REINSURANCE BOND INVESTMENT PERSPECTIVES
Reinsurance is nothing new; it's been around since the year 1370. Reinsurance bonds historically have paid well. Investors seem to be drawn to them because they do not correlate to the stock and bond markets.
INVESTING IN REINSURANCE BONDS
The reinsurance bond investment strategy presents the opportunity to add an investment that may perform well in years when the markets performs poorly. They are normally sold in large increments to pension plans, hedge funds, sovereign wealth funds and wealthy individuals. In general, reinsurance bonds have a notable lower volatility than stocks and junk bonds.
In the case of TARTAN RE’s related reinsurance bonds the proceeds are invested in primarily hard assets. Thus, they are secured bonds by the underlying quality assets.
TARTAN RE’s related reinsurance bonds offer diversification from economic and market risk because claims and risk aren’t correlated with specific stocks and typical bond markets.
Additionally, there are two key investment perspectives, in TARTAN RE’s opinion, which are significant. The first is the above mentioned quality hard assets that are the security interests for the bond holders. Secondly, unlike typical bonds where the payout of interest or coupon rate stems from the yield tied directly to the underlying invested asset base, these reinsurance bonds can generate underwriting profit from reinsurance business, which is a secondary revenue stream.
The secondary revenue stream from reinsurance business associated with the bonds is important. It is important if there is a potential deficiency from the yield of the underlying hard asset base in the payout of the interest or coupon rate of the bond to the bond holders. This revenue stream can thus be tapped to assist in supplementing the deficiency.
Also, there could be a set aside of an amount of yield (for example, 2% of a current years yield) from the reinsurance secondary stream to supplement a deficiency in the overall amount of the asset base. In other words, if the value of the asset base decreases below the principal amount of the bonds, there may be the capacity to have some of the value set aside to replenish a future decrease in value. Of course, each reinsurance bond is constructed differently, so potential bond investors should do their own research and rely on their financial experts.
Reinsurance bonds usually offer stable interest or coupon rates, offer competitive rates compared to other fixed-income bonds and dividend-paying stocks. From an investment portfolio perspective, a reinsurance bond investment can be a conservative diversification vehicle for an investor. With the additional security of having its unique structure potentially generate supplemental support of payout and principal value.
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