TransRe, the Alleghany owned reinsurance brand name for Transatlantic Holdings, is approaching opportunities to provide fronting services for insurance-linked securities (ILS) or third-party capital providers with caution and opting to be selective about those it works with.
Options in the world of fronting for ILS funds and capital providers shrank when Tokio Millennium Re (TMR) was acquired by fellow Bermuda-based reinsurance firm RenaissanceRe.
When that acquisition was announced, RenRe made it clear that the provision of this fronting service to other collateralised and ILS markets was not a business line it would be continuing once it had completed the integration of TMR, although it did offer continuity for in-force fronting arrangements.
As those in-force arrangements rolled off risk ILS funds and third-party reinsurance capital providers needed to find new service providers to front reinsurance deals for them.
Companies like Allianz, through its Allianz Risk Transfer (ART) unit and the Capital Solutions team, as well as reinsurance firm Hannover Re both likely benefited from this change to the fronting for ILS landscape, able to cherry pick deals from some of those looking for a provider to assist them in accessing risk after the demise of TMR.
Other re/insurers are trying to break into the fronting for ILS market as well, such as Bermudian insurance and reinsurance firm Arch Capital, as well as French reinsurer SCOR which is considering taking a leap into this area.
Alleghany’s TransRe only came to light as a fronting provider recently when it became clear that the reinsurer had fronted for ILS fund manager Fermat Capital Management for its participation in the Florida Hurricane Catastrophe Fund (FHCF)’s 2019 reinsurance renewal.
That was the first time TransRe was seen to front business for an ILS fund manager, a sign that the reinsurer may be looking to offer this service more broadly and could bring more choice to the fronting market for capital providers and ILS funds.
But it seems TransRe, while now having an offering in the fronting space, isn’t looking to move into it wholesale and is tentatively exploring the opportunity.
Analysts from JMP Securities recently met with the Alleghany management team who expressed some nervousness around the fronting model.
While reinsurance rates have certainly improved at recent renewals and those improvements look set to continue into 2020 currently, TransRe is finding risk adjusted returns more palatable and is expected to expand its underwriting back into areas where it had pulled back in recent years.
However the company still has concerns about tail risk in reinsurance and that is making it more reticent to dive into the fronting space.
Previously, Weston Hicks, President of Alleghany, had warned re/insurers providing fronting and risk transformation services to the ILS and collateralized reinsurance market to beware of being left holding the tail risk.
It seems this concern over tail risk and how fronting providers may get left with more than they bargained for remains at Alleghany and is making the company and its reinsurance unit TransRe much more cautious when it comes to entering into fronting relationships with capital providers.
The analysts said that the management of the firm continue to be very cautious and selective when it comes to fronting-tyle relationships with third-party capital providers.
The reason for the reticence is that Alleghany management believes that the industry has a significant amount of unrecognised risk sitting on its balance-sheet, at more distant return periods such as 1-in-500 to 1000 years.
While catastrophe events at those levels are clearly very infrequent and present the most remote of risks, the analysts note that if one were to occur “it could bring with it the risk of ruin for some companies.”
This is of course why companies like TMR, Allianz and Hannover Re have been the predominant source of fronting for ILS and collateralized reinsurance deals, given the depth of their balance-sheets and ability to diversify away the tail risks.
However they never go away completely and when fronting for ILS capital (and taking the tail for the investors) there is clearly a risk that you are picking up very remote, but potentially significant exposure to massive industry loss events.
Of course, any catastrophe event at such remote return periods could mean ruin for much of the insurance and reinsurance industry anyway, given the size of loss would reverberate around the entire marketplace.
But it’s sensible to move carefully into an area of the market like fronting for ILS capacity, where you could pick up exposure to these extreme tail events, hence TransRe’s cautious and selective approach is definitely warranted.