Collateralized reinsurers target growing casualty opportunity

The established cohort of smaller niche collateralized reinsurers writing mainly auto liability and general liability quota shares are being complemented by the growth of sophisticated players such as Ledger, Long Tail Re and Multi-Strat with access to large pools of investors seeking casualty risk, according to Acrisure Re CEO Simon Hedley.

Speaking to this publication at the APCIA event in Denver, Colorado last week, Hedley said that collateralized reinsurers such as Topsail Re and Freedom Specialty have been active in the space for some time, typically providing capacity to segments where rated reinsurance was less available.

The segment of the market has also been supported by the growing number of fronting carriers available as transformers for collateralized reinsurers to partner with, he added.

But the emergence of Ledger Investing, Stone Ridge’s Long Tail Re and Multi-Strat is bringing potential new capacity to areas of program and MGA business with the expertise and experience to move “into mainstream reinsurance”.

As previously reported, Long Tail Re and Multi-Strat have been involved in a number of innovative transactions, while Ledger has been increasingly active in the program space and recently launched an ILS fund backed by Ontario Teachers. 

“It is still early days, and they are not necessarily a replacement for traditional reinsurance when you need more extreme tail cover, but they are part of what is potentially an overall more efficient way of doing business as a complement to traditional reinsurance,” Hedley suggested.

“I think we are genuinely starting to see the beginning of casualty becoming part of capital markets strategy in the sector,” the executive continued.

The initial involvement in the space has been by supplying quota share capacity, which usually has a structured element to it, similar to the involvement of collateralized writers in the property cat market.

While the “ultra-niche” collateralized reinsurers have typically targeted low margin, low volatility long-tail business to build mostly auto liability and general liability portfolios, the newer entrants have a broader appetite, including areas like excess and umbrella.

Hedley said that the evolution of the legacy market is also providing opportunities for the casualty market to structure transactions involving cedants or MGAs/fronting carriers and collateralized reinsurers who may in turn and in time access the legacy market to address the tail risk. 

“You’ll increasingly see the legacy market being part of the picture for whoever ends up holding the tail risk, whether it’s the original cedant or other parties in the reinsurance structure,” he said.