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Twelve Capital highlights private ILS exposure to Australian wildfires


Zurich headquartered specialist insurance-linked securities (ILS) and reinsurance investment fund manager Twelve Capital has noted that a private collateralised ILS contract has potential exposure to the ongoing Australian bushfire losses.

Wildfire industry lossesIt’s the first confirmation that some ILS capital could potentially face some losses from the bushfire season in Australia, as so far it had been assumed most of the impacts would be retained by primary insurers, with any leakage to the reinsurance market most likely through quota shares and aggregate layers.

Twelve Capital explained in an update that its portfolio contains one private reinsurance contract covering a domestic Australian insurer and this is exposed to the ongoing series of Australian bushfire events.

Currently, the Australian bushfires since November are estimated to have caused an insurance market loss of around US $970 million.

In terms of reinsurance market impact, the only confirmed so far has been from insurer IAG, which said that the ongoing bushfires in Australia triggered its aggregate reinsurance protection.

Fellow insurer Suncorp said that claims from the bushfires had not reached its reinsurance arrangements but that its drop-down and aggregate reinsurance could come into play with as little as another A$50 million of claims perhaps tipping the balance.

There is always a chance of some losses from these major players flowing to the ILS market, but with such large quota shares in place with global reinsurers and the lower levels of their aggregate layers largely traditional, any impact was expected to not be too significant at this stage.

But Twelve Capital has confirmed that the ILS market does hold exposure, as if this one ILS fund manager has a position that is exposed to the bushfires it stands to reason that others will do too.

The manager explained that the total reported loss under the contract at the end of November suggested that the position and the invested capital behind it would not be affected.

But with industry loss estimates for the Australian bushfires having increased since then and expected to increase further, there is a chance that the position faces a risk of loss should the covered insurers ultimate rise into that layer of coverage.

“As claims from the recent bushfire events are expected to increase and based on the initial market loss estimates, a material impairment of this transaction cannot be excluded at this stage,” Twelve Capital explained.

The manager said that the exposure to this particular transaction across the private ILS focused mandates and funds that it managed ranges from 1.7% – 1.9% of the November net asset value.

But, “Twelve Capital does not expect an impact on our fund at this stage,” the manager said.

The transparent update from Twelve Capital shows that the ILS market may be impacted by the ongoing Australian bushfires, should losses keep rising.

It’s not clear how many positions such as this exist in the ILS market, but if one manager has an exposure to the loss event you can bet others do as well.

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