Paul Barker, Partner and Chief Investment Officer, Private ILS at alternative investment manager Elementum Advisors, LLC, explores how the specialist insurance-linked securities (ILS) manager positions itself within a competitive landscape, and how its approach has adapted amid an increasingly sophisticated investor base.
“In terms of what sets us apart, our long-standing track record across multiple market cycles is an obvious differentiator. But for us, what really sets Elementum apart is our collaborative approach with both cedants and our clients (investors), our ability to create customized solutions, and the flexibility within our approach to respond to the market environment. This takes time and deep relationships to execute, along with robust analytics in the form of a proprietary view of risk and the development of customized structuring and portfolio construction tools.
“The depth of our underwriting, and robust investment due diligence process are also central to our platform. We spend a lot of our time researching the counterparties that we invest with, for and on behalf of our clients. We meet directly with cedants onsite–we’re in their offices, meeting with their teams, evaluating their platforms and that’s a very important piece for us. That fundamental due diligence, combined with deep technical analysis and a proven ability to create customized solutions for cedants, has been key to our strategy over time. At the same time, we have been able to create tailored mandates for our clients, aligning both sides of our strategic approach,” said Barker.
Elementum, a specialist in collateralized natural catastrophe event reinsurance investments, was launched in 2009 and established its Bermuda office in 2011, which is when Barker joined the company.
With such a long history and by adopting a macro view of cycle management, Elementum is able to take a disciplined approach to navigating the cycle, and then work with its clients to be forthcoming, transparent, collaborative and communicative, Barker highlighted.
“Obviously, this approach requires a lot of effort and a lot of time spent with our investors on the phone and in their offices, but we believe it yields positive results in the communication, the longevity, and ultimately the willingness and ability for our investors to remain long-term capital providers to us, and to the space. And so, providing that transparency and maintaining that underwriting discipline, we think, is super critical,” he said.
Barker went on to emphasise that although not everyone does everything right all the time, both Elementum and the wider industry have learned lessons from the past and from past cycles, and those lessons have been carried forward.
“We try our hardest not to have a short-term memory. Too often we’ve seen this industry get complacent after a few good years, forgetting the missteps of the past, which opens the door for them to happen again. We try to stay in the moment while keeping our eyes on the past. Our collaborative approach with our clients keeps us grounded, with an ability to say: here’s the opportunity set, here’s what we think it looks like now relative to what our expectations were, let’s derive the best path forward. We’ve used a very dynamic portfolio construction process that has allowed us to have that level of collaboration. I think this has insulated us somewhat from the same pressures that some of our competitors, and certainly the traditional reinsurers, may have experienced that have been heavy influencers of the cycle itself,” explained Barker.
In the ILS universe and broader re/insurance landscape, transparency is often a buzz word, and it’s fair to say that some good progress has been made over the years to allow for a greater level of openness and detail.
“One of the things that we hold true when underwriting is, as the market begins to soften, it shouldn’t mean that transparency wanes. It shouldn’t mean that because pricing is softening and there’s a bit more capacity, and the supply/demand dynamics are tipping in favor of buyers or cedants, they should then stop providing transparency and data and loss information,” he said. “Obviously, in the wake of some of the advances in tech and the quality of data, there’s just more of it to be shared as well, which means you need to know how to sift through it to make sense of it but, importantly, remain diligent in requiring it as a barrier to entry during the underwriting process.”
Given the fact there’s more and better-quality data in the industry, as well as a greater understanding of views of risk and the impact of climate change, Barker feels that there’s a difference in what newer investors bring to the table today than in the past.
“ILS is not this nascent asset class anymore. Now, it’s absolutely a more well known, well-researched asset class. So, even new entrants are starting further along than new entrants 20 years ago, because they either participated after 04/05 or in the early 2010s, or have been assessing the asset class from the sidelines as it has matured. And so, some of these participants are coming back in after a retrenching/re-education phase, and perhaps looking at it a little bit differently, through a different lens. New entrants also have the benefit of long-term investors who are doing their best to force discipline into the market to avoid a repeat of the cycle trough of 2016-2018.”
“Obviously, there’s a lot of uncertainty, which is why our asset class exists, and there’s all the caveats in the world around climate change, increasing loss activity, and understanding frequency perils. However, if you rewind 15/20 years, I think the difference in what they bring to the table in terms of sophistication, knowledge, and innovation, is great,” said Barker.
“I also think there’s the flip side of it, because any asset class with solid three-year returns looks attractive. That’s going to attract new investors, new managers. We think our experience stands out here compared to some of the new managers. So again, this goes back to the short-term versus long-term memory, and I think that is influencing allocation decisions and will ultimately result in differential performance outcomes,” he added.
Read all of our interviews with ILS market and reinsurance sector professionals here.
