As PIMCO (Pacific Investment Management Company LLC) ramps up its new insurance-linked securities (ILS) operations, its executives have highlighted that the relationship with parent company, insurance giant Allianz, is both a key differentiator and key to its ILS potential.
PIMCO is the $1.76 trillion asset management arm of insurance and reinsurance giant Allianz S.E.
The firm has since been building out its ILS team and operations, hiring its first key executives in Vijay Manghnani as Senior Vice President, ILS Risk & Analytics and Juan Prado as Senior Vice President, ILS Finance and Operations, followed by the addition of Michael Beck as Senior Vice President, ILS Portfolio Management.
PIMCO has also been establishing its ILS infrastructure, setting up its first ILS fund, into which some capital has already been raised, as well as registering its own reinsurance underwriting vehicle Newport Re Ltd.
Now, with much of the infrastructure in place, the marketing begins and PIMCO is actively speaking to its investor base about the insurance-linked securities (ILS) asset class and reinsurance linked investing.
The asset manager has also explained what it feels sets it apart from other ILS operations, with its closeness to parent Allianz seen as key.
While the PIMCO ILS team believes all ILS assets offer attractive investment qualities to investors, the team will have a particular focus and Allianz will be an important part of it.
Explaining this, Chris Santore, Senior Vice President and Product Strategist at PIMCO said, “We believe that customized, direct origination in collateralized reinsurance contracts (collateralized re), which are bespoke, privately negotiated investments, have particular alpha generation potential.”
The relationship with parent company Allianz provides the PIMCO ILS team with a unique ability to originate its own risks from one of the largest insurance pools, an advantage for anyone following the above strategy.
Colin Riendeau, Executive Vice President and Head of Corporate Development at PIMCO explained, “We determined that the right investment team at PIMCO, one of the largest global asset managers, and a strategic relationship with Allianz, one of the largest global insurers and PIMCO’s parent company, could make ILS a compelling investment solution, and we committed significant resources to building this business.
“By working together with Allianz, PIMCO now has an ILS platform with a distinctive value proposition.”
Consistent acess to insurance and reinsurance risk is a key piece of the alpha that an ILS investment manager can generate for its investors.
Riendeau noted that this can be a challenge for some ILS managers and is also difficult to scale without relationships in place.
But the relationship with Allianz has deeper benefits as well, as the PIMCO ILS team will also call on its expertise.
“We have developed a new strategic relationship in ILS with Allianz that provides numerous potential advantages, including access to risk, operational efficiencies, and knowledge-sharing,” Riendeau said.
Importantly, the PIMCO ILS and Allianz relationship is also built on independence though, meaning that the ILS team can source risk from anywhere it chooses.
Riendeau continued, “While our relationship with Allianz is a key differentiator, we were careful to structure it to align the interests across both firms with the interests of PIMCO’s clients. The PIMCO team is fully independent and under no obligation to take any risk from Allianz; we have full flexibility to source risk from both Allianz and third-party insurers and reinsurers.”
That’s also vital to the proposition at PIMCO ILS, as it means the unit can work with Allianz competitors as well, which will enable it to better position itself as a market for capacity that is open to all and so has a broader range of risks it can access.
Commenting on how the relationship has been set-up, Rick Pagnani, Executive Vice President and Head of ILS Business at PIMCO explained, “PIMCO has the prerequisites for a successful platform: an experienced team, multidisciplinary experience, infrastructure, and analytics. But our relationship with Allianz is a key component of what sets us apart.”
While Allianz’s experience, size and reach are key advantages, Pagnani highlighted that Allianz’s global diversification and low level of exposure to the U.S. (just 2% of its reinsurance portfolio) are also valuable differentiators and can provide the PIMCO ILS team with an edge.
“The typical ILS market portfolio is exactly the opposite: U.S. peak peril risks (such as Florida hurricane exposure) dominate, and sourcing quality risks in the rest of the world is a tough challenge,” Pagnani said. “We believe that Allianz’s global risk footprint significantly enhances our ability to build robust, diversified ILS portfolios.”
“Achieving diversification in ILS is not easy. Our strategic relationship with Allianz enables us to manage downside risk through extensive diversification across global exposures, with the ultimate goal of seeking to deliver more consistent returns to clients,” Pagnani continued.
In addition, the PIMCO – Allianz relationship means that the ILS team has access to a wealth of expertise and deep technical underwriting knowledge that it can draw on.
According to Pagnani, “This is another area where our relationship with Allianz adds value, affording us access to the resources and experience of one of the largest and longest-tenured insurers, including the latest meteorological insights, analytical tools, and technical experience.”
The PIMCO ILS team see their model as a hybrid, between the reinsurance company managed ILS unit that only sources risk from its parent to share with investors, and the independent ILS fund manager who sources risk from anywhere but lacks the alignment with a true risk originator.
Riendeau explained, “At PIMCO, we have built a hybrid model that combines direct access to a reinsurance company with the flexibility to source risk wherever we see value. We have direct access to Allianz’s global book of risk but no obligation to take it. That’s an important point: We have full flexibility to source risk from both Allianz and the open market, which expands our opportunity set.
“Our business model results in the ability to build a flexible portfolio diversified across the spectrum of ILS, by instrument, geography, peril, and issuer.”
Finally, the PIMCO ILS team has a desire to lower the cost of reinsurance capital, by connecting their investor funds to risk as directly as possible to enhance efficiency of their capacity deployment.
Riendeau said he sees, “a clear opportunity to bring investor capital closer to the source of risk,” further explaining that “we intend to continue searching for ways to trim costs associated with transacting reinsurance.”
Summing up, Riendeau again stressed the relationship with parent Allianz, saying, “We think PIMCO is well positioned to capitalize on continued growth and evolution in the ILS market.
“We have access to ILS risk from a variety of sources; we have dedicated resources to deploy capital, with runway to expand and grow; and we have a long-term, strategic partner that wants to grow with us and our clients.”