Insurance linked investments ILS increasingly on RIA’s radar

by Artemis on August 12, 2016

The uncorrelated and diversifying benefits of investing in insurance-linked securities (ILS) continues to broaden the reach of the asset class, as registered investment advisers (RIA) become the latest to show increasing interest in the asset class, according to a recent article by Institutional Investor.

The increased maturity and size of the ILS space combined with its roster of efficient and diversifying structures, such as catastrophe bonds, investment funds, collateralized reinsurance, sidecars and so on, has seen the investor base expand to include pension funds, sovereign wealth funds, family offices, and other institutional investors.

Registered investment advisors, or RIA’s, an advisor or entity focused on the investment advisory business and that’s registered with the Security and Exchange Commission (SEC) or state securities authorities, are, according to website, becoming increasingly interested in participating in the ILS space.

Speaking to the site, Sam Sudame, Director of Research at SingerXenos Wealth Management, an RIA that has allocated a reported 5% of its $1.2 billion portfolio to the asset class, underlined that “by its very nature, a quality cat bond portfolio is diversified and offers powerful return compared to the risk – both crucial for private wealth management.”

The diversification benefits of the ILS space are clear and most likely one of the driving forces behind its continued expansion and increased sophisitication, offering investors a steady return that not only diversifies against their overall portfolio, but can also be greatly diversified in itself owing to its peril and geographical reach.

The article has a focus on RIA’s and their interest in catastrophe bonds, but it’s important to remember that this is just one aspect of the ILS space, and institutional investors also participate in a range of other sub-sectors within the asset class. Also, often cat bonds are the known asset that gets discussed, but the portfolio can be much more diverse.

John Seo of Fermat Capital, a specialist in cat bond and ILS investment manager, described the asset class as “unrisky for risky,” speaking to the website. A notion that is somewhat supported by the fact that it’s rare for catastrophe bonds to be triggered owing to their structure and the fact that they cover peak risks, which are typically low frequency, high severity losses.

Canon Hickman, a Wealth Manager at Henrico, which has a reported $700 million in assets of which includes cat bonds, expanded on this point.

“With events such as Hurricane Irene and the tsunami in Japan, 2011 was one of the worst years for the reinsurance industry. Yet only four out of some 120 cat bonds were impacted,” Hickman told the website.

Furthermore, the Swiss Re Cat Bond Index reveals that since 2002, when it began tracking cat bonds, there actually hasn’t been a down year, underlining that during times of financial crisis and other, broader market turmoil, catastrophe bonds continue to offer investors a steady, reliable return.

Despite a notable slowdown in cat bond issuance during the second-quarter of 2016, Q1 again broke records, and the wealth of alternative reinsurance capital continues to take an increasingly larger share of the overall reinsurance market pie.

Local and international governments, bodies like the UN and the World Bank, along with the growing base of institutional investors continue to show a willingness to utilise the ILS space for risk transfer and disaster resilience efforts, and now it seems RIA’s and their clients are the latest to embrace the asset class.

Of course, one of the main reasons insurance linked investments, in ILS, catastrophe bonds and other reinsurance linked assets, have hit the RIA’s radar is down to U.S. mutual fund managers Stone Ridge Asset Management and also Pioneer Investments.

Stone Ridge, which has rapidly grown its ILS and reinsurance linked assets under management to $4.76 billion, only sources its investors via RIA’s and as a result the rapid growth of its funds will have raised significant attention in the RIA space.

As RIA’s become increasingly educated in ILS, which managers like Stone Ridge and Pioneer will stimulate further, we can expect a greater amount of interest from their client base and gradual increased inflows controlled by these advisors.

And their client base isn’t solely retail based, as is often misconstrued, RIA’s also command a significant amount of high-net worth qualified investors and smaller family office money, much of which is sophisticated enough to appreciate the risk and reward profile of insurance linked investments.

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