“Unprecedented” opportunity for ILS investors in 2023, says Neuberger Berman’s Conyers

Alex Conyers of investment management firm Neuberger Berman suggests that he is “super excited” about the opportunities and solutions the insurance-linked securities (ILS) space brings to the table amid global economic and environmental uncertainty.

Conyers’ comments stem from Neuberger Berman’s Disruptive Forces podcast series, in which the firm’s seasoned investors discuss trends that are transforming the industry. It is hosted by Anu Rajakumar, Multi-Asset Class Advisor with the Quantitative and Multi-Asset Class investment team.

When asked how the market dynamics of recent years have shaped the ILS space, Conyers explained that the environment has become increasingly more challenging. He cited the start of this cycle as 2017, which saw a series of significant natural disasters such as hurricanes Harvey, Irma, and Maria, as well as wildfires and earthquakes in Mexico.

According to Conyers, it “never really let up from there”, with COVID-19 in 2020, Hurricane Ida in 2021 and Hurricane Ian last year, for which Neuberger Berman pegged insured losses at $50 billion.

These concurrent years of outsized natural catastrophe losses, alongside inflationary macroeconomic conditions, “has restricted the supply of risk capital significantly because of balance sheet losses due to Central Bank actions, volatile effects markets, and the general pullback by investors from poor performance,” said Conyers.

He continued, “However, the demand for risk capital has been increasing. The rating agency/regulatory pressures for that risk transfer hasn’t gone anywhere, if anything, it’s increased because of the inflationary impacts on underlying exposures.

“We’ve seen a huge dislocation between the supply and demand of risk capital to the tune of $70 billion in our estimate.

“The upside for investors now is that premiums have doubled year over year and terms and conditions materially improved. So, it’s a unique entry point opportunity for prospective investors.”

Conyers also highlighted how important the diversification benefits of this asset class are in traditional markets.

He said, “Its well-documented correlations on bonds and equities can quickly converge in times of extreme market stress. If inflation remains volatile, bonds and equities can also move in the same direction.

“For ILS the outcome is exclusively tied to that specific risk exposure, (the occurrence of a hurricane or earthquake), which by definition cannot be triggered by the ups and downs of financial markets.

“Based on history, during periods of structurally high inflation, government bonds are not as effective in diversifying portfolios and hedging equity drawdowns.”

Conyers added, “It’s important for investors to look at the broader toolbox of strategies, which is why we feel ILS has a critical role to play in institutional investors’ broader asset allocation plans.

“Another benefit is the fact that ILS is a floating rate return instrument, whereby investors are in the risk-free rate regardless of the outcome, which mitigates interest rate risk, and to some extent, inflation risk too, which is significant in the current environment.”

When asked how climate change factors have affected the ILS space, Conyers said, “climate change has had a profound impact on our world and is going to shake up our industry a lot.”

“One thing to bear in mind is that ILS is really a risk transfer mechanism, it shows a lot of promise in being able to create what is resilience in the wake of natural catastrophes. We’re quantifying natural catastrophe risk, and then pricing it in order for that risk to be transferred from one party to another.

“You can imagine insurers and reinsurers use ILS a lot now because of rating agency and regulatory pressures, but imagine if operating companies or NASDAQ and S&P 500 listed companies had to publish and be transparent about the climate risks that they have on their balance sheet?

“They might have to turn to ILS markets and reinsurance to be able to transfer that risk off their balance sheet and it creates a lot of solutions for doing so.”

All in all, Conyers noted that Neuberger Berman remains “optimistic” despite the headwinds and the wider gloominess that is climate change.

He concluded, “Our overarching takeaway for investors is that the opportunity for 2023 is unprecedented considering the diversification benefits of the asset class, the potential to generate attractive returns, and some of the ancillary benefits of the floating rate return component that mitigate interest rate and inflation rates.

“We’re really bullish on ILS and super excited about the opportunity as well as the solutions that it brings to the table and fixing a lot of things we spoke about.”