Casualty sidecar / ILS market to expand. Alignment, maturity driving investor interest: SIFMA

The casualty insurance-linked securities and casualty reinsurance sidecar market is seen as primed for expansion, with speakers at today’s SIFMA ILS conference in Miami saying the aligned nature of the structures and the motivation of cedents to participate all suggest traction will persist.

During a panel discussion this morning at the conference, moderator Andras Bohm, Managing Director and Global Head of Structuring, Gallagher Securities, was bullish on growth potential for non-cat and casualty sidecars.

In essence, the increasing maturity of this segment of the market is driving greater confidence, while the alignment inherent in the structures is helping fuel investor interest as they seek access to insurance-linked returns.

Bohm set the scene by saying, “How big this space is is hard to assess, but I think brokers generally collide around this one and a half to $2 billion of capital being raised and deployed in casualty sidecars last year.

“However, there is significant activity in the market, and there is a very strong pipeline, and I think it’s very reasonable to assume that this market is going to double by the end of this year.

“If this trend were to continue, we would be truly looking at a significant new asset class, an opportunity for all of us to explore and grow it.

“What really drives this? There’s a number of features that drive this. Clearly, investors see value in operating leverage. They see value ultimately, in generating material returns, partnering with great underwriters.

“What underwriters and insurers see here is an interesting opportunity in casualty to explicitly benefit from investment returns and yield, that are harder to achieve in the traditional reinsurance market.

“At least from where we are sitting, I think it’s hard to argue that the fundamentals of this market are not real. As such, it’s hard to argue for us that this is not going to be a more core section of the market, as we see in the short term.”

Panel participant Aaron Slan, Managing Director, Culpeper Capital Partners LLC, an investor behind some structures in the market, followed up by saying what he sees as drivers for the success of the non-cat side of insurance-linked securities.

Slan commented, “You have a confluence of rate adequacy across many, many casualty and specialty lines, where you can actually get an underwriting return as an investor in these structures, or providing reinsurance.

“Rates are at a level where you take advantage of the inherent leverage in the structure as well. So as investors, you can get really good risk adjusted returns effectively in this market without pushing too much risk on either side of the transaction, either the underwriting or the investment side.

“We’ll see how the dynamics go. I think a lot of the interest from the cedent side has been built, because you do have a lot of private credit and institutional capital looking at the space, especially private credit. That’s kind of on the back end of the life trade, where that’s become very expensive and hard to do.

“So we’ll see how it develops. There’s no reason this can’t be as big as the cat ILS market over years, right? The casualty-specialty market is a lot larger as an insurance market. There’s different investor interests and different cedent interests and we’ll see how those will get matched in the market.”

Next, James Lee, Managing Director, Sompo Capital Markets, noted that, “We’ve had a few dynamics occur that helped catalyse the recent emergence of a new breed of casualty ILS vehicles.”

Lee highlighted factors he believes have set the scene for the success of casualty ILS, citing improved underwriting side and rate increases, plus better rates, giving a chance to generate better returns. While, improved and more aligned structures make investors more comfortable, as well as new investors that are okay with illiquidity and complexity, as well as investment risk.

Lee said, “When you have those types of investors come into our market, we’re able to look at other lines of business and put together underwriting risk and investment risk in a package that makes sense for all parties. I think that’s what we’re seeing, and hopefully we’ll continue to see.”

Finally, Danny Arnett, Managing Director, ILS, Ryan Specialty Underwriting Managers, a sponsor of a number of non-cat ILS structures, explained that the timing was right for Ryan Specialty to do a large sidecar, that ceded a portion of the MGA business for close to a billion dollars of premium.

Arnett said, “We know that is large, but we have great faith and confidence in our scruples and the partners that have supported us historically are going nowhere. It doesn’t mean that we’re shifting entirely to an ILS backed platform, 10% is only 10%.

“We view this as a symbiotic relationship moving forward, that we’ll continue to participate when and where it makes sense, and we’re happy to be, you know, leading contributors of premium to the ILS environment.”