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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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China’s Central Bank Creates Macro-Prudential Management Bureau

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The People’s Bank of China (PBOC) created a new department to oversee and attempt to eliminate financial risks to the system. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Like its U.S. Peers, Legg Mason Seeks to Trim Costs

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Legg Mason Inc., a Baltimore-based asset manager, has announced a reduction in workforce as is prepares to streamline operations and save money. Legg Mason’s leadership commented that assets under management fell 5 % year-on-year. Legg Mason currently manages US$ 727.2 billion (as of December 31, 2018), which is down from the previous US$ 767.2 billion. CEO Joseph A. Sullivan noted that a global operating platform will centralize fund administration, IT, and other departments that work with affiliates. Sullivan did not discuss the number of layoffs expected, or specify which areas would be impacted. Legg Mason disclosed they planned to close a quarter of its exchange-traded funds in March 2019. These three ETFs include a U.S. strategy, emerging markets, and a developed markets strategy outside the U.S. However, these funds run around US$ 28 million in assets under management.

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Monetary Authority of Singapore Establishes Corporate Governance Advisory Committee

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On February 12, 2019, the Monetary Authority of Singapore (MAS) revealed the creation of a Corporate Governance Advisory Committee (CGAC). CGAC was formed to advocate for good corporate governance practices among listed companies in Singapore. Bobby Chin, Director of Singapore Telecommunications Limited, will be the Chair of CGAC. According to a MAS press release, “CGAC will identify current and potential risks to the quality of corporate governance in Singapore.”

MAS formed the Corporate Governance Council (Council) in February 2017. The Council was dissolved after it pushed out a publication of its final recommendations on August 6, 2018.

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