Netherlands headquartered global life insurance company, annuities provider and pension investment manager Aegon is shuttering its dedicated ILS investment operations and will run-off the current portfolio of risks it had invested in during 2019, we can report.
Aegon began its latest venture into insurance-linked securities (ILS) and reinsurance-linked investing in the last few years, with a more pension fund like approach that many thought would see the significant asset holder allocating a large sum to the sector in the years to come.
But that’s not to be, as Aegon has decided that ILS is not for it anymore and the Aegon Insurance Linked Securities team will be closed down, while existing positions will be put into run-off.
In the past, Aegon saw insurance-linked securities (ILS) as a tool for optimising its capital structure and adding capital efficiency.
The company had invested in ILS assets in the past through its Blue Square Re reinsurance vehicle, which first built up a portfolio including some ILS as a way to diversify more into property casualty risks, as its main focus was on mortality and longevity reinsurance exposures.
Blue Square Re added some ILS exposure to its investment portfolio in 2015, but this was really seen as adding diversifying underwriting risk rather than investment. This portfolio only amounted to EUR 15.6 million at the end of 2018 and we’re not sure if it exists anymore.
Where as, the recent dedicated ILS investment activities within Aegon were seen as a potentially much more significant investment operation, starting out with catastrophe bonds, some collateralised reinsurance quota shares or sidecars, but with an ambition to do much more, including to underwrite direct reinsurance using the companies rated balance-sheet vehicle as a way to access more risk in future.
The unit was established in 2017 and the team expanded in 2018, with ambitions to ramp up steadily and for ILS to become a relatively meaningful investment alternative for the insurer and pension investor.
But having created a portfolio featuring some risks in 2019, we’re told somewhere north of $200 million but less than $300 million, Aegon has now decided that ILS investing is not for it at this time.
As a result the unit is set to be shuttered and will not be deploying more capital in 2020. We understand that the Aegon ILS team did not write any new business at the recent renewals.
We’re told that Aegon will keep a few staff from the ILS team employed to manage the run-off of the portfolio it has underwritten, which includes some quota share reinsurance positions and cat bonds.
An Aegon spokesperson explained to us, “Aegon started its ILS investment strategy 2.5 years ago. The strategy was developed with the help of a fully dedicated ILS team, which started investing in ILS funds, then in CAT bonds and in 2019 also in Collaterialized Reinsurance Investments (Sidecars and Quota Shares). At the end of 2019, a reassessment of this strategy took place, as this would be the moment to either expand it considerably or divest. A strategy of investing in catastrophic risks involves a volatility that Aegon is currently unwilling to bear. Aegon will therefore no longer invest in this asset class for the time being.”
In terms of the reason for the shift in attitudes on ILS investing, we understand it is not solely to do with the catastrophe related volatility inherent in the ILS asset class.
Rather, Aegon has had some internal solvency related issues in recent months, resulting in a discussion internally about whether ILS was supportive or potentially a detractor on that front. The volatility in the investment was seen as something unnecessary to add at this time, we’re told.
Regulatory wise, we’re told that Aegon was satisfied that from a diversification point of view adding ILS to its investment portfolio would have been ok. But with a relatively low solvency ratio in the Netherlands based parent, and ILS viewed as something that could introduce potential volatility, it has been decided not to push forwards with the initiative.