The increasing interest that pension funds around the world are showing in the catastrophe bond and insurance-linked security assets classes will be nothing new to our readers. It’s been widely accepted that much of the capital flowing into the insurance-linked and reinsurance-linked investment space (including catastrophe bonds) has been sourced from institutional pension fund investment managers. It’s a trend that seems likely to continue as pension funds access the space via specialist ILS funds or even directly.
This article from Reuters which was published yesterday contains some interesting insight on this trend we wanted to highlight. Generally the article says that focus is being placed on the reinsurance space as an investment because of the market-beating returns it offers and non-correlation with broader financial markets at this time of global market uncertainty.
Pension funds are fueling demand for catastrophe bonds notes in particular. Pension funds have an investment mandate which sits nicely in the cat bond and ILS space as they are generally prepared to invest over longer periods of time, are already active in the alternative investments space and find the diversification cat bonds and ILS offer important to their overall investment strategies. Dutch pension fund administrator PGGM is one of the large institutional pension funds who are moving into the ILS and cat bond space according to the article. PGGM have €121 billion of assets under management from over 500,000 members so can clearly bring a lot of capital to the space if they chose to.
The Reuters article says that managers of cat bond funds believe that the cat bond space could be on the cusp of significant growth because of increasing interest from pension funds. Eveline Takken from PGGM is said to oversee €1 billion of cat bonds and other investments, the article quotes her as saying “We have made some additional allocation to the catastrophe bond market because of the very attractive issuance yields that are offered right now.” It’s encouraging to hear of large investors increasing their commitments to the space (see our article on another investor announcing an increased commitment yesterday). Takken added that she feels that the cat bond sector will grow more in the next five years than it has in the last five years. PGGM are hiring more staff with insurance expertise to help them manage their commitment to the space, a sensible move for any manager of this size as it will allow them to better understand their portfolio of risk and allocate more funds safely to insurance-linked assets.
The increasing interest from large investors is encouraging and it seems that the sector is poised for further growth, but as ever the caveat has to be that issuance needs to accelerate in order for the cat bond market to accommodate the additional capital that is being targeted at it.