Unlocking Alternatives: Opportunities in Insurance-Linked Securities

Rick Pagnani, Portfolio Manager and Head of PIMCO's Insurance-linked Business discusses how insurance markets are responding to the elevated natural catastrophe event activity of the past few years and where PIMCO sees the most compelling opportunities for investors.

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Text on screen: PIMCO

Text on screen: How are insurance markets responding to the elevated natural catastrophe event activity of the last few years?

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Rick Pagnani, Executive Vice President, Head of PIMCO ILS Business

Rick Pagnani: The market is responding rather favorably to the activity the last three to four years. In particular, going back to 2019,

Text on screen: TITLE – Market conditions are improving for ILS investors, BULLETS – Reinsurance rates are moving higher following elevated loss activity 

you started to see a secular trend where rates were improving, where the market was saying, "we need more units of premium for the risk,” this is a result of the activity of 2017, ’18, ’19, we had hurricane activity in the US, and also in Japan. And then that on top of 2020, where we had unprecedented number of events, 30 named storms in the United States. It was really a year of seriality, as opposed to verticality. So, it was really borne mostly by insurance companies, but it also impacted the reinsurance industry. That, in addition to covid.

Now, while these claims are still being battled in courts, and will be for some time, what this served to do is to trap capital within the reinsurance industry. Reinsurers, ILS managers are having to post reserves. Those reserves, if you're an ILS manager and you're not a sponsored ILS manager, you're going to have to buffer those. So that serves to trap capital, draw out capacity. Demand is still high, so the rate environment is quite favorable at this point. In addition to that, we like what we're seeing from a rate and risk standpoint.

Text on screen: TITLE – Market conditions are improving for ILS investors, BULLETS – Reinsurance rates are moving higher following elevated loss activity, Terms and conditions are improving

We're also seeing better terms and conditions on the underlying reinsurance contracts. Those are the contracts between the ILS manager, the reinsurers, and the insurance companies. Those are moving in favor of reinsurers.

That improvement has served to further amplify the rate improvements, and further amplify and improve risk-adjusted returns for reinsurers and ILS managers.

Text on screen: Given that, where does PIMCO see opportunity in ILS markets?

Rick Pagnani: Well, we see markets across the board.

Text on screen: TITLE – Opportunities today – remain selective, BULLETS – Focus on well modeled perils, SUB-BULLETS - Wind, Earthquake, BULLETS - Emphasize geographical and peril diversification

We would focus and recommend people focus on the primary perils, IE wind and quake. We find that they lend themselves to a higher degree of modeling certainty. We would avoid secondary perils such as wildfire, convective storm, hailstorms, et cetera. We also would emphasize the importance of geographic distribution in terms of peril in region.

We think it’s very important for managers to consider a well-balanced portfolio that is resilient to single events, one that can withstand a type of year like 2020 was. Certainly it is challenging, not every manager can do that. But those that can, can capitalize on it, in a very improved market environment.

Text on screen: How can investors take advantage of these opportunities? 

Rick Pagnani: This is an elevated rate environment. I think it’s a great time to be getting in.

Split screen with chevron: TEXT ON LEFT – Text on left: ILS provides diversification in a well-balanced portfolio, IMAGE ON RIGHT – PIMCO trade floor

There are all sorts of benefits associated with the asset class. It certainly provides diversification for a diversified, well-balanced portfolio. So, for those who are looking to take less risk in the space, what we would emphasize there is hyperdiversification, and portfolios that are resilient to single events. For those that are looking to take more risk, we would caution them in manager selection.

Text on screen: TITLE – Considerations when selecting an ILS manager, BULLETS – Understand pitfalls in high-risk strategies, Have requisite skills and risk management systems, Ability to leverage the portfolio 

You want to make sure that they understand some of the pitfalls associated with these higher-risk strategies. They tend to be closer to the money, and when you're closer to the money, you're closer to the secondary perils.

