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Italian and global insurance giant Assicurazioni Generali S.p.A. has revised its framework for green catastrophe bonds to incorporate updates and expand its scope, now publishing a Green, Social and Sustainability Insurance-linked Securities Framework in its place.

Generali was early to recognise the potential for insurance and reinsurance linked investments to have green, or environmental, social and governance (ESG) credentials.

Because of the insurers focus on this, Generali launched its own framework for Green insurance-linked securities (ILS) back in 2020.

That framework defined how Generali could use the freed-up capital benefit achieved through its sponsorship of an ILS or catastrophe bond transaction for Green asset investments.

At its core, that meant an amount equivalent to the capital relief benefit achieved through issuance of a Green ILS or cat bond transaction could be exclusively used to allocate capital to, or refinance, green initiatives, projects or assets, under Generali’s framework.

The insurer sponsored its first green catastrophe bond issuance in 2021, the €200 million Lion III Re DAC transaction.

Those €200 million of cat bond notes provided Generali with reinsurance protection against certain losses from European windstorms and Italian earthquakes across a multi-year term.

As we later reported, Generali said that, in the case of the Lion III Re catastrophe bond, it freed up €28.1 million of capital for the insurer, under regulatory capital relief calculated on the basis of its Solvency Capital Requirement at the inception of the cat bond risk period.

That freed up capital was allocated to a sustainable investment deemed to make a positive environmental impact, in this specific case it refinancing a green asset that Generali already had interest in, the Tour Saint-Gobain in Paris, a building project that asset management unit Generali Real Estate was behind, and that on completion achieved the highest marks possible for four international environmental certifications.

It was found that the €28.1 million of capital, freed up due to the issuance of the Lion III Re catastrophe bond, had served to avoid 35.1 tCO2e of greenhouse gas emissions, after an audited impact evaluation undertaken by a third-party specialist.

Now, Generali has revisited the green ILS framework and updated it to become the Generali Green, Social and Sustainability Insurance-linked Securities Framework.

The insurer said that the company “recognises the crucial role the financial industry must play in the transition to a low carbon economy and strives to have an active role in the further development of a sustainable financial market.”

To enhance its ability to address environmental and sustainability issues, where Generali can affect positive change, the new framework has been developed under which the insurer can issue sustainable ILS instruments.

The company further explained, “This Green, Social and Sustainability ILS Framework represents Generali’s latest efforts to align its program with best practice, promote SRI principles, and enhance its ability to support stakeholders in realising their green and social objectives. We see the issuance of Green, Social and Sustainability (‘GSS’) labelled ILS as an effective tool to make a positive contribution to the climate and/or the society, while achieving the Sustainable Development Goals of the United Nations (‘UN SDGs’).

“Through GSS ILS, we aim to further diversify our investor base, focusing on socially responsible and highly dedicated sustainable investors and by strengthening the relationship with the existing investor base.”

As the company has taken important steps to enhance its green strategy since the publication of the first Green ILS Framework, Generali says it has now expanded it further, launching the new framework to align with its Green, Social and Sustainability Bond Framework that was published in December 2023.

Now, under the new Green, Social and Sustainability ILS Framework, Generali can categorise different types of sustainable ILS, including:

• Green ILS, to finance and/or refinance Eligible Green Assets.
• Social ILS, to finance and/or refinance Eligible Social Assets.
• Sustainability ILS, to finance and/or refinance a mix of Eligible Green Assets and Eligible Social Assets.

So as to maximise the impact of the new framework and its contribution to a sustainable financial market, Generali said that it is designed “to reflect the structure of an ILS transaction, which allows the allocation funds to Green, Social and Sustainability initiatives following two different approaches.”

This is, through the use of the freed-up capital benefit, as in the previous case with Lion III Re, and also by use of the proceeds segregated in the SPV in a portfolio of Green and Social investments.

By expanding the scope of its framework for green, social and sustainable cat bonds and ILS, Generali is also aligning with the needs of many investors, that continue to have a strong focus on ESG appropriate assets.

Generali has commissioned Sustainalytics to conduct an external review of the new Green, Social and Sustainability ILS Framework.

