Pennsylvania schools pension fund enjoys risk/return profile of catastrophe bonds

Last June we wrote about the Pennsylvania Public School Employees’ Retirement System (PSERS), the public body that organises, manages and invests the retirement funds of public school employees in Pennsylvania, and their first allocation of capital to the catastrophe bond and insurance-linked securities asset class. They allocated $250m into the Palmetto Fund, an insurance-linked securities fund managed by Nephila Capital. Recent articles in local Pennsylvania newspapers suggest that the fund is pleased with their allocation to ILS and committed to investing in the sector.

The local news articles (available here and here) quote PSERS spokeswoman Evelyn Tatkovski as saying that reinsurance market and ILS is one area where the PSERS has found an uncorrelated return stream which they say helps them to lower the overall risk profile of their portfolio. She says; “The reinsurance market is one new area where we have found the risk (and) return profile to be attractive.”

The PSERS invests just 0.55% of their total assets into cat bonds and ILS but as a pension fund with an aggressive annual rate of return target of 7.5%, ILS can offer a good way to make up return shortfalls from other allocations if it is well-managed.

They seem happy with their choice of fund manager, particularly with respect to the diversification that Nephila Capital’s Palmetto Fund afford them. “The Palmetto Fund has a very geographically diversified portfolio of very remote catastrophe risk,” Tatkovski said. “Losses occur when the lower layers of coverage typically retained by insurance companies are eroded by major catastrophes such as a significant earthquake or a powerful hurricane. However, given the geographic diversity of the portfolio, those losses may only consume a small portion of the total reinsurance portfolio.”

It’s not all that often that pension funds of this size (PSERS has some $50.8 billion under management) speak out specifically about their allocations to the ILS and cat bond space so it’s encouraging to hear that they are pleased with the allocation and the strategy as a whole. It would not be surprising to see PSERS increase their allocation to the space in the future as at 0.55% it is currently a small part of their overall alternatives strategy.