Pennsylvania schools pension fund on ILS investment exposure to Sandy

by Artemis on November 1, 2012

Here’s an interesting side-story on Sandy where a U.S. state schools pension fund was in the path of hurricane Sandy, Pennsylvania was a state impacted by the storm, and now also faces a potential impairment to their investment portfolio because they have invested in a reinsurance-linked investment fund. The Pennsylvania Public School Employees’ Retirement System, invested $250m in the Palmetto Fund, an ILS fund managed by Nephila Capital, back in June 2011.

The potential Sandy hit to the Pennsylvania Public School Employees’ Retirement System portfolio investment has not gone unnoticed and has been picked up by the PA Independent in this article. The article says that the PSERS fund has actually invested $375m, or 1% of their investment capital into reinsurance as at September 2012, we’re not sure whether that is all with Nephila or whether they have allocated capital to other insurance-linked strategies. The performance of their reinsurance-linked investments is said to be 7% which must be a welcome return for the pension fund in the current macro economic climate.

The article, which was published yesterday, quotes Evelyn Tatkovski the PSERS press secretary as saying that early indications were that their reinsurance investments had not incurred material losses, explaining that they were diversified to avoid major loss from a single event.

“Given the geographic diversity of PSERS’ reinsurance investments, this storm’s losses may only impact a small portion of the total reinsurance portfolio. But again it is too soon to tell what the exact impact may be until the actual losses, including the type of losses (i.e. wind, flood, etc.) are determined,” Tatkovski is quoted as saying.

It’s interesting as, while we often hear from ILS funds commenting post catastrophe events, we don’t generally get to hear from the investors in those ILS funds.

Given the 1% allocation to reinsurance and ILS (including catastrophe bonds and weather related instruments) via Nephila (and maybe others) that the PSERS has made, even if Sandy turns out to be an industry loss right in the upper range of current estimates it is unlikely that PSERS themselves will suffer a particularly large impairment to their investments.

Nephila’s Palmetto Fund is diversified in many different classes of peril and across geographical risk zones, meaning that an event like Sandy is unlikely to cause the fund a major loss. Perhaps under a worst case scenario it could wipe out the return for 2012 and maybe a little of the fund value, but that could (and regularly does) happen with an investment in equities or other alternative asset classes. While that is clearly disappointing for an investor it is not usually enough to alarm a sophisticated investor like a pension fund. ILS funds and reinsurance linked investment strategies should be really well diversified so that even a 1-in-100 year event can only wipe out a portion of an investment. Given the sophisticated manner in which ILS funds are managed, and Nephila are a very highly rated manager, we’re sure that PSERS will continue to find the risk/return profile of reinsurance attractive well beyond the final calculation of any losses incurred due to Sandy.

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