Northern Re’s McKelvy eyes $500 million GWP amid casualty ILS growth projections

By Rebecca Delaney

May 2 - (The Insurer) – Northern Re founder and co-CEO Peter McKelvy is bullish on the growth potential of casualty insurance-linked securities (ILS) but told The Insurer the market still requires structured solutions to address concerns around tail risk.

McKelvy said he remains optimistic that capital will “pour in” to the casualty ILS space despite reputational “bumps” over the past two years, most notably the respective controversies around Vesttoo and 777 Partners.

“We’ve seen bumps with Vesttoo and 777 which have slowed things down, but eventually we do think that alternative capital is going to start going in,” he said. “There's a demand for reinsurance capacity in the casualty space that is not being met adequately today.”

McKelvy continued that there are specific issues around the way in which reinsurance is provided to MGAs and fronting carriers. To this end, Northern Re, which opened for business on January 1, 2023, posts collateral in cash rather than letters of credit.

The reinsurer was set up as a Cayman Islands-based segregated portfolio company but it also has an onshore balance sheet through its Northern Reinsurance Segregated Portfolio Holdings (Northern Holdings) platform.

“Other reinsurers that were ahead of us had posted in letters of credit. That makes people a little bit nervous as they don't really know what those assets are invested in,” said McKelvy.

“Yes, you can upgrade a letter of credit, but if there's a correction in the equity markets a la 2025, then that can make you a little nervous about your collateral.”

Northern Re’s capital stack is bifurcated into company surplus on a U.S. balance sheet and risk capital to collateralise its obligations.

McKelvy explained that this is enabled by the fact that Northern Re does not carry a rating, which he described as “expensive and relatively inefficient” for the risk profile of the casualty market.

“For a nat cat fund, a lot of times you need to have a rating. When you’re writing the LA wildfires or some large hurricane risk in Florida, you want to have that rating and that big capital stack standing behind you so that you know you can meet your obligations when needed,” he said.

“For us on the casualty side, the rating isn't really necessary. Our carriers don't require a rating because they understand that the downside risk in our contracting is fairly limited. The risk profile is just very different.”

However, limiting volatility on the underwriting side leads to compressed underwriting margins compared to cat, where "good" and "bad" years generally level out over time.

In order to reduce underwriting volatility, Northern Re said it is currently looking to develop solutions to address tail risk in casualty lines of business.

“We've got a couple of markets that are interested in developing tail solutions with us, and I think we'll have something to talk about towards the end of this year. We know it's the main objective for investors,” said McKelvy.

Northern Re targets high-frequency, low-severity casualty business including, among others, general liability, professional lines and workers’ compensation.

“We’ve been doing quite a number of structured transactions for those looking for surplus relief, and we do full account quota share as well. We want to be diversified, and we are – nothing is over 30% of the book,” McKelvy said.

“If we can wrap our heads around the tail and volatility and who's producing the risk, then there's a case to be made to write the risks. We are staying away from some of the hairier topics right now.”

NORTHERN RE TARGETS $500 MILLION GWP IN 2025

On April 29, Northern Re announced it had secured an additional $100 million in committed capital from new and existing institutional investors.

It has taken Northern Re's total capitalisation to $175 million, with the reinsurer eyeing more than $500 million GWP over the next 12 months.

This would more than double the amount of GWP compared to last year ($230 million), which itself was a 115% increase on $107 million GWP from Northern Re’s first underwriting year in 2023.

“Another $100 million dedicated to the space would allow us to write over $500 million this year. That's a really exciting growth for us,” McKelvy confirmed.

“We went from about $107 million our first year writing in 2023 to about $230 million last year. For the next 12 months on a rolling basis, we’ll probably get about $500 million.”

Looking forward, McKelvy concluded that Northern Re is exploring “boots on the ground” for a European platform.

“We think the same ecosystem that popped up in the U.S. around MGA and fronting carriers is going to start building more slowly in Europe, and so we'll be able to expand over here as well,” he said.

“We have one global deal that covers part of Europe, but we don't have any boots on the ground here yet. We've got folks in New York and in Cayman, we don't have anyone in Europe yet.”