Briefing – ILS: resilience despite the thrills

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Institutional investors have piled into insurance-linked securities (ILS) with the goal of adding reliable returns and a touch of diversification to their investment strategies. 

  • A series of natural catastrophes has made investors more aware of the risks embodied in insurance-linked securities
  • ILS have proven less liquid than expected in the wake of these disasters
  • Catastrophe bonds are the most traditional and most liquid ILS instrument

A series of natural catastrophes that hit the world in the past three years has taught them that they have incorporated the potential for large losses into their portfolios.

A relatively young asset class, ILS investments have been put to test since the summer of 2017, as a destructive series of hurricanes, earthquakes, floods and wildfires shot insurance losses through the roof. They also affected investments that, to some extent, constitute a bet that catastrophic events will not happen, or at least will not be too severe in terms of property destruction.

Swiss investors diversify insurance-linked portfolios after difficult 2017

ORIGINAL PUBLICATION HERE

Severe hurricanes in the US last year not only left local inhabitants struggling with the aftermath, but the effects also rippled through to European investment portfolios.

The €197.2bn Dutch health care pension provider PFZW reported 13.3% lossesfrom its portfolio of insurance-linked portfolios.

In Switzerland, the CHF17.8bn (€14.9bn) pension fund for the Swiss railways (PKSBB) noted in its annual report that it had suffered “significant losses from its insurance linked investments for the first time last year amounting to over 9% because of expensive natural disasters”.

Consultants: Gearing up for alternative advice

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Investment advisers have laid the groundwork for further growth in the alternative investment market 

Key points

  • Investment advisers are increasingly focusing on alternatives, in response to strong client demand;
  • Most consultants offer advice on the whole spectrum of alternatives, with similar structures in terms of staff and processes;
  • Qualitative research on alternatives is key, but there is a growing role for quantitative analysis;
    Advisers are concerned about growing dry powder and high valuations in the sector;
  • In the UK, consultants are in the spotlight, with regulators investigating their activities to assess whether they are offering value for money to their clients. The quality of advice in this complex and rapidly changing area will separate the winners from the losers in the relatively narrow investment advice sector.

How we run our money: Centrica

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Centrica, one of the UK’s largest energy suppliers, suffered a tough 2017. Regulatory pressure to reduce charges to customers is eroding t operating margins. It released a profit warning in November and closed the year as the worst performing stock in the FTSE 100.

In 2016, the company saw its net pension liability jump from £119m (€135m) to £1.14bn owing to falling bond yields. The discount rate was reduced from 3.9% to 2.7% over the same period. To manage the pensions deficit, the group agreed to make annual cash contributions of £76m over the next 14 years starting in 2017. This may sound bleak but the truth is that Centrica’s three defined benefit (DB) schemes are backed by a strong trustee board and a modern investment strategy.

North Yorkshire eyes insurance-linked bonds amid ‘urgent review’

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The £3bn (€3.5bn) North Yorkshire Pension Fund (NYPF) has launched a tender for an insurance-linked securities (ILS) mandate in connection with an “urgent” review of its investment portfolio.

The local government pension scheme (LGPS) said it was carrying out the review in light of interest rate fluctuations and “performance of some of its fund managers”.

“This has proven to be more turbulent as the UK conducts its Brexit negotiations and the Pension Fund Committee wishes to mitigate the risks associated with this at short notice,” it said in a tender notice.

IPE

Insurance-Linked Securities: Taking the market by storm

IPEORIGINAL PUBLICATION HERE

Insurance-linked securities are gaining popularity as a diversifying asset class, but what are the available strategies, underlying risks and costs? Carlo Svaluto Moreolo finds out

At a glance 

• The ILS marketplace is growing, with traditional asset managers launching ILS strategies and funds.
• A variety of liquid and illiquid strategies is available to investors.
• The asset class is generally decorrelated from the wider markets but the risk can vary greatly between strategies.
• Fees also vary, from active fixed-income levels to more costly hedge fund-like levels.