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PHILADELPHIA-Alternative risk transfer companies, which have been popular with risk managers seeking non-traditional insurance options, have been attracting investors as well.
Companies in the alternative market represent a good investment, said Alice Schroeder, managing director for Oppenheimer & Co. in New York.Not only are alternative risk transfer companies growing faster than traditional insurance companies, but they also don't possess the underwriting risks of traditional companies, Ms. Schroeder said late last month at The Producers' Forum in Philadelphia, sponsored by Commonwealth Risk Services L.P.Many of the a ttributes that make alternative risk transfer companies attractive to investors also are good indicators for risk managers. A number of factors attract Wall Street investors, she said, regardless of industry. Investors want growth and earnings that increase over time. They also want companies involved in new and emerging markets so the companies "can have growth without having market share competition," Ms. Schroeder said.Investors want sustainable earnings , and not where one-shot transactions, such as a merger, boost growth.The quality of a company's management also is important, she said.
Investors want value. "Investors don't like to overpay," Ms. Schroeder pointed out. Stability of income is also preferred over volatility by portfolio managers, and the investment must be liquid, so investors can sell, she added.
What risk transfer companies must realize is that investors don't want to invest in a business they don't understand. Also, she added, investors don't want to invest money where they can't assess the risks.
Therefore, alternative risk transfer companies have to explain their bu siness to investors, she said.
One publicly traded alternative risk transfer company generally satisfies these criteria to date, she said: Mutual Risk Management Ltd. in Bermuda, which provides rent-a-captive and captive management services. MRM owns Commonwealth Risk, which sponsored The Producers' Forum.
Wall Street is interested in alternative risk transfer companies, she said, primarily because of their growth possibilities. Although most large U.S. compan ies already use a captive insurer in some capacity, midsize companies represent an area for growth, she said.Mutual Risk Management's growth underscores this point. Ms. Schroeder said that since 1991, when the company first traded publicly, fee income has grown by 27% per year and the market capitalization of the company has grown by 22.6% per year.
What investors also like about Mutual Risk and other alternative risk transfer companies is the lack of underwr iting risk along with growth rates that exceed those of traditional insurance companies.Ms. Schroeder, however, is not optimistic about all aspects of the alternative market. For example, she said securitization of risk does not ha ve a bright future. She called it "an elegant solution to a non-existent problem."To date, Ms. Schroeder said, these types of risk transfers, such as the United Services Automobile Assn.'s recent catastrophe bond offering, are mo re expensive than traditional reinsurance (BI, June 23).This is done to attract investors. The soft market and plentiful reinsurance capacity provide little reason for such deals to exist, she added