NZ Gov Super Fund says ILS still “appropriate to objectives” despite losses

The Government Superannuation Fund Authority of New Zealand, an autonomous entity that manages the pension assets of state sector employees, said that its allocations to insurance-linked securities (ILS) remain “appropriate to objectives” despite having fallen to a negative return in the last year.

The New Zealand Government Superannuation Fund has been allocating some of its assets to insurance-linked securities (ILS) since 2010, when it began with a small commitment to ILS and reinsurance fund manager Nephila Capital.

It then added an allocation to Fermat Capital Management in early 2013 and since then has been reaping the returns as part of its significant 20% of assets allocation to alternatives.

With roughly NZ $4.53 billion of assets in total under management as of June 30th 2019, the target allocation for catastrophe insurance-linked assets is for 6% of the superannuation fund to be allocated to the asset class.

At June 30th 2019 the catastrophe ILS and catastrophe bond allocation stood at NZ $247 million, so short of the allocation target.

However, the main reason for that is due to declines in the ILS allocation over the year to end of June, as the impacts of major catastrophe loss events from 2017 and 2018 continued to hit the underlying cat bond and reinsurance assets in the ILS funds the NZ Government Superannuation Fund is allocated to.

Overall, the NZ Government Superannuation Fund allocation to catastrophe insurance-linked securities (ILS), which is understood to be largely in cat bonds, was down -3.1% for the year to June 30th, after investment fees.

Explaining the dent to the ILS allocation, the Fund Authority said, “Major catastrophe claims in 2017 and 2018 hurt the Fund’s catastrophe insurance portfolio.”

The New Zealand Government Superannuation Fund also allocates to life settlements through investments managed by Apollo Global and Credit Suisse.

It’s actually relatively unusual for a retirement investment fund to allocate to life settlements, given their returns are often focused on longevity risk and a pension fund naturally has its own internal risk of this kind.

But the NZ fund likes the non-correlated nature of life settlements, as well as catastrophe reinsurance through its ILS allocation.

However, in the last year the life settlements allocation fared much worse than catastrophe ILS, as increasing life expectancy estimates meant there was a write-down of part of its life settlements portfolio, resulting in a -23.2% decline for the year.

However, the challenges faced due to catastrophe losses since 2017 and these significant longevity related write-downs of the life settlement assets, have not put this pension fund off ILS and reinsurance linked returns as an asset class.

“The purpose of these investments is to provide similar returns to equities on average while performing well when equities do badly. Despite a bad year, the Board is satisfied these alternative assets remain appropriate to the Fund’s objectives,” the Fund Authority explained.

We track as many pension funds that invest in the insurance-linked securities (ILS) asset class as we can, across catastrophe bonds, collateralised reinsurance and other insurance-linked assets, based on the public or private data made available to us.
View our directory of pension funds investing in insurance-linked securities (ILS).