Representatives from two organisations at the ILS Bermuda Convergence conference this week laid out a compelling case for shifting capital away from saturated corporate credit towards catastrophe insurance-linked securities and asset-backed structures.

The institutional investors included the International Monetary Fund and Sage Advisory, a Texas asset management firm with a 30-year track record of managing institutional fixed-income assets.

The latter is working with Cedar Trace, the Bermudian-based insurance, reinsurance, and asset management group formerly known as Mereo Advisors Group.

Global markets are faced with soaring public debt and persistent rate volatility, and institutional allocators have been re-evaluating core fixed-income strategies.

Bob Smith, president and co-CIO of Sage Advisory, and Nick Ashmore, deputy director and CIO of the International Monetary Fund, were participating on the panel, “Allocating Through Uncertainty”.

Also on the panel were Joseph Pursley, head of insurance distribution, Americas, Nuveen, and the moderator, Louay Mikdashi, head of multi-sector private credit, Neuberger Berman.

Mr Smith noted: “I think that the private credit magic is starting to evaporate. And what I think is more important is that the cat ILS market represents, I think, a very exciting and meaningfully better alternative as a diversifier, as a return sector, and with lower volatility and so forth.

“So for us, we're very much focused on that. We're involved with our friends from Cedar Trace here in Hamilton, actually creating a very interesting fund that combines public fixed income and cat ILS. And we think that is where the growth will be.

“No longer are we to consider this a niche market. We think that the cat ILS market should be considered a strategic allocation. And we're not alone in that.

“KKR has now made it part of their strategic capital market analysis. Cambridge Consulting in Boston has done the same. We are now looking at a point of change where we think ILS can go toe-to-toe with traditional fixed income on several different levels.”

With US national debt exceeding 106 per cent of gross domestic product and major global economies running massive fiscal deficits corporate borrowers in the single-B and triple-C rating tiers are struggling against interest costs that remain 200 to 300 basis points higher than two years ago.

Mr Ashmore corroborated this macro pressure, noting an unusual economic pattern where expansionary government deficits coincide with massive private investment booms in infrastructure and technology.

He oversees approximately $120 billion in aggregate assets across the IMF's capital structure — including conservative sovereign reserves, an endowment, and an 80-year-old defined benefit staff retirement plan.

He explained that the IMF strictly avoids corporate direct lending due to its high-risk profile. Instead, the institution favours asset-backed private credit and has maintained a dedicated absolute return allocation to ILS for roughly ten years to achieve genuine portfolio diversification.

Mr Smith said cat ILS should no longer be treated as a niche satellite play, but rather as a core strategic allocation — a position he said is now endorsed by major advisory firms such as KKR and Cambridge Consulting.

He said cat ILS has consistently outperformed aggregate bond indices, intermediate fixed income, and short high-yield credit on both a gross and risk-adjusted basis, accompanied by lower standard deviation.

Highlighting capacity dynamics, Mr Smith contrasted the crowded $2.5 trillion private credit market with the $120 billion ILS sector (which includes roughly $65 billion in catastrophe bonds), emphasising the vast runway for ILS capital to bridge the global protection gap.

Mr Ashmore added that as equity and fixed income markets increasingly move in tandem, ILS stands out for its near-zero correlation to broader financial markets.