Australia’s superannuation industry is ramping up investment in natural catastrophe reinsurance

Risks from rising natural disasters offer Australia’s biggest superannuation funds a chance to boost returns.

Colonial First State, one of the nation’s largest pension and wealth managers, is looking to add natural catastrophe reinsurance to its $US151 billion ($99.5 billion) portfolio, while rival Insignia Financial Ltd. recorded returns of 16% in this category last financial year.

Australia’s fast-growing superannuation industry needs to find investment opportunities for the more than $2 billion in inflows it receives each week. Natural catastrophe reinsurance covers a wide range of financial products. Catastrophe bonds reward buyers for taking on the insurance market risk of natural disasters such as hurricanes and earthquakes. If a catastrophe occurs, the bondholders pay. If not, they will have huge profits.

Colonial First State chief investment officer Jonathan Armitage said it aims to provide capital where there is a “natural event risk” such as hurricanes and earthquakes. Investments can be in funds or directly with an insurer to provide capital, he said.

“This type of market, first of all, has grown significantly over the last 15 years and is structured accordingly,” he said, adding that it focuses on developed market catastrophe bonds. Funding will come from other fixed-income investments, he said, mainly corporate bonds.

Issuance of catastrophe bonds hit a record high in June as the market braced for a tough hurricane season with the potential to cause substantial damage. Sales of so-called cat bonds were 38 percent higher this year through May than in the same five-month period in 2023, according to Artemis, a data compiler on insurance-related securities.

Natural catastrophes caused insured losses of about $62 billion in the first half of 2024 – about 70% above the 10-year average – as extreme fires, droughts and floods upend historical norms.

“This is a very exciting area to put capital into, where you can see pretty solid returns,” Armitage said. “As you see more of these events happening, there will be more capital needed to support these types of policies.”

The world’s fourth largest pension savings fund receives mandatory contributions equivalent to 11.5% of workers’ wages, which will rise to 12% next July. About half of the $3.9 trillion industry is invested offshore, and the industry is highly competitive and closely scrutinized in terms of investment performance.

Insignia Financial Ltd.’s pension business, which oversees about $180 billion in retirement savings, earned about 16 percent on its investments in the sector last year. Insignia invests in catastrophe bonds, which represent 15-20% of its total natural catastrophe reinsurance exposure. It also invests in quotas — risk-sharing of reinsurers’ balance sheet exposures — and guaranteed reinsurance contracts, it said.

“It’s been a very strong year for some of those differentiating asset classes,” Dan Farmer, MLC Asset Management’s chief investment officer, said in an interview. Farmer manages most of the money in Insignia’s pensions business and MLC is part of the Insignia Financial Group. Part of the appeal of investing in reinsurance is that the returns are “very uncorrelated with the rest of the portfolio,” he said.

JANA, which advises institutional investors including pension funds, said several cat bond managers visited Australia to raise money for new or existing funds. “With current spreads widened, clients have taken the opportunity to either supplement existing bond holdings or add new managers,” said Martin Rea, senior consultant for JANA.

Rea said he has a “positive view” on the cat bond market over the medium term. Still, he said JANA “tempers our view” of the market over the next 3-6 months due to forecasts of higher-than-normal hurricane activity. Other considerations included catastrophe bond funds that pose significant liquidity risk and strong overall returns.

“The market has gone 19 months without a negative return,” Rea said. “We don’t think this is sustainable.”

Photo: A New South Wales (NSW) Rural Fire Service volunteer receives instructions from a colleague as he puts out a fire during backburn operations in bushland near the town of Kulnura, New South Wales, Australia, on Thursday, December 12, 2019. Photo credit: David Gray/Bloomberg

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Catastrophe Reinsurance Australia