Zurich-based insurance-linked securities (ILS) and reinsurance-linked investment management firm Twelve Capital has announced the completion of its fourth privately placed catastrophe bond transaction, Dodeka III a $10m U.S. multi-peril deal.
Twelve Capital has already completed three Dodeka private cat bonds, Dodeka I, Dodeka II and Dodeka IV. The Dodeka III cat bond, which was completed and issued on the 1st August, comes slightly out of sync with the naming convention due to taking a little longer to complete.
Dodeka III is again a zero coupon, including the premium, privately placed catastrophe bond. This time the Dodeka III deal is just $10m in size and the underlying risk is not from a reinsurance contract, rather it is from an industry loss warranty (ILW) derivative contract which is transformed into a cat bond for Twelve Capital.
Dodeka III provides coverage for U.S. all natural perils, so including risk such as U.S. wind risks, U.S. earthquake, U.S. severe thunderstorms, U.S. winter storms and wildfire. As the private cat bond is transformed from an ILW the deal features an industry loss index, with Property Claim Services (PCS) acting as the reporting agency and providing data on industry losses.
The Dodeka III deal has a one year term, having been completed on the 1st August and with coverage running until maturity on the 31st July 2015.
The Dodeka III cat bond is another innovative transaction from Twelve Capital, featuring a new diversifier for the Dodeka series of deals which is rarely featured in the catastrophe bond market. Dodeka III is a third-event cover, meaning that for the deal to be triggered during the term of the cat bond three (or more) qualifying catastrophe events which cause a market loss above a pre-defined level must occur.
This is actually the only third-event catastrophe bond in the outstanding market at this time, we believe. There are some second-event covers still in effect, but with the majority of cat bonds being either aggregate or first-event per-occurrence, Dodeka III provides Twelve Capital with a valuable and unique diversifier for its fund.
Twelve Capital told Artemis that the Dodeka III cat bond will pay an equivalent of a high-single digit return to investors, somewhere between 5% and 10%, which is higher than many recent catastrophe bond issues. Given the third-event nature of the trigger and the attractive returns possible from investing in this bond, it is sure to raise interest in the Dodeka issues among the ILS investor community.
“The cost-efficiency of our technology is allowing for a wide size range of transactions, including small ones, such as the currently issued bond which corresponds to the investment-capacity required by our investment vehicles. Furthermore, this bond offers a unique risk-profile to our clients as there are no other publicly traded bonds that require at least 3 events to trigger,” commented Dr. Roman Muraviev, Director at Twelve Capital.
Twelve Capital continues to show that the Dodeka platform and series of private cat bond deals will be used to allow it to access the risks it feels will complement its ILS portfolios, adding diversification for its investors and allowing it to access risk in liquid, securities form when it cannot source anything similar through the public cat bond market.
As such the Dodeka series is becoming a valuable way for Twelve Capital to increase the diversity within its funds and in future could become a way for the ILS manager to create new opportunities to allow for further inflows, when perhaps the main cat bond market is not supporting its needs.
Muraviev explained; “Dodeka allows Twelve Capital to access risks which return more than the market can offer, as well as allowing us to access diversified risks and as a result reduce the tail risk within our portfolios.”
The Dodeka III private catastrophe bond, like the previous three Dodeka deals, was issued through the Kane SAC Limited private cat bond platform, which is operated by global independent insurance manager Kane.
The $10m of Dodeka III private cat bond notes will be listed on the Bermuda Stock exchange, enhancing their liquidity and providing Twelve Capital with improved options and additional transparency to trade the notes on the secondary market. The notes will also be priced by a number of ILS broker desks, giving the market visibility of their pricing and increasing options for liquidity.
In future the Dodeka platform may see even more diverse risks come to the catastrophe bond market, with likely targets being Asian perils and perhaps even some of the man-made risks that Twelve Capital underwrites. Having the ability to transform any reinsurance or derivative risks that it underwrites into a liquid security gives Twelve Capital great flexibility and options for the future which could help it to continue to grow, even while the market is not supplying a particularly diverse selection of deals.