Trends Watch: Casualty-Linked Securities

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.   

This week, Elana talks with John Butler, Managing Director and Head of Global ILS Program, Cohen & Co. Asset Management.  

What is your outlook for investing in casualty-linked securities? 

I am very excited about the prospects for casualty-linked securities, which I see poised for significant growth. Casualty insurance covers the legal responsibility for losses from damage to another person or business. Known as “long-tail,” its policies have on average three-to-five-year plus claim settlement periods, allowing premiums, which are paid upfront, to be invested in longer-dated assets, potentially yielding attractive returns. I believe it offers unique value by deriving returns from both underwriting and premium investment. Only recently has this asset class opened to institutional investors, driven by an increase in written premiums from reinsurance companies, primarily to cover the knock-on effect of the rising cost of claims from non-casualty lines, and a focus on fee-based revenue generation. 

Where do you see the greatest opportunities and why? 

I believe that casualty reinsurance holds significant growth potential. It may follow a trajectory similar to catastrophe reinsurance, which has evolved into an established asset class over the past two decades, despite having considerably lower total premiums than casualty.  Compared to catastrophe, casualty reinsurance is more stable, with high frequency/low severity claims, making its underwriting performance more predictable. This stability requires less required equity for the premium received, typically around 30-40%, leading to significant embedded leverage in the strategy. 

What are the greatest challenges you face and why? 

I believe the greatest challenge is educating institutional investors about this new and complex asset class. Many are not aware of casualty insurance, even those experienced in catastrophe-focused insurance-linked securities. Historically, reinsurers retained this risk, so it wasn’t available to institutional investors. While there is growing interest, there is a major learning curve and many investors are hesitant to be early adopters, especially since it requires locking up capital for three-to-five years or longer. 

What keeps you up at night? 

Individual lines of casualty insurance are generally relatively stable, with high-frequency, low-severity risks that typically have limited sensitivity to the economic cycle. However, casualty insurance includes diverse lines like workers’ compensation, auto liability, and professional liability, each with unique risk profiles. 

Unforeseen risk factors can cause significant losses in individual lines, as asbestos did to commercial general liability in the 1980s. I believe that a pool of policies, diversified by casualty insurance lines and geographies, may provide a stable return profile, allowing us to sleep relatively well at night. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper. 

Cohen & Company Asset Management, a business segment within Cohen & Company, LLC, the main operating subsidiary of Cohen & Company Inc. (NYSE American: COHN). Cohen & Company Asset Management’s business is conducted through Cohen & Company Financial Management, LLC, Dekania Capital Management, LLC, and Cohen & Company Financial (Europe) S.A., each majority, indirectly owned subsidiaries of Cohen & Company Inc. (collectively “Cohen & Company”).  The views and opinions expressed herein are those of the speaker and do not necessarily reflect the views of Cohen & Company, its affiliates or its employees.  This interview is solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such.  The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Diversification does not eliminate the risk of experiencing investment losses.  No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Cohen & Company.