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Uncorrelated Return Streams – Reinsurance Strategy – Part 1 of 3

Uncorrelated return streams.    As I sit in advisor offices around the country, the conversation always turns to asking about uncorrelated return streams as everyone ponders how much more this bull market has left in it.  Many private investment asset classes have delivered low correlated returns compared to public securities, but much of that is due to the inherent nature of private investing and reporting lags.  True uncorrelation relates to a return stream that won’t respond to either the equity or credit markets or in the matter that an investment is bought or sold.  It is here that one asset class stands out among all others: reinsurance.

While the reinsurance industry began in the mid 1800’s in Europe, the current iteration of the industry was shaped after a couple of devastating events in the early 1990’s.  The industry was forced to change after a deadly earthquake outside of LA in 1994 closely followed Hurricane Andrew’s ravaging of the FL coast only a few years before.  Both traditional insurance companies as well as reinsurers realized that they were undercapitalized relative to the risks that they were assuming and a number of firms were fatally impaired.  As a result, the industry underwent a capital re-invention, as the traditional players refused to insurer to the same degree that they had previously.  A new infusion of money was needed and that came from the capital markets.  Accordingly, alternative capital first arrived in the form of catastrophe bonds.  This marked the beginning of the insurance-linked securities (ILS) industry and a way for traditional insurers to move risk off their balance sheets.

Stay tuned for Part 2 of our Reinsurance Series, as we continue to discuss the history, benefits and future of this strategy.

For more information on reinsurance and other alternative investment strategies, please contact me.

Frank Burke, CFA, CAIA
Chief Investment Strategist, PPB Capital Partners
484.278.4017 Ext. 108