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Investors see ILS asset class as increasingly mature: Malawer, K2 Advisors


Capital markets investors increasingly view the features and structures of the insurance-linked securities (ILS) sector as a more mature asset class, according to K2 Advisors Jonathan Malawer, underlining the potential for further market expansion as ILS acceptance grows.

Although the ILS market and its various tools and structures have been a feature of the risk transfer market for some time now – the first catastrophe bond issued according to data from the Artemis Deal Directory was at the very end of 1996 – some in the sector perhaps still view, and certainly discuss the asset class as emerging.

Notably, only in the last few years has the wealth of alternative reinsurance capital, of which a substantial amount is in catastrophe bonds and collateralized reinsurance agreements, grown to a size where it’s meaningfully impacting the overall re/insurance landscape, pressuring rates and raising competition, but also creating opportunities for re/insurers and ILS players.

Jonathan Malawer, Managing Director, Senior Investment Analyst at hedge fund investor K2 Advisors, LLC, as part of a panel at the 2016 SIFMA IRLS conference held in New York recently, discussed the growth of ILS and its transition away from being an emerging asset class.

“I definitely, personally view it as a more mature asset class, I think it depends upon the time horizon of the investor,” said Malawer, noting that there are a couple of ways to approach the debate of emerging or mature.

Malawer stressed that for those investors that entered the ILS space many years ago, like K2 Advisors, which first allocated to the space in 2003, they benefit from having participated in the space for many years.

This means investors would have the benefit of witnessing the “asset class tested many times,” something that increases an investors familiarity with the sector and means they likely better understand its workings and features, and would therefore view it as a more mature asset class.

A sensible notion, as investors that entered the space more than ten years ago, and even within the last five to ten years would have seen how the asset class has reacted and behaved during different insurance market cycles.

Enabling them to make a more informed decision on allocations to the space at different stages of a cycle based on previous hard or soft markets. Furthermore, that investors such as K2 Advisors have been in the space for so long, through various cycles and also the financial crisis, but remain in the space today, highlights the growing maturity of the asset class and its investor base.

With this in mind, by no means does it suggest that new investors interested the space would view it as an emerging asset class, although arguably they could be more inclined to lean this way, as the heightened acceptance and sophistication of ILS in more recent times serves as a sign of maturity to potential investors.

Another way to approach the topic is to consider the current, and past geographical position of the ILS investor base, explains Malawer, underlining that “ILS has been adopted more so in some areas first, like in Asia, Australia,” when compared to North America for example.

“So I would envisage that if you look at a U.S. pension plan they might view it more as an emerging asset class, where as you might look at funds in Australia or other areas and they see it as more of a mature asset class,” explained Malawer.

Malawer raises an interesting point, as historically the majority of ILS funds or managers are situated in Europe, or re/insurance and ILS hubs like Bermuda, so outside of the U.S., and therefore investors in the states might not have had such easy access to this segment of the capital markets.

However, the times have changed, and ILS is now widely talked about among the insurance and reinsurance landscape, with a host of firms, U.S. domiciled included, increasingly utilising the benefits of ILS capacity to supplement their catastrophe reinsurance programmes and reduce costs.

As a result it’s possible the ILS investor base will surge in the coming months and years, as the acceptance and understanding of the asset class filters through, and investors become more and more aware of its diversification, and low correlation benefits to their overall portfolio.

To conclude, Malawer highlights that as a hedge fund allocator investors would tend to see them as more in the alternatives bucket, but in recent times discussions about ILS are more common place, “so I think that’s more of a maturity.”

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