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Twelve Capital forecasts longer-lasting heightened ILS pricing environment


Twelve Capital, the Zurich headquartered insurance-linked securities (ILS) and reinsurance investment manager, is forecasting “a longer-lasting heightened pricing environment”, or so-called hard insurance market cycle, with discipline one factor that can help sustain this.

twelve-capital-zurichThe investment manager forecasts returns in the 10% range for liquid catastrophe bond fund strategies in 2024, losses allowing, helped by growing interest in the structure for reinsurance purposes.

While Twelve Capital also believes its private ILS fund offering can return around the 15% mark, as long as major catastrophe loss events remain absent from the market.

In addition, Twelve Capital forecasts that the ILS market will continue to grow in 2024, while the catastrophe bond market is expected to be busy with new issuances again.

On the persistence of the heightened ILS pricing environment, the manager said, “This is to be sustained by factors such as disciplined deployment of capacity from market participants and new issuances that are likely to go hand in hand with increased investors’ interest in the asset class.”

More broadly, on the macro economic side, Twelve Capital said, “A normalised market environment is expected to offer a tailwind for the asset classes where Twelve Capital is active. Markets’ deepness and liquidity will benefit from a healthy pipeline of new deals while achievable risk-adjusted returns will remain attractive following the positive performance in 2023.”

2023 saw investors in the manager’s ILS fund offering benefit from the record-high spreads, sound risk-free returns and benign US hurricane season.

Looking ahead, the risk-free rate may reduce its contribution, with a progressive decrease expected, while at the same time inflation is also expected to slow which Twelve Capital notes can “benefit indemnity type of deals and index linked bonds, where the payout is linked to paid losses.”

Climate change is a factor that Twelve Capital notes as important, saying, “A progressive increase in climate related insured losses is negative.”

But, Twelve Capital focuses on peak perils with higher attachment points and notes that the renewal and repricing cycle in ILS and reinsurance allows risk to be repriced, while climate change also supports market growth, as cedents seek more protection.

For 2024, Twelve Capital is anticipating another strong year for the catastrophe bond market, with supply coming from both existing and more new cedents.

In addition, the manager expects more diversifying risks and cat bonds, including through cyber cat bonds and more parametric deals.

On the investor side, Twelve Capital notes that, “Many investors are (re)entering the space thanks to attractive spreads and improved contract conditions.”

As a result, the manager expects that overall ILS capital will grow at a high single digit pace above the current US $100 billion level over the next years, adding “This will have positive liquidity implication for investors.”

Where spreads and pricing are concerned, Twelve Capital says, “We expect a progressive normalisation albeit towards an elevated level. While improving, capacity remains constrained by the discipline of (re)insurer, leading to a longer positive cycle.”

Which overall is a very positive outlook, which if it comes to pass as Twelve Capital suggests should ensure a strong year of growth and also more new investors entering the cat bond and ILS space in 2024.

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