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Mon May 18, 2020 10:19 am
|Head of Credit Suisse Insurance Linked options Ltd
the actual Linked Securities industry continues to see growth and is increasingly being seen as a diversified source of alpha in investment portfolios. Could you please present to our readers a bit of background to Credit Suisse ILS business, Including information regarding the key personnel in your team?
Our Credit Suisse Insurance Linked solutions (CSILS) Team has one of the longest track records in the ILS space dating back to 2003 when members of our team first managed ILS funds at Bank Leu, A former Credit Suisse Group part. on the market now, We sit inside our own legal entity Credit Suisse Insurance Linked Strategies Ltd, A Credit Suisse Group subsidiary and have built out a very helpful ILS russian dating platform with currently more than $8bn assets under management. much like their current roles. Our 20 investment pros have combined more than 220 years of relevant experience and, may, Have been with Credit Suisse for over 11 years. in total, We have more than 55 people fully dedicated to ILS on top of supported by various teams within Credit Suisse.
What was your drive for venturing into the ILS space, And how has the business grown and changed within the?
The appeal of the ILS space is that it applies proven, Proven reinsurance concepts in a more dynamic and innovative capital market planet. The capital market with trillions of dollars of capital is a natural risk taker for decide the financial low frequency, High impact catastrophes that have previously only been covered by reinsurance companies in the particular market. The transfer of part of these catastrophe risks can be described a win win win situation: The overall risk taking capacity in the re/insurance industry is enlarged that permits insurers and reinsurers to provide additional coverage where they were previously constraint by capital requirements which ultimately benefits insurance buyers; Insurers and reinsurers can stabilize their capital base by converting part of their peak risks to the capital market; And capital market investors take pleasure in access to a niche asset class with attractive return potential, A floating rate return structure and truly low correlation to original and alternative asset classes.
Our CSILS business has grown to more than $8bn in assets under management over the last years. While we initiated managing pure cat bond portfolios, We soon saw the necessity to access more diversified reinsurance risks and were the first in Europe to launch a commingled fund that invested into both cat bonds and collateralized reinsurance contracts. over the years, We have continuously strived to maintain a edge against your competitors by developing new structures and investment solutions for clients. In 2009 for example, We launched the first commingled pure life fund with a main focus on macro longevity and excess fatality risks. as 2014, We became the first ILS manager to get a start up rated reinsurance company, Funded by an active investor of a CSILS managed fund. one year later, We funded the Lloyds syndicate rcus 1856through CSILS managed funds which made us the first ILS manager in the market with the ability to transact in cat bonds, Collateralized reinsurance, Rated reinsurance and a Lloyd distribute.
Given the dimensions of our team today and the risk limits we write each year, CSILS compares to the largest reinsurers in the world in the house and property catastrophe segment. We feel innovation and flexibility is key to adapt to the changing market environment and offer investors attractive investment solutions suited to their needs and the market conditions.
Can you briefly describe and explain the differences between the various IRIS funds offered by Credit Suisse? What is your edge over rival ILS products?
We offer an all-inclusive range of ILS investment solutions. Our commingled funds have different risk/return and liquidity profiles allowing investors to choose according to their risk tolerance level and liquidity needs. Iskin this context typically refers to the expected loss in the portfolio and the maximum drawdown potential. Our offering ranges from a fund supposed to yield only a few percentage points a year to double digit return potential. on top of, We have structured several bespoke client mandates for large institutional investors which is very much tailored to the client preferences.
Having a thorough fund offering and bespoke client solutions has become even more important as competition in the ILS market has certainly increased. When our team began managing ILS portfolios back in 2003, The ILS market was around $7 billion in size and there were only many ILS managers around. subsequently, The ILS market has exploded to approx. $75 billion1 in size with today probable several dozen ILS managers. Even reinsurers have launched in house ILS management boutiques or are offering investment strategies to external investors. So when considering competition, We face other ILS managers anticipations of your partner reinsurers. over-all, The market has are more commoditized; Barriers to entry have reduced and today entire market is using similar risk models. For investors and non insiders it is difficult to differentiate between the players given the persistent intransparency in the ILS market.
possessing, We believe there are opportunities throughout the entire investment process for an ILS manager to gain a competitive edge and add value for investors. For us yet:
Having a strong and broad origination network to acquire good investment opportunities across the full range of ILS/reinsurance instruments; in conjunction with large assets under management this can offer economies of scale and access to rivatereinsurance layers
Experienced underwriting and risk modeling with proprietary adjustments to properly price risk and assess whether the resulting risk margin meets the portfolio regulations
Portfolio construction focusing on variation and minimizing tail risk (Drawdown jeopardy) For certain target rate of return
Real time event review and possible trading (Cat provides) Or hedging to reduce hazards loss impact on the portfolios
To help our readers appreciate this better, How does exposure to ILS sit within a hedge fund structure? What kind of instruments do you have exposure to and how liquid is the market with regards to spreads and the cost of borrowing for short positions?
