Insurance-linked securities – A rare liquid market with income & value: Schroders Capital

Insurance-linked securities (ILS) such as catastrophe bonds represent a rare opportunity for investors today, being one of only a few liquid markets that offer value, with most others having historically tight risk premiums, while also being an asset class that offers uncorrelated income, investment manager Schroders Capital has said.

In giving its investment outlook for the private asset classes the company focuses on, Schroders Capital explained that there are some promising investment opportunities available right now.

But, Nils Rode, Chief Investment Officer (CIO), Schroders Capital cautioned that, “While a normalisation in fundraising and valuation adjustments is creating promising opportunities, ongoing geopolitical tensions means diversification within private market allocations is crucial.”

Income and asset classes that can deliver it, has been particularly appealing Schroders Capital said.

But the investment manager favours asset classes where market inefficiencies can deliver more opportunity, focusing on the fundamentals of an asset class over distressed assets.

Enter insurance-linked securities (ILS) and catastrophe bonds, an asset class where the fundamentals have rarely been better.

Uncorrelated income from the ILS sector is seen as one area to benefit, in the current broader private market environment.

In addition, while most liquid markets are facing tight risk premiums, ILS is one of a rare few where this is not the case and as a result Schroders Capital said that “value remains” 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 driven by reinsurance limitations.”

With investors seeking income and ILS set to continue benefiting from higher collateral returns, as interest rates while peaked do not appear set to decline far, the asset class could prove attractive later this year it seems, once the peak of the hurricane season is over.

Interestingly, for a number of private markets the “complexity premium” is proving attractive to investors as well.

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