Aberdeen maintains reduced ILS allocation after losses

Aberdeen Standard Investments intends to persist with insurance-linked securities (ILS) as a core diversifying asset class within its diversified funds despite experiencing losses after the last two years of catastrophe events.

The Chairman of the Aberdeen Diversified Income and Growth Trust plc said that the performance of their ILS allocation had proven “unsatisfactory” which has resulted in a near halving of the amount invested in the asset class.

The managers explained that “an exceptional series of natural disasters across the globe including hurricanes, typhoons and wildfires” drove losses to the ILS allocations within the investment fund, with further impacts coming through loss creep as well.

“Risk cannot be disassociated from the diversified range of investment opportunities identified by our Investment Managers and the Company’s experience with ILS is an unfortunate example of this,” Chairman of the fund James Long explained.

The Aberdeen fund’s investment managers Mike Brooks and Tony Foster went into more detail on the impacts and resulting change in allocation to ILS and reinsurance linked investments.

The managers elected to reduce the allocation to ILS from 9.1% of net assets to 5.4%, which given the fund in question had total assets of roughly £470 million as of the end of March 2019 is not an insignificant sum.

The reduction was largely due to the impacts of losses following catastrophic storms and wildfires in Autumn of 2018, the managers said.

However, despite the disappointing performance experienced, the managers are set to persist with the asset class.

“ILS has the potential to produce attractive returns not correlated with those from mainstream asset classes. We think that this readily justifies its place in a diversified portfolio and so, as we outline below, we have decided to maintain some exposure to the asset class,” they explained.

The investment managers further explained that the impact of losses to the ILS and reinsurance linked investment portfolio was more than -3% to the portfolio over a six month period, which they said is “obviously very disappointing to us.”

However, despite this the managers are electing to persist and maintain a decent sized allocation to the ILS asset class, given the potential to deliver attractive returns over the longer-term.

Given the impacts of 35% of NAV or more to ILS funds the managers allocated to, one of which is Markel CATCo, as well as the issues surrounding the departure of CATCo’s leadership and the inquiry into its reserves, the Aberdeen managers “undertook a thorough reassessment of our exposure to the asset class.”

They noted that there is an expectation of some return of assets from Markel CATCo’s listed Reinsurance Opportunities fund, as the contracts run-off and so most of the Aberdeen ILS allocation is not technically on-risk for new losses in 2019 anyway.

“With catastrophe premiums continuing to rise as a result of the events in 2017 and 2018, we concluded that our current level of exposure (5.4% of net assets) to this diversifying asset class was appropriate,” the managers said.

Of the ILS investments that are still on-risk the majority is in another Markel CATCo allocation, to what appears to be the 2018 issue of the Markel CATCo Reinsurance Fund Ltd. private fund the manager operates.

After the steps taken at Markel to resolve the Markel CATCo issues and install fresh oversight, the opinion at Aberdeen is that the outlook has improved.

The managers explained, “We take a positive view of the new management arrangements for this fund although, so far, the regulatory review is still ongoing.”

Adding that, “We will have a further opportunity to switch our holding into a run-off share class in the autumn should we think that appropriate.”

The Aberdeen fund’s other allocations to ILS are through the Blue Capital Management operated listed reinsurance vehicle Blue Capital Reinsurance Holdings, which has also seen a decline in its valuation.

Still, the manager holds roughly £22.4 million of ILS assets and clearly sees the benefits of maintaining a level of allocation to reinsurance and the ILS asset class.

Many of these multi-asset class managers have been reassessing their ILS positions in recent months and it will be interesting to see whether any new, more liquid or equity based ILS fund offerings emerge, as multi-asset class managers look to what other opportunities in ILS that suit their mandates may become available.

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