Challenger Life, a large Australian life and retirement income underwriter and investor, saw its insurance-linked investment allocation shrink slightly over the course of the last year, but cited higher catastrophe bond distributions as one driver of improved investment yields in the financial year.Alternative investments as a whole helped to drive Challenger Life’s investment yields up 7bps in the financial year to June 30th 2025.The life and retirement specialist said this rise in investment returns, ” Reflects an increased allocation to alternative investments and higher catastrophe bond distributions, partially offset by lower yields on fixed income securities reflecting the tighter credit spread environment.” Challenger Life has been allocating to insurance-linked securities (ILS) and reinsurance related investments within its portfolio for a number of years, with investments made on both the non-life and life side of the market.As long ago as 2019 the investor had highlighted catastrophe bonds as a driver of attractive relative returns.

Then, as Challenger sought out diversifying sources of return, the investor expanded its cat bond investments and added a life settlement allocation as well.A reinsurance sidecar investment was also added in the financial year to June 30th 2024.These investments to ILS strategies have served Challenger well, as the company once cited cat bonds and ILS as the highest returning asset class relative to the capital requirements needed to support them.

At the middle of 2021, Challenger Life’s general insurance investments (so cat bonds only at the time) amounted to AU $155 million in size, while its life insurance investments allocation through a settlements strategy amounted to AU $100 million.By mid-year 2022, the cat bond focused ILS allocation had increased to AU $212 million, while life insurance related investments were AU $112 million.As of the middle of 2023, the cat bond allocation had grown further to AU $506 million, while the life investments shrank slightly to AU $96 million.

After the next fiscal year, as of June 30th 2024, Challenger Life upsized the catastrophe bond investments again, reporting 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.In the year to mid-2024, Challenger Life’s general insurance related investments grew by 45%, .At June 30th 2024, Challenger Life had AU $719 million (US$479m) deployed to catastrophe bonds, which was being managed by four external investment managers.

One year on, as of June 30th 2025, the catastrophe bond investments within Challenger Life’s portfolio amount to a slightly smaller AU $718 million (approx.US $470m), while the firm says the cat bond investments are allocated across three investment managers now.Perhaps to be expected, the reinsurance sidecar allocation that was first made in the prior year at 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,” had shrunk down to just AU $7 million (approx.

US $4.6m) over the twelve months to June 30th 2025.We can speculate that loss activity seen in the last year could have shrunk down this sidecar investment somewhat, perhaps the California wildfires in January 2025 as one example.As taking first-loss exposure would almost certainly have involved erosion due to that event and perhaps some others in the past year.

We can’t be certain though.On the life settlement side, Challenger Life’s allocation was valued at AU $92 million (approx.US $61.2m) at June 30th 2024, but a year later was valued at AU $80 million (approx.

US $52.3m).Over the insurance-linked investments, at mid-year 2024 Challenger Life reported roughly US $490 million across catastrophe bonds and a newly added sidecar investment, while life insurance investments shrank slightly to US $61 million, for a total allocation valued at US $551 million at that time.Now, as of the June 30th 2025 reporting, the catastrophe bond and reinsurance sidecar investments are valued at approximately US $475 million, while the life settlement allocation is $52.3 million, for a total insurance-linked strategies allocation of around US $527.3 million.

So slightly down in terms of allocation size, but with strong distributions from the catastrophe bond investments serving Challenger Life well, in boosting its investment yield over the course of the last year.Presumably the firm will have been able to take some value back from its cat bond allocation after the very strong sector performance through 2023 and 2024.The cat bond and reinsurance related investments remain close to 2% of Challenger Life’s total investment portfolio assets, but catastrophe bonds make up 21% of its alternatives bucket as of the mid-year 2025.

Finally, Challenger Life said that across both the cat bond and sidecar investments performance was in-line with its benchmark, for which it has adopted the Plenum CAT Bond UCITS Fund Index, which suggests that over the last year its cat bonds and sidecar investments combined delivered a return in excess of 11% to 12%, perhaps higher...All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

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