ILS – a nascent asset class and exceptional opportunity: Conyers, Neuberger Berman

The insurance-linked securities (ILS) market is undergoing a “dramatic repricing”, leading to a situation that Alex Conyers of Neuberger Berman explains as “an exceptional opportunity for investors looking for non-correlated returns.”

“Few asset classes can offer sizable, floating rate returns with no correlation to broader financial markets,” Conyers, a Senior Vice President in the Neuberger Berman ILS investment team explained recently.

The opportunity is at its best because insurance-linked securities (ILS) have now entered a “historically favorable” hard market, Conyers said, meaning that higher returns are available, while at the same time terms and conditions are also tighter and as a result more favourable returns available to the ILS investor base.

Premiums have roughly doubled over the last year, Conyers said, meaning that they, “In our view, now present ILS investors with an even more attractive opportunity than they faced on the heels of Hurricane Andrew (1992), the September 11 attacks (2001), and Hurricanes Katrina, Rita & Wilma (2005).”

The ILS hard market has been driven in part by macro-effects, such as those that have affected reinsurance capital and also ILS investor allocations, but also the effects of trapped capital that have been experienced, after a run of significant catastrophe losses, and also a “general skepticism from new investors”, all of which has severely limited the availability of fresh risk-bearing capital, Conyers and the Neuberger Berman ILS team believe.

In fact, Conyers notes that “Hurricane Ian alone could go down as one of the costliest natural catastrophes in history—and may be the final straw in sending the ILS market into distressed territory.”

All of which has driven a dislocation in reinsurance and ILS markets, between the supply of capital and demand for it.

Neuberger Berman estimates that global underwriters placed $220 billion in notional natural catastrophe risk capital protection for the US, in 2023 they believe the market will face a shortfall of approximately $70 billion.

“Hence the drastic increase in premiums on top of structural improvements to contract terms—including hard deductibles, narrower peril scopes, and better collateral release provisions,” Conyers explained.

All of which adds up to an incredible opportunity, for those with capital and an appetite for an asset class with the return profile of ILS, a return profile now seemingly improved thanks to higher pricing and tighter terms.

Conyers concludes that, “Non-correlation, attractive pricing, better terms: all of this is why we believe ILS—although still a nascent asset class—should play a role in institutional investors’ longer-term asset allocation plans. Especially now.”