Insurance-Linked Securities (ILS) as an investment Asset Class

Catastrophe bonds, also known by their abbreviation as CAT bonds, fall into the broader category of Insurance Linked Securities (ILS). ILS which are financial instruments that transfer certain types of insurance risk from the insurance to the capital markets, where the risk is spread among investors. Recently the buyers’ club widened with (para-) government agencies becoming, with increasing frequency, sponsors of CAT bonds for the purpose of emergency relief and reconstruction access to protect against events of a devastating scale. These initiatives have considerable support from the World Bank and UN, who see them as an important protection gap solution at the macro level.

There are three main types of ILS: CAT bonds, Industry Loss Warranties (ILW) and Collateralized reinsurance. Among these, CAT Bonds are the only liquid financial instruments that are securitized and traded on a secondary market; ILWs and collateralized reinsurance are annual private contract transactions.

Cat bonds return on investment is tied to the occurrence of predefined large catastrophic events, such as earthquakes, hurricanes, or floods. If nothing happens, the investor receives a floating coupon plus the principal at the bond maturity. Conversely, if the event specified in the contract occurs, the investor incurs a partial or total loss of principal depending on the scale of the catastrophic event or the losses caused by it. That is where market and analytical tools, management experience and quality investment strategies are the key to success.

Cat bonds, as a class of investment, offer stable high-yield fixed income returns independent from macroeconomic risks and cycles and widely perceived by institutional investors, especially hedge & pension funds as an ideal portfolio diversifier. For example, even before natural yields increase following Q3 2017 losses, almost 1/4 of pension funds consider ILS investments with average of AuM 1-4% allocations. By clicking here you may find some selection of news with individual references.

Portfolios of ILS investments represent a carefully selected and balanced range of exposures.

Over the last 15 years, CAT Bonds have yielded very steady returns, only suffering mild volatility, also during difficult market conditions such as the occurrence of hurricanes and earthquakes. As shown below, these steady returns have so far translated in a risk-adjusted performance (measured by the Sharpe ratio) that is superior to that of bonds, equities or commodities. The annualized return over the observed period is also higher than that offered by the other traditional asset classes whilst the annualized volatility is by far lower.

CAT bonds returns are related to factors such as meteorology, geology or engineering and, as such, they are unrelated to the economic cycle. As a result of that, CAT Bonds as shown in the table below sport a very low correlation to other traditional asset classes (i.e. equities, bonds and commodities) thereby bring to the investor’s portfolio a high degree of diversification.

Additionally, CAT bonds are characterized by a high level of intra-class diversification given by their correlation to different and independent risk factors arising in different parts of the world (i.e. earthquakes, tsunami, tornados, floods, etc).

As shown in the table below CAT bonds improve a portfolio’s risk statistics such as volatility, value at risk and worst month return by increasing at the same time its average return. For this reason, CAT bonds should be present in any portfolio where a diversification from traditional market risk is desired.

An obvious and important question is CAT bonds performance in Q3 2017 following an unprecedented market loss (approx. 100 bln) after Harvey, Irma & Maria US hurricanes.

While 2017 is likely to see more impaired cat bonds than any previous year, the total defaults are likely to be a modest proportion of the market, which is a good argument to intra-class diversification and balancing factor of individual investment strategies. Also there are plenty of ILS funds, which incurred minimal or no losses at all due to minor exposure to North American perils or invested into bonds with higher triggering attachment points.

Anyway the Swiss Re Total Return index is now (as of 1/11/2017) less than 5% below its peak.

The first bonds placed after the losses – XL Catlin’s Galileo bonds – priced above recent issues.

The ILS market has seen CAGR of 20% since establishment in 2002. Now worth a total of $80bn, ILS transactions account for 14% of the reinsurance market with anticipated increase to $224bn or 28% by 2021 and have become an attractive opportunity for leading institutional investors worldwide who now consider these investments as partner to reinsurance world rather then alternative. Also the market is well analysed and clicking here you may see one of many comprehensive overviews.

For the purpose of this documents it is also worth separately to mention ILWs development as a riskier but more rewarding (double digits) usually small balancing component of many ILS funds strategies. The best illustration to be is Mercury investible Catastrophe Risk Index (MiCRIX), the first investible catastrophe risk index of its kind. This index, launched by Mercury Capital Ltd., tracks the performance of a diversified portfolio of peak peril industry loss warranties (ILW’s) providing another useful proxy for the return of the catastrophe risk and reinsurance market. Please note, that picture below as well reflect Q3 2017 losses:

Solvency II

As well it is worth to mention why (re)insurers use cat bonds issuance in a way to cope with Solvency II requirements, which became effective 1/1/2016.

Additionally, from investor perspective, our authentic ABILS offer for insurers in CEE give them a big advantage in both S2 issues and decrease in cash reserving for their property investments from 25 to 4%.

To learn more on that please click here for example assessment report.



The investment to generate a long–term return of 7-9% with low volatility and minimum correlation to the capital markets utilizing some unique features for market access and broad profile experience of the suggested team members. Out of industry scenarios typical entry ticket for such activity starts from EUR 10 mil.

Just for the sake of demonstration below are 3 different possible strategies (for illustration we took peak conservative, median and opportunistic variants):


Why us:

  • Unique amalgamation of industry professionals with traceable track records;
  • Actively managed, risk-controlled approach;
  • A to Z knowledge of the ILS market with access to most distinguished deals;
  • Own unique growth concepts including ABILS and Russian Cat Bonds program;
  • Ability to attract a wide range of third party institutional investors including Chinese, Russian, CEE, Asian, Middle East and US capital.



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