Global insurance and reinsurance firm XL Catlin and its ILS fund manager partner New Ocean Capital Management have significantly expanded the size of one of their third-party capital vehicles, growing the Daedalus I Re Ltd. special purpose insurer to $600 million of limit, providing investors with aligned access to XL Catlin’s property catastrophe risks.
The Daedalus I Re vehicle was first launched just over a year ago, when XL Catlin and the specialist ILS investment unit in which it has a stake New Ocean Capital Management launched the SPI to cover $200 million of limit funded by third-party investors.
The Daedalus strategy is an interesting one, as it is almost algorithmic in nature, enabling institutional investors to access a share of XL Catlin’s catastrophe portfolio, but on terms and using preferences that the investors get to provide input to.
In effect this means that the third-party investors get to set their preferences for what risks they want to invest in, tuning the algorithm to match their own risk appetite, return requirements and setting preferences by exposure type.
This is an efficient way to ensure that investors can get the returns they want from XL Catlin’s vast portfolio of risks. It also ensures alignment, as the Daedalus portfolio sees investors allocating to layers of risk that XL Catlin co-participates in.
The $200 million of limit portfolio ceded into Daedalus I Re Ltd. last year for its investors has now matured, but for the next year XL Catlin has clearly experienced more demand for the product, enabling it to treble the amount of limit included in Daedalus II to $600 million.
We understand that there is minimal leverage at play here, so the amount of capital committed to the strategy for this year is just slightly under the $600 million of limit involved.
We also understand that the vehicle is flexible, in that it is not tied to specific renewal seasons and can be funded throughout the year as availability of risk allows.
The Daedalus product enables investors to create customised access to risks underwritten and participated in by XL Catlin, so not only can they benefit from the firms access to risk, underwriting expertise, but also add their own preferences to specify the risks they invest in.
That gives investors both alignment and control, a little like a private mandate where an investor can be very specific about what they want, but safe in the knowledge that there remains full alignment of interests in the risks as well.
We’re told that much of the capital backing the Daedalus I and Daedalus II products is from the same sources, so long-term in nature and that will give XL Catlin the ability to fine tune the strategy over time and in response to market conditions, we’d imagine.
In terms of roles, we understand that Daedalus I Re is a joint venture by XL Catlin and New Ocean, bringing the underwriting expertise of the re/insurer, its experience in alternative capital and the ILS portfolio skills of the ILS manager all to bear in providing a unique investment opportunity to clients.
It’s not really the same as a typical quota share sidecar, in that it’s not just a percentage share of the overall catastrophe portfolio of XL Catlin, the building of the overall portfolio is more selective, while the ability of investors to specify preferences (so the algorithmic piece of the product) means it is much more customised to meet investors needs.
It’s impressive growth of the strategy and underscores the continued expansion of XL Catlin’s engagement with the capital markets, both as source of retrocessional protection, as well as in aligned risk sharing and fee earning too.
Daedalus I Re is similar to a sidecar, hence we’ve added it to our directory of those vehicles and related SPI’s. For more details on reinsurance sidecars and related investments view our directory of collateralized reinsurance sidecar transactions.
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