ILS investors to increasingly favour low severity risks: AM RE’s Zayicek
Updated: Sep 27
Ernie Zayicek, Chief Operating Officer at AM RE Syndicate Inc., believes that the attritional, low severity types of risks offered by AM RE will become increasingly attractive to insurance-linked securities (ILS) investors over the coming years.
AM RE is a reinsurance MGA that matches US specialty insurance risk with different capital sources using a originate/underwrite to distribute model.
Zayicek recently spoke to Artemis about the company’s business model and its ambitions to leverage new forms and sources of capital in 2021.
Notably, AM RE sees ILS capital and institutional investors as potential partners as it looks to expand its business lines and overall level of gross written premiums.
“Put simply, AM RE functions like a reinsurance company,” Zayicek explained. “We take a technical approach to our portfolio by utilizing analytics to examine the underwriting protocols of our clients. We look at each opportunity as if we are using our own balance sheet.”
“What we’re trying to do is find the best programs, and advise MGA’s on how to improve those programs to make them even better,” he added.
Specifically, AM RE is focused on low severity types of risks that are sourced with very low limits across a selection of different classes.
Why focus on low severity types of risks?
This differentiates the business from other offerings in the ILS/sidecar space, Zayicek explained, many of which have attachment points that are chasing catastrophe risks or other large limit losses.
What’s more, Zayicek is confident that AM RE will benefit further from this focus as more investors begin to move away from potentially more volatile risks.
“In a period of very low-interest rates, ILS/sidecars might expand their focus to less volatile business lines,” he told Artemis. “This change would create an uptick in investor interest. For many pension funds, for example, the ability to earn consistent, high-quality returns from attritional, low severity, low limit business, the type that AM RE writes, should be very attractive; as compared to traditional fixed income options or writing wind risk in the southeast US, for example.”
“Nat Cat business comes with a highly volatile return based on storm activity,” Zayicek went on. “We believe that the types of businesses we bring to the market have a much more predictable return profile which is not exactly a 100% true replacement for fixed income, but it has more of that dynamic due to its consistency.”
What are the benefits of AM RE's model?
Another benefit of AM RE’s low exposure to catastrophe risk is that the business does not have to purchase significant retrocession programs, Zayicek pointed out.
However, as the company moves into more diversified lines of business, it plans to continue exploring innovative ways to manage risk in a cost-effective way, based on the different capital structures and risk tolerances of its partner reinsurers.
“If there were capital market-based alternatives or other cost-effective alternatives, we would certainly explore those,” Zayicek confirmed.
One option that AM RE sees as particularly attractive is flexible sidecar-type structures, especially when it comes to investors like pension funds.
AM RE’s portfolio would allow these investors to select specific risk class pools, including defined risk parameters, meaning they would have a well-defined profile of what’s going into the vehicle when signing up.
“Being able to select those specific risk types, with us aggregating the attritional, low severity business profile should allow them to have a very tailored and stable return profile over the underwriting cycle,” Zayicek told Artemis.
AM RE also sees the addition of an E&S carrier to its platform as an opportunity to expand its ability to partner with different capital sources on a global basis, whether that be ILS funds, sidecar structures, or more traditional reinsurance capacity.
“With the addition of an E&S carrier, our expanded structure will allow us to take advantage of the increased fluidity we have seen in capital coming into the (re)insurance markets over the last 20 years,” Zayicek said.
“As we enter into this hard cycle, the differentiating factor for companies is distribution, risk selection, and the ability to deliver consistently across all the lines that they are writing. With the current rate environment, that differentiation has eased somewhat. But 2 to 3 years down the line, we’ll see companies that excel at risk selection rise to the top. We expect to be in that quartile.”
“We’re always open to innovative ways to bring additional capital to the US program insurance market including ILS and sidecar structures,” Zayicek concluded. “We believe with our strong focus on risk selection and long-term partnerships with top quartile MGAs, the returns over a full underwriting cycle would be very attractive given the low loss volatility of our underlying business.”