Investment managers views on pension funds in the insurance-linked securities market

by Artemis on September 7, 2011

This morning we attended Standard & Poor’s London ILS event, the ‘5th Annual European Insurance-Linked Securities Conference’. This well attended, informative event featured a number of interesting panel discussions including one involving three well known ILS investment managers discussing the increasing trend for pension funds investing in ILS and catastrophe bonds.

The panelists were Luca Albertini, Chief Executive of Leadenhall Capital Partners LLP, Urs Ramseier, Managing Partner of Twelve Capital and Christian Bruns, Head of Portfolio Management for Insurance-Linked Investments at Clariden Leu. These three have all got a successful track record in the insurance-linked securities investment space and the firms they work for manage significant amounts of capital dedicated to the asset class, as such they had some interesting points to make.

We don’t have a full transcript of the discussions that took place but we have got a few salient points and quotes which we thought would interest our readers. None of our regular visitors will be at all surprised at the interest being shown by pension funds in the ILS asset class, however some of these points may make the reason for the heightened interest pension funds are showing a little clearer.

On the subject of how much of their asset base a pension fund might commit to an investment in ILS or cat bonds, the panel were pretty much in agreement for somewhere between 1% and 4%. When you consider the amount of assets under management by pension funds globally that is an awful lot of capital.

The main barrier to entry for pension funds seeking to invest in ILS is becoming comfortable with it as an alternative investment they should look seriously at. Of course a pension fund has to do its due diligence on the sector before they will commit anything and the panel suggested this could take as long as two years from when a pension fund shows interest in insurance-linked securities to when they actually invest.

Urs Ramseier said that it was the role of the ILS manager to help make pension funds feel more comfortable about the asset class. They can do this by publishing insights into the market, educating their clients or alternatively we’d encourage them to contact us to submit articles for publication on Artemis (as we have a large audience of pension fund managers). Urs also said that in his experience some pension consultants were not particularly proactive at promoting new asset classes to their clients. Luca Albertini however said that he felt they (pension consultants) were getting better at this. It seems that some of the pension consultancies could also do with education and comforting about the asset class in that case.

The main motivation for pension funds to invest in ILS or catastrophe bonds is as part of their alternative investments strategy. All pension funds have some of their assets in what are deemed ‘alternatives’ and they do this for diversification purposes. The panel all agreed that diversification was the main driver for pension funds to seek out an ILS allocation.

One thing that all the investment managers agreed on was that there are advantages to having pension funds allocate some funds to you. Urs Ramseier said that pension funds are ideally suited ILS investors as they are not looking for weekly or monthly liquidity, rather they are looking for an absolute return. He added that for pension funds it is a strategic allocation meaning that the investment strategy is longer term.

Urs Ramseier also said that this longer term view meant that private ILS transactions can be arranged for pension funds. Christian Bruns added that pension funds have so much capital to allocate to ILS that the natural route would be through private transactions to provide opportunity (the ILS market is limited by size). Luca Albertini added, on the subject of private ILS transactions, that they have no secondary market available to them so investors in them cannot adjust their portfolio and have to live with the risk for the tenure of the bond. This is an extremely good point, and one that needs considering by anyone looking into the private cat bond type structures we’ve recently seen in the market. Urs Ramseier said that private transactions were unlikely to have a longer term than 2 or 3 years as pension funds, and other institutional investors, look to change or at least reassess their investment managers every couple of years.

On the topic of what type of return a pension fund may be looking for, Christian Bruns said that it depends, some carefully select risks and perils seeking as much diversification as possible, while other investors put everything in U.S. Wind seeking the best possible returns.

There was some discussion by this panel, and on a subsequent panel, regarding whether pension funds would seek to invest in a longevity-linked ILS transaction. Luca Albertini said that he felt pension funds could in some cases use an investment in life or longevity ILS as a directional hedge against their own exposures. The other opinions seemed to be that in general no they wouldn’t, as pension funds themselves have significant longevity risk exposure already, but a Swiss Re representative did say that a pension fund was one of the investors in their Kortis Capital longevity ILS transaction.

Finally, the panel discussed the future for pension funds in the ILS space. The best comment on that topic that we picked up was from Christian Bruns, who said that the leaders are already involved in the sector or actively performing due diligence on the asset class, next would come the followers over the coming 4 or 5 years so we can expect the inflow from pension schemes to continue and perhaps increase.

That sounds encouraging for ILS investment managers and dedicated ILS funds, both of whom will be looking at pension funds as a significant source of inflow over the coming months and years.

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