Midwest Holding uses Vermont captive Seneca Re to access capital markets

Use of third-party investor capital to support growth of insurance and reinsurance businesses is an expanding trend, as carriers find an increasing array of routes to channel capital markets funding to their underwriting vehicles, adjusting the traditional value chain as they go.

An interesting one that has recently come to light is Midwest Holding Inc., a company currently focused on the life and annuities space that is bringing capital markets support in as reinsurance capacity, specifically to fund more rapid expansion of a technology driven underwriting strategy.

Midwest Holding explains its mission as to “advance the insurance value chain with technology and services that reduce cost, increase value, and provide a better experience for our partners and customers.”

Part of this strategy involves the use of the capital markets as a way to fund underwriting insurance business, bringing third-party investor capital into its overall business structure using a Vermont domiciled captive reinsurance company named Seneca Re.

Working with affiliate 1505 Capital, an SEC-registered investment advisor, Seneca Re “brings capital markets-oriented capacity to the U.S. insurance market,” the company explains.

In simple terms, Seneca Re is bringing in supportive reinsurance capacity from third-party capital markets investors as a way to fund underwriting growth for Midwest Holding through its Nebraska-based insurer American Life.

Seneca Re utilises protected cells to bring in this capital and in April 2020 entered into a flow quota share reinsurance arrangement with American Life, while its first protected cell was launched in May and a second protected cell that was funded by institutional alternative investor Crestline in July of this year.

Midwest Holding provides an end-to-end tech solution to help re/insurers offer annuity products, reinsuring most of the risk to reinsurance providers, including capital markets players and via Seneca Re.

Access to efficient sources of reinsurance capital from investors seeking the returns of insurance-linked business is clearly at the core of the business model and in using a Vermont captive to deliver this, Midwest Holding is showing an alternative way that perhaps other classes of insurers could look to tap into investor appetite for insurance and reinsurance linked returns.

“We partner with traditional reinsurers and reinsurers sponsored by capital market investors, including asset managers and institutional investors. We believe this strategy helps us preserve our capital while supporting sales growth because we have lower capital requirements when the policy liabilities are reinsured than when we retain all of the policy liabilities,” the company explains.

As part of this strategy, “Seneca Re was formed to operate as a sponsored captive insurance company for the purpose of reinsuring insurance policies through one or more single purpose entities, or “protected cells,” under Vermont insurance regulations. Seneca Re provides an efficient structure for capital markets investors to reinsure our policies through protected cells that it manages,” the company continued.

Using a technology platform to develop, sell and administer life and annuity policies, while leveraging third-party capital markets backed flow reinsurance capacity to fund underwriting expansion, could give Midwest Holding a route to much faster growth than it could have achieved alone as a balance-sheet operator.

The fact the company is making this work with U.S. domiciled entities is an interesting twist, which perhaps some in the insurance-linked securities (ILS) market may look to, especially to work with U.S. domiciled investors.

As more U.S. investors come on-line in the ILS market, it seems likely we’ll see innovative U.S. P&C insurance carriers looking to ways they can own similar flow reinsurance type relationships with capital market funding to back them.

As a result business models like this perhaps provide a glimpse of another efficient way to bring third-party capital meaningfully into an insurance business model, altering the value chain in a way that can add capital efficiency and ultimately benefit the customer as well.