FALCON INSURANCE LINKED STRATEGY FUND
CAT bonds are an interesting alternative to traditional investments such as stocks and bonds. This asset class has a very weak dependence to the financial markets. Its performance almost solely depends on the occurrence of certain natural events. CAT bonds offer some protection about rising inflation. Depending on the structure they can offer a return in the range of three to fifteen percent above the risk-free interest rate. Insurance and reinsurance companies are transferring an ever-increasing amount of risks to the capital markets. The Falcon Insurance Linked Strategy Fund offers exposure to this rapidly growing asset class with its valuable investment characteristics.
LOW DEPENDENCE TO THE FINANCIAL MARKETS
CAT bonds (catastrophe bonds) are bonds which insure rare natural events. These papers are generally issued by insurance or reinsurance companies which are transferring their peak risks via CAT bonds to the capital markets. Peak risks are risks whose occurrence has a very low probability, but could do a very high damage. Transferable risks are predominately windstorms and earthquakes in the USA, Europe and Japan. The probability for such a natural event is 2.0–1.0% on average or, in other words, the incident happens every 50 to 100 years.
Due to its structure and its complexity, private investors generally can access the CAT Bond market only via investment funds. Falcon Private Bank can offer such an instrument in form of the Falcon Insurance Linked Strategy Fund. The fund is available in three currencies Swiss Franc, Euro and US Dollar. The management team has many years of experience in valuating insurance risk and insurance-linked securities. In addition, the team has access to reliable and proven weather forecasting models and a well-developed network of long-term relationships.
CAT bonds offer several advantages and valuable investment characteristics. First and foremost, they have a very weak dependence to traditional investments such as stocks and bonds, but also to non-traditional areas such as commodities, real estate or hedge funds. This was impressively demonstrated in the financial crisis of 2008, when almost all asset classes went down in sync. CAT bonds not only showed very high resiliency even during the worst days of the crisis, but also stayed liquid. Hence, including a portfolio of CAT bonds enhances the overall risk/return profile of a securities portfolio.
EXPERIENCED FUND MANAGERS
The price of a CAT bond hardly changes as long as the precisely pre-defined event does not occur. If such an event however occurs, a sizeable part or even all of the nominal value of the bond can be lost. However such risks can be minimized by efficient portfolio diversification. The Falcon Insurance Linked Strategy Fund always holds a minimum of 40 to 60 positions, divided in the two main segments "earthquakes" and "windstorms" in various regions of the world. The regulations of the fund call for a limit of 10% per single holding. The fund aims for an optimal combination of its investments with regard to the expected return, the event risk of the single investment and the dependence among the different insurance risks.
INFLATION PROTECTION MECHANISM
Another advantage of CAT bonds is their inherent mechanism, which protects investors from rising interest rates and rising inflation. The coupon of a CAT Bond has two components: 1) the money market interest rate, which is adjusted regularly to the prevailing interest rate environment, and 2) a fixed insurance premium. Hence, in case of rising interest rates and in sharp contrast to traditional bonds, CAT bonds do not fall in price; instead, CAT bond investors are getting a higher coupon. A special structure minimizes credit risks. Hence investors primarily invest in isolated insurance risks.
The Falcon Insurance Linked Strategy Fund is a so-called UCITS III Fund and offers weekly liquidity. A UCITS (Undertaking for Collective Investment in Transferrable Securities) fund is an investment fund that meets the criteria laid down by the EU directives to be eligible for sale in EU member states. Such a fund enjoys a high degree of regulation to the advantage of the investor.
MARKET OUTLOOK
CAT bonds continue to be an interesting investment, as market growth will remain robust. In order to improve their capital structure, not least due to markedly risen regulatory requirements, insurance companies are interested to transfer an increasing amount of risks to the capital market. This helps to relieve the insurer's balance sheets, improving the equity ratios. Furthermore, as a result of population growth in catastrophe prone regions, the insured risks and therefore the potential damage for the insurance industry are rising constantly. No doubt, the robust supply will meet strong demand. We expect the investor base for this asset class to broaden, as the search for yield and alternative sources of return are likely to increase.
CONTACTS
For further information please contact
Gregor Gawron, Head ILS and Quantitative Solutions
Tel: +41 44 227 52 43, Email:
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Maria Oldin, Head of Product Marketing and Distribution Partners
Tel. +41 44 227 52 93, Email:
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