CalPERS, the largest public pension fund in the United States with total assets under management of over $582 billion, is making its first ever investment allocation to the insurance-linked securities sector, we understand in catastrophe bonds, Artemis has learned.
In the past, we’re told that CalPERS has made investments into reinsurance structures such as sidecars, but has never allocated to a dedicated insurance-linked securities (ILS) fund or catastrophe bond fund strategy before.
But we are now told by market sources that CalPERS is making, or may already have made, an investment into ILS (we are told cat bonds) after a period of collaborative working on the project between its fixed income and private debt teams.
This news is a further important signal of the growing acceptance of the ILS and cat bond asset class among large institutional investors.
We are also told that the way CalPERS is set to access the cat bond asset class serves to demonstrate that it remains a relatively more challenging sector for the largest investors to gain sufficiently meaningful exposure to, or to enter at scale. While also showing a thoughtful approach to entering the asset class.
According to our sources CalPERS has been looking at the insurance-linked securities (ILS) space for a while and has shown interest in accessing it before.
But, the ability to make an allocation into the ILS market, that could be scaled to become meaningful enough to make a difference to an entity with an asset base as large as CalPERS, has made investments difficult to move forwards with in the past.
For very large investors, once they gain an appreciation for the ILS asset class, it can be seen as potentially challenging to deploy sufficient capital into cat bonds and ILS to make a real difference to their portfolio mix and return profile, given their size.
Which is why we don’t tend to see larger end-investors becoming really meaningful allocators to the asset class at any rapid pace. Even a giant ILS allocator such as PGGM has had to scale up and expand its multiple ILS access points over a near twenty year period, to get to where it sits as such as key ILS allocator today.
ILS as a whole, and cat bonds in particular, is not an asset class you can easily venture into with an ambition to deploy billions of dollars overnight.
Few opportunities exist to even deploy hundreds of millions of dollars at any meaningful pace and the fastest growing allocators can take a minimum six months or more to get above the $500 million mark, with that often achieved by taking either a very direct approach, via a significant partnership with an established market player, or through more than one access point being utilised.
In the case of CalPERS, we’re told that the pension has found a way to get comfortable with an entry point that provides a reasonable level of exposure to catastrophe bonds though, through cultivation of a relationship with an established ILS manager or investor.
We do not know at this time who CalPERS has struck this kind of deal with. But, we are told that it is a meaningful player in cat bonds, which suggests the list of potential names is quite short and full of the usual specialist cat bond manager suspects, or perhaps another large direct end-investor.
CalPERS has reached an agreement to take something akin to a vertical slice of an existing catastrophe bond portfolio, we understand. With this slice set to be contained in some kind of segregated or managed account structure, perhaps a fund of one, for the giant pension fund investor.
An approach like this might offer CalPERS a way to kick-start a cat bond portfolio that is more under its own control or direction, rather than entering through a co-mingled fund. While giving the investor a way to try out the ILS asset class in a way that more closely suits its needs.
It also would have diversification baked in and provides an instant portfolio, without having to construct this either through acquiring positions in the secondary market or participating in primary cat bond issuance. We understand that CalPERS, as with similar large and more generalist investors, sometimes feel they could be at a disadvantage in the market compared to established, specialist ILS players.
While the cat bond and ILS asset class has been growing, cat bonds at the fastest pace of all in the last few years, the sector remains relatively small compared to many other asset classes. Which means a thoughtful approach to accessing it and some persistence is required, by even the largest investors such as CalPERS.
We cannot be certain of the exact size of this initial allocation to catastrophe bonds by CalPERS, but suspect it will be somewhere in the low to mid-hundreds of millions of dollars to be meaningful enough to pursue.
We are told it is meaningful enough to offer a good test of the asset class and a way for the large pension investor to try out whether ILS is really suitable for it, while providing a base portfolio that could be built on over time if the appetite proves to be there.
It’s worth noting also that CalPERS recently made a hire that brings the pension fund meaningful experience in allocating to the ILS asset class, with Mascha Canio, the former head of credit and insurance-linked investments at PGGM, joining it.
We believe this catastrophe bond, or ILS investment process was likely well-underway prior to that hire being made. Canio is taking on the Head of Private Debt role at CalPERS, but her significant experience in overseeing ILS investments at PGGM will add meaningful value as the pension looks to potentially build-out further in the space, which we understand could be an ambition over-time.
We reached out to CalPERS, but the organisation declined our request for confirmation or comment regarding this allocation.
