Pensions & sovereigns waiting for right time to upsize ILS allocations

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Some of the larger pension funds and sovereign wealth funds that are already investing in insurance-linked securities (ILS) and other reinsurance linked investments are keen to increase their allocations to the space, but waiting for the right time.

A growing number of the world’s pension funds are already allocating to ILS and even more continue to investigate and research the space, educating themselves in order to understand the unique nature of insurance and reinsurance linked assets.

At the ILS Bermuda Convergence 2016 event held last week, representatives from three pension funds that already invest in the ILS asset class all explained that they are ready and willing to increase their allocations once attractive opportunities become available.

Eveline Takken-Somers, Investment Director responsible for the ILS allocation at Dutch pension fund manager PGGM, explained that they have been investing in ILS, starting with catastrophe bonds only, since 2006.

That makes PGGM one of the most sophisticated and experienced of large pension fund managers accessing the ILS asset class right now and with EUR 180 billion under management getting the ILS allocation to a meaningful size is important.

“Currently we have an allocation of 2.5% of our assets. We’re not there yet, we’re working on it. It’s quite a substantial size to get invested,” Takken-Somers explained.

Increasing the size of the mandate as opportunities allow is the goal for PGGM. Takken-Somers continued; “We use external managers to implement our strategy, we currently have six and are still expanding. Hopefully we will add some more at the end of this year.”

Craig Dandurand, Director of Debt and Alternatives at Australia’s sovereign weather fund the Future Fund, said that the ILS asset class makes up part of the broader alternatives strategy at the AU$125 billion superannuation manager, but that the Future Fund does not target a specific allocation.

Growing the ILS allocation is the plan though, Dandurand explained, saying; “We have two managers, the program is predominantly revolving around natural catastrophe risks but it’s not exclusively down that path. The intent over time is to grow it from its current level.”

The Future Fund’s ILS allocation is currently not meaningful, compared to its overall pool of assets under management, but Dandurand said; “We wouldn’t have started the program if we didn’t intend it to get that way.”

The other end-investor panelist at the Convergence 2016 event, Brock Stephens, ‎a Senior Investment Analyst at US$28 billion Utah Retirement Systems, also explained that currently the pension fund manager is underweight to ILS compared to its ambitions for the asset class.

“We’re currently invested with just one manager. We’ve set that up in a way that we feel aligns our interests with theirs and have done it in a manner that provides them with committed capital above what is actually being invested,” Stephens said.

The Utah Retirement System is waiting to be able to deploy more capital into the space and has an arrangement to enable it to do so without too much red-tape.

“In the event it’s needed and makes sense they can call further capital without us having to take the time to go through committees and so forth,” Stephens said of the arrangement with its selected ILS manager.

This scenario, of being invested in ILS but not being able to deploy as much capital as desired, is the same for many pension funds around the globe.

Pension fund managers are waiting for the right time and opportunity to deploy more capacity, without increasing the overall risk level of their allocations but still meeting target returns in ILS.

Stephens continued, saying that the philosophy at Utah Retirement Systems is to either maintain the risk level of its ILS allocation, although that may mean not achieving its return requirements currently, or to be more innovative and “be more efficient with the risk you are taking.”

Takken-Somers of PGGM also said later in the conversation that PGGM also seems ways to make allocations more efficient and being aware of expenses related to the ILS program is important.

This is interesting, as it shows that it’s not just the ILS managers who are keen to increase the efficiency of their capital allocations and that pension funds are also prepared to leverage innovative ways to access insurance risk in order to enhance returns.

Stephens said; “I don’t think it’s a time to increase risk when you’re already starting in a maybe less attractive place. We’re able and willing to be patient, even if we don’t meet that particular return goal, both within ILS and overall.

“I’d rather increase risk when I don’t need to, as opposed to maybe when you do. But that said, we’re not taking down the strategy we still find it attractive relative to other opportunities.”

This is holding back the ability of pension funds to get as invested in the ILS asset class as they would like to, which also promises to bring additional capital into the space as soon as opportunities to allocate more emerge.

That is one reason that continued growth of ILS is expected, as so many of the world’s biggest pension funds are now at this stage of understanding and appreciating ILS, being invested to gain experienced but waiting for the right time to upsize allocations.

“We know that we have a pool of capital that we could be putting to work but now is not the time,” Stephens explained.

The importance of educating itself is key for pension funds allocating into ILS and Stephens said that for Utah Retirement Systems the view of the asset class has matured.

“We fully recognise and understand that we’re going to lose a lot of money one day and at that point I don’t think it will be a difficult conversation to say hey we’ve just lost a bunch of money but we’re looking to up the ante here,” he said.

Dandurand of the Future Fund is also looking to allocate more, but certainly not at any cost.

“We are building the program right now, the allocation is increasing in size but it’s not increasing in conviction.

“I think we still find pricing in this market to be adequate and sufficient for us to continue to move the program forward and build the relationships, but not sufficient to give us a great deal of confidence that the expected return we can generate right now is going to meet our longer term expectations,” Dandurand commented.

Takken-Somers explained that PGGM’s view is similar.

“We’re also not increasing risk, not putting more risk into the strategy to achieve higher returns,” she said. “At the moment in time we’re still under allocated, because we have not reached our target allocation.”

The discussion should give confidence to the ILS manager community and also to ceding companies, as having large pension fund players buy into the ILS asset class in such a way that they are able to allocate, gain an appreciation for it and develop a desire to grow the allocations is positive.

These are the type of long-term investors for whom ILS is an attractive asset class, but who are also the type of investor the asset class really needs, with their ability to commit to ILS, understand what it means and that losses will happen, but appreciate the benefits of the asset class enough to be ready and able to stay committed to it.

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