During an analysts presentation this morning Amlin, the London-headquartered non-life insurance and reinsurance business, emphasised the strategic importance of its now larger stake in insurance linked securities (ILS) investment manager Leadenhall Capital Partners.
Amlin recently increased its ownership stake in ILS and reinsurance-linked investments manager Leadenhall, taking its shareholding from 40% to 75% in the firm a month ago. The increased synergies and income as a result of the bigger stake is clearly a key strategic move for Amlin in the current reinsurance market, giving it an established ILS business which has a demonstrable track record in the market.
The analysts presentation today gave Amlin and Leadenhall a chance to explain the strategic importance of the relationship and how the increased share will benefit Amlin over time. It also allowed the management to discuss issues such as future growth potential and what initiatives may be pursued in future.
Charles Philipps, CEO of Amlin, said that Amlin’s strong reinsurance franchise, along with Leadenhall’s strong relationships with clients and investors, is providing Amlin with a competitive differentiation. The result is that Leadenhall and ILS today is proving to be very important strategically to Amlin and hence the desire to grow the stake and strengthen the relationship between the two even further.
With increased tiering being seen in reinsurance markets and business gravitating to established and larger players, Leadenhall has undoubtedly helped Amlin to move towards the upper tier, in terms of client sizes, Philipps continued. This allows Amlin to get preferential signings, to be more selective and even to secure off-market signings. This is highly relevant to navigating the difficult reinsurance market and elevates Amlin to higher levels in the tiered marketplace.
Philipps explained; “Leadenhall provides differentiation. It is not a sidecar, it’s a specialist fund manager with deep understanding in ILS, reinsurance and with the trading skills to really excel in the market.” Demonstrating its leading position in the ILS space, Leadenhall has now grown its assets under management to over $1.825 billion.
Philipps said that Amlin feels it’s important that the Leadenhall team kept some skin in the game, maintaining a healthy share of the ILS manager operations hence only taking 75% and leaving the partners with 25%, and that it is important to demonstrate that there is still independence in underwriting decision-making.
Having established Leadenhall Capital Partners as a joint venture back in 2008, seen it through the difficult financial market at the time and subsequently grown its assets considerably, Amlin feels it has an early mover advantage with Leadenhall. This gives it a competitive advantage over other re/insurers are all establishing their own ILS operations now but are still start-ups effectively.
Philipps said that while 2014 has seen slower growth in assets, due to reinsurance market conditions, Amlin believes there will be further attractive growth going forwards as Leadenhall continues to scale and increases its access to business.
Kevin Allchorne, Global MD of reinsurance, said that Amlin aims to build a more client-centric reinsurance business with Leadenhall being central to Amlin’s ambitions in the global reinsurance market.
The capacity, products and expertise that Leadenhall provides are a key asset in the Amlin reinsurance business structure. The reinsurance structure sees Leadenhall sitting alongside the regional reinsurance business units, in terms of importance and as a result Luca Albertini, CEO of Leadenhall, will be invited to attend Amlin’s reinsurance management meetings, demonstrating the importance of a strong alignment between the ILS unit and traditional reinsurance at Amlin.
On the prospects for further growth of ILS and Leadenhall’s assets, Allchorne said; “ILS and collateralized will be here to stay, it will be a more meaningful part of the reinsurance sector and hence it’s importance to Amlin. The genie is not going back in the bottle.”
If market issues, such as losses or disputes, caused a flight-to-quality among investors in ILS Allchorne said that Amlin wants to position itself as one of these quality players, with the market access, scale, relevance and expertise to attract capital.
However, reinsurance market trends point towards continued growth of ILS, with capital becoming ever more abundant and free flowing. This positions the combined Amlin and Leadenhall business well to navigate the changing environment, said Allchorne.
Leadenhall investors and clients will benefit from access to Amlin’s business, while Amlin will benefit from ILS expertise, increased capacity and access to Leadenhall’s clients. Amlin plc as a group will also benefit financially from the income that the increased stake in Leadenhall will contribute in future quarters.
The combined force of Amlin and Leadenhall allows significant capacity to be offered to clients, a broader range of products to be offered, enhanced competitiveness in the reinsurance market and increased client intimacy, as they work closely to define the best capital agnostic traditional reinsurance and ILS solutions. All of this gives Amlin increased relevance in the reinsurance market, explained Allchorne.
He gave examples given of how the two capital sources, Amlin’s balance sheet and Leadenhall’s third-party capital, combine to offer clients enhanced solutions. The combination and addition of a balance-sheet from Amlin allows for typical ILS issues such as collateral release to be eased, leverage to be added while consistent coverages can be offered to clients across layers within a reinsurance program.
