HedgeNordic welcomed 15 institutional investors and investment professionals to ILS Day Stockholm, bringing together allocator and manager perspectives on the role of insurance-linked investments in institutional portfolios.
The Stockholm lunch seminar focused on two distinct areas of insurance risk: catastrophe bonds and the broader insurance-linked securities (ILS) market, presented by Twelve Securis, and life settlements, presented by RESS Capital. Opening the session, Gustaf Hagerud, CEO of Finserve Nordic, approached the asset class from an institutional portfolio construction perspective.
Drawing on his previous experience in asset allocation at Alecta and AP1, Hagerud argued that investors should distinguish between assets that have historically displayed low correlation and return streams that are fundamentally uncorrelated because their underlying economic drivers are different.
“When I say fundamentally uncorrelated, it is not just about looking at data, whether it is monthly data or daily data,” said Hagerud. “Rather, one should understand that what drives the return is uncorrelated with the stock market and the bond market.”
“One should understand that what drives the return is uncorrelated with the stock market and the bond market.”
Gustaf Hagerud, CEO of Finserve Nordic.
Hagerud identified the global business cycle and monetary policy as two primary risk factors behind conventional financial assets. Insurance-linked investments provide exposure to risks that are largely independent of both. Catastrophe bonds transfer risks associated with events such as hurricanes and earthquakes, while life settlements are primarily exposed to longevity risk.
To illustrate the portfolio implications, Hagerud compared a traditional 60/40 equity-bond portfolio with portfolios incorporating insurance-linked investments. Based on the assumptions used in his analysis, replacing part of the traditional allocation with 20 percent catastrophe bonds reduced expected volatility from 11.1 to 9.6 percent while maintaining an expected annual return of 8.4 percent. A portfolio combining ten percent catastrophe bonds and ten percent life settlements reduced expected volatility further to 9.4 percent at the same expected return.
“The interesting thing is to have diversification when the market goes down,” Hagerud said, pointing to periods of market stress including the Covid shock and the market disruption following Russia’s invasion of Ukraine. “You should be strong when everyone else is weak.”
Beyond Cat Bonds
Cahal Doris, CIO ILS at Twelve Securis, then provided a closer look at catastrophe bonds and the wider ILS opportunity set.
Twelve Securis manages $9.4 billion, with more than $6 billion invested in catastrophe bonds. Doris described cat bonds as a way for insurers and reinsurers to transfer defined catastrophe risks to capital-market investors, who receive an insurance risk premium for assuming that exposure.
Doris also highlighted opportunities beyond the public cat bond market through private ILS. These transactions can broaden the available risk universe and potentially offer higher returns, but require investors to accept lower liquidity.
For investors considering their first allocation, Doris said liquidity is typically the starting point. “The first thought is liquidity. So when we’re speaking to investors, liquidity is often the starting point.”
Cat bond funds typically offer relatively frequent liquidity, whereas incorporating private ILS can mean moving towards monthly liquidity. Doris argued that the broader opportunity set can also allow managers to diversify insurance exposures and move between public and private markets as relative pricing changes.
The Life Settlement Market
Jonas Mårtenson, Co-Founder of RESS Capital, completed the session with a presentation on the secondary market for US life insurance policies.
Life settlements allow policyholders who no longer want or need their life insurance to sell the policy to an investor. The investor assumes responsibility for future premiums and receives the insured amount when the policy eventually pays out. The central risk is therefore longevity rather than movements in financial markets.
Mårtenson also discussed how higher interest rates have reshaped the market. Some leveraged US investors have faced cash-management pressure as financing costs increased while policy premiums still needed to be funded, creating opportunities for unleveraged buyers such as RESS.
RESS itself sold much of its older portfolio and is now redeploying the proceeds into policies available at higher prospective returns. Mårtenson said recent purchases had been made at projected gross IRRs of between 15 and 20 percent, while stressing that the current buying environment would not persist indefinitely. “It’s not forever, of course. We think the market will normalize, but we also see the market is quite small.” Mårtenson estimated that the favourable secondary-market environment could persist for another 18 to 24 months, while acknowledging the uncertainty around that assessment.
Across the three presentations, the common theme was not the absence of risk, but exposure to different risks. Catastrophes, longevity, liquidity and insurance underwriting bring their own uncertainties, but their underlying return drivers differ substantially from those dominating traditional equity and fixed-income portfolios.
