The insurer that ridesharing service Uber Technologies Inc. uses to protect drivers and passengers is going public, promoting how it’s more willing than competitors to invest in junk-rated loans.
James River Group Holdings Ltd. outlined its strategy this way in a Dec. 2 prospectus: “We do not operate like a hedge fund, but we are comfortable allocating a portion of our assets to non-traditional investments.”
About a fifth of its $1.2 billion portfolio was in bank loans at the end of September, according to the filing from the company, which is backed by hedge fund firm D.E. Shaw & Co. and Goldman Sachs Group Inc. While these holdings offer higher yields than insurers’ typical investments, they tend to be below investment grade and trade infrequently, making them hard to sell in a pinch.
“It’s not conservative,” said Alton Cogert, chief executive officer of Strategic Asset Alliance, a company that consults with insurance companies on their investment portfolios. Still, such an allocation could be “reasonable” because James River’s surplus, or assets minus liabilities, is sufficient to cushion losses, he said.
Shaw organized a Bermuda-based holding company that bought James River in 2007 for more than $560 million. The switch cut tax rates at the insurer, which was previously in Chapel Hill, North Carolina.
Most of the company’s sales come from excess and surplus lines, or coverage that isn’t licensed by a state. The E&S market focuses on more complicated underwriting.
Shaw, Goldman
One area James River has developed is selling coverage to ridesharing — or transportation network — companies, like Uber. Premiums for that business climbed to $18.7 million in the first nine months of this year from about $1.7 million in the same period in 2013, according to the prospectus.
Shaw and New York-based Goldman Sachs each are offering as many as 6.33 million shares in the sale, which is expected on Dec. 11. A sale of that size would cut the bank’s stake to 4.1 percent from 26.3 percent. Shaw’s could drop to as low as 50.4 percent from 72.6 percent. At the high end of the price range, the insurer could be valued at as much as $685 million.
John Clarke, a spokesman for James River, declined to comment. Nairi Hourdajian, a spokeswoman for Uber, confirmed that it has a policy from James River and declined to comment on the insurer’s investment strategy.
One key to attracting shareholders is delivering portfolio returns that are better than what the company could get by choosing only investment-grade bonds. Federal Reserve policy makers have kept interest rates low for years to stimulate the economy. That’s put pressure on fixed-income investors, like insurers, which have posted some of the lowest portfolio yields in decades.
‘Wasting Assets’
Insurers usually buy highly rated bonds to back policies. On the margins, they may invest in stocks, real estate and hedge funds among other assets to increase returns. The idea is to make money off the premiums they collect, while having plenty of easy-to-liquidate investments to pay claims.
Coupons have fallen so much that Warren Buffett called the bonds on insurer balance sheets “wasting assets” last year. The billionaire has long favored buying stocks for the insurance companies at his Berkshire Hathaway Inc. and keeping billions of dollars in cash on hand to pay big claims.
James River isn’t alone among Wall Street-backed firms pushing into riskier assets. Life insurers tied to Harbinger Group Inc. and Apollo Global Management LLC have been adding mortgage-backed securities in recent to boost yields.
Loeb, Einhorn
Hedge fund managers Dan Loeb and David Einhorn have taken a different approach. They started reinsurers that outsource investment decisions to the star money-managers. Both companies highlighted the arrangement when they went public.
James River said investors shouldn’t expect the same approach, even as it emphasized the returns it gets on harder- to-sell assets. Yields on its bank loan portfolio were 5.5 percent at the end of September, more than double what it was earning on its core fixed-income holdings.
“It’s a different mix,” said Cogert. “But the fact that it tends to be in more illiquid securities may well be a plus.”
–With assistance from Richard Bravo in New York.
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