Vario Partners launched by PwC trio to grow & expand insurance securitisation

A new firm, named Vario Partners, is launching to advise on and facilitate the bringing together of portfolios of insurance risk and the capital markets through securitisation (ILS), with three founding employees all hailing from PwC backgrounds.

The trio behind Vario Partners are Quentin Moore, an ex-Partner at PwC and also the former head of research at Lloyd’s, Bryan Joseph, Partner and Global Actuarial Leader at PwC and James McPherson, Partner and Mid-tier and London Actuarial Leader at PwC. Joseph and McPherson will be joining Vario Partners in 2015.

The company is being set up by the trio to capitalise on what they see as a gap in the market. There is a lack of risk being delivered to sophisticated institutional investors, such as pension funds, in securitised form, but there is a significant appetite to invest in it. At the same time there is a significant amount of risk sitting in insurance portfolios, some of which could be segmented and structured using securitisation techniques to satisfy some of this investor appetite.

Matching risk and capital is what insurance-linked securities (ILS) is all about after all, but the market has failed to keep up with demand for securitised paper. With other fixed income assets paying such low coupons, any additional deal flow of insurance-linked securities or even insurance-related securities, should be eagerly accepted by investors.

There are benefits for the insurers or entities holding these portfolios of risk too. By structuring some of them into securities and letting investors bear the risk, in return for interest coupon payments, the insurers and entities holding these risks will gain capital efficiencies and improve their capital adequacy, particularly important under new regulatory regimes such as Solvency II.

Vario Partners will aim to; “Create capital efficiencies for (re)insurers by structuring books of business into securitised instruments which can be supported by the capital markets,” according to the firms new website.

The founders of Vario Partners believe that the traditional and alternative reinsurance markets alone are not satisfying investor demand for securitised access to reinsurance risk, an opinion which our conversations with investors certainly validates. Investors are keen for access to risk in a liquid, securitised form, especially with rates so low across so many other comparable asset classes.

Vario wants to take the ILS market beyond catastrophe risks, with a bold aim to open up casualty and specialty portfolios of insurance to securitisation. Vario wants to overcome issues such as the tail risk which makes collateralisation more difficult and says it will use its portfolio modelling technology to enable non-peak risk and whole portfolios of insurance to be structured in such a way as the capital markets can directly invest in them.

“We felt that the time was right to promote our ideas and proprietary modelling techniques in the ILS field,” commented McPherson. “We foresee significant opportunity, not just in the catastrophe space, but particularly in non-peak risk as the European industry adapts to Solvency II and the capital markets get increasingly comfortable with the insurance asset class.”

“The insurance industry is undergoing a fundamental change in how capital is sourced and utilised within their businesses. Successful insurers and reinsurers will be those that efficiently tap into the availability of all sources of capital, made possible by the increasing appetite for uncorrelated risk from fixed income investors. We see this as a propitious time to bring new ideas to the reinsurance/capital convergence space,” Joseph added.

Moore acknowledged that the challenging re/insurance market was forcing insurers to be open to using different forms of capital and creating different revenue streams, such as fee income for originating business.

“Investor appetite for uncorrelated risk presents our industry with a new reality in terms of long-term trends in pricing and cycle management. History has shown that the most successful insurers have been able to manage cycles through balancing underwriting for their own capital and third party capital; ILS gives all insurers this potential,” he said.

Interestingly, Vario will in the future look to develop its own fund management capability, subject to regulatory approval. That would put it in an interesting position of perhaps originating risk, structuring it, investing in it once it has a fund capability, while also finding other investors to support transactions. That would put it in a very interesting space as a bit of a market-maker, which in our opinion is a shrewd place to sit.