Given the recent decline in pricing and therefore returns on investments in reinsurance linked assets and insurance-linked securities (ILS) such as catastrophe bonds, it is no surprise to hear that some large, institutional investors are pulling back.
One such investor is the Illinois pension fund that manages the assets of teachers and education professionals from the state. The Teachers’ Retirement System of the State of Illinois, a pension fund with over $45 billion of assets and which reported an 18% return for the first half of 2014, is one such fund.
Illinois Teacher’s has an assumed annual return target of 8% per annum, so the 18% achieved in the first-half is exceptional, but the pension fund also has a large unfunded liability which means that maintaining its target returns is key, so as the unfunded liability doesn’t grow even larger.
Pensions & Investments reports that the Illinois Teacher’s fund has decided to pull-back on its investment allocation to reinsurance linked assets and ILS in its latest adjustment to its portfolio for fiscal year 2015.
As we reported in November 2012, Illinois Teacher’s allocated $40m to an investment with AQR Capital Management, into the firms AQR Risk Balanced Reinsurance Fund Ltd., as the pension fund sought new diversifying asset classes to tap into. According to Pensions & Investments, the trustees of the Illinois Teacher’s fund have decided not to renew the two-year contract to invest in AQR’s reinsurance strategy.
The two-year contract expires in December and trustee’s were told by the pension funds senior investment officer for fixed income that the investment team now lacks conviction that reinsurance-linked investment strategies will do well in the near future.
Illinois Teacher’s investment in AQR’s reinsurance strategy was said to be worth $40.9m at June 30th 2014. That would seem to suggest quite a low return for a year and a half of investment, but we can’t be sure what the performance has really been as this information is not available through any reports from the Illinois Teachers’ website.
As we’ve said before, investments in reinsurance are not going to be suitable for everyone. For a pension fund which is chasing unfunded liabilities the current soft market environment is particularly likely to not be a conducive time to be allocated to ILS.
Other investors are likely to pull-back from ILS, as returns settle into the new, softer market environment. But still more institutional investors continue to look to the sector, meaning that reinsurance or catastrophe linked investments continue to be seen by many as a potential source of stable returns with low correlation to broader financial markets.