Reinsurance offers strong diversification with total return potential: US Bank

A recent report authored by wealth managers at US Bank, the fifth-largest commercial bank in the United States, has outlined key opportunities for qualified investors in the reinsurance market, with the firm particularly highlighting how reinsurance offers effective diversification with total return potential, making a strong case for its inclusion alongside traditional assets due to its low market correlation.

The US Bank team notes that reinsurance’s unique diversification properties are amongst the primary benefits to investor portfolios, driven by its differentiated return sources.

The team outlines that assets whose prices move differently than traditional investments can enhance long-term portfolio returns relative to the risks that investors incur, while stocks and bonds can be highly sensitive to the economic cycle and shifting investor sentiment.

“Over the long run, stocks and bonds often move differently to one another, but occasionally economic factors cause prices to move in similar fashion, reducing their diversification benefits in a portfolio. In contrast, reinsurance price sensitivity relies primarily on catastrophic events that can trigger claims, the report reads.

Likewise, the US Bank team stresses that security selection within investment vehicles further enhances diversification.

“Most reinsurance vehicles embed diversification across various peril types and geographic regions, which partially mitigates the risk that a single event could cause disproportionate investor losses, although investors cannot fully eliminate this risk,” US Bank explains.

Moving forward, the US Bank team also goes on to highlight how over the last 25 years, publicly traded U.S. insurance companies have exhibited robust profitability, with median annual earnings growth of 12% compared to 7% for the S&P 500.

In fact, strong profitability over time heavily suggests that insurance and reinsurance companies retain their ability to appropriately price evolving risks.

“Insurance companies and reinsurance investors align their incentives as both parties need premiums to adequately compensate for insured losses and provide a sufficient total return on their invested capital,” the report explains.

In regard to the current reinsurance market, as of October 2025, recent reinsurance income has far exceeded historical losses, which according to US Bank, creates a “meaningful buffer” if losses stemming from natural disaster events exceed historical norms.

For an investor with a long-term perspective, the integration of portfolio diversification, substantial current income, and the protective buffer that this income provides against potential losses enhances opportunities within the reinsurance sector.

“An additional consideration includes global growth in insured assets. Developed economies have a disproportionate share of insured assets. If recent trends remain consistent, emerging economies should continue insuring a greater share of assets. This presents opportunities for investors to further diversify amongst global perils and provide capital to a steadily growing industry to meet increasing insurance demand across the globe,” the report added.

Additionally, US Bank notes that throughout recent decades, re/insurers have turned to the capital markets in order to facilitate growth within their underwriting businesses, as well as to further meet customer demands.

The report states that over the past few years, new reinsurance funds have increased access to the market, with hedge funds representing investors’ initial access point.

Of course, hedge funds also encompass the insurance-linked securities (ILS) fund manager category, offering investors a managed avenue to access global reinsurance returns, such as catastrophe bonds and collateralized reinsurance, through a managed strategy without relying on direct fixed income investments.

“More recently, investors began to access interval funds, and now daily liquid mutual funds are available. Hedge funds offer the lowest degree of investor liquidity, with longer time frames to deploy capital and to exit the investment,” US Bank explained.

Furthermore, the US Bank team emphasises that reinsurance reflects the world’s evolving insurance needs.

While developed economies still dominate the insured asset market, emerging economies may also require more coverage if recent market trends continue. Given this, broader coverage needs could wind up expanding the opportunity set for reinsurers and ILS investors while providing capital that supports growing overseas insurance demand.

Looking ahead, the US Bank team states that it sees “compelling opportunities” for qualified investors in reinsurance, and new, more liquid vehicles increase choices. The firm also says that low correlations with traditional assets present a case for inclusion of reinsurance in diversified portfolios.

“The industry’s ability to re-price contracts allows for adjusting to evolving risks and bolsters industry profitability, which aligns with investor incentives. Current fundamentals, including high current income and the cushion it provides against typical insured losses related to catastrophes, add to the investment case. We view reinsurance as an important part of diversified portfolios for qualifying investors, albeit with the potential for periodic volatility and losses,” the report concludes.