As investors look to expand in private fixed income, ILS is the better alternative: Convergence

At a time when institutional investors and large allocators are looking for diversification and to expand their allocations to private fixed income and other private market asset classes, insurance-linked securities can offer a better alternative, speakers at the recent Convergence conference explained.

At the ILS Bermuda Convergence 2026 conference a panel discussion featuring a range of allocators explored the current macroeconomic environment and what this means for their strategies, as well as where investors are looking for diversification and a potential safe harbour from volatility in broader equities and credit markets.

Joseph Pursley, Head of Insurance Distribution, Americas at Nuveen, a TIAA asset management subsidiary, gave some context based on a recent survey his firm had undertaken.

Pursley explained, “This year, we surveyed a little over 200 U.S. institutional investors, and what’s really interesting is 75% of them are now telling us that they plan to increase their private fixed income or private markets allocation over the next five years.

“When you drill into that and say well, if you are increasing that, what’s your allocation going to get to at some point? We’re seeing nearly 50% of our respondents saying they expect to have 20% or more of their portfolio allocated to private fixed income over the next five years.

“It’s a really interesting result of that definitional evolution, of expanding what private fixed income means and how it can work in your portfolio.”

Nick Ashmore, Deputy Director, Chief Investment Officer at the International Monetary Fund (IMF), gave a perspective from the point of view of a broad allocator and investor, while also revealing that the IMF has been a long-standing allocator to insurance-linked securities.

Ashmore said, “We have two long-term mandates. We have an endowment account, and then the pension fund. The pension fund has been running for 80 years as a defined benefit scheme and that’s where we see scope for private assets, private credit specifically. We’re probably much further back, we’re just starting to introduce these different forms of private credit, but we have within absolute return, had exposure to ILS for about 10 years now.

“Right now, anything that helps us to diversify some of the concentration risk we have in our equities portfolio is increasingly important.”

Also participating in this session was Bob Smith, President & Co-CIO of fixed income and alternative solutions manager Sage Advisory, who explained why his firm is particularly bullish on catastrophe bonds and ILS investments.

Smith commented, “I think the private credit magic is starting to evaporate. What I think is more important is that the cat ILS market represents a very exciting and meaningfully better alternative as a diversifier, as a return sector with lower volatility and so forth. So for us, we’re very much focused on that. We’re involved with our friends from Cedar Trace here in Hamilton, creating a very interesting fund that combines public fixed income and cat ILS, and we think that is where the growth will be.

“No longer are we to consider this a niche market, we think that the ILS market should be considered a strategic allocation, and we’re not alone in that. We are now looking at a point of change where cat ILS can go toe to toe with traditional fixed income on several different levels.

“From a timing perspective, now is not the time to extend your credit allocation to the lower echelons of credit. I think it’s time to go to high ground.”

Later in the session Smith further explained that more traditional areas of fixed income receive significant allocations from US investors, while the catastrophe ILS market is still relatively nascent in market penetration terms.

Smith said, after showing some data on how ILS returns compare and decorrelate from other fixed income assets, “I look at the cat ILS market, and I have to kind of wipe my eyes and say, “Am I seeing something that is unusual?” This is an asset class that has beaten everything on this page for the last decade, not only in gross returns, but on a risk-adjusted basis, lower standard deviation, lower volatility.

“This asset category has tremendous upside growth. We’re living in a world now where we have as many private credit managers as we do McDonald’s franchisees. Who’s the best of the best? It’s hard to know.

“But this is a much smaller market, much easier to put a finger on in terms of who’s really doing well, who has access, who has underwriting expertise, who’s a great modeller. These are all the attributes that we look for.

“You have a very small community right now. Private credit is roughly two and a half trillion dollars in size. When you look at the cat ILS market, it’s a splinter of that. There’s way more upside because there’s still a huge insurance gap that needs to be addressed with capital.

“I’m looking for more upside, more potential with great numbers like this to support my case. As an asset allocator, this is where I want to go, this is where I think I can make a very strong case, particularly on forward-looking earnings projections off of this asset class, unlike private credit at this point in the interest rate cycle.

“So I think this is the better alternative, and it’s not an alternative any more, it’s a strategic asset allocation in our view.”

Ashmore of the IMF then explained that this is what makes ILS so attractive, saying, “That’s really where it stands out, because the risks around scale, public equities, and fixed income, and the sort of on again, off again correlations, depending on whether the crisis relates to U.S. interest rates and inflation, or it’s some sort of global geopolitical event. When they do, the whole safe haven thing kicks back in again. But we’re seeing more of the former than the latter. You’re seeing fixed income and equities move together. Finding an asset class that you can be exposed to, as long as you’re happy with the risk you’re taking, that’s uncorrelated, is one of the best solutions.”

Ashmore said that this is increasingly important given the volatile environment right now.

“Trying to understand what’s in your portfolio, how to think about opportunity and risk, is becoming harder and you’re having to maybe think about coming up new ways of classifying investments,” Ashmore said. “Then on top of that, the sheer momentum in equity markets that’s grinding on the back of AI is enormous, and it’s not a question of the rate of growth; it’s the rate of acceleration of growth. If that starts to come off, then you can see the bloom come off very, very quickly potentially.

“So, again, where then is your resilience, where then is your diversification, where then is your liquidity coming from?”

But he also cautioned that, “One of the risks with ILS is it will be a source of liquidity when people need it,” which of course has been seen before in financial crises and other volatile market situations.

The discussion made it clear that diversification is once again at the forefront of investors minds, while at the same time ILS has demonstrated its value through cycles and financial conditions.

Smith of Sage Advisory summed up the current desire and need for diversification well, “The one place that you get it is in cat ILS. Diversifying the diversifiers is our number one goal right now.

“I’m looking for something that goes left when everything else goes to the right, and we’re about to approach up on that kind of a market environment in our view.”