TransRe invests in Florida primary P&C insurer Monarch

by Artemis on July 21, 2014

Transatlantic Reinsurance Company (TransRe) is another example of a reinsurer investing in a Florida start-up property and casualty insurance carrier, making a small debt investment in Monarch while also securing a right of refusal to provide reinsurance.

Monarch National Insurance Company is a new Florida-based property and casualty insurance carrier being formed through a joint-venture between publicly traded Canadian merchant bank and alternative asset manager C.A. Bancorp Inc. and Federated National Holding Company (FNHC), an insurance holding company.

It’s another example of different companies coming together to take advantage of the returns possible from Florida primary property insurance underwriting. Ever since the depopulation of Florida Citizens began, new start-up insurers have been emerging with backers from a diverse range of sectors.

Some of these start-ups have also been backed by companies with reinsurance interests, a great example being Heritage Insurance Holdings which received a small investment from Nephila Capital as part of its IPO, a deal which also gave Nephila the right of first refusal on Heritage’s reinsurance renewals. This enables Nephila to provide its reinsurance capital to help an insurer to grow, while providing access to new sources of catastrophe reinsurance risk.

The launch of Monarch National Insurance Company remains subject to the receipt of regulatory approvals and other customary conditions.

TransRe already has an interest in a third-party ILS and reinsurance capital manager in Pillar Capital Holdings., allowing it to benefit from the returns of ILS and collateralized reinsurance business. Now it is adding an investment, albeit small at just $5m in return for a non-voting share of the Monarch holding company, in primary Florida property insurance.

The holding company Monarch Delaware Holdings LLC will have an initial equity capitalization of $33m. CAB Holdco, an entity established by C.A. Bancorp and a unnamed third-party investor is contributing $14m. FNHC is also contributing $14m. These two investors will have a 42.4% share of the equity and voting interests. TransRe’s minority stake will be the remaining 15.2%, from its capital contribution of $5m for a non-voting interest.

Interestingly, Monarch will have its investment assets managed by a C.A. Bancorp affiliate, which could result in a slightly more active or aggressive investment strategy than is typical in a primary insurer, especially given C.A. Bancorp’s focus on alternative assets. That could make Monarch a primary, Florida focused property insurer with a strategy to achieve a higher investment return, more akin to the hedge fund reinsurers we often write about. Of course regulations will restrict the investment of a primary insurers assets to a degree, but it will be interesting to see how that pans out with C.A. Bancorp managing the asset side of the business.

FNHC will provide the underwriting, again through an affiliate, as well as the accounting, reinsurance placement and claims administration after entering into a Managing General Agent and Claims Administration Agreement with the newly formed Monarch National Insurance.

Meanwhile, TransRe is also providing $5m of senior debt to Monarch, which will pay 6% in annual interest and will mature after 6 years. Additionally, TransRe will have a right of first refusal for all quota share and excess of loss reinsurance that Monarch deems necessary, as long as TransRe remains an invested member or the debt remains in place. This deal gives TransRe the right to provide, at market rates and terms, a maximum of 15% of any reinsurance coverage obtained by Monarch in any individual reinsurance contract.

So TransRe gets a share of the primary insurer which will earn it a return via the provision of reinsurance capital to a primary Florida property insurance underwriter, a return from its debt investment and also the right of first refusal on reinsurance renewals up to a limit.

That appears to be a savvy investment for a reinsurer which has shown before that it is agnostic as to where the capital and returns come from, as evidenced by its investment in ILS and third-party capital through Pillar.

With competition so high in the reinsurance market, securing a right of refusal at reinsurance renewal time for Florida market insurers could also be valuable to TransRe, giving it a guaranteed source of reinsurance premiums for the market where competition is highest.

The Monarch National Insurance is an interesting strategy; an alternative asset manager/bank, teaming up with an insurance management and holding company and a dedicated reinsurance firm to launch a Florida start-up. We would also expect it to pitch for depop or takeout business from Citizens as well, given most Florida start-ups do. The combination of an alternative asset manager on the investment side, with dedicated reinsurance capacity and an insurance management firm could make this particularly interesting to watch as start-ups go.

“We are looking forward to partnering with FNHC and leveraging FNHC’s known expertise in the Florida P&C market, together with C.A. Bancorp’s investment management experience,” commented Colin King of C.A. Bancorp.

Michael H. Braun, FNHC’s Chief Executive Officer and President, added; “This is a great opportunity for us to partner with two quality organizations that see an opportunity in the Florida homeowner’s insurance market. Additional property capacity is capital intensive and has been long sought after in the Florida marketplace. We are proud that we will both have a significant ownership stake in Monarch and also provide managing general agent and claims administration services to the new venture.”

FNHC and C.A. Bancorp intend to seek out other potential opportunities to grow the Monarch platform, both within Florida and in other states, in the future. It will be interesting to see whether TransRe participates in those as well.

With these Florida start-ups, the structure they are taking and the partnerships that are emerging, we could be seeing a new way of launching primary insurance businesses emerge. The fact that these launches are bringing reinsurance and sometimes ILS capital into the mix is also no surprise. With the reinsurance market under such pressure we would expect this trend towards innovative primary insurer start-ups to continue, as reinsurers and also ILS players seek to use their reinsurance capital for these different financing purposes.

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