ILS investment allows Centrum to decouple from the interest rate cycle

by Artemis on January 14, 2014

Centrum Bank, a private bank headquartered in Liechtenstein, owned and operated by a foundation set up by the Marxer family, appreciates the diversification properties of its investments in insurance-linked securities (ILS).

For Centrum Bank, its investments in the insurance-linked securities space offer it an attractive return, with low correlation to broader financial markets. In particular the private bank appreciates the ability of its ILS investments to achieve returns in real terms, not based on any benchmarks and allowing it to reduce interest rate sensitivity across its portfolio.

For Centrum Bank, ILS investing sits firmly within its alternative investments area, but it likes them within a portfolio context due to this ability to allow it to decouple a portion of its returns from the interest rate cycle. Interest rate turbulence has been a factor on the minds of many institutional investors in recent months and ILS, both catastrophe bonds and financial insurance contracts or collateralized reinsurance, offers its return whether rates fluctuate or not.

Centrum Bank refers to its ILS investment strategy as a complement to its fixed income bond portfolio, but without the interest rate volatility, providing it with an offset to some bond portfolio duration risks. Centrum has an expectation that long-term interest rates will edge higher over the next few months, hence it uses asset classes such as ILS as a bond diversification instrument and to reduce interest rate exposure.

However, despite its clear liking for ILS investments Centrum Bank says it is monitoring the sector closely, monitoring performance and market growth. At the moment, Centrum Bank says, the risk/return potential remains very balanced.

It is interesting to understand how large institutional investors are utilising investments in ILS and catastrophe bonds. Given the small nature of the majority of allocations, compared to total assets under management, some have different motivations for others depending on the composition of their overall portfolio.

Centrum clearly finds the interest rate offset an attractive factor, where as other investors discuss absolute returns and low correlation as their drivers. This shows that there are many positive attributes about the ILS and reinsurance asset class and as the sector continues to expand investors will likely find more to add to the list.

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