Those perils, again, being convective storm, wildfire, hail, et cetera. Those are tougher to model, some are unmodeled. So you need to make sure that the underwriters understand those, have the requisite skills and system to handle them from a risk management standpoint. You also want to investigate the operating platform. You want to make sure that they have a sponsor, they have rated paper. With that rated paper, they can avoid the pitfalls of trapped capital. You also want to make sure that they’re able to leverage your portfolio from a reinsurance and financial standpoint. That’s critical in order to take on rest of world risk, which tends to be lower priced, and requires at times to be levered in order to meet the risk/return objectives of the fund.

Look, it’s been an interesting three years. There’s been a lot of lessons learned. I think we are the beneficiary of those lessons, and we created what we consider a better mousetrap,

Images of PIMCO trade floor

and a better platform, and we look forward to answering any questions you might have with regard to ILS.

Text on screen: For more insights and information, visit

Text on screen: PIMCO 50 1971-2021


This summary is for educational purposes only, and does not constitute an offer to sell, or a solicitation of an offer to buy, interests in a fund or any other PIMCO trading strategy or investment product.  In the event that an offer were to be made, any such offer would be made only after a prospective purchaser has had the opportunity to conduct its own independent evaluation of the fund and has received all information required to make its own investment decision, including a copy of the private placement memorandum, limited partnership agreement, subscription agreement and other definitive documents (the “Documents”), which will contain material information not included herein and to which prospective purchasers are referred. Each prospective investor should consult its own counsel, accountant, or tax or business adviser as to legal, accounting, regulatory, tax and related matters, as well as economic risks and merits, concerning the possibility of making an investment in a fund.

Past performance is not a guarantee or a reliable indicator of future results.


Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice


A private fund is not subject to the same regulatory requirements as mutual funds. A private fund may be, and is expected to be, leveraged and may engage in speculative investment practices that may increase the risk of investment loss. A private fund’s performance can be volatile; an investor could lose all or a substantial amount of their investment. A private fund manager has broad trading authority over a private fund. The use of a single adviser applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. A private fund is not restricted to tracking a particular benchmark and is not restricted by client guidelines. There is no secondary market for the investor’s interest and none is expected to develop. There are restrictions on transferring interests in a private fund and it has limited liquidity provisions. A private fund’s high fees and expenses may offset a private fund’s trading profits. A substantial portion of the trades executed for a private fund are in non-U.S. securities and take place on non-U.S. exchanges. A private fund may invest in non-publically traded securities which may be subject to illiquidity risk. A private fund is not required provide periodic pricing or valuation information to investors. A private fund involves complex tax structures and there may be delays in distributing important tax information.

Insurance-linked instruments provide exposure to various insurance risks and are tied to a varied group of available perils and geographic regions. Such perils will consist, amongst others, of earthquake, flood, hail, wind or other weather-related risks, and may include exposure to other natural or non-natural catastrophic events. Examples of insurance-linked instruments include, but are not limited to, securities or other financial instruments linked to excess of loss, quota shares or other reinsurance or derivative risk transfer contracts, catastrophe bonds, industry loss warranties, sidecars, over-the-counter financial derivatives, listed derivatives (i.e., futures/options on futures) and equity and/or debt securities. of insurance and reinsurance companies. The performance of insurance-linked instruments depends on the occurrence or non-occurrence of specific insurance events, including such catastrophic events mentioned above, and the incidence, frequency and severity of such catastrophic events are inherently unpredictable. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Derivatives and commodity linked derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous.  Investing in derivatives could lose more than the amount invested.

This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.| Pacific Investment Management Company LLC (650 Newport Center Drive, Newport Beach, CA 92660) is regulated by the United States Securities and Exchange Commission. | PIMCO Investments LLC (“PI”), a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, serves as the principal underwriter for the U.S. registered PIMCO Funds (“Funds”) and placement agent for the PIMCO-sponsored private funds (the “Private Funds”). The Funds are distributed in Latin America and the Caribbean by certain of PI’s non-U.S. sub-agents, certain of whom also serve as sub-placement agents to PI with respect to the Private Funds in those jurisdictions. Shares of the Funds and Private Funds may not be offered or sold in, or to citizens or residents of, any country, state or jurisdiction where it would be unlawful to offer, to solicit an offer for, or to sell such shares. | PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to individual investors, who should not rely on this communication but contact their financial adviser. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Spanish Branch (N.I.F. 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