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Dorian & Faxai may partially erode some ILS deductibles: Twelve Capital


Reflecting on the potential impacts from recent catastrophe events to insurance-linked securities (ILS) and collateralised reinsurance investments, specialist ILS fund manager Twelve Capital warns that together hurricane Dorian and typhoon Faxai might erode some underlying protective layers.

Twelve Capital logoHurricane Dorian and typhoon Faxai have the potential to be the largest two catastrophe loss events to affect the insurance and reinsurance industry so far in 2019.

As a result there is an expectation that some minor impacts to certain layers of ILS protections will be seen, particularly on the lower down collateralised reinsurance layers, or on the quota share and sidecar sides of the market.

But it’s still early days and as industry loss estimates will take some time to develop and become clearer, ILS fund managers like Twelve Capital, which invests across catastrophe bonds, private ILS and collateralised reinsurance, as well as private debt and equities, are making their own assessments and discussing the events with counterparties to establish whether they hold any particular exposure to them.

On hurricane Dorian alone, the investment manager says, “Twelve Capital’s expectation remains that this event will have only a marginal impact on ILS portfolios, if any.”

That’s based on a wide range of industry loss estimates, from as low as $3 billion to as high as $10 billion for hurricane Dorian, although the main driver remains the Bahamas where the damage was most significant, Twelve Capital said.

Typhoon Faxai, which struck Japan in the Tokyo and Chiba region on September 8th and 9th, could be a more difficult event to identify potential losses from, given the evident complexities that have emerged with recent Japanese typhoon losses such as last year’s Jebi.

Twelve Capital noted the $3 billion to $7 billion estimate for insurance and reinsurance market losses that have so far been published. The ILS investment manager also noted the estimates beginning to emerge from major Japanese domestic insurance carriers.

However, Twelve Capital notes that grossing up the Japanese carrier estimated losses would result in a total insured loss around the $3 billion to $4 billion mark, so nearer the lower end of the modelled estimates.

But because of the experience the market has had, with typhoon Jebi and loss creep, Twelve Capital urges caution on Faxai.

“These initial estimated losses should be treated with corresponding caution,” the ILS investment manager said. “Twelve Capital is in touch with parties to try to establish how Typhoon Faxai might resemble Typhoon Jebi from a meteorological perspective (e.g. wind field symmetry and peak wind gusts at landfall) as well as from a modelled impact perspective. With that in mind, Twelve Capital is expecting further validation of initial loss estimates of Typhoon Faxai and evaluation as to whether these initial loss estimates could experience a similar level of development as the market experienced with Typhoon Jebi.”

The investment manager said that its own fund and portfolios potential for exposure to typhoon Faxai will be in collateralised reinsurance instruments from private ILS transactions.

On its own though, the investment manager says of Faxai, “Twelve Capital does not expect any significant impact on ILS portfolios from this single event.”

But when added to the previous hurricane Dorian, Twelve Capital warns, “In combination with the impact of Hurricane Dorian, however, the partial erosion of some underlying protection could be expected,” referring to deductibles, likely from world-wide aggregate type deals.

That would suggest some valuation impacts may be felt by ILS fund managers that allocate to these kinds of private ILS and collateralised reinsurance transaction.

Outside of the potential for aggregate deductible erosion impacting valuations, at the level of industry losses currently anticipated any loss impact to ILS is likely to be largely attritional when looked at on a portfolio or fund wide basis.

It may be restricted to simply an erosion of aggregate deductibles on certain contracts, or it could be minor and attritional losses for specific positions, on lower layer collateralised deals, quota shares and the likes.

Twelve Capital said that it intends to closely monitor the evolution of estimates and information on the impact of hurricane Dorian and typhoon Faxai and will provide its investors with further updates as more reliable data emerges.

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