Tell me about the reasons for investing in reinsurance.
The fund we’re in is run by Leadenhall Capital Partners. Effectively it is reinsuring catastrophe risks such as wind, hurricane and earthquake damage in places like the US and Japan. For example, if a hurricane hits Florida some of the bonds we’re invested in might have to pay out, but the pooled fund that we’re in is in around 120 different positions around the world. It has to be quite a big loss, i.e. a catastrophe loss, for us to lose money.
We’re effectively providing the funds out of which any big losses will be paid, but we are receiving the premium plus interest on the money which we’ve put into that fund as our return. Actually, it has been a very good returning fund for us – the return net of losses and fees has been around 7% to 8%. It’s totally uncorrelated with other risks. Also, fundamentally it seems to have quite a good return and a good record. That return has actually come off a bit since we first invested, however, because it’s a market that other people have woken up to.
What is your view for the year ahead? Does market volatility concern you?
I’m not worried about 2017 or 2018, but actually I’m looking over the period of the next five to 10 years. That’s the period over which I don’t want to be disturbing the board by having an actuarial evaluation which suddenly has a bigger deficit because of investment volatility. Yes, we’ve got short-term market risks, but we’ve done a lot to reduce the potential impact of short-term market volatility on the scheme and I’m taking a longer term view on all of this.
What else are you planning?
The one thing we haven’t done yet but we are planning to do next month, is put the broad bond mandate out to tender and, quite probably, split it between two
managers. We want to avoid manager risk issues with having too many eggs in one basket. We might change the existing manager [Legg Mason], we might not. We will also introduce something which is a little bit more conservative in its return assumption than Legg Mason has as a target.
After we get the bond mandate sorted we hope we’ll be able to just sit back and wait for everything to do its job. I want to be as boring as I possibly can internally, but as far as the external world is concerned, I’m more than happy to talk about what we’ve done because I actually think it’s quite a good story. Our scheme is only £200m and I’m very proud of what we’re doing.
