Celebrating 10 Years of Achievement: A Retrospective and Outlook for Our Sustainable Insurance Subordinated Bond Fund

Reflecting on a decade of both challenge and growth, we have navigated through major regulatory, economic, and geopolitical shifts, enhancing our expertise and delivering value.

Subordinated insurance bonds, bonds issued primarily for regulatory reasons, have delivered reliable and consistent returns over the past 10 years*, whilst issuance from the sector has continued to grow to close to just under USD 1 trillion notional outstanding.

The strategy successfully navigated significant events during the past 10 years, including:

• Solvency II inception driving enhanced transparency and stability within the European insurance sector
• Ultra-low interest rate environment and ECB quantitative easing, putting pressure on insurance balance sheets but creating growth opportunities within subordinated bonds
• Significant growth in the insurance subordinated asset class with RT1 bonds gaining scale, reflecting the development and maturity of insurance capital frameworks
• Covid-19 crisis that tested the resilience of the financial sector and highlighted the robustness of insurers’ financial strength
• Ukraine conflict increasing geopolitical risks as well as general inflation
• Higher inflation urging Central Banks to increase interest rates at an unprecedented pace and scale, a response not seen in the past decade

Key themes and opportunities for the future

• End of Solvency II grandfathering period concluding on 31/12/2025, aligning insurance capital with modern regulatory standards which will lead to more issuance
• Increasing Protection Gap reinforcing the critical need for (re)insurance, particularly in regions with substantial coverage gaps or exposed to severe weather events
• Emergence of New Insurable Risks, e.g. cyber risks expected to expand, creating new needs for capital, underwriting expertise, and regulatory responses
• Aging population creating a growing need for private pensions and health insurance solutions to address the shortfall left by diminishing public sector support

Twelve Capital continues to highlight the sectors attractiveness in comparison to other sectors of both the investment grade and high yield market, where recently spreads have narrowed significantly leaving investors to rethink their alternative sector allocation across the credit spectrum. Twelve believes that the Insurance sector has unjustifiably lagged the move seen in traditional parts of the credit universe and therefore offer investors a compelling entry point. We further point out that, in the current market environment, strategies focused on traditional bottom-up security selection and in-depth credit research are well positioned. These strategies, which require specialised knowledge and skill, are particularly suited to sector experts like Twelve Capital.

*Past performance is not indicative of future returns. Capital invested may increase or decrease in value.