Hedge Fund Banks on Insurance05.31.2013
A newly-launched hedge fund is focusing on the insurance industry, a sector that has exhibited solid returns as part of the long-term bull market.
New York-based SaLaurMor Capital will rely on the expertise of its founder Joel Salomon, a former credit analyst and actuary who has almost ten years of experience investing in financials for Citi, FSI and Swiss Re.
“It’s a value-oriented, long-short equity fund with a focus on global insurers and asset managers and related industry groups with low turnover and a long-term investment time horizon,” said Salomon.
SaLaurMor uses proprietary balance sheet analysis, with a focus on creditworthiness, and scrutinizes regulatory filings to derive economic fair value to generate alpha.
The year 2013 started off much better than expected for the U.S. insurance industry, with most of the primary insurers beating first quarter earnings estimates and reporting relatively low combined ratios, according to Zacks Investment Research. Moreover, the sector continued to witness rising premium rates after a long period of softness.
“The sector seems to be reaching a favorable pricing cycle and its near-term outlook for pricing power remains upbeat in the wake of rising demand from economically recovering American households,” said Kalyan Nandy, manager of equity research at Zacks, in a report. “But a dearth of positive catalysts is delaying the recovery process of the insurers. Among the fundamental challenges, weak underwriting gains and low investment yields stand out.”
At Swiss Re, Salomon managed a credit portfolio averaging $25 billion in commitments, recommending companies to credit default swap traders based on relative valuation.
At FSI Group, an investment advisory firm specializing in the management of long/short equity hedge funds and private equity funds in the financial services sector, Salomon was responsible for up to 50% of hedge fund capital, and assessed more than 300 companies for long-short equity investments, and 125 high-yield public and private insurers for potential inclusion in CDOs.
“They were structuring CDOs, and were including bank and insurance company trust preferred paper in the CDOs,” he said. “Within a year, I was giving them long and short stock ideas in insurance, and ultimately I was responsible for close to 50% of portfolio.”
In 2008, Salomon joined Citi as a portfolio manager, where he managed a long/short equity and credit portfolio focused on insurers, asset managers, and specialty finance companies which grew from under $100 Million in 2008 to about $700 Million in 2011.
When Citi shut down its proprietary trading operations in 2012 as a result of the Volcker Rule, Salomon decided to launch his own fund. “I am a credit analyst at heart, and there aren’t many credit analysts who also have experience in investing in equities of financial companies,” he said. “Our approach here will closely replicate the approach I took at Citi, i.e., identify companies where current valuation is inconsistent with expected book value, ROE expansion, and potential rating agency action, and use credit analysis techniques as alternative valuation measures, for confirmation of and inconsistencies with proprietary equity thesis.”
The fund, which will be capped at around $700 million, will consist of approximately 20-40 longs and 15-25 shorts, with average monthly turnover of 5-7% and an average holding period of 12-18 months for core positions.
Core long and short positions are generally held for more than 12 months and as long as 36 months, Salomon said.
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