When selecting an insurance-linked securities (ILS) investment size isn’t everything, and despite reduced returns in the space those that invest now will be in a good position to vary their allocation in the future, says Chris Parry, Managing Director, RenaissanceRe (RenRe) Ventures.
When investing in ILS the size of a dedicated fund can be important in terms of access to business and resources, however, within the cat bond market RenRe’s Parry feels that for the most part, size is less important.
“This is due to the largely efficient primary market where transactions are syndicated across the market. However, the emergence of the private cat bond market does mean that certain deals are only being placed with a select group of investors,” says Parry, in an interview David Grana, Head of North America Media, Clear Path Analysis.
Parry continues to explain that although larger ILS funds may have access to better resources, such as risk modellers, science experts, climatologist and seismologists, for example, new investors within the space should be cautious of funds that market themselves just on their assets under management (AuM).
“Therefore, size isn’t everything in the ILS market…I think a more important consideration is how funds are able to manage their capital through the underwriting cycle. One important area to focus on is whether the particular fund has a proven track record of returning capital when market opportunities deteriorate and where underwriting discipline is clearly being observed,” says Parry.
It’s no secret that returns in the ILS market are down when compared with more recent times, as insurance and reinsurance market headwinds combine with a lack of large losses and an abundance of alternative and traditional reinsurance capital both in the market and reportedly sat on the sidelines waiting to enter.
But despite this investors clearly remain attracted to the asset class, as shown by the Artemis Deal Directory, which shows that the second-quarter of 2017 has witnessed an unprecedented volume of catastrophe bond activity, with full-year issuance now likely to breach $10 billion for the first time.
Speaking with Clear Path Analysis, Parry notes that returns in the space aren’t what they were, but stressed that for the most part it still generates a good return. Regarding those on the sidelines perhaps waiting for returns to increase to more desirable levels, Parry stressed that by making an investment now, of any size, will be a benefit going forward.
“Investors who make an investment now – even if modest in size – will be in a good position to vary the allocation over time while remaining cognizant that there may be a time in the future that they may wish to materially increase their allocation if a market opportunity presents itself,” says Parry.
Diversification and low correlation with broader financial markets remain key benefits of an ILS investment, and combined with stable returns and liquidity, Parry underlines the fact that catastrophe bonds are highly transparent and fairly simple to grasp, as key reasons investors are attracted to the space.
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