Thursday, June 22, 2023

Catastrophe Bonds; Reinsurance: "City of Zürich Pension Fund ILS allocation surpasses $700m"

There's some information embedded in this position. As we noted in the introduction to a 2021 post on the city doubling their exposure to cat bonds/Insurance Linked Securities:

The next time Munich Re starts moaning about climate change and how we're all going to die, or at minimum go broke, just remember reinsurance/cat bonds are a for-profit business and that some folks a couple hundred miles southwest of München, who might have access to some very sharp minds in the reinsurance/cat bond business, seem to think this is a profitable place to put some longer term money....

From the ILS mavens at Artemis - also the source of that 2021 post:

The City of Zurich Pension Fund has continued to increase its allocation to the insurance-linked securities (ILS) asset class in 2022, with the total reaching over US $700 million by the end of the year.

The City of Zurich Pension Fund managed 19.3 billion Swiss francs in assets at the end of last year.

It was a challenging year for the Pensionskasse Stadt Zürich, as its assets fell to a -10.4% negative return for 2022, with falling stock markets and rapidly rising interest rates the key drivers.

The pension fund has been investing in insurance-linked securities (ILS) for some years now and while these also came out negative for the year, they performed better than many of the other asset classes in allocates to.

Insurance-linked securities fell -3.1% for the City of Zurich Pension Fund, far better than the -18.8% return from its equities portfolio.

The pension fund has been steadily increasing its ILS allocation, having been CHF 280 million at the end of 2020, then rising to CHF 549 million by the end of 2021....


 It's all about time rather than timing. Like casinos, reinsurance try their darnedest to have the odds on their side. And because they can choose whether to enter or exit a peril, and if they do enter get to choose what price they will offer to their insurance company customers, they can get close to the mathematical certainties that casinos enjoy.

The key is to be able to ride out the drawdowns, the variance and semi-variance and, as we noted about Stephen Roach and China:

Mr. Roach is a sharp guy with a vast knowledge of Asia, one of the reasons MS kept him around as chairman of Morgan Stanley Asia. However....when the U.S. retaliated against China for China's trade practices Mr. Roach seemed to have lost a half-step, focusing on the next quarter rather than the next quarter-century (as the pension/insurance crowd is fond of saying, if not doing) and was too dovish in his estimation of the effects of U.S. tariffs on the Chinese economy.

When you encounter a positive expectation game you want to expose as much of your bankroll as you can to the action, consistent with the Kelly Criterion to avoid the risk of Gamblers ruin.

The optimal Kelly wager = (p*(b+1)—1) / b where p is the probability (% chance of an event happening) and b is the odds received upon winning ($b per every $1 wagered).

It was Ed Thorp who first applied the Kelly Criterion in blackjack and then in the stock market.  The following is what I learned from his presentation at SFI.

If interested see also: