Randall & Quilter still working on exit solutions for ILS investors

Specialist non-life insurance investor, service provider and underwriting manager, Randall & Quilter Investment Holdings continues to develop solutions to provide insurance linked investors with exit strategies in the event of a claim.

Randall & Quilter first revealed the existence of this product development in its 2012 results, when it said that it was exploring an opportunity to enter the insurance linked securities market with a product designed to provide ILS investors with a way to access liquidity for investments hit by claims.

One of the issues for investors in the ILS space is the fear of having capital locked up for long periods in the event of difficult or lengthy claims processes. It’s often been said that investors would likely take a haircut to their investment in return for gaining liquidity of their assets enabling them to be reinvested, this is perhaps the kind of product offering that Randall & Quilter has been looking into.

A year ago Randall & Quilter said that it could provide exit solutions to investors looking for liquidity in the event of a claim and that it was working with a potential new ILS fund on the initiative, with the ultimate goal being a way to offer liquidity or a complete exit from a claim affected position to capital market investors in collateralised reinsurance contracts.

In the firms latest annual results statement, published yesterday, Randall & Quilter said that the firm continues to explore an opportunity to enter the ILS space with a product designed to offer exit solutions to ILS investors looking for liquidity post-event, particularly in collateralised reinsurance.

The development of such a product is not a simple exercise. Randall & Quilter are already well versed in taking on and running down insurance and reinsurance contracts and portfolios, providing exit strategies and liquidity to insurers or reinsurers, but translating that to the ILS capital markets backed space is likely not as straightforward.

The fully-collateralised nature of the contracts means that capital would have to be recovered from collateral assets, or transferred along with the exposed assets the investor wants to be released from having any liability for.

The issues and difficulties perhaps lie in the fact that often the reinsurance liabilities are collateralised by many investors, not a single one, so releasing investors depending on their wish for liquidity would require new structures and capital flows to be devised.

Making some assumptions as to a possible scenario, the investors seeking liquidity may choose to receive reduced collateral to get out of the affected positions now, while investors in Randall & Quilter’s exit solutions facility would take on the liability and provide the rest of the collateral. Liabilities would then be run down, claims paid where necessary, but some would no doubt not develop to the point of causing losses against the collateral so the investors in the exit strategy would hope to win more than they would lose.

There are of course many ways this could potentially be achieved, but all are complex and require considerable work on legal structures, design of capital flows and how to ensure collateral is always fully in-place to meet the liabilities. Hence we’re not really surprised that this is a work in progress still.

Randall & Quilter recognises that the development of exit solutions products for ILS investors is not a simple task and said in its results statement; “Tenacity and patience will however be required to ensure we enter the market with a relevant and attractive product.”

While this is clearly not a simple product to launch it is certainly a worthwhile one. As mentioned above, how investors can exit positions which are at risk of developing losses to free up capital for redeployment is a topic that often comes up in conversation with ILS end-investors and managers. If Randall & Quilter can successfully develop an exit solution or facility that enables liquidity in affected investment positions it would be sure to be well received by the ILS market.