Non-specialist investors increasing allocations to insurance-linked securities (ILS): A.M. Best

Participation in the insurance-linked security (ILS) and catastrophe bond markets is on the increase from a segment of the investment world which rating agency A.M. Best terms ‘non-specialist investors’. These large, institutional and capital market investors, include entities such as pension funds and mutual funds and they have been steadily increasing allocations to the ILS sector and as a result contributing to the demand which has helped the asset class grow this year.

This confirms a trend that we have noticed over the course of the last year, our audience on Artemis has become much more diverse and a lot of our growth is coming from the investor side of the market. We’re noticing many of the world’s largest pension funds, mutual funds and even sovereign wealth funds visiting us regularly, signing up for our email updates and contacting us with questions and comments on our service. Interest in the asset class from these types of large institutional investors is seemingly on the rise and capital is available to be deployed when issuance provides opportunities. Anecdotally we hear from contacts that there are significant sums of capital available to be put into the right ILS and reinsurance-linked investment opportunities as some of these large investors have been pulling back from equities and some hedge funds because of uncertainty in the broader financial markets.

An article published by A.M. Best in a recent Best’s Review discusses the investment side of the catastrophe bond (and ILS) market. As well as seeing an increase in assets under management in dedicated ILS and cat bond funds (so the specialist investors), A.M. Best’s managing senior financial analyst of insurance-linked securities, Asha Attoh-Okine, said; “Tremendous interest from the pension industry is also contributing to the increased demand. Pension administrators, especially in the European region and Canada, have investment mandates for ILS products, including cat bonds.” As a whole A.M. Best are seeing non-specialist investors increasing allocations to the cat bond and ILS sector.

Attoh-Okine comments in the article that primary insurers invest in cat bonds and ILS to some extent but that reinsurers participation as investors has decreased. However he says that insurers and reinsurers are actively investing in other areas of the insurance-linked investment market such as industry loss warranties (ILWs).

Given what is happening in the broader financial markets, where returns are becoming harder to find and many once successful hedge-fund managers are currently looking unappealing, the ILS investment opportunity looks extremely attractive right now. It will be interesting to see how this interest in the asset class translates into actual issuance and investment opportunities. The fourth quarter of 2012 and first quarter of 2013 are going to be fascinating to watch and we will learn a lot from where and how capital is deployed during the 1st January renewal season.