In an interview with Artemis, Terrence McLean, Chief Executive Officer (CEO) of SageSure, discussed the firm’s debut reinsurance sidecar transaction Seawall Re Ltd., stating that he thinks of it as the first in a series of additional transactions which has a direct focus on sideways and other perils.Earlier today we reported that the coastal property managing general underwriter securing $50 million of third-party retro support from investors for its captive reinsurance vehicle Anchor Re.The Seawall Re sidecar marks an expansion of the MGU’s activities in the capital markets, as the company has already become a meaningful participant in insurance-linked securities (ILS) issues through its sponsorship of the Gateway Re catastrophe bond series that protect a range of its associated underwriting entities.In terms of why SageSure has now looked to the sidecar structure, with the firm having already become a big sponsor of cat bonds, McLean stated that the company wanted more protection from other catastrophe perils besides hurricane, while noting how the firm has had a lot of success going to the market and outstanding of more than $2 billion across all of its different peak hurricane and earthquake risks.

“As we looked at our exposures, one of the areas that we’ve been short on protection is on the other perils, severe convective storms (SCS) in particular,” McLean said.“To some degree, there’s some wildfire cat and SCS in our traditional placements, but in terms of our overall hedging strategy, we haven’t had the wildfire and the SCS in there.So, this sidecar allowed us to get protection from those other perils in addition to hurricane.

“To put those perils in our cat bonds doesn’t really make sense, because the cat bond coverage attaches at a return period that doesn’t involve wildfire or SCS for our portfolios.We could add them, but if we did, we may be penalized in our pricing, and we would end up paying more for basically no coverage.So that really doesn’t make sense in the way we’ve done cat bonds, because this is done on a whole account basis, or loss occurring quota share basis, rather than on our excess of loss basis, so we’re able to get additional coverage in those perils.” Moving forward, McLean then explained how the Seawall Re sidecar will complement SageSure’s Gateway Re cat bond coverage.

“It’s complementary, isn’t it? I would simply put it as sideways protection and protection from all of our perils, rather than simply from the peak zone perils that we’ve had in the past.The Seawall structure did include non-catastrophe perils; we certainly didn’t go to market with the need to get protection from that, but when we did the analysis, it just made more sense to include it,” McLean told us.He continued: “It’s not like we were seeking capital relief from that or anything on that basis.

But ultimately, we did include the non-cat aspects in it.It just seemed more aligning, primarily because we couldn’t easily justify the bifurcation of the money back from the cat premium.So rather than attempting to convince, we just said, okay, we’ll just include everything in the structure.” The CEO also highlighted how the Seawall Re sidecar structure opens new third-party investors for SageSure.

“We think of Seawall as the first in a series of additional transactions, which is a focus on sideways and other perils.There clearly is an interest from the market.We hear it on a regular basis.

There’s tremendous excitement about the potential to get access to well-priced cat risk, and cat bonds are a great way to do that.“We’ve certainly tapped into that, and we think Seawall is the first of a series of ways to do that further in the marketplace.” Acknowledging that the sidecar structure is a new area for SageSure, McLean discussed how he thinks Seawall Re will grow over time.“We went into the market with this with Guy Carpenter, as we walked through what we were trying to solve on cat and the other perils, they suggested the sidecar structure, which ultimately worked out since it solves those specific needs.

Now that we’ve gotten one done, it certainly begs the question of ‘how does this fit into that?’ I don’t think we really have figured out long-term where sidecars fit into and what this might look like in three years or five years,” McLean told Artemis.“Our ambition with it is to do more and continue to take on those same types of risks, if that means we need to bundle that with earthquake and with hurricane.We’re not sure how the market will react.

What’s really interesting is the market is not super comfortable with SCS in the same way they are with hurricane or earthquake.They’re also not as comfortable with wildfire as they are with hurricane risk, and so one of the big questions as we develop our strategy looking forward is, how do we get a broader audience of investors comfortable with the SCS risk?” He continued: “SCS is something that we see massive amounts of where we write, including Texas, Louisiana, and some of the other southern states.It’s an important peril for us to think about.

And in my mind, the jury is still out on how the investing audience gets comfortable with it.The way we’ve gotten investors comfortable in this transaction was through sharing our experience with them.Maybe the models are good enough, maybe they’re not, but regardless, they weren’t enough on their own to convince the investors who participated in this deal.

“I think there’s a huge degree of skepticism around those models, and understandably so.SageSure’s track record and the way we share information tell us a lot about how investors behave in this transaction.If that is true, and in the future we can extrapolate that, then I think there’s a huge opportunity to get broader investor interest in Seawall and conduct larger transactions in this area.

“I think that investor skepticism is the biggest challenge.Unlike hurricanes and earthquakes, where there’s a fair degree of buy-in to the modeled losses and transparency around the return periods in those transactions.SCS is an area that they have not yet explored deeply enough so you’ve got to do a lot of extra work to get them convinced, versus just printing numbers off the shelf.” McLean added: “The other aspect is that a large amount of this risk is sideways, which is challenging.

So how do you get people comfortable that they’re getting paid enough to take that sideways risk? They have to buy into our track record that we are, in fact, pricing this risk adequately.So, those are the big challenges going forward.” Furthermore, we asked McLean to explain how essential he perceives Seawall Re being towards providing reinsurance capacity for SageSure and its underwriting entities.“We’ve got cat bonds and traditional reinsurance, and they’re both huge parts of our reinsurance programs, playing somewhat different roles in getting our programs done.

It’s certainly not going to be at that same level, but when you look at what the market provides, even in the most difficult markets of 2022 and 2023, something like Seawall becomes a very important secondary hedging tool for us to manage what is now billions of dollars of insurance premium and many billions of cat risk in terms of the limit.“It’s secondary.Seawall is not set up to be a primary tool in managing our overall risk profile,” McLean concluded.

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