Australian institutional investor Colonial First State is considering allocating some of its nearly US$100 billion in assets to help with the catastrophe bond market, according to a Bloomberg report. This potential move highlights the growing interest in insurance-linked securities (ILS) among Australian pensions and superannuation fund managers.
In recent years, ILS managers have seen more inflows from Australian institutional investors. Colonial First State potentially entering into the market could boost capital availability for the reinsurance sector.
The investor’s chief investment officer (CIO), Jonathan Armitage, told Bloomberg that Colonial First State is targeting investments in “natural event risk”. These investments could be made possible through ILS funds or directly into re/insurers. Armitage believes catastrophe bonds in developed markets have grown over the past 15 years and are well-structured. As for the main source, it is believed that corporate bonds will fund most of these investments.
Colonial First State manages pension and wealth management funds. It offers a range of investment strategies, including superannuation funds that allocate capital to external managers. As Australia’s pensions continue to grow and receive significant inflow from their members, diversifying into cat bonds is seen as an attractive way to add returns as well as relatively uncorrelated performance.
“That is a very interesting area to commit capital to, where you can see pretty robust returns,” Armitage told Bloomberg. “As you see more of those events occurring, there is going to be more capital that’s required to support those types of policies.”
Superannuation specialist Insignia Financial Ltd. is also cited in Bloomberg's story. The company managed $312.3 billion in assets as of March 31, 2024, and saw positive results from its reinsurance investments. Insignia reported a 16% return from its investments in the last financial year through MLC Asset Management. MLC’s strategy involves allocating between 15% and 20% of its investments into catastrophe bonds, quota shares, and other collateralized reinsurance opportunities. This approach contributed to strong returns, with MLC's insurance-related investments comprising 2% to 4% of its portfolios.
“It’s been a really strong year for some of those differentiating asset classes,” MLC Asset Management chief investment officer Dan Farmer told Bloomberg, also saying that the insurance-related investment strategies are “very uncorrelated to the rest of the portfolio.”
Investment consultant JANA told Bloomberg that cat bond fund managers have been visiting Australia more frequently.
“With current spreads elevated, clients have taken the opportunity to either top up existing cat bond holdings or to add new managers,” said senior consultant for JANA Martin Rea.
Bloomberg's report suggests a positive outlook for Australian institutional investor interest in catastrophe bonds and ILS. As large investors worldwide seek uncorrelated and diversified opportunities, catastrophe bonds and ILS are becoming increasingly attractive, particularly given their recent strong performance.
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