By matching the risk in a clients reinsurance program to the risk appetite of different sources of capital, Amlin and Leadenhall can optimise the client offering and build stronger client relationships, said Allchorne.
Interestingly, Allchorne also explained that Amlin are already discussing with Leadenhall management the possibility of moving into other lines of business, where ILS investors have an appetite to assume reinsurance risks. This could lead to a growing focus on risks such as specialty, we’d imagine, where the two businesses already have significant expertise.
Allchorne said that for Amlin and Leadenhall the next few years are about adding scale, growing the assets under management at Leadenhall and building greater synergies between the two. This puts them a step ahead of others who are still starting-up their ILS and third-party capital activities.
John Wells, Chairman of Leadenhall Capital Partners, said that from his side the origination and underwriting expertise at Amlin allows Leadenhall to access deals that it couldn’t otherwise and gives the portfolio managers access to a team of expertise that they can call on when underwriting deals.
Wells explained that Leadenhall’s ILS funds have consistently provided attractive market-beating returns and that over the longer-term they have outperformed benchmarks such as the catastrophe bond market index, which helps to explain their continued success at growing assets. With the Amlin relationship deepened and synergies increasingly recognised this track record will stand the firm in good stead going forwards.
Interestingly, Leadenhall has not lost a client since the firms launch Wells revealed, which is testament to its attractive product offering to both cedents and investors. The balanced offering has attracted much more capital from pension funds, rather than from other types of investors, resulting in a capital base which the firm considers to be sticky.
Richard Hextall, Finance director at Amlin, then explained some of the financials. Over the next two years Amlin expects the share of Leadenhall’s profit before taxes that it benefits from will increase to approximately $10.6m in 2015 and $15.4m in 2016, assuming continued growth of assets under management. This is seen as accretive to Amlin’s earnings per share and revenue synergies should be material through time now the stake is at 75%.
However the real benefits over time will come from leveraging the increasing synergies and creating a complimentary strategy of both balance-sheet and ILS capital for their clients, Hextall explained. He believes that this will grow the benefits, both in terms of share of profits and also in increased business written due to increased relevance in the reinsurance market.
Philipps said that while ILS is clearly growing and expected to grow further, he expects that reinsurance clients will continue to want the core of their reinsurance programs to be backed by traditional reinsurance, while ILS will be a growing component of them.
As Leadenhall grows its funds under management Amlin will help it to deploy that capital and put it to work, Phillips said. The enhanced origination and access to business is perhaps the key benefit for Leadenhall, allowing the firm to continue to grow, thanks to the Amlin relationship, perhaps even in markets where other independent ILS managers would struggle to continue to take on capital and deploy it.
Philipps interesting said that Amlin could look to add reinsurance sidecars to its business offering at the right point in time, giving it access to even more investor capital. Leadenhall can help Amlin with such new initiatives, such as reinsurance sidecars, enabling Amlin to structure these vehicles while also benefitting from the fees for managing the investor capital.
During questions and answers from the analysts, John Wells said that the pipeline for growing assets under management remains robust and open.
“The market for pension funds to look at ILS is continuing to grow,” said Wells. Pension fund consultants continue to recommend that their clients enter the ILS space and deploy capital into it, Wells explained, adding that Leadenhall continues to see new pension investors coming into the asset class.
In terms of whether Leadenhall wins that new investor business, Wells said; “As long as our good performance continues and our asset gathering strategy continues to work, the growth numbers talked about should be achievable.”
He qualified that by adding that; “The sales process when talking to pension funds is pretty long.” He explained that this process involves talking to pension consultants, investment committees and pension trustees, needing to get them all up the education curve in terms of their understanding of ILS. Leadenhall tends to focus on the renewal periods for raising capital, Wells said, as it is easier to deploy any capital raised at that time.
Another potential future initiative for Leadenhall would be to look at solutions with more frequent liquidity options for investors. Wells said he recognised that some investors require more frequent liquidity than the firms funds currently offer, meaning that structures such as UCITS funds could be launched as it seeks to grow further. For now, the Leadenhall funds offer quarterly liquidity and this has been sufficient to build a strong investor base, Wells said.
The key message that the Amlin and Leadenhall senior teams were trying to get across to analysts and investors is that the combined Amlin Reinsurance and Leadenhall Capital Partners operations equals a competitive advantage for both parties. The symbiotic relationship between the two has a growing importance for both firms and it is clear that ILS and third-party capital through Leadenhall remains a key strategic tool and lever for Amlin going forwards.