Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS funds face deluge of investor queries due to coronavirus outbreak


At this time of global uncertainty due to the Covid-19 coronavirus outbreak the insurance-linked securities (ILS) fund market is facing a rising demand for investor relations support, as the institutions backing the market, plus those looking at it for potential deployment, ramp up their queries and requests for information.

telephoneAs we explained in an article yesterday, it is largely business as usual across the catastrophe bond, collateralised reinsurance and ILS fund management marketplace.

However, the one area that is not business as usual (aside from the home working and business continuity plans that have been put in place by many market players) is the level of investor enquiries that are being fielded by ILS funds and other reinsurance investment managers.

We’re hearing from ILS funds that their investor relations teams are being kept extremely busy this week, for a number of reasons.

We’ve also been receiving an increasing amount of interest from investors directly, who are interested to learn more about the ILS market, its assets and its managers. As a result our readership has increased this week and new investors such as pension and sovereign wealth funds that don’t deploy into ILS yet are now making themselves known.

This isn’t, generally, because investors fear any significant risk of losses to the ILS market.

In fact ILS market exposure is relatively low to this crisis, despite the global ramifications of the coronavirus outbreak.

Of course the World Bank issued pandemic catastrophe bonds are facing a loss of principal and likely to be triggered by the ongoing coronavirus outbreak, with a default and eventual loss payment expected to be made some time after March 23rd (that could be in April or early May we understand).

But outside of the World Bank’s pandemic bonds, there appears little specific exposure to the coronavirus outbreak in the ILS market, aside from some potential for claims leakage to collateralised reinsurance contracts that cover contingency related claims.

The queries that ILS fund investor relations teams are fielding relate more to operational issues, as well as questions related to the general nervousness in the investment markets after the volatility seen in stocks and equities in recent weeks.

This has led to questions about how the ILS market is preparing to ensure continuity for its investors and cedents, as the reinsurance market has always been a heavy international traveller and relied on face-to-face contact for maintaining relationships.

The ILS funds we’ve spoken with have all enacted business continuity plans and largely have staff working remotely from home.

That means core operational activities, from portfolio analysis and modelling, to deal reviews, pricing, allocation decisions, claims activities and other structuring related tasks, are all continuing apace.

On the investor side, as we said the investor relations teams are particularly busy, but other activities that support investors such as reporting and collateral related operations all continue as normal.

Of course roadshows are going to stop for the time being, both for ILS funds that go to meet new and existing investors, as well as for transactions such as catastrophe bonds.

These activities are largely becoming virtualised, which means they can continue with participants dialling in remotely to conference and video calls.

So the operations of the ILS market continue as normal, albeit more remotely and virtually than before.

But investors are seeking information in their droves from ILS funds, we’re told. Both in terms of asking for certainty on operational issues, but also in asking whether there are opportunities to deploy more capital at this time.

Given the significant losses being realised by investors across the globe as stock markets crash down and other asset values are depressed by the fear caused by the Covid-19 coronavirus outbreak, it once again makes insurance-linked securities (ILS) and reinsurance assets look incredibly attractive.

The last time we saw such stock market declines was around the financial crisis in 2008, a time when interest in ILS investing increased considerably.

Not only does ILS look like a relatively uncorrelated safe haven in the current investment climate, it also offers an asset that can be more easily sold when other markets lock-up, the catastrophe bond.

As a result, we understand queries on deployments into cat bonds are among the most frequently received and we’re hearing the same direct from investors this week.

Investors may be facing declining liquidity in their more traditional asset classes, as well as in alternative classes that are more correlated to financial markets.

All of which is making ILS funds, catastrophe bonds and reinsurance linked opportunities look increasingly attractive.

Some interest is being seen to deploy more capital into ILS from large investors, we’re told.

We’ve also spoken to a number of investors that said they would upsize existing allocations if the market opportunities present themselves, with the mid-year renewals the main target for that.

It will be interesting to see how that pans out, as opportunities may not support the level of interest that could come in, with obvious ramifications for the reinsurance renewals.

Once again, the ILS market demonstrates that it is broadly uncorrelated with financial market contagion as well, with this currently playing out just like during the financial crisis and helping to drive increasing interest in the asset class again.

However, while much of the investor inbound enquiries we’re seeing are on the more positive side, we understand that some investors are also making sure they understand their redemption options as well.

Typically, ILS is a less liquid asset class and so investors are largely locked in for periods into ILS funds making immediate redemptions impossible.

But in a world where fear is rising of a prolonged global economic recession, perhaps depression, investors are wise to ensure they understand what the terms are surrounding their investments in the ILS space.

Should the coronavirus outbreak persist in impacting global activity and stock markets for a longer period, say right through the rest of 2020, then we understand the chances of some redemptions being seen could rise.

If investors continue to face significant losses elsewhere in their portfolios, they might see a chance to liquidate and cash in their ILS investments as attractive.

But right now their seems ample interest to soak up any capacity that came available in funds and we’re hearing, both from funds and direct investors, that there seems more interest in allocating than withdrawing at this time.

Of course it is all early days and it’s natural for investor relations to be busy at a time like this, especially as the crisis has really only gone fully global in the last week or so.

In fact, it’s only as of the last week that many countries have introduced restrictions and begun to introduce economic stimulus, so this is all relatively fresh and so worries or concerns are too, which naturally drives enquiries.

One final point related to economic stimulus.

As interest rates get cut to zero and are likely to stay low for even longer now, that generally helps to drive investors towards investments in asset classes like ILS anyway.

With ILS now exhibiting just what is meant by the asset class being said to have low correlation, there is every possibility that awareness and interest in ILS and cat bonds continues to grow.

It’s at times like this that ILS funds and reinsurance investment teams can demonstrate their client service capabilities, as well as their sourcing ability, in helping investors with their queries and securing opportunities for deployment, all while providing continuity to their existing investors and cedents.

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