Giving its opinion, that company explained, “Sustainalytics is of the opinion that the Generali Green, Social and Sustainability Insurance-linked Securities Framework is credible, impactful and will deliver overall positive environmental and social impacts. Sustainalytics is further of the opinion that the principles of impact and transparency that underlie the responsible investment industry, as well as many of its norms and standards, are applicable to the green, social and sustainable insurance-linked securities (ILS) instruments to be issued under the Framework.

“Sustainalytics is of the opinion that the Generali Green, Social and Sustainability Insurance-linked Securities Framework is impactful, transparent and in alignment with core market expectations.”

Generali’s first green catastrophe bond, the Lion III Re DAC transaction, remains in-force through to June 2025.

With this new framework in place, it will be interesting to see what green, social or sustainability features the insurer incorporates into its next cat bond deal.

Read our stories about ESG investment in catastrophe bonds and insurance-linked securities (ILS).

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Banque Bonhôte & Cie, a Swiss private bank, investment firm and wealth manager, has announced the launch of a new environmental, social and governance (ESG) focused fund strategy that will incorporate catastrophe bonds as one of its allocations.

Pierre-François Donzé, Head of Asset Management at Banque Bonhôte, said that, “Our approach and the integration of ESG criteria, is based on a quantitative allocation methodology to identify appropriate investment opportunities in the entire spectrum of the fixed income bond universe.”

The newly launched Bonhôte Selection Global Bonds ESG fund strategy does not follow a benchmark, instead leveraging quantitative methods to identify assets to invest in from the fixed income universe, based on indicators that define the attractiveness of one type of bond, over another.

These can range from the majority of the global fixed income universe, including sovereign bonds, investment-grade and high-yield corporate bonds.

But in addition catastrophe bonds are a specific asset class that will be targeted for this ESG focused investment fund strategy, the private bank explained.

The private bank notes that, catastrophe bonds, “Offer an advantageous risk/reward and provide useful diversification through a performance that is largely uncorrelated with conventional financial markets.”

Explaining that, “CAT bonds, which are part of the insurance-linked securities (ILS) category, are used by insurers and reinsurers to transfer the risks of predefined events to investors.”

The strategy has been optimised for investors whose reference currency is the Swiss franc and takes into account the cost of currency hedging as well.

The use of ESG criteria to identify opportunities is “a fundamental part of our investment strategy,” Banque Bonhôte & Cie said.

“The fund promotes environmental or social features, or a mix of the two, by investing in the vehicles and securities of issuers with an ESG profile above the median of their peers. Many controversial business activities and sectors are automatically excluded,” the company further explained.

Catastrophe bonds can be up to a maximum of 20% of the ESG investment fund strategy

Julien Stähli, Director of Investments, stated “This new fund gives pride of place to ESG criteria and marks a further step in our long-standing commitment to responsible investment and quantitative approaches.”

Donzé also said the approach taken, “Makes it possible to add value compared to strategies limited to a single market segment. The indicators used estimate the relative attractiveness of the various segments of the bond market on a historical basis.”

He also said that the Global Bonds ESG fund portfolio will be “dynamically rebalanced” when the indicators used suggest this is necessary.

It’s clear that Banque Bonhôte & Cie recognises the investment qualities of catastrophe bonds and the diversifying benefits they can deliver to portfolios, as well as the inherent ESG qualities given their role in the provision of critical disaster risk financing to support the global insurance and reinsurance industry.

As we previously reported, Banque Bonhôte & Cie had said before that catastrophe bonds, as an asset class, exhibits the rare property of price moves that are independent of broader financial markets and so can be considered “the only true source of diversification.”

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Tokio Marine Holdings, Inc., through its subsidiary Tokio Marine & Nichido Fire Insurance Co. Ltd., has become the first Japanese insurer to make use of a SOFR-based World Bank Sustainable Development Bond as a permitted investment within its latest catastrophe bond issuance, the company highlighted today.

As Artemis has been reporting, Tokio Marine has been in the market since February and has now secured its targeted $100 million Kizuna Re III Pte. Ltd. (Series 2024-1) catastrophe bond recently, with the reinsurance coverage from the transaction priced at the low-end of initial guidance.

