Insurance-linked securities

Insurance-linked securities (“ILS”) is an asset class that generally derives its return and risk from property damage insurance contracts related to natural catastrophes (e.g., earthquakes, hurricanes, etc.). In this class, investors provide insurance-related, at-risk capital in exchange for pre-defined premium payments. Investors assume the role of an insurer, as the underlying risk sources are insurance policies and/or derivatives that are analogous to insurance policies. The archetype of ILS is natural catastrophe property reinsurance where investors effectively assume insurance policies from the original insurers of global property damage that stem from natural perils.

ILS generally provides a moderate level of return whose risk sources are completely unrelated to the traditional capital markets. This type of investment provides a unique source of uncorrelated and economically intuitive returns that are typically absent from most investment portfolios. Moreover, ILS has the potential to provide societal benefits by lowering the cost of insurance for end policyholders and diluting the risk of ruin for the most susceptible companies and regions. For institutional investors that are willing to accept the complexity, modest returns, and relatively small market size, we believe that ILS, and in particular natural catastrophe property insurance/reinsurance, can benefit a total portfolio when included as an illiquid diversifying strategy.