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III. Insurance-Linked Securities
and reinsurance broker Guy Carpenter. Michael Millette, the former global head of structured finance at Goldman Sachs Group Inc.’s underwriting unit, initiated the launch of Hudson Structured Capital Management to focus on re/insurance and transportation assets.
Also in 2015, RenaissanceRe sidecar DaVinci Re raised debt capital in a private offering of senior notes, with the proceeds being used to repay a loan made by RenaissanceRe to the venture and repurchase DaVinci Re shares, and for general corporate purposes in support of the vehicle’s alternative capital activities. DaVinci Re writes a quota share of RenaissanceRe business, largely focused on its catastrophe reinsurance portfolio. The 10-year rated notes provide further support for the capitalization of RenaissanceRe’s rated alternative capital platform.
There were a few significant exits from the ILS fund space in 2015. Third Point Re wound up Third Point Reinsurance Opportunities Fund Ltd. as part of a realignment of its partnership with Hiscox Insurance Company (Bermuda) Limited. AQR Capital Management announced the wind- down of its AQR Re unit and the closure of its related ILS funds. In connection with these closures, spokespersons from both firms cited changing market fundamentals and the increasing difficulty in putting larger amounts of capital to work, noting the importance in the current market of diversification across multiple lines of business, a theme that resonated around the industry in 2015.
With concerns about sourcing business at the fore, many fund managers sought to expand their business lines, loosen investment restrictions and broaden their investment programsin2015. WehavealsoseenanumberofILSfund managers (e.g., Nephila and Twelve Capital) make strategic investments in onshore carriers with the potential benefit of sourcing more risk. Furthermore, several new funds being organized for 2016 are expected to offer greater exposure to property & casualty, mortality, longevity and other risks in addition to property catastrophe risks.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
We continue to see both open-end and closed-end fund structures, with many closed-end structures in particular utilizing segregated accounts of Bermuda segregated account companies to isolate portfolios of reinsurance risks as between different classes of investors or risk periods. Some closed-end funds redeploy the available capital from one renewal period into the next available renewal period, whereas other funds require investors to commit a fixed amount to future renewal periods, which must then be funded with additional investor contributions if rollover proceeds are insufficient or not in time to collateralize new transactions. In either case, investors are typically given the opportunity to increase or decrease their continuing investment in future renewal periods as they see fit.
In addition, open-end ILS funds continue to be organized. These funds generally allow for more frequent subscription and redemption activity into an existing portfolio of risks, subject to side pockets, slow-pay redemption shares (redeemable based on portfolio run-off rather than at net asset value) and other restrictions principally designed to maintain liquidity and protect new investors from pre-existing events affecting the portfolio. We saw several open-end structures brought to market in 2015 and several others are targeting launches in early 2016. Open-end vehicles are being used both for funds with liquid portfolios comprising principally Cat Bonds, as well as for funds that invest almost exclusively in traditional reinsurance contracts.
The Alternative Investment Fund Managers Directive, which we discuss in more detail in Section III.H below, came into effect in July of 2014 and continues to be a major consideration for managers looking to raise capital in the European Union. As many ILS funds are managed by fund managers located outside the European Economic Area (“EEA”), the marketing and other activities of ILS Funds in the EEA are directly impacted by this directive. Given the complexities associated with this directive, many such fund managers located outside the EEA, such as in Bermuda and the United States, opt for a streamlined marketing plan into just one or only a few EEA countries,
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