PIMCO to close dedicated insurance-linked securities (ILS) platform

Asset management giant PIMCO is closing down its dedicated insurance-linked securities (ILS) investment platform, citing a lack of alignment with its long-term vision and business priorities, as well as challenges in achieving business scale.

PIMCO (Pacific Investment Management Company LLC) began building out its insurance-linked securities (ILS) investment management operations in 2019, hiring well-known executive Rick Pagnani to lead these developments at the asset manager.

Calling ILS a “strategically important asset class for PIMCO’s broader alternatives platform” at the time, PIMCO partnered up with its owner Allianz, with the insurance and reinsurance company set to source global catastrophe risk in the form of collateralized reinsurance and other structured ILS investments for PIMCO’s strategies.

By the end of 2022, PIMCO’s insurance-linked securities platform had grown its ILS assets under management to $774 million across ILS-dedicated strategies and multi-asset accounts.

Now, the asset manager has confirmed that it is to discontinue its dedicated ILS platform operations, given a lack of alignment with its priorities and vision and other challenges in achieving necessary scale.

A PIMCO spokesperson told us that it has conducted a comprehensive evaluation of the ILS operation, including an assessment of multiple criteria, from cost and complexity of operations, to client demand trends and the all-important alignment with PIMCO’s overall growth strategy.

Following this evaluation, PIMCO has decided that “the best course of action was to wind down the business unit,” the spokesperson said.

This decision was not related to the performance of any specific products, nor to the performance of the professionals running the PIMCO ILS division, we’re told.

Rather, PIMCO’s spokesperson said that, “A challenging investment environment, including a multi-year period of low absolute returns for the asset class and changing investor preferences to the ILS category created significant headwinds to achieving business scale.”

Relative scale is likely a critical factor here, as with ILS still a relatively small asset class, compared to most others PIMCO invests in, but one that requires specific and professional management expertise, it can appear much more costly than asset classes that can quickly be grown to be multiple-billions of dollars in scale.

PIMCO has around $1.8 trillion of assets under management, with around 5% of that in alternatives, so roughly $90 billion.

Given the investment required to grow into ILS and the challenges the asset class has faced in the last few years, particularly on the collateralized side of the market where PIMCO’s focus is understood to have largely been for the dedicated ILS fund strategies, achieving the scale necessary to make this an attractive category of investments for the firm may have been deemed too difficult at this time.

PIMCO does hold ILS assets including catastrophe bonds in multi-strategy investment funds it offers to clients and while the dedicated unit is being shut down, we suspect some ILS assets will likely continue to feature. But it seems more likely this will be from the liquid 144a cat bond side of the asset class.

It’s a shame to see PIMCO stepping back from offering dedicated ILS strategies to its clients, but on a relative basis we imagine the firm can derive much more in profits, as well as AUM, from other asset classes that are considered less niche and may require fewer specialist skills to manage.