As we wrote just last week, large pension funds continue to show their attraction to investments in reinsurance, insurance-linked securities (ILS) and catastrophe bonds, with new mandates and recent allocations still coming to light.
One of the latest allocations by a large pension fund to come to light (in this article in Pensions Expert) is a 1.04% allocation by the IBM pension fund, a fund of approximately £5.9 billion in size, which has put over £50m into reinsurance linked investments through the largest asset manager in the space Nephila Capital.
According to the IBM pension funds annual report, an allocation was made to reinsurance during the last year and it lists the Nephila Iron Catastrophe Fund as the recipient.
The allocation to reinsurance is part of an overall strategy shift, by the IBM pension fund, to move assets unto lower volatility, longer term diversified return seeking asset classes and to reduce some exposure to higher risk assets such as equities. Reinsurance, ILS and catastrophe bonds, of course, meets this changing mandate as a diversified portfolio of reinsurance risk has the potential to deliver attractive total returns over the longer term.
There has been a lot of discussion, both in the reinsurance and mainstream press, regarding the fickle nature or otherwise of ILS investors and whether pension funds would be among the first to flee should as rates decline or if losses threaten.
Of course the reality is that some pension funds may leave the ILS space, particularly if they entered it and became accustomed to higher returns in the last few years. But the promise of a low volatility 5% to 6% (or more) return, with very low correlation to the wider financial markets, is still an extremely attractive proposition as part of a diversified portfolio strategy and is expected to attract new pension funds as they gain an understanding of insurance linked investing.