Recent catastrophes open value in insurance-linked strategies: Neuberger Berman

Senior executives at investment specialist Neuberger Berman have highlighted insurance-linked securities (ILS) as an alternative asset class that should be particularly attractive to investors at this time.

In an annual update to help guide clients investment decisions into 2022, Neuberger Berman’s top leadership team discussed the trends that are driving investors to alternative asset classes and said that insurance-linked strategies is one area ripe for consideration.

In general, the Neuberger Berman leadership team are expecting market volatility and uncertainty to persist in 2022, but also with the potential for further economic expansion.

In the alternative space, the growing menu of investment options will continue to expand, while the fact diversification in some market is diminishing alongside higher inflation could drive investors to investigate niche alternative strategies.

“This appears likely to encourage all types of investor to make larger, more diverse allocations to alternatives, liquid and illiquid, as well as assets that can mitigate the impact of transitory and secular inflation,” the Neuberger Berman leaders said.

Expanding to say, “Idiosyncratic and uncorrelated strategies such as insurance-linked securities and macro trading could help lend stability to portfolios during any periods of increased volatility.”

Notably, it is execution risk, rather than market risk, that will determine success for many in alternative investments, they explained, which can make private market asset classes, such as reinsurance, particularly appealing.

This is especially true in insurance-linked securities (ILS), where specialised knowledge of the risks being underwritten, as well as relationships that enable deal-flow to be originated, are both vital to managing ILS fund strategies.

Anthony Tutrone, Global Head of Alternatives at Neuberger Berman explained that alternative asset classes can help to mitigate market risk, putting the onus on execution and investment selection, while the alts space offers “an abundant range of opportunistic strategies.”

Tutrone continued, saying, “The menu of non-traditional diversifiers continues to expand as well, giving investors a wider range of both defensive and opportunistic strategies to tap into, that can be much less correlated with markets and where returns are often contractual and not directly equity-linked.”

Discussing how investors can look to diversification with alternatives in 2022, Neuberger Berman Chief Investment Officer, Multi-Asset Class, Erik Knutzen, said, “Many investors are looking for assets that can diversify potential downside equity risk, mitigate the impact of inflation, or both. Moreover, some assets have been effective against short-term inflation spikes while others have done a better job of outperforming more persistent inflation. The result is that we see many investors lengthening their menu of alternatives and allocating more to them.”

He continued to explain that both idiosyncratic and uncorrelated strategies are in high-demand, but that selectivity is important in them, something particularly true of ILS strategies.

Then referring to opportunities to invest in reinsurance, Knutzen implied there is a particularly good entry-point at this time.

“Hurricane Ida and Germany’s summer floods might have opened up value in insurance-linked strategies,” he explained.

Tutrone added that, “The main difference between public and private investing is that there is much more you can do as a private owner to ensure that the risk you take is business execution risk and not valuation risk. We believe that, in today’s environment, the ability to tilt the playing field in that way is meaningful.”

Again, this is especially true in ILS and speaks to manager selection, as well as alignment of interest being important in this marketplace.