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By Donald A. Steinbrugge, CFA, Agecroft Partners
Property Reinsurance/ILS Insurance Linked Strategies is a hedge fund strategy that many of the largest pension, sovereign wealth, and endowment funds have exposure to, and there are four reasons other institutional investors should consider the strategy.
1. Forward modeled returns remain competitive with most fixed-income-oriented alternatives
When evaluating reinsurance as a strategy, forward-looking modeled returns are more important than historical returns. Reinsurance returns are heavily influenced by current market pricing relative to expected catastrophe losses and the amount of capital required to assume those risks.
The probability of hurricanes, earthquakes, and other natural catastrophes is relatively stable over long periods. What changes materially is the price investors receive for assuming that risk.
The history of the market illustrates this clearly. Following Hurricane Katrina in 2005, reinsurance pricing increased significantly as insurers and reinsurers sought to rebuild capital and capacity. The attractive pricing subsequently attracted substantial institutional capital into the market. Over time, that influx of capital increased capacity and pushed risk-adjusted pricing lower. Beginning around 2016, lower pricing coincided with a period of above-average catastrophe losses, resulting in weak reinsurance returns through approximately 2022. Those mediocre returns caused capita...................... To view our full article Click here
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