Reinsurance and ILS a compelling income opportunity: US Bank

Wealth managers at US Bank, the fifth-largest commercial bank in the United States, have highlighted reinsurance and insurance-linked securities (ILS) as diversifying drivers of income for their clients.

Within US Bank’s weather, commercial and corporate business segments, it offers investment advice and management for clients, ranging from retail, through high-net worth, to large corporate allocators.

As a result, it’s notable when insurance-linked securities (ILS) get a mention, as it shows a further broadening of awareness in the asset class and also reflects the current trend in market conditions that have made ILS investments increasingly popular.

Noting the ongoing geopolitical and domestic political volatility, US Bank highlights the opportunity for investors to complement their traditional fixed income allocations with diversifying assets.

Here they recommend “modest” exposures to insurance-linked securities (ILS) and reinsurance-linked assets, as one complement to broader fixed income mandates.

Such “unique corners” of the bond market can offer investors “attractive income with strong fundamental tailwinds,” US Bank explained.

The bank is careful to advise that reinsurance isn’t an asset class for everyone, recommending it for qualifying clients only.

But notes that ILS currently offers “compelling income opportunities” thanks to the higher premiums in the reinsurance market and the higher deductibles being retained by the primary insurance market, so those higher attachment points you are always reading about.

The higher income currently available in ILS can act as a “cushion in the event of higher-than-average insured losses that erode principal,” US Bank believes.

Summarising that, “Reinsurance may provide constructive diversification qualities relative to stocks and bonds based on its sensitivity to global catastrophes rather than the business cycle.”

While also rightly noting again that ILS investments are not for everyone, saying that, “unique investor circumstances and eligibility can dictate availability of reinsurance.”