Swiss Re Insurance-Linked Fund Management

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Institutional investors increasingly considering allocating to insurance-linked securities


Institutional investors are increasingly looking at the insurance-linked securities and catastrophe bond market as they consider allocating funds to the sector in a search for attractive returns and portfolio diversification opportunities, says the latest report on Insurance Linked Securities (ILS) by independent publisher Clear Path Analysis. The report contains insight from pension, endowment, asset management professionals and ILS and cat bond investment managers and consultants.

The report, which was released today, takes a look at the asset class from a pension scheme and endowment fund perspective and suggests investors are looking to diversify their portfolios away from other, more mainstream financial market instruments, such as equities and fixed income.

The report discusses the hunt by investors for uncorrelated returns at a time when the wider financial markets remain challenging. Funds and institutional investors are actively seeking out new sources of reliable returns and insurance-linked investments are gaining a profile as one of the best options available right now.

The report includes insight from many stalwarts of the cat bond and ILS investment space, including AXA Investment Managers, Nephila Capital, Clariden Leu and Secquaero Advisors, as well as interviews with active investors in the space including the BBC Pension Trust and the Ontario Teachers’ Pension Plan.

The report looks at why ILS are becoming an attractive investment for pension and endowment funds and how they suit different types of investors, the benefits of diversification within an ILS investment strategy, challenges in the market as well as discussion of catastrophe and life, longevity and mortality instruments.

Christophe Fritsch, Head of Insurance Linked Securities at AXA Investment Managers commented;

“At a time when institutional investors are grappling with the challenge of making economic predictions and taking long term bets on asset classes, Insurance Linked Securities could provide an attractive investment opportunity. An investment particularly in Catastrophe Bonds can offer an important source of diversification on the asset and on the liability side for pension funds which have exposure to longevity risk on their liabilities but are not exposed to natural catastrophe.”

“Given their appealing risk-return profile which is dependent on the occurrence of natural events and not linked to economic factors, inclusion of insurance linked securities in a portfolio of traditional asset classes could enhance the efficient frontier of the portfolio. Furthermore, by nature of their unique underlying risks and their low frequency, extreme loss distribution profile, catastrophe bonds are likely to remain a truly uncorrelated asset class yielding stable investment returns.”

Michael Stahel, Director at Clariden Leu Insurance-Linked Investments (joining LGT Capital Management in Q2 2012) remarks that timing is key when considering an investment allocation to ILS;

“The best time to invest in Cat Bonds is typically in the year after a very severe insurance catastrophe and 2012 is providing investors with a very interesting point because 2011 to date is one of the worst years on record in terms of insurance losses.”

“Many don’t realize that 2011 was actually worse than 2005 which saw hurricane Katrina devastating the shores of the US south coast. Last year, we saw several extreme events, the Japan earthquake and tsunami, the New Zealand earthquake, a very severe tornado and hurricane season, as well as the flooding in Thailand, which all together, based on Munich Re’s latest assessments, totalled approximately 110 billion dollars of actual insured losses.”

Meanwhile Dirk Lohman, Managing Partner at Secquaero Advisors discusses the full range of ILS investment opportunities that are available;

“Cat Bonds only represent about a third of the total outstanding volume of insurance linked assets. Even if one were to include so-called private collateralized reinsurance transactions and side-car investments in vehicles writing the risk as part of the broader ILS space, they would still only represent about 50% of the market’s current universe.”

“An issue with limiting one’s focus to catastrophe risk is that the risk being offered to the capital markets is relatively concentrated. Beyond alternative catastrophe instruments the largest potential lies in ILS where the underlying insurance risk is linked to the performance of life risks. This could be event driven, such as the risk of pandemic mortality or it could be portfolio based, such as the risk of a higher than projected mortality, morbidity or lapse behaviour.”

Greg Hagood, Founding Principal at Nephila Capital also comments on the wider ILS market;

“When people hear ILS their minds immediately go to the Cat Bond market. Catastrophe Bonds started in the late nineties and are certainly a meaningful market, worth somewhere around $12-13 billion range in terms of outstanding issuance.”

“However, the traditional reinsurance market represents about $200 billion in risk that trades each year compared with the Cat Bond market, making it far larger. There are a number of additional risks in this market, which can also help diversify or complement a portfolio. These can present new opportunities to investors than you would otherwise get from the Cat Bond market.”

The report is available as a free download from the Clear Path Analysis website (registration required).

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