LGT ILS Partners, the specialist dedicated insurance-linked securities (ILS) investments unit of the private bank and asset manager, is considering ways to enable equity investments to be made into its rated Class 3A reinsurance underwriting vehicle Lumen Re.
Speaking during a panel session at our ILS Asia 2020 conference yesterday, Partner and Portfolio Manager at LGT ILS Partners Michael Stahel explained that the opportunity, while providing an attractive opportunity to equity focused investors, may also allow for additional “gearing” of the capital deployed via Lumen Re.
The panel session discussed the importance of capital efficiency in reinsurance and how insurance-linked securities (ILS) activities play a significant role in that, with the topic of the current wave of private equity appetite for re/insurance one topic raised.
Stahel noted that private equity appetite for reinsurance strategies may also present an opportunity for LGT ILS Partners, in taking its rated reinsurance platform Lumen Re to another level of efficiency.
Speaking during the ILS Asia 2020 panel session Stahel said, “We’re received a number of enquiries from investors whether there would be a possibility for private equity allocations direct into Lumen Re. At this time Lumen Re is fully owner controlled ultimately by LGT.
“But we are now looking into potentially allowing external investors to take a share in Lumen Re.”
He went on to explain how this could add even greater efficiency to the Lumen Re, rated and still fully collateralised reinsurance underwriting model that LGT ILS Partners has developed, saying “It’s very much in-line with the topic of this discussion here, it’s about capital efficiency.”
“It’s quite obvious. Lumen Re is also gaining some transaction fees, it’s gaining transaction costs and fronting fees which could be allocated to equity investors.
“Once again you can run a certain level of leverage, you have to be very mindful about the level of leverage that you actually run, but you can gear up and expose yourself to a bit more limits, vis-a-vis the actual paid in capital.
“This is, in our view, a very attractive solution. So that would be another product offering, that we can and will offer to some potential investors,” Stahel said.
Stahel also explained that any equity investment in Lumen Re would likely be on a non-voting basis, as LGT would want to retain control of its reinsurance platform.
But the potential to allow investors in to boost the paid-up capital of the reinsurance vehicle, enabling them to earn fees income as Lumen Re operates and expands, all while providing additional gearing to the capital deployed through its underwriting, seems a win-win for potential private equity investors and the ILS ILS Partners strategies (and investors).
An optimal structure will have to be found before moving forwards with allowing equity investments into Lumen Re, to ensure alignment of interest in the most effective manner. But the fact it’s being considered shows LGT’s appetite to build-on and innovate the successful reinsurance underwriting platform and investment management business they have created.
Stahel said, “We have to be very mindful about the fact that we don’t want to dilute the value that we try to generate with Lumen Re towards our trading counterparties, but still optimise the way capital can be deployed in this market.”
You can view the full ILS Asia 2020 panel session on-demand here.
As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2020 conference over on our YouTube Channel in the coming weeks.
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