Private cat bonds attract new counterparties

The development of specialist platforms that enable private catastrophe bonds to be structured quickly and in a cost-efficient way is increasingly attracting more traditional counterparties which were not previously active in the insurance-linked securities (ILS) space to get involved in the market, John Butler, managing partner and head of sourcing at Twelve Capital, told Baden-Baden Today.

Twelve Capital uses a private cat bond issuance platform called Dodeka to issue deals.

Butler said it allows the firm to introduce investors to more diverse risk through innovative triggers and counterparties which would not ordinarily have issued cat bonds on the public markets.

“One of the most interesting observations in the ILS market is that it continues to open up to private cat bonds, and that’s an area where Twelve Capital has been particularly active,” he said.

“We have found that more traditional counterparties not previously active in the ILS space have become interested in transacting in private cat bonds and, because we have a cost-effective, simple and efficient platform, bonds can be effectively structured on behalf of our end investors.”

Butler added that he believes expected volatility in the financial markets will also drive interest in the sector.

“We expect increased volatility in financial markets going forward. 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.

“In addition, we will be continuing to develop our cross-balance-sheet investment strategy, with the launch of an insurance equity investment strategy to complement our existing ILS and debt products.”

In terms of this year’s Baden-Baden conference, Butler hopes that the idea of so-called alternative capital is becoming increasingly normalised as a concept, given that the ILS market is now a well-established risk transfer mechanism.

“It is simply another potential means for insurers and reinsurers to obtain efficiently priced risk capital,” he said. “I would expect a continuation of the broadening acceptance of ILS structures with a wider range of potential cedants this year.

“In addition, progress is being made in expanding outside the pure cat arena into other lines, an initiative in which Twelve Capital is particularly active.”

He stresses that the ILS market is an example of an industry that is innovative, one that is developing to address the needs of insurers and investors alike.

“As Twelve Capital invests a significant amount of assets on behalf of clients across the balance sheets of insurance and reinsurance entities, it is a major facilitator of financing for these organisations and, as a result, we look to Baden-Baden not only to help drive a continued convergence between re/insurers and capital markets, but also to help bridge the ever-narrowing gap between traditional and alternative investments in the insurance space.”