Hedge Funder Stahl Says Bermuda Bet is a Safe ILS Play “At the Margins”

The largest single shareholder of Bermuda Stock Exchange (BSX) argues that despite consolidation in reinsurance and stalling premiums, insurers will continue to lay off risk by raising capital through insurance-linked securities (ILS).

“One day, we hope—we do not know, but we hope—that the insurance-linked securities business is going to be orders of magnitude larger,” said Murray Stahl, cofounder of the multi billion hedge fund firm Horizon Kinetics LLC. “We don’t know that; we can’t predict it, but insurance companies like to lay off their risk, and Bermuda is the home of that kind of investment.”

Stahl said during the annual shareholder meeting for FRMO Corp., the holding company for Horizon Kinetics.

After accumulating 37.57% of outstanding BSX shares, the New York-based hedge fund has been gradually increasing its ownership in the offshore domicile’s equity exchange.

Prior to 2015 it held a 37.57% interest, but then increased its shareholdings to 40.08% this year, according to company documents. A 2014 agreement between the hedge fund and Bermuda allows it to  acquire up to a maximum of 575,265 additional shares, or 42.77% of total BSX shares issued and outstanding, at a price of $4.50 per share plus applicable stamp duty.

Stahl currenlty holds 2,648,733 shares of BSX as of August 15, 2015, according to disclosures.

Stahl argued during FRMO’s annual shareholder meeting last month that the firm’s BSX investment is a “seedling” that it intends to hold for the long term that allows Horizon access to the “real asset class” of ILS that it “ordinarily wouldn’t get exposure to in the conventional asset management business.”

“That’s a small but very rapidly growing asset class,” Stahl said, according to a meeting transcript. “Its size approaches $25 billion, and the Bermuda Stock Exchange has about a 67% market share in that class.”

During the Q&A portion of the meeting, Stahl said that the thesis behind the BSX bet is that capital will continue to flow through reinsurance and the ILS market.

“The idea is that, if they want to expand and control risk at the same time, a big payout resulting from a catastrophic event somewhere in the world, like an earthquake, would immediately disrupt their expansion plans,” Stahl explained. “Therefore, the logical approach is to take certain catastrophic risks and lay them off on the market. Ironically, the market is willing to accept that, and that’s actually a pretty good thing for the Bermuda Stock Exchange, at the margin. All these developments are at the margin. That’s sort of a nice thing, and I think that it’s going to continue.”


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