Specialist Swiss-based insurance-linked securities (ILS) and reinsurance-linked investment manager Twelve Capital is issuing its first private catastrophe bond, named Dodeka I, as a way to acquire transformed risk for its more liquid investment strategies.
Dodeka I is a $25m (including the premium) zero-coupon private cat bond issued under a programme using a transformer vehicle. The notes are exposed to multi-peril U.S. risks and have a one-year term.
The Dodeka I private cat bond is effectively a transformed industry loss warranty, so uses an industry loss trigger based on Property Claim Services (PCS) catastrophe report data.
For Twelve Capital this private cat bond serves a purpose of creating assets which qualify to be invested in by its more liquid securities vehicles and mandates. With the risk into listed securities it allows the risk to be more easily priced and makes it more accessible to a broader audience, including the potential for secondary liquidity.
Twelve Capital said that it expects the development of private cat bonds to become a core activity for the asset manager in 2014. It allows the ILS manager to create new liquid security investment opportunities for itself. Utilising private cat bonds might also allow Twelve Capital to move risk from one fund to another, perhaps taking collateralized reinsurance contracts or industry loss based contracts and transforming them into securities with increased liquidity for its strategies which mandate this.
Twelve Capital said that the notes will initially be held within its own ILS fund strategies, but in future it might seek to sell them on the secondary market. This strategy gives the manager enhanced flexibility when taking on risk and an ability to move it around or sell it.
Aon Benfield acted as advisor for the private cat bond transaction. The risk is transformed and the Dodeka I notes issued using the Kane SAC Limited private cat bond platform, which is operated by global independent insurance manager Kane.
Artemis understands that this deal will incept in a few days and the $25m of notes issued for this Dodeka I private cat bond will be listed on the Bermuda Stock Exchange (BSX) to enhance the notes liquidity.
If the costs to transform and issue private cat bonds are attractive enough it is likely that this strategy will become much more widely adopted among ILS asset managers with multiple strategies and a need for new, securitized risks with secondary liquidity. If the 144A catastrophe bond market itself is not providing enough new investment opportunities, managers may choose to create their own.
Also read our piece on Twelve Capital’s 2013 returns and its new ‘Best Ideas’ insurance investment strategy: