SCOR plans two new Atropos ILS funds and ILS transformer operations

by Artemis on September 6, 2013

French reinsurer SCOR, one of the world’s largest reinsurance companies, plans to strengthen and expand its operations to leverage the increasing convergence between reinsurance and capital markets, according to the reinsurers newly released strategic plan for the next three years.

SCOR released its latest strategic plan earlier this week. The plan called ‘Optimal Dynamics’ will see SCOR attempt to build on the momentum it has gained in recent years. It is the fifth strategic plan that the firm has launched and will see the firm look to build on an already strong global reinsurance market position that it occupies.

Naturally, given the reinsurance markets current convergence with third-party capital from capital markets investors, SCOR’s plan gives us a few ideas of how the reinsurer intends to make sure it can leverage and profit from a growing proportion of the reinsurance market consisting of alternative reinsurance capital.

SCOR is already a regular sponsor of catastrophe bonds for its own retrocessional risk transfer needs, most recently marketing an extreme mortality cat bond under the Atlas brand. It has also been an issuer of industry loss warranties (ILW’s), again for retro purposes and has been involved in some mortality swap agreements which involved third-party capital in the past as well.

The investment arm of SCOR, SCOR Global Investments, is also involved in the insurance-linked securities and reinsurance convergence space, through SCOR Alternative Investments operation of an ILS fund called Atropos. This fund has existed for a number of years and recently SCOR has consolidated all of its investment efforts under the Global Investments branding.

SCOR’s new strategic plan lays out some of the ways it will continue its use of third-party capital, both for risk transfer and as a manager of capital and assets.

It intends to continue to issue catastrophe bonds and ILS, with its latest being the Atlas IX Capital mortality linked bond designed to protect it from pandemics.

SCOR said that it intends to build on its ILS fund management under the Atropos and SCOR Alternative Investments brand with the launch of two new ILS funds. No details were given on the funds in the presentation, but we understand that they will involve different strategies to its existing Atropos fund, which we understand had $171m of assets under management at the end of August.

The Atropos ILS fund returned 7.1% in 2012 and year to date in 2013 has returned 5.7% (to the end of August), both of which figures are inline with the broader return of the ILS market.

One of the new funds, a catastrophe bond only strategy, has already been launched with initial seed funding from SCOR and third-parties taking it to approximately $60m in size already. That brings the SCOR Alternative Investments ILS assets under management to $231m as of the end of August 2013.

The second new fund, which will be SCOR’s third under the Atropos brand, will focus on higher risk investments and offer investors a higher return as a result. This ILS fund will likely invest across the entire range of collateralized reinsurance instruments. With three ILS fund strategies, SCOR Alternative Investments is aiming to offer a range of options to suit investors with different mandates and risk appetites.

Additionally, SCOR’s strategic plan says that it intends to further strengthen its operations in the convergence arena by ‘structuring ILS solutions as a transformer’. We assume that what SCOR means here is that it will offer solutions to its clients, where by it will offer its facilities to structure their risk into ILS solutions to enable them to tap into third-party capital as well as its own balance sheet capital. That is a sensible move in the current climate and should see SCOR able to offer a broader range of ILS focused reinsurance solutions as well as become more capital agnostic.

SCOR sees the potential to offer ILS transformation services as an area of potential growth for its SCOR Global P&C branded reinsurance operations. It is also a way it can begin to bring alternative capital into that side of its business, whether from its investments arm or directly via external investors.

SCOR wants to bring its experience and knowledge of alternative reinsurance capital to its client base, particularly to cedents looking for alternative or complementary ways to purchase protection. This will allow the reinsurer to further develop alternative and complementary business platforms which will open up opportunities in the convergence arena for it.

SCOR said that it will help clients to access the capital markets as a source of reinsurance capacity as a transformer by sponsoring catastrophe bond issuances for the benefits of its clients. This will provide SCOR with a new source of fee income allowing SCOR Global P&C to better leverage its relationships.

Given SCOR’s strong position in the life reinsurance market as well, we would imagine that this new strategy to offer transformer facilities to clients and assist by issuing ILS on their behalf to help them access third-party capital, may also extend into its life reinsurance business in future as well.

SCOR also said in its presentation on the new strategic plan that it will look to renew its contingent capital facility, which it sees as a key piece of its risk management framework alongside capital markets solutions and retrocession.

In its new strategic plan, SCOR has set out its ambition to increase its use of third-party capital within its own risk transfer and retrocession, increase the amount of alternative reinsurance capital and ILS assets it has under management as well as offer its clients new ways to access the capital markets within their covers.

For a reinsurer this is a sensible way to react to the influx of new capital into the marketplace. SCOR is essentially saying that it will continue to grow its use of this capital in whatever way is most appropriate to improve its own risk transfer, earn fees by managing capital or earn fees by offering ways to access the capital markets for risk transfer to others.

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