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III. Insurance-Linked Securities
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if any. Where permitted, such as in the U.K., managers engage in limited pre-marketing efforts to ascertain better the capital raising opportunity before registering and taking on any additional regulatory burdens.
F. Hedge Fund Re
In 2015, the start-up hedge fund reinsurer model continued to diverge from the “greenfield” model of Third Point Re, Hamilton Re and Greenlight Re, where a single asset manager controls the investment of almost all of the reinsurer’s funds. As discussed in our 2014 Year in Review, Watford Re was established as a sidecar-style hedge fund reinsurer that would allow the new venture to operate as a “pure” sidecar through quota shares with the reinsurer sponsor or as a “market facing” sidecar with business produced by an affiliate of the reinsurance sponsor to be written directly on the new venture paper (whether side- by-side with the sponsor or on its own). As concerns with obtaining an A.M. Best rating grew, a new, unrated model evolved with the formation of ABR Re, a joint venture between ACE and Blackrock, which essentially acts as a sole cedent captive reinsurer tied to ACE with respect to all of the new venture’s business. Richard Brindle and Neil McConachie developed yet another rated model in the formation of Fidelis Insurance, where the business accepts and calibrates risk on either the investment or insurance side based on return profiles over time. Multiple investment managers selected by Goldman Sachs Asset Management will be used to manage the reinsurer’s asset portfolio. Finally, Enstar and UBS O’Connor announced that they will create Aligned Re as an unrated vehicle that will reinsure prospective business generated by Enstar’s “live” business platforms as well as run-off business owned by Enstar.
A number of other hedge fund reinsurance vehicles remain in the pipeline, although the timing of future capital raises remains uncertain. Beset by investment headwinds, a
fiercely competitive underwriting environment, rating agency skepticism and the uncertainty for U.S. investors based on proposed regulations and legislative proposals aimed at eliminating any perceived U.S. tax advantage as discussed in Section VII below, a number of the ventures have been delayed and the hedge fund reinsurance companies currently represent a small (i.e., low single- digit percentage) slice of the overall reinsurance market. If there is an improvement in the underwriting and investment environment or more clarity for U.S. investors, we would expect more hedge fund reinsurers to enter the market in 2016.
G. U.K.ILSLegislation
The London market is one of several hubs, together with Bermuda, Guernsey, Zurich, Ireland and the Cayman Islands, for the expansion of activity involving ILS, funds and collateralized structures. While London has benefitted from the presence of talented underwriters and professionals and the Lloyd’s and London market generally, the City has not been a leading destination of choice for onshore ILS structures such as transformers or sidecars due mainly to the longer process in obtaining regulatory approvals and the current tax regime as compared to other jurisdictions.
In 2015, the London Market Group established an industry taskforce in response to the pledge by the U.K.’s Chancellor of the Exchequer, George Osborne, in his 2015 Budget Statement, to attract ILS business into the U.K. The London Market Group has teamed up with the U.K. government to investigate ways in which more ILS business could be attracted to London, with the primary task of looking at potential changes to the U.K.’s tax, regulatory and company law regimes that could make the U.K. a more attractive domicile for ILS business and managers.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review