Humboldt Re, CSAM’s (Credit Suisse’s) new reinsurance vehicle, rated

The latest Guernsey domiciled reinsurance vehicle to be launched by ILS investment manager Credit Suisse Asset Management has now been rated. Humboldt Re Limited, launching with CHF 500 million of capital, received an A- rating from A.M. Best.

Humboldt Re marks the Credit Suisse Asset Management ILS team’s second foray into the world of the rated, traditional reinsurance company model, although backed by fund’s from its investors.

Previously, CSAM launched Kelvin Re, another Guernsey domiciled reinsurer, which was 100% backed by a single investor at launch and aimed to operate a hybrid (perhaps hedge fund investment) style approach.

Humboldt Re looks like a more traditional rated reinsurance vehicle, although backed by fund’s under CSAM’s ILS team’s management, we understand. A.M. Best said that Humboldt Re has a conservative investment strategy, focused on highly liquid fixed income paper, so it does not seem to have a hybrid underwriting and investment out-performance model in mind.

A.M. Best has given Humboldt Re a financial strength rating of A- (Excellent) and an issuer credit rating of “a-“, with stable outlooks for both ratings.

A.M. Best said the ratings reflect; “Humboldt Re’s diversified projected underwriting exposure within the natural catastrophe spectrum, expected strong risk-adjusted capitalisation, a risk management framework adequate to its intended business profile and its experienced management. Offsetting rating factors include the challenges related to the immediate execution of its proposed business plan in current market conditions.”

Moderate leverage and a flexible retrocession program are expected to help with the reinsurers risk-adjusted capitalisation in future, according to A.M. Best. No doubt the retro program will take advantage of synergies within the CSAM ILS world.

Humboldt Re will provide mostly short-tail property and specialty lines reinsurance, A.M. Best explains. The reinsurer launches with CHF 500 million of capital and hopes to write a portfolio of around CHF 140 million of premiums, focused on a globally diversified property catastrophe reinsurance book.

For distribution, Humboldt Re will leverage the specialists of the CSAM ILS team, an experienced group of underwriters and originators who have already helped the asset manager to grow its ILS and reinsurance linked investments business to around $6.5 billion under management.

The linkage to the CSAM team and its experience for origination, sourcing and underwriting risks “mitigates the inherent execution risk of a start-up reinsurance company” according to A.M. Best.

Underwriting and reserving services for Humboldt Re are to be outsourced to market-leading providers and and third parties will also provide its management function. We understand that Aon Insurance Managers are providing services, as they have for CSAM’s Kelvin Re reinsurer.

A.M. Best notes that it has confidence in the business plan and the team, directors and service providers that Humboldt Re will utilise. However the rating agency also notes that even with a lean business model and approach to bringing third-party or ILS capital to cedants through a more traditional style of reinsurer, success is not assured.

A.M. Best said; “Current headwinds in the global reinsurance market present challenges to the execution of Humboldt Re’s proposed business plan. Although the company’s medium-term revenue plans are realistic, underwriting margins and investment yields continue compressing, which creates potential strain on profitability that can ultimately place a drag on financial strength.”

For the CSAM ILS team another rated reinsurance company but focused on core property catastrophe lines could provide some efficiency when it comes to renewals. It means that CSAM can underwrite with a rated balance-sheet, making the collateralised nature of ILS one step removed, which for some cedants can be preferred.

It also means CSAM can put Humboldt Re up as an efficient competitor to other similarly rated traditional reinsurers, perhaps targeting areas that ILS has not yet penetrated, or where the traditional rated balance-sheet is still seen as king.

Having access to balance-sheets is becoming seen as increasingly important for the largest ILS managers, particularly those looking to expand into markets where ILS and the collateralised reinsurance product has not been so prevalent to date.

By finding ways to establish rated reinsurance carriers, backed by investors or ILS funds under management, ILS managers can benefit from the rated balance-sheet, without paying fronting fees and with the backing of a rating for their collateral.

It provides a vehicle to get third-party, ILS capital right up to the cedant, with no intermediary in between (in terms of a front or transformer) as well, which has to add efficiency as these vehicles scale. A trend we’re likely to see continue as the market grows in size and deepens its relationship with cedants.

Of course the real trick to these rated vehicles is firstly to ensure you have access to the business to enable scale so it can be profitable, and secondly to ensure you structure it in such a way that the returns can flow through to the investor(s) or ILS funds that provide the capital backing it.

Given CSAM are now on their second such vehicle, it would seem they’ve fulfilled both of those requirements.