Legacy expert Armour looks to help free capital from trapped ILS assets

Bermuda-headquartered P&C legacy or run-off reinsurance specialist and founder of ILS Investment Management (ILSIM) Armour Group is seeking to put its expertise to work to help ILS funds or investors that have been hit by recent catastrophe losses.

Artemis has learned from our sources that Armour Group is actively looking to assist ILS investment fund managers and end-investors who have been hit by the aggregation of severe catastrophe losses over the last year and a half.

As we explained just this week, the insurance, reinsurance and ILS market has now experienced around $200 billion of industry losses from major catastrophes and man-made disasters in the last 18 months, which has taken its toll on some funds and managers.

The effects of trapped collateral and side-pocketed ILS assets, held while cedants and counterparties establish their ultimate losses and how much of the collateral they can claim, has weakened some ILS funds, leaving a number with less capital available to deploy into the key January renewal period.

As we’ve written recently, this has made it very challenging for some ILS funds and managers to even renew core portfolios of reinsurance and retrocession underwriting, let alone try to grow and take on new business this renewal season.

But Armour, having broad expertise in taking on legacy portfolios of risk and managing them through to the settlement of claims, while always trying to improve their performance in the process, sees itself as well-positioned to assist funds and investors in some cases.

The company has been active in the market looking to acquire distressed ILS portfolios from investors and managers, offering a route through which some capital can be freed up from assets for which the future could remain uncertain for some months or even years to come.

Given the situation some ILS funds find themselves in, with a significant percentage of their collateral and capital trapped, this could be an extremely helpful offering to some ILS funds right now.

By taking distressed portfolios and trapped collateral positions off the hands of ILS funds and investors, at what of course will be a much reduced valuation, Armour will hope to manage those positions through to the settlement of any claims.

This gives finality on these positions to the investment fund managers and while Armour takes on the liability for the claims, it has a track record of being able to do this (take on legacy risks) and manage them through to closure, while making a profit.

Valuations will of course be key here, as Armour will only be able to pay what it feels the position is worth and will quote a price that allows it to make a profit after managing the claims through to settlement.

At the same time ILS funds won’t want to give away a position too cheaply either, as this would naturally diminish their returns.

But the opportunity to free up capital from positions that could remain trapped for months or years may prove too attractive to miss, for some of the ILS funds most affected by recent losses.

Similarly, ILS end-investors could look to find a secondary buyer for their investment holdings in ILS funds, another area we understand Armour believes it can help.

The firm feels it has the necessary capital to address this issue, the ability to value distressed ILS positions across reinsurance and retrocession and the expertise to manage and settle the claims, we understand.

Of course the chance of improving the claims outcome would likely only hold for collateralised reinsurance positions, not retrocession where the claims would largely be non-negotiable.

But where the claims expertise of a group like Armour could come into its own would be with collateralised reinsurance positions that are distressed or at-risk and experiencing loss creep.

Given the ILS markets experience with hurricane Irma loss creep and the potential for more from hurricane Michael and also typhoon Jebi, this could also be an interesting option for funds or investors that are exposed.

We can’t confirm at this time whether any deals of this kind have successfully gone ahead.

But this is another fascinating development that has emerged out of the most challenging period for some ILS funds and investors.

It is a reflection of the severe stress some have faced due to recent catastrophe losses, but it also reflects the utility of the legacy platform and how partnering with experts in that space can benefit ILS managers or investors, especially as they continue to grow and when any losses are more significant.