Super Fund picks 'catastrophe bonds'

NZPA | Tuesday, 2 Feb 2010

The New Zealand Superannuation Fund is investing between US$125 million and US$250m (NZ$176.4m-NZ$353.4m) in "catastrophe bonds".

The Guardians of New Zealand Superannuation today said the bonds were a strong diversification play and offered attractive risk-adjusted returns.

Catastrophe bonds and other insurance-linked securities are a way for capital markets to provide reinsurance to the insurance industry.

The risk could be mitigated and was capped, the guardians said.

NZ Super had made an initial commitment to the strategy of US$125m with potential to expand to US$250m.

Most of the NZ Super investment would be in securities that covered hurricanes in the United States, with some products covering European wind storms and Japanese earthquakes.

Essentially the bonds covered catastrophic events in areas where such events presented a low but genuine risk, the guardians said.

"They exist as a way to spread the risk and the cost of major catastrophic events that are unlikely to occur but which are very expensive when they do.

"For an investor, the rationale is the income stream derived from the premiums paid on the policies in the pool. The insurance industry values this back-up insurance, and pays attractive premiums to investors to provide it," the guardians said.

"Should a relevant catastrophe occur, the bond may be triggered. Triggering depends on the size and severity of the catastrophe. Triggering constitutes a requirement to pay out, but the size of the payment is capped to a maximum agreed by the investor."

The NZ Super investment is being managed by Chicago-based Elementum Advisors.

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