Senior industry figures are expecting more institutional investors to allocate to the ILS asset class following recent broker predictions that the catastrophe reinsurance capacity is expected to double and reach $100 billion in the next few years. The absence of yield in other asset classes is pulling ILS instruments towards mainstream investment tools, presenting new challenges for investment managers.
John Whiley, Head of ILS Administration at SS&C GlobeOp gives the issue further context, “Pension assets are worth around $30 trillion globally, hedge fund assets are expected to top US$3 trillion in 2014, compared with the traditional reinsurance limit of $300 billion. As pension investors are attracted to potential ILS returns they are likely to deploy capital that has been sitting on the side lines.”
This appears to be a trend seen across the industry, Dr Urs Ramseier, Chief Investment officer at Twelve Capital says “We’ve seen an increasing number of pension funds tracking and analysing the risk and return of the ILS investments and many of these may well invest in the next 2-3 years”
On average, ILS investments represent 1-3% of pension fund assets but despite this relatively small allocation when put in context it mirrors levels of other more traditional alternatives such as gold or real estate.
This is one of several insights from the Clear Path Analysis ‘Insurance-Linked Securities for Institutional Investors 2014’ report, which discusses the key issues and opportunities involved with ILS investing and their place within an investment strategy, for both new and existing investors.
Over the past 12 years, the insurance-linked securities market has created an industry with over $15 billion trading between capital market investors. The first quarter of 2014 saw near record issuance for catastrophe bonds one of the more commonly known forms of the alternative capital market of $1.41 billion compared with $0.67 billion in 2013*.
Despite a lower than usual number of severe natural catastrophes in the last year, the market for reinsurance risk has risen to an estimated size of $50 billion in allocated capital. One of the main drivers behind ILS investment is that insurance risks and natural catastrophes are fundamentally uncorrelated, giving the investor an invaluable diversification benefit to their portfolio.
On the investment side, Michael Stahel, Partner at LGT Capital Partners demonstrates the institutional shift towards ILS: “Our clients are typically pension funds looking to allocate between 1-3% of their total assets to ILS. There has been increased capital flowing into this market from institutional investors which has boosted investor demand.”
Despite the growth seen by the ILS sector, there are risks associated with not diversifying the ILS proportion within a portfolio. Stahel states: “Without diversifying within the proportion, a pension fund manager can be susceptible to losing as much as 50% of their ILS allocation with a single US wind storm event”.
Nevertheless, investors continue to be enticed by ILS exposures, something Adam Beatty, Business Development Director at Nephila Advisors notes: “The CAT bond market can be characterised as a relatively small pond in a vast ocean of available risk, but new capital coming into the market is fundamentally attracted to the lack of correlation of catastrophe risk, something which is very valuable to investors.”
Dirk Lohmann, Chairman and Managing Partner at Sequaero Advisors looks at the future growth of the ILS asset class: “We would argue that the potential is enormous. Given the size of the global debt market, this represents a challenge for institutional investors wishing to make a meaningful allocation to reap the diversification benefits offered by the asset class.”
|
