For investors looking to access pure, short-tail property catastrophe re/insurance risk, the insurance-linked securities (ILS) fund format is likely the optimal solution, according to Michael Stahel, Partner at LGT ILS Partners.
Today, there’s more ways than ever for investors to deploy capital in their search for insurance and reinsurance linked returns.
And, with all the different entry points out there for a growing investor base, with a diverse set of goals and requirements, the best way to access the industry varies.
“This is where it really gets interesting, because we believe that when we look at ILS today, and all the different nuances and approaches in ILS, some fundamental elements have somehow got lost in translation, and lost in the development,” said Stahel, speaking last month as part of Artemis’ fifth ILS NYC conference.
According to Stahel, some of the new propositions and suggestions that come to market are perhaps missing the fundamental point of view that, “as an investor looking to allocate into event driven, insurance-linked investments, you look for liquidity, you look for broad diversification.”
If equity-like returns are what investors are seeking, Stahel explained that this is a very easy approach and can be acquired from a well-run re/insurer.
“That would mean you have everything you want. You have the approach to access a huge firm with many specialists that have a broad access to the market, that have a very stable track record for many years, and that also offer liquidity… and it’s fundamental liquidity.
“And, then, yes, along comes the element that ultimately, is in our view the value proposition of the pure ILS element, the market psychology and demand and supply shifts and market volatility. But, I think the essence is really, if you want access to a broadly diversified portfolio of insurance risks, well, you should certainly start at the core of buying equity of a well-run primary insurer or reinsurer,” said Stahel.
For ILS then, he continued, it’s all about the event driven piece and the ability to carve out the pure cat risk and to transfer that element to the capital markets.
“So, it’s really that fundamental element first; why not even just buy the equity piece? But then if you look at the pure event driven piece, this is where the ILS element comes into play.”
With this in mind, Stahel went on to explain that this is where the ILS asset class has developed a very robust marketplace and that absorbing extreme cat events is what insurance-linked securities should be all about.
“So, is the fund format the optimal solution? Probably not. I think it is the optimal solution for a very small element of risk transfer opportunities, and that’s the property cat short-tail business. As soon as you enter into longer tail elements it’s just a challenge.
“You have to somehow put down a value on a position on a given day, and you potentially even have to offer liquidity to investors at a certain period of time. With short-term cat, I think you do know at the end of a term whether there was a big cat event or not. And if there was a big cat event, I think it’s easier to assess and evaluate what impact it may have on your portfolio.
“With long-term business; marine, aviation, casualty, motor, you don’t have that,” he said.
Adding, “My point is that ILS funds are not an optimal solution, but are probably the best solution for short-tail cat business. For longer-tail business, I think a closed-end structure, potentially in the form of private equity, or potentially just in the form of a plain vanilla reinsurance entity, is the better solution.”
The session, which was broadcast first to event registrants on Monday 8th Feb, can now be viewed below: