Twelve Capital, the Zurich-headquartered insurance-linked securities (ILS), catastrophe bond and reinsurance investment manager, remains positive on the potential for the private ILS market to continue to recover from its recent historical challenges and intends to launch a new strategy to target the end of year renewal period, Marcel Grandi, Head of ILS Sourcing told Artemis.
In a recent interview, around the 2023 Monte Carlo Reinsurance Rendez-vous, Marcel Grandi of Twelve Capital highlighted that, while the catastrophe bond market has been the source of ILS market expansion this year, the prospects for private ILS market growth have also improved.
Reflecting on how the ILS market switched its focus from private ILS to cat bonds, in recent years, Grandi explained how we got to this stage.
“Considering the severity and frequency of the loss activity between 2017 and 2022, one may conclude that cat bond strategies in general performed better than expected, given the circumstances,” he told us. “The private ILS market – the big growth area pre-2017, with the growth to a certain extent also facilitated by the stagnation of the cat bond issuance in the middle of the 2000 years and a period of low coupon spreads created the disappointment with the investor community.”
Continuing to explain some of the issues that the ILS market cannot afford to repeat, “So called soft market structures as low attaching aggregates with no or low franchise deductibles or complex top and drop or cascading structures were not to the benefit of the collateralized markets.
“Poor wordings and a broad scope of coverage allowed for pandemic related losses creeping into property cat structures. The expansion into difficult to model diversifying risks beyond peak natural perils through the use of leveraged fronting structures did not support the performance either.
“Last but not least the issue of locked collateral and the creation of multiple sidepockets within funds created a frustration with investors.”
Grandi went on to highlight how to ensure investors aren’t disappointed by private ILS again, by saying, “Avoiding the mistakes of the past, sticking to simple event-based structures with named peak natural perils and a focus in the tail of the reinsurance protection is delivering convincing results (mid double-digit returns) even in difficult cat years as 2021, 2022 and 2023. Appropriate top layer occurrence structure also may minimize the risk of locked collateral.
“Investors need to see that private ILS strategies may also perform in difficult times before considering larger involvements again.
“Interestingly the addition of private ILS to a cat bond portfolio helped to improve overall ILS performance in 2022 with cat bonds impacted by mark-to-market adjustments following the general coupon increase of newly issued bonds.”
Grandi also explained that work is required to address issues with the collateral release mechanism in private ILS structures and transactions, saying that refinements to this are necessary.
With the right tweaks to collateral release mechanisms, Grandi believes the ILS market can, “further minimize any discretion in the ongoing loss calculation and achieve the same transparency and objective standards as in cat bonds.”
With the right actions taken and discipline maintained, Twelve Capital believes private ILS markets will recover and continue to regain some of the lost traction.
“We are optimistic that the private ILS market will further recover provided a prudent underwriting approach continues to be applied and supported by an attractive track record over the last 2 to 3 years,” Grandi told us.
He went on to say that he believes, “Private ILS can be added to a comingled ILS Fund enhancing return or can be pursued on a stand-alone basis best within a closed end type structure to avoid valuation uncertainties at dealing dates, as no interim subscriptions and redemptions are allowed accordingly also resolving the sidepocket issues.”
Grandi went on to highlight how Twelve Capital has integrated private ILS within some of its ILS fund strategies, drawing on its cat bond investment experience, while using private ILS to be additive, to help in creating more performant portfolios.
“Based on our position as a leading and successful cat bond manager we have reshaped our private ILS strategy three years ago and have applied in commingled funds complementing cat bonds by private ILS. In that respect we have a bespoke approach.
“Our focus is the Retro market to access peak perils in a narrow definition. We are trying to avoid diversification into secondary perils or non-peak risks. Within commingled strategies we try to select the best priced risks.
“In this context private ILS is enhancing the scope of options of investing in insurance risks,” Grandi explained.
Finally, Grandi told us that Twelve Capital will be looking to deploy investor capital to private reinsurance and retrocession opportunities at the year-end, with potential new capital for the renewals.
“For the 1.1 2024 renewal we want to be in the market with a bespoke stand-alone private ILS strategy with closed end type features,” Grandi explained.