Now, the Japanese insurer has highlighted its use of the proceeds of the catastrophe bond issuance to purchase a sustainable development bond, saying that using this “as collateral for the Kizuna Re III cat bond is supporting the achievement of sustainable development goals and contributing to the realization of a sustainable society.”

Use of proceeds of cat bond issues to invest into financing for sustainable development helps sponsors align their catastrophe bond issues with their own environmental, social and governance (ESG) agendas, while also making the investment more appealing to investors with an ESG focus or mandate.

Tokio Marine used the proceeds of the Kizuna Re III 2024-1 catastrophe bond, that provides it with earthquake reinsurance and was issued out of Singapore, to purchase a SOFR-based Sustainable Development Bond issued by the World Bank Group’s International Bank for Reconstruction and Development (IBRD).

The company said that, through its sustainability strategy, it aims to “solve social issues through business activities and contribute to the realizations of a sustainable society” as a medium- to long-term growth engine and is accelerating its efforts to take climate action, improve disaster resilience, and protect the natural environment.”

The company said that, as part of its goal to improve disaster resilience in what is one of the most disaster-prone countries in the world, Tokio Marine has been a regular user of catastrophe bonds, alongside purchasing traditional reinsurance capacity.

“As a part of these strategies, besides sponsoring the issuance of the Kizuna Re III cat bond, TMNF has elected to invest the proceeds from the sale of the Kizuna Re III cat bond in a SDB issued by IBRD (rather than money-market funds), which is the first example of a Japanese insurer doing so since IBRD notes transitioned from LIBOR to SOFR,” the company explained.

Adding that, “The principal amount of this catastrophe bond raised from qualified institutional investors will be invested in a SDB issued by IBRD under its Global Debt Issuance Facility. The net proceeds of the SDB will be used by IBRD to fund projects, programs, and activities in IBRD’s member countries designed to achieve positive social and environmental impacts and outcomes.”

It’s encouraging to see the use of sustainable development bonds as collateral investments in the catastrophe bond market expanding further beyond just the World Bank, to private insurance sector cat bond sponsors.

The World Bank itself was the first to do so this, since when insurance giant Assicurazioni Generali S.p.A. developed its framework for Green insurance-linked securities (ILS) which saw the proceeds of one of its catastrophe bonds used to refinance a green asset in an effort to help avoid greenhouse gas emissions.

But, Tokio Marine is the first private insurance or reinsurance market sponsor of a catastrophe bond to use a puttable SOFR linked Sustainable Development Bond from the IBRD, which marks an efficient way to structure a cat bond with collateral that can be put to work in supporting sustainable or ESG driven goals.

As a reminder, Gallagher Securities, the insurance-linked securities (ILS) specialist arm of reinsurance broker Gallagher Re was the sole structuring agent for this new cat bond for Tokio Marine, so will have been instrumental in incorporating the sustainable development bond as permitted investments for the collateral, within the overall cat bond structure for this issuance.

You can read all about this new Kizuna Re III Pte. Ltd. (Series 2024-1) catastrophe bond transaction and every other Tokio Marine sponsored cat bond in our Artemis Deal Directory.

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The Bermuda Monetary Authority (BMA) has laid out its plans for 2024, with Chief Executive Officer (CEO) Craig Swan highlighting specific opportunities in parametric risk transfer for climate insurance.

The 2024 business plan of Bermuda’s financial regulator contains a focus on “initiatives and projects to achieve positive outcomes and strengthen Bermuda’s regulatory framework for the upcoming year.”

Of relevance to the insurance, reinsurance and insurance-linked securities (ILS) community, the Bermuda Monetary Authority (BMA) expects to continue to work on enhancing its regulatory and supervisory regimes to meet the evolving needs of financial service companies today.

There will be further work on the Insurance Code of Conduct, “to uphold the importance of financial transparency, consumer protection and education initiatives,” the BMA explains.

While an Environmental, Social and Governance (ESG) model and a Sustainability Strategy are also key initiatives and here there are relevant items to look out for, for this industry.

BMA CEO Craig Swan said, “The Authority’s strategy is underpinned by deep expertise and cross-functional viewpoints designed to champion innovation. This plan’s many thoughtfully curated objectives will optimise excellence while simultaneously preparing the organisation to meet and address emerging challenges that impact the regulatory environment. In a continually fluctuating business climate, this approach enables the BMA to open new pathways for enhancing our abilities and innovative practices today and for many years to come.”

