NZ Super has 2.5% of funds invested in Japan

Tuesday 22nd March 2011

New Zealand's national superannuation fund has 2.5% of its $19 billion investments - $475 million - in Japanese assets.

"Our exposure to Japan across all investment classes - including catastrophe bonds linked to Japan, equities, fixed interest, and a little bit of property - is 2.5% of the fund," Paul Gregory, a spokesman for the Guardians of New Zealand Superannuation, told NZPA.

Gregory said that the fund, designed to help pay for future pensions, will not lose money on its catastrophe bonds linked to Japan because of the 9.0 quake there, the subsequent tsunami, and the linked nuclear accident.

It began investing in the disaster funds, known as "cat bonds" in February 2010 with US$125 million (NZ$169.6 million), and since May has had a commitment to invest US$300 million, though not all of that has yet been invested.

NZ Superannuation invested in cat bonds through Chicago-based Elementum Advisors, LLC, and said in its annual report that most of the money went into securities that covered US hurricanes and earthquakes, with some products covering European windstorms and Japanese earthquakes.

Despite the exposure to specific earthquakes in Japan, Gregory said that the Guardians did not expect losses on the cat bonds because the specific triggers set for payouts were different to what actually happened.

Insurers and re-insurers typically sell cat bonds to help cover their most extreme risks such as an earthquake rocking Tokyo or a hurricane with the force of Katrina hitting the centre of Miami.

"They can cover the location, the nature of the event and sometimes they can even be combinations of events," Gregory said. "Although we have exposure to Japanese earthquakes in our portfolio, they are either not in that location, or if they are, they are also required to be in combination with another event." Triggers could also include requirement for a particular threshold of damage to be reached.

The earthquake in Japan struck about 380 kilometres northeast of the capital, meaning investors in many bonds may pay insurers less than 10% of the US$1.7 billion of debt sold to help cover losses, Niklaus Hilti, head of insurance-linked strategy at Credit Suisse Group AG told Bloomberg newsagency.

Owners of cat bonds risked losing their entire investment if a disaster occurred exactly as defined under the security's terms, but over the past five years such bonds have returned 64% interest, with annual gains even following Hurricane Katrina in 2005 and the collapse of Lehman Brothers Holdings Inc. in 2008.

Characterised by some brokers as "hole-in-one insurance" the bonds usually have triggers which are very specifically defined.

"Typically for a cat bond to trigger you need a bull's eye to be hit instead of a general shot in the right direction," said Tom Keatinge, managing director in JPMorgan Chase & Co.'s insurance capital management team in London.

The economic toll of the 9.0-magnitude earthquake that struck off the coast of Japan near Sendai on March 11 and the subsequent tsunami and nuclear incident, is expected to be US$200 billion to US$300 billion, but is likely to directly cost insurers and re-insurers US$12 billion to US$25 billion.

"I would not expect to hear that cat bonds have been triggered by events in Japan," Keatinge said. "The losses don't seem that considerable."

NZPA

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