XL plan ILS funds and collateralized reinsurance for Stone Point venture

Last Friday, global insurance and reinsurance firm XL Group announced a new venture it was launching with reinsurance focused private equity firm Stone Point Capital LLC to create an investment manager in insurance-linked securities and reinsurance-linked investments. More detail on the plans have now emerged from the re/insurers earnings call yesterday.

The new, as yet unnamed, Bermuda based investment manager will be 75% owned by XL with a 25% contribution from Stone Point. The two firms have worked together on a number of ventures in the past and XL Group is no stranger to managing outside capital, having been an early player in the sidecar arena before.

The XL management team spent some time discussing the new insurance-linked securities venture on the firms second-quarter earnings conference call yesterday. CEO of XL Michael McGavick said that the firm had spent a considerable amount of time working out the best way to enter the space with an offering that would continue to offer shareholders the same value as the rest of its underwriting operations.

Commenting on the partnership with Stone Point, McGavick said; “We focused on the fact that if we want to create something that could last over time and be substantial, we would have to have a partner that really understood the elements of stewardship of other people’s money, of all of the various complexities that go with it, and that really understood what was going on in the insurance marketplaces so that we can have a realistic partnership, one that we thought could endure. And in Stone Point, someone we’ve worked with on many ventures over many years, we found really, we think, the ideal partnership.”

McGavick said that the aim of the venture is to marry XL’s underwriting expertise with sources of external capital to serve clients with innovation and shareholders with the kind of performance they are used to from XL. In terms of ownership of the ILS asset management firm, XL will aim to keep its 75% of the asset manager, Stone Point will maintain its 25% and external capital will be raised into the various funds and structures that sit beneath the asset management firm.

In terms of the activities that will be undertaken by this new ILS asset management firms, they will all be in the insurance-linked securities space, commented XL Group CFO Peter Porrino. The initial plan is to launch ILS funds and there will also be a collateralized reinsurance vehicle established as well.

Porrino said that there will also be some elements of the activities that will be unique to XL and that may include giving third-party investors access to a broader range of product than you traditionally see in the ILS space.

McGavick said that the initial focus would likely be on lines of business that you traditionally see in ILS ventures, but that XL would not have a limited vision for the venture and would look to find ways to bring other lines into the ILS asset manager to give investors access to unique risks. McGavick said that XL sees a lot of room for innovation by leveraging its underwriting talent alongside third-party capital to reward its shareholders.

James Veghte, Chief Executive of Reinsurance at XL, commented; “I think that there’ll be a variety of products introduced in the vehicle. Some that have been traditionally associated with XL and others, such as retrocessional business, where we have not been considered historically a large player.”

The focus for XL will be on getting this business up and running and operational in time for the January renewals. It will likely seek to raise some third-party capital in the interim but will also likely deploy some of the initial capital injection from itself and Stone Point in January as well. In the interim it will be busily establishing the asset management entities, fund structures and collateralized reinsurance vehicle and at some point between now and January we will likely learn the name of this venture as well.