ILS
News in brief
Bermuda’s ILS sector continues to flourish, evolve and generate regular news and developments. We pulled together some of the key news stories of recent months—in case you missed them the first time.
Resolute solves trapped capital
Resolute Global Partners, the Bermuda-based investment advisor specialising in re/insurance, has unveiled a new type of reinsurance contract, which it claims solves a number of problems that have vexed the reinsurance industry, including trapped capital.
Footprint, which it has created in collaboration with broker Gallagher Re and catastrophe modelling firm Karen Clark & Company (KCC), can be used for any type of catastrophic event, from severe convective storms and wildfires to hurricanes and earthquakes.
The first Footprint transaction is focused on severe convective storms, which are some of the most common and most damaging natural catastrophes in the US. These storms, which can include tornadoes, hail, and high winds, have become one of the costliest perils for insurance companies. As a result, insurance companies are demanding more coverage while reinsurers are limiting supply, a dynamic that highlights Footprint’s value in the market.
Footprint’s innovative structure solves a number of problems which Resolute claims have vexed the reinsurance industry since 2017. These include trapped capital, extended settlement times, economic inflation, social inflation, non-modelled risks, and pricing uncertainty.
The product’s benefits, Resolute claims, include rapid claim settlement (within 30 days of an event); automatic commutation (within 30 days of contract maturity); and fixed exposure risk. Unlike other products such as parametric triggers, industry loss warranties and cat bonds, this approach provides a more accurate assessment of storm losses than what is currently available, giving insurance companies cost-effective coverage and critical liquidity post-event while also offering investors a more efficient way to access the property reinsurance market and earn attractive returns.
Footprint’s process works as follows: An insurance company submits its exposure file, which is then fixed at the inception of the contract. In the event of a covered event, KCC will overlay the intensity footprints on the insurance company’s fixed exposure profile and determine the company’s ultimate loss. The loss, as determined by the model, is paid to the insurance company within 30 days. The contract is automatically commuted within 30 days of maturity, allowing investors to receive their original investment plus any profits, or less any losses, immediately.
Ariel Re first to use London Bridge 2
Bermuda-based reinsurer Ariel Re has secured $270 million of capital from five new institutional and family office investors to support growth opportunities in 2023. The company said that existing backers Pelican Ventures and JC Flowers & Co also have “meaningfully increased” their underwriting capital commitments.
As part of this capital raise, Ariel Re secured $170 million through London Bridge 2 PCC, becoming the first sponsor to raise capital through the structure. Launched by Lloyd’s in August 2022, the protected cell company was designed to reduce complexity and give greater flexibility for global investors to participate in the Lloyd’s market.
Burkhard Keese, chief financial officer and chief operating officer of Lloyd’s of London, said: “I’m delighted that Ariel Re chose the LB2 structure to facilitate delivery of this new capital into the Lloyd’s market, a key deliverable of the Future at Lloyd’s strategy. We set the London Bridge PCC vehicle up to be as flexible and responsive as possible, and with oversight of the UK’s Prudential Regulation Authority, we now believe we have an onshore UK structure that can rival any of the established offshore vehicles in other jurisdictions. We hope that Ariel Re will be the first of many to use LB2.”
Ariel Re launches carbon offset cat bond
Ariel Re has completed its third cat bond—and included an innovative first-of-its-kind carbon offset feature whereby it will buy carbon offset options in the event of a significant event.
Titania Re III, the third issuance from Titania Re (Series 2023-1 Notes), provides Ariel Re with $125 million of collateralised reinsurance cover for named storms and earthquakes in all US states, Puerto Rico, the US Virgin Islands and Canada with an industry loss trigger over three years.
In a first for the cat bond market, Ariel Re will seek to buy carbon offset options from a qualified provider to generate carbon credits in the event of a significant hurricane or earthquake that requires a large number of homes, commercial properties and vehicles to be replaced.
There is no rule that requires replacements to have lower carbon emissions, so Ariel Re is using Titania Re III to mitigate what it calls a missed opportunity and buy carbon offsets equivalent to the benefit that would have come from rebuilding or replacing buildings and vehicles with those which have a less damaging carbon impact.
Titania Re III is the third cat bond which Ariel Re has sponsored since the initial Titania Re deal in 2021.
Two cyber ILS deals launched
Two new cyber ILS deals were launched in January this year, which some have described as a game-changer for cyber risk transfer market.
January 2023 could come to represent a watershed moment in the development of the ILS markets. After almost a decade of wrangling and debate by the very best dealmakers in the risk transfer landscape, not one but two cyber ILS deals finally came to market.
First Beazley, then Hannover Re brought the deals. They are very different and thus significant in their own ways, but their importance cannot be overestimated.
First Beazley launched a $45 million “market’s first” cyber catastrophe bond with backing from a panel of major ILS investors.
The $45 million private Section 4(2) bond is fully tradeable under Rule 144A resale and gives Beazley indemnity against all perils in excess of a $300 million catastrophe event, with the potential for additional tranches to be released through 2023 and beyond.
The bond is backed by a panel of ILS investors including Fermat Capital Management, and was structured and placed by Gallagher Securities, the ILS arm of Gallagher Re.
The bond is designed to cover remote probability catastrophic and systemic events. Developing effective solutions for catastrophe risk is vital to allow the supply of capacity to the cyber re/insurance market to increase, to meet growing demand for cover from business and society.
Just weeks later, Hannover Re came to market with the “first” proportional reinsurance structure for cyber risk, which it delivered after partnering with asset manager Stone Ridge.
Stone Ridge has provided $100 million in capital to support an innovative retrocession tool that “for the first time” enables the capital markets to participate directly in coverage of its cyber risks through a quota share cession.
The transaction covers cyber risks in Hannover Re’s worldwide portfolio and has a long-term orientation. The reinsurer noted that it enabled it to reconcile the complexity of a proportional cyber risk cession with the needs of a capital markets investor.
ILS at a crossroads
The ILS market finds itself “at a crossroads” following several years of heightened catastrophe losses, and with the supply of capital set to remain low while investors re-assess the class, AM Best warned.
The rating agency notes that losses stemming from Hurricane Ian, after years of elevated losses, have solidified the arrival of a hard market and dampened the influx of new capital from ILS investors. Reflecting on the state of the ILS market amid these challenges, AM Best notes that some investors are holding steady in this asset class.
However, it acknowledges that sentiment among some ILS managers is that the supply of capital, particularly for aggregate reinsurance and retrocession, will remain tepid for some time despite high demand given the losses, along with inflation and lower asset valuations.
Tremor launches cat bond platform
Tremor Technologies, the reinsurance pricing and placing platform, launched Tremor Issuer, an online catastrophe bond issuance platform powered by the firm’s Panorama marketplace tech.
The new platform can be accessed online by investors, issuers, bankers, and brokers, and is offered via the company’s new regulated subsidiary, Tremor Capital Markets. The company said it will bring transparency and price and cost efficiency to the cat bond marketplace, which is an important component of the broader ILS space
H2 Group targets ILS space
H2 Group, a Bermuda-based technology company, launched its inaugural product, RUDDR, a policy management system. It said its initial focus will specialise in developing bespoke solutions for the entire insurance and reinsurance industry, but its initial focus will be on the ILS space.
The company also intends to expand into other verticals of the insurance industry in time, targeting areas where technology can modernise the insurance industry.
Image Credit: Midjourney / Mcadoodle
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