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Can Reinsurance Exposure Provide Uncorrelated Alpha?

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Chief investment officers love to talk about finding uncorrelated assets. Sovereign funds and pensions like Australia’s Future Fund, the New Zealand Superannuation Fund and the Pennsylvania Public School Employees’ Retirement System seek risk-adjusted returns, especially if it springs from an uncorrelated source. Insurance-linked securities (ILS) are gaining traction as a viable asset class for institutional investors. Catastrophe reinsurance can provide investors opportunity with taking risk and getting paid for it. Insurance companies like AIG are in the business of serving clients and pricing risk. Often times, these insurers need to offload risk and reduce exposure to potential catastrophes. By having reinsurance, insurers can expand capacity.

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Generally speaking, insurance-linked securities are not fully correlated with the larger financial markets. For institutional investors, a unique mindset is necessary when contemplating ILS strategies. For example, reinsurance loss does not present major upsides. The only news is bad news; investors need to get a grasp on how much they have to pay for bearing downside risk. Fresh investors to the ILS market typically hire an experienced ILS fund manager to access reinsurance exposure. Generating sources of alpha is related to information asymmetry. The fragmented reinsurance market and complex layers of coverage provides pricing differences and market inefficiencies. Experienced ILS managers may have access to relationships and information flow in this opaque market.

Largest Insurance-Linked Fund Managers – Ranked by Name

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Funds and Ownership, KKR Partners with Shinhan Financial

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South Korean financial giant Shinhan Financial Group Co., Ltd. reached a preliminary agreement with KKR & Co. to form a series of global buyout funds that could raise up to 5 trillion KRW. KKR and Shinhan signed a Memorandum of Understanding (MoU) in Seoul in early October. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Norwegian Government Recommends SWF Remains at Central Bank

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There was speculation that Norway Government Pension Fund Global (GPFG) could be managed outside of Norges Bank. The Norwegian government shot down this idea and recommended Norway’s GPFG remain in Norges Bank. This recommendation came in the form of a white paper submitted to the Norwegian Parliament, Stortinget.

Norway’s Minister of Finance Siv Jensen, commented in a press release, “The Government proposes a new and modernised governance structure for Norges Bank. Moving forward, this new structure lays the foundations for the sound management of the central bank and of the GPFG.”

Some Central Bank Recommendations

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Invesco Buys OppenheimerFunds for $5.7 Billion

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Invesco Ltd. signed a deal to acquire OppenheimerFunds, Inc. from Massachusetts Mutual Life Insurance Company (MassMutual). In turn, MassMutual and the OppenheimerFunds employee shareholders will receive a combination of common and preferred equity consideration, and MassMutual will become a significant shareholder in Invesco, with an approximate 15.5% stake. This strategic transaction will bring Invesco’s total assets under management (AUM) to more than US$ 1.2 trillion. The transaction is expected to close in the second quarter of 2019, pending necessary regulatory and other third-party approvals. The transaction gives Invesco access to more third-party distribution platforms.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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