Non-CAT ILS is “well and truly out of the bottle” – MultiStrat

As pressure on reinsurance rates intensifies, alternative capital seeks yield, and appetite broadens beyond the catastrophe space, the adoption of casualty insurance-linked securities (ILS) is poised to accelerate, according to MultiStrat, the specialist underwriter, and reinsurance investment facilitator.

The combined effects of rate increases and capacity constraints drive innovation in the ILS market and expand the appetite for and utilization of casualty ILS structures.

This is according to MultiStrat, a specialty division of Canopius Group that underwrites casualty and longer-tailed reinsurance and arranges casualty ILS transactions.

In a recent interview with Artemis, MultiStrat discussed the outlook for this less prominent but growing part of the marketplace.

To date, the ILS market remains heavily skewed towards the catastrophe arena for numerous reasons, but an ongoing investor desire for diversification, stable returns, and alternatives for capital deployment suggests the casualty sector is ripe for ILS expansion.

“As ILS prepared for expanding classes, it had to refocus on its core offerings due to challenges like multiple years of higher CAT losses, modeling and disclosure issues, and trapped collateral. With these challenges, CAT business moved in some investors’ perceptions from a short to medium tail exposure, and CAT ILS design has evolved in response,” explained Bob Forness, Group Chief Executive Officer (CEO).

“For casualty,” he continued, “there is a range of classes with different returns, volatilities, and durations. Often investors are looking for the right balance of investment yield and longer-term exposures.”

Adding, “Alternative capital ought to be part of every reinsurance broker’s go-to-market strategy for all classes and not just catastrophe. Non-CAT ILS is well and truly out of the bottle. We’ve been at it since 2014, refining our product offerings and structures. We’ve worked with a select group of brokers, carriers, and advisors who’ve invested time and resources alongside us to develop these products.”

“Cedents find several elements of investor-backed reinsurance attractive – multiyear and larger participations can reduce the size of the panel of reinsurers requiring audits, reporting, funds flow management, claims oversight, and annual renewals – allowing cedents to focus on their business and ensure annual placement efforts begin with solid support.
Forness went on to explain, “Investor capital has different cycles and sensitivities not in synch with reinsurance markets, creating a more resilient reinsurance program when combined with a panel of traditional reinsurers.”

Forness added, “We are structuring deals across the full spectrum of risk – for example, workers’ compensation, general liability, commercial auto, private passenger/non-standard auto, construction liability, professional liability, employers’ liability, and healthcare liability.”

Debates around casualty ILS often highlight a few key challenges: managing collateral, tail risk, and liquidity strategies. However, to address these issues and drive more interest from investors, MultiStrat has pioneered multiple solutions for making casualty risk attractive to both ILS investors and cedents.

“More investors are now working on multiple transactions with us,” explained Jim Robinson, CEO of MultiStrat Advisors, which focuses on capital markets and investors for the MultiStrat Group. “The continued pressure on yields for institutional capital will only enhance our offering solid, non-correlated, risk-adjusted returns.”

The pair noted how MultiStrat’s capital markets team has developed a range of tools to ensure it continues to deliver total returns to its investor base. Revealing that because of the current rate environment, the team has established a new service working with capital providers to maximize returns within insurance counterparties’ requirements.

“Since we use specialist asset managers to generate a total return, we can also consider for retrospective transactions an investment return credit on the premium funding account depending on agreed investment flexibility,” said Robinson.

In fact, every transaction the firm has completed, including the landmark $205 million hybrid retrospective and prospective transaction closed in February of last year (see article), has led to “refinements of terms, capital efficiency, vehicle evolution, and contract improvements.”

“It’s the combination of several low-risk conservative elements that create solid, high risk-adjusted returns rather than accepting higher levels of insurance risk or taking significant investment risk to generate incremental returns,” he added.

Although deals are becoming increasingly similar, the majority still contain bespoke elements. According to Forness and Robinson, standardization is still a few years away as many refinements are still being added.

“We’re also aware of dedicated funds being launched, which we expect to do for Casualty what ILS did for CAT – provide institutional investors a diversified pool of risk in which they can get exposure in size,” said Robinson.

One of the hallmarks of ILS is the lack of correlation with the broader financial markets, a quality the asset class exhibited during the stress caused by the Covid-19 pandemic, just as it did through the 2008 global financial crisis.

But as noted by Forness, casualty ILS is not only non-correlated but also boasts “the best “risk-adjusted returns available regardless of class.

“Investors should expand from CAT into insurance classes offering asset management, lower volatility, and attractive total returns. The work has already been done to make this possible.”