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Bermudian insurance and reinsurance firm Arch Capital is said to be targeting the launch of a fronting for ILS business, to replace the perceived gap left behind by the exit of Tokio Millennium Re from this space, we’re told.

The acquisition of Tokio Millennium Re by Bermudian reinsurer RenaissanceRe has left a gap in the market for fronting services for collateralised and ILS markets.

RenRe made it clear after the announcement of the acquisition that the provision of this fronting service to other collateralised reinsurance and ILS markets was not a business line it would be continuing after the integration of TMR was completed.

Other established providers of fronting have done their best to soak up some of the demand left unsatisfied in this fronting for ILS capital space, with the two main providers of this service, Allianz and Hannover Re, already able to take their pick of the opportunities where they can.

But both of these established fronting for ILS partners can only do so much of this business though, given the tail-risk exposure and limits on catastrophe risks their balance-sheets have.

Hence it was always likely another provider would come along and we understand a number of companies have looked closely at the fronting opportunity, with one name in particular cited by sources as progressing its plans and readying a launch into this space.

That company is Bermuda headquartered insurance and reinsurance firm Arch Capital Group, which of course has an established business in leveraging third-party capital within its business and also cedes risk through to ILS investors from its own book.

Adding a fronting for ILS business would fit well alongside other third-party capital related activities at Arch, with its third-party capital under management in insurance-linked securities (ILS) related assets having surpassed $600 million last year, its use of ILS to transfer mortgage insurance risks to the capital markets, and its established total-return and third-party capitalised reinsurer Watford Re as well.

The fee income that can be earned through the ILS fronting business would be a useful addition for Arch, while the relationships it will build with ILS investors and ILS funds as a result of this may also stand it in good stead to further expand its management of third-party reinsurance assets as well.

Fronting for ILS and collateralised reinsurance demands a robust balance-sheet, great market-wide relationships and an acute understanding of the needs of fund managers and investors, all traits Arch no doubt has already developed for itself.

The company has already hired a number of ex TMR employees, David McComas for certain and we’re told Butch Agnew is set to join as well, to assist in the development of a fronting service strategy and provision. So it would not be a surprise to see this activity begin in the coming months, perhaps before the mid-year renewals.

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