In April 2020, Peak Re acquired Lutece Holdings Ltd. and its subsidiary Lutece Investment Management Ltd. to strengthen its access to the alternative capital market and to establish a solid foothold in Bermuda, the Insurance-Linked Securities (ILS) market’s undisputed global centre. Following the acquisition, Peak Re consolidated Lutece with its alternative capital activities under the brand “Peak Capital”, creating a new Bermuda-based ILS specialist. The wholly-owned subsidiary of Peak Re is coled by ILS veteran and Lutece founder Erik Manning and Peak Re’s Managing Director of Underwriting Lawrence Cheng as Co-CEO. Together, they explained to Peak Times their objectives for Peak Capital and gave an ILS market outlook.
What was Peak Re’s intention in acquiring Lutece?
Lawrence Cheng: Peak Re has the objective to become an Asian leader in the global ILS market. We believe that alternative capital will be essential in expanding insurance protection in Asia, as the region becomes more affluent. Against this backdrop, Peak Re has built up its ILS expertise over the past years. In late 2018 and early 2020, we successfully launched Asia’s first and second sidecar “Lion Rock Re”. Both transactions were oversubscribed, indicating a healthy appetite for securitised insurance risks from investors in Asia, a region underserved by ILS solutions. Besides its benefits for the Asian insurance markets, alternative capital enhances Peak Re’s financial flexibility and forms an integral part in our acknowledged value proposition to modernise reinsurance and expand the insurance penetration in Asia’s emerging markets and its growing middle class.
What will be the added-value of Peak Capital to the parent company?
Erik Manning: Peak Capital expands Peak Re’s current product offering. The company will be led by the two of us, bringing complementary skills to the table: Lawrence built Peak Re’s alternative capital expertise with the launch of the two Lion Rock Re sidecars. In its endeavour to provide access to Asian risks to investors in the region but also globally, it became apparent that Peak Re would strongly benefit from the expertise and the infrastructure of the world’s leading ILS market in Bermuda. That’s how we came into play. We were looking to expand our franchise by accessing new investors and broadening our offering also across new types of risks. The two of us are, therefore a perfect fit. Going forward, we will be bringing both our skills to the market. We will be supported by the experienced original Lutece team, including CFO Angus Ayliffe and CUO Julia Henderson.
Lawrence Cheng adds: The combination of these highly experienced professionals with their unmatched ILS and structuring expertise with Peak Re’s strong presence in the Asian markets will create new opportunities to develop differentiated and innovative (re) insurance products for both our clients and investors. Eventually, it will also expedite Peak Re’s mission to close the protection gap in Asia.
More specifically, what will Peak Capital focus in 2020?
Erik Manning: Our immediate focus will be to launch a new series of our flagship Retro-focused investment product. This is a niche product offering where Peak Capital is already positioned as a market leader with a unique business model. That will be our primary focus in 2020 and 1 January, 2021. Going forward, Peak Capital will then assist Peak Re in managing and expanding our current ILS offerings – so “watch this space”.
How is the ILS market holding up during the COVID-19 crisis?
Lawrence Cheng: During the crisis, the ILS market demonstrated once again its resilience. While financial markets exhibited enormous volatility, ILS remained mostly stable. Unlike other financial asset classes, the performance of catastrophe bonds and securitised insurance risks is generally uncorrelated to economic cycles, interest rate movements, the political environment or currency fluctuations.
Did some parts of the ILS market corrected during the COVID-19 pandemic?
Erik Manning: Whenever investors’ cost of capital increases dramatically or whenever financial markets liquidity is constrained (both of which occurred at once with the COVID-19 pandemic), ILS markets see a “correction” in terms of price and underwriting terms. We witnessed this in 2008 – 2010, and again in the last two to three months with COVID-19. ILS markets are not, in this sense, uncorrelated to financial markets, although the performance of ILS investments themselves tend to be decorrelated. One interesting dynamic of the COVID-19 pandemic for ILS, however, has been a demonstration that there is the scope for some correlation even in respect of contract-performance: the ILS industry as a whole will suffer at least some “trapping” or impairment from Business Interruption and potentially other Lines of Business as a direct or indirect result of the pandemic. The distribution of such impairments will not, in my opinion, be evenly distributed across all managers but will likely affect some strategies more than others. These are issues that can and, I am sure, will be corrected by our industry going forward; however, the extent to which managers have been impacted by such unforeseen consequences may determine the reallocation of investments between ILS managers in the near future. This is another effect that the industry has witnessed subsequent to periods of “market correction”.
What is the potential for ILS in the future?
Erik Manning: We believe that ILS will play an even more prominent role in the future. Over the past 20 years, the catastrophe bond market has grown steadily, becoming a vital tool for managing insured natural catastrophe losses. While Hurricane Andrew spurred the creation of the catastrophe market, hurricane Katrina in 2005, the financial crisis of 2008, and the post-crisis lowinterest- rate period and most probably the current COVID-19 crisis too have shaped its growth since inception.
What is the role for ILS in Asia Pacific?
Lawrence Cheng: Despite the current COVID-19 crisis, the market opportunities in Asia Pacific are abundant. Premium growth in emerging Asia is well ahead of the global average, driven by the region’s low insurance penetration and its expanding middle class. The insurance market needs more capacity in the long run to reap these opportunities. We are convinced that it will be impossible to address the current and future insurance needs in emerging Asia without alternative sources of capital.
What kind of market initiatives would benefit most from ILS?
Lawrence Cheng: Risk transfer through catastrophe bonds could be particularly interesting for China’s Belt and Road initiative that has temporarily come to a halt due to COVID-19 crisis. ILS solution could potentially be an exciting option to alleviating the financial burden by paying out to the Chinese government, contractor and workers in a disruption comparable to the current crisis.
ILS is an asset class that transfers a specified insurance risk or set of risks – predominantly natural catastrophe risks – from the sponsor (e.g. insurance or reinsurance company) to the investor (e.g. ILS fund), which in return receives a risk premium.
ILS is attractive to sponsor and investors. To insurance and reinsurance companies, these securities provide additional risk capital at reasonable prices, with little or no credit risk, because the investor has to fully collateralise the liability, which is mostly held in a trust account and invested in money market investments. To investors, it offers a possibility to diversify its investment portfolio. ILS provides returns that are mostly uncorrelated with other financial assets. But equally important – catastrophe bonds are essential tools to protect societies against all sorts of risks. They allow a fast payout when catastrophes strike, and communities require financing to recover from a disaster.
The ILS market is relatively new compared to other traditional financial assets. The first insurance linked securities with standardised terms and conditions, also known as catastrophe bonds, were issued in the mid-nineties. They appeared in the wake of hurricane Andrew in 1992. At the time, hurricane Andrew, with insured losses of USD 23 billion, was the costliest hurricane ever to make landfall in the United States. It led to the failure of numerous insurance companies and pushed others to the brink of insolvency, raising the question of capital adequacy within the industry. A new source of capital to absorb significant losses was required, and this is when the ILS market was established.