ILS funds allow investors to access reinsurance type risks and perhaps premiums in a capital market friendly structure. Although fund complexes and terms such as liquidity are often similar to other hedge fund strategies, the actual investments in the portfolios are rather different.
foul breath, we are able to transact across the breadth of ILS instruments including cat bonds, Collateralized reinsurance, Rated reinsurance and quota provides:
Cat bonds are the instruments most well known also outside of the ILS space. a coverage or reinsurance company) To capital market potential traders. Thanks to their standardised nature, Cat bonds provide certain liquidity and are traded OTC on a secondary market. however, The spreads and liquidity are not much like listed equity/bonds. perhaps even, With a scale $24.3bn the market is comparably small and therefore imposes certain restrictions on a manager ability to select risks and construct a reliable portfolio.
Private ILS private transactions in spite of this are non standardized and are structured directly between the manager/fund and the re/insurance counterparty via a risk transformer. t's and c's of the transaction such as premium and risks covered can be negotiated between both parties. The transactions usually are fully collateralized giving the counterparty certainty that liabilities can be paid should the trigger event occur. Collateral is often held in a segregated account and invested in money market expense providing a floating rate return. projected property natural catastrophe limits), Which offers much broader potential for variation. ILS private transactions are not tradeable and typically will house terms of up to one year. ILS private ventures can be further split into:
Industry Loss extended auto warranties (ILW). $30bn, $50bn and so forth.
Collateralized (customary) Reinsurance. Trigger good actual loss of the counterparty, so named ndemnity/li>
Retrocession. Parametric that is founded on physically measured values)
Quota gives (Or accounts trades) Are also a form of a private ILS contact. ILS account) Assumes a pro rata share of the re/insurer book of business for a specific region or risk class. The two parties share the the liability, monthly payments, And losses based on the agreed percentage, that enables a full alignment of interests. for that ILS fund, This allows access to an attractive and diversified book of business in areas in which they may not have immediate access.
While the company plan of ILS funds is to assume risk and receive a premium in return, Short positions or ellingrisk is possible. To reduce specific risks in the portfolios or to use pricing differences between long and short risk. having said that, These opportunities have become increasingly rare as the market ukraine ladies has become more effective. quitting basis risk. When a hurricane is drawing near to landfall. Pricing indications are often just obtainable on request between established players and can vary significantly. web browsing experience, Even a high premium may be worth paying if the short position (A dom facto hedge) Later pays out to slow up the event impact on the ILS fund.
The IRIS funds have varying portfolio diversification across kinds of catastrophic events and geographic locations. Can you run us through how your internal models identify and execute the best businesses in the ILS space?
There are vintage enewal dates in the reinsurance market when annual contracts are renegotiated and potentially renewed. customarily 1 January for many global or European risks, 1 April for Japan risks and 1 June/July for US hurricane risk. Negotiations on pricing and scenarios start months before these dates. We will closely monitor and research expected pricing and profitability levels across market segments, Risk classes and methods to define the strategic asset allocation. The underwriting and risk modeling in a purchase process we use the same principles and systems that reinsurers use or can use. this is very important because underlying risks of ILS investments are insurance and reinsurance catastrophe risks. a definite fact nderwriting, Reviewing and validating the risk modeling data with more than one of this marketplace wide catastrophe models and making adjustments (Both quantitative and qualitative) Where we feel all-important. there are plenty of good, Lue chipcounterparties on the market, Where our underwriting and risk modeling simply shows that we feel the exposure and risk data provided is quality and accurate; But in today market we also see a growing number risks brought to the reinsurance and cat bond market, Where this is not the case and risks are often significantly undervalued with sometimes no or negative risk margin after adjustments.
Risk administration is a key to any investment strategy. How do you protect your portfolio against downside risk that would be extremely idiosyncratic given the nature of your strategy? notably, What was the fund experience in 2011 as a direct consequence of the earthquake in Japan and how well is it positioned now to cope with any losses arising from exposure to hurricane Harvey, Irma and helen.