Insurance-linked securities (ILS) and reinsurance asset management unit Blue Capital Management Ltd. is seen as an “important component” of re/insurer Sompo International’s strategic future, according to the company.
Blue Capital Management has had a number of different parent companies, having been founded under the ownership of Bermudian reinsurance firm Montpelier Re, which was subsequently acquired by fellow Bermudian Endurance Specialty Holdings Ltd. and which has now itself been acquired by Sompo Japan Nipponkoa Insurance, a division of Sompo Holdings, and renamed to Sompo International.
As the ultimate parent company has grown, the benefits to Blue Capital Management and its range of ILS and reinsurance investment funds and strategies have increased as well.
The growing scale of the group’s that Blue Capital has been part of have resulted in an increasing level of access to the global property catastrophe reinsurance market, where the ILS manager is focused.
Now, under the wing of Sompo International and with firm ties to the mammoth Sompo Holdings, Blue Capital Management believes that it benefits from access to over 90% of the market opportunities available in catastrophe risk underwriting, helping it to be selective in creating differentiated portfolios for its investors, thanks to the scale and reach of Sompo.
In the current reinsurance market environment where prices are softened and competition is high, having access to risk is key for ILS fund managers so as to construct robust portfolios which demonstrate underwriting alpha, rather than purely becoming a beta play of the main programs in the marketplace.
ILS managers seek to achieve this differentiation in their portfolios in a variety of ways, either through their own relationships developed over time, partnerships with risk originators, access via a parent company re/insurance platform, or simply through selective underwriting.
Here, the model of being a third-party capital management unit within a larger, established and global reinsurance entity has its benefits, enabling greater visibility of risks than some of the smaller, independent ILS managers can achieve.
Given the reinsurance market environment, efficient capital from third-party investors benefits the traditional parent of an ILS venture as well, offering a way for it to lower its own cost-of-capital, while benefitting from income generated through managing the investors money.
In this way the re/insurer parent can still get paid for its underwriting expertise, while not putting the risk on its own balance-sheet, a useful source of revenue in a soft reinsurance market.
So it’s no surprise that Sompo International considers the ILS asset manager as an important piece of its strategic future, as the re/insurer positions itself