Swiss Re Insurance-Linked Fund Management

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Attractive 2013 returns across all ILS strategies for Twelve Capital


Specialist Zurich-based insurance-linked securities and reinsurance-linked investment manager Twelve Capital achieved attractive returns across its core strategies of catastrophe bond funds, ILS mandates and insurance bond funds in 2013.

The catastrophe bond fund strategies offered by Twelve Capital achieved 2013 returns of between 4.3% and 6.7%, while ILS mandates which include investments in private ILS and collateralized reinsurance contracts achieved between 8.5% and 10.1%. The asset managers insurance bond funds, which invest in assets such as insurer private debt, achieved between 11.9% and 13.6%.

The broad range of strategies offered by Twelve Capital, all insurance and reinsurance-linked investment strategies, demonstrates the growing opportunities for investors to access the returns of the insurance and reinsurance market. No longer is the market solely about catastrophe risk, asset managers are now launching new strategies and ILS mandates in particular are broadening their reach to invest in new lines of re/insurance business.

Twelve Capital noted in an update that the performance of its ILS mandates was partly driven by spread compression across the catastrophe bond market, due to significant investor demand and capital inflows from large institutional investors looking for yield. However, the gross yield of the cat bond market is down, currently 4.8% compared with 7.4% a year ago, while expected loss levels remain roughly the same at 200bps.

However institutional investors are seeking the diversification benefits of the ILS asset class, meaning that the returns available are still attractive. Also, Twelve Capital believes that cat bond spreads will not decline much further and the cat bond asset class will remain attractive to institutional money.

In private ILS, so privately transacted fully collateralized reinsurance contracts and ILS, Twelve Capital has been growing its portfolio and offerings in 2013. Twelve Capital has been actively encouraging new, more specialist classes of business into the ILS market.

For example, Twelve Capital said that it generated double-digit returns from transactions exposed to the U.S. crop market, benefitting from favourable pricing after a loss affected year in crop reinsurance. It also generated attractive returns from transactions exposed to global terrorism, adding that the terror market is one of the best performing in reinsurance and the transaction Twelve Capital undertook was a first in the ILS market.

The insurance bond portfolios managed by Twelve Capital saw performance helped by a general tightening of fixed income spreads. The manager captured some gains by investing in securities it deemed mispriced after performing in-depth credit and legal research on the issuers, alongside its understanding of the industry and regulatory developments.

Evaluation of transactions and issuers is one area that Twelve Capital feels it offers investors significant value, undertaking this research both on ILS mandates and its insurance bond positions before allocating capital to investments.

Looking ahead, Twelve Capital said it foresees a challenging investment environment, but ne in which investors will be attracted to more illiquid investments, due to available illiquidity premiums. Investors such as life insurers and pension funds, who do not need highly liquid investments, will seek to capture the premium available for investing in less liquid assets. This should help to push private ILS and collateralized reinsurance more to the forefront of investors insurance-linked strategy consideration set in 2014.

In private ILS, Twelve Capital said that the renewals in January were challenging, but that it has secured attractive positions and expects its ILS mandate to produce high single-digit returns and some portfolios with higher single event limits to produce low double-digit returns.

Twelve Capital has continued to add new specialist classes of business to its portfolio, seeing opportunities with good performance potential from business that is more complex to source. Specifically, Twelve Capital said that it has entered the property fire market to complement its positions in terrorism risk and crop reinsurance.

The investment manager said that it has become more defensive in its strategy, focusing on a core list of high quality protection buyers which show strong performance. It has also allocated capital across first, second and subsequent events, in order to diversify its portfolios further.

Twelve Capital expects cat bond issuance to remain strong as the coupons are attractive to insurance and reinsurance firms looking for protection. At the same time investors continue to search for diversification. In the absence of catastrophe events, coupon return is expected to be the main driver for cat bonds in 2014.

One strategy that Twelve Capital expects to become a core activity in 2014 is the development of private cat bonds, small to medium-sized transactions accessible only to Twelve Capital. This strategy would allow Twelve Capital to enhance its portfolio of catastrophe bonds with private deals which also have liquidity allowing them to be sold in the secondary market if desired. It will also allow them to bring some of their specialist lines of business into cat bond focused investment strategies to generate attractive returns and boost diversification. Artemis will bring you more on Twelve Capital’s private cat bond activity soon.

Interestingly, Twelve Capital launched a new strategy at the end of 2013 which is one that Artemis forecast might be a new product for the firm last year. Back in September 2013, after Twelve Capital announced its private debt strategy, Artemis wrote:

Twelve Capital will be in an interesting position where they could offer investors a blended insurance and reinsurance-linked investment strategy, combining the elements of insurance-linked securities, collateralized reinsurance, hybrid insurance bonds and insurance private debt. That might be extremely attractive for certain investors with specific mandates and return targets.

At the end of 2013 Twelve Capital launched its ‘Best Ideas’ mandates, which are portfolios with flexibility to invest across the spectrum of insurance and reinsurance-linked investments, targeting the transactions and securities with the best risk-adjusted returns.

This strategy provides similar returns to ILS and insurance debt, but with even more diversification possible in the portfolio by investing across the insurance and reinsurance-linked investment universe.

Currently the Best Idea portfolios are invested in high yield insurance bonds, private insurance debt and selected private ILS transactions. Twelve Capital said that it will look to invest in cat bonds exposed to U.S. wind before the hurricane season, but will likely only hold them for a few months to benefit from the seasonal risk premiums.

As Twelve Capital broadens its offering, to encompass investment strategies focused on catastrophe bonds, private ILS, private insurance debt and now a blended strategy across the sector as well, it is becoming an ever larger provider of capital to the reinsurance space.

At the current time Twelve Capital has lifted its total assets under management to USD$2.5 billion, with slightly more than half of this in hybrid insurance debt instruments and the rest in insurance-linked securities, private ILS, collateralized reinsurance and catastrophe bonds.

Twelve Capital has experienced strong growth of its assets under management in 2013, growing from a reported ‘over $1 billion’ last January, to nearly $2 billion in June and now $2.5 billion. With the addition of new strategies and a unique offering in insurance and reinsurance-linked investments it is to be expected that Twelve Capital will grow further in 2014.

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