Catastrophe bonds offer answer to asset correlation problem
Friday, 11 October 2013 10:10am

Insurance-linked securities (ILS) offer investors returns completely uncorrelated to traditional assets, but so far, Australian investors have been slow to pick up on sector, which is tipped for strong growth in the coming years.

Insurance-linked securities (ILS), of which catastrophe bonds are the best-known type, package a specific set of insurance risks from an insurer to an investor. Developed in the 1990s in response to Hurricane Andrew, they were designed to allow insurers to diversify their liabilities.

The advantage for investors is that their values are driven not by movements in financial markets or interest rates, but by whether certain events, such as an earthquake in India, a Tsunami in Japan or a storm off the east coast of New York, do or do not occur. This means that returns are unrelated to the economic activity.

In the wake of the global financial crisis, and against a backdrop of lower investment returns in traditional markets, investors have increasingly sought out alternative asset classes.

For the first time in its nearly 17 year existence, the catastrophe bond market has hit $19 billion for the amount of risk capital outstanding.

In light of the growing interest in the sector, Plenum Investments Australia (the local division of the Swiss asset manager) is courting interest from Australian fund managers and institutions that have done their research and have an appetite for the asset class but lack the expertise to manage ILS portfolios on their own.

"We are a team of seasoned battle horses who have been involved since the earliest days of insurance-linked securities," said Plenum Australia's managing director Daniel Nickles.

The group grew out of Zurich when it became established as a reinsurance hub in the 1990s.

There are a only a handful of group's globally that provide ILS products and while there are larger players, such as Credit Suisse and Fermat Capital, Nickles said that a small firm like Plenum offers investors certain advantages.

"Larger players are limited in what they can buy because the supply isn't available to take meaningful positions. Smaller managers like us can pick and choose the securities we buy and can therefore offer greater diversification," he explained.

Home to large, sophisticated investors with a growing capital base, the group has identified Australia as a market with significant potential of ILS investment.

"Our message is that we're in business, we're ready to develop partnerships, we're flexible and we have a finished product that can be translated to the Australian market. We want to speak to investment banks that are thinking about adding to their alternatives exposure," Nickles said.

"Our technology can also be duplicated if clients want to manage their own ILS operations."

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