ILS
Innovation and freeing trapped capital
ILS Capital Partners—which this year changed its name to Resolute Global Partners—hit the headlines in the summer of 2020 when it completed the first-ever securitisation of trapped capital. Co-founder and managing partner Tom Libassi discussed with Bermuda:Re+ILS the ways the firm is continuing to build value for its investors.
“Seeing this market dislocation, we designed a strategy to collateralise those contracts in a very efficient way.”
Tom Libassi, Resolute Global Partners
Last spring, ILS Capital Management changed its name to Resolute Global Partners to reflect the growth of its strategic partnerships and the addition of new business lines over the past several years that have significantly expanded the scope of its investments beyond traditional insurance-linked securities (ILS).
Launched in 2011, the Bermuda-domiciled investment advisor now employs more than 300 people across its organisation and strategic partnerships, and has offices in Hamilton, Bermuda; London, UK; Stamford, Connecticut; Chicago, Illinois; and Jacksonville, Florida.
Its strategic partners include Prospero Re, Producer’s National Corporation (PNC), MLTPLY, Pouch Insurance, Stable Insurance, Evolution Risk, Arrow Agency, Helios Underwriting, and Lloyd’s corporate member RGP. Through its team and strategic partnerships, Resolute Global has access to a breadth of opportunities across the property reinsurance, specialty reinsurance, US insurance, global insurance and specialty insurance arenas.
Non-correlated risk
When Tom Libassi and Paul Nealon, co-founders and managing partners of Resolute Global, joined Don Kramer (formerly chairman of Ariel Holdings) at ILS Capital in 2012, they soon came to the conclusion that they wanted to focus on non-correlated risk. Libassi points out that today’s market volatility highlights the importance of non-correlated investment strategies, which can temper the impact that traditional asset classes’ volatility can have on investment portfolios.
“We launched the fund initially using collateralised structures to cover a mix of property-cat risks, as well as marine and offshore energy reinsurance. We were the first fund to do specialty reinsurance, which was a core competency of Ariel Re, Don and Paul’s former company,” Libassi said.
“Our team, strategy and investment process were well thought of so, even in that first year, one of our big clients was Berkshire Hathaway. We wrote a portfolio of marine and offshore energy contracts for Berkshire’s book as an underwriting consultant.
“As we continued to grow our treaty reinsurance book, we began to see what I would call the structural problems with the collateralised model, including the fact that the ‘tail’ of property cat reinsurance is now longer than the ILS market anticipated, potentially making other sectors of the insurance market attractive alternatives.”
In late 2017, they started to look at another non-correlated sector: the US auto insurance market, which in 2015 and 2016 had been “abysmal”, Libassi said.
“High frequency and an increase in severity due to issues such as distracted driving and use of cell phones in cars caused significant losses in those two years, resulting in a reduction of capacity in that market. Seeing this market dislocation, we designed a strategy to collateralise those contracts in a very efficient way that we believed could generate mid-teen returns for our investors.
“We also came to the conclusion that there are a tremendous number of middlemen throughout this process. All the way from the US independent agent to Lloyd’s or Bermuda, there are many layers of cost,” he said.
“We thought: ‘why don’t we benefit from some of these fees in the middle so our investors could effectively reduce their costs, and let them be on both sides of the table, as both reinsurer and insurer?’.”
This prompted the firm, in 2018, to make its first investment in a US insurer, acquiring a stake in Chicago-based PNC, which owned five managing general agencies (MGAs) and three insurance companies.
“Since that time, we have expanded our original investment to a 90 percent+ ownership stake, meaning that our investors own 90 percent of our US insurance company and the opportunities that come with it,” Libassi said.
Through this partnership, Resolute Global gained immediate access to the US auto market, which has about $300 billion in premium written per year, three times greater than the premium in the reinsurance market, he said. This includes the Texas auto insurance market, which alone generates $26 billion a year of premium.
“We have plenty of room to grow and work with our strategic partners to uncover hidden opportunities.”
Expansion to other US sectors
Resolute Global then took its strategy further, adding US commercial lines and contingency risk through new partnerships with leading MGAs.
“I’ve always described insurance as being about 30 to 40 years behind Wall Street,” Libassi said. “Wall Street went through a period when the star trader would leave to start a hedge fund, or the star investment banker formed a new private equity fund. The insurance industry is beginning to have that, with the star underwriter leaving to form an MGA.
“Sourcing, underwriting and claims management drive underwriting profitability—the non-correlated return stream of the insurance sector. We want to partner with the best-of-breed underwriters in short-tail insurance sectors.”
These new MGAs have given Resolute Global access to additional opportunities in attractive sectors such as commercial auto and property, as well as contingency. They enable the firm to partner with experienced teams with established track records in a way that ensures that the interests of Resolute Global, its investors, its MGA partners and PNC are aligned.
