Schroders launches ILS fund; non-cat in the mix

Schroders has launched the Schroders Investment Fund Core Insurance Linked Securities fund, which will invest in a diversified portfolio of ILS.

Schroders has indicated that the fund will contain a mix of cat risk—wind and quake—as well as man-made risks such as “aviation, marine and offshore energy”, although the fund will exclude life risk.

Schroders has ramped up its interest in ILS since its acquisition of Secquaero Advisors earlier this year and has indicated that ILS is an opportunity for institutional investors to achieve “highly attractive risk-return characteristics and diversification benefits within their asset allocation models”.

Bermuda:Re spoke with Daniel Ineichen, Lead Fund Manager of SIF – Core Insurance Linked Securities about the recent developments at Schroders.

What was behind the decision to go for a cat and non-cat mix in the fund?

The Schroder Investment Fund Core Insurance Linked Securities (ILS) fund invests in a broad basket of risks which include natural catastrophes and also 'man-made' risks such as aviation, marine and offshore energy (but not life insurance risk).  The fund invests in a mix of tradable ILS (e.g. cat bonds) and also private transactions (bespoke, collateralised, reinsurance agreements which are drawn up between the reinsurer and individual investors).

The rational for investing in a broader range of instruments than cat bonds is that it provides us with a wider investment universe and a broader range of exposures. This allows us to further reduce volatility and the risk of losses when constructing a portfolio.

How active a pipeline of risks are you seeing at present? Is there an expectation that this will grow?

The market has experienced very strong growth over the last few years, particularly in 2013, during which ILS has provided robust returns to investors. We expect this growth to continue for several years as regulatory changes such as Solvency II drive the requirement for capital transfer.

We currently see a very active pipeline in the market – in both areas, cat bonds and private transactions. Generally for cat bonds the fourth quarter tends to be the busiest period. Market activity for private transactions is more correlated to the traditional reinsurance cycle which has three big renewal dates, however the busiest period in terms of pipeline also tends to be the fourth quarter as many deals have a 1 January inception date.

What kind of investors do you anticipate investing in the fund?

The Schroder IF Core ILS fund is available to institutional investors.  We expect the fund to be attractive to investors who are seeking better diversification than a pure cat bond fund, but who do not want to invest in life risk (the all ILS fund is available for those interested in life risk). Defined benefit pension schemes would be a natural market for the Core ILS fund. We expect the diversification benefits and strong track history of the asset class to be attractive to many types of institutional investors.