NGS Super has seeded an Australia-domiciled catastrophe bond fund managed by Fermat Capital with $30 million.
NGS Super, the $4.4-billion superannuation fund for workers in non-government schools, invested in the Fermat ILS Yield Fund to diversify from equity risk and gain the double-digit yields that catastrophe bonds have delivered in past years, says Anthony Rodwell-Ball, chief executive officer of the industry fund.
Fermat returned 13.59 per cent before fees in 2011 by investing exclusively in so-called cat bonds issued by re-insurance companies wanting to transfer some of the risk of pay-outs triggered by natural disasters such as earthquakes, hurricanes and floods in predominantly developed-world cities. Bondholders receive coupon payments for taking the risks, which are not linked to the performance of financial markets and can trade the securities as they change in value.
“We wanted an investment that is not equity market-linked and this fitted the bill,” Rodwell-Ball says. “Hopefully it won’t be correlated with market movements.”
NGS Super bargained “good commercial terms” for being the first investor in the fund, which it chose instead of other “growth alternatives” such as long/short equity strategies, he says.
Fermat was co-founded by John Seo, who was profiled in The New York Times Magazine in 2007 by Michael Lewis, journalist and author of The Big Short and Boomerang, in a story based on Hurricane Katrina. The manager, which is represented in Australia by placement agent Brookvine, was not recommended to NGS Super by contracted investment consultant JANA Investment Advisers. Tim Hughes, the former chief investment officer of Catholic Super who has advised NGS Super on investments since 2005, helped bring Fermat to the NGS Super board.
Surge in supply
Catastrophe bonds grew to a $14 billion market by the end of 2011, according to re-insurer Swiss Re. In recent weeks Everglades Re, a catastrophe bond issued by Floridian insurer Citizens Property Insurance Corporation, became the largest on record by attracting US$750 million, according to Artemis, a news website focused on the insurance-linked strategies market. It pays bondholders 17.75 per cent above the London Inter-bank Offer Rate for shouldering some of insurer’s liabilities for hurricane damage in Florida.
“We have a record surge in supply as well as a record surge in yields,” Seo says.
Last week Seo made his sixth visit to Australia since early 2010 to market Fermat’s investment strategies. He says the Solvency II directive, forcing European insurers to keep more capital on their balance sheets, has helped spur recent bonds covering flood and earthquake risk in Italy and flood risk in Germany.