Dan Farmer. Photo: Eugene Hyland

There is one investment area where Insignia’s $180 billion super arm has not lost money for the past 17 years.  

It is what chief investment officer Dan Farmer – who leads the MLC asset management business and oversees the bulk of Insignia’s APRA-regulated retirement assets – calls insurance-related investments (IRIs).  

The alternatives strategy is gaining popularity among asset owners as its return is deemed to be lightly correlated with traditional asset classes, and the so-called “hard market” of insurance in the past two years, associated with increased premiums, has only spurred more interest.  

But having been investing in IRIs since 2007, Farmer warns it is a space where investors can suffer if they “stumble in without doing the homework”. 

“It really is a specialist area, it’s something that takes time to build skill up in,” Farmer tells Investment Magazine. 

“We saw a lot of capital disappear seven or eight years ago because they had a negative year. [Investors were thinking] ‘I don’t like this. I don’t like the weather risk’, and they pull back. 

“There’s certainly more interest coming back in, in part because we’ve seen the premiums that are being paid for taking on that risk increasing. 

“But investors can suffer…some investors probably will suffer with the LA wildfires and the hurricanes.” 

The right trade-off

The largest default fund in Insignia, MLC MySuper, has a 3 per cent allocation to IRIs, and approximately $3 billion is allocated across the retail super suite. The biggest risk that its IRIs strategy is exposed to is US weather risk – think Southeastern coast states such as Florida where the reinsurance market is huge.  

The IRIs are managed internally by a team of four specialists at MLC, and five external managers that target the reinsurance market. One advantage that Insignia has is its scale. 

“We’re big enough that we’re tailoring mandates with our investment managers in that reinsurance space,” Farmer says. 

“The team does the work, tailoring and identifying what parts of that weather risk or that reinsurance risk we think are most attractive, or in other words, what catastrophe risk do we think we’re being overcompensated for?” 

The internal team and external managers will then together conduct weather, climate, and impact modelling that is probably enough to “blind someone with science”, Farmer quips. 

 “At its core, it’s really that trade-off between expected probability of loss and size of loss, and what rate of return you’re being paid to take that on,” he says. 

US wildfire events have not looked attractive to Insignia due to that exact imbalance of risk and reward, he says. LA fires have subtracted an estimated 2 per cent return from its IRIs portfolio so far in January, but the exposure is minimal.  

“It’s a tragedy for the individuals involved, but from the investment CIO perspective, I wasn’t lying awake at night because I knew we only had 3 per cent risk exposure to that wildfire space [in the IRIs portfolio],” Farmer says.  

Heading into 2025, he believes IRIs is still not yet at a stage where there is too much money chasing opportunities, or “capital inundation” as he calls it, and remains an attractive asset allocation component.  

“2024 that was a year really driven by market beta, a lot of your overall performance and performance relative to peers was driven by your allocations to listed global equities,” Farmer says. 

“2025 will be quite different… that diversification, low correlation benefit of [IRIs] will probably be even more pronounced and more beneficial.” 

Looking ahead

Elsewhere in the super portfolio, Insignia is staying with neutral allocation on equities but is looking at downside protection via options should there be further spikes in valuations. With a recession looking unlikely in the next 12 to 18 months, Farmer says Insignia will not be heavily underweight the asset class.  

“If anything, if we saw equity sell-off in the later half of 2025 or anytime, [or] a sharp sell off on fears of recession, we’d probably be buying equities,” he says.  

Farmer says he is happy with a modest overweight position on credit but will consider trimming high-yield and other growth credit investments if it sees further rallies.  

MLC is looking to increase allocation in opportunistic property through potentially a US-focused mandate, hunting for assets that could offer good returns with some repairs and upgrades, Farmer says.  

There are also plans to increase the private equity asset class allocation in IOOF MySuper through MLC’s internal capability. 

“Private equity returns have been okay, but not as strong as the listed equity markets,” he says.  

“Last year was probably a tale of two halves with private equity in a large part at the start of 2024 [seeing] really low deal activity…as the market was resetting to higher rates and working its way through that, the end of 2024 we saw a real pick up. 

“It’s quite an attractive vintage year at the moment to be building investments in private equity.” 

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