UBS recommends maintaining ILS exposure, notes weather analysis key at mid-year

UBS Hedge Fund Solutions, a division of UBS Asset Management focused on managing and advising on a range of alternative assets for clients, has recommended maintaining exposure to insurance-linked securities (ILS), but in what could be a nod to hurricane season forecasts, noted that weather analysis is key around the reinsurance renewals this year.

It’s important to note that this commentary comes from the UBS Hedge Fund Solutions group, not the specialist ILS investment arm that UBS acquired with the Credit Suisse deal.

So the commentary comes from a unit that leverages ILS as a diversifying asset within broader portfolios of alternatives and fixed income instruments, rather than a manager of dedicated ILS funds.

The UBS Hedge Fund Solutions team said that reinsurance and ILS fund strategies have “generally produced positive returns” in recent months, thanks to the lack of major industry loss events.

In fact, recent months have seen catastrophe bond and collateralized reinsurance managers experiencing no losses, in the majority of cases, so “the primary driver of returns was premium income,” UBS explained.

The UBS team commented on the spread dynamic in the catastrophe bond market, saying that, “spread widening partially offset the premium carry as new issue supply volume exceeded that of maturing bonds.”

Also noting that, “Historically spreads have typically widened during the spring months because of the oncoming hurricane season.”

The investment manager felt that pricing was generally more attractive through April, with a better balance to supply and demand than was seen in the first-quarter of this year.

Leading them to remain positive on the asset class, saying, “In reinsurance / ILS, we plan to maintain exposure,” but also qualifying that by saying, “However, we may tactically manage exposure to mid-year contracts depending on early weather analysis.”

Within its investment model, the UBS Asset Management gives reinsurance and ILS investments a 3% of portfolio weighting.

Which is a typical weighting for most investors, as cat bonds and ILS still tend to be utilised as a diversifying asset class which institutional investors put a relatively small proportion of their overall assets into.