Emerging Manager Monthly
Natural catastrophes seem to be front page news on a daily basis, whether it is an event such as Hurricane Katrina or the Chilean earthquake or more recently the oil spill in the Gulf of Mexico, but what many investors should be paying attention to is the investment opportunities these types of events can provide.
Cartesian Iris manages an absolute return fund focused on natural catastrophe reinsurance that invests in industry-loss warranties, which are short-term investment contracts tied to the occurrence or non-occurrence of specified large-scale and low-probability natural catastrophes.
Cartesian Capital Group sponsored Cartesian Iris to provide superior risk-adjusted returns that are uncorrelated with all other asset classes.
“The non-correlation is the focus of our strategy and why our offering resonates with investors,” said Chase Toogood, CEO of Iris Reinsurance, Cartesian Iris’s Bermuda-based reinsurance company.
The multiple catastrophes early in the year led to the largest losses for a first quarter that the industry has ever seen, Toogood said, which in turn creates opportunities for investors with capital.
“Losses tend to increase the cost of capital. There is now less capital available out there for future risks than there was 6 months ago”- Toogood said. Consequently, the return on capital for certain risks has increased.
And for investors in Cartesian Iris, Toogood said they can sleep easy knowing that one major event will not bring down the portfolio, as it is diversified among regions, peril and structure.
“We diversify the portfolio by creating exposures across a number of independent events. This helps to reduce the downside risk for our investors,” he said.
The firm’s core competency lies in industry loss warranties. According to Toogood, a further attraction of these contracts is their reliance on a third-party index.
For example, Cartesian Iris might enter into a contract tied to the occurrence of a single hurricane that creates $30 billion of insured losses. If such a storm occurred-statistically a rare event-the contract would pay the counterparty (typically an insurer or a reinsurer). If no such storm occurred, Cartesian Iris’s investors would reap a significant gain.
“By utilizing an index we are removing the indemnity and underwriting risk that we might have to a specific reinsurer or other counter party under a more traditional reinsurance contract,” Toogood explained.
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