Growth in private cat bonds brings new faces to ILS


Driven by lower costs and faster time-scales, the market for private catastrophe bonds is growing quickly, allowing counterparties not previously active in the ILS space to use this method of risk transfer, John Butler, managing partner at Twelve Capital, told Monte Carlo Today.

Deals of this nature can be structured in as little as 10 days and also allow investors access to more diverse risks unavailable in the public markets.

“The ILS markets continue to open up to private cat bonds, and that’s an area where Twelve Capital have been particularly active, with the firm investing in three such bonds in the second quarter of this year alone,” Butler said.

“From our perspective, we’ve found that more traditional counterparties who wouldn’t have previously been active in the ILS space have become interested in transacting in private cat bonds and, because we have a cost-effective platform, bonds can be effectively structured on behalf of our end investors.

“It takes about 10 days to put one of these together and the benefit of this is that we can introduce investors to more diverse risk through new counterparties who wouldn’t ordinarily have had the chance to issue cat bonds on the public markets.”

He said the rise of these bespoke deals has in part been driven by a growing sophistication among investors and due diligence processes that have continued to become ever more detailed over the past 12 months.

“Pension funds are well-educated as to the nature of these risks, having historically always been the major providers of equity investment for traditional reinsurers,” Butler said.

“Today, they just become more proximate to the same risk as their level of sophistication improves.

“Coupled with the significantly improved levels of detail and granularity around reporting, investors are being regularly educated by their manager around how investments are performing and frequently seek ever more innovative solutions in order to enhance returns.”

The growth of the sector will be boosted by increased volatility in the wider financial markets, Butler predicts. He explained that, by adding ILS to a wider portfolio, institutional investors will be able to reduce the volatility of their overall investments.

“With volatility expected to increase in the next two to three years, it is understandable that ILS will continue to have an ever-growing place within the context of a broader and more diversified portfolio,” he said.

Butler stressed that he sees the ILS market as an example of an industry that is innovative, one that is developing to address the needs of insurers and investors alike. He is attending Monte Carlo this year with the aim of driving “communication between reinsurers and the capital markets, but also to help bridge the ever-narrowing gap between traditional and alternative investments in the insurance space”.

John Butler, Twelve Capital, ILS, Europe

Intelligent Insurer