Emergence of casualty ILS the most exciting part of the industry: Fleming CEO

Fleming Insurance Holdings has received positive feedback from the investor community as it works towards the launch of its insurance-linked securities (ILS) platform focused on the emerging and exciting casualty ILS space, explained Eric Haller, Chief Executive Officer (CEO).

Last May, Fleming secured a $150 million growth capital commitment from Altamont Capital Partners, and as the company continues to expand and develop its casualty ILS platform, Artemis spoke with CEO Haller to gauge his thoughts on Fleming’s evolution, and the wider ILS marketplace.

“The last year has been great for us,” said Haller. “A year ago, we completed a capital raise with Altamont Capital Partners, to focus on building infrastructure, fund future growth and execute on our strategic plan. The last year has been busy, but the company is poised for significant growth in 2023.”

Overall, explained Haller, Fleming’s development is on plan, and one of the key initiatives is to get the ILS platform up and running.

“Simply said, we are getting the plumbing and wiring in place to make sure we’re able to accommodate the anticipated demand. That’s the initial goal in terms of that business unit, and I think we’re doing well,” he said.

The casualty ILS market remains in its infancy, and while there are some clear benefits for investors when compared with the well-established catastrophe ILS universe, there’s also been some challenges.

“With casualty ILS, you have the benefit of a frequency model versus a severity model. It doesn’t have that nonbinary nature of cat ILS, but it does provide the same non-correlation benefits. That’s why investors are attracted to it.

“One of the biggest challenges has been the investment time horizon. Historically, investors have gravitated toward Cat ILS because of the one year time horizon, assuming the collateral is not locked up. They traditionally have not liked typical casualty lines such as, workers comp or general liability because they don’t want an investment time horizon of 10 plus years,” explained Haller.

The long tail of casualty insurance and reinsurance-linked business has often been blamed for the lack of development in the casualty ILS space. But for Fleming, its experience in the legacy market means it is able to tranche up the liabilities, effectively providing investors with a more desired time horizon that specifically works for them.

“If they want something that is two or three years, we can shorten the time horizon. Maybe some of the pension funds, for example, want something a little bit longer, we can also accommodate that. It’s incredibly flexible in terms of what we’re able to do,” said Haller.

Having the ability to split liabilities into tranches with specific time horizons is an important part of the evolution of the casualty ILS space, and one that is expected to fuel investor comfort and interest over time.

Expanding on this, Haller provided some insight into exactly how Fleming does this.

“If you look at the overall legacy market, essentially what it does is it reprices liabilities at a point in time. Now, historically, that point in time has always been when people are looking at a specific transaction.

“What we’ve been able to do and what we spent a lot of time on over the last couple of years, is perfecting our planned LPT solution. Essentially, it allows us to price a transaction at any point in the future,” said Haller.

“Leveraging this solution, our focus is to change the paradigm of the legacy markets. Instead of transactions focused on toxic liabilities, discontinued operations, or liabilities that have performed badly, we are concentrating on mutually beneficial transactions, involving good liabilities to allow our counterparties to recycle capital back into the front end of their business. To accomplish this, we are merging some of the good qualities of the legacy market with the good qualities of the traditional reinsurance market,” he continued.

Fleming is focused on capital solutions versus exposure solutions, meaning that instead of getting rid of bad liabilities, the carrier wants to help its counterparties write more good liabilities.

Essentially, then, it’s more of an ongoing partnership relationship, and Fleming has several counterparties that it has executed transactions with.

The proof of concept transaction is now in its fourth iteration, which has enabled the firm to realise what it originally anticipated the benefits to be of having a recurring transaction.

“It’s phenomenal that we have definitive proof that our innovative solution works,” said Haller.

“With an ongoing partnership, we are able to create an efficient, recurring solution that specifically achieves the stated goals. On an annual basis, we will assume an entire policy year based on the parameters of what we’ve outlined in the agreement.

“We can then translate that same solution to ILS. As we bring liabilities on our balance sheet, we will then pass them on to the ILS market using the same Planned LPT solution. It is a testament to the solution that we are using it to recycle our own capital. This should provide counterparties with a significant amount of confidence.”

“That evolution in casualty ILS is going to really push things forward and it’s going to be an incredibly huge market,” he continued.

While it’s always hard to judge the size of emerging industries, Haller believes that casualty ILS will eventually eclipse the cat ILS space. And when you consider the size of the run-off or legacy market which has estimates as high as $800 billion, and then look at the size of prospective reinsurance and bring that into casualty ILS, it’s easy to see why.

“Combining those reinsurance markets, we’re talking a trillion dollars plus market size once it enters the maturity stage,” said Haller.

In terms of investor feedback for its casualty ILS offering, Haller told Artemis that it has been very positive.

“Obviously they want to see the hard data. They like the fact that it’s a frequency versus severity model. Meaning, there’s not always that binary outcome and the principal is a little more protected,” he explained.

To conclude, Haller asserted that he sees a significant amount of growth for Fleming in the months and years ahead.

“Our pipeline is incredibly strong, and we’re focused on our strategic initiatives. With the launch our ILS platform in 2023, it’s going to be busy; it’s going to be exciting, and it’s going to be a lot of fun.”

Read all of our interviews with ILS, reinsurance and risk transfer sector professionals here.