as its retrocessionalbusiness.Sidecars are popular in a market where capacity is shrinking because insurance companies get to write more business, and hedge funds get achance to access the insurance business in a way that is cheaper thancapitalizing and setting up their own reinsurer, explains Christopher McGhee,managing director in charge of the investment banking and capital marketsbusiness for Guy Carpenter & Co.Hedge funds typically look for a 20% return on sidecars, at least for the equitytranches, which have recently run in size from $60 million up to as much as $1billion. Like cat bonds, sidecars are not brand new. Renaissance Re set up two joint ventures – Top Layer Re, in 1999, and DaVinci Re, in 2001 – that could be viewed as models for todayssidecars. Unlike Top Layer Re and DaVinci Re, however, todays sidecars are not rated and do not dobusiness on their own behalf. But they do allow reinsurers to offset some risk from their own balance sheets.Following Katrina, interest in side cars has picked up dramatically as the market for reinsurance tightened.This year, some $5.24 billion in sidecars have been funded, according to the Rein-surance Association of America. Hedge funds have poured an estimated $3 billion into such vehicles.But cat bonds and side cars are limited in that they typically carry very heavy exposure to propertycatastrophe. The cat bond market is also relatively small, representing a mere 2% to 3% of the riskstransacted in the reinsurance market. A more involved investment technique that involves working with areinsurer to front or transform risks from reinsurance form to capital-markets form has evolved to allowhedge funds to participate in a broader range of risks than are currently available in cat bond form. This letsthem invest more heavily in insurance risks, says McGhee of Guy Carpenter.To get more flexibility and control over their reinsurance exposure, as well as access to much deeper markets, hedge funds may choose to set up their own reinsurer. In the past year, Citadel, Magnetar, EtonPark and the management team of West End Capital Management all established and capitalized their ownreinsurers. Eton Park, through its private equity portfolio, also participated in such a transaction inpartnership with other private equity funds. Ritchie Capital Management, meanwhile, set up Ritchie Risk-Linked Strategies in Bermuda in the spring of 2005. Setting up a reinsurer allows you access into the marketplace, because that is where there are the mostbuyers of protection, says Barney Schauble, a principal at Nephila Capital, which manages insurance- andreinsurance-related hedge fund assets. Nephila formed its own reinsurer,Poseidon Re, in 2003.Establishing a reinsurer may sound like a costly and time-consumingproposition. But in truth, the barriers to entry – at least in the lightly regulatedreinsurance capital of the world, Bermuda – are relatively low. All a hedge fundreally needs is enough capital to satisfy its clients – the insurance companiesseeking to offset some liabilities – and a team of experienced reinsuranceexecutives.For hedge funds, capital is the easy part. The $12.1 billion Citadel set up NewCastle Re late last year with $500 million. The $4 billion Greenlight Capitalcapitalized Greenlight Re with $220 million. Flagstone Reinsurance Holdings,which was sponsored by the management team of West End CapitalManagement, a Bermuda hedge fund, Lehman Brothers Merchant Banking andLightyear Capital, a New York private equity firm, was initially capitalized with$715 million. Setting up areinsurer allowsyou access intothe marketplace,because that iswhere there arethe most buyers of protection Barney Schauble Years that bringcostly disasters,such as 1992sHurricane Andrew,2001s terroristattacks and 2005sHurricane Katrina,are typicallyfollowed by areduction of reinsurancecapacity asreinsurers pullback on risk Getting industry expertise is critical, and for most hedge funds that means looking outside for help. Peoplewant to know Who is running the company, and does the market think they are credible? says oneinvestment banker with long years of reinsurance experience.Magnetar, founded by Citadel alum Alec Litowitz, brought in Sterge and his team this year to help establishits reinsurer, Pulsar Re. Sterge once served as chairman and chief executive of Cooper Neff and createdCoopers Risk-Linked Assets Fund, one of the earlier hedge funds dedicated to reinsurance. More recently,Sterge managed his own firm, AJ Sterge Investment Strategies, which managed investments in insurancerisk as well as other segments of the equity and fixed-income markets. AJ Sterge is now a division of Magnetar.Similarly, when David Einhorns Greenlight Capital set out to launch Greenlight Re in the Cayman Islands,the hedge fund