ILS as an asset class to offset financial market volatility: Aberdeen’s Brooks


Mike Brooks, head of diversified multi-asset strategies at major investment manager Aberdeen Asset Management, has underlined the attractiveness of investing in the insurance-linked securities (ILS) space, particularly as a way to secure diversified returns during financial market volatility.

In an interview with The Edge Malaysia, Brooks discussed the ongoing volatility in financial markets, and how expectations of greater volatility throughout the year suggests investors might want to look at more alternative asset classes for returns, such as the ILS space.

Monetary policy is expected to drive volatility in equities and bonds, making niche alternative investment asset classes, such as ILS, increasingly attractive as more stable drivers of return that are disconnected from typical economic cycles.

“It is quite an unusual asset class where you earn a return from taking on the risk of insurance losses due to extreme natural catastrophes such as hurricanes and earthquakes. Even the biggest reinsurers in the world do not have the capital to cope with such claims, so investors could put capital to protect against those events and get good returns,” said Brooks.

After the devastating impacts of 2017 catastrophe events, many ILS investors experienced losses for the first time. However, this certainly didn’t scare the base of mature and sophisticated capital markets investors, and actually the market has grown in size from the end of 2017, underlined by the record level of catastrophe bond issuance in the first-quarter of this year.

In fact Aberdeen Asset Management continued to find ILS an attractive asset and earlier this year explained why ILS remains attractive post-loss.

Heading into 2017 and prior to the catastrophe events that occurred in the third and fourth quarter, returns in the ILS space had been falling, as was the case in the global reinsurance market, driven by intense competition and the softening market landscape.

But despite this, investors like Brooks remained attracted to the ILS space, which is testament to the diversification the asset class offers, along with its very low correlation to wider financial market trends, and also an increased understanding of the asset class by investors.

Discussing returns, Brooks said: “We expect a return of about 10% per annum. But if there are no catastrophic events, investors could get a return of 17%. However, it is best to diversify this investment, spreading the exposure to risks such as the California earthquakes, Florida hurricanes, European windstorms, Japanese typhoons and Australian floods.

“This is only a small part of our portfolio, but it is another way for us to earn good returns from different types of risks.”

It’s worth noting that following the events of last year there remains a possibility for some higher returns in the ILS space as well, as reinsurance and retro markets push for higher yields after years of falling rates.

“There are a lot of ways to make money nowadays. Although some areas are very small, alongside traditional and alternative investments, they could be built up to become a nice, diversified portfolio,” said Brooks.

There is an increasing appreciation among asset managers that ILS can add an element of diversification to their portfolios, which can help to offset the volatility of broader investment markets. As this appreciation continues to spread it can only help to drive further inflows into the asset class.

Also read:

ILS & reinsurance are Hedge Funds 2.0, says Future Fund CIO.

Interest rate rises to boost profile of ILS, generate more inflows: Agecroft.

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