Investors have plowed $23 billion into reinsurers, both new and established, since Hurricane Katrina, according to the Reinsurance Association of America.
And $7.3 billion of that comes from hedge fund and private equity firms that have flooded new Bermuda-based start-ups with capital, according to The New York Times.
Hedge fund companies have sent another $3.6 billion gust to the industry in the form of so-called sidecars, or special added agreements.
During the 12-month period prior to Hurricane Katrina, no hedge funds invested in the industry, according to Frank Nutter, president of the Reinsurance Association.
Insurers and reinsurers alike create models based on potential claims, and then use those figures to set the price of premiums. Last year was a once-in-a-century year, giving insurance companies the opportunity, and justification, to ratchet up premium rates.
Premiums for residents of the Gulf Coast have increased two-fold, and in some cases more, compared to 2005.
Because premiums are steady, reinsurers also help curb against market swings.
Last year was the most expensive in history for insurance firms, which faced $80 billion in claims for three sweeping, nearly consecutive storms, according to Standard & Poor's. Because it was a blockbuster year, many predict such a series of events is a long time away, giving insurance companies an opportunity to replenish their profit reserves.
"It's not a short-term investment," said Nutter. "They can sell, but they can't just walk away."
Companies that have sought profit in Bermuda, a hub for reinsurance companies, include Citadel, a $12 billion Chicago-based fund; Magnetar in Evanston, Ill.; Bostons' Highfield's Captial Management; XL Capital; and Eton Park Capital.
Catastrophe bonds typically yield between 5% and 15%, according to S&P, and in 2005, about $1.8 billion worth were issued. This year, another $2.5 billion in catastrophe bonds have been offered to date. Since Hurricane Katrina, 10 new reinsurance companies have opened, and 10 sidecars. Existing reinsureres have raised $12 billion more.
The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.