firm hired Len Goldberg from Alea North America Insurance and Bart Hedges from PlatinumUnderwriters Bermuda. Citadel, meanwhile, tapped Chris McKeown, former chief executive of Ace TempestRe, when it formed its first reinsurer, CIG Re, in 2004. McKeown now also runs New Castle Re, whichCitadel formed after Hurricane Katrina.The staffing needs of a reinsurance company depend on its lines of business and the breadth of risk typestaken. But it doesnt require loads of people. A Bermuda reinsurer is a way to participate in the market asan insider. It allows one to be more flexible, explains Magnetars Sterge. In large part thats because of therole reinsurance brokers play. The reinsurance business is one in which you dont need a massivedistribution arm, says McGhee of Guy Carpenter. You can hire a relatively small number of people to writea relatively small number of policies. Most of the attention to hedge fund investment in reinsurance has focused on short-term propertycatastrophe plays in the Atlantic, Caribbean and Gulf Coast. Reinsurance is obviously a much broader business than that. The big multistrategy hedge fund firms typically take risks in the four biggest territoryperils: Japan earthquake, California earthquake, U.S. hurricane and European windstorm. Hedge fund-backed reinsurers have also delved in to the life settlement, or viaticals, business.Catastrophe is attractive to hedge funds in part because the risks can be more easily modeled. If you aregoing into more difficult insurance products, such as directors and officers coverage for a large anddiversified company, then you would need to keep an eye on the companys whole business operation. If youre a hedge fund, catastrophe risk is something that is easier to model. The risk is binary: either thecontract is triggered, or it isnt, explains S&Ps Ader.Through a reinsurance arm, hedge funds can participate in a range of reinsurance transactions. One popular strategy is to purchase contracts of indemnity called industry loss warranties. These warranties are triggeredwhen two conditions are met. The ceding company must have experienced a loss at a specified level, andthe insurance industry as a whole must have suffered a loss at a specified level as measured, at least in theUnited States, by Property Claims dustry loss warranties may be the easiest type of reinsurance contracts to understand. They requireexpertise, but they are not esoteric like indemnity reinsurance contracts, where a firm is indemnifying aceding company on a piece of business, Sterge explains. ILWs are something that capital-marketderivatives guys can understand because they are instruments with a probability of payoff. You cant get itoff Bloomberg, but you can hire a guy to run the probabilities and obtain a price. Citadel set up two reinsurers to take advantage of different segments of the reinsurance market. CIG Re,established in 2004, writes collateralized, customized property catastrophe business. New Castle Re, whichcarries an A- rating from A.M. Best and thus doesnt have to tie up its capital in collateral, is more likely toparticipate in broadly syndicated risk offerings over a range of perils beyond property catastrophe, such asaviation and workers compensation.Hedge funds do hold a few advantages over their traditional reinsurance peers. First and foremost, their primary business is investing – oftentimes aggressively – which could boost returns on their investmentportfolio. Max Re, for example, srcinally set out to put its entire investment portfolio in hedge fundstrategies. Cayman Islands-based Greenlight Re, which carries an A- rating from A.M. Best, invests most of its assets in the same types of equities that Greenlights hedge fund buys. Thats probably good news for

September 2007. Institutionalising Common Pool Resources Management: Case Studies of Pastureland Management from Rajsamand district, Rajasthan (Co-authored with P. K. Mishra). 8-14. Economic and Political Weekly.(Special Article)

Polysulfides made from re-purposed waste are sustainable materials for removing iron from water

How does Parental Leave Affect Fertility and Return to Work? Evidence from Two Natural Experiments

Does Parental Leave Affect Fertility and Return-to-Work? Evidence from a True Natural Experiment

How does Parental Leave Affect Fertility and Return to Work? Evidence from Two Natural Experiments

11.28.11 Renegade Benedict Arnold Lawyers RGRD-Motion totry2 Steal more $$ from Class & institutional investor

170. ARK (Absolute Return for Kids) 31/09/2003 Accounts; funding Teens and Toddlers.

11-05-06 FOIA Request on the USODJ and Response in Re – Log Cabin Republicans v USA Et Al (2-04-Cv-08425) in the US District Court, Central District of California s

Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.