Cat bonds find favour in Asia

We speak to Christian Bruns, vice-president of insurance-linked securities at Zurich-headquartered private bank Clariden Leu, about what drives investment decisions into catastrophe bonds and why investors in Asia are now more open to the product.

What exactly are insurance-linked securities?
ILS are fixed-income securities through which the insurance industry passes on pure insurance risk to the financial markets. They are issued by insurance and reinsurance companies as protection in the event of extreme insurance losses, for instance following severe natural catastrophes or a potential pandemic disease outbreak. The risk assumed by investors is related to a specific insurance loss (such as earthquake, mortality or airplane crash).

What ILS products do you offer?
We currently manage $1 billion across three ILS funds. The first fund, launched in 2001, invests only in catastrophe bonds, or cat bonds, for natural-catastrophe ILS. It has $800 million of assets under management (AUM) and yields around 6.5% per annum, with a low-risk element.

In 2005 we raised around $200 million for our second fund, a mixed-use fund. It has yielded around 10% annually during a three-year period. Around 60% of the AUM is invested in cat bonds. Another 30% is invested in insurance contracts between the fund and insurance companies, which provide the insurance company with cover. The balance 10% is allocated into funds which have specific underwriting capabilities for diversifying risks.

Our third fund offers investors an opportunity to profit from the currently prevailing, unique situation. This fund targets between 15% and 20% return. Insurers are suffering after large losses they booked in 2008 and their asset base has shrunk. They can underwrite less business, therefore the premium has gone up for the same risk profile. All our funds capitalise on the current premium increase of between 30% and 50%, which can be seen on newly issued cat bonds and insurance contracts negotiated today.

What portion of their portfolio do wealthy individuals allocate to ILS?
High-net-worth individuals (HNWIs) generally put between 5% and 10% of an overall portfolio in ILS. The risk in our space has not changed, unlike that in many other investment opportunities. That is why more investors are turning to this asset class today. The insurance-linked space is essentially about assessing and mastering risk. As an investor, I want to be properly compensated through a high enough insurance premium for taking on certain risks.

Portfolio diversification is critical to an investor's decision to invest. HNWIs want to have at least one product in their portfolio where they don't have to watch financial markets daily.