Investor appetite remains but ILS sector’s “mettle” to be tested: Flandro, Hyperion X

Despite the capital markets enduring the biggest shift since the financial crisis, driven by the impacts of the Covid-19 pandemic, investment appetite for insurance-linked securities (ILS) assets remains healthy, according to David Flandro, Managing Director at Hyperion X.

In a video interview with Artemis, available in full here along with other video content, Flandro offered some thoughts on the prospects for the ILS sector in light of the current crisis.

“This is an interesting time for catastrophe bonds,” he started. “Our mettle is going to be tested, our investors’ mettle is going to be tested, and, the capital backing the ILS sector is going through the biggest shift it has since the financial crisis.”

Of course, the catastrophe bond market is just one sub-sector of the broader ILS asset class, which, itself is just one, relatively small arena in which third-party capital looks to participate.

With this in mind, and against a backdrop of Covid-19-related financial market volatility, Flandro explained that it’s both interesting and important to think about third-party, or alternative capital more broadly and all of things that they invest in.

“Oil and energy, real estate, equities, low-grade fixed-income securities, all of these things have been impaired significantly. It’s no different for teachers retirement funds and pension funds and others that invest in ILS markets,” he said.

As a result, one might assume that everything is correlated in the tail and ultimately, that this would lead to a reduced appetite for collateralized investments. However, that’s not been the case.

“On the contrary, we are finding that a couple of things are happening, and this is just my experience. But, investors that are endeavouring to be more opportunistic, if you’re looking at negative oil or you’re looking at low real estate prices or equity prices, and you want to get back in, you need to have something that hedges your Sharpe ratio.

“And, what that just means is that investors are measured by their average return, divided by standard deviation, which is a function of ROE. And, if you have a small proportion of investments that’s non-correlative and relatively high-yielding in your portfolio, it can hedge you or enable you to invest in other stuff.

“So, in fact, I don’t think this has diminished appetite for ILS very much at all. I think people are in fact looking for, and we are getting new investors, who are looking for non-correlative assets that are relatively high-yielding in sectors where rates are going up,” said Flandro.

As evidenced by the April 1^st, 2020 renewals season and prior to the pandemic, positive rate movements have occurred in the reinsurance markets following a prolonged softened market, exacerbated by consecutive heavy cat loss years.

“So, there seems to be pretty healthy investment appetite for alternative capital products, even products that are just non-cyclical rather than non-correlative.

“It doesn’t seem to me that appetite has diminished particularly in any way. And, it is probably because ILS typically represent a fairly small proportion of broader pension fund, hedge fund and sovereign wealth fund assets,” said Flandro.

The video is embedded below. All of our video interviews can be viewed in full here.

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