Some investors look to diversify ILS allocations after 2017 losses

After some European investment portfolios were impacted by the severity and subsequent damages caused by 2017 catastrophe events, owing to their insurance-linked securities (ILS) investments, funds are reportedly looking to diversify their allocations within the space.

The huge level of insured losses as a result of U.S. hurricanes, earthquakes in Mexico and wildfires in California, resulted in many ILS funds and investors experiencing losses for the very first time.

However, this didn’t scare investors off and alternative capital actually reloaded and expanded in time for the January renewals, underlining the sophistication and maturity of the marketplace’s investors, as well as its permanence in the insurance and reinsurance industry.

An article on the website of IPE International Publishers Limited explores the impact of 2017 events on European investment portfolios, in light of the fact that numerous pensions funds across Europe allocate to the space, and this is understood to be typically somewhere between 2% – 3% of their overall alternative investment allocation.

According to the article, the Swiss railways pension fund noted that it suffered a significant loss from its ILS investments for the first time, amounting to more than 9% as a result of the costly natural catastrophe experience.

At the same time, the Dutch health care pension provider noted a 13.3% loss from its portfolio of ILS business, while the pension fund for the city of Winterhur (PKSW) reported a loss of 8% on its ILS portfolio last year, and these certainly aren’t the only funds to have experienced losses.

However, owing to the good understanding of the ILS space investors now have, and their desire to invest in a diversifying alternative asset class that importantly offers very low correlation to wider financial market turmoil, losses haven’t scared investors away but instead driven a desire among some to diversify within their ILS portfolio.

IPE spoke with the Chief Executive Officer (CEO) and Chief Investment Officer (CIO) of ILS specialist Twelve Capital, Urs Ramseier, who explained that in Switzerland most pension funds have looked at the space and that many that invest are now looking to diversify further.

“A number of pension funds that started by investing in the catastrophe bond space, that have built sufficient in-house expertise around the asset class, are now looking to diversify their allocations into the potentially higher returning, although less liquid, private ILS market,” Ramseier told IPE.

Ultimately, explained Ramseier, funds aren’t looking to abandon the catastrophe bond space, but are perhaps looking to allocate to both sides of the market, being the more traditional cat bond space and the private ILS side, both of which are expanding their remit.