Investment Process
All Icosa products are managed through our regulated partner company, MRB Fund Partners AG. At the heart of our investment philosophy is the strategic harvesting of the systemic risk premium found in catastrophe bonds. The approach is designed to capitalise on these opportunities while avoiding idiosyncratic risks that do not offer sufficient rewards. The investment process is a multi-layered approach, integrating economic analysis, risk management, and ESG & sustainability considerations into a cohesive strategy.
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Our journey begins with the economic analysis of transactions, a foundational aspect of our investment decision-making. This analysis forms the bedrock of portfolio construction, ensuring that each investment aligns with the product's broader financial objectives. We don’t just stop there; risk management is a pivotal part of the process, ingrained in every aspect of investment decision-making. This commitment to risk management ensures that we are always prepared for market shifts and the unique challenges of the cat bond market.
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In line with modern investment principles, we strongly adhere to ESG & sustainability practices. Recognising the importance of environmental, social, and governance factors, we integrate these considerations into our investment analysis, acknowledging their impact on long-term investment outcomes.
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What sets us apart in the cat bond market is our continuous integration approach. While our economic analyses typically align with the deal placement timeline in the cat bond market, we go beyond this. Liquidity management, capacity planning, and risk management are not afterthoughts but are actively integrated throughout the entire investment process and the lifecycle of each deal.
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Central to the strategy is HUBBLE, our cutting-edge proprietary analytics platform. HUBBLE is the cornerstone of our data-driven and scientifically robust decision-making process. It houses an extensive database on over 1,000 cat bonds, dating back to the late 1990s, with a cumulative issuance volume that surpasses $150 billion. The platform is a treasure trove of information, containing thousands of data points that include risk profiles, peril details, expected losses, involved currencies, notional values, and various trigger types. It also encompasses historical performance data and pricing details for all known cat bonds that have incurred losses in the past. In addition, HUBBLE offers valuable climatic data, enabling us to analyse seasonal patterns and trends, further bolstering our investment decisions.
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Our investment DNA is deeply rooted in identifying and leveraging opportunities in the cat bond market, underpinned by a strong emphasis on risk management and sustainability. Through our investment process, we harness the power of experience coupled with robust science and data to inform our decisions, setting us apart as leaders in cat bond investment.
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How do we build cat bond portfolios?
Our cat bond investment process is designed to deliver optimal risk-adjusted returns while maintaining a strong focus on liquidity and transparency. This process combines both top-down and bottom-up approaches to ensure that our investment decisions are well-informed, objective, and aligned with overall market trends.
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Pipeline Management
Active pipeline management is an integral part of our economic portfolio, capacity and liquidity management. We use our own in-house pipeline management software to track transactions even before first discussions are held.
2
Deal Analysis
We combine vendor model (e.g. Verisk, RMS, EQCat) output with proprietary in-house views of risk, incorporating cedant-specific views as well as our perspective on the impact of climatological changes. We benchmark each cat bond's qualitative aspects against the relevant current universe and our historic database of 1000+ cat bonds to calculate the Icosa conviction score.
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Portfolio & Trading
The Icosa strategies are built to harvest the systemic risk premium of the cat bond asset class. The portfolio construction aims to reduce any idiosyncratic risks which are not sufficiently well rewarded. Transactions are executed via our global network of brokers and are settled directly with the relevant custody banks. We are active in primary and secondary markets. All trading and portfolio management decisions are taken at MRB Fund Partners AG, our regulated partner firm.
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Lifecycle Management
We track deals in our lifecycle management software from pre-announcement to maturity. Distressed cat bonds are flagged and reviewed continuously by our analyst team to identify trading opportunities.
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Risk Management
Our investment strategy has the aim of being conservatively positioned within the middle of the cat bond market. Our risk management ensures constant monitoring of exposures, based on historical and stochastic stress testing.
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FX Hedging
We aim to reduce any foreign exchange risk to as close to zero as possible. For this reason, currency risk is fully hedged on a portfolio and on a share class level.
White Paper by Florian Steiger
A Systematic Approach to
Cat Bond Portfolio Management
Whilst the cat bond market has been a huge success, there have also been failures and weaknesses in structures and strategies. The approach to managing cat bond portfolios employed by many asset managers in the space is often characterised by a lack of structure, robustness and transparency.
Furthermore, conflicts of interest by the involved parties, such as brokers and modeling firms, a limited understanding of qualitative aspects, and an overconfidence in quantitative risk models can result in poor investment performance. Differences in valuation methodologies can drive meaningful performance dispersion between otherwise comparable cat bond portfolios run by different managers.
All these factors can make it difficult, if not impossible, for investors to accurately assess the risks and returns associated with various cat bond funds. Additionally, many of the individuals and institutions that manage cat bond funds have a background in the insurance or reinsurance industry, which can result in intellectual biases that might negatively impact the performance of their funds.
We believe that investors should be aware of what has worked well and what needs improvement. We are happy to share our honest thoughts and how we deal with these issues as part of our investment process in this white paper.
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Examples of critical aspects covered:
Model uncertainty
Cat bond investors have long relied on the sophisticated and standardised models provided by external research firms to calculate their perspective on expected loss and other critical risk metrics. These models play a pivotal role in informing investment decisions, offering a quantified view of potential risks. However, it's becoming increasingly clear that these industry-standard models, while robust, may not fully encapsulate the dynamic and evolving nature of global risks – particularly in light of current trends like climate change or inflation.
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Private ILS & trapped collateral
Private ILS, also known as collateralised reinsurance, are illiquid and bespoke instruments within the ILS asset class. Unlike cat bonds, these structures provide investors with access to a broader range of perils for portfolio diversification. However, the lack of standardisation, along with modeling flaws and information asymmetries, has historically led to underperformance compared to cat bonds.
Transparency
In the world of cat bond investments, market transparency, or rather the lack thereof, poses significant challenges for investors, particularly in areas like pricing in the secondary market and the sharing of loss information. These challenges are not just logistical but also impact the strategic decision-making process for investors.
Fund valuation
Fund valuation is a critical process, with different approaches offering varying degrees of accuracy and insight. The methods used can significantly influence the perceived value of a cat bond fund. In our White Paper, we explore the most common valuation methods – average mid, average bid and mark-to-model – highlighting their implications for investors.