The attractiveness of catastrophe reinsurance risk as an alternative investment opportunity continues to spread, helped by the increasingly high-profile nature of the asset class. Catastrophe bonds, insurance-linked securities (ILS) funds and reinsurance-linked investment funds are driving the asset class profile to investors you may once have thought out of reach.
We like to highlight interesting investors who are allocating assets to the ILS and catastrophe reinsurance-linked investment space to help to highlight the growing diversity among sources of capital flowing into reinsurance markets. One of the most recent we have discovered, although they’ve been investing in the asset class for a while, is a Danish organisation called Realdania.
Realdania is an interesting organisation that pitches itself as a ‘strategic philanthropic association supporting projects in the built environment’. Realdania was founded in the year 2000 after it merged its mortgage credit association operations with Danske Bank and changed its purpose to managing an investment portfolio which would be used for the strategic goal of improving the built environment in Denmark.
Realdania had €3 billion, or $3.9 billion, of capital under its management at the end of 2012 and invested across a range of asset classes, one of which is a small allocation to alternative asset classes. The alternatives allocation only amounts to somewhere near 2% of the funds capital at this time, but it only introduced alternatives in 2010 and expects that it will grow that area of its portfolio.
In 2011 Realdania made its first investment into catastrophe reinsurance risk through CATCo Investment Management into its reinsurance and retrocessional linked investment fund. We don’t know how large this investment is today, but judging by comments in a recent article, by Richard Tomlinson published on 8th May in Top1000funds.com (which you can read here), Realdania appreciates the diversification that an allocation to catastrophe reinsurance risk brings it.
The article cites Gert Poulsen, chief investment officer of Realdania, as becoming interested in catastrophe risk as an asset class as a way to fend off market risk and it uses the asset class as a hedge of sorts. Realdania has a large exposure to real estate in Denmark and to Danske Bank, in which it remains a large shareholder, so having some alternatives which are broadly uncorrelated with wider economic trends is attractive to the fund.
Interestingly, the article says that since 2010 Realdania has acquired a $25m holding in catastrophe bonds, however looking at Realdania’s financials shows CATCo as the only reinsurance-linked investment, so perhaps the $25m is just in CATCo’s funds.
The article quotes Poulsen as saying; “Catastrophe reinsurance risk and bonds have the great attraction of being absolutely not correlated with our other investments. The risk of an earthquake is different from market risk.”
That leads us to an aside about correlation. One of the major attractions in ILS and reinsurance for large institutional investors is lack of correlation to other asset classes and economic conditions, but to say they are not correlated at all is perhaps a little strong. Correlation becomes a moot point when a magnitude 9 earthquake strikes San Francisco or a Category 5 hurricane hits Miami, for example, as any large institutional investor would feel some pain from the economic effects such a major event would create.
The key for investors is that, as an asset class, catastrophe reinsurance risk is uncorrelated enough to provide a useful hedge and correlation would only ever become a factor in the most severe of catastrophic events, when all asset classes risk contagion anyway.
Anyway, Realdania is an interesting organisation who clearly appreciate the diversification that an allocation to catastrophe reinsurance risk offers its investment portfolio. As the profile of ILS and reinsurance-linked investments continue to spread, we’ll continue to cover interesting investors in the space.