Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

AQR Capital Management setting up reinsurance-linked investment group


AQR Capital Management, an investment management firm based in Greenwich, CT, have announced in a press release this morning that they have formed a reinsurance group tasked with developing investment strategies which they believe will have low correlation with traditional markets and hedge funds.

The aim of AQR seems to be to create a highly diversified portfolio of reinsurance-linked assets. They say in the press release that they aim to achieve this diversification by investing in over 50 different territory and peril exposures with minimal correlations among themselves. We would assume that the strategy will involve insurance-linked securities such as catastrophe bonds, industry loss warranties and other reinsurance linked investment opportunties such as sidecars and retrocessional.

AQR say they have conducted extensive research and analysis of the reinsurance investment sector and intend to publish a white paper on their findings. They say the white paper demonstrates that:

  • The magnitude of the risk premiums offered in reinsurance resemble those in equities, but unlike equities, there are dozens of reinsurance risks that are independent of one another, increasing the potential for improving the risk/reward characteristics of a portfolio.
  • A 20-year historical performance review of reinsurance portfolios reveals little significant correlation to global equities, US fixed income, high yield credit, commodities and hedge funds.
  • Also looking back 20 years, a risk balanced portfolio of reinsurance spread across distinct territories and perils outperforms a “peak peril” portfolio that is concentrated in US hurricane, US earthquake, European windstorm and Japan earthquake.

The press release suggests that they will be targeting pension funds to help them meet their goal of achieving a $250m funding goal for the reinsurance group. David G. Kabiller, founding partner of AQR and Head of Client Strategies, said; “Reinsurance is one of the most diversifying sources of risk premium that a pension fund can access, in part because reinsurance risks are diversifying among themselves, unlike the correlation one finds among other financial assets. Reinsurance risk allows you to construct a portfolio with very high risk-adjusted returns and limited downside, but with an equity-like risk premium. A diversified portfolio of reinsurance makes for an attractive strategic allocation for pension funds.”

AQR have built up a team of specialists in the reinsurance sector who have experience in instruments such as insurance-linked securities, catastrophe bonds, industry-loss warranties, retro and parametric products. They’ve recruited Andrew J. Sterge, PhD who was previously head of Pulsar Re, a reinsurance affiliate of the Magnetar hedge fund, to lead the reinsurance effort. Also on board for the AQR effort are Rick Montgomerie and Charlie Vaughan, two London based reinsurance professionals who previously worked for a Magnetar affiliate and are now both directors of Chard Re sourcing reinsurance business for ILS hedge funds.

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