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Succession planning and ILS: First-generation platforms still vulnerable

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The founding generation of ILS platforms may have largely sold up to new owners, but future leadership remains a much thornier issue for the market, with only a couple of businesses having already made the transition to new CEO-equivalents.

Trading Risk explores how vulnerable the market is in this area, how some of the firms which have undergone a leadership handover came through it and key takeaway points for the platforms that are still enmeshed in planning future transitions.

In terms of the sector’s risk regarding succession planning, naturally for those within the industry the perception is that businesses are built around certain individuals and there is significant brand power tied up in the series of original founders such as Frank Majors and John Seo.

However, in fact, some investment consultants might not see the industry as one where succession planning is particularly problematic – at least compared to hedge funds dominated by a founder and their investment ethos such as Third Point’s Dan Loeb or Greenlight Capital’s David Einhorn.

One consultant told Trading Risk that they saw ILS as more of a “beta” business, where the proposition rested on market access rather than talent of a “brilliant CIO”.

Personnel considerations might also vary based on the structure of an ILS fund. Ensuring staff are incentivised to stay the course through a longer-term ILS vehicle such as life funds is of more concern than for a cat bond fund position that could be quickly sold if an investors’ point of view changed.

Moreover, as the original generation of ILS platforms has largely sold up to asset manager or reinsurer owners, structural changes by M&A have minimised personnel risk.

“The real ‘key man’ risk got weaker because asset managers got more institutionalised,” the source added.

The real ‘key man’ risk got weaker because asset managers got more institutionalised

Schroders ILS chairman Dirk Lohmann noted that the sale of the Secquaero business to the asset manager was partly influenced by succession planning considerations, as other staff were not going to be in a position to buy out partners.

“We felt it was a rational way to give the brand [more] power for the longevity of the business.”

This is not just the case for asset management firms either – some described the likes of Scor and RenaissanceRe as “institutional plays” – but even within firms that rely on a broader reinsurance infrastructure, there could still be a concentration of power among smaller ILS teams at the helm.

And even with that degree of institutionalisation, the life cycle of the ILS market, with many of the original founding CEOs currently at the top of their careers, does raise the stakes for planning ahead for the industry and any transition phase is likely to be closely watched by consultants and investors.

To date, only a few of the major first-generation ILS firms have progressed through a handover of their CEO role – most recently Schroders and Securis – while recently Leadenhall named Lorenzo Volpi as deputy CEO and signalled this had been done to provide clarity over succession planning.

Pillar Capital has also been through a CEO handover although, since its rebrand and takeover, current CEO Steve Velotti has become arguably viewed in light of the founding leader (the prior CEO Philip Lotz does not feature on its website) – thus putting the firm in a more similar position to other ILS managers helmed by original CEOs when it comes to succession planning.

Another Bermudian, Aeolus, has already has its key original founders leave the firm, although long-term senior staff remain. Former chairman Peter Appel stepped back to a non-executive role in 2016 before leaving the firm several years later.

Twelve Capital has also experimented with various different leadership structures, with founding leaders Christoph Buerer and executive chairman/CIO Urs Ramseier each having held the CEO role in the past, although it introduced new co-managing partners last year.

For the rest of the pack, for whom several contenders may be in the running, or for whom there is no clear succession pathway, two key points to bear in mind are: getting internal buy-in for any planned change and seeking to find a happy medium of timing for progression.

Looking inside or outside

Lorene Phillips, CEO at reinsurance executive coaching firm Clarendon Wallace, said organisations should always look for new CEO talent both internally and externally to avoid the risk of “groupthink”.

Either option would create a change in dynamic, she added, comparing it to “bringing a new member into the family”.

Lohmann said he ultimately looked for an external successor at Schroders as the in-house team were not interested in taking over an all-encompassing CEO role. After the death of colleague Hans-Peter Boller in 2014, Lohmann said he became much more personally focussed on planning for a transition of future leadership.

Once current head of ILS Stephan Ruoff was selected for the role and joined the firm, he spent a year working alongside Lohmann before the latter stepped back to a chairman role.

“You need time to work together to see whether the chemistry is right,” he said, noting that this also gave time to bridge the differences between working in traditional reinsurance, as Ruoff had previously done, and working in asset management.

M&A also drove the transition of power at Aeolus following the sale to Elliott, with Appel citing it at the time as a formalisation of roles that had already evolved over time. The firm initially set up a leadership committee following Appel’s step-back, though Andrew Bernstein later emerged as CEO while the addition of Aditya Dutt in 2020 as president added another new name to the mix as it looked to broaden out in new strategic directions.

