PGGM / PFZW ILS portfolio hits ~$8.8bn, further above target allocation

PGGM, the Dutch pension fund investment manager that allocates the largest amount to the insurance-linked securities (ILS) market on behalf of end-client the Dutch pension PFZW, now looks after a portfolio that was valued at just over US $8.8 billion (EUR 8.1bn) at the mid-point of 2023, which has grown further above its strategic allocation target in the last year.

The PFZW strategic allocation target for its insurance and reinsurance-linked investments was set at 2.7% of assets for 2023.

But, as of the middle of this year, the ILS allocation has now crept higher to make up 3.6% of the overall pension fund assets under management.

That’s increased since the middle of 2022, when the roughly US $8.5 billion of assets, or EUR 8.2 billion ILS portfolio at the time, made up around 3.4% of overall assets.

At that time the strategic allocation target for ILS was also lower, at 2.5%, but despite that target being increased, the value of the ILS portfolio has increased further, as a percentage of the pension’s asset base, taking the fund well over its allocation target.

Which of course is down to fluctuations in the value of other assets in the pensions portfolio. The pension had seen its assets approaching EUR 280 billion towards the end of 2021, but with global asset values falling off a cliff this plummeted, which caused any asset class that avoided those valuation declines to become more over-weight, in portfolio allocation terms.

With ILS and reinsurance-linked investments being non-correlated with the financial market effects that drove the declines in broader asset values, the PGGM managed ILS allocation for PFZW has been rising as a percentage of the pensions assets and has seemingly continued to do so through the first-half of 2023.

The PGGM managed ILS allocation on behalf of the PFZW pension had reached EUR 8.2 billion at June 30th 2022, which was roughly US $8.5 billion at the time and made up 3.4% of pension assets.

One year later, at June 30th 2023, the PFZW ILS investment portfolio was measured a little smaller, in Euro terms, at EUR 8.1 billion, which as of that date was just slightly over US $8.8 billion.

But, despite the Euro value falling a little, the ILS portfolio had still grown to become 3.6% in strategic allocation target terms, still almost one percent above the allocation target of 2.7% of overall pension assets.

Recall that, PGGM had been expected to reduce the overall size of its insurance-linked securities (ILS) market investments, once the ILS portfolio had grown substantially above the target allocation percentage in late 2022.

Now, with the allocation even further above target, it will be interesting to watch for future fluctuations, as the recovery of other assets and the overall AUM of PFZW’s pension portfolio continues.

In the last year there have been some changes to the allocation sizes of certain of the ILS investment strategies that PGGM invests into on behalf of PFZW.

Most notable of these is the fact the allocation to Aeolus Capital Management’s lower-risk Spire PF Fund investment strategy, that invests in US focused natural catastrophe reinsurance risks, which has been increased from between $100m-250m in 2022, to now between $250m-500m.

Also notable for its increase, is the allocation target for the Nightingale Re Ltd. private mandate vehicle, that transacts with a number of cedents and has seen the allocation target rise from $50m-100m, to now $50m-250m.

Another allocation which now has more potential to upsize going forwards, is the Concordia private sidecar arrangement with French reinsurance firm SCOR, that had an allocation target of $50m-100m in 2022, but has now been increased to between $50m-250m as of June 30th 2023.

There have been other changes that suggest more flexibility to downsize allocations as well, if required.

The allocation target for AlphaCat’s Soteria ILS fund has dropped from $500m-1bn, down to $250m-500m. But remember that AlphaCat is being acquired by RenaissanceRe, within its acquisition of AIG’s Validus reinsurance operations, so that allocation could be in question going forwards anyway. That would be an easy way for the overall PGGM / PFZW ILS allocation to come down in size, if they chose to discontinue it (or RenRe did on completing the acquisition).

Another area where the target size has shrunk, is with the Swiss Re private quota share reinsurance sidecar vehicle Viaduct Re, where the allocation target has shrunk from $500m-1bn, down to $250m-500m as of the middle of 2023.

Update: We’re now told there was an error in the allocation target published for the Swiss Re Viaduct Re sidecar vehicle and it has not come down, with the target remaining between $500m-1bn.

The PartnerRe private sidecar under the Huygens structure has seen the bottom end of its allocation target come down from $100m-250m, to $50m-250m.

The overall PGGM allocation to ILS on behalf of PFZW is now pegged at between EUR 5bn-10bn, with a target return of 4% above the risk-free rate, across the range of ILS investment structures being allocated to.

For the first-half of 2023, the PGGM / PFZW ILS portfolio delivered a 6.3% return, with 3.3% of that achieved during the second-quarter.

Full-year 2022, saw the ILS portfolio falling to a -0.9% return for PFZW and 2021 was the same, so the ILS investments are really delivering for the pension in 2023 and this seems likely to have continued for Q3 given the lack of major loss events likely to have affected them.

PGGM remains the largest single investor listed in our directory of pension funds and sovereign wealth funds investing in ILS and reinsurance.