AGILE Risk Partners, the specialist technology-focused direct & facultative (D&F) property risk underwriting start-up with an eye on the capital markets for capacity, has now told us it has completed its first two D&F insurance-linked securities (ILS) transactions.
The D&F market, of large, challenging, and often bespoke single risks has always seemed an area for capital market and ILS investor expansion.
AGILE Risk Partners has devoted its last few years to carving out a niche specialism focused on this opportunity and now, in its first two landmark D&F ILS deals it has demonstrated both the appetite of cedents to access diverse and efficient capital, of investors to access these kinds of risks, as well as a process and structure to transfer and transform the risk to make it investable.
As we reported before, AGILE Risk Partners had secured a commitment of US $250 million from a major hedge fund investment firm, the starting point for the world’s first facultative reinsurance investment strategy.
Now the firm has begun to put this to work and in proving its concept created what could become a new market for ILS capital, as the D&F space is often in need of more capacity.
James Poole, Founder of AGILE Risk Partners told us of the first deals, “We’re really pleased with the proof-of-concept. It’s a world’s first, it represents creation of a new financial asset-class, and it’s a tool that we are going to use to drive-down the Total Cost of Risk.
“CAT bonds have existed for a quarter of a century now and Solvency II is playing out as a tremendous deleveraging pressure, moving insurable risk away from re/insurer balance sheets to investors in private capital markets. So, we thought this was always going to happen.
“Transfer of direct & facultative reinsurance risk to investors in capital markets was inevitable.”
We’ve been aware of AGILE’s progress since its Seed capital placement in January 2019.
We discussed the concept in much more detail in a recent Artemis Live video-interview with Poole, and now the team’s proof-of-concept deals further demonstrate that there is considerable demand for re/insurable risk of different types, and ILS structures, in capital markets.
Poole explained some of the , “The process is a bit different. We’ve built an algorithm in R [a statistical programming language] that we pass risk-data through to help us to understand a client’s situation, understand the specific risk-problem, and then evaluate the suitability of this for our hedge fund mandate.
“Then once we have done our data analytics it becomes a restructuring exercise—a question of helping broking teams to restructure their clients’ risk-transfer arrangements so that an ILS component can be used to create value.”
Poole further explained that typical insurance-linked securities (ILS) technology was used to get these two D&F ILS deals done.
“In this case we used a cell within Horseshoe Re, a Bermudian segregated account captive, to transform $29m of risk-capital (with the hedge fund investing in a debt-instrument), into reinsurance promises totalling $29m, using the broker’s own placement slips,” he explained.
He further explained that to the investors these look very like any other private ILS deal, although the underlying risks, being from the D&F market, are a little different of course.
But the benefits are the same, in extending to the ceding clients who get to transfer their risk efficiently to an efficient source of capital and to the investors.
“These deals are fully-cash-collateralised which means that claims settlements are likely to be very quick―which is of course great news for the buyer. But right now, at inception, we’re looking at these deals representing a win-win-win. Firstly―they’re a win for the broking team because it has used an ILS arrangement to create value for their client by solving really challenging risk-problems. Second―they’re a win for the hedge fund team because these deals represent the first two deals in the $250m capital commitment to our ‘Special Reinsurance Situations’ strategy. And thirdly―they’re a win for our team, the risk advisory team, because these deals represent the creation of an entirely new financial asset-class,” Poole said.
Poole continued, “We think that full convergence of insurance and capital markets is inevitable. You’ve got Swiss Re valuing global re/insurance markets at around $2.5 Trillion, which appears to be similar to the $2.5 Trillion amount of dry-powder understood to be in private equity funds coincidentally.
“So if you consider direct & facultative risk as amounting to about half of this, then you’ve got about $1.25 Trillion of risk which is now in scope for securitisation using the analytics that we’re doing, and using the transformational properties of captives, and their management teams (in this case Bermuda-based Horsehoe Re, managed by Artex).
“We set out to prove that collateralisation of facultative reinsurance was feasible using an operating model that is simple, predictable and cash-generative. So now that we have done this we think that it’s time for us to scale things, and so we’d love to hear from VCs or other strategic equity capital investors interested in helping us to start collateralising re/insurance risk on massive-scale. Because collateralising of reinsurance on a massive scale is the process that we’re choosing to drive-down Total Costs of Risk for clients. And driving-down the Total Cost of Risk for clients is the purpose of our business.”