The board of the Arkansas Teacher Retirement System, a state pension fund that provides retirement solutions to Arkansas education professionals, voted yesterday to redeem an investment in a Nephila Capital managed ILS fund and make a new allocation to one managed by Pillar Capital, on the recommendation of consultant Aon Hewitt.
The Arkansas Teacher Retirement System (ATRS) began allocating to insurance-linked securities (ILS) and reinsurance-linked investments in 2016.
The pension fund maintains a roughly 1.25% allocation to the ILS asset class, split between managers Aeolus Capital Management and Nephila Capital.
The ILS and reinsurance allocation at Arkansas Teachers has gradually weighted towards Aeolus over recent years, most recently as the pension added to its allocation to Aeolus’ Property Catastrophe Keystone PF Fund in late 2019.
The allocation is now roughly 85% made up of the Aeolus commitment and 15% to Nephila Capital, which is invested in its Nephila Rubik Holdings, Ltd. ILS investment strategy.
But, on the advice of consultant Aon Hewitt, the Arkansas Teachers pension plan has re-evaluated its allocations and now the board has voted to approve a motion to redeem its investment in Nephila’s Rubik strategy and to make a new investment into a strategy managed by Bermuda-based Pillar Capital Management.
Aon Hewitt’s advice is to restructure the ILS and reinsurance allocations as performance has generally been disappointing since Arkansas Teachers first allocated to the space.
Which is hardly surprising, given the allocation began in 2016 and so suffered the impacts of the 2017 and 2018 significant catastrophe loss years, plus events more recently in 2019, through 2021.
However, Aon Hewitt said that ILS market conditions remain attractive, but the consultant said that “there may be more compelling funds to consider.”
As a result, its advise to Arkansas Teachers is to redeem the Nephila investment, then add an allocation to Pillar Capital’s Juniperus Insurance Opportunity Fund Limited, but then to also adjust the weighting, so that the ILS allocation is more balanced as 65% Aeolus’ Keystone, 35% Pillar’s Juniperus.
To achieve this, the board voted to approve the redemption from Nephila and to make a new allocation to Pillar Capital of $95 million.
At the same time, Aon Hewitt has advised that Arkansas Teachers re-evaluates its Aeolus allocation and continues to monitor it as well.
The rebalancing of the ILS manager structure, to 65% Aeolus, 35% Pillar, means that Arkansas Teacher will have to reduce its allocation to Aeolus slightly, something that is expected to be achieved during the renewal process at year-end.
Nephila’s Rubik has a 90-dat notice period for redemption and so Aon Hewitt recommended that the Pillar Capital investment be made in January 2022.
As of June 30th 2021, the ILS allocation at Arkansas Teachers is split $41 million to Nephila, $226 million to Aeolus.
After the recommended redemption and new allocation are made, the Arkansas Teacher ILS allocation will be split $95 million to Pillar Capital and $173 million to Aeolus, board documents seen by Artemis explained.
Which means a very slight increase in overall ILS allocation, from the $267 million as of June 30th, to $268 million in 2022, depending on side-pockets and further catastrophe loss activity.
Aon Hewitt said that it had downgraded its opinion of Nephila’s strategy in March this year, leading it to say, “We believe Nephila’s investment process is no longer consistent with expectations of a manager who exceeds their peer group and has given us less conviction in the manager’s ability to deliver on the strategy’s return target going forward.”
On Aeolus, Aon Hewitt said, “Aon continues to monitor Aeolus and will re-evaluate that allocation over coming months.”
On Pillar Capital, Aon Hewitt explained that it appreciates their investment process, modelling and strategy, while its track record has been positive in recent years and outperformed.
It’s interesting, as this does show the influence of investment consultants in the allocations of large institutional investors, but also how they support large investors to manage individual allocations to managers within their very large portfolios.
Redemptions happen and strategies adjust, of course.
It is interesting to consider that Nephila’s Rubik has a lower risk-return profile than either the Aeolus or Pillar funds, to which Arkansas Teachers is now set to allocate.
Alongside the information from the board documents that, as of Jun 2021, Pillar’s strategy had positive performance of a 1.26% return, while Aeolus’ strategy was down -5.23% and Nephila’s down -2.83%.
These figures will, of course, be very different at this stage of the year a few months on, if including any impacts from recent catastrophe losses from severe weather and flooding in Europe, as well as from hurricane Ida in the United States.
It shows the diversity in strategies in the ILS market, as well as the importance that investors perform their due-diligence and evaluate performance.
A question this raises though, is how frequently performance should be evaluated and what period ILS investments should be evaluated over, in a market that has experienced a few challenging years (specifically right since this pensions first allocations) where managers have relatively similar exposure to large catastrophe events, but the finer details of their risk sourcing, contract terms and structures employed can make a huge difference in performance over a number of cycles.