Pillar Capital Management (‘Pillar’) was founded in 2008 and is headquartered in Bermuda. The firm manages open-ended Bermuda incorporated funds invested in the global property catastrophe risk market.
The senior management team at Pillar, headed up by CEO and CIO, Stephen Velotti (pictured), has an average of 25 years’ experience in the reinsurance marketplace.
Pillar Capital is focused on providing alpha to investors through the reinsurance space. It aims to provide an attractive yield for investors while managing the risk it takes to achieve its returns. Analysing the entire market from the large reinsurance sector to the small ILW market and searching for opportunities on the buy and sell side allows Pillar Capital to optimise the portfolio and provide long-term compound returns.
Deal access is a critical element of any successful ILS manager. In that context, last year Pillar reviewed over 1,600 opportunities with an 87 per cent declination rate, with Velotti explaining that alpha is generated from judiciously selecting the best securities on such a high submission count, producing a more robust portfolio.
In his assessment of the ILS market last year, Velotti comments: “The ILS market continues to grow as investor appetite for a non-correlating asset class with strong returns increases. With the events in 2017, the ILS space has shown a spectrum of results as it has come to light what level of risk people where holding. Going into 2018 a number of good opportunities look to show themselves, specifically in the areas that were loss affected.”
He believes that loss affected instruments will offer the most attractive alpha opportunities going forward, such as Florida reinsurance, Retro, etc.
As the increase of capital into the reinsurance has outpaced the increase in reinsurance demand over the past 5 years the market has become more competitive. However, post the 2017 loss events, in Velotti’s opinion, “We could potentially see enough capital sucked out of the market that this could start to shift the market in the other direction; and an important note to make is that it will take time for the losses of 2017 to crystallise.”
Rather than target returns, Pillar’s strategy is to develop a portfolio that considers the risk/ reward of the portfolio and, in particular, the tail of the portfolio’s distribution. “We believe the portfolio should be developed using the Omega Score. The Omega Score is an excellent metric for judging the risk/reward trade off and ultimately the downside risk to the investor. Portfolio metrics are evaluated utilising Pillar’s proprietary Pillar Risk Optimization System (‘PROS’) platform,” explains Velotti.
He says that a few of the key characteristics that one should associate with strong ILS managers are: having an accurate portfolio of risk, managing the risk/return of the portfolio, and providing top class service to all associates in the space. Pillar’s success stems from its people, process and information, as well as its disciplined underwriting approach, says Velotti.
Last year, the Cat Bond market was dominated by low coupon transactions with low multiples.
That trend has continued in 2018, with Velotti noting: “We are seeing the same or even more competitive pricing year-on-year. As the Cat Bond market was not heavily affected from the 2017 loss events, we are seeing better opportunities in other sectors of the market.”
On winning the award for Best ILS Manager for the second year in succession, Velotti remarks:
“The entire management team is excited to receive this recognition. We believe this award comes on the heels of controlled growth of our AUM, and investor recognition of our prudent and disciplined approach to risk selection and capital preservation.”
