Alternative capital creates opportunities on both sides for Montpelier Re

At Bermudian reinsurance firm Montpelier Re the impact of third-party reinsurance capital and alternative structures, such as catastrophe bonds and ILS, creates opportunities on both sides of the market, according to comments from senior executives.

Montpelier Re already has its own third-party reinsurance capital management unit Blue Capital Management, which operates a listed fund, private investment accounts and is launching a New York Stock Exchange listed collateralized reinsurer as well. Through Blue Capital Management Montpelier Re can leverage capital from investors seeking returns from the reinsurance market and effectively increases its capacity while also collecting fee income for managing the money as well.

On the other side of the market, Montpelier Re feel’s that the growth in issuance of catastrophe bonds and other alternative capital vehicles do not negatively impact the firm, despite pricing declines, rather they can create additional opportunities.

Chris Schaper, President of Montpelier Re Bermuda, acknowledged that cat bonds are impacting rates on certain layers of reinsurance programs, during the reinsurers third-quarter earnings call. However Montpelier Re does not see a dramatic effect or impact to its business as it underwrites reinsurance business across the catastrophe reinsurance market at all attachment levels.

Shaper explained; “Cat bonds themselves do not really have a dramatic effect across the board with regards to the cat rates. They actually, in some cases, create some changes in how programs are structured and that can create an opportunities for us.”

Christopher Harris, President and CEO of Montpelier Re Holdings, reiterated that competition from catastrophe bonds is not having a meaningful impact, saying; “It is fair to say that the impact has been fairly limited. I mean, it’ a very narrow segment of the market. It’s traditionally been targeted at low rate online, high attaching business. So I think they had some impact there but the more widespread impact has been much less from cat bonds.”

Clearly Montpelier Re is finding that its broadly diversified book of catastrophe reinsurance can still be maintained despite the growing catastrophe bond market and alternative capital taking increasingly large slices of these high attachment layers. The reinsurer also finds value in leveraging alternative capital for its own risk transfer and portfolio optimisation needs, using a number of different mechanisms when it is appropriate.

Harris explained; “We look at a number of options to optimise our portfolio on a regular basis and I think what we are seeing in the marketplace today gives us a kind of wider universe of potential opportunities as we look to optimise that portfolio. We have a number of private facilities where we partner with capital in various forms, and I would say we have done a few things through that framework as well.”

So Montpelier Re is working hard to adapt to the inflows of third-party capital, which have moved into the catastrophe reinsurance market, in two ways. Firstly, by actively managing that capital through its Blue Capital Management unit and its associated investment vehicles and secondly for its own portfolio optimisation and retrocessional reinsurance needs.

As the Blue Capital stable of vehicles grows, and its assets under management increases the amount of third-party sourced capacity available for deployment, it will be interesting to watch how a large and integrated reinsurer such as Montpelier Re copes with the differing motivations of a range of investors.

Montpelier Re is becoming a good case study to watch as a once more traditional reinsurer evolves into one which is totally capital agnostic and seeks to find the best return for all of its investors, whether investing in its equity or its third-party capital vehicles.

Other recent articles related to Montpelier Re:

– Blue Capital Re establishes dividend policy, targets 8% RoE

– Blue Capital Reinsurance Holdings to target $125m in IPO

– Blue Capital grows premiums earned in third-quarter