ILS investments are about as attractive as ever right now: Schroders

The insurance-linked securities (ILS) market currently represents one of the most attractive markets in which to invest since the ILS market came into being, according to Doug Abbott, Head of UK Intermediary at Schroders.

Abbot places insurance-linked securities (ILS), such as catastrophe bonds, as one of the four investment strategies he believes should not be overlooked at this time.

Noting investors recent flight to the relative safety of cash, money market and government bonds in 2023 amid macro uncertainty, Abbott explained that, “Away from traditional equities and fixed income strategies, there are some less well-heralded investment strategies that are also worth considering at challenging times.”

“Many investors find themselves caught between the attractive yields available in government bonds and cash, falling but high inflation rates, and the need to generate real return for their clients,” he goes on to explain.

Adding that, “In this environment there are a number of strategies and asset classes which might be worth considering or revisiting,” the first of which he offers being insurance-linked securities (ILS).

Given investor’s concerns over inflation, desire for diversification and attraction to interest rate sensitive assets, ILS is set to receive growing attention.

Abbot of Schroders commented, “As a floating rate instrument, an ILS has little interest rate duration to speak of, leaving it relatively unscathed by the latest bond market rout.

“If inflationary pressures persist – as most major central banks believe they will – higher rates may be with us for a while. More interest rate rises will feed through to ILS investors as part of their coupon.”

On cat bonds and ILS investments in general, he summarises, “In short, the current market represents one of the most attractive markets in which to invest since the ILS market came into being, with yields at very high, indeed record, levels.”

Abbot went on to explain what has driven the record levels of yield available in the ILS market, highlighting that the demand for reinsurance protection continues to exceed supply, both in ILS and the traditional market, while returns have been elevated after investors faced years where the asset class failed to meet their profitability expectations, and also, given their floating-rate nature, higher interest rates are contributing to yields across catastrophe bonds and most other ILS assets.

All of this suggests a continued buoyant environment for catastrophe bond issuance ahead as well, and while spreads are expected to come under some pressure if capital flows continue, once the pipeline reopens in the coming weeks, there is a desire in the market to sustain higher levels of return, which means the attraction for investors will likely not diminish.