As the renewal season negotiations get underway, quota share focused ILS investment manager Tangency Capital feels well-positioned and believes the capital it provides is core to reinsurers, so more important than ever in current market conditions.
Artemis spoke with Dominik Hagedorn, COO of Tangency Capital Ltd., an insurance-linked securities (ILS) investment fund manager with a focus on quota share reinsurance business, after the news about a recent successful capital raise came to light.
Tangency Capital raised $200 million from a new investor to the ILS asset class, in an allocation that had been agreed prior to hurricane Ian hitting Florida. This takes Tangency’s assets under management to approximately $650 million.
Now, the situation is looking even more promising with reinsurance rates expected to harden further and Tangency Capital is continuing with its bespoke quota share approach.
Discussing how hurricane Ian has changed market expectations at this time, Hagedorn told us that, “We expect a fundamental shift in underwriting and in pricing .”
Adding, “Naturally the risk-adjusted return profile is expected to look much better from here on out, than it did even three months ago.”
Hagedorn explained that not only is the reinsurance industry repricing for losses from hurricane Ian, but factors from inflation to climate change are all playing into price expectations and investors’ demands for returns, driving opportunities as the renewal negotiations get underway.
“As an industry we have not delivered,” Hagedorn said, commenting on the potential for further capital raises. “A lot of allocators are now going to want to see newly priced portfolios in action before they decide where to go.”
“So far, we’re not seeing any meaningful capital inflows into the ILS space. Even if we did, I don’t think it would make a big difference assuming that the capital shortage is as bad as we think it is.”
“Because it’s not just a capital supply question, it’s an underwriting discipline question.”
Aside from pricing, Hagedorn feels there is room for improvements in terms and conditions again at the renewals in the quota share space.
“Everything’s on the table and those that provide capital into this space, additional capital in particular, are in a great position to build out, or build on, structural ideas that have been presented in the past,” he told us.
Which is making it even more important that those providing quota share capital are able to negotiate bespoke structures, to provide the right coverage for cedents while securing the best possible terms for their investors, Hagedorn believes.
“It’s only natural that you’re moving towards a market in which deals are bespoke. We’ve been doing bespoke deals for a long time, and it really helps us in building out what we want in a quota share transaction and not cater to any common denominator,” Hagedorn said.
Adding that this has, “Worked well for us in the past and now, in an environment like this, it helps us even more because we can continue rolling out features that we care about.”
“We’re seeing that reinsurance companies have growing teams that service the alternative capital space which I think also underlines the thesis that quota shares are a core part of the capital structure of any reinsurance company,” he also said.
Positively, Hagedorn feels that there is interest in the asset class, even if that’s going to take time to convert into inflows.
“We’re speaking to more allocators than we would have done a year ago and there is more interest right now in the asset class,” he explained.
“There is interest in the asset class as a whole, but there are also a lot of allocators that have had a challenging experience.”
There is opportunistic capital out there that may come in more quickly, Hagedorn explained to us and he feels there is room for these different types of investors, alongside the longer-term more stable capital that the ILS market has developed over time.
The renewal negotiations are positive so far, he feels, and Hagedorn is positive about the prospects for Tangency Capital’s 2023 portfolio.
“We’re having very good conversations with reinsurance companies about what their targets are, what they’re accomplishing, what they’re solving for, and what we want to solve for,” he said.
“It goes beyond pricing, it goes beyond terms and conditions,” he added. But said always front-of-mind is, “Being very thoughtful about how to deploy capital.”
Hagedorn told us that, “There is great demand for quota share capacity, just as there is great demand for collateralised reinsurance, cat bonds and everything else.”
For Tangency Capital though, it’s often about more than just capital, as the company tries to leverage its relationships and insights to provide added value to cedents and investors alike.
He explained, “So, we are a capital provider, but we also want to provide relevant insights to our counterparties.”
“We tell our clients, we can provide you with more than capital, and that does resonate.”