With most parts of the global economy entering recession in the past 12 months, thanks to the restrictions imposed as a result of COVID-19, investors increasingly considered the makeup of their portfolios and examined the notion of diversification.
In fact, in times of such widespread economic turbulence, true diversification can be extremely hard to find. One investment that indisputably offers this, however, is insurance-linked securities (ILS), bonds linked not the performance of a company or government, but to insurance risk, most commonly the probability of natural phenomena such as earthquakes or hurricanes occurring.
That increased interest by investors in seeking true diversification was one of the reasons for the accelerated growth of Twelve Capital’s UCITS catastrophe bond fund over the last three years.
UCITS—undertakings for the collective investment in transferable securities—are investment funds regulated by the EU and intended to create a barrier-free market for collective investment funds. The fund has reached $1 billion in assets under management since its launch three years ago.
Florian Steiger, executive director, cat bonds strategy at Twelve Capital, discussed the fund’s success in an interview on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are available on demand.
“Catastrophe bonds have demonstrated their ability to reduce volatility in portfolios.”
Florian Steiger, Twelve Capital
Taking the plunge
Steiger said that, for many investors, the time has come to be open-minded and curious about a new asset class.
He said a growing number of new, and some unexpected, investors have invested in the fund and it is becoming clear that almost all investors are now seriously considering catastrophe bonds.
He notes that several new issuers entered the market in 2020, which helped to drive the robust growth. Over the past 12 months in particular, catastrophe bonds have demonstrated their ability to reduce volatility in portfolios.
One of the next steps, which he believes will speed the development of the asset class further, is greater harmonisation of regulatory standards.
“Our goal is to establish a common framework and harmonise collective fund regulation across the EU,” said Steiger.
“In today’s world the entire investor community is looking at catastrophe bonds.”
“We establish minimum standards to protect investors across participating countries and the UCITS fund has to make certain disclosures so that our investors can make the best decisions,” he said.
While large pension funds in search of portfolio diversification were pioneers of this asset class, they are now being joined by other types of investors such as smaller pension funds, private banks, and family offices.
“We can really say that in today’s world the entire investor community is looking at catastrophe bonds, which is why are seeing these steady growth rates,” he said.
Twelve Capital has reassessed its ILS strategy in recent months to focus on catastrophe bonds and peak perils. It has done this to attract new investors with fresh capital—and it looks like the robust move is working.
“We have a very precise understanding of these new climate change risks and have formed partnerships on behalf of our investors to help us better understand rising trends,” Steiger said.
“For now, we will focus on building our pipeline and on finding new investors as we expect good fund performance over the next couple of months,” he concluded.
To view the full Re/insurance Lounge session click here
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