Swedish state sector pension fund AP3 was one of the lead investors behind the recent World Bank issuance of $320 million of pandemic catastrophe bonds that support the Pandemic Emergency Financing Facility (PEF).
The World Bank’s International Bank for Reconstruction and Development issued $320 million of IBRD CAR 111-112 capital at risk notes, which will offer coverage to developing countries against the risk of pandemic outbreaks across the next five years.
Catastrophe bonds, being a source of disaster risk transfer and financing, are increasingly seen as a socially responsible investment and the pandemic cat bonds from the World Bank have been well-received by major pension funds, such as AP3, who increasingly look to adopt environment, social and governance focused investment criteria.
In its latest half-year report, AP3 which is also known as The Third Swedish National Pension Fund and one of five managing Swedish state pension system assets, felt that the pandemic cat bond was important enough to mention in what is a relatively brief review of the half-year.
AP3 explained; “During the spring, AP3 became a lead investor in a new type of catastrophe bond issued by the World Bank to combat pandemics in the world’s poorest countries.”
AP3 previously said that its investments in what it often calls “disaster bonds” contribute to the pension fund’s strategy of increasing its returns and spreading risk outside the stock market, providing it with diversification and a relatively uncorrelated asset.
“Since 2008, the fund has been systematically carrying out certain hurricane and earthquake risks,” Dan Bergman, Head of Investment Research & Insurance-Linked Securities at AP3 said recently.
Continuing to say; “This investment means an expansion of the strategy as the fund will now also bear risks in connection with outbreaks of pandemics. In return, the fund receives a good return.”
AP3 had 2.948 billion Swedish Krona (around $360m) of investments in insurance-related risk as of the end of 2016, making up the majority of its 3 billion SEK of so-called ‘other assets.’
At the middle of 2017 AP3 does not break out the insurance-related risks from the rest of the other assets, which are convertible debentures, but the whole other asset category has grown to 4.2 billion SEK, so it’s safe to assume the investments in catastrophe bonds and other insurance-linked securities (ILS) have grown considerably, especially when you take into account the record issuance in the first-half of this year.
In total the AP3 pension fund has around US $42 billion of assets under management, so the ILS and other insurance-linked investments segment remains under 1% of its total portfolio.
It’s encouraging to see a major pension fund citing the expansion of the ILS asset class into pandemic risks as important enough to mention to its pensioners, clients and partners. It’s a sign that ILS and catastrophe bonds can be seen as socially responsible and important investments, something that could encourage a much greater number of the world’s pension funds to look to ILS and in particular disaster risk financing as an ESG focused investment category for the future.