When bringing in an external hire, it is crucial to get buy-in from the existing team who will report up to the new leader. Lohmann noted that he got the existing leadership team involved in interviewing incoming CEO candidates.

On the other hand, buy-in is also necessary to support accession of an in-house new leader, as Securis CEO Vegard Nilsen pointed out.

Nilsen argued that, for small ILS organisations, external senior hires are likely to be riskier unless there is a specific desire for the company to pursue a new direction.

But to begin with, the transition process has to be initiated by the founders. “For succession to work, the founder needs to genuinely want it to happen.”

And once power has been handed over, he said it is crucial that an exiting CEO steps back from operational responsibilities in order to give the new CEO the chance to effectively take over.

“I was allowed to run the business and build ‘Securis v2’, while having access to the founders,” he added. One of the Securis founders, Espen Nordhus, remains in a chairman’s role. His fellow co-founder Rob Procter stayed as CIO for only a year, having relinquished the co-CEO/CIO role before standing down from an executive role at the firm.

Investors will naturally still want access to the founders, Nilsen added. “You can’t be precious about it – investors always want to see the founder and it's good if people want to and have the ability to see them.”

As mature ILS firms prepare for a leadership transition, the firm’s structure should also have been built out from its early entrepreneurial start-up days and rely on a strong governance framework, well-defined processes and job descriptions based on skills and functions rather than vague titles, Nilsen said.

“Segregation of duties is crucial at this point; there is a distinct difference between managing money and managing a business,” he added. “Retaining the entrepreneurial spirit of the start-up phase will however be very important for continued success.”

The Securis handover did not come without fallout: ahead of Nilsen taking over the CEO role, it lost head of origination Neil Strong.

Another illustration of a complex transition is that of Pillar Capital. Originally launched under the Juniperus Capital brand by Philip Lotz, it was briefly taken over by Chris McKeown (now at Vantage) for an eight-month phase in 2012. That coincided with a short investment by Aquiline Capital, before the firm moved into a more stable phase under leadership of Velotti, who had been one of the original portfolio management team.

As Phillips pointed out, “there can be a fallout at any level” when promotions are involved. “It’s part of the cost of doing business,” she added. “It's more about how you do it and managing expectations of individuals who think they should be the next person.”

Phillips recommended giving time for new plans to be accepted internally at a firm before making external announcements.

Timing the transition

Succession planning has to start early, not just for the top founding roles at a company, but also to ensure that new talent is continuously coming through the ranks. As Phillips points out, that opens out the recruitment pathways to support bringing in a diverse leadership team.

This should include investors and other stakeholders being given access to mid-ranking staff at an ILS platform, not just founding leaders, Nilsen pointed out. “The more exposure investors and stakeholders have had to the future leaders, the greater their comfort level is likely to be. Perceived stability is key.”

Leadership turnovers also require looking at how the upcoming team is being incentivised to stick around for the new era, he added.

Setting up long-term incentives can be tricky in an asset class where achieving performance fee income ties closely to catastrophe volatility and is outside the control of an individual. But, Nilsen argues, employees, like ILS investors, must take a long-term view.

Even if there is volatility from time to time, a firm should be able to deliver long-term attractive returns and correspondingly offer meaningful staff incentives with a long-term component.

“In terms of building equity, that takes time,” he said. “[Staff] need to see [incentive plans] as translating into real value.”

When it comes to timing turnover in the top roles of a firm, Phillips said she typically sees firms looking to select a new leader anywhere from two to five years before a handover.

Two years is a happy medium, she suggested, as it is “not too short but not too long either”, and allows for an executive to be coached in the areas they need to develop in before stepping up. “You could lose great talent if you wait too long,” she cautioned.

There are pros and cons either way when it comes to publicly nominating a successor early, she said. On the positive side, it lends credibility to the individual. “It signals to the market that the organisation is moving in a forward direction.”

But if they are not well prepared to close any expertise gaps and ultimately are not ready in time, this can lead to fallout.

Even if succession plans inevitably evolve over time, Nilsen said he believed that when a credible plan had been agreed, a firm should be open about it.

"When the actual transition in leadership occurs, people (external and internal) should feel that it’s business as usual and little has changed.”

Taking it back to the core

Ultimately, Phillips said that core to the succession planning process was revisiting the fundamental question of what core skillset an organisation needs to succeed in the future and bearing this in mind throughout.

Meanwhile, Nilsen argued that keeping staff who have a long institutional memory in key positions helps to build up a firm’s “DNA” and retain its culture.

It is still not obvious who will be in charge at many of the major ILS platforms once their current leaders depart – but all will be hoping to pass on some of the magic of their DNA.