Allocating capital to investments in insurance-linked securities (ILS) can offer investors a major yield advantage in addition to relative value, while ILS market risk premiums still offer some of the attractive entry points ever, in keeping with Leadenhall Capital Partners.
While the investment case for other growth asset classes, equivalent to equities and real estate, has proved challenged and credit spreads have compressed in certain fixed income classes, each private ILS and catastrophe bonds are offering substantial yield as compared, the specialist insurance and reinsurance linked investment manager states.
Leadenhall Capital Partners has examined ILS as compared to other asset classes in a recent paper and highlights the proven fact that, in addition to the yield advantage and relative value it offers to investors, ILS continues be an asset class that exhibits low correlation, offering “real diversification from cyclical assets and economic risks.”
“The present level of risk premiums in Insurance Linked Strategies represents some of the attractive entry points ever into the ILS market. With the yield on ILS currently starting from money + 7% to twenty% pa it’s hard for the expected returns from other liquid asset classes to check,” Leadenhall explains.
Happening to spotlight that, “ILS is showing substantial yield as compared to fixed income asset classes where credit spreads have compressed over recent years. Moreover non-life ILS is just not a ‘long lock’ private asset like private credit or private equity where capital must be committed for at the least several years before investors receive cashflows and returns back. Quarterly liquidity is common across private placement non-life ILS funds with much more frequent liquidity points within the case of catastrophe bonds (cat bonds).”
As compared to other asset classes, Leadenhall Capital Partners imagine that insurance-linked securities (ILS) currently stand-out for a lot of reasons.
The actual fact risk premia remain very high and ILS offer “significantly higher yields than most other liquid fixed income asset classes including investment grade credit, high yield bonds, loans, asset backed and securitised assets.”
That ILS can offer more stable expected returns based on yields, than in comparison with growth assets like equities or real estate where forecasts of future capital growth should be made.
ILS offers greater liquidity than many long lock private assets classes, equivalent to private credit and personal equity.
As well as, ILS has a fundamental driver of its returns, the financial cost of providing re/insurance protection, which Leadenhall notes is more tangible than in lots of specialty or hedge fund strategies.
On the present opportunity, Leadenhall Capital Partners believes reinsurance premiums are prone to remain at high levels, saying, “We see the chance continuing through 2024 and a growing consensus that attractive market condition are prone to persist into 2025.”
On top of this, the very fact ILS based on private reinsurance contracts and catastrophe bonds are fully collateralized, with that collateral typically invested into money market instruments equivalent to Treasury bills, means investors also profit from a floating rate of return on top of the danger premium, which suggests “ILS has a robust linkage with short term rates of interest.”
As well as, while ILS are clearly exposed to the danger of major insurance loss events occurring, over time they’ve produced strong returns which can be comparable to growth assets equivalent to equities and high yield bonds, that has include noticeably less volatility, Leadenhall explains.
“ILS’s return over harmless rates per level of risk (Sharpe Ratio), or per level of downside risk (Sortino Ratio), are strongly attractive when deciding upon Strategic Asset Allocation (SAA),” the investment manager said.
Happening to spotlight that this implies, historically, the return per unit of risk has been more efficient for investors, which within the context of the currently high-levels of return the ILS asset class is offering, could make it a very attractive alternative for adding to a portfolio.
Leadenhall Capital Partners analysed the advantages of including ILS inside strategic asset allocations, finding that “there’s a major yield advantage and relative value that comes with investing in ILS in comparison with most other liquid asset classes.”
“Including ILS in portfolios whether on the high, medium or low risk / return end of the spectrum, will subsequently improve a portfolio’s expected efficiency,” Leadenhall said.
The specialist ILS investment manager’s evaluation finds that adding ILS to portfolios can improve their efficient frontier, as ILS can deliver higher expected returns with levels of liquidity which can be more preferential to finish investors, while one other profit is that non-life ILS strategies will be usually valued and aren’t reliant on money being returned to investors to generate a return or IRR.