Challenger Life ILS investments grow 37% to ~US $551m, makes sidecar allocation

Challenger Life, the Australian life and retirement income underwriter and investor, expanded its insurance-linked investment allocation by around 37% in the last financial year, with it now amounting to roughly US $490 million across catastrophe bonds and a newly added sidecar investment, while life insurance investments shrank slightly to US $61 million.

Challenger Life has been allocating to insurance-linked securities (ILS) and reinsurance related investments for a number of years, with investments on both the life and non-life side of the market.

The investor had originally looked just at catastrophe bonds, highlighting as long ago as 2019 the attractive relative returns its allocation to cat bonds had delivered.

Then, as Challenger looked for diversifying sources of income and return that were relatively uncorrelated to broader economic conditions and markets, the cat bond portfolio was expanded and a life insurance linked strategy, specifically life settlements, added.

At one stage, the company said that cat bonds and ILS had been its highest returning asset class relative to the capital requirements needed to support it.

So it’s no surprise that given the strong performance of the cat bond and ILS asset class in 2023, that Challenger Life has added to its allocations to the space.

At the mid-year 2021, Challenger Life’s general insurance investments (so cat bonds) were AU $155 million in size, and its life insurance investments were AU $100 million.

By mid-year 2022, the figures had grown to AU $212 million, while life insurance related investments were AU $112 million.

Then, at the mid-point of 2023, the cat bond allocation had increased further to $506 million, while the life investments shrank to AU $96 million.

Now, as of the latest end of fiscal year, June 30th 2024, Challenger Life counted AU $735 million (US$490m) of general insurance related investments and a slightly smaller again AU $92 million (US$61m) of life insurance-linked investments.

Which represents growth of its insurance-related investments of 37% for the last year, some of which will of course be driven by earnings from the strong catastrophe bond market performance.

The general insurance related investments grew by 45%, which was helped by additional capital put into catastrophe bonds and also a reinsurance sidecar investment as well.

Challenger Life had AU $719 million (US$479m) deployed to catastrophe bonds as of June 30th 2024, all of which is managed by four external investment managers.

In addition, for the first time, Challenger Life has disclosed a sidecar investment. Just AU $16 million (US$11m) in size and said to be invested in “externally managed special purpose vehicles that predominantly take exposure to first-loss property and casualty insurance risks.”

The allocations to catastrophe bond funds and other ILS investments continue to serve Challenger Life well.

In the last year, the investor reported that it experienced “outperformance in the general insurance portfolio relative to the normalised growth assumption” with the returns largely tracking the market benchmark Swiss Re index.

As a result, with this an attractive area for Challenger Life, the investor said it “increased deployment” into this area of its investments.

The investor also noted the fact alternatives like cat bonds and ILS are less correlated to credit and listed equity markets, as an attraction it sees in the asset class.