LGT’s Lumen Re ratings affirmed, balance-sheet assessed as “strongest”

Lumen Re Ltd., the Bermuda domiciled Class 3A reinsurance underwriting vehicle of LGT ILS, a unit of the investor LGT Group’s alternative asset manager LGT Capital Partners, has had its credit ratings affirmed and balance-sheet assessed as strongest by A.M. Best.

LGT ILS launched Lumen Re and received an A.M. Best rating of ‘A’ for the vehicle just over a year ago, with the reinsurer offering the ILS investment management team a rated platform for underwriting reinsurance business.

The rated underwriting vehicle provides the ILS manager with a route to access to underwriting business that may not be available on a fully collateralised basis. With some cedants demanding ratings as well, it opens up a greater spread of the market to the LGT ILS funds, without the need for using a third-party front.

Rated vehicles help ILS funds broader the reach of their collateralised reinsurance products as a result, although in the case of Lumen Re all business is collateralised behind the rated underwriting vehicle anyway.

A year into the operations of the reinsurer, rating agency A.M. Best has affirmed Lumen Re’s Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Rating of “a” of Lumen Re Ltd. (Lumen Re) (Bermuda), both with a stable outlook.

In addition A.M. Best categorises Lumen Re’s balance sheet strength as “strongest”, a feature some cedants look for in reinsurance partners.

Lumen Re underwrites largely non-proportional, property catastrophe treaty reinsurance business for a range of cedants around the globe, focusing on both reinsurance and retrocession, largely on an excess-of-loss basis.

Given the rated reinsurer acts as a front for LGT’s ILS funds, the majority of its underwritten business is retroceded to third parties, with all the protection retroceded fully collateralised through a trust account for the benefit of Lumen Re, A.M. Best explained.

As a result, the cedants benefit from ‘A’ rated paper, but also the security of full collateralisation with the funds invested in secure assets such as money market funds or short-term treasury bills. In terms of a promise to pay this is a much stronger offering than a traditional equity balance-sheet backed reinsurer, with the cash required to pay claims fully collateralised and bound by trust rules making it a very secure source of underwriting capital.

Fully collateralised reinsurance was always attractive as it sets the cash that could be paid out in the event of a claim to one side, in a trust governed by rules over how and when it can be paid out. Putting a rating in front of this only serves to raise the attractiveness of the ILS fund backed reinsurance product.

Another attractive feature is a very low-level of leverage within Lumen Re, as measured by retained limits to equity, as this means the reinsurer cannot write more business than it has the cash collateralised to pay for claims, in the event of a major catastrophe.

Even the largest of traditional reinsurers could technically run out of capital to pay claims, if it was hit particularly hard by the largest of catastrophic events. With Lumen Re the collateral should always be there to pay its claims, no matter how impactful an event was to the reinsurance industry.

For some cedants this level of security is everything, hence the rated underwriting vehicles of some ILS funds (including LGT’s Lumen Re) are beginning to prove very attractive options.

A.M. Best notes that Lumen Re’s isk-adjusted capital is projected to remain at the strongest level over the near term, while its “liquidity, asset/liability management, quality of assets and use of internal capital models provides ample support of its balance sheet assessment.”

A.M. Best does note the reliance on retrocession, but adds that this is written on a fully collateralised basis as well, enhancing the security of the vehicle’s balance-sheet again.

The rating agency says the operating performance of Lumen Re is assessed as adequate, based upon projected results in its business plan. There is no detail on underwriting results of the business written and collateralised, but LGT’s ILS strategies are typically lower-volatility, meaning the vehicle likely hasn’t faced the level of catastrophe impacts some others may have through 2018.

Also, Lumen Re launched after the major losses of 2017, meaning the reinsurer does not have the loss creep from hurricane Irma to deal with, like other ILS strategies do.

We’ve seen Lumen Re participating in reinsurance renewals for the Florida Hurricane Catastrophe Fund (FHCF) and insurer Federated National in the last year.

Also in the reinsurers’ favour, is a strategy to limit coverage for start-up insurers or those with unrealistic growth plans, which A.M. Best said creates, “a strong environment for management to execute its pricing strategy.”

With a focus on underwriting profits, not on assets which merely support the collateralisation of risks, Lumen Re will become a significant origination source of risk for the LGT ILS funds and strategies.

It is effectively an ‘A’ rated but still fully collateralised reinsurance underwriting vehicle, which should make it a particularly popular participant in renewal panels for many cedants for whom security, as well as diversified sources of risk capital, is all-important.