ILS spreads need to widen before Baillie Gifford allocates more: McIntyre

Global asset management firm, Baillie Gifford, is unlikely to significantly increase its allocation to the insurance-linked securities (ILS) space until spreads widen, according to Baillie Gifford’s David McIntyre, one of the managers of its Diversified Growth Fund.

Currently, the asset manager’s allocation to the ILS sector sits at just under 4%, but in order for the firm to increase its allocation spreads would need to widen, said McIntyre, in an interview in the second half of this year.

“I think to want to change our allocation significantly, we’d need to see spreads move wider, and to get a significant wider-moving spreads from here almost certainly requires a major event, and probably an event in one of the world’s peak peril zones. So, Florida being the most likely source.

“Absent that, it’s hard to see what causes spreads to move significantly, so I don’t expect our allocation, absent an event, to change materially from where it is,” said McIntyre.

He explained how pricing in the ILS sector has been coming down for some time now, driven by the flood of available insurance and reinsurance capacity and the aforementioned absence of a major, truly market turning event, which, has seen insurers build up their capital bases, ultimately requiring less assistance from the capital markets.

“And on the demand side, we’ve seen a very substantial increase in interest in the asset class, from a number of different investors.

“And that combination of diminishing supply and increasing demand is what’s driving prices to the levels that they’re at today,” he continued.

In 2009, described as the peak by McIntyre, the ILS index provided a return of around 10% in excess of expected loss, which, is now closer to 2% in today’s marketplace.

That being said, the ILS market continues to reach new heights, and issuance of catastrophe bonds so far in 2017 has smashed all previous records for full-year issuance, surpassing $10 billion for the first time in a single year, and with four months still remaining.

So, despite returns falling from previous highs, and in light of insurance and reinsurance market headwinds, investors clearly remain attracted to the asset classes diversification and uncorrelated benefits, while taking advantage of steady, albeit reduced premiums.

“I do think the market will continue to broaden, that we’ll see new types of issue, and that we’ll have the opportunity to participate in attractive issuance from time to time,” said McIntyre.

It’s possible that Baillie Gifford may see greater opportunities to increase its allocation to ILS in the wake of the 2017 hurricane season, however this will likely depend on how rates adjust at the upcoming reinsurance renewal.

Join us in New York in February 2018 for our next ILS conference