The importance of robust administration, oversight and valuation of insurance-linked securities (ILS) funds, particularly those investing in hard-to-value private ILS transactions, cannot be overstated, according to Horseshoe Group and IKONIC.
Bermuda-headquartered insurance and reinsurance linked securities (ILS) management, servicing, transformation and fronting specialist Horseshoe Group, recently acquired IKONIC Fund Services to create a full-service ILS offering.
IKONIC Fund Services Ltd., now the specialist fund administration, accounting, investor services and corporate governance arm of Horseshoe, then recently won the Best Offshore Fund Administrator award from Hedgeweek.
Artemis spoke with representatives of the Horseshoe Group and IKONIC to better understand the important role administration and valuation plays in the world of ILS funds.
Kathy H. Garrigan, SVP & Actuary, Head of Consulting Actuarial Services, Horseshoe Group, explained the importance of fund administrators in ILS.
“As regards general fund administration for ILS Funds, there are certainly different complexities than, for example, a standard long short equity hedge fund. ILS Funds, in many cases, are investing in private transactions which means as administrator, we are dealing with level 3 assets in terms of valuation,” Garrigan explained.
Continuing; “The importance of administrator oversight when funds own hard to value assets cannot be overstated and investors gain a lot of comfort when they know the fund they are investing substantial money in is independently administrated by specialists in the valuation of those hard to value assets.
“Also, using a fund administrator that specializes in ILS and therefore has exposure to best practice in the market place means that the fund administrator is in a very good position to recommend best accounting methodologies like side pocketing when a large event happens.”
Garrigan went on to explain the importance of valuations; “In terms of valuation, a robust valuation is critical in the ILS environment where subscriptions and redemptions occur throughout a year. We are well equipped to verify that our clients’ premium earnings are consistent with their portfolio’s underlying, potentially seasonal, exposure. In addition, we are uniquely positioned to compare our clients’ earnings’ patterns with industry benchmarks.”
Interestingly, administrators can also act as a stress test for ILS fund managers, providing scenario based analysis and insight of portfolios of ILS assets to help managers better understand exposures and potential losses.
“We are also well qualified to test the assumptions our clients use in determining a loss estimate and building a buffer around that estimate for additional uncertainty. Our deep knowledge of not only worldwide catastrophe exposure but also treaties’ structural characteristics designed to best address that exposure make us a key player in monthly discussions with our clients on loss activity, appropriate handling, and subsequent messaging to investors and other relevant parties,” Garrigan said.
Brian Desmond FCA, EVP Head of Fund Services at Horseshoe Group, then explained what differentiates IKONIC; “We continue to hire very experienced staff at IKONIC which means IKONIC’s client service levels always remain high. Our clients see us as much more than NAV calculation agents, but instead see us as an extension of their back office. We like to work with clients that appreciate the value we bring as we feel it’s important there is mutual appreciation in any good working relationship.
“Another key differentiator we bring to the market is our flexibility in building technology solutions for our clients unlike some of the larger administrators that can be quite inflexible in meeting client’s special ad hoc requests.”
“IKONIC was acquired by the Horseshoe Group in June 2016, following a successful period of partnership, which began in 2011 through the creation of the joint venture called ILS Fund Services Ltd (ILSFS). In approximately 5 years, we grew our assets under administration (AUA) in ILSFS to $5.5 billion which certainly reflects the successful partnership we have built,” Desmond continued.
“As a group, we now have approximately $22 billion of AUA which we expect will lead to further growth for IKONIC. Also, the combination of IKONIC and the Horseshoe Group means we have a very experienced group management team that has extensive experience in building successful companies which we are confident will add a lot of value and lead to the continued growth of IKONIC.”
Artemis then spoke to Brent Slade, COO of Horseshoe Group, about ILS market trends, how the firms view of the market plays into its strategy as an administrator and valuer of ILS assets and where it gets excited about the future for this market.
“We see several trends of importance emerging,” Slade said.
“Firstly and most importantly, we see ILS funds increasingly gaining acceptance with cedents at the expense of traditional markets. This means more diversified risks and perils for the ultimate investors to be able to participate in. In turn, this enables more funds to flow into the ILS space from quality institutional investors and thus we see the managers raising their games and making their businesses and processes more robust as a consequence,” Slade explained.
Slade explained what that means for Horseshoe as a service provider; “This means increased volume of business for us as an administrator to these ILS funds due to our expertise in this space and ability to offer enhanced institutional services such as independent valuation, actuarial, and other specialized insurance services that are unavailable from competitor administrators.”
Horseshoe forecasts ongoing growth and innovation in ILS fund markets, helping to expand the sector and enable more investors to access insurance-linked returns.
“Secondly, and in a similar fashion, we are seeing investors look for new entries into the insurance and reinsurance business outside of primarily the property and property cat markets. This means new and innovative products and offerings in the life and annuity as well as the casualty space. In fact, in many respects those lines of business are at a stage now where the property focused ILS market was in 2005. We predict some interesting growth in these areas…… watch this space!” Slade enthused.