Insurance-Linked Securities – A rare liquid market with income and value: Schroders Capital

Insurance-linked securities (ILS) such as catastrophe bonds represent a rare opportunity for investors today as they are one of the few liquid markets that offer value potential when most other markets have historically low risk premiums. They also offer uncorrelated returns as an asset class, said investment manager Schroders Capital.

Announcing its investment outlook for the private asset classes on which it focuses, Schroders Capital stated that there are currently some promising investment opportunities available.

However, Nils Rode, Chief Investment Officer (CIO) of Schroders Capital, warned: “While a normalisation of fundraising and valuation adjustments creates promising opportunities, diversification of private market allocations is crucial given ongoing geopolitical tensions.”

Income and asset classes that make this possible are particularly attractive, said Schroders Capital.

However, the investment manager prefers asset classes where market inefficiencies can provide more opportunities and focuses on the fundamentals of an asset class rather than distressed assets.

This is where insurance-linked securities (ILS) and catastrophe bonds come into play, an asset class whose fundamentals have rarely been better.

In the current broader private market environment, uncorrelated returns from the ILS sector are seen as an area that is likely to benefit.

In addition, while most liquid markets face high risk premia, ILS is one of the few markets that does not, so Schroders Capital believes there is “continued value” for investors in ILS.

The asset manager explained: “Insurance-linked securities provide valuable portfolio diversification due to their lack of correlation with macroeconomic conditions and offer attractive returns due to higher yields due to reinsurance restrictions.”

With investors looking for yield and ILS set to continue to benefit from higher collateral yields as interest rates do not appear to be falling much despite being at their peak, the asset class could prove attractive later in the year once the peak of hurricane season has passed.

Interestingly, the “complexity premium” also proves attractive to investors in a number of private markets.

Of course, this additional premium within ILS, although the overall asset class is relatively complex, can definitely be captured in private ILS and collateralised reinsurance strategies, so this could prove to be an additional attraction later this year, it seems.