Insurance technology (insurtech) and insurance-linked securities (ILS) start-up Ledger Investing has successfully completed its first transaction, directly securitizing a portfolio of non-standard passenger auto insurance between an MGA and the AIG-owned ILS fund manager AlphaCat.
The transaction is a step away from the more typical property catastrophe risk exposures that are securitized for ILS funds and ILS investors, but Ledger had always hoped to expand the securitization of insurance risk outside of typical classes of business in an effort to broaden the market.
This first transaction saw Ledger Capital Markets (LCM), the broker-dealer entity of Ledger Investing, acting as the structurer and bookrunner for a bilateral ILS transaction between an MGA arm of AmWINS, as the originator of the risk, and AIG-owned specialist insurance-linked fund manager AlphaCat Managers Ltd. as the ILS investor on behalf of one of its fund strategies.
The transaction, dubbed Newport 2019-1 after the segregated cell it is housed in, saw AmWINS Specialty Auto ceding a portfolio of new non-standard auto insurance (with minimum required liability limits) risk via a fronting arrangement with Redpoint Insurance Group to the Newport segregated cell of special purpose reinsurance vehicle Artex SAC Ltd.
The underlying auto insurance policy business had been rated to target prime consumers in the state of Texas.
AlphaCat Managers as the ILS fund investor capitalised and collateralized the transaction which will run for a risk period of one year through 2019.
Samir Shah, the ex-Head of Insurance Capital Markets at AIG, joined Ledger Investing as its CEO bringing significant expertise in the world of catastrophe bonds and insurance-linked securities (ILS), as well as an ambition to broaden the ILS market’s remit.
Commenting on the successful completion of this first Ledger transaction, Shah told Artemis, “This is a small, promising step towards expansion of the ILS market to ultimately securitize all classes of insurance risk. We look forward to working with other MGAs and insurers to securitize their insurance risks.”
Lixin Zeng, Chief Executive Officer of AlphaCat, also said, “We’re pleased to lead the ILS market expansion beyond property catastrophe and reinsurance sourced risks. This facility’s novel structure enables MGAs to upsize more nimbly and AlphaCat to deploy our clients’ capital more efficiently.”
There are a variety of innovative features to this ILS transaction, which help to deliver on Ledger’s original promise that it aimed to make the securitization of insurance and reinsurance risks more streamlined, efficient and to help expand the ILS market’s scope to include new risks and classes of business.
The transaction featured a private placement of two tranches of notes amounting to $10 million, the first a $6.67 million senior note and the other a $3.33 million junior note layer.
The senior note pays a 4% premium above the risk free rate, with a 3 year maximum term (1 year expected) and an expected loss f just 0.01%.
The junior note meanwhile is an equity layer that will pay the AlphaCat Managers ILS fund the retained earnings after payments have been made to support the senior tranche. As a result, this junior tranche acts as a profit and loss share with the MGA, and has a sharpe ratio of 2.8.
The notes are variable rate principle at risk notes, but their funding is also variable with just-in-time capital contributions designed to closely match any increase in risk as the non-standard auto insurance portfolio grows.
As a result this is a flexible source of capacity for the MGA, which can upsize to match its writings in this class of business, acting as both reinsurance and underwriting capital.
Capital release from the notes will be at year-end, with a reinsurance-to-close to 2020 treaty to be used to offset any adverse development of reserves over and above a specified buffer level.
The transaction is a novel and innovative way to bring a new class of business to an ILS investor in a manner that still supports the underlying business and the needs of the ceding originator, the AmWINS MGA in this case.
Important to the success of the arrangement was ensuring that capital flows are as efficient as possible.
Shah explained, “The capital contribution has been structured to virtually eliminate volume risk and reduce drag on undeployed capital for the investor, without incurring any funding risk to the insurer. In addition the capital release uses reinsurance-to-close to return capital at year-end.
“The transaction utilised a combination of this efficient contribution and release of capital, alongside the use of a senior note for the very remote risk and a profit/loss sharing arrangement with the MGA to align interests, creating attractive economics for both parties.”
As the first transaction from Ledger this deal will provide a fine example to the market of what can be possible in diversifying lines of business and the company is hoping to repeat this type of arrangement for other ceding companies and investors across a wide array of risk classes.
To support this, Ledger will provide ongoing analytics and servicing of transactions.
Shah explained, “LCM will provide automated, daily updates of premium, exposure and loss metrics to allow current and potential investors to develop a view on performance and trade the securities. Quasi-real time reporting makes these securities look more like traditional asset classes where there is a continual flow of information that affects value.”
That’s also important for expanding the ILS space as it will provide attractive signals to investors that have not yet allocated to the sector but who are looking to invest in diversifying asset classes that provide near real-time feedback on transaction health.
Importantly, the use of Ledger’s technology alongside financial market securitization helps to make a longer-tailed risk more investable and appealing to ILS funds in this example, which bodes well for future ILS market expansion opportunities.