that over time this entity would take on a life of its own, with key
functions moving in-house.
The team at Schroder Secquaero has the expertise to run a balance
sheet reinsurer—Lohmann himself was the former chief executive of
Converium, and he says that some recent hires have been made partly
with this in mind. Stephan Ruoff, former CEO at Tokio Millennium
Re (TMR), joined the company as deputy head in November 2018;
Beat Holliger, an experienced executive who has previously worked
at Munich Re and Swiss Re, joined in February.
“Stephan and I have both managed balance sheets in the past, and
we also have a well-resourced actuarial side and deep risk-modelling
capabilities,” Lohmann says. “We have a much broader set of
capabilities than many ILS funds.”
He stresses that the thought process behind launching a balance
sheet reinsurer is part of a wider process of broadening the scope of
risks that his company can offer ILS investors. The company has also
looked at ILS funds targeting the life re/insurance space, run-off, and
opportunities in Lloyd’s.
“We are looking at this space very differently from what ILS has
done traditionally,” Lohmann says. “Run-off is becoming a really
interesting space, with much bigger deals being done.
“We are seeing a lot of capital pulling out of the Lloyd’s market.
Could that be an opportunity for ILS capital? Apart from Nephila,
no-one has done that. We need to see what Lloyd’s CEO John Neal’s
plans are but it is certainly something we are looking at.”
Best of both worlds
The idea that ILS funds are headed in this direction is an increasingly
hot topic for the industry.
Mike Van Slooten, head of market analysis at Aon Benfield, confirms
that he is aware of a number of ILS funds pondering the move to
creating a rated balance sheet reinsurer. He says that this could work
in a number of ways, but it could effectively operate simply as a
way of transferring the risk onto capital markets investors via a 100
percent quota share retrocessional deal.
“For the buyer, it is offering them something they are familiar
with in the form of a rated counterparty,” Van Slooten says. “What
happens behind the scenes is irrelevant to them but if another risk
transfer is taking place that makes it more efficient—that can work
for both parties.
“It is a way of achieving the best of both worlds—achieving
maximum access to business at a low cost of capital.”
Eric Andersen, co-president of Aon Benfield, agrees that the
structure of the market is changing and ILS funds creating rated
carriers could become a logical conclusion of that process. He says
As previously documented in this publication, momentum
seems to be growing towards some of the bigger and/or
more innovative ILS funds exploring the possibility of
forming their own reinsurers.
It seems the apparently unsolvable problem of trapped capital, which
has grown into a real challenge for the insurance-linked securities
(ILS) sector in the aftermath of the cat losses of 2017 and 2018, is
probably the biggest driving force. But there are other motivations as
well, including the increasingly sophisticated strategies of investors.
These potential startups would seek to secure a rating and write
business backed by a well-capitalised balance sheet. Yet while the
concept seems straightforward, the structure that may underpin such
a formation could vary dramatically depending on the objectives of
their investors. But the basic concept would be that it would allow a
more efficient matching of risk with capital, offering investors and
cedants the best of both worlds.
Bermuda-based ILS Capital has openly discussed the concept for
some time, first outlining this as an ambition for the company in
2018 and discussing the idea in detail in the September issue of this
publication. It remains committed to exploring the concept. But more
recently, industry veteran Dirk Lohmann, who heads up the ILS
business of global asset management group Schroders, has said that he
is exploring the possibility of launching a new reinsurer on Bermuda
with a minimum of $500 million in capital.
An asset class matures
Lohmann explains that ILS investors are becoming increasingly
sophisticated and are open to investing in new ILS asset classes for
longer durations. Thus the investment firm is exploring the launch of
a rated reinsurer which takes the needs of some investors to what he
calls a logical conclusion.
“We are looking at the possibility of creating something with
permanent capital structure with a rated balance sheet, which would
allow us to manage a portfolio of risk in a way that allows for all the
various risk appetites of the investors we work with,” he says.
“It depends on an investor’s objectives. Some do not want to be
investing in an operating business but they like the returns. For
others, this might be a natural evolution into the industry.”
Lohmann’s ILS unit has been called Schroder Secquaero since the
former acquired 100 percent of Lohmann’s Secquaero business in
July this year. He says that Schroders has “deep” relationships with
a number of sovereign funds, several of which have invested in the
reinsurance space previously. “It is a question of looking at clients’
objectives and considering what we can deliver,” he says.
One possibility, Lohmann suggests, is that Schroders would play a
central role in forming, managing and building a new reinsurer—but
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