Aon Hewitt advises Arkansas pension to wind-down Aeolus fund allocation

Investment consultants continue to demonstrate the influence they have over institutional allocations to insurance-linked securities (ILS), as Aon Hewitt has now advised the Arkansas Teacher Retirement System to wind-down an allocation to an Aeolus Capital Management fund.

Just one month ago, we reported that the board of the Arkansas Teacher Retirement System, a state pension fund that provides retirement solutions to Arkansas education professionals, voted to redeem an investment in a Nephila Capital managed ILS fund and make a new allocation to one managed by Pillar Capital, which was all on the recommendation of consultant Aon Hewitt.

Now, a report from local newspaper the Arkansas Democrat-Gazette suggests that the investment consultant has recommended further changes to the Arkansas pension fund’s allocations to insurance-linked securities (ILS) and reinsurance linked investments, advising it to wind-down an allocation to the Aeolus Capital Management Property Catastrophe Keystone Fund.

At June 30th 2021, the Arkansas Teacher Retirement System had a roughly $185 million allocation to the Aeolus managed fund, which invests in collateralized property catastrophe reinsurance and retrocession.

But the consultant at Aon Hewitt has advised the board of the pension not to move forwards with its allocation, so not to refund for the renewals, but to allow the investment to wind-down, which is expected to happen by mid-2022.

The Arkansas Democrat-Gazette reports that Aon Hewitt’s advice to the board in a presentation cited “outsized losses” from recent major hurricane Ida, that risk levels assumed by Aeolus may be unnecessarily high to achieve its target returns and that the Keystone funds’ performance has not been particularly attractive in recent history.

The consultant also mentioned fees and a lack of a high-water mark as other specific concerns.

Of course, Aeolus’ Keystone catastrophe reinsurance and retro strategy are one of the higher risk strategies in the market, something that investors are no doubt aware of and the fact a recent major loss event such as Ida impacted the strategy should not be a surprise to anyone invested in it.

However, the Aon Hewitt consultant told the board at a meeting this week that it does recommend the pension stick with the insurance-linked securities (ILS) asset class, as ILS exposure will remain an attractive complement to its overall portfolio mix.

As a result, Aon Hewitt is said to be looking for a replacement allocation for the Arkansas pension, to reallocate its funds to after the winding down of investments into the Aeolus managed strategy.

Clearly Aeolus, with its significant footprint in collateralized reinsurance and retro markets would be anticipated to face a relatively meaningful hit from recent catastrophe loss events, such as hurricane Ida.

As too will its peers, so other reinsurers, retrocessionaires, or ILS funds, that write contracts at similarly low levels in the risk tower to Aeolus.

But the investment fund manager would also be expected to be well-positioned to take advantage of market hardening and so will be looking forward to the next sets of renewals, which many of its investors will no doubt see as an opportunity as well.

It’s also worth considering when the Arkansas pension entered the ILS market, as we understand that its first allocation was in 2016.

Since that time loss experience has been particularly prevalent for the industry, so perhaps this is also a factor in how the pension is looking at the space now, developing a preference for lower-volatility strategies.

Of course, it’s also key to look at ILS strategies over the longer-term and any August hit from Ida, or from prior month catastrophes, may now have been at least partially earned back in the quieter, but high premium months seasonally, September and October (to-date).

This and the recent case of Aon Hewitt advising the same pension to drop its Nephila allocation, really drives home the influence that investment consultants can have among institutional clients, especially when it comes to allocations to a niche and highly-specialised asset class like ILS.

While investment advice can be critical for allocators without expertise in a niche like ILS, whether that influence is always positive or not, really depends on your view, or position or affiliation.

But it can be a challenge for ILS fund managers, especially those starting off in the sector. As getting onto a consultant’s shortlist in the first place is no easy feat and it seems staying there can be just as hard.