City of Zurich pension to double insurance-linked securities allocation

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The City of Zurich Pension Fund announced a rebalancing of its portfolio strategy, part of which will see the investor as much as double its allocation to the insurance-linked securities (ILS) asset class.

zurich-cityThe City of Zurich Pension Fund manages roughly 21 billion Swiss francs in assets, which equates to more than US $22.5 billion.

Currently, as of the end of September 2021, the pensions allocation to insurance-linked securities (ILS) sits at around 1.5% of its assets, so could be roughly CHF 315 million, or US $340 million.

But its target allocation has always been a little higher, at 2% and now, under a new investment strategy the City of Zurich Pension Fund is lifting the target ILS allocation amount to 4% of its portfolio.

The pension fund is adjusting its investment strategy to take account of the economic environment, financial market conditions and the regulatory landscape, aiming to achieve a more balanced approach between the risks of individual investment categories it allocates to.

A key driver is the low interest rate environment, with the pension set to reduce its allocations to areas of the financial markets with depressed yields, in favour of diversifying further, so high-rated securities are set to be reduced, as too are some foreign currency related assets.

However, the pension is also reducing its general hedge funds allocation by 2%, favouring ILS funds instead and boosting that allocation by 2%.

A 4% ILS asset allocation could amount to as much as CHF 820 million, which would be around US $880 million, making the pension a significant institutional investor in the ILS space.

Of course, allocation target thresholds are not always met, as evidenced by the fact that despite the target having been 2% prior to these changes, the Zurich City Pension Fund only allocated around 1.5% of its assets to the ILS funds it works with.

The ILS portfolio is already diversified as well, with the pensions first allocations to insurance or reinsurance linked investments having been on the life side of the market.

The pension began with allocations to life settlements and life insurance linked investments, at first through asset manager Broadriver and then later through MiraVast.

The pension then added its first allocation to P&C insurance-linked securities (ILS), with an investment in funds managed by reinsurance specialist ILS investment manager Elementum Advisors in 2019.

An additional allocation to P&C ILS and reinsurance was added through SCOR Investment Partners in December 2020 as well.

So the Zurich City pension has plenty of options to deploy more capital into the ILS and reinsurance sector, with a diverse range of managed strategies available to it.

The asset reallocation is set to take place over the autumn months, which would position the City of Zurich Pension will to take advantage of the 2022 underwriting cycle, as well as an expected busy period of catastrophe bond issuance through the end of the year and into early next year.

As a result, it should find increasing the weighting of ILS in its portfolio relatively easy to achieve, although additional ILS fund managers may be needed as it grows.

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

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