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Private ILS investments offers illiquidity premium: Kriesch, Twelve Capital


Investments in private insurance-linked securities (ILS) mechanisms is a growing sub-sector of the overall ILS space, and its attractiveness to third-party investors as a viable asset class is supported by the illiquidity premium offered, according to Sandro Kriesch of Twelve Capital.

Compared with the traditional 144A catastrophe bond sector the private ILS space, which includes collateralised reinsurance, cat bond lites, sidecars, among other insurance, or reinsurance–linked assets, is a far less liquid and accessible market, explained Kriesch, Managing Partner and Head of Private ILS at specialist insurance and reinsurance asset manager Twelve Capital, speaking at the ILS & Cat bonds London 2016 event held recently.

The typically shorter, 6-12 month duration of private ILS deals compared to more traditional ILS placements, and the fact that unlike in the traditional cat bond space entry into the private ILS market is fairly bilateral, underlines the illiquidity of the space compared to other ILS investments.

However, according to Kriesch, the pension funds that insurance-linked investment manager Twelve Capital speaks with is happy to invest in an asset class with 12-months illiquidity owing to its diversification benefits and attractive yields, a notion that is supported by the continued growth of the asset class in recent times.

Beyond its diversification benefits, Kriesch underlines that according to data and calculations from Twelve Capital, private ILS investments offer an illiquidity premium of roughly 1%, adding that even this has come in from the 2% witnessed in previous years, but highlighting that it still exits.

The illiquidity premium refers to the added return received for the additional risk of tying up capital in a less liquid, or illiquid asset class.

1% might not sound like very much, especially considering the illiquidity premium within the private ILS sector used to be double, at 2%. However, with yields in both the traditional catastrophe bond space and the private ILS sector tightening somewhat in recent months, 1% is a healthy additional premium for investors.

Kriesch underlined the benefits of investing in private ILS as “access to a sub-asset class that is not correlated with the wider financial market. You have an illiquidity premium; I support the view that our data suggests 1%, roughly. And you can diversify further in that field if you don’t feel comfortable having a book that is consistent just of U.S. or even Florida wind, you may consider going wider.”

The diversification and low-correlation benefits are true of both the traditional catastrophe bond and ILS space, and also the expanding private ILS sub-sector, with the latter providing a further benefit to investors with the 1% illiquidity premium, although this does reflect the illiquidity of the overall market which again, investors that Twelve Capital speaks with aren’t so bothered about today.

“Most of our investors, even though they allocate just 2%-3% of their assets, if they are in this for longer-term – and this should be a strategic allocation in ILS – then any diversification that they add should be a good item.

“All in all we have in our books a lot of investors who seek diversification and a good area to be in is the private ILS space if you can digest the 12 months illiquidity,” said Kriesch.

The private ILS space as become an expanding element of the overall ILS sector, which, is becoming a more influential and larger section of the entire reinsurance marketplace.

Benefits such as the illiquidity premium has the potential to help investors offset any impacts from their capital being tied up in an illiquid asset class for 6 or 12 months.

And when coupled with the diversification benefits and low correlating nature of the asset classes underlying risks, it’s not surprising that ILS continues to expand and is widely expected to broaden its scope and reach in the coming months and years.

Furthermore, increased investor sophistication and understanding of the benefits of both traditional ILS and the private market will likely continue, and could result in increased demand for both the liquid and illiquid structures that operate within the ILS space.

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