AP2, or Andra AP-fonden, a Swedish state pension fund that is one of the largest in Europe at SEK 459 billion under management, saw its insurance-linked securities (ILS) allocation rise in value to around US $1.1 billion by the end of 2024, with the ILS asset class exceeding its long-term return expectations last year.AP2 has been allocating to catastrophe bonds and ILS in private reinsurance form since at least 2012 and its allocation has been growing in value over-time, as returns compound.At the end of 2023, the AP2 ILS allocation stood at around the US $920 million mark and the pension fund had expanded its allocation that year, to capitalise on rising reinsurance premiums and cat bond spreads after hurricane Ian.Now, at the December 31st 2024 valuation date, AP2’s ILS portfolio is valued at SEK 12 billion, which converted to roughly US $1.1 billion at the time.

AP2 said that it invests in insurance-related assets for their diversification benefits, in delivering non-correlated returns.AP2 said on 2024’s performance for its ILS allocation, “The ILS market benefitted during the year from a continued high risk-free rate combined with high spread levels, which emerged as a result of Hurricane Ian in Florida in September 2022.No major insurance events that could have had a negative impact on the portfolio occurred during the past year.” Adding on the performance of its ILS investments, that it, “exceeded the Fund’s long-term return expectations in local currency.” Interestingly, AP2 is among the pension funds that have been working to reduce external asset manager fees, preferring to manage assets in house where it can and shifting to large co-investments as well.

But, where it does still pay fees to external asset managers, AP2 said that at the end of 2024, “externally managed capital (which determines the level of the management fees) now solely comprises investments in alternative risk premiums, specifically funds that specialise in premiums for reinsuring insurance companies.” Which suggests the pension fund sees the value in external asset managers in the ILS space, where specialist risk modelling and underwriting expertise is critical to portfolio construction.At the last portfolio disclosure, AP2 was allocating to a CS Iris Credit Suisse fund, the Elementum Zephyrus catastrophe bond fund, and a number of vintages of the GAM FCM cat bond fund..

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