Twelve Capital Group, ICMIF’s Supporting Member for capital, maintains an extensive network of banks, brokers and (re)insurers in all key markets. Through its funds, Twelve Capital is a leading capital provider to (re)insurance companies. Twelve Capital provides financing in the form of collateralised reinsurance, (private) cat bonds as well as loans and private placement bonds. In its 2H Outlook report, Twelve Capital Perspectives, the organisation examines the current situation regarding Solvency II in Europe and its impact for both investors and insurers.
Twelve Capital sees Solvency II as the key fundamental issue that will impact insurance debt and equity investor sentiment over the remainder of 2015. By contrast, market volatility associated with recent macro events naturally positions the Insurance-Linked Securities (ILS) asset class at a sweet spot in the fixed income space, due to its low levels of correlation to broader financial markets and strong risk-adjusted yield opportunities.
Positively for debt investors, Twelve Capital believes the vast majority of insurers will successfully manage their Solvency II transition. This is another product of the post financial crisis balance sheet strengthening and enterprise risk management enhancement that has driven improved industry capital quantity and quality over recent years. Twelve Capital sees Solvency II encouraging additional insurer restructuring, involving further efficiency gains and non-core asset disposals for example, as management teams look to optimise businesses to the new regulatory environment.
Twelve Capital expects investor perceptions of individual groups to alter as final Solvency II positions are revealed, with implications for bond relative value and pricing. The organisation sees insurers that have heavy exposure to the low yield environment as most challenged by Solvency II, in particular those life insurers in Germany, Switzerland, the Netherlands, Norway and elsewhere that sold material, long term investment guarantees and allowed significant asset-liability mismatches to develop.
Twelve Capital says it sees greater Solvency II implications for insurance equity investors, especially those investing for outsized sector capital returns. Whilst the organisation believes attractive equity returns are possible, stock selection is key given Twelve Capital’s expectation of strong regulatory oversight and conservative capital management. Emergence of Solvency II clarity will also act as a key catalyst for prospectively stronger insurance equity investment performance.
Not surprisingly, the Solvency II framework and enhancement of regulation within the insurance sector has also contributed to the growth of the ILS universe. Broadly speaking, sponsors of Cat Bonds note the potential positive regulatory capital implications of this multi-year protection mechanism. Moreover, the risk transfer methodology offered through this fully collateralised cover benefits cedants due to a removal of counterparty and credit risk, and assures efficient access to capital during insured events.
John Butler (pictured), Managing Partner & Head of Sourcing, Twelve Capital says “As a specialist insurance investment manager, Twelve Capital has a thorough understanding of the capital requirements of mutuals and cooperatives and we are here to support ICMIF members at every stage of their organisational development.”
“The inherent complexities within an insurance business means that when mutuals and cooperatives are looking for financing from other, non-specialist investment managers, there can be a significant degree of execution risk around these transactions. At Twelve Capital, our core activity is insurance investing and our partners work closely with their counterparts at mutuals and cooperatives at every stage of the process.”
Commenting on Solvency II, John Butler said: “Solvency II regulation in Europe has been drawn up with large multinational insurers in mind, rather than mutuals and cooperatives. At Twelve Capital, we aim to work with ICMIF members to help them navigate through and ensure compliance with the new regulatory environment.”
“As mutuals cannot raise capital in the equity markets, debt is a topic that is particularly pertinent. The Twelve Capital team aims to work with mutuals to ensure that their financing needs can be met in a way that best suits their long term business requirements and in a way that fosters a long term partnership between us and them,” John concludes.
Please click to read and download the Twelve Capital Perspectives 2H 2015 Outlook Report (PDF).