PGGM grows ILS portfolio 16% to ~$6.5bn in 2019, adds new reinsurance partners

PGGM, the Dutch pension fund investment manager and the largest single source of assets in the insurance-linked securities (ILS) market, has grown the size of its ILS portfolio by roughly 16% in 2019, to reach around US $6.5 billion of assets and also added two new reinsurance partners during the year.

PGGM has continued to broaden the breadth of strategies that it allocates to in the ILS and reinsurance sector in recent years, becoming an increasingly important source of assets for the market as a whole.

The pension fund investment manager, that looks after allocations to the ILS and reinsurance market on behalf of one of the pensions it administers, the Dutch healthcare and social welfare sector’s PFZW pension, entered 2019 with around EUR 5 billion of assets under management, but lifted that figure throughout the last year to EUR 5.8 billion (around US $6.5 billion at the end of 2019).

PGGM told us that even at this new size of allocation to ILS, it still only equates to 2.4% of overall assets under management (AuM).

In fact, while the allocation to ILS and reinsurance has grown in size over the last year, it shrank slightly in terms of percentage of assets, having amounted to 2.5% of overall AuM at the end of 2018.

The ILS and reinsurance linked investment portfolio managed by PGGM had a good year in 2019, delivering a positive return of 6.3% in US $, net of all costs and fees paid.

That’s a very attractive return when you consider that some elements of this portfolio were likely dented by loss creep from prior year events during the period, while there will also have been some losses paid under some of the positions as well

But the fact global catastrophe losses remained lower than the last two years has clearly helped, as PGGM said that 2018 saw its ILS portfolio fall to a negative return of -0.6% and 2017 saw lower at -1.8%.

The scale of PGGM’s ILS investment portfolio is also a factor, as while it means it is exposed to most major catastrophe events that strike the insurance market, it is also likely well diversified, in terms of risks and layers of reinsurance it includes, so helping to moderate the ultimate impact of major loss events somewhat.

So too is the managers preference for lower volatility investments in the ILS space, as it does not allocate to the more working layer type reinsurance contracts or funds, we understand.

Currently PGGM allocates to ten different managers in the ILS and reinsurance space to secure its portfolio, with twelve different investment allocations made across the group.

PGGM’s existing ILS managers and reinsurance partners as of the beginning of 2019 were AlphaCat, AXA XL, Elementum, Fermat Capital Management, LGT, Munich Re, Nephila Capital and RenaissanceRe.

But PGGM added two new ones in 2019, although these have not been disclosed and won’t be until later this Spring, when the pension PFZW discloses its managers and investments.

PGGM is a particularly sophisticated investor in ILS and reinsurance.

The pension manager works with reinsurers to access their portfolios, as it does with Munich Re using the private sidecar vehicle Leo Re (renewed at $400m for 2020). Has a reinsurer managing a rated reinsurance carrier for it, the relationship with RenaissanceRe and the Vermeer Re reinsurance vehicle. As well as more standard allocations to ILS funds and private sidecar style arrangements.

PGGM is known for its rigorous approach to manager selection and its view on fees, as well as alignment. But for managers, getting an allocation from the largest investor is a long-term benefit, as PGGM has been investing in ILS for almost 15 years now.

The growth in size of its ILS allocations, the additions of two more reinsurance partner managers and the attractive returns generated in 2019 suggest that this major insurance-linked securities (ILS) investor will continue to find the asset class a positive contributor to its portfolio construction and returns for some time to come.

PGGM remains focused on long-term returns, rather than short-term volatility, in its investment strategies, with ILS having delivered over the years. The manager maintains a target allocation of around 2.5% of assets, which it is close to, suggesting growth from now will be aligned with the overall size of the pension fund pot it manages.

PGGM is the largest single investor listed in our directory of major pensions funds, sovereign wealth funds and other institutions allocating to the ILS asset class.