The Government Superannuation Fund Authority of New Zealand reported that its catastrophe bond and catastrophe insurance-linked securities (ILS) investments delivered a 14.7% return in the year to mid-2024, one of the strongest performing investment categories in its portfolio.
The Government Superannuation Fund Authority of New Zealand is an autonomous entity that manages the pension assets of state sector employees and has been investing into insurance-linked securities (ILS) for more than a decade.It began allocating some of its assets to insurance-linked securities (ILS) in 2010, when it made a small commitment to ILS and reinsurance fund manager Nephila Capital. An allocation to Fermat Capital Management was then added in early 2013.
The NZ Government Super Fund also allocates to life settlement investments through Apollo Global Management, LLC.
The NZ Government Superannuation Fund Authority’s allocation to catastrophe bonds and catastrophe ILS was negatively impacted by the major catastrophe loss years of 2017 and 2018 and returns were also dented in some years following that.
But more recent years have seen the performance of these investments improve considerably for the NZ Fund Authority, with the 5-year annualised performance of its catastrophe ILS allocation now running at 6.5%, while the 3 year return is running at an impressive 11.3%.
For the calendar year to June 30th 2024, the NZ Fund Authority saw its catastrophe bond investments deliver a 14.7% return, which beat the benchmark it uses of the Swiss Re Cat Bond Index at 14%.
The prior year, to mid-2023, saw the catastrophe insurance-linked investment allocation only delivering a 5.3% return.
The investor explained, “To add value, against the Reference Portfolio, without increasing the overall volatility of returns, we invest the Fund in private equities and insurance-linked assets that offer a diversified return source.
“The Fund’s investment in alternative assets, such as insurance-linked securities were also strong contributors this year, significantly outperforming their funding sources.”
Overall, the Fund delivered a 14.3% return, so its allocations to cat bonds and ILS outperformed that as well.
Currently, the Fund Authority runs a 3.1% of assets allocation to catastrophe risk through its ILS investments, with a further 2% allocation to life settlements. The life settlements portion delivered a 20% return in the last calendar year to June 30th 2024.
Overall assets in the catastrophe ILS allocation sat at almost NZ $165 million of Level 2 assets and almost NZ $6 million of Level 3, as of June 30th 2024.
That compares to NZ $141.5 million of Level 2 and almost NZ $23 million of Level 3 a year earlier.
Meanwhile, the Authority’s life settlement allocation shrank to NZ $98 million from NZ $157.5 million over the same period, but that appears down to a redemption from a previous manager that had been used (Credit Suisse).
Interest.co.nz, a New Zealand focused financial news hub, has reported this week on comments made to the Finance and Expenditure Committee (FEC) of NZ’s Parliament by executives of the Government Superannuation Fund Authority of New Zealand.
Asked about the Authority’s investments into catastrophe bonds and insurance-linked securities (ILS), they are reported to have said that the NZ $5.5 billion Fund sees the risks as outweighed by the attractive returns offered by the ILS asset class.
Chief Executive of the Authority Tim Mitchell noted that the catastrophe risk exposure is to peak peril events, such as earthquakes in North America and Japan.
“The way the catastrophe bond market works for us is that we are the second line of defense when disaster hits. The first line is met by the insurer and then effectively we’re the reinsurer up above a level,” Mitchell is reported to have explained.
Catastrophe bonds look “very different” to the other investments the Fund makes, with Mitchell saying that this makes it an attractive asset class.
“They’re not affected by economic conditions, they’re not affected by interest rates, things like that,” he explained.
“We’re always looking at this – how much are we being paid to take on risk? Is it an attractive time to be taking on more risk or should we be letting that risk dial down as we go through a sort of reinsurance cycle?” Mitchell added.
Chair of the Authority Anne Blackburn noted the “uncorrelated” nature of catastrophe risk ILS investments and that this is an area the board spent “quite a lot of time focusing on” due to the changing environment and fact risks are priced in annually.
“We remain comfortable with the risk we’re taking,” she is reported to have said.
With cat bonds and catastrophe ILS delivering outperformance in their returns for the New Zealand Government Superannuation Fund Authority, it seems their executives are closely monitoring the reinsurance market cycle and assessing their appetite for the segment.
The allocation remains at their target level of around 3% of assets, but with such strong performance over the last few years it seems cat bonds and ILS will remain a core strategy for the investor.
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