ILS fund manager Aeolus Capital Management is believed to be considering the creation of a rated vehicle to write property reinsurance and retro and add to the growing suite of products it makes available to brokers and clients on a collateralized basis, The Insurer can reveal.

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Market sources described the potential move as a long-term strategic play aimed at complementing its established collateralized offerings to provide options to clients seeking rated solutions.

They added that the firm would not look to replace or cannibalize its existing collateralized book of business.

The mooted move also comes after the Bermudian – which is led by Andrew Bernstein as CEO and co-head of portfolio management – has unveiled high profile hires in the last two months.

They include Aditya Dutt from RenaissanceRe as president, and Nick Jagoda from Elementum Advisors as portfolio manager.

Both executives will also be partners at Aeolus and bring with them experience of working with collateralized and rated platforms.

Indeed, Dutt is credited with playing a key role in the evolution of RenRe’s ILS and third-party capital management business as senior vice president of its Ventures unit and president of Renaissance Underwriting Managers.

The third-party capital management business includes DaVinci Re, Top Layer Re, Upsilon Fund, Medici Fund, Vermeer Re and the Langhorne Re joint venture with RGA.

RenRe has built a strong reputation as a manager of its own rated balance sheet, third party-backed rated balance sheets and joint ventures, as well as collateralized ILS funds, allocating risk to the appropriate return hurdle across the platform.

Long-term play

Details of the Aeolus plans for a potential rated balance sheet are not known at this stage.

Broker sources noted that Dutt will not officially start at Aeolus until next summer, when his contractual obligations to RenRe have been completed.

Aeolus fact file

They added that it is unlikely that Aeolus would be targeting a 1 January start date for a rated platform, given the lengthy process of applying for and securing an A- AM Best rating. An A- rating is considered the minimum for a vehicle looking to compete in the rated property reinsurance and retro space.

In common with other funds, the ILS manager is also likely to be in the throes of launching a capital raise for 2021 in what continue to be challenging fundraising conditions in the space.

It is currently thought to have in the region of $4bn of assets under management.

With expectations of a sustained period of attractive pricing for property treaty and retro business, sources said the addition of a rated capital vehicle by Aeolus could be part of a larger buildout as the firm looks to equip itself with a broader range of capabilities to meet the demands of brokers and clients.

Aeolus has already built a strong reputation as a leading player in the collateralized retro market, with a particularly solid grip on the aggregate segment of the market.

It is thought that the fund manager has a share of around a third of the overall aggregate retro market, which has seen a retrenchment of capacity over the last year, including with the demise of CatCo.

Adding a rated platform would bring the ability to leverage a balance sheet, compared to the capabilities of its current fully collateralized model.

It would also allow it to leverage its established franchise and client relationships to add products that are not necessarily a good fit for a collateralized balance sheet.

Sources suggested a likely approach would see Aeolus look to construct a diversified portfolio of property cat reinsurance business on the platform.

Growing partnership

Suggestions of a platform build-out and the addition of high-profile hires at Aeolus come after the firm made a series of changes to its growing management team this summer.

Bernstein was appointed CEO in June this year as one of a series of promotions at the Bermudian. Managing partners Chris Grasso and Trevor Jones were promoted to co-chairmen of the board, while partner and chief analytics officer Frank Fischer was also added to the board.

Aeolus also made portfolio manager Henry Kingham and general counsel and chief compliance officer Daina Casling partners, adding to existing partners including COO and CFO Jason McAlpine and portfolio manager Evan Winters.

Aeolus originally opened for business as a private equity backed reinsurer in 2006, with Warburg Pincus and founders Peter Appel and David Eklund supporting the business.

In 2011, the company was transformed into a managed capital platform. Aeolus has been majority owned since early 2017 by entities controlled by Elliott Management Corporation and the operating principals of Wand Partners. Aeolus declined to comment on this article.

The Insurer comment

The idea of an ILS fund adding a rated balance sheet to an existing collateralized platform is not new of course.

In recent years examples have included the Humboldt Re and Kelvin Re vehicles launched by Credit Suisse Asset Management.

At the time they were seen as part of the continued blurring between traditional reinsurers and the ILS sector, as several established rated carriers launched their own third party capital platforms.

There are other ways for collateralized ILS funds to bring rated capacity to the market, including the use of transformers and fronting arrangements such as the long-established Nephila-Allianz partnership.

But the appeal of having its own rated balance sheet is clear for an ILS fund.

It provides access to more permanent paper, and doesn’t leave it subject to a strategic change of direction or M&A at a fronting provider or transformer, such as that which saw Tokio Solutions impacted by the RenRe acquisition last year.

How an ILS fund uses its rated balance sheet is key to maintaining relationships with distribution and investors, however.

Sources have said that there is a risk that simply shifting business currently written on a collateralized vehicle to a rated balance sheet can be counterproductive because of its impact on ILS investor relations.

If the strategy is rather about adding a string to the bow, by writing business as a reinsurer that an ILS fund wouldn’t do on a collateralized basis, then that is likely to be viewed positively by clients and investors.