Don Friedman
February 08, 2017
Don Friedman @ JV Events Group
Digital Asset Strategy Summit - Oct. 20 - 21, 2019 - Hotel Crescent Court - Dallas, TX

Joseph Morgart: The diversification benefits of insurance-linked securities

  

Joseph Morgart is a Client Portfolio Manager at Pioneer Investments. As it’s become increasingly difficult to add potential return without adding correlated risk within a portfolio, we found our recent interview with Joe particularly interesting. Joe, who will be speaking at our 3 rd Annual Liquid Alternative Strategies Summit (April 4 – NYC), walked us through the diversification benefits of insurance-linked securities. 


JV Events Group: What are insurance-linked securities?


Joe Morgart : Insurance-linked securities (ILS) are financial instruments whose performance is determined by insurance loss events, primarily driven by weather-related and other natural catastrophes, e.g., hurricanes and earthquakes. These events are typically low frequency but high-severity occurrences.

With ILS, investors assume the risk of an event occurring during the life of their bonds/contracts (typically one year), with their principal used to cover damage caused if the catastrophe is severe enough.


JV Events Group: How can advisors use them in an overall asset allocation and what role do they play?


Joe Morgart: We believe including ILS within a broader asset allocation can have powerful diversification benefits. ILS returns are not determined by economic factors such as GDP growth, interest rates or corporate profitability. Rather, the asset class performance is driven by the occurrence of low-frequency, high severity natural disasters such as earthquakes and hurricanes. This is a key distinguishing feature, which has resulted in a very low correlation to other asset classes. The return profile and liquidity of the asset class does require a long-term investment horizon. Given these characteristics, we believe ILS may fit well within the fixed income or alternative asset class portion of a client’s portfolio .


JV Events Group: How do you differentiate your product/strategy from others in the category?


Joe Morgart: Experience and resources. Pioneer has been investing in ILS since early 2007. We manage ILS as a component of many of our diversified portfolios and as of December 31 2016, Pioneer has $1.52 billion in exposure to ILS. This is a sector that we use across a large number of our portfolios—it has been a very effective diversifier for us. Over a number of years, we’ve found the diversification benefit to be tremendous. 


The two portfolio managers, with over forty years of combined investment experience, are supported by our CAT Modeling/Investment Risk team and fundamental research team. The CAT modeling team evaluates each exposure in the portfolios and provides rigorous scenario analysis. The analytic effort is supported by a quantitative modeling platform to provide actuarial analysis across the risks in which we are investing. For that, we use AIR Worldwide’s CATRADER, which in our view, is the best in class analytical platform for reinsurance risk.


In addition, two credit analysts and two equity analysts, located in Boston and Dublin, cover the global insurance and reinsurance markets. This is a particular differentiator for Pioneer. When we are evaluating a deal, not only are we looking at it through the lens of an ILS investor, but we also have input from our equity and fixed income analysts. We have the benefit of bringing particular insights into the management competence of the insurers and their business strategies. Therefore, we can develop some comfort that there is an alignment of interests between our investment and the objectives of the insurer who is ceding the risk. 


We are also supported by an investment risk group, which reports outside of the investment team, so it has autonomy to provide risk oversight on all of our strategies and very importantly, provides support on the portfolio modeling and scenario analysis side of the investment exercise. The legal team at Pioneer provides support, as we are frequently negotiating complex contracts, including both in-house attorneys and specialized external counsel. We also have a very large operations team, which is critical in this area, as these are operationally complex instruments. Our client portfolio manager works with our investors to meet their information needs, satisfy questions they have and provide research support. 


JV Events Group: What kind of expertise does your team bring to the asset class?


Joe Morgart: At Pioneer, we sit on the same side of the table as many advisors, trying to solve a specific problem endemic to the fixed income world, which is how to add potential return without adding correlated risk within a portfolio. The following are just a few of the ways we are able to do that: 

· Experience and Commitment : Pioneer has been investing in ILS since early 2007. We manage ILS as a component of many of our diversified portfolios. As of December 31, 2016, Pioneer has $1.52 billion in exposure to ILS.

· Extensive Risk Analysis : Our process is built upon a significant analytical foundation, using industry analytics to evaluate the risk of individual investment opportunities.

· Comprehensive Research Coverage : Pioneer supplements its robust proprietary research capabilities with third party analysis, to incorporate broad industry trends as well as in-depth company-specific analysis into the investment decision. Our comprehensive coverage permits analysis of reinsurers from multiple views: equity, corporate bond and ILS risk.

· Global Presence and Access : As an asset manager with over $240.7 billion in assets, Pioneer has cultivated partnerships with many reinsurers, providing us strong market access to the ILS sector.


JV Events Group: Thanks Joe. We look forward to hearing more of your thoughts at the 3rd Annual Liquid Alternative Strategies Summit April 4th in NYC.

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