Arch Capital sees ILS platform as key growth lever for reinsurance

During its investor day yesterday, senior executives from Arch Capital, the Bermuda headquartered specialty insurance and reinsurance group, explained that third-party sources of capital and its insurance-linked securities (ILS) platform are key to future growth opportunities.

Arch put forwards its Capital Partners operations as an area it intends to expand on yesterday, alongside other third-party capital backed initiatives such as Watford Re.

Arch’s reinsurance division Arch Re makes use of retrocessional reinsurance for its own book and also shares risks with third-party investors through insurance-linked securities (ILS) style structures.

Arch has managed somewhere around $1.2 billion of third-party investor capital from the capital markets through its ILS initiatives and that is an area that can act as a growth lever for Arch, particularly in a firming market environment.

The company also operates as a facilitator or fronter of collateralized reinsurance transactions for certain ILS funds and investors, plus remains the largest sponsor of mortgage insurance-linked securities (ILS) transactions as well, further underscoring its ILS pedigree.

During the investor day, executives explained the importance of ILS activities and positioned Arch as one of the companies set to benefit from the well-documented flight to quality of ILS investors.

Analysts agreed and KBW said, “We see it as one of the ILS capital market share winners in coming years, enhancing an often-overlooked (and under-discussed, to be fair) component of its Reinsurance segment’s product portfolio and exposure management strategy.”

Arch Re CEO Maamoun Rajeh explained that while ILS investors in the main remain attracted to the returns possible from property catastrophe reinsurance, investors do want higher returns and are becoming increasingly selective about their reinsurance partnerships, something expected to benefit his company.

Arch’s executives believe that reinsurance market firming can be sustained, given the multiple factors that have driven reinsurance market hardening this year.

The execs said that expansion of the third-party capital platforms at Arch would be a lever for driving further growth, with the companies ILS platform one unit that is expected to drive further growth into property reinsurance for the company.

Arch Capital, like the majority of its peers, has been steadily expanding its use of third-party capital alongside its own balance-sheet.

Optimising this mix of capital going forwards is going to be vital to enable companies to sustain returns for both sides, their equity investors and the institutional investors backing their ILS structures.

This is where alignment is so important and as the reinsurance market increases its use of third-party capital and ILS, it will be interesting to see how companies demonstrate and make clear their alignment with all their capital providers, as those that can clearly demonstrate it, alongside robust and sustainable underwriting results, are likely to be the winners in attracting investors to their platforms.