Peak peril approach insulates Twelve Capital’s ILS strategies in 2023

For insurance-linked securities and reinsurance-linked investment manager Twelve Capital, while 2023 has been another year of above average global insured catastrophe losses, the managers ILS and catastrophe bond fund strategies have been largely insulated from impacts.

Like many ILS managers have done, Twelve Capital adopted a focus on the major peak perils and shifted away from many reinsurance and retrocession arrangements that included frequency exposure and lower-layer risks in recent years.

The shift towards the true peak perils, largely on an occurrence basis, has helped to insulate ILS managers from what has been another costly year of severe weather and catastrophe losses for the global insurance and reinsurance industry.

Global catastrophe losses were already above $100 billion for the year around the beginning of November, the sixth year since 2017 they have done so and the fourth year in a row.

In a post-hurricane season update, Twelve Capital noted that the contribution from so-called secondary perils has again been high.

The article linked above suggests more than three-quarters of global insured catastrophe losses in 2023 have been from peak perils, with US convective storms the biggest peril contributor to the annual loss total.

Twelve Capital commented that, “Despite another year of significant industry losses around the globe, the approach at Twelve Capital to focus on covering well modelled and clearly defined peak perils has resulted in minimal impact on its portfolios.”

Going on to note that, “With U.S. convective storms causing over USD 50bn worth of insured losses, it was certainly a test to the Cat Bond market to understand how these losses would impact investors. Aggregate erosions of transactions covering convective storms were certainly impacted, but at the time of writing, the current impact to the market is expected to be minor, with the impact to Twelve Capital’s positions in particular expected to be even less than the market, given our “Peak- Peril” approach.”

Referring to other non-peak perils or regions, Twelve Capital said, “There were also minor impacts to aggregate erosions from Winter Storm Elliot (December 2022) and the Turkey Earthquake (February 2023), but these impacts were in addition to losses already driven from Hurricane Ian in 2022, and did not cause any impact on a stand-alone basis.”

Then, specifically on the hurricane season, Twelve Capital also said, “The latest available data on Hurricane Otis indicates to an expected 50% payout on the FONDEN IBRD Class D Notes, which use a parametric trigger based on central pressure estimates. This bond constitutes a minimal position in our portfolios, and as such a payout from this transaction will not have material impact on performance.”

This is the experience of many in the ILS manager community, that the shift up reinsurance and retro towers, as well as further away from frequency and attritional severe weather losses, has helped to insulate ILS fund portfolios against the still-high industry loss experience this year and alongside rates is driving strong performance, because of this.

Of course, hurricane Idalia could have changed all of this, had the category 4 storm made landfall further south along the Florida Gulf coast.

But even in the majority of more severe scenarios for hurricane Idalia, the adjustments made to ILS fund portfolios would likely have made that more of a manageable loss event, one that could even have still been absorbed by annual ILS fund performance, rather than wipe it out.

In 2023, the ILS fund manager community has demonstrated the strengthening of their portfolio strategies, especially against secondary perils and frequency severe weather loss events.

We didn’t see a significant hurricane, typhoon, or earthquake loss event test this year, but it is clear that ILS portfolios are generally much more hardened against even the most severe of catastrophe events.