Just nine months into its life, the latest insurance-linked securities (ILS) fund launch from Plenum Investments AG, the Zurich based specialist insurance-linked securities (ILS) and catastrophe bond investment manager, has surpassed $100 million of assets under management.
Plenum Investments launched its Plenum Insurance Capital Fund, a UCITS ILS fund that will allocate to both catastrophe risks and subordinated insurance debt instruments, in June 2020.
The fund saw a new strategy in managing ILS assets at Plenum, which was better known for its relatively low-risk catastrophe bond fund that has more than a decade of track record behind it.
Plenum’s Insurance Capital Fund seeks to manage high-yield insurance risks more efficiently, using an approach Plenum has termed “tail-to-tier.”
The idea is to help mitigate the concentration risk in US wind exposures, which is typical of cat bond and other ILS or collateralized reinsurance investment strategies, and to enable investors to capitalise on the yield spread between catastrophe bonds and subordinated bonds issued by European insurance and reinsurance companies.
Now nine months in, the new strategy is gaining traction, with over $100 million of capital raised.
“There are various reasons for the fact that the Plenum Insurance Capital Fund has been so well received by the market,” explained Daniel Grieger, the fund’s lead portfolio manager. “We see strong investors’ demand for a more effective tail risk management in the high-yield risk-focused natural disaster business.
“We had a fantastic start and were able to generate a performance (in USD) of 7.85% in the first nine months. We are delighted at that, particularly for those investors who have supported us and placed their trust in us in the early stages.”
The Plenum Insurance Capital Fund aims to match the performance of the Swiss Re CAT bond index, but without the high tail-risk exposure of a pure cat bond market beta play.
Plenum sees this approach as a way to actively manage hurricane risk allocations, without lowering the return in periods without events.
Using subordinated insurance bonds, the tail risk of catastrophe bond portfolios that are typically strongly weighted towards US Wind is reduced, without giving up too much yield.
This investment approach was evidenced after the end of the US hurricane season in 2020, when the subordinated bonds drove the performance of the fund and generated an outperformance versus the cat bond market, Plenum explained.
“The invested capital is harder at work,” Dirk Schmelzer who manages the CAT bond allocation at Plenum said. “It is not only the low correlation between the two asset classes that suggests such an approach, but also the special way they relate to each other. Both asset classes are part of the capital structure of an insurance company, with an attractive complementarity in terms of their geographical distribution of risk, seasonality, and cyclicality.”
“By following the ʺtail-to-tierʺ approach, we significantly reduce the conflict between high returns and high tail risk, thus offering investors a new way of investing in high-yield CAT bonds,” added Grieger.
“The Plenum Insurance Capital Fund fulfills the request of many investors for stable low correlation and an attractive risk-adjusted return. It is exactly the right product in times of low interest rates and growing fears of inflation,” Rötger Franz who portfolio manages the subordinated insurance bonds at Plenum also said.
Plenum’s Insurance Capital Fund, as well as its flagship and long-standing catastrophe bond fund, were both accredited with a sustainability FNG Label by the German “Forum Nachhaltige Geldanlagen e.V.” last year.