PKA Ltd. (Pensionskassernes Administration A/S), a large pension fund investment service provider for employee pension funds in Denmark, has highlighted the stability and return possible from ILS investments, achieving 15.7% from its allocation in 2015.
PKA has been investing in insurance-linked securities (ILS), including catastrophe bonds and private ILS or collateralised reinsurance deals, since 2011, when it made a decision to add the asset class to its alternative strategies with a $150m allocation to Swiss ILS specialist manager Twelve Capital.
The allocation to the ILS asset class has provided a welcome diversification and return-driver for the PKA portfolio, which in 2015 only managed to generate a return of 1.7% from its portfolio. However the alternative strategies segment is among the most healthy, with ILS driving a significant boost to returns.
For 2015 PKA reported a 15.7% return from its investments in catastrophe bonds. Now, as any of our regular readers will know that kind of return is unlikely just from pure 144a catastrophe bonds and so it has to be assumed that PKA really means across private ILS, collateralised reinsurance and cat bonds as well.
The mandate PKA set up with Twelve Capital in 2011 included such private ILS assets, although we cannot confirm if that mandate still exists today. Also, PKA has itself said in the past that as a pension fund investing just a small proportion of its assets into ILS, it is happy to have a concentrated allocation, in order to generate higher returns.
With the financial climate hurting PKA’s overall return, it had generated an 8% average return over the last five years, alternative investments in asset classes such as ILS and cat bonds are essential to help to boost the overall performance of the pension portfolio.
“Alternatives ensures stability in the portfolio, even in years where returns on traditional investments in stocks and bonds is modest,” explained Michael Nellemann Pedersen of PKA. “We will therefore continue the strategy of investment in alternatives also in 2016. We expect in a few years to have 25% of our investment in alternatives compared to 22% today, representing an increase of 10 billion. kr.”
With ILS among the highest returning segments of the alternative strategies that PKA invests in there is a good chance that the pension fund will increase its allocation to the sector as it grows its focus on alternative drivers of return.
PKA currently has somewhere between $1.3 billion and $1.4 billion of assets allocated to ILS and insurance-linked strategies, with managers including Nephila Capital, Markel CATCo and Twelve all on its ILS roster.
This strategy, of actively looking for and allocating to alternatives that can provide a stable source of return, with low-correlation to the broader financial and equity markets, is expected to become increasingly prevalent at large pension funds, such as PKA. As a result ILS and catastrophe bonds as an asset class is expected to benefit.
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