Swiss pension PKBS (Basel) to exit insurance-linked securities investments
The Board of Directors of the Pensionskasse Basel-Stadt have elected to dissolve the pensions insurance-linked securities (ILS) investment portfolio, opting to allocate more to domestic real estate opportunities and fixed income instead.
The move comes after a year when the City of Basel pension fund’s allocation to insurance-linked securities (ILS) fell -4.98% for the year.
The City of Basel pension fund explained that its ILS allocation was split roughly 70% to life insurance and reinsurance linked investments, the remaining around 30% being invested into ILS exposed to natural catastrophe risks.
This Swiss pension investor had decided to introduce insurance-linked securities (ILS) back in 2017 as it sought diversification and to reduce its overall traditional bond holdings, but seems to have only made its first investments in 2018.
That year, the ILS portfolio was largely weighted to natural catastrophe risks, with the life ILS side growing over time.
In 2018, the Basel City pension (PKBS) ILS allocation fell to a negative -1.81% return, then in 2019 the life ILS allocation grew to 35% of the overall, but the ILS portfolio delivered a positive return of 0.59% for the year.
For 2020, the life ILS portfolio was slightly smaller again at 25% of the overall ILS allocation, with nat cat ILS making up the lions share. The portfolio was positive again, but only delivered 0.97% for the year.
2021 saw the Basel City pension investing more into life ILS, growing that to 48% of its total ILS investment allocation.
But the ILS portfolio fell to -2.46% for 2021, with PKBS reporting that life ILS investments was positive, but natural catastrophe losses drove the portfolio to a negative return for the year.
Up to and including 2021, the City of Basel pension fund was allocating to Leadenhall Capital Partners and LGT ILS Partners, but in 2022 the pension added two more ILS managers, SCOR Investment Partners and Securis Investment Partners.
As a result, the life ILS component grew to comprise 72% of the ILS investments made by the Basel pension, with catastrophe ILS the remaining 28%.
But the portfolio was impacted by both catastrophe loss events and losses to the life side as well, falling to a negative performance of -8.39% for full-year 2022.
So with another -4.98% decline for 2023, it’s clear PKBS entered the market at a time of challenges and with simplification a key goal, it looks like ILS is the asset class to suffer this time.
In 2023, the pension said that its natural catastrophe ILS portfolio posted “a very positive return due to high insurance premiums and less high claims amounts.”
However, on the life ILS side, “the “Life” area suffered from the sharp rise in USD interest rates at the beginning of the year and therefore posted a negative return.”
With the life ILS side being 72% of the whole, it’s clear those negative effects wiped out what was likely a very profitable year for the catastrophe ILS allocation of the PKBS pension.
At the end of 2023, Pensionskasse Basel-Stadt had over US $330 million invested into ILS, which was down on the end of 2022’s almost US $400 million and end of 2021’s over US $540 million.
Timing can be everything and PKSB entered the ILS market at a challenging period, while the fact it was weighted towards life ILS then did not work out in its favour once the nat cat side of the portfolio bounced back strongly.
It’s a reminder that ILS isn’t for everyone and there have been a number of Swiss pensions that pulled-back in recent years. However, we have also seen pensions exit and return, or up and downsize allocations. So moves like this are not always permanent.
Also, for every pension that pulls-back or exits its ILS investments, there are many others that have never allocated to insurance-linked securities (ILS), hence pensions are expected to remain the largest contributor to ILS assets globally.
View details of major pension fund and sovereign wealth investors in ILS and reinsurance in our directory.
