Whole portfolio ILS firm Vario targets fund raising in 2017
Vario Global Capital, the venture unveiled just before the Monte Carlo Rendez-Vous in 2015, which has been working on developing a ‘whole portfolio’ insurance-linked securities (ILS) product as a capital management tool for insurers, intends to open its first fund to investors in 2017, its founding partner told Monte Carlo Today.
Quentin Moore, founding executive partner of Vario Global Capital, said the venture had been working closely with potential clients in the past 12 months looking to structure private placements using the concept. Now, he feels confident that the first fund offering investors the ability to invest in these deals will be opened next year.
“It has been a very busy 12 months as we have been furiously paddling below the water,” Moore said. “The objective now is to get a fund to market next year. In what remains an uncertain economic climate it is tough to predict exact timescales but the hard work should be done behind the scenes by the end of 2016, and we always wanted to launch the first fund in 2017.”
The ‘whole portfolio’ ILS concept works by offering non-life insurers the opportunity to buy high level protection effectively on a quota share basis covering their whole portfolio using structures very similar to the typically catastrophe-based ILS deals.
But the key function of such deals—which will, almost always, be by private placements into the capital markets—is capital relief for insurers under Solvency II or equivalent regulatory regimes in other countries. This will deliver greater capital efficiency and improved returns on equity.
The biggest inhibitor to such a solution has always been the difficulty of establishing a suitable mechanism for a bond being triggered and funds being released, especially in relation to long-tail liabilities.
Vario claims to have developed solutions to this problem using actuarial methodology—a portfolio modelling technology capable of setting triggers based on the performance of an insurer’s whole portfolio, taking into account factors including validated internal capital models and loss ratios.
In its quest towards launching a fund next year, Vario took an important step forward in August when it hired Mike Kontaratos, formerly executive director at JP Morgan in the securitisation group, as head of investment.
Vario also hired Markus Gesmann, formerly responsible for market-wide analytical research and development at Lloyd’s, as head of research and modelling.
Moore said that Gesmann was needed to complete Vario’s capabilities on the modelling side of the business. He feels Kontaratos will offer a complementary insight on the capital markets in the business.
“We are experts in insurance but we needed an expert from the capital markets,” Moore said. “Mike will be instrumental to the launch of this fund. It is amazing how the language of banking and insurance can be so similar in many ways, but there are subtle differences. The same words can have slightly different meanings.”
Moore stresses that the ‘whole portfolio’ ILS concept, tipped last year to become six times bigger than cat bonds in the long term, still has the potential to thrive and interest is picking up pace faster than expected.
“Post Brexit, the investment side remains negative in most areas so that this becomes increasingly appealing to insurers. Their margins are being squeezed all the time and we don’t see this dynamic changing. They are looking to cut cost and the next biggest cost after claims is the cost of capital,” he said.
“That was not a question the boards of many companies had previously been inclined to consider, but Solvency II and the way the rating agencies have changed their methodology have changed that. The question is simply which industry player has the appetite or agenda to take that first step. There are plenty of companies willing to follow but we are talking about a fundamental cultural shift here.”
