Help! How do I allocate my capital?

At Awbury, we believe that we need to combine the virtues of patient research and analysis, with those of prompt structuring and execution. So, we read with a interest, a recent speech by one of our favourite public intellectuals, Andrew Haldane, Chief Economist of the Bank of England, which presents a fascinating overview of the arguments for and against likely patterns of future growth.

One may well ask why an insurance company focused on E-CAT and helping its clients, manage their complex financial and economic risks would pay attention to such matters.

In a general sense, a growing economy, providing it is one based upon the creation of productive assets and the accumulation of capital for further investment, is a good thing.

If growth rates return to what are perceived as “normal” ones of 2 to 3 percent per annum in advanced economies, central banks are likely to have to raise their policy interest rates to prevent “overheating” and maintain low rates of inflation. Yet, nominal interest rates, particularly longer term ones, have been on a downward trend for some three decades; and, as we have written before, now stand at close to the “zero bound” in a number of key economies. And, as Mr. Haldane pointed out in his speech, real interests are signaling negative returns for 30 years out. To quote: “This pattern has no historical precedent”. It also begs the question of whether and where “normal” rates of economic growth will return.

Such seemingly arcane facts matter, because, (re)insurance companies, whether P&C or life, have historically used their investment returns to provide a cushion against weak underwriting results. Investing predominantly in bonds of relatively short duration, P&C (re)insurers in particular are increasingly finding “no hiding place” in that asset class- even the ability to harvest capital gains may be coming to any end.

Now, it is a fact that (re)insurance businesses are, and should be, rewarded by investors for their underwriting skills and ability to increase their volume of solid risk adjusted premiums from underwriting prudent liability business. Yet, in many traditional product lines, pricing and even available demand are reducing to levels which may make it difficult to continue to sustain reliable underwriting profits; and are driving a wave of consolidation. Couple that with  potential constraints on yields and  returns in the bond markets and one has an environment in which senior management needs to pay careful attention to deploying available capital in ways that generate the best, long-term risk adjusted returns, with low volatility.

The Awbury team has thought long and hard about such issues; and has developed a range of products that not only provide returns that are non-correlated with traditional product lines, such as NatCAT, but also enable (re)insurers to write attractive risk adjusted business in ways that provide exposure to non-traditional asset classes that are also highly capital-efficient.

You should call us; and let us explain how we can help address those Growth Constraint Blues…

– The Awbury Team

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