(updated with correction)
Significant demand for insurance-linked securities, in particular catastrophe bonds, has driven down yields and taken some of the luster off the once-shining beacons of uncorrelated assets in a pension fund's investment portfolio.
But all is not lost.
Now comfortable with the ILS sector, investors are looking beyond the more liquid, but arguably more expensive, parts of the market such as windstorm- and earthquake-related bonds, and seeking uncorrelated yield in securities that insure against firestorms and more esoteric calamities. They are also becoming more comfortable with ILS investments that are less liquid.
“There are newer products coming to market to sate some of the demand ... we will see more and more esoteric risk that goes beyond earthquake and wind — it could be a type of firestorm, or something else,” said Joe Higgins, New York-based managing director and fixed-income portfolio manager at TIAA-CREF, which manages between $300 million and $500 million of ILS assets. The firm has a total $569 billion under management.
Other managers have noticed pension funds playing in the less-liquid pools of assets.
“We have seen some investment mandates moving toward more private ILS — those pension funds without liquidity constraints,” said Christoph Buerer, CEO at Twelve Capital in Zurich. Twelve Capital is also looking to bridge the gap between the liquid catastrophe bonds market and the broader ILS sector. “We are trying to combine those two worlds with a private cat bond structure,” said Mr. Buerer. “(This type of structure) is cheaper to place and manufacture than cat bonds, and more liquid than private ILS.” Twelve Capital has $3 billion of assets under management across ILS funds.
GC Securities, a division of MMC Securities Corp., a U.S.-registered broker-dealer, has also seen pension funds cast their nets wider in a search for yield. “We are seeing investors that typically chase the liquid catastrophe bonds instead looking at more linkages with existing reinsurance or insurance companies,” said Chi Hum, New York-based global head of distribution at GC Securities.
“They're looking at private deals or managed-account type situations, with investors looking to sit alongside underwriters and allocating pools of capital to property catastrophe, for example.”
Mr. Hum said this broader investment range is starting to make up for those investors sitting on the sidelines in the tighter, liquid parts of the market. “Overall, dollars invested in the sector continues to go up — but rather than just investing in catastrophe bonds, there is now more opportunity to partner up with insurers, looking at things like collateralized reinsurance contracts.” This brave new world for investors “points to a level of comfort that (they) have gotten to with the underlying risk.”