Casualty ILS: the next frontier is here

For almost as long as the ILS market has been around the question has been when and whether an asset class dominated by catastrophe risk could be broadened to encompass longer-tail exposures and provide a more diversified uncorrelated portfolio to investors.

This publication recalls in the immediate lead-up to the 2008 financial crisis a number of investment banks looking to structure ADC-type covers for the insurance industry.

Carriers were also active, with Axa pioneering a series of auto securitisations that were heralded as structures enabling the transfer of property and casualty risks.

The credit crisis put paid to some of those early efforts. And until recently it was the property cat market that continued to be the focus of ILS investors, products and innovation, at least publicly.

But the tide finally appears to be turning. At a time when investors have retrenched from areas of the ILS property market outside of cat bonds, there is a wave of interest and now activity in the longer-tail casualty arena.

In the last year The Insurer and our sister title Program Manager have written about Ledger Investing gaining traction as it targets US programs business for its ILS transactions, typically working with fronting carriers to provide quota share capacity.

And late last month, Program Manager revealed two developments that highlight the appetite from capital markets investors to access the business through transformers and fronting carriers – and the demand from cedants to utilise the capacity.

There was the major commitment from Vesttoo to deploy $1bn in reinsurance capacity to the portfolio of programs fronted by Clear Blue.

The arrangement is not an index play as a portfolio-wide quota share. The capacity will instead be deployed on a deal-by-deal basis.

But the nature of Clear Blue’s portfolio is instructive as to the kind of risk that will be transferred to capital markets investors through Vesttoo’s platform.

The fronting carrier’s book of programs is heavily weighted towards commercial auto and construction, including general liability, matching the lower volatility, higher frequency-type exposures that a growing number of capital markets are looking for as an alternative to cat risk.

The arrangement is slated for 12 months, but the two parties have already done a significant amount of business together and this feels like a relationship where a significantly greater amount of capacity than the $1bn publicly committed could be deployed over time.

Vesttoo CEO Yaniv Bertele commented at the time: “We want to go beyond the current players and increase access to the asset class to include significantly more sustainable capacity that allows banks, hedge funds and asset managers to participate, where they pledge their investment grade assets and enhance their yields with uncorrelated returns … and also diversify their portfolios.”

Longer-tail casualty

On a similar theme, our sister publication revealed that Bob Forness-led MultiStrat is acting as a transformer and deal structurer to bring $115mn of ILS capacity from an unnamed investor to support Venture Underwriters’ primary contractors’ general liability program.

MultiStrat’s Bermudian vehicle acts as a quota share reinsurer through a segregated cell to State National’s United Specialty subsidiary, which provides the rated paper for the deal.

And this transaction relates to underlying exposures that are longer-tail than the majority of the casualty business that has been involved in ILS deals to date.

There had been question marks over the appetite of investors for longer-tail exposures where duration can run beyond a decade. On this deal, at least, it appears that the quality of data and track record of the program was sufficient to satisfy any concerns.

Venture Underwriters is owned by CRC, one of the big three US wholesalers. It has for some time been suggested that wholesale (and retail) aggregators may ultimately be able to make greater use of capital markets capacity to support the broad and well-diversified portfolios across underwriting platforms that have been consolidated at scale.

That raises the intriguing prospect of index plays or even more selective ETF-type structures that could create and structure pools of risk that are packaged to the specific appetites of a range of different types of capital markets investors.

Beyond programs into mainstream (re)insurance

While the US programs and MGA space appears to be at the forefront of this innovation at the next frontier for ILS investors, Vesttoo and MultiStrat – as well as Longtail Re and Ledger Investing – have appetites that stretch beyond that segment.

Ledger Investing this summer closed a WestCap-led $75mn Series B fundraise and told this publication that it had placed more than $400mn in premium into the capital markets by June 2022 and was on course to go past $1bn by the end of the year.

And speaking to this publication, the firm’s COO Brad Fischtrom said: “In addition to continuing to expand ILS in the MGA/fronted market, Ledger will also be growing significantly in the traditional insurance company space.

“ILS is a capital management tool, i.e., replacing high-cost, fixed capital with flexible and efficient off-balance-sheet ILS capital. This is the insurance company business model of the future, and Ledger will be the catalyst.”

AM Best picked up on the theme in its latest report on the broader sector as it tipped casualty ILS to grow.

“Diverse industry players such as traditional reinsurers, insurtech companies and longtime ILS investors believe there is an opportunity to transfer casualty risk to the capital markets via ILS transactions,” the rating agency observed.

Traditional reinsurers may have initially viewed the emergence of these new players as relevant only around the fringes of the market.

But lofty ambitions that extend beyond making significant inroads into the MGA segment – which along with the E&S market is the fastest-growing and hottest space in the P&C industry – are being driven by serious, experienced industry veterans at the wheel and heavyweight institutional investor support in the background.

“This brings the real possibility of swathes of potential new capacity entering areas such as the program and MGA business, with the expertise, experience and access to capital to move beyond that and make a significant impact as a complement to mainstream, traditional reinsurance”

For example, Ledger’s Series B included investment from Teachers’ Venture Growth and Intact Ventures. The former is part of Ontario Teachers’, the pension fund giant which is also understood to have backed the launch of ILS fund Nanorock by Ledger last year.

Ledger is led by former AIG chief reinsurance officer Samir Shah.

Meanwhile Vesttoo under CEO Bertele has assembled an advisory board led by chairman Jacques Aigrain, the former Swiss Re CEO. It has access to various sources of capital and is understood to have funding from one of the largest investment firms globally.

MultiStrat is led by seasoned (re)insurance executive Bob Forness and Stone Ridge’s Longtail Re is led by former TransRe president and CEO Mike Sapnar.

Other examples of new ILS players in the casualty space include RenaissanceRe’s Fontana Holdings joint venture, which is backed by third-party capital focused on casualty and specialty risk.

For a number of years, smaller niche collateralised reinsurers such as Topsail Re and Freedom Specialty have been active focusing on areas like auto liability and general liability quota shares.

But the new breed is now bringing access to large pools of institutional investors seeking casualty risk.

And this brings the real possibility of swathes of potential new capacity entering areas such as the program and MGA business, with the expertise, experience and access to capital to move beyond that and make a significant impact as a complement to mainstream, traditional reinsurance.