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AP3’s ILS portfolio turns 4.4% unhedged gain in 2019

Panorama of Gamla Stan in Stockholm, Sweden

Swedish state pension fund AP3 has reported that its $600mn ILS portfolio made a 4.4 % unhedged US dollar return, corresponding to a 1.5% return when hedged back to SEK in 2019 as its holdings grew slightly in US dollar terms.

AP3 reported its ILS holdings reached SEK 5.6bn ($600mn) by year-end 2019, 7% ahead of the SEK5bn recorded a year before.

The 2019 US dollar return was ahead of the 3.9 % gain recorded in 2018 which corresponded to a 1.0% return when hedged back to SEK.

ILS represented 0.9% of the SEK393.7bn fund at 2019 year-end. The prior year, AP3 broke down the ILS segment as 1.6% of its absolute return strategies.

AP3 has been investing ILS since 2008 and allocates to ILS managers as well as making some in-house cat bond and other investments.

Addressing climate change, the latest report released in English said that AP3 invests in instruments with a maturity of three years, which means that their pricing adjusts much faster than climate risk.

AP3 wrote that investments in insurance risk were "strategic, long-term and help to make insurance markets more efficient". In its 10 years of participating in the sector, the strategy has "more than matched expectations", doing well even in peak disaster years such as 2011 and 2017, it added.

CEO Kerstin Hessius said in the report that 2019 was one of the best years ever for the state fund. The net result of SEK59.5bn corresponded to a 17.6% return after expenses, with all investment categories making a positive contribution, she said.

Fellow Swedish state pension fund AP2 also made a positive return from its ILS investments in 2019, which grew 7 percent in US dollar terms to reach SEK6.4bn ($686mn) at year-end 2019, according to its annual results.

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