PGGM hits ILS targets but more growth in sight

PGGM has hit its target of investing 2.5 percent of total funds in ILS for the first time since it began allocating to the sector in 2006, despite taking a minor loss within the portfolio last year.

But as its overall portfolio is still growing, the Dutch pension fund has room to keep adding ILS investments, the firm’s senior director of credit and ILS Eveline Takken-Somers told Trading Risk.

Its ILS portfolio was worth more than EUR4bn ($4.5bn) in mid-2018 or around 2 percent of assets, but by year-end after a new $1bn allocation to the Vermeer Re vehicle and expanding its relationship with Axa XL, this had reached EUR5bn of its total EUR199bn portfolio.

The fund made a 0.6 percent loss on its ILS portfolio in 2018, before the impact of currency hedging. This followed a 1.8 percent loss before currency results in 2017. 

In both years, its ILS portfolio has clearly outperformed benchmarks, such as the Eurekahedge ILS Advisers index.

This has been done through investing across a spread of geographies and risk levels.

PGGM has allocated to eight ILS managers: Nephila, Fermat, Elementum, LGT, AlphaCat, Munich Re and Axa XL, with a new mandate for 2019 awarded to RenaissanceRe to direct the Vermeer Re vehicle.

Nephila and AlphaCat manage US portfolios for PGGM, while LGT’s mandate covers European and Japanese risks and Fermat’s covers the cat bond segment.

The firm manages its ILS portfolio to a couple of points on the exceedance curve, most importantly the 1-in-40-year loss – in line with Dutch regulations surrounding pension fund risk-taking.

Now that PGGM has reached its target allocation to the sector, the team will focus on finding efficiencies in its way of accessing reinsurance risk, Takken-Somers told Trading Risk.

“We can put more emphasis on efficient investment structures such as trapped collateral, fronting and costs, leading to earning more premium for the same risk,” she said.

Rated vehicle Vermeer Re, which will write top-layer US catastrophe reinsurance risk, is the organisation’s most capital-efficient investment in accessing remote peak peril risks in the ILS sector to date, she added. 

Last year PGGM released a paper on its ILS investments in which it described the sector as an important pillar in the firm’s responsible investment philosophy.

In the paper it said that it believed a balanced ILS portfolio focused on peak perils would provide investors with stronger risk-adjusted returns.