Alecta plans more ILS allocations, reflecting long-term perspective

Alecta, which is the largest pension fund in Sweden, intends to take a long-term view on the insurance-linked securities (ILS) sector and according to a report is planning to make further investments into reinsurance related risks through ILS strategies.

Alecta was founded in 1917 and now manages occupational pensions for around 2.6 million private individuals and 35,000 companies in Sweden.

With around US $128 billion in assets under management, Alecta is one of the largest investors in Sweden’s own stock exchange and one of the countries biggest holders of real estate assets.

When an investor gets this big identifying diversifying alternatives that have long-term potential becomes incredibly important and Alecta has identified insurance-linked securities (ILS) and reinsurance related investments as one such sector to allocate to.

Alecta’s appetite for ILS and reinsurance-linked returns became evident last week when two recent investments into ILS structures managed by major global reinsurance firms were announced.

First, it was announced that Alecta has allocated US $250 million to a strategy managed by specialist insurance-linked securities (ILS) fund management unit Swiss Re Insurance-Linked Investment Management Ltd (SRILIM), part of the global reinsurance firm.

The $250 million is being invested into Swiss Re’s insurance-linked securities (ILS) fund platform 1863 Fund Ltd., a Bermuda registered fund company that the reinsurer established in 2020.

The 1863 Fund structure launched with a single strategy, the Core Nat Cat Fund, but we understand it now houses additional strategies and perhaps also fund-of-one mandates.

It’s assumed this Alecta’s investment with Swiss Re represents a managed fund strategy, rather than a quota share as it sits under 1863 Fund.

The second Alecta allocation that was revealed last week was a US $200 million investment into French reinsurance company SCOR’s latest collateralised reinsurance sidecar vehicle.

SCOR has established a new special purpose reinsurer named Atlas Re Limited, that is domiciled in Bermuda.

Alecta’s $200 million investment has been made into a specific segregated account of Atlas Re, named the Atlas Gotland Worldwide Catastrophe Sidecar, so presumably a global nat cat ILS strategy that access risk from SCOR’s book on a quota share basis. We also believe this is a sidecar of one set up for Alecta.

We understand that Alecta has been exploring the insurance-linked securities (ILS) market for some time and as one of the largest institutional investors in Europe, it’s no surprise that eventually the pension fund manager has allocated to the sector.

In fact, timing is certainly a factor, as in an interview with Swedish Financial newspaper Dagens Industri, Tony Persson, Head of Fixed Income and Strategy at Alecta, explained that after the heavy catastrophe loss toll in 2021 it has made it a more appealing time to enter the ILS market.

Persson said that rates have been too low to compensate for the risk assumed and catastrophe losses experienced, but that this is now changing for the better in reinsurance.

“The effect for investors is that it forces up premiums,” Persson told Dagens Industri.

Continuing to say that, “The catastrophe market has been a catastrophe for several years, but the positive thing about it for investors is that it forces up premiums. The market must now cover the losses that have occurred, which caused premiums to rise between 10 and 15 percent this January.”

Hence the US $450 million allocated across two ILS structures managed by two of the world’s leading reinsurance companies, as Alecta found what it will see as safe hands to deploy its funding.

The ambitions don’t stop there, as Alecta is aiming to deploy more capital into insurance-linked securities (ILS).

For a pension fund manager with such an enormous AuM, a $450 million allocation doesn’t really make a huge difference, either in diversification or pure return terms.

So it seems Alecta is looking for more partnerships and allocations in ILS, so that it can scale up the asset class within its overall portfolio.

Commenting on this, Persson said, “You have to be prepared to use a few percent of the balance sheet to have an effect.”

Alecta feels that entering the ILS market represents a new long-term commitment and so the ILS allocation looks set to grow over time, as market conditions allow.

Commenting to Dagens Industri on the rationale for entering the ILS sector, Persson said, “Natural disasters are impossible to predict. If you are unlucky, it can be a costly year right away, which means that you have to put in more money. To get them back, you have to be willing to stay in the position for a long time, and it is the long-term perspective that makes us a good match.”

He also noted that there are other benefits to entering an asset class with a buy and hold intention.

Saying, “We can take a higher liquidity risk than many others, and we get a good premium for that here.”

In all the talk of shifting investor appetite for insurance-linked securities (ILS), it has been encouraging to see a new major institutional investor entering the sector meaningfully and with a long-term view.

View details of major pension fund and sovereign wealth investors in ILS and reinsurance in our directory.