According to a new report from King Ridge Capital Advisors LLC, the specialist insurance-linked securities (ILS) investment manager, casualty ILS is gaining traction with investors familiar with private credit structures, while also offering diversification away from credit-linked risks.
“Global investors have committed more than $1.6 trillion to private credit and even larger sums to private equity, both of which ultimately rest on the same foundation of corporate credit risk. This expansion has fueled crowding, compressed returns, and contributed to a broader credit bloat, leaving portfolios increasingly tied to borrower default dynamics that worsen during recessions and liquidity stress,” King Ridge explained.
“Casualty Insurance-Linked Securities (ILS), a growing segment of the growing $120 billion ILS market, provides an alternative. Like private credit, casualty ILS are built on long-duration obligations and predictable cash flows. Unlike private credit, their performance is independent of corporate balance sheets or economic cycles,” the firm continued.
Moreover, the ILS investment manager outlines how casualty ILS transforms the age-old economics of insurance float into an investable strategy, offering income independent of credit markets and rooted in the fundamental mechanics of risk transfer
King Ridge also outlines how casualty lines of insurance have historically generated positive underwriting margins for well-run insurers.
“Global property & casualty insurers typically operate at combined ratios (losses + expenses + premium) of 95-100%. That means premiums collected exceed ultimate claims and costs, leaving a margin,” the firm explained.
Adding: “For investors, these structures provide exposure to the same margin that has historically supported casualty insurance economics. Casualty ILS portfolios are modeled to produce mid-to high teens returns under certain assumptions, though actual results can differ materially depending on risk selection, market conditions, and claims experience.”
According to King Ridge, one key reason why momentum is growing for casualty ILS is that investors already understand private credit. The ILS investment manager highlights how both involve long-tail obligations, both provide contractual income, and both reward disciplined underwriting.
“The key difference is correlation. Borrower defaults tend to rise when recessions hit, or liquidity dries up. Casualty outcomes are largely driven by the frequency and severity of accidents, litigation outcomes, and social inflation not GDP growth,” King Ridge said.
“This makes casualty ILS intuitive for allocators already familiar with private credit structures, while offering them diversification from credit-linked risks. The long-tail liability structure is familiar to investors, but the source of risk and therefore the diversification benefit is completely different.”
Additionally, King Ridge states that a number of forces are converging to “pull casualty ILS into the mainstream of institutional portfolios.”
Among these forces, the firm notes that with private credit assets under management (AUM) surpassing $1.6 trillion, investors are increasingly wary of concentration risk. However, as King Ridge highlights, casualty ILS is one of the few alternative income streams independent of credit risk
Along with this, the ILS investment manager affirms how insurers face growing liability exposures but limited capacity on their balance sheets, which therefore means that they need outside investors to share risk.
King Ridge also stresses that much like any investment strategy, casualty ILS also involves risks, while stressing that allocators must understand both the risks and how experienced managers mitigate them
“Casualty ILS carry risks distinct from traditional credit, but when underwritten with discipline, they offer investors contractual, long-duration income from a fundamentally separate risk pool,” King Ridge said.
King Ridge also added that for institutional allocators and investors, casualty ILS can serve as a core alternative income allocation, highlighting its resilience, especially when credit and equity markets are under stress
“Casualty ILS give portfolios a chance to earn contractual, long-duration income but from a risk pool that is fundamentally separate from financial markets,” King Ridge noted.
Concluding: “The last decade has proven the appetite for private credit. Investors have grown comfortable with long-tail exposures, multi-year commitments, and underwriting-based strategies. Casualty ILS shares many of those features but with one critical difference: the risks are not tied to credit markets.
“For RIAs, Family Offices, and institutional allocators seeking independent sources of income, casualty ILS represents a compelling next step. The structures are familiar, the return potential is attractive, and the diversification benefit is clear.”
