European Regulator Warns on Catastrophe Bonds

(December 13, 2013) — Rising flows into insurance-linked securities, such as catastrophe bonds, has prompted the European pension regulator to voice its concern about whether investors are sophisticated enough to handle them.

During the past year, there has been a significant increase in investments in insurance-linked securities, driven by institutional investors seeking returns in a subdued economic environment.

In its round up of the year, the European Insurance and Occupational Pensions Authority (EIOPA) has warned it had concerns that pension funds and other investors may not have the modelling capabilities and experience to fully analyse the underlying risks of these investments.

“Without adequate supervision, such developments could cause systemic risk,” EIOPA said.

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In addition, the regulator highlighted the impact of significant natural events in the past 12 months.

The costliest natural disaster this year was the massive flooding event across Central and Eastern Europe in May and June 2013.

However, economic losses of $22 billion and insured losses of $5.3 billion were still below the 10-year (2003-2012) average and “do not seem to have caused any major financial stability concerns yet”, EIOPA said.

The regulator’s concerns were largely driven by research published this spring by Aon Benfield. As aiCIO reported in April, catastrophe bonds returned 12.7% in the year to the end of March, but there were three high profile blow-ups which resulted in investor losses of $500 million, following severe natural disasters and storms in Japan and in the US.

In addition, the catastrophe bond market is still largely dominated by repeat issuers, something that led to Aon Benfield’s Chris Parry, director and head of international capital markets, to call for more encouragement for new players to enter the ILS market.

Parry also noted that while there is a large supply of capacity, and as such, pricing is very competitive, there were a number of reservations shared by investors and pension funds about entering the European reinsurance market.

“We will overcome these challenges as people become more comfortable with the capital markets and the association with third party capital,” he said.

“It is very much an educational process to get people comfortable with the structures and costs associated with accessing the market. But it is certainly going to move forward if prices continue to come down, as we are seeing at the moment.”

Following the state pension CIO's resignation over alleged misconduct, Pennsylvania's treasurer has called for the removal of the board chairman, as well.

(December 12, 2013) — The board chairman of the Pennsylvania State Employees’ Retirement System (SERS) has been accused by the state treasurer of being part of the scandal surrounding CIO Anthony Clark's conduct.

In an open letter, board member and Treasurer Rob McCord called on the governor to replace Chairman Nicholas Maiale to “improve SERS operations and business practices and restore the agency’s reputation” following accusations against the CIO.

These allegations broadly involve Clark’s investment practices, recommendations, and personal dealings, Pennsylvania Treasury Communication Director Gary Tuma told aiCIO. No further details have been disclosed to the public.

Clark has submitted his resignation and is expected to retire on December 31, 2013.

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"These charges not only implicate SERS' chief investment officer, but also explicitly include the chairman of the board and the process by which investment opportunities are identified and vetted, and also the veracity with which they are presented to the board for approval," McCord wrote in the letter.

Claims of wrongdoing by the CIO and chairman were yet unproven as investigations got underway, but McCord argued that the system's reputation and future health depend on an immediate leadership change.

This call for Maiale’s removal follows a December 11 executive meeting, during which McCord’s proposal to suspend pending investments was dismissed in a seven to four vote.

“Despite my effort to seek additional time for the members of the board to be fully informed of the scope and seriousness of the allegations as they related to pending investment proposals, the chairman of the board pressed for the immediate consideration of all of the proposed allocations on yesterday’s agenda totaling $185 million in commitments,” McCord wrote.

According to SERS, the board committed up to $25 million to the real asset class with Lubert-Adler Real Estate Fund VII and an additional $160 million to alternative investments.

McCord went on to argue that Maiale’s decision to pursue these investments undermines public and member confidence in the retirement system.

“While the legal and investigatory process can and must be allowed to proceed at its own pace, SERS cannot wait,” McCord wrote to Governor Tom Corbett. “This is an opportunity for you to help restore the reputation of the board by immediately replacing the current chair and selecting someone with a proven record of independence, transparency, and commitment to restoring public trust.”

However, Maiale defended SERS’ move forward: “It is important that we advance with the investment items on the agenda. The need to pay benefits hasn’t stopped, so it is important that we keep the portfolio working for the benefit of our members.”

SERS has put Senator Charles McIlhinney, Jr. in charge of the search for a new CIO. It also authorized its internal audit division to recommend a third-party investigative professional to “proceed with regard to allegations as well as to ensure an independent and exhaustive review of SERS’ due diligence process within the investment program.”

Tuma, the treasury's communication head, said McCord has had several areas of concern about Clark since the CIO came on board in 2011.

“After watching him for a number of months, the treasurer became concerned with his investment practices—the wisdom of his investments,” Tuma said. “Investments were fee-heavy, with many funds-of-funds and overall management practices were lacking transparency.”

He also said performance reports were repeatedly pulled from board meetings and audio transcripts of meetings were frequently unavailable to McCord.