Pension funds in Chile gain appreciation for catastrophe bonds and are allocating: Report

Over the last few year’s we’ve noticed increasing interest in the insurance-linked securities asset class as an investment opportunity from institutions in Latin America and now pensions in Chile have reportedly begun allocating to catastrophe bonds.

Helped by a number of years of consecutive strong performance, catastrophe bonds and ILS as an investable asset class is generating meaningful attention.

This has resulted in capital flows that have helped to fuel the expansion of the cat bond market over the last few years.

But, institutional investors can take months or years to make new allocation decisions, especially when it comes to niche alternatives. So as awareness of cat bonds and ILS opportunities rises new allocations can often be a lagging indicator of this.

Meaning there is the potential for investor interest in making first allocations to the ILS asset class to continue rising as well.

Across Latin America there are a number of countries where investor interest has been rising in recent years, with Chile being one of those.

The country has had its own catastrophe bond coverage in the past, through World Bank supported issuances IBRD CAR 116 in 2018 and IBRD – Chile 2023 in 2023, while Talanx’s Maschpark Re Ltd. (Series 2024-1) cat bond also covered earthquake risk in the country.

That issuance activity helps to raise institutional awareness, but in recent years investment consultants, distribution platforms and also specialist insurance-linked securities managers have been spending more time in Latin America spreading awareness of the ILS asset class.

HMC Capital, an alternative investment firm that operates across parts of Latin America, has told Chilean newspaper Diario Financiero that pension funds in the country have begun allocating to catastrophe bonds.

Nicolas Fonseca, Head of Distribution – Liquids at HMC Capital, told the publisher that catastrophe bonds have now hit the radar of pension investors in Chile.

Allocations amounting to US $79 million had been made into cat bonds by pension funds in Chile by the end of April, marking the first investments into ILS by pensions in the country, he explained.

Fonseca said that the structural decorrelation of ILS investments is a key driver for pension investor interest in the country, while they are also attracted to cat bonds return profile and the fact it often beats other fixed income instruments and provides a diversifying alternative within that bucket for institutional investors.

Fonseca also highlighted to publisher Funds Society that cat bonds are an asset class with demonstrable social impact given they provide disaster risk transfer capacity, which can be another attraction for large institutional investors such as pensions.

Pensions remain one of the largest allocator segments to catastrophe bonds and ILS. As awareness and understanding of the asset class expands around the globe, increasing traction with these long-term investors is to be expected.