LGT ILS Partners would expect that if it becomes necessary to transform its existing UCITS catastrophe bond offering into a new liquid alternative investment category as a result of the recent ESMA recommendation, such investment solutions should remain available for private investors, Michael Stahel, Partner and Portfolio Manager at LGT ILS Partners told us in an interview.
Recent feedback following the European Securities and Markets Authority’s (ESMA) recommendation not to allow catastrophe bonds as eligible assets in UCITS funds has gained wide attention across the industry.
In light of this, Artemis recently spoke with Michael Stahel, Partner and Portfolio Manager at LGT ILS Partners, the specialist dedicated insurance-linked securities (ILS) investment unit of LGT Capital Partners, who shared the organisation’s perspective on these proposed changes.
In May, ESMA launched a call for evidence on UCITS eligible assets, seeking input from stakeholders to assess any possible risk and benefits of UCITS gaining exposure to certain alternative asset classes.
In June, the ESMA published its advice to the European Commission (EC) on its review of the UCITS Eligible Assets Directive (EAD), suggesting that some alternative assets such as catastrophe bonds may be better suited to a different framework than UCITS.
“First and foremost, it should be noted that this UCITS eligibility review was not specifically targeted at catastrophe bonds. Instead, ESMA’s intention was a broad assessment or confirmation of the UCITS framework across all asset classes.
“At LGT Capital Partners, we maintain an open dialogue with the relevant regulators regarding insurance-linked strategies, ever since the launch of our first-ever UCITS cat bond fund globally back in 2010,” Stahel explained.
He continued: “The report recently published by the ESMA now suggests that catastrophe bonds and other less common liquid asset categories such as commodity futures are viewed as alternative assets that may not necessarily fit the current UCITS framework aimed at highly liquid asset classes. However, ESMA clearly recognizes the positive impact these alternative assets can have on a diversified portfolio, but also voiced the view that a new, yet to be established type of fund classification may be better suited to deal with the risks associated with such alternative investments.”
Moreover, the EU Commission is now set to review and digest ESMA’s advice and begin to start its own consultation on a legislative proposal, if any.
Concerning cat bonds, Stahel emphasized that this may offer market participants an additional opportunity to articulate their case from an investment standpoint; while also enabling them to underscore the critical function that cat bonds serve within the regulatory capital framework for insurers and reinsurers.
“We have also taken note of recent publications by the EU Commission regarding deregulation, removal of unnecessary barriers from EU financial markets and stipulation of growth of the EU economy. Therefore, the EU Commission may take a pragmatic approach and simply affirm the eligibility of cat bonds under the UCITS rules,” Stahel said.
“If the EU Commission does in fact follow ESMA’s view, this would likely entail the creation of a new regulatory investment category that sits somewhere between ELTIF and UCITS, which would, however, take considerable time to implement. The legislative process alone would take several years. Furthermore, ESMA has already stated that, once such a new framework were to be introduced, there would need to be a sufficient transition period to enable existing funds to adjust their investment strategy or be transformed into a new vehicle type.”
Regarding catastrophe bonds, Stahel informed Artemis given that such a new investment category would maintain the same liquidity level as current UCITS funds, it should remain suitable for inclusion in private wealth portfolios.
“Our fund vehicle’s home regulator, the Luxembourg CSSF, has confirmed that they will not change their approach or take any action until the final legislative acts are released. Our expectation is therefore that if there is a requirement to transform our existing UCITS cat bond offering into such new “liquid alternative” investment category, it should still be marketable to retail investors,” Stahel added.
“This assessment is based on the recent reform of the ELTIF framework which widened the restrictions to permit the marketing of certain alternative assets with limited liquidity to wealth management investors. Given that cat bonds already today meets the high standard of UCITS-liquidity requirements, we would expect for the regulator to not restrict the marketing of such investment solutions to professional investors only. We are therefore hopeful that our existing investor base can be maintained even after such a transformation.”
To end, Stahel asserts that LGT ILS Partners’ favourable position on this matter is validated by the observation that investors seem to concur with this evaluation.
“We have not received any negative feedback or comments from our investor base following the most recent ESMA publication. We are thus confident that the important role of cat bonds as a supplier of regulatory capital to the insurance industry and as an attractive diversifying asset class for investors is being recognized by the EU Commission as part of their evaluation of the UCITS framework.”