New ventures
Seeing another opportunity to source attractive, non-correlated risk for investors, Resolute Global’s partner MLTPLY was launched in late 2021 to invest in and accelerate innovation for insurtech startups. Backed by the infrastructure of Resolute Global and PNC, MLTPLY helps to eliminate distractions and enables founders to focus time and resources on the particular problem they are working to solve, Libassi explained.
“MLTPLY helps us to attract the best entrepreneurs by enabling them to take advantage of the nuts-and-bolts insurance services that enhance their businesses. Our offering frees people to do what they do best, while we handle the back-office administration for a fair fee.
“Because we own equity in each new venture, our interests are aligned, representing a fully integrated approach that is an innovation for our industry.
“Supported by our team, each new venture has access to our claims department, our underwriting teams and, most importantly, our paper. In exchange for this support, we maintain control or influence, allowing us to focus on underwriting profitability while empowering entrepreneurs to develop their best ideas.
“MLTPLY and PNC make it possible for insurtech entrepreneurs to launch faster and with alignment of interests of all parties. At the same time, our investors benefit from proprietary, non-correlated returns with equity upside.”
Lloyd’s expansion
Resolute Global has taken a similar approach outside the US, partnering with entrepreneurial syndicates at Lloyd’s. Although Bermuda dominates the market in property reinsurance, Lloyd’s provides additional access to global property, as well as specialty lines, with insurance “licences” throughout the world. Resolute Global partners with entrepreneurial teams at Lloyd’s that have a different approach from the insurance market.
One example, Libassi said, is the Apollo ibott Syndicate 1971, which insures leading sharing economy and other innovative companies. Another example is the Volante Syndicate 1699, which has “boots on the ground” with 15 offices in Europe, the Middle East and Africa, providing additional geographic reach, he added.
These links with Lloyd’s give Resolute Global a more efficient, attractive way to source underwriting returns and gain diversifying exposures outside the US, he continued.
In early 2021, Resolute Global added another string to its bow in the form of Helios Underwriting, formerly Hampden Underwriting. Helios, which focuses on growing a portfolio of top performing Lloyd’s syndicates through the acquisition of limited liability vehicles (LLVs), is well positioned to capitalise on attractive insurance pricing.
This gives Resolute Global “even broader exposure” at Lloyd’s and in global insurance, Libassi said, highlighting the expertise of Helios chief executive officer Nigel Hanbury and its directors. Libassi joined the AIM-listed company as a non-executive director in April 2021, following Resolute Global’s participation in Helios’ capital raise the previous month.
The Helios board includes Martin Reith, the founder of Ascot Underwriting, who became a non-executive director at the same time as Libassi. Reith also serves as a director of Resolute Global’s reinsurance company Prospero Re.
Resolute Global’s efforts over the past four years to expand beyond traditional ILS investments have resulted in a well-diversified portfolio of re/insurance risk. Reinsurance represents one-third of the fund’s current portfolio, with insurance accounting for two-thirds. Resolute Global’s reinsurance book looks very different from those of the firm’s peers, Libassi said, with over half of the fund’s reinsurance book allocated to specialty risks and the remaining property business containing no aggregate contracts, no retrocessional contracts, and very little exposure to Florida.
“We’re still pretty small, but we have the ability to be very picky, particularly given the firm’s ability to source and analyse non-correlated insurance risk. The insurance market is large and highly fragmented, so we have plenty of room to grow and work with our strategic partners to uncover hidden opportunities,” Libassi said.
Tackling trapped capital
Resolute Global has applied an innovative approach to tackling one of the industry’s greatest challenges: trapped capital. In August 2020, the firm (then known as ILS Capital) announced that it had completed a $57 million offering of 5.5 percent asset-backed notes, a securitisation of the residual value of trust accounts supporting reinsurance contracts, or trapped capital. It issued the notes through its subsidiary Parliament Street Finance.
Libassi explains that, following the events of 2017 and 2018, there was about $15 billion in trapped capital—the amount of capital held in excess of reserves—worldwide. The firm found out for itself how much trapped capital can hurt when it had to turn down potentially lucrative deals following the Tianjin explosions in China and the Pemex offshore energy platform fire in 2015. It has been actively managing trapped capital ever since.
“As of the end of Q1 this year, our investors had roughly 90 percent of their money at work with only about 10 percent trapped. That’s the first time since 2015 they’ve had that high a percentage at work,” he said. Compare that to 2018, when only 40 percent of the firm’s investors’ available capital was at work in new contracts, and 60 percent of their capital in excess of reserves was held for reserve development.