Swan also commented, “The pace of innovation is challenging organisations to remain agile and adapt how they work to meet the ebb and flow of their markets. From artificial intelligence and automation to decentralised finance and insurance-linked securities, the financial services industry has evolved markedly over the last few decades with increasingly transformative leaps forward each successive year.

“As firms confront issues such as inflationary pressures, relentless consumer demands, volatility in the commodity markets and extreme climate patterns, they are building systems to redefine and reimagine their future aspirations.”

The BMA intends to explore working with investment funds to “set up a new framework that facilitates the ability to designate certain Bermuda funds as ESG compliant,” Swan said.

This could be an interesting initiative for ILS managers, given there are plenty of ILS fund structures domiciled in Bermuda that could find an ESG framework appealing to look into.

The BMA also intends to prepare a consultation paper on a new climate risk disclosure framework for Bermuda commercial (re)insurers, Swan also explained.

But, perhaps most compelling in the current environment and in terms of opportunity, the BMA also intends to work in 2024 on “reviewing and, where applicable, updating other (re)insurance frameworks to better facilitate parametric climate-related insurance products.”

Bermuda has always considered itself as the world’s climate risk capital market and given the proliferation of catastrophe, weather and climate focused underwriting expertise in the islands insurers, reinsurers and of course ILS fund managers, there is clearly a wealth of experience and relevant knowledge, as well as ongoing business there.

If Bermuda can make its regulatory and supervisory regime even more relevant to underwriters of parametric climate risk insurance and reinsurance opportunities, while also finding ways to tap into the ILS market expertise on the island, the opportunity to attract and deploy climate risk capital out of the market there seems a worthwhile achievable goal.

The BMA has always followed a forward-thinking agenda and this year’s business plan again highlights the regulators’ ability to focus on emerging trends that can be drivers of future profit for Bermuda’s financial market and its participants.

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The capital raise for the 2024 underwriting year for London headquartered specialty insurance and reinsurance firm Beazley’s third-party capital backed Smart Tracker syndicate 5623 was “heavily oversubscribed” and the structure remains on-track to deliver a fourth consecutive year of underwriting profits to backers.

This is according to Will Roscoe, Head of Portfolio Underwriting at Beazley, and the Active Underwriter for the firm’s Smart Tracker Syndicate 5623 and its ESG Syndicate 4321.

Roscoe was reflecting on a strong 2023 for the Beazley Portfolio Underwriting team he runs and looking ahead to 2024 in a post on Linkedin.

He explained that, “The Beazley Smart Tracker syndicate 5623 has delivered its 2023 business plan having underwritten $425m Gross Written Premium.”

Further stating that, “We are on track to return a fourth straight underwriting profit to our investors when we announce our 2021 year of account result next year.”

The third-party capital backed Smart Tracker is one of Beazley’s underwriting structures at Lloyd’s that attracts a diverse range of institutional investor capital.

It is considered akin to an insurance-linked strategy, attracting some well-known pension investors that allocate to insurance-linked securities (ILS).

The Smart Tracker both augments Beazley’s underwriting capacity in the market, while also enabling it to earn fee-like income and offer low-cost risk capital to clients.

The newer ESG Syndicate 4321 is also popular with third-party capital and delivers similar benefits to Beazley, while also providing a home for underwriting capital that targets ESG aligned opportunities.

Roscoe highlighted the demand from investors for the strategies, saying, “Our capital raise for the 2024 underwriting year of account was heavily oversubscribed, reflecting the strong demand we have seen from our third-party capital investors.”

He also highlighted that his team has launched additional underwriting facilities, saying, “We are proud to be leading the London market’s Smart Follow underwriting strategy.”

Beazley has ambitions to continue growing out the Smart Tracker and related facilities.

Roscoe said, “Looking ahead to 2024 we are poised to deliver further growth, with an ambitious plan to underwrite $525m in premium, taking advantage of continued excellent market conditions.”

