Digital Assets Report


Like this article?

Sign up to our free newsletter

Pillar Capital Management – Best Insurance-linked Securities Manager

Related Topics

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 insurance linked securities marketplace. 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. 

"Our core investment strategy is focused on building a diversified portfolio comprised of a majority of Traditional Reinsurance trades (at least 70 per cent) with a lower reliance on Cat Bonds, Retro and Industry Loss Warrantees," explains Velotti. "The high percentage of risk committed through the use of traditional reinsurance contracts differentiates Pillar from competitors who are usually more narrowly focused."

Pillar's success stems from its people, process and information, as well as its disciplined underwriting approach, says Velotti. "Pillar is comprised of people who have focused their careers in the reinsurance market. Our process starts with extensive market access based on the team's relationships and sourcing business across a broad spectrum of brokers and intermediaries. The information we use is based on a comprehensive deal database that we have compiled from all the deals we've priced over the years.

"The large volume of deal flow allows us to control the tail risk by diversifying via single state, single country, regional and super regional programmes in lieu of relying on national account and worldwide covers," explains Velotti. 

The choice of taking risk in different geographic locations will depend on favourable pricing compared to the loss expectancy. There are, says Velotti, target "peak" zones where pricing is more attractive, but Pillar will monitor other zones as well. 

"The focus will generally be on higher expected loss / higher rate-on-line (`ROL') layers. However, Pillar will evaluate the entire efficient frontier. If a potentially better risk/reward can be attained by moving to lower expected loss layers then we will execute this," confirms Velotti. 

Given the nature of the firm's strategy, market risk is best evaluated from the perspective of the reinsurance markets versus financial markets. 

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.

In terms of the market outlook for 2017, Velotti observes that the current Cat Bond market is dominated by low coupon transactions that have low multiples in relation to historical averages. 

"Low multiples and low coupon transactions are not overly attractive at the moment. Traditional private reinsurance transactions exhibit better pricing and multiples," says Velotti

On winning this year's award, he adds: "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."

Like this article? Sign up to our free newsletter

Most Popular

Further Reading