NZ Superannuation Fund to increase allocation to catastrophe bonds and ILS

by Artemis on January 29, 2013

Here’s some more evidence of the increasing interest that large pension funds are showing in the catastrophe bond, insurance-linked securities and reinsurance-linked investment space. The New Zealand Superannuation Fund, a fund for the state-run retirement benefit (pension) available to all working New Zealanders, already has an allocation to cat bonds in its alternative investment portfolio but is considering increasing it further.

We wrote about the NZ$20 billion plus pension funds allocation to the ILS space back in 2010 here and here. The allocation to catastrophe insurance-linked securities currently amounts to approximately NZ$260m which the pension fund places with U.S. ILS fund manager Elementum Advisors, and we assume the investment continues to be managed by that firm.

In an interview with Reuters recently, the NZ Super Fund general manager of investments Matt Whineray said that the fund was interested in expanding its allocation to various alternatives including catastrophe risk, though investments in cat bonds. He said that the allocation to this asset class was currently minimal but could be increased to around 2%. That’s quite a significant increase which could take the funds allocation to reinsurance and catastrophe risk closer to NZ$400m.

The interview said that the NZ Super Fund may reduce allocation to certain international equities and fixed income to invest in catastrophe bonds and other alternative asset classes instead.

The challenge for these large pension funds is beginning to move beyond acquiring the initial allocation to cat bonds and ILS and towards how they can expand their exposure to an asset class which is still relatively new, can be limited depending on issuance and can be more difficult to access.

As the cat bond and ILS market grows we expect to see other large pension funds increase their exposure to the asset class and we also expect the collateralized reinsurance funds to begin to pick up more of this business as well. It’s good for the sector to see the appetite from large sources of investor capital continue to grow and it clearly shows that large pension funds enjoy the low correlation, attractive returns that investments in catastrophe and reinsurance risk offer.

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