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2018 DRR Financing 5.3 Kirill Savrassov


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Matching Risk & Capital, Investors’ Expectations

Published in: Government & Nonprofit
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2018 DRR Financing 5.3 Kirill Savrassov

  1. 1. 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.”
  2. 2. 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.
  3. 3. Pension funds already investing in ILS as of 1H 2018 with stakes over $100 mln:
  4. 4. 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
  5. 5. Source: Lombard Odier Investment Managers CAT Bonds vs. Other investment classes (2002-2016):
  6. 6. 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:
  7. 7. 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
  8. 8. Some largest ILS managers: Source: InsuranceLinked