Reinsurance veteran Don Kramer’s latest Bermuda start-up venture has got off to a flying start.

In its first full year of operations, ILS Capital Management Ltd generated a 19.7 per cent return for investors in its 1609 Fund.

The company invests in insurance-linked securities such as catastrophe bonds and managed to comfortably outperform the Swiss Re Cat Bond Index, which returned 6.4 per cent in 2014.

In an interview with The Royal Gazette, Mr Kramer said that while the sector as a whole benefited from a lack of catastrophes, the fund’s outperformance was driven by selection of both sectors and securities.

He also commented on the wave of mergers and acquisitions happening in the Bermuda reinsurance market, suggesting that well managed small survivors might benefit from the consolidation around them.

Mr Kramer said his firm’s capital was invested in higher risk securities than those reflected by the index, but that the risk was mitigated through diversification and, in some cases, by hedging.

“We believe our model should achieve good returns in nine years out of ten, with one year not so great,” Mr Kramer said.

The firm uses portfolio analytics to ensure its investments are diversified and non-correlated.

“It may be that I see something with an attractive 15 per cent return, but I don’t write it because it correlates with something else in the portfolio,” Mr Kramer explained. “We diversify by geography and by risk.”

ILS Capital Management has around $230 million of assets under management. It employs five Bermudians on the Island and four others in the US. Armand Foy, a vice-president with the firm, said investors came from a number of different categories, including pension funds, private equity, wealthy individuals and university endowments.

Mr Kramer said the company hoped to grow — but hoped that it would not get so big as to lose the advantage of nimbleness.

“If we can generate superior returns to cat bonds and to our competitors, we would hope to expand,” he said. “But there will be a point at which size will be an issue.”

Mr Kramer is something of a reinsurance elder statesman in Bermuda, having founded companies including Ariel Re, Tempest Re and NAC Re, and having served as vice-chairman of Ace Ltd.

Asked whether he expected the wave of consolidation to continue in the Bermuda reinsurance industry, Mr Kramer said: “There’s not that much more to consolidate.”

The future of smaller, stand-alone companies would depend on how well they were managed, he added, but they could see opportunities.

“One of the issues coming out of this consolidation is third-party concentration,” Mr Kramer said. He gave the example of a reinsurance buyer which had previously bought 12 per cent of its reinsurance from Axis and another 12 per cent from PartnerRe.

As a result of the pending merger between the two, the proportion of the programme with one company would rise to nearly one quarter, potentially raising concerns over counterparty risk.

“The smaller companies could benefit from people deciding they don’t want 25 or 30 per cent of their contract with one company,” Mr Kramer said.