While there are numerous ways to generate alpha in your investors within the insurance-linked securities (ILS) sector, it stays critical to administer investor expectations and avoid delivering unwanted surprises, speakers at Convergence 2023 in Bermuda said last week.

Panellists were discussing “alpha versus beta” and the differences in ILS fund manager strategies, concluding that there are many ways alpha will be generated by managers, for his or her investors, in what’s a very complex asset class.

Asked to spotlight a few the ways they see alpha generation as possible of their roles as ILS investment managers, the speakers listed off multiple ways it could be achieved.

First, Michael Jedraszak, Co-Founder & CIO at quota share reinsurance focused ILS manager Tangency Capital, said, “I wish there was only two things that drive it, right? We hoped so, a few years ago after we began this after which realised that there was probably five or ten things that could make a very big difference within the end result.”

Jedraszak went on to explained that that is, “From, the underlying risks, the information collection, how you’re managing inflation, staple items like that. Through to then how you utilize the models, which cedents we select, through to the structuring of a transaction.

“There’s lots of things you possibly can do fallacious, that eat into what might have been a superb result, but has been mismanaged through structuring issues. That’s not only frictional costs, there are literally just a lot of other things which are related to how capital gets reused or rolled.”

Concluding, “So, we wished it was less drivers of alpha, but there’s quite just a few and that’s partly why it’s a posh asset class. Because there’s no obvious one or two things which you can deal with after which have a superb end result. It’s just not that easy.”

Next, Lixin Zeng, Managing Partner at reinsurance-linked asset manager Integral ILS, who further explained, “I feel the 2 most significant in a sector allocation, is peak versus non-peak, I feel that’s very essential in ILS investing.”

Zeng further said that, “Peak, is the systemic risk of the insurance industry, so individuals are willing to pay high premium for the chance. Peak risk accounts for about 45% of the worldwide reinsurance limit, 60% of the premium and 75% of expected profit, in order that’s the differential between peak and non-peak.

“So, if our for our clients, their entire portfolio is the stock market, the bond market, with 2% to five% the ILS market, the choice to deal with peak, we predict that’s the foremost driver of making alpha, creating outperformance.”

Zeng went on to say that, “The second is risk preference, between writing higher-risk, higher-premium reinsurance contracts, versus having a leverage facility to write down distant risk and which do you favor, what form of terms are you able to negotiate along with your fronting company, that creates a structural advantage. For 80 to 90% of the reinsurance market you can’t access it with out a fronting facility.

“So, we predict those two things create a more structural, or everlasting factor that drives the alpha.”

Zeng also highlighted analytics and cedent selection as other key areas for delivering alpha in ILS strategies

Finally, Vincent Prabis, Managing Principal at re/insurer aligned manager Hiscox ILS, noted that alpha remains to be the goal.

“We’re all attempting to do that, all of the steps that were discussed at once, we’re all really attempting to optimise our access to risk, structuring the fronting and ultimately, we do see that within the performance, as you possibly can imagine for this yr you recognize, we’re at inception high performances,” Prabis explained.

“But for us, just taking away if there are two things which are very essential, they usually sound very similar but they’re not, we’re managing expectations on what we do ultimately, once we’ve done our greatest on this portfolio, managing expectations. But in addition avoiding the surprises.”

Prabis said, “That’s ultimately a really soft method to take a look at how a portfolio has performed. Have we been in a position to deliver that to our investors, that’s a part of the education that we’re consistently doing even with investors which were with us for a very long time.”

He then highlighted that investors in ILS strategies are typically only deploying a small amount of their assets to the sector, so education and communication stays critical to maintain them on top of things on their investments.

“That could be a very essential role that we want to play, to get to that time and be certain that that they understand what we want to get there and what’s the goal,” Prabis said.

Concluding, “To me the goal is de facto to avoid those surprises.”

Also read:

– AI + computing power = exciting developments for ILS: Adrian Jones at Convergence.

– Responsible investors still require a minimum return: Convergence 2023.

– Significant investor interest. A wall of cash, but slower moving: John Search engine marketing at Convergence.

– ILS market size matters. We’d like to make it scalable: Convergence panel.

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

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