Helios uses collateralised reinsurance structures to release capital

by Artemis on June 30, 2014

Helios Underwriting, the Lloyd’s of London focused investment and underwriting vehicle formerly known as Hampden Underwriting, has entered into a new collateralised reinsurance agreement to free up capital for new opportunities.

As Hampden the firm entered into a number of collateralised reinsurance quota share agreements, with XL Re, for the same purpose of freeing up capital to put back to work in new underwriting activities. This morning the firm, under its new name Helios Underwriting, announced a new collateralised reinsurance agreement to extend the amount of capital it can free.

Helios has entered into reinsurance agreements with Hampden Insurance PCC (Guernsey) Limited – Cell 6, a Guernsey domiciled special purpose vehicle. Cell 6 has then reinsured the reinsurance risk with Bermudian reinsurer, Everest Re Ltd on a back-to-back basis. amounting to 12.5% of the Company’s exposure and with Guernsey insurer, Polygon Insurance Company Ltd as to 7.5% of the Company’s exposure.

Through the reinsurance agreement 20% of Helios’ 2014 insurance exposure has now been ceded to reinsurers using the protected cell structure on a collateralised quota share basis. Added to the existing collateralised quota share reinsurance with XL Re, which amounts to 50% of the company’s exposure, Helios has now secured 70% of its business as well as broadening its base of reinsurance providers.

As with the XL Re quota share, Helios has a profit commission clause built-in, so if the ceded business outperforms a performance related payment will be forthcoming. This allows Helios to offload risk, using collateralised reinsurance structures and to benefit from the continued performance of the portfolio of risk even after it has been ceded.

The reinsurers provide in return letters of credit amounting to £2.6m to the Company’s funds at Lloyd’s (20% of its regulatory capital requirement), the majority of which will immediately release corresponding group resources for reinvestment in new opportunities.

Nigel Hanbury, Helios Underwritings Chief Executive, commented on the transaction; “These transactions present HUW with further capital with which to fund near-term opportunities the Company wishes to pursue and does so on advantageous commercial terms. Current market conditions continue to present the Company with attractive investment opportunities which require funding. The reinsurance terms provide both a profit commission in good underwriting years and a reduced risk exposure.”

Helios, which invests third-party capital in reinsurance opportunities for its clients, continues to use collateralised reinsurance structures and special purpose vehicles as a way to free capital and make its capital base more efficient. These reinsurance transactions, while not perhaps fully-collateralised in the way insurance-linked securities are, provide Helios with capital at low-cost and free it up to continue investing while also making profit commission from the ceded business if it performs.

These types of capital focused reinsurance agreements could become more popular as a way to acquire risk for investors as well. If one group of investors are happy to hold the risk, structuring it in such a way would allow the investors to access the return of the reinsurance business, while freeing up capital for the cedant and allowing them to participate in the future success of the portfolio as well.

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