UK asset managers increase allocations to reinsurance through CATCo

by Artemis on February 14, 2013

Reinsurance-linked investments as an asset class is growing in popularity amongst investment managers who are perhaps considered more mainstream now that the profile of the reinsurance and insurance-linked investment space is rising. The latest example comes as a well-known UK investment house increased its allocation to reinsurance through investments in CATCo Investment Management’s fund operations.

The investment manager in question is Cazenove Capital Management Limited, a very well-known independent asset management business based in the UK which operates a number of funds and wealth management solutions. On the 8th February Cazenove Capital Management Limited increased its holdings in CATCo by 2.9m Shares, which at today’s share price would have cost around $2.68m to now hold 45,260,596 Shares, worth around $41.87m at today’s price. This gives Cazenove Capital Management Limited an indirect shareholders voting right of 12.24%, keeping it as one of the larger investors in CATCo.

Cazenove Capital Management Limited is not the only one of these more mainstream asset managers who enjoys the returns offered by reinsurance premiums through CATCo. As we wrote back in 2010, Baillie Gifford has an allocation to CATCo which was worth approximately 10% of the voting rights when the allocation was made. Henderson Global Investors, another major asset manager, held as much as 20% of the voting rights through its allocation to CATCo at one stage. JP Morgan Asset Management has been another major investor, with around 8% of the voting rights at one point. Another UK based independent investment manager, Brewin Dolphin Limited, has an allocation to the CATCo Reinsurance Opportunities Fund through several of its entities, which gives it around 4.5% of indirect shareholder voting rights.

To put these allocations from established investment managers in context, CATCo currently has as many as 150 investors in any one of its funds at any one time. What is interesting here is that there does seem to be a growing trend for more mainstream investment houses to allocate funds to reinsurance or ILS and that this trend has been increasing.

It seems these asset managers find an allocation to reinsurance a very attractive prospect which they can pass on the benefits of to their clients through various funds and wealth management solutions. The low correlation with other financial asset classes and the prospect of healthy returns make reinsurance-linked investments particularly attractive in the current low-yield investment climate.

With CATCo expecting its 2013 portfolio to yield as much as 32% gross (if no loss events occurred), and also guaranteeing  a dividend of 5%, investment houses could do worse than to take advantage of the discount the current share price offers against the fund’s NAV. As seasonality premiums start flowing into CATCo the NAV will likely increase further, making this a good time to consider an allocation. The same is of course true of other reinsurance-linked investment opportunities, a number look like a very good investment bet right now, which can benefit from seasonality in premium flow.

This trend for investment managers to allocate clients funds to the reinsurance sector is growing and these types of private client and wealth management firms now account for a meaningful amount of capacity in the reinsurance and ILS space. This shows the appreciation these investment managers have for reinsurance and catastrophe risk as an asset class with impressive returns and a low-correlation with wider economic factors. It’s a trend we expect to continue in years to come; at least for as long as reinsurance remains as attractive an asset class as it does today.

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