Speaking to The Insurer as part of #ReinsuranceMonth, Fry outlined the reasoning behind launching Acacia in the fourth quarter of 2020 ahead of the 1 January renewal season – a critical date for retrocession when as much as 70-75 percent of annual limit tends to be purchased.
“We entered the market with the ability to write around $500mn of limit, very much focused on the excess of loss (XoL) retrocession market,” Fry said.
“There are multiple reasons for this focus; in particular it’s an area where we really felt we could add some value for cedants and generate superior risk-adjusted returns for our investors,” he continued.
Fry added that Acacia’s specific area of focus – XoL retro – is typically “a strategic buying decision at the C-suite level”, which allows the firm to work with cedants to understand their buying rationale and construct solutions.
From an investor perspective, Fry said XoL retro was an “exceptionally attractive area” for investors seeking low-correlating insurance risk opportunities.
“I think it’s also an excellent opportunity for long-term investing in that it’s less sensitive to market downturns in the broader reinsurance market. And ILS investors are also a proven market participant, they provide the majority of the capacity so we’re not necessarily breaking new ground,” Fry explained.
Fry said the Acacia business model “is a little different” to traditional ILS funds in that the firm is “a major co-investor” with third-party investors.
“So we have our own balance sheet in a sense, not a rated balance sheet of course, but the cash that’s subscribed for our equity provides the bulk of the collateral we post to pay claims.”
“If you think about that, the vast majority of our income is from the performance of our own account investing rather than from management fees and performance fees from third-party money. So even if we were to treble in size, that would still be the case,” Fry continued.
He said Acacia’s “entire DNA” is around the performance of the fund and maximising its own – and therefore its investors’ – return on investment.
Fry said that this approach takes away the pressure of gathering assets under management to generate profits, which enables Acacia “to maintain a focus, maintain discipline and its specialism”.
“I think also from the cedants’ perspective it points to a level of permanence which is also important in terms of keeping with our desire to be long-term partners. I think overall that model, candidly when it comes to investors, I think it’s unparalleled in terms of alignment,” he continued.
Questioned on Acacia’s optimum size, Fry said he “wouldn’t necessarily” put an exact number on how much bigger Acacia would get and continue to maintain and deliver an alpha strategy for investors.
“But if you think about it [the XoL retro market] at $20bn of limit, we’re $500mn today, give or take. Three times that I think we can still confidently say we can deliver that alpha strategy in our chosen marketplace.”
Fry said there was “plenty” of opportunity for Acacia to expand in its chosen market segment, and said the firm wasn’t looking to diversify beyond XoL retro in the near term.
“We are not trying to be all things to all people – we’ve no interest in doing that.”
“We’re about being frankly not just an inch wide and a mile deep but an inch wide and multiple miles deep,” he continued.
“We’re going to get deeper before we get wider and we’ll continue to be focused enough to generate superior risk-adjusted returns,” Fry concluded.