Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

One sidecar pulled on lack of investor appetite, others questioned on terms


One collateralised reinsurance sidecar transaction that had been lined up for the January 2019 renewals has been pulled due to a lack of appetite from investors, while at the same time other sidecar arrangements are now being questioned for changes being proposed to their terms, Artemis understands.

It’s shaping up to be a particularly challenging January renewal season for the collateralised reinsurance and insurance-linked securities (ILS) space, after the proliferation of losses over the last two years and the resulting trapping of collateral, ongoing loss uncertainty and loss creep that has been seen.

As we explained earlier this week, there is an expectation that the January 2019 reinsurance renewals will be challenging, potentially late and that capital and losses are going to drive the negotiations, with the market perhaps even set to stop growing as investors and fund managers hold back on fund-raising and deployment.

We’re now hearing reports of an ILS fund manager and ILS investor base that is becoming increasingly selective about the opportunities that they allocate capital to, as year-end approaches and they digest the losses and loss creep of the last two years.

At the same time we hear reports of an increasingly demanding cedant or sponsor base, that wants to guarantee it won’t be left lacking in collateral when major catastrophes strike.

We’re told by sources that investors and ILS funds have not shown sufficient support for one collateralised quota share reinsurance sidecar deal, leading to it being withdrawn from the market at this time. We can’t confirm whether this was a broadly marketed sidecar, or a privately offered arrangement and of course it could come back to market again (perhaps with improved terms).

We’ve also heard of another that is struggling to fill the allotted size the sponsor had been targeting, but this is due to the losses and trapped collateral from the prior year, with investors not keen to double-down on it.

Sources said there has been some push back from investors in the sidecar space, as these collateralised reinsurance structures have in some cases been hit repeatedly by the losses of 2017 and 2018 leaving their performance poor, while investors and ILS funds question whether they should still be supporting them and the quality of the business these portfolios sometimes include.

We understand questions have also been raised over the quality of some private quota shares as well, although cannot confirm whether any are set to be pulled from the collateralised market, or revert back to traditional capacity sources. But we do understand that investors are demanding better rates from some quota share partners.

One factor that is also responsible for the changing appetites for sidecars and quota shares is the changing terms of transactions, which in some cases are becoming more onerous and difficult to reconcile with for the investors.

We’re told that at least one well-known global re/insurers sidecar deal, an annual transaction, now has buffer loss table clauses calling for the trapping of as much as 150% of collateral, an increased percentage from prior years.

These clauses stipulate that collateral must be held at a certain amount above loss estimates, to allow for development time. But investors say that the increased percentages make investing in them difficult, if not impossible in some cases, leading to additional push-back.

At the same time we understand that sidecar sponsors are also looking to hold collateral for longer when losses occur and in some cases would like to change the terms on collateral being rolled into newer sidecar vintages as well.

Some of this is the result of a publicised case of a cedant that released collateral early and then subsequently tried to claw it back, but had no recourse under the terms of the deal. It seems that some cedants would like to strengthen the terms to avoid any uncertainty over collateral release.

A number of ILS investors have expressed concerns about this firming of terms, which they feel makes sidecar allocation a less attractive prospect.

It’s understandable for sponsors to seek to protect themselves and ensure the collateral is there to pay for losses, but applying overly onerous terms only promises to result in less investor support for their sidecars, not increased protection.

Of course the real answer to these issues is enhanced, faster and more transparent reporting of losses throughout the insurance and reinsurance value-chain, but that’s another story in itself.

After the losses of the last two years it is encouraging to hear that a more discerning approach to capital allocation is being applied by investors to areas of the industry where the loss history of an account is less than attractive, or the terms are pushing investors further than they feel comfortable with.

Not all investors are pulling support though and most sidecar renewals are expected to go ahead without hindrance, but there is likely to be a change in the base of investors supporting some of the transactions.

However, it is important that cedants and investors speak and can negotiate terms that make this work for both sides. Sometimes it seems like terms are proposed or enforced and the counterparties don’t ever actually discuss how best to make the mechanics of these arrangements work for both of them.

This all makes negotiating private sidecar transactions, or just private collateralised reinsurance quota shares, seem much more attractive to investors today. Perhaps a sign of where some of the larger investors will move to.

It can give investors more influence over the final deal terms and ensure they get to allocate their capital to transactions that align with their expectations and risk appetite.

While at the same time allowing cedants to negotiate directly with specific markets to ensure collateral release and buffer loss clauses are aligned with investors needs for liquidity and ultimately their returns.

That’s a better, more equitable solution than surprising investors with expanded terms in deal documentation.

Also read: Capital availability & losses to drive reinsurance rates at 1/1 renewals.

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