Prospero Re Ltd., the rated reinsurance vehicle of Bermuda-based fund ILS and investment manager Resolute Global Partners (formerly ILS Capital Management), has exceeded rating agency KBRA’s expectations for the execution of its plan modified business.
Prospero Re Ltd. received approval from the Bermuda Monetary Authority (BMA) in late 2020 for an expansion of its operating model, allowing the business to write secured reinsurance as well as traditional reinsurance with an element leverage on the balance sheet.
KBRA had previously stated that the revised business plan would result in a more productive use of capital and after its first year of operating the new model until 2021, the rating agency noted its shift to underwriting less real estate catastrophe reinsurance and more insurance-oriented risk as a positive.
ILS Capital Management changed its name to Resolute Global Partners in early April 2022, also stating at the time that its investment scope had expanded to include additional opportunities related to insurance and reinsurance.
KBRA’s latest rating report for Resolute’s primary reinsurance vehicle, Prospero Re, explains that “in 2021, Prospero Re’s execution of its amended business plan exceeded initial expectations.”
Commenting on the execution of the amended business plan, KBRA said: “Prospero Re has managed to assume around 64% of its net written premium in 2021 on its balance sheet, mainly through related insurance activities as well as several catastrophe reinsurance treaties.
“Furthermore, Prospero Re has continued to strategically shift its portfolio from inadequately priced property catastrophe reinsurance to more adequately priced insurance.”
Emphasizing that “at the end of 2021, 78% of the portfolio was made up of insurance, compared to 67% at the end of the previous year. »
The KBRA was also impressed with Prospero Re’s risk-based capitalization, stating that Prospero Re’s “Bermuda solvency capital ratio of 523% at the end of 2021 compares very favorably to its reinsurance peers with profiles similar exposures.
The KBRA also noted that the premium and reserve leverage of reinsurers is conservative compared to its peers, but noted that this “despite continued adverse developments in the previous year, particularly related to natural disasters in over the past five years”.
Like many other third-party capitalized and ILS-backed reinsurers, as well as traditional reinsurance companies, the past five years of natural catastrophe industry losses continue to take their toll.
But the revised business plan means the transition to insurance risk, along with Prospero Re’s diversification within its underwriting portfolio, should generate profits even when industry nat cat losses are higher. high.
Importantly, the ILS-backed reinsurer has stabilized its accident year combined ratio in the high 60% range, with KBRA noting that this is “primarily due to the change in business mix to business low-volatility insurance and the reduction of catastrophe reinsurance. ”
Looking ahead, KBRA noted potential exposure to the Russia-Ukraine conflict, with aviation war risk policies as a source.
We have flagged the potential for some ILS strategies that invest in leased line businesses to be exposed to conflict recently here.
However, the ratings agency said: “These policies would only be triggered if the loss of aircraft was considered an act of nationalisation. Until the end of May 2022, no notice of loss has been received and no loss reserve has been established.
“Going forward, Prospero Re will seek to minimize exposure to air warfare and focus solely on maritime and energy risks.”
Additionally, Prospero Re holds $3.4 million in COVID-related reserves, but with no official loss notices filed thereon, those reserves are fully IBNR, KBRA explained.
Also noteworthy is Prospero Re’s use of funding to help it provide liquidity to investors, which the reinsurer highlighted in its manager’s innovative securing of trapped capital in 2020.
KBRA said, “To simplify providing liquidity to its investors, the Fund issued $25 million of 5-year senior unsecured notes in June 2021 and an additional $25 million in November 2021. Proceeds from the notes was for working capital and general business purposes. . Interest accrues at 4.5% per annum. At the end of 2021, the notes outstanding were $50 million and the Fund was in compliance with all covenants under the notes.
Prospero Re remains an attractive reinsurance vehicle in the insurance-linked securities (ILS) space and KBRA’s reports are helpful in understanding some of its strategy and how the business plan continues to develop there.
Recall, last week we reported that Prospero Re had appointed a senior executive to its board, securing the services of well-known insurance and reinsurance industry leader Martin Reith.