Australian investment giant Colonial First State said looking for cat bond deployment

Colonial First State, one of the largest Australian institutional investors, is looking to deploy some of its near US $100 billion of assets into the catastrophe bond market, according to a report from Bloomberg.

Interest in insurance-linked securities (ILS) has been on the rise again among Australian pensions and managers of superannuation funds in recent years.

As a result, ILS managers have been benefiting from increased inflows from Australian institutional investors and Colonial First State is another allocator that has the potential to bring more capital to the reinsurance market.

Speaking with Bloomberg, Colonial First State Chief Investment Officer (CIO) Jonathan Armitage said he is targeting “natural event risk”, with investments able to be made to ILS funds or direct to re/insurers.

Bloomberg reports that Armitage’s focus is on catastrophe bonds in developed markets, while he is quoted as saying, “That sort of market has, first of all, it’s grown significantly in the last 15 years or so, and is properly structured.”

Funding for investments into cat bonds and ILS are expected to come from other fixed income allocation pots, primarily corporate bonds, Bloomberg said in its report.

Colonial First State is both pension fund manager and wealth manager, so has its own range of fund strategies, as well as superannuation funds that allocate to external investment managers.

With Australian pensions growing and seeing significant inflows all the time from their members, the ability to add a new diversifier, such as 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,” Bloomberg quotes Armitage as saying. “As you see more of those events occurring, there is going to be more capital that’s required to support those type of policies.”

Another superannuation specialist, Insignia Financial Ltd., is also cited in the Bloomberg story.

Insignia Financial, which counted A$312.3 billion in assets under management and administration as of March 31st 2024 and counts MLC Asset Management as one of its group companies, is reported to have benefited from a 16% return from its reinsurance investments in the last financial year within its pension business.

Insignia, largely via MLC Asset Management strategies which had around US $1.6 billion invested into insurance-related investments in the last year, allocates around 15% to 20% into catastrophe bonds, as well as quota shares and other collateralized reinsurance opportunities.

MLC operates a broad insurance-related investments strategy, which its funds tend to include a share of as a roughly 2% to 4% of their 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.”

JANA, an investment consultant, told Bloomberg that cat bond fund managers have been visiting Australia more frequently.

Martin Rea, a senior consultant for JANA, said that, “With current spreads elevated, clients have taken the opportunity to either top up existing cat bond holdings or to add new managers.”

Rea said he has a positive view on cat bonds in the medium term, but was “tempering” it over the next few months, due to forecasts of an active hurricane season.

Overall, Bloomberg’s report paints a positive picture of Australian institutional investor sentiment for catastrophe bonds and ILS opportunities at this time, which bodes well for continued flows from the country into the ILS and reinsurance market over the coming years.

As large investors around the world search out relatively uncorrelated and diversified investment opportunities, catastrophe bonds and ILS, with their floating rate of return, are seen as increasingly attractive given their recent historical performance.

View details of major pension fund and sovereign wealth investors in ILS and reinsurance in our directory.