Secquaero Advisors managing partner Dirk Lohmann airs views
Dirk Lohmann, managing partner at Secquaero Advisors:
1 Why are investors interested in reinsurance (for example, cat bonds) as an option?
It is a risk that is not correlated to the financial markets and an asset class that diversifies well both to traditional assets like bonds or equities, as well as alternative assets such as hedge funds, commodities, or high yield.
The investment case for this was proven back in 2008 when most investors tried to look to diversify by investing in hedge funds, commodities, and other things. For all those large clients, it was the worst move ever because there was no diversification. Insurance and cat bonds were the few that continued to do well.
Insurance risks are different because these are local and not correlated to each other. They have also consistently generated a positive absolute return with a relatively low volatility.
2 Is this classed as a good risk option for non-insurance investors?
With this asset class and with any other asset class there is always a risk. The question is: Is that risk fairly compensated and how much of that risk are you willing to consume? Insurance bonds are securities where the principal’s at risk, so if the event happens you lose your investment. The consequence of that is what makes it an interesting risk.
3 Will reinsurance continue to be an investor’s choice in 2014?
There’s been a lot of talk that capital markets have been rushing into insurance securities and cat bonds because of low interest rates. That’s not quite correct. What many institutional investors now have learned is that not only does insurance offer positive absolute returns, but it is not correlated and that has a value in its own right regardless of where general interest rates are. We would argue that this is definitely an asset class that is now slowly emerging from being a small niche to a more institutional-type product and will become a feature in a strategic asset allocation for any investors long term.