Randall & Quilter (R&Q) Investment Holdings, the specialist non-life insurance and reinsurance legacy investor and program manager, is proceeding with plans for a collateralised legacy P&C risk sidecar vehicle, marketing an up to $500 million structure to investors, Artemis has learned.
Readers will be aware that Randall & Quilter (R&Q) has been exploring the possibility of bringing third-party investor capital into its legacy and run-off focused underwriting and investment business using ILS structures for a number of years.
The idea has been presented as a way to bring onboard third-party capital to assist in undertaking larger legacy and run-off insurance or reinsurance transactions, leaning on institutional investor appetite for property and casualty insurance-linked returns to enable R&Q to increase its presence in what has become a highly-competitive market segment in recent years.
Size, in terms of capital, matters in legacy and run-off markets these days, especially for the very large transactions.
It’s a market that is expected to be buoyant over the coming years, with plenty of opportunity to build large portfolios of risk.
As a result, R&Q has been exploring the possibility of a collateralised reinsurance sidecar structure, as an aligned vehicle for bringing investor capital into its business, since at least early 2019.
We understand that R&Q has been in active conversations with investors over the launch of a sidecar structure dubbed Race Re (but later renamed Gibson Re we understand), which is positioned as a vehicle that will invest in legacy insurance and reinsurance transactions alongside the parent company.
As a result, investors backing Race Re would be expected to benefit from R&Q’s underwriting capabilities and its claims function, in managing the legacy portfolios that the sidecar co-invests in, while also benefiting from similar levels of return to the company by putting their capital at-risk.
We’re told that plans detail a target of up to $500 million in capital for a collateralised reinsurance vehicle named Race Re.
It’s said that R&Q will have its own skin in the game here, with third-party investor capital hoped to make up around $405 million of the structure, with R&Q supplying the rest in an aligned model.
The idea is to provide investors with a way to share in the economics of legacy and run-off business, in a vehicle with a longer-term lock-in than a typical insurance-linked securities (ILS) structure which we’re told could be up to 8 to 10 years, but with an earlier exit opportunity potentially available under the right circumstances.
While this is a longer-term for an ILS investor to get comfortable with, if investment capital can be freed and rolled into new legacy deals as the portfolios mature, or returned to investors over the duration of the life of Race Re, it could make for an interesting way to tap into the returns of longer-tailed, well-managed, insurance and reinsurance business, it seems.
We understand that the idea is to domicile Race Re in Bermuda or the Cayman Islands, as a collateralised reinsurance structure.
The sidecar would ramp up its portfolio over the first few years, while its lifespan would be expected to be around ten years.
It would also offer some leverage to investors capital, while R&Q would originate, underwrite, manage and settle claims on the business, and the sidecar would be able to take a 20% share of any new run-off deals that met its risk and return appetite.
Race Re (or Gibson Re as it was later named) is expected to offer the potential to earn roughly 15% annualised returns, we’re told, while investors would also benefit from management of the assets backing the legacy and run-off P&C risks the sidecar has invested into.
Given the longer-term nature of these risks, there appears to be an element of utilising the float in R&Q’s plans, which could augment investor returns further.
It’s no surprise to learn of the development of the Race Re strategy at R&Q, the company has also expressed a desire to leverage third-party capital in other areas of its business, including its own reinsurance program and for its program management activities.
Use of third-party capital in legacy and run-off businesses is not unusual, especially from private equity type investors, who may be as suited to this sidecar opportunity as a pension investor, or more typical ILS institution.
As a reminder, global run-off and legacy reinsurance specialist Premia Holdings became the first to bring additional capital into its business using a collateralized reinsurance sidecar structure, with the launch of Elevation Re at the end of 2020.
For investors, the opportunity to access diversifying risks, that still offer the relative lack of correlation of other ILS and cat bond allocations, but come from experienced originators and managers of run-off books and their claims, can be an attractive way to expand appetites for reinsurance-linked returns.