The Smart Tracker has proved a popular structure for investors looking to participate in the returns of the Lloyd’s market, as it follows a curated approach to tracking and following the performance of some of the best underwriters.

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Craig Hupper, an executive from global reinsurance company TransRe who is well-known and liked in the insurance-linked securities (ILS) community, is set to retire from the firm at the end of this year, Artemis has learned.

Craig Hupper is a Senior Vice President at TransRe and currently holds the title of Managing Director, Head of Sustainability and Resilience.

But, through much of his career at the reinsurance company he has developed and led TransRe’s third-party capital and ILS offerings.

Hupper already had insurance and reinsurance market experience, gained on the broking side of the market, when he joined TransRe back in 1998.

At first Hupper was a VP of non-traditional underwriting and the Head of Retrocession for the reinsurer, after which he became an SVP and the Director of Risk Management, before moving over to dedicate his time to further developing third-party capital initiatives at TransRe in 2013.

Hupper has been instrumental in the build-out of the third-party capital and insurance-linked securities (ILS) offering at TransRe, as well as in the development of investor relationships.

His work at the company included, leading on the launch of TransRe’s long-established collateralized reinsurance sidecar vehicle, Pangaea, as well as other initiatives that connected institutional investor capital with reinsurance risk (private ILS arrangements) and also the launch of TransRe’s Bowline Re catastrophe bond program.

Hupper then shifted roles at TransRe in 2021, taking on a new position leading Environmental, Social & Governance (ESG) at the reinsurance firm.

Mike Torre, who had joined TransRe from broker Aon around five years ago, took over the lead at TransRe Capital Partners, managing the reinsurers third-party capital initiatives and relationships that year, as Hupper’s full-time focus moved to the new role.

Torre continues in that Capital Partners lead role today, supporting TransRe’s existing and future partnerships with alternative capital providers.

With Hupper now set to retire from TransRe at the end of this year, the company had already promoted existing employee Brett Denyer to become Head of Sustainability and Resilience earlier this year.

Denyer had already been a key member of TransRe’s Task Force on ESG for a number of years, and has also helped the reinsurer in further integrating ESG considerations into underwriting processes and decision-making.

While Hupper is now departing TransRe after his roughly 26 years of service, he intends to remain connected to the insurance-linked securities (ILS) market and be involved in selected reinsurance, ILS and sustainability focused ventures, following some time off early in 2024.

Hupper spoke at our New York conference back in 2022, participating in a panel session focused on ESG in ILS, which you can still watch here.

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While the insurance-linked securities (ILS) sector has strengthened its governance practices considerably in recent years, when it comes to environmental, social and governance (ESG) considerations, ILS manager selection really matters, as there is variation in how ESG has been adopted and practices are followed, according to Frontier Advisors.

Frontier Advisors is an Australian independent investment consultant with experience advising regional institutional investors that allocate to the insurance-linked securities (ILS) asset class.

In a recent paper, Isabella Milazzo, a Consultant in the Alternatives Research Team at Frontier Advisors, explained that for end-investors, ESG remains an important consideration when allocating to the insurance-linked securities (ILS) asset class.

She explained that ESG is increasingly being incorporated into the ILS market, saying that consideration of ESG issues is deemed to be “critical for the development of the ILS market and for insurance and reinsurance markets more broadly.”

As a result, “ILS managers are increasingly focused on improving ESG practices throughout the entire investment process,” Milazzo said.

But she also noted that, “Manager selection matters when considering ESG factors,” saying that, “Frontier has observed many instances in recent periods where ILS managers will deem contracts uninvestable on the basis that counterparties do not meet ESG criteria.

“However, there is variation with how stringent managers are with this process.”

Milazzo went on to explain that, for the ILS manager community, “environmental and climate change risk is of high importance.”

As a result, a significant amount of time and resource is put into understanding climate risk, the influence it has on specific perils and the effect it can have on ILS investments, Milazzo said.

She also highlighted that, as ILS investments are used to support resilience against natural disasters, this aligns with environmental sustainability goals.

On the social side, Milazzo noted that ILS investments also “inherently provide positive social impact in that they support the efficient functioning of the insurance market.”

ILS is one of the contributing sources of funding when natural disasters occur, helping in the rebuilding and recovery of affected communities.

