Insurance-linked securities (ILS) fund managers and reinsurance companies managing third-party capital are likely to see continuing volatility in terms of investor inflows and outflows, as the broader implications of the Covid-19 pandemic continue to emerge.
While an economic recovery is hoped for in the long-run, the hit to global economies and gross domestic product (GDP) has been and will continue to be unprecedented.
So for large institutional investors, of the kind who back insurance-linked securities (ILS) strategies, cash may remain king for a time and some will be forced to react and move allocations around, from one asset class to another or in terms of the size of their allocations.
We’ve canvassed a number of major institutional investors (largely pension funds, as well as some sovereign investors and family offices) that already allocate to insurance-linked securities (ILS) and reinsurance linked strategies, as well as some that don’t but are interested in the sector, in the last week.
We’ve found that the majority of those already invested in ILS anticipate maintaining a similar level of ILS investment, but say that their allocations may fluctuate over the coming months and perhaps for longer if the economic impacts from the pandemic are particularly prolonged.
Some said there little chance of allocations increasing over the short-term, despite the fact that right now ILS looks about as attractive as it ever has, having once again proven out its relative lack of correlation to broader financial market declines.
Some of the investors not yet allocated who we’ve spoken with, said that entry points are being considered, but that their priorities are focused on managing the broader portfolio of assets and a relatively small allocation to what might be an entirely new asset class to them could take time to work its way through the priorities list.
What is particularly interesting at this time though, is the positive view of ILS as an asset class that many institutional investors appear to have at this time.
With the majority of money managers and asset managers having seen significant declines in performance and the value of their portfolios in Q1 2020, the ILS market has escaped relatively unscathed aside from the mark-to-market impacts seen in catastrophe bonds, much of which is being recovered at this time.
Meanwhile, even though some ILS fund managers have marked certain collateralised reinsurance or private ILS positions for potential losses due to the pandemic related claims that could flow into property insurance, the actual size of this exposure remains relatively small at this time, as a significant amount of the ILS market’s capacity is focused on reinsuring homeowners coverage.
While greater uncertainty remains over reinsurance sidecars, private ILS quota shares and how the eventual pandemic toll could affect retrocession markets, the institutional investors we’ve spoken with seem relatively unconcerned by the potential for specific Covid-19 losses.
Positively as well, every institution we spoke with last week said that they were not surprised that some losses from such a global and impactful event would end up in insurance-linked securities (ILS), even though it is not the type of natural catastrophe the industry is best known to cover.
But just because the asset class seems to be gaining favour and also profile at this time, does not mean it will instantly translate into inflows to ILS fund managers or other reinsurance-linked investment strategies.
Pension funds, which made up the majority of investors we’ve spoken with, are still looking to cash opportunities in asset classes and expect that this need will persist for a time, given the repositioning of portfolios that is currently being undertaken by many investors.
More liquid investments are in favour as a result, which could benefit the catastrophe bond market over the coming months.
In fact, if catastrophe bond issuance continues to be brisk there could be opportunities for some investors to allocate to that market and benefit from wind season premiums, while also being able to withdraw capital should it be required, especially in the most liquid cat bond fund opportunities such as UCITS funds.
Institutional investors told us that they do not want to sell-down portfolios of less-liquid private assets every time there is volatility though and with uncertainty set to continue in the global economy, a shift towards more liquid alternatives is becoming evident in many markets.
In balancing how much cash to keep on hand, versus how much to lock away in longer-duration private market investments, pensions and other institutional investors are looking increasingly favourably at alternative strategies that provide simple withdrawal terms.
Here again, the catastrophe bond market could prove an attractive option.
Over the longer-term, pension funds and other major investors are likely to look to keep larger cash buffers available, put more money into liquid strategies and rebalance their portfolios to accommodate a strategy designed to enable a smoother response should broader market volatility return.
A second wave of the coronavirus is seen as a particular risk and investors are seeking to position themselves to be ready for that.
Overall, the ongoing uncertainty and potential for a prolonged recession means that institutional investor flows into and indeed out of the ILS market are expected to be more volatile for the foreseeable future, than they were prior to the pandemic.
While that can make things a little more challenging for managers, the ILS fund space could be less affected by this than the structures such as reinsurance sidecars where investors need to lock-in for fixed periods, or a minimum of one-year.
Flexibility and adaptability is going to be key, both for the ILS fund managers and the end-investors targeting insurance and reinsurance linked returns.
One investor told us that they are working with potential partners to identify the most attractive way to enter the market at this time and that this would not be a rushed project, given the other priorities they have to deal with.
Which means ILS funds may need to be patient, work more closely than ever to help end-investors understand what their strategies can offer and ensure they are out in front of them and part of the investor-base and potential investors’ consideration set over the months ahead.
None of this means inflows won’t be seen, in fact we understand from sources that some smaller, fresh inflows are being arranged around this renewal, although these are largely for investors that targeted increased allocations earlier this year.
But positively, the overall perspective of ILS from the investor community appears to be one of an asset class offering significant and positive values, that has once again demonstrated a key selling point and as a result the longer-term prospects for the asset class look good.