The ability to access the capital markets is key for reinsurers and with Hong Kong eager to establish itself as Asia’s insurance-linked securities (ILS) hub, Peak Re is well positioned to serve as a conduit between investors and Chinese property catastrophe risks.
This is according to the Chief Executive Officer (CEO) of Hong Kong domiciled reinsurer, Peak Re, Franz Josef Hahn, who recently discussed the firm’s second sidecar issuance and broader ILS market trends in Asia with Artemis.
The company has now completed the renewal of its ground-breaking Asian sidecar transaction, Lion Rock Re II, at $77 million in size for 2020.
The new issuance came after the success of the $75 million Lion Rock Re issued a year earlier, which was the first ever Asian sidecar.
The reinsurance sidecar vehicle provides Peak Re, which is majority backed by Fosun International, with a source of capital markets backed collateralized retrocession.
In light of the renewal, Hahn told Artemis that Peak Re’s portfolio on offer to the capital market is both unique and well diversified.
“As such the reception from global investors was as good as Lion Rock I. The structure offered by Lion Rock I not only helped the investors to diversify their book but also to gain strong profits. The withdrawal of some capacities could therefore be easily counter balanced by highly interested new investors,” said Hahn.
Looking forward, Hahn explained that the reinsurer does expect Lion Rock Re to grow alongside Peak Re’s overall portfolio, and underlined how integral ILS is to its growth strategy.
“Financial flexibility is of utmost importance to any reinsurer, so the ability to access the capital markets is very critical. We have experienced strong growth since our founding and we see yet tremendous market opportunities especially in Asia. To be able to seize market opportunities with flexibility, we need different pockets of capital to support us throughout market cycles, including ILS capital.
“The majority of our business derives from emerging Asia markets. The strong growth of the middle class society for the decades to come contributes to the need of ever growing capacity. This is particularly true with 150 million new young entrants to the middle class societies from markets such as China, India and Indonesia.
“In our opinion, closing of the natural catastrophe protection gap is impossible without new additional capital available,” he said.
In China, for example, rapidly expanding insured catastrophe and severe weather-related exposures have, in recent times, underlined the very real need for effective risk transfer solutions.
Growing urbanisation in areas of the country susceptible to a range of natural catastrophe events, is just one of the trends driving a need for more risk capital, which in turn requires reinsurance access to diversify the exposure.
With this in mind and in light of Peak Re’s positioning, Artemis was eager to hear Hahn’s thoughts on the potential for Peak Re to serve as a conduit for investors in the ILS space to access Chinese property catastrophe risks, leveraging Hong Kong as a domicile for it in the future.
“Sure,” said Hahn. “We have strong expertise and track record in underwriting risks in China and would serve as an ideal conduit for investors to familiarise themselves and to access risks from China.
“Peak Re benefits from a regulatory ease of access to Chinese insurance business, which is unique to our home.
“Hong Kong has strong ambition to become the ILS hub of Asia. With the depth and breadth of its capital markets and strong financial and economic tie to the mainland, we are confident it is a matter of time Hong Kong will achieve this goal.”
Generally, he continued to explain, Peak Re sees a lot of room for the industry to innovate and enhance product features.
“There are inherent inefficiencies in certain ILS products and that eventually will change. We see potential of ILS market reaching level of breadth and sophistication of the broader capital markets,” said Hahn.
So far, the sidecar vehicle is a product that makes the most sense for Peak Re and has appeal to investors, but Hahn explained that the reinsurer will continue to develop other ILS solutions that are attractive to the ILS marketplace.
“Investors come to Peak Re for our Asia underwriting expertise, our uniquely diversified portfolio and tailored approach in each market. We will continue to capitalize on these differentiations and offer unique products to the market.
“Other than natural catastrophe, other risks, such as pandemic risks on the life side, are on our long-term horizon to offer to the ILS market. At the moment, we are strongly growing our life business so that different forms of risks will be offered over time,” said Hahn.