“When that much capital is being held, it’s impossible to generate the rates of return our investors expect, and it was a massive drag on performance because it’s money that can’t be used for other investments,” he added.
“Parliament Street was a way for us to release trapped capital for current deals, but it was only the first step toward what we hope will be a permanent solution to trapped capital. When we completed our trapped capital securitisation in 2020, we put all of our trapped capital contracts into a trust. We securitised the trust, issued single-A rated debt against it, and then that debt was sold to US insurance companies.
“It was short-duration, attractively priced debt that was paid off in less than two years. It was a way to free up capital for our investors, and also to offer our investors the potential upside of the equity tranche of the trust. We immediately freed up about 70 percent of their capital through the securitisation.”
Regulatory approval
Later in 2020, Resolute Global obtained the Bermuda Monetary Authority’s (BMA) approval of its amended business plan for its reinsurance company, Prospero Re, which early that year had been assigned a single A rating, making it the first Bermuda-based collateralised reinsurance company to be rated. The BMA’s approval allowed Prospero Re to write traditional and collateralised reinsurance contracts, retaining the benefits of the collateralised reinsurance model while adding leverage associated with traditional reinsurers.
“That means we can write non-collateralised and collateralised contracts. Today, our US property book is written entirely on a non-collateralised basis, as is most of our global property and insurance risk. We have begun to write some of our marine and offshore energy business using our balance sheet but anticipate this transition occurring more slowly,” Libassi said.
“Most importantly, Prospero Re’s single A rating has meant that we can now focus on generating more underwriting profitability for ourselves, and focus less on trapped capital. The result of that was the 90 percent money at work we achieved for our investors in the first quarter of this year.”
Libassi put that achievement in perspective by saying the industry has had average annual losses of more than $100 billion over the last five years, which has inevitably created additional trapped capital woes for the industry at large.
“These were big loss years for the industry. However, we have been able to successfully navigate these losses based, in part, on our shift away from the property reinsurance market and, in part, on our shift away from fully-collateralised contracts.”
ESG focus
Resolute Global is working to improve the way companies assess risk and promote responsible environmental, social and corporate governance (ESG) practices across its portfolio. This includes developing products with benefits for immigrants, who make up the majority of its insurance customers in the US.
“We’re currently working with a partner to develop a credit enhancement product, where our partner will report to the credit agencies payments to help new immigrants to the US build credit,” Libassi said.
The firm also plans to launch by the end of this year a “green” insurance product, Libassi said, adding that it is easier for insurers than reinsurers to work on products that align with strong ESG principles. It has an investment in a Green Growth Fund, which helps support the innovative use of solar PV panels to absorb water from the air and convert it into clean drinking water. It does not reinsure coal and provides customers with a discount to support its paperless approach, making payments electronically and otherwise eliminating the need to print and mail policies.
“All insurance companies will need to factor climate change into their portfolios. There are multiple ways to do that, but we need to keep in mind that this means looking 30+ years into the future,” Libassi said.
“ESG principles should be taken into consideration on the investment side of carriers’ portfolios as well. At Resolute Global, we believe we have the opportunity and the fiduciary duty to make a meaningful impact for our global community, while building long-term value for our investors.”
Libassi cited Gerald Chen-Young, a Resolute Global director, who believes the concept of being a so-called “ESG investor” will fade away. “Gerald has said that the time will come when everyone in the industry will simply say ‘I’m an investor’ because ESG will be so embedded in everything that we do.”
What ILS needs to grow
The ILS market has remained roughly the same size for the last five years, Libassi said, and unless it dramatically moves away from the property space, it will be very difficult to grow the sector. For a transformation to occur, the sector needs to have more control over its capital and diversify its risk more broadly.
“Major reinsurance companies have been clamouring to do quota shares of our book, which is another way for us to reduce risk and create value for our investors. That attention to our approach validates our belief that the ILS world needs to diversify,” he said.
If property was the “first frontier” for ILS, is there an obvious second frontier?
“The second frontier has to be a broader array of insurance risk because there is just not enough reinsurance growth. For example, in the marine and offshore energy retrocessional market, we are one of only eight players in the world. We have about a 10 percent market share, and we’re relatively small.
“Other possible frontiers are cyber, although people are extremely cautious about it, and space launch insurance. We think the aviation market is ripe for disruption, especially in light of the ongoing war in Ukraine.”
To encourage diversification, the ILS sector needs to drop its “mantra” of what defines short tail, Libassi said. “We’re defining short tail as 24 to 36 months, and if you have a rated balance sheet that you’re no longer collateralising, the economics are very compelling in various non-property or ‘non-traditional’ ILS sectors.”
Image Credit: Shutterstock.com / Lijuan Guo
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