Kelvin Re, CSAM’s reinsurer with hedge fund strategy (of sorts), is rated

by Artemis on November 11, 2014

A new reinsurance company is set to launch in Guernsey, named Kelvin Re Limited (Guernsey), underwriting short-tail property and specialty lines while investing 50% of its assets with hedge funds, backed by ILS investment manager Credit Suisse Asset Management.

It’s the latest in the series of reinsurers to embrace a hybrid or alternative investment strategy. Interestingly, while the rating alert does not give away who is behind Kelvin Re Limited , the companies documents registered at the Guernsey Register are signed by a CSAM ILS team portfolio manager and lead counsel. The signings have been made on behalf of the CS Iris A Fund Ltd., which we believe to be one of the CSAM ILS team’s master funds.

The information disclosed suggests that this is not just a rated reinsurer backed by an ILS manager, it also implies that Credit Suisse is not simply looking for any old reinsurer, but is attempting to create a high-performing reinsurer, with expenses being kept as low as possible by either outsourcing or partnering with providers of claims and investment services. The Credit Suisse Asset Management ILS team is among the largest, in terms of assets in the space, with over $6 billion under management.

A.M. Best has assigned an A- (Excellent) financial strength rating and an issuer credit rating of “a-” to Kelvin Re, both ratings have a stable outlook. In order to receive such a rating the business plan has to be robust and the capitalisation of the reinsurer has to meet certain requirements, suggesting that Kelvin Re is a well-funded venture. It has been suggested that Credit Suisse Asset Management had sought to raise $600m to capitalise the reinsurer, but we cannot confirm that.

A.M Best said; “The ratings reflect Kelvin Re’s strong capitalization, diversified projected business profile within the natural catastrophe reinsurance market, experienced management and well-designed risk management function.”

Offsetting these facts is the market environment, A.M. Best says that the soft market could make the “tactical execution of its proposed business plan” more difficult. Also offsetting some of the strengths of the plan is the “increased investment risk brought on by a non-traditional investment strategy.”

Kelvin Re is expected to have excellent risk adjusted capitalisation, with moderate underwriting leverage likely and a letter of credit also providing a source of contingent capital to the reinsurer.

The reinsurer is outsourcing (or partnering) with providers of underwriting, which will be the CSAM ILS team we assume, reserving and risk management, with the providers being “market-leading providers”, while the board are largely individuals with reinsurance industry experience.

A.M. Best says that Kelvin Re is a privately owned start-up reinsurer domiciled in Guernsey. The firm will offer short-tail property (natural catastrophe) and specialty lines reinsurance. On the asset side of the business the reinsurer will follow a non-traditional investment strategy with 50% of investments allocated to blue chip hedge funds, according to A.M. Best’s report.

That’s interesting, as our expectation was that CSAM was looking to launch a rated vehicle in order to provide clients with more choice, by offering both collateralized and rated balance-sheets. However, the fact that a non-traditional investment strategy is being employed as well, suggests that CSAM is taking the opportunity to try something a little different to make the reinsurer more performant in order to increase the return for its investors. CSAM is the first ILS asset manager with a rated vehicle, it will be interesting to see if others follow suit.

The goal for Kelvin Re is to build a globally diversified reinsurance portfolio focused on property catastrophe, A.M. Best says. It is expected that Kelvin Re will underwrite in its first-year a portfolio of around $100m of globally diversified reinsurance, with as much as two-thirds consisting of non-proportional catastrophe risks. Gross premium revenue is expected to increase by approximately 10% annually in subsequent years, while operating performance over the next two years is likely to be solid.

The reinsurers management team has a track record in the core business that Kelvin Re proposes to underwrite. A.M. Best also said that Kelvin Re demonstrates a commitment to an organic culture of enterprise risk management (ERM), with an ERM committee established that is expected to employ strong controls and monitoring capabilities, right up to board level.

Kelvin Re looks like an interesting play for Credit Suisse. It will provide it with the rated balance-sheet option for cedents that prefer it, while also offering something different for CSAM investors as well. With a hybrid approach to the investment strategy, third-party capital to capitalise it, a lean model of outsourcing certain services and CSAM’s proven underwriting on the front end, Kelvin Re could be a very interesting reinsurer to watch.

Kelvin Re could have a relatively low cost-of-capital, making it more competitive at deploying capacity, while the non-traditional investment strategy could help it to outperform on a total-return basis. If the underwriting performs and the combined ratio is attractive, the extra boost to the asset side and the low-cost operating model could make the potential returns for investors very attractive.

We would also suggest that the Kelvin Re model could provide a glimpse into a future operating model for some traditional reinsurers that might struggle if they don’t introduce efficiencies into their business, embrace third-party capital, or add juice to the asset side.

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