ILS investment thesis still true after losses, upsizes Aeolus & CATCo: MassPRIM

The insurance-linked securities (ILS) and reinsurance linked investment thesis still holds true even after recent catastrophe losses, the Massachusetts Pension Reserves Investment Management (MassPRIM) Board has said, leading it to approve increased allocations to managers Aeolus and Markel CATCo.

The Massachusetts Pension Reserves Investment Management (MassPRIM) Board approved $250 million of investments into ILS fund managers Aeolus Capital Management and Markel CATCo Investment Management at the end of 2017.

The MassPRIM Board is responsible for investing the roughly $72 billion of assets in the Massachusetts pension fund, which includes the Massachusetts Teachers’ and State Employees’ Retirement Systems, as well as assets from roughly 100 other participating municipal and county pension systems in the state.

In electing to allocate to the ILS market, with $100 million allocated to the Aeolus Property Catastrophe Keystone strategy and $150 million to the Markel CATCo Diversified Fund, the pension was joining other major institutional pension investors in adding reinsurance as an asset class for its return and diversification properties.

But MassPRIM entered the sector at what turned out to be a relatively challenging time, having initially allocated capital to benefit from rate increases that were expected to be secured through 2018 reinsurance renewals.

While rate increases did manifest, they perhaps weren’t of the level that might have been hoped for. While at the same time, 2018 through another aggregation of major catastrophe losses, from hurricanes, typhoons, severe weather and wildfires, that ended up in a negative year for the MassPRIM reinsurance investment mandate.

The investment committee for the MassPRIM pension fund assets met in late 2018 to consider renewing their mandates for both Aeolus and Markel CATCo, authorising the current level of investments ($250 million across the two ILS managers) to be renewed each year for three years from 2019.

But at a Board meeting for the pension at the end of November, these authorisations were raised for discussion and approval by the Board, but in the period between committee and Board meeting the California wildfire losses had occurred.

As a result of this, the performance of the reinsurance investment allocation for 2018 had changed from being up around 11% across the two managers to down anywhere from -9% to -15%, a figure which could have worsened by the end of the year given the loss creep from typhoon Jebi and rising wildfire toll.

So after authorising the renewal of the allocations to Aeolus and Markel CATCo, then watching the returns from those allocations plummet after the wildfires, it’s encouraging to see that MassPrim’s Board approved the committee’s motion to renew the reinsurance investments and at an upsized amount of up to $320 million.

At its most recent Board meeting, Chief Strategy Officer of MassPRIM Eric Nierenberg said that “we still believe that this allocation makes a lot of sense,” adding that after the recent loss that had been incurred he would expect “pricing in the retrocession sector to improve pretty substantially.”

He said that both Aeolus and Markel CATCo had said that rates would likely rise at the January reinsurance renewals and that both of the managers had also said they would limit wildfire exposures in their 2019 portfolios, following the impacts of the 2018 events.

Nierenberg said that he was suggesting an increased allocation to these reinsurance investments for 2019 and beyond.

He proposed lifting the Aeolus allocation to $120 million and the Markel CATCo allocation to $200 million, a $70 million overall increase to $320 million. It should be noted these are the maximum allocations per year, but could be reviewed each year and increased if the Board chose to.

The Board noted that any allocations would be dependent on market conditions and pricing, as well as the ability of the managers to deploy capital at the renewals.

Executive Director and Chief Investment Officer of MassPRIM Michael Trotsky commented, “When we make an investment, we make long term investments. The thesis still holds for this reinsurance marketplace.

“Longer-term we still like the thesis of this investment and, you know, we think the pricing will make this even more valuable going forward.”

The upsized allocations to both Aeolus and Markel CATCo were approved by the Board, with the ability to renew automated for three years.

It’s encouraging for the asset class that large institutional quality investors, such as this pension, still see the value in reinsurance as an asset class and find the original investment thesis that led them to it holding true, even after suffering a year of losses.

Of course, we don’t know what allocations were actually made at the start of 2019 and the ability to allocate the full $320 million will likely have been driven by the managers ability to deploy the capital at acceptable rate increases.