AP3’s ILS portfolio returns 2.9% despite catastrophe losses


Swedish state sector pension fund AP3 was one investor whose ILS portfolio stood up to the impacts of the 2017 catastrophe events relatively well, as the pension investor reported a 2.9% return for its investments across the insurance and reinsurance linked investments space.

AP3 allocates to catastrophe bonds and other insurance-linked securities (ILS) opportunities within its giant $41 billion plus pool of assets.

ILS makes up a small component of this, with the pension having approximately $500 million (SEK 4.139 billion) allocated to the space, as of the end of 2017, up from the SEK 2.948 billion it had allocated to ILS at the end of 2016.

Impressively, the pension fund reported that its ILS portfolio generated a return of 2.9% over the year, which given the extent of the catastrophe losses suffered by ILS and reinsurance markets is impressive, especially given AP3 has previously said it does not feel the need to diversify too much within the asset class itself, given it is diversifying for its overall portfolio.

The 2.9% return from its ILS and reinsurance-linked investments compares to an overall return for the pension fund of 8.8% after expenses for 2017, so still falls some way short but given the impacts to the ILS sector and the diversification ILS offers to AP3’s portfolio the return achieved is still likely seen as an important contributor.

AP3 said that its views its ILS allocation as one that has a low correlation with the other financial asset classes it invests across and said that it “helps to stabilise the funds return over time.”

Hence it views the ILS allocation as “strategic and long-term” also noting the beneficial effect that ILS has on insurance and reinsurance in general, saying that it “streamlines insurance markets.”

AP3 explains that it aims to “systematically carry insurance risks” and expects a good return in most years, with the risk of negative performance in major catastrophe years.

2017 was such a major catastrophe year, but still AP3 saw a positive return from ILS, which is a good advert for the asset class at a time when many are counting their losses still.

Important to AP3 is the network that it has built up in the ILS field, which enables the pension to gain access to the investment opportunities it wants and highlights the importance of relationships to ILS investors and counterparties.

The pension said that its activities in ILS are a good example of, “AP3’s long-term ability to build efficient internal management within complex asset classes.”

Previously AP3 explained that it saw ILS as a strategically important asset class.

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