Matching Risk & Capital, Investors’ Expectations

2. Wall Street Journal – January 2018:
“The goal of most pension funds is to pay for future benefits
by earning 7% to 8% a year. After the 2008 financial crisis,
many funds tried to hit those marks by lowering their
holdings of bonds as interest rates dropped, and by turning to
real estate, commodities, hedge funds and private-equity
holdings. These so-called alternative investments rose to 26%
of holdings at about 150 of the biggest U.S. funds in 2016,
according to the Public Plans database, compared with 7%
more than a decade earlier.”

3. 2018 Context Allocator Trends Report
(400+ institutional investors):
70% of respondents planning to increase their allocations to
alternatives in 2018, and
29% planning to maintain their current allocations. The demand
for alternative investments is supported by doubts over how
long the current bull market can last, with
69% of institutional allocators surveyed predicting that
traditional equities and fixed income markets will underperform
in 2018 when compared to 2017, and an additional 19%
predicting similar year-over-year performance.

4. Pension funds already investing in ILS as of 1H 2018 with stakes
over $100 mln:

5. Centrica (UK):
EUR 9,5 bln. pension scheme for one
of the UK’s largest energy suppliers
Linde Group (Germany):
EUR 6.07 bln. pension fund of international gases and
engineering group
ILS
Source: IPE

6. Source: Lombard Odier Investment Managers
CAT Bonds vs. Other investment classes (2002-2016):

7. An important question is Can bonds and broader ILS market performance in 2017 following an
unprecedented market loss (US$130bn) after Harvey, Irma & Maria US hurricanes.
While 2017 is likely to see more impaired cat bonds than any previous year, the total defaults to
be a modest proportion of the market, which is a good argument to intra-class diversification and
balancing factor of individual investment strategies.
The best example to be is Swiss Re Total Return Index, a market value-weighted basket of nat cat
bonds tracked by Swiss Re Capital Markets:

8. High level of intra-class diversification given
by their correlation to different and
independent risk factors arising in different
parts of the world
+
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

9. Some largest ILS managers:
Source: InsuranceLinked