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Original Risk: A Society for Change Agents

ILS could be attractive to $1 trillion alternatives “dry powder”


Alternative investment managers and funds are sitting on approximately $1 trillion of undeployed capital or “dry powder” and with few other attractive opportunities available, insurance and reinsurance linked investing has been cited as one of the more attractive asset classes.

sand-dry-powder-investmentAlternative asset managers face a challenge currently as their investors want to deploy far more money than they are able right now, as investment managers have begun to shy away from some areas of the alternatives market.

Asset classes aren’t looking as stable as they once were and there is a growing fear of the amount of credit and leveraged investment opportunities among some, leading to a conundrum over where to deploy capital in order to secure the returns investors are demanding.

Investing is challenging right now, with many markets showing signs of excess liquidity and equities no longer viewed as the safe haven they once were.

Alternatives are increasingly seen as not just an asset area to deploy a small amount of capital into to provide diversity to overall portfolios, but rather as a broad segment of the investment market within which diversification can be achieved as well.

This is leading large institutions to plough more capital into the alternatives sector, making finding the diversifying niches within it all the more important.

The dry powder that J.P. Morgan Global Alternatives cites, is largely the type of capital that had been looking for private equity or credit opportunities. But with these strategies often predicated on leveraged opportunities that don’t always come off, investment managers are becoming increasingly careful about deployment, resulting in a capital build-up and a hunt for return drivers that have other qualities to add to investor portfolios.

Enter insurance-linked securities (ILS) and reinsurance linked investing, cited by one of J.P. Morgan’s alternative investment chiefs, as among just a handful of opportunities categorised as in the private credit realm, offering attractive qualities for investor portfolios and currently open for inflows.

But the ILS asset class does continue to be constrained by its own deployment opportunities, as risk needs to be found to match with the investor capital.

Hence ILS alone is not the answer to investment manager’s dry powder woes.

But, the fact ILS and reinsurance is once again being cited by large, traditional asset managers as one of the few, best asset class opportunities available, suggests that awareness of the asset class is once again on the rise.

It tends to be that when asset managers and investors have trouble deploying their capital into the classes they had been targeting, that awareness and education on alternative niches grows.

We’ve seen this first-hand, in a significant uptick in institutional investors and main street asset managers subscribing to our news, reading Artemis and contacting us directly to discuss the ILS and reinsurance sector over recent months.

This has happened before, especially following the crisis in the late 2000’s and from 2010 to around 2014.

It seems to be economic cycle related. In particular related to the ability of investors to deploy capital at reasonable rates of return, combined with a growing fear that the cycle may be coming to a head, leading to a desire to diversify and acquire defensive, or non-correlated, positions.

Christopher Hayward, Managing Partner, J.P. Morgan Global Alternatives explained, “In the late-cycle, investors are increasingly looking beyond traditional asset classes to achieve their objectives, recognizing that a sizable allocation to alternatives can be additive to their portfolios.”

Anton Pil, Managing Partner, J.P. Morgan Global Alternatives added, “In the current environment, investors can look to increase returns and reduce risk by focusing on assets that generate stable streams of income, and on strategies that benefit from the rising volatility.”

In the current investment market climate and with so much dry powder unable to find a home, ILS and reinsurance related investing is an area that has qualities investors are looking for right now, hence its natural that desire to learn about the asset class would increase.

J.P. Morgan Global Alternatives advises investors to look to sources of diversified return to add differentiation to their portfolios, an area it sees as complementing a core alternatives strategy.

This is where ILS and reinsurance linked investing sits so well, with the returns relatively uncorrelated to broader financial market factors and returns seen to be relatively stable except for in major catastrophe loss years.

The investors we speak with continue to ask questions about pricing, climate, and how big the ILS opportunity could be in years to come, seemingly the largest concerns of the moment.

If ILS fund managers and others offering investors access to reinsurance linked returns can adequately explain to investors how they are dealing with issues related to pricing and climate, plus demonstrate that they can source a meaningful deployment opportunity for them, it seems reasonable to expect that interest in ILS will continue to expand as investors increasingly look for new options.


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