Ascot’s entry into the casualty sidecar arena with Wayfare Re is a 10-year deal that it wants to evolve into a rolling three-year, “evergreen” arrangement, Mark Wilcox, group CFO at Ascot told Insurance Insider ILS.
The CFO also said the firm will continue investing in its ILS platform Leadline Capital Partners with evolutions in scope that include a cat bond offering and specialty-focused deals.
The Wayfare Re casualty sidecar, launched in July with $500mn of capital, is Ascot’s first third-party capital offering in the casualty arena. It follows several property-focused transactions covering insurance, reinsurance and retro that have drawn institutional capital.
For an investment vehicle with a 10-year life, the sidecar “benchmarks very attractively” against similar long-term vehicles in terms of IRR and multiple on invested capital, Wilcox said.
Alignment across underwriting, investment risk and reserves
The carrier itself has taken a minority interest in the vehicle, which helps in ensuring economic alignment with the investment partner, credit manager Antares, he added.
There is also alignment on the underwriting side, as “it’s all business on our balance sheet and they are taking a small pro rata share,” said Wilcox.
The sidecar will take “a very diversified portfolio of longer-tail risks,” across two sleeves. (It has two SPIs sitting beneath it.)
One sleeve is a US-focused cession of multiple longer-tail insurance classes, including E&S casualty, excess casualty, general liability, workers comp and environmental, and several other longer-tail lines.
The other is ceded from Ascot’s Bermuda balance sheet. It includes longer-tail reinsurance and insurance classes, across casualty treaty, excess casualty, management and professional liability.
The 10-year deal duration covers three years of active underwriting and seven years of reserve development, then business will be commuted back to Ascot.
“We didn’t feel a run-off arrangement was appropriate. We feel good about the way we’ve reserved our long-tail business,” Wilcox said.
The sidecar’s reserves will follow Ascot’s reserving on its own balance sheet, which he described as cautious, prudent, taking a long-term view.
Sidecar investments will shift to match cashflows
The investment strategy of the vehicle is focusing on three tranches. There is a highly liquid cash portion to pay claims and expenses, a high-quality liquid, short-duration fixed income component to provide stable investment income, and the middle market direct lending strategy deployed through Antares.
The allocations to the three classes within the investment portfolio are expected to change over time, based on actual and expected cashflows within the sidecar.
The strategy is designed around modelled payout patterns in the casualty re/insurance portfolios. The number of paid claims is typically “not a lot in the early days, and then in the later days the frequency starts to pick up little bit,” Wilcox said.
Ascot first partnered with Antares when it allocated to the manager’s middle market direct lending strategy out of its general account. This led to it meeting Antares’ insurance solutions team, then starting exploratory conversations around a potential casualty sidecar.
In selecting an investment partner for the vehicle, the carrier sought a strategy that paired well with longer-tail casualty business. It also looked for a long-term track record, strong balance sheet, stable ownership and excellent corporate governance.
ILS a component of a diverse capital base
Wilcox said the firm aimed to develop the sidecar into “a three-year rolling facility”, so that it becomes a core part of its ceded reinsurance and capital management strategy.
Third-party capital had a role to play as part of the balance sheet carrier’s diverse capital base, Wilcox added.
“The goal is to lower the weighted average cost of capital and generate strong returns for shareholders and our third-party capital vehicle can really help with that,” he said.
The firm looked to access all forms of capital, he added, and to grow or shrink each of those dependent on investor sentiment and appetite, and market opportunities.
The diverse capital base included also equity, senior notes, hybrid instruments, letters of credit and reinsurance.
“There is a healthy part art, a healthy part quantitative math and science, that goes into optimising the capital structure,” Wilcox said.
Commenting on the evolution of the ILS market more generally, the CFO expected the majority of capacity supporting casualty risk to continue to come from large, high quality, highly rated balance sheets.
“That’s what insurance managers and risk managers really want – they want to interface with a large, regulated, highly rated insurance carrier,” said Wilcox.
However, sidecars are a way to bring in other types of capital to access the risk.
In particular, he noted that sidecars offer speed and ease in deploying capital, with an underwriting track record and management team in place already. This was contrasted with the effort involved in forming new balance sheet company.
“And with a sidecar, you are in and out at book value, whereas if you start a company, you’re in at book value and now that’s either a multiple, which is beneficial, or a discount – not so helpful – of book value. You need an IPO or a sale to execute an exit.”
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