Finally, Milazzo also highlighted that ILS managers own governance practices “have become increasingly robust over recent years.”

In fact, “It is typical for managers to conduct deep assessments of governance factors associated with all parties involved in ILS investments,” Milazzo explained.

Because of this, the ILS asset class is continuing improving and increasing the incorporation of ESG issues into its processes and ILS manager decision-making.

But, with ESG practices and their adoption not a level playing-field in the industry, it is important that investors do their own diligence on ILS managers, if ESG is one of their core investment tenets.

Recall that, the ILS ESG Transparency Initiative is a global insurance-linked securities (ILS) industry group of investment managers focused on enhancing environmental, social and governance (ESG) transparency in the ILS market.

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Tenax Capital, the London based hedge fund investment manager that operates a catastrophe bond strategy, has joined the insurance-linked securities (ILS) industry working-group that focuses on enhancing environmental, social and governance (ESG) transparency in the ILS market.

Tenax Capital joined the ILS ESG Transparency Initiative and noted its commitment to incorporating ESG considerations into its investment processes.

As we reported recently, the formation of the ILS ESG Transparency Initiative came about as what was a Swiss-based working group of ILS managers focused on ESG transparency welcomed its first international members.

The Switzerland-based insurance-linked securities (ILS) investment fund managers created the working group to develop a data transparency proposal to advance environmental, social and governance (ESG) in the ILS market, with the initiative informally known as the Zurich ILS Working Group.

The founding members were, Credit Suisse Insurance-Linked Strategies; LGT ILS Partners; Plenum Investments; Schroders Capital ILS; Solidum Partners; and Twelve Capital.

The expansion and renaming to the ILS ESG Transparency Initiative saw the following new members joining: AXA Investment Managers; Leadenhall Capital Partners; SCOR Investment Partners; Securis Investment Partners; and Tangency Capital.

Now, Tenax Capital can also be added to that list.

Tenax Capital noted that the ILS ESG Transparency Initiative currently counts some of the largest and most respected ILS managers as members.

“The primary scope of the initiative is to improve and standardise the ESG disclosure and data related to ILS transactions, in an effort to enhance transparency with respect to covered risks and ultimate beneficiaries of coverage,” Tenax Capital said.

Adding that, “At Tenax we are committed to make ESG considerations a key driver of our investment management process, and we actively work to raise awareness of ESG within our investor community and the broader markets.”

ESG investing and the opportunities it presents remain an area of focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.

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Parameter Climate, the parametric climate risk transfer focused underwriter and advisor, has completed a management buyout of seed investor SiriusPoint, as the latter continues to reduce its equity ownership in program and MGA businesses.

Parameter Climate was founded by long-standing weather risk transfer industry executive Marty Malinow and staffed by a very experienced senior team that had worked together over numerous years.

The company launched to provide specialist advisory, structured financial products, distribution, and underwriting services to the growing market for climate risk transfer, with parametric risk transfer at its heart.

Parameter Climate then secured a relationship and seed investment with specialty insurance and reinsurance player SiriusPoint roughly two years ago.

Now, the Parameter Climate management have bought SiriusPoint’s stake in the company, while SiriusPoint is set to continue supporting the firm through the provision of underwriting capacity.

“We thank SiriusPoint for its significant contributions to our launch two years ago and look forward to continuing to provide underwriting advisory to SiriusPoint and others,” Martin Malinow, Founder and CEO of Parameter Climate explained.

Scott Egan, CEO, SiriusPoint added “SiriusPoint is pleased to have contributed to the creation of Parameter Climate, which addresses an important protection gap in the climate and weather risk management market. While this transaction is consistent with our strategy to reduce our equity investments in programs and MGAs, we look forward to continuing to support Parameter Climate with underwriting capacity based on its strong underwriting results to date.”

Since its launch, Parameter Climate has also developed its own risk analytics platform, focused on climate exposures, with the ClimateDelta product now available for licensing as well.

In addition, the company is also adding advisory and brokerage services for both vertical-based protection buyers and capacity providers to its specialised climate risk transfer focused offering.

