COVER STORY: ILS CAPITAL
In a world where alternative capital is already regarded as a disruptive
force, one Bermuda-based ILS fund is breaking even more rules.
Tom Libassi and Paul Nealon, co-founders of ILS Capital, discuss with
Bermuda:Re+ILS some of the company’s more revolutionary strategic plans.
The term ‘convergence’ has gone from buzzword to old hat
and back to trendy again when it comes to the risk transfer
industry in recent years.
Originally used to refer to money from the capital markets
being put to work in the re/insurance sector via insurance-linked
securities (ILS) or sidecars, convergence then became so commonplace
and the mechanisms by which the money was invested so varied, that
industry executives started using the word in the past tense.
Now a slightly new meaning is entering the industry’s parlance. Instead
of talking about the industry as a whole, it is being used to refer to
specific companies that are breaking the rules or blurring the boundaries.
No company epitomises innovation in convergence to a greater
extent than ILS Capital Management, the Bermuda-based investment
firm that melds the needs of traditional reinsurance buyers with the
desires of capital market investors.
It transcends the limited property catastrophe-based products most
players in this space deal in and packages risk in very different ways
from others. As it explores the possibility of securing a rating, the
company continues to challenge the norms about what constitutes
traditional reinsurance or ILS—and what convergence can truly mean.
“People use the word convergence but, for us, that happened back in
1992 after Hurricane Andrew when money flooded into the market.
“That’s when our partner Don Kramer started Tempest Re and
applied modern portfolio theory to the insurance market, bringing
a Wall Street approach to the management of reinsurance risk,” says
Tom Libassi, co-founder and managing partner of ILS Capital.
“The founding of Tempest Re was the real turning point. Our whole
investment philosophy developed from there. Since then, things have
become ever more sophisticated. What we are doing now dovetails
with where we think the market will eventually go.
“I believe we are at a tipping point for this sector. I don’t think this
market will just continue to grow steadily—it is about to rocket to
new heights. If this is a $100 billion market now, it isn’t going to
go to just $150 billion. We believe that, with true innovation and
convergence, it has the potential to exceed $500 billion.”
All about the journey
ILS Capital has been on its own journey. Launched in 2011, the
company initially managed the money of a handful of investors, using
collateralised structures to cover a mixture of property-cat risks, marine
and offshore energy.
Five years ago, Libassi and his co-founders Kramer and Paul Nealon
made some fundamental changes to the company. They wanted to
make its offering equally appealing to buyers of reinsurance and to
investors seeking the inherently attractive characteristics that the
reinsurance asset class offers, while also looking at the risk-return
dynamic in a different way.
Nealon says that on one side of the business, they spent a lot of time
speaking with investors.