COVER STORY: ILS CAPITAL
“These are traditional reinsurance coverages from the buyer’s
perspective—just fully collateralised. They are not index-linked contracts
such as industry loss warranties or cat bonds.” Tom Libassi
“We asked them what they liked and what they did not like, and we
took that on board. The original structure, which had been developed
by reinsurance experts, made no sense to investors.
“We wanted to make our products and the language wrapped
around them much more investor-friendly,” he adds.
On the other side of the business, Libassi explains, the company
decided to hire reinsurance experts who knew their markets and
the risks associated with them intimately. The company wanted to
write marine and offshore energy business—so it recruited experts
in those fields.
“On that side, we need access to good risks; the best way to get it was
by hiring well-connected, experienced underwriters and actuaries,” he says.
Finally, the firm continues to spend a lot of time talking with
reinsurance brokers, many of whom had never looked closely at this
fully collateralised space—especially for risks beyond property-cat.
“We realised that we could write a much broader portfolio of risk
than we ever imagined, which was also very diversified. Our team has
a long track record of committing capital to specific deals and knows
the clients we wanted to work with,” Nealon says.
Some five years on, ILS Capital still sits apart from almost any
other player in this space in two key ways: no other fund has such
substantial books of business that are not property-cat; and no other
fund packages the risks in a way that is so investor-orientated, with
language they can understand.
Libassi stresses: “These are traditional reinsurance coverages from
the buyer’s perspective—just fully collateralised. They are not indexlinked
W k d th h t th lik d d h t th did t lik d Th h ti ll i Lib i d N l
contracts such as industry loss warranties or cat bonds.
“We were the first ILS manager to offer an indemnity-based product
to the marine and offshore energy sector. While some others have
entered this space over the past five years, there are not many.”
A rapidly growing niche
From having one marine client in 2013, ILS Capital now has around 15,
which represents roughly 40 percent of its target clients in this sector.
In terms of the business’s entire portfolio, some 25 percent is made
up of specialty marine and offshore energy business; 25 percent US
insurance business (via a recent acquisition); 25 percent property
business; and 25 percent property-cat business.
The company has grown exponentially since Libassi and Nealon
joined. From assets under management of some $20 million in 2014,
it is now approaching $400 million. It works with more than 200
investors, over 90 percent of which had never previously invested
in an ILS fund, and has 14 people across three offices in London,
Hamilton, and Greenwich.
Libassi explains that another factor that sets the business
apart and has helped drive this growth, is the way it measures
return on investment. Instead of measuring a contract’s attractiveness
using solely traditional reinsurance metrics such as loss ratio, the
team has incorporated traditional Wall Street risk and return metrics,
such as Sharpe ratio and return on capital, into its diligence process.
These measurements factor in the risk of capital being ‘trapped’,
something that has become a big problem for the ILS sector, especially
in the aftermath of the heavy losses of 2017 and 2018. Libassi says ILS
Capital has been focused on mitigating this issue since 2015.
“We structure our deals differently to try and ensure that investors
get their money back faster and we better manage this issue. We
have created total alignment of interests between ourselves and our
investors,” he says.
“That is a very different way of thinking about it. With the Tianjin
explosions in China and the Pemex offshore energy platform fire in
2015, we experienced first-hand the impact that trapped capital could
have on our investors and have actively managed it since then. We
have turned down some great deals because of that very issue.”
ILS Capital had exposure to the Tianjin explosions but still posted
a positive return that year and underwrote the same deals the year
after. Libassi says that this helped to reaffirm to the buyers that the
company and its investors were here for the long haul.
“The view of some reinsurance buyers was that ILS investors
were simply opportunistic. We overcame this by hiring the
seasoned underwriters we have, and our continued support through
2015 and in subsequent years proved we are a long-term partner,”
“That did us a lot of good in the long run. We learned some valuable
lessons and tweaked the business model as a result.”
The value of the fund’s diversified strategy was borne out by the
positive return of its specialty positions in both 2017 and 2018.