Insurance Linked Securities (“ILS”) lie at the convergence of the capital markets and the insurance markets. A growing asset class, ILS encompasses a wide array of products, including Industry Loss Warranties (“ILW”), catastrophe bonds, and private reinsurance.

The ILS asset class has experienced annual double-digit growth over the past few years, reaching over $75 billion in 2016. This growth is driven in part by the demonstrated non-correlation of ILS to other asset classes, even in periods of extreme stress.

Strategy & Discipline

We are dedicated specialists within the ILS asset class: we focus on ILWs linked to natural catastrophes.

Strategy: Why Natural Catastrophe Risks?

Some ILS investors participate in risks such as maritime, aviation, satellite, terrorism, and cyber-risks. In contrast, we focus exclusively on natural catastrophe risks—such as large-scale hurricanes and earthquakes.

We do so because those risks are well-studied and well-modeled, thus enabling us to evaluate those risks with a meaningful level of scientific rigor. Other risks, while potentially uncorrelated with financial asset classes, are less well understood and significantly influenced by human behavior, which itself is very difficult to model with accuracy.

Strategy: Why Industry Loss Warranties?

ILWs are short-term, fully cash collateralized instruments transferring risk from a protection buyer (Insured) to the protection seller (Cartesian Re).

ILW diagram

ILWs offer a high level of transparency and greater liquidity, with less risk of adverse selection, counterparty credit, claims development, and other ancillary risks.

The below table summarizes the key characteristics of three ILS investment options, as well as how these investment options compare to the traditional reinsurance market with respect to the following key differentiating risk factors:

  • Breadth, i.e. the types and numbers of diversifying risks available
  • Transparency, the ease of understanding and measurement of true risk exposure
  • Liquidity risk
  • Counterparty credit risk
  • Adverse selection & information asymmetry risk
  • Claims development risk, the time to process, value and pay claims
  • Settlement risk, the ability to exit contracts at expiration without loss uncertainty

Comparison of risk factors across ILS investment options

Traditional or
Collateralized Reinsurance
Sidecars Cat Bonds ILWs
Breadth Large Moderate Moderate Moderate (highly customizable)
Transparency Low Very Low Indemnity: Low
Index: High
Liquidity Limited Limited Moderate (secondary market) High (short tenor)
Counterparty Credit Risk High High Moderate (spread payment risk) Minimal
Adverse Selection Risk High Very High Indemnity: High
Index: Minimal
Claims Development Long Long Indemnity: Long
Index: Short
Settlement Risk Option of Reinsurer High Indemnity: Moderate
Index: Minimal

Of the different types of ILS structures, ILWs offer a shorter tenor than catastrophe bonds (which are usually multi-year and whose claim development tends to be much longer), as well as greater transparency than collateralized reinsurance and reinsurance sidecars.

We invest primarily in privately negotiated ILWs that we tailor to the needs of our portfolio. This yields the following benefits:

  • Transparent and targeted risk exposure: predefined events ensure no surprises, bespoke nature allows for customization of investments
  • Reduced counterparty risk: pre-payment of premium and exposure only to the occurrence of a physical event, not the specific loss performance of counterparty
  • Speed and certainty of settlement: use of independent estimates of industry loss or physical measurements of event severity reduce time necessary to settle post event.
  • Reduced liquidity concerns: short duration and collateral trust structure


We create a portfolio of ILWs, diversified by geography, peril, and structure (both severity and frequency). ILWs structurally isolate natural catastrophe risk from other ancillary risks present in the investment process such as counterparty credit, illiquidity, and adverse-selection risk.

Most investment managers, implicitly or explicitly, adopt a return-centric approach—that is, they target a specific return level. Some managers define their targets in absolute terms; others define their targets relative to a benchmark. Our strategy is fundamentally different. Rather than target specific returns, we target a specific level of risk.

Our risk-centric approach begins from a fundamental premise: ILWs are useful additions to an investment portfolio principally because of their structural non-correlation with traditional asset classes. Thus, unlike many asset classes, the value to investors of ILWs is achieved less by maximizing return and more by managing risk.

We select a target level of risk and maintain that risk across different physical and financial environments. This results in a two-dimensional variation. First, we can vary the exposure based on the prevailing physical environment to match the target risk. Second, our returns will vary based on the prevailing financial environment.

One of the attractive features of ILWs is that they are highly customizable, enabling us to create distinct portfolios to fit a wide range of risk appetites.