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Three major pension funds have made significant investments in property and casualty insurance companies in the past six months. What do the transactions suggest about pension plans’ interest in the insurance sector?

It’s quite common for “mammoth” pension funds to invest in property and casualty insurers, says Joel Baker, president and chief executive officer of MSA Research Inc., an analytical research firm focused on the Canadian insurance industry. The property and casualty insurance market “is correlated with the capital markets typically and also not correlated with the longevity risk,” which makes it a better bet than life insurers, he notes.

Last September, the Canada Pension Plan Investment Board announced it would acquire Ascot Underwriting for US$1.1 billion. In January, the Ontario Municipal Employees Retirement System announced it was buying 21 per cent of the U.S. insurer Allied World for US$1 billion. In March, the Alberta Investment Management Corp. announced it was indirectly acquiring 10 per cent of Allied World for $673.5 million. And a few days after that, the Caisse de dépôt et placement du Québec announced it would jointly acquire an American consultancy and insurance brokerage for US$4.3 billion.

By investing in property and casualty insurers, pension funds “can ride out the cycles of the insurance industry as long as they invest wisely, in good companies, and it’s kind of aligned with their asset class mix,” says Baker.

Pension plans have been investing in the area for some time. Ontario Teachers’, for example, bought property and casualty insurer GCAN Insurance Co. in 2005 and sold it to the RSA Insurance Group in 2010. In 2012, an investor group led by Ontario Teachers’ bought AIG United Guaranty Mortgage Insurance Co. Canada.

Large pension funds also invest in catastrophe bonds or insurance-linked securities, says Baker. The bonds act as a type of reinsurance whereby investors lend money to an insurance company, usually for a three-year term. If a natural catastrophe, such as an earthquake, occurs and is serious enough to trigger the bonds, the investors would lose their money. If no catastrophe occurs during those three years, investors would get back their principle and interest. The triggers vary by the bond and may be based on seismology, as well as loss to the primary insurer or the industry as a whole.

Catastrophe bonds aren’t common in Canada because reinsurance premiums aren’t very expensive, says Baker. “The primary companies have been happy so far to live with their traditional reinsurance, but it is moving [towards catastrophe bonds] in the U.S. and globally. Eventually, it will come here as the very, very high severity risks are really well suited to the cat bonds,” he notes. And in the meantime, pension funds are investing in catastrophe bonds based in foreign markets.

“Teachers’ and OMERS have small teams that are dedicated to cat bonds and [insurance-linked securities] as a class, as do other large global plans,” says Baker. “And the investment in actual operating insurance or reinsurance companies is just taking it down one notch from the cat bonds to the operating companies.”

Recently, pension funds have “beefed up their teams” dealing with insurance investments, says Baker. While there hasn’t historically been much crossover between the insurance and pension industries, he points to George Cooke, chair of the board of directors at OMERS Administration Corp., who previously worked as president and chief executive officer of the Dominion of Canada General Insurance Co.

And, in October 2016, Sharon Ludlow became head of insurance investment strategy at OMERS. She previously worked as president and chief executive officer of the Swiss Re Group and then as president of Aviva Canada Inc.

For more on pensions, read:

When a pension isn’t a pension

Institutional investors turning to riskier assets: survey