Start-ups Mereo and Perren Capital Management have shown that it’s still possible to draw capital into reinsurance and ILS, even as industry fundraising efforts generally remain an uphill struggle.
ILS launches, while not easy, can offer flexibility and fluidity for end-investors, when compared to a rated reinsurer balance sheet start-up.
ILS funds have no minimum size hurdle to overcome to get a rating and, in a tough environment for new raises generally, Perren secured $300mn-$500mn from two investors in under a year, after its founder and now CEO Darren Redhead resigned from Howden Tiger in early 2024.
Reinsurer start-up Mereo’s fundraise took a longer, more winding route to finalisation, securing ~$650mn from six backers, after founder Brian Duperrault, former AIG, MarshMcLennan and ACE CEO, first began the project in September 2023.
This partly reflects its decision to seek a rated vehicle, which requires more corporate infrastructure build-out. The ILS fund structure is a lighter lift to get into position to start writing business, with a Bermuda segregated cell company able to be up and running in around six weeks.
However, Mereo having incorporated ILS as a core component of its business from the outset also looks like a vote of confidence for ILS, suggesting that a third-party capital capability is now a necessary ingredient in any successful reinsurer start-up plan.
Perhaps the most significant differentiator between an ILS fund and a rated carrier, from an end-investor perspective, is the pathway to an eventual exit.
End-investors in an ILS fund can review their investments at any time and stick, top-up or redeem if they want to, subject to the terms of the deal.
The reinsurance market cycling into a hard rate phase post-Hurricane Ian offered an opportunity for longer-term ILS allocators to top up, while several opportunistic players also stepped into the space from 1 January 2023.
As an equity investor in a balance sheet entity, there’s a lot less scope to scale up quickly, and exiting can be a case of waiting for the right conditions for management to execute an IPO, or for an acquisition-focused suitor to come along.
Aspen resumed IPO preparations last month with an eye to a Q1 2025 listing, having paused work in April amid a negative turn in sentiment in the sector and subdued IPO markets.
Ascot has also signalled no IPO in its near future, after receiving a new injection of capital from BellTower Parners in September, though it had been widely perceived as on a pathway to an IPO in 2025.
Cat bond mandate fee angst
The reinsurance/ILS space has been wringing itself out over slow inflows and a lack of start-up capital in the past couple of years, but the reason for such agony is not wholly clear. Supply and demand have remained generally balanced.
And while Perren and Mereo show there is room for launches, there have been inflows to the cat bond market as well.
Cat bonds drew a significant amount of new capital last year, with around $7bn of additional new issuance placing in 2023 compared to 2022, according to data tracked by Insurance Insider ILS.
Perhaps one reason for the angst around the lack of start-ups is that, for ILS managers, there is an element of stress to growth solely through cat bond assets. These attract a much lower fee percentage compared to private ILS allocations.
Twelve Securis CEO Urs Ramseier, announcing the merger of Twelve and Securis in July, told Insurance Insider ILS that $10bn-$12bn of AuM is now the baseline required for survival as an independent ILS manager.
The past couple of years have seen a falling away of smaller reinsurer-owned managers too, with the likes of Brit shuttering Sussex Capital, and Lancashire transferring risk from Lancashire Capital Management (formerly Kinesis) onto its balance sheet.
The moves indicate that the reinsurer-aligned space is not immune to downward margin pressure.
While there is sufficient capacity around, through new raises and retained earnings, the angst may be more likely to ease in tandem with an uptick in fundraising for higher-fee private ILS assets.