Malinow went on to say, “Our dialogues with both existing and new clients in a variety of industries illustrate a significant and growing need for climate and weather risk management, yet there remains a gap in advisory, intermediation and analytics. We created ClimateDelta to streamline the process of risk assessment, structuring and transaction management for both buyers and sellers, and look forward to using our 20+ years of market expertise to turn this need into transactions.

“With increased climate and weather volatility, risk transfer is becoming a strategic imperative for protection buyers in a number of industries and an important opportunity for a growing group of capacity providers,” Malinow added. “Parameter Climate will make this risk insurable and investable by combining the market’s most experienced advisory team with cutting-edge analytics.”

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Although there are investors waiting on the side-lines of the insurance-linked securities (ILS) market with an interest in responsible transactions, there’s still a need for a minimum return which outweighs the importance of liquidity and diversification, according to industry experts.

During the final panel at Bermuda’s annual Convergence event yesterday, Sarah Demerling, Partner, Head of Investment Funds and Co-Lead of Re/Insurance & ILS, Walkers, moderated a panel on responsible ILS investing.

“I think we all recognise how ILS fits into ESG, it’s socially, environmentally responsible. We’ve seen the speed to market in which the capital comes in to provide recovery,” said Demerling.

Demerling questioned whether there’s investor appetite to tackle emerging market issues.

“I think probably it’s worthwhile having a quick look at who are ILS investors, because I don’t think that there is one ILS investor with a unique or a uniform feature. I think there are different groups of ILS investors, and they use it for different purposes in their investment cases,” said Stephan Ruoff, Global Head of ILS Capital, Schroders.

A large portion of the ILS investor community is made up of pension funds, which Ruoff explained look for certain features, such as tail driven distribution and some liquidity that is decorrelated and diversified, with a high predictability of return.

Alongside pensions funds, large wealth manages and alike, Ruoff explained that there’s other ILS investors that are very interested about transactions that would potentially sit in the protection gap discussion.

“There are more investors that are driven out of a do good argument, actually. And here you find foundations, you find state owned entities who are willing to put money into funds who support development of countries. And I think that is an investor base that usually does not go into traditional ILS investing, and they sit a bit on the side lines, actually. And I think it’s that group of investors that we potentially should discuss a little bit more today,” said Ruoff.

In response, Tom Johansmeyer, Global Head of Index Classes, Inver Re, highlighted that the three legs of liquidity, minimum return, and diversification, are not equal in size.

“In my work in placing ESG business and structuring things like the carbon offset derivative in the Titania Re cat bond transaction, I found that minimum return is the most important of these three most important things,” said Johansmeyer.

“If you’ve got diversification and liquidity, but you’re not making enough money, that’s just not going to be good enough. If you’ve got a certain amount of liquidity and a minimum return, but you’ve got some diversification issues, okay, then you can talk to the alpha leaning funds, and you’ve got something to work with.

“But that minimum return is going to be, I think, the biggest challenge I’ve seen in connecting ESG opportunities with the ILS market, because you can tell end investors, you can tell ILS managers all day long about the diversified opportunity you’re going to bring, but if it’s just not going to make any cash, it’s a pretty short conversation in my experience,” added Johansmeyer.

For panellist Dr. Raveem Ismail, Head of Parametric Underwriting, Africa Specialty Risks, this goes back to the ‘do-gooders’ mentioned earlier in the panel.

“For all of the investment into making communities more resilient or helping the base level of the economic pyramid, the smallholder farmers in many of these areas, all of those donors and funders they want to make sure that resilience comes at the minimum price. If that’s the case, then there’s not necessarily enough left for any kind of innovative risk transfer,” he explained.

Adding, “Now, does that mean that there needs to be a minimum quantum or a minimum volume of investment, in such a way in order to make an attractive prospect for ILS? That I don’t know, but to date, none of the efforts in developing economies have made it to ILS or securitization.”

Also read:

– Significant investor interest. A wall of money, but slower moving: John Seo at Convergence.

– ILS market size matters. We need to make it scalable: Convergence panel.

– The “most pronounced” risk-adjusted ILS returns: Tangency’s Stanton at Convergence.

– Bermuda remains world-leader for cat bonds, ILS and Convergence.

Responsible investors still require a minimum return: Convergence 2023 was published by: www.Artemis.bm
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