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Hedge Funds Piled Into Reinsurance Cos After Hurricanes
Bermuda-based PXRE Group, whose stock price imploded last week, is not the only reinsurance company with major hedge fund shareholders. Some of the biggest hedge funds have substantial stakes in PXRE competitor companies, according to Securities and Exchange Commission filings that reflect holdings through Dec. 31, the last day of last quarter.
Bermuda-based PXRE Group, whose stock price imploded last week, is not the only reinsurance company with major hedge fund shareholders. Some of the biggest hedge funds have substantial stakes in PXRE competitor companies, according to Securities and Exchange Commission filings that reflect holdings through Dec. 31, the last day of last quarter. Most of these trades probably took place after last fall's hurricane season, because of a perceived opportunity for reinsurance companies, explained a hedge fund manager whose firm is not invested in the sector.
Farallon Capital Management, the world's biggest hedge fund, is also the largest shareholder in Bermuda-based insurance and reinsurance company Arch Capital Group. The San Francisco firm increased its stake from 1,115,688 shares in Q305 to 2,531,889 at the end of last quarter, according to SEC filings. SEC Rule 13F states that investment firms with stock holdings worth $100 million or more must disclose these to the public. Wellington Management was Arch Cap's third-largest institutional shareholder as of Dec. 31. D.E. Shaw, Citadel Investment Group, Balyasny Asset Management, Caxton Associates,Renaissance Technologies and Pequot Capital Management are among other hedge funds with stakes in the company. Its stock price has increased nearly 50% since the start of Q305. Wellington is the second-largest institutional shareholder in RenaissanceRe Holdings and the third-largest in Everest Re Group. Endurance Specialty Holdings' biggest shareholders include Perry Partners International. For more, see the chart below. In nearly all cases, the firms' Dec. 31 holdings increased--sometimes substantially--over Q3 allocations.
"Whenever a natural disaster occurs, people like to pile into the reinsurance sector [because] of the assumption that premiums will increase and the companies will have additional cashflow," explained Lenny Zephirin of The Zephirin Group, an independent research firm. The assumption is based on the fact that disasters spike the demand for insurance and reinsurance policies, allowing the companies who write them to increase prices.
PXRE's stock price plunged 66% last week after the company announced its net pretax estimate of losses from last year's hurricanes had increased by as much as $311 million, bringing total hurricane losses to as much as $788 million. "It will definitely impact the major insurance companies," said Zephirin. Because reinsurance companies hedge liability by trading risk with each other, analysts and others expect the PXRE effect to ricochet throughout the space. XL Capital and RenaissanceRe reported substantial fourth-quarter losses earlier last month, in large part due to hurricane-related losses, but neither stock has mimicked PXRE's fate. XL's stock price has increased in recent weeks. Calls to the companies were not returned by press time.
|Hedge Fund Holdings In Reinsurance Companies|
|HEDGE FUND||ARCH||ENDURANCE||EVEREST RE||MAX RE||PXRE GROUP||RENAISSANCE RE||REINSURANCE||XL CAPITAL|
|Shares held on Dec. 31|