Newport 2019-1 – Full details:
This is the first transaction from insurance technology (insurtech) and insurance-linked securities (ILS) start-up Ledger Investing, which saw the firm acting as structurer and bookrunner in a deal that directly securitized a portfolio of non-standard passenger auto insurance between a managing general agent (MGA) and the AIG-owned ILS fund manager AlphaCat.
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.
The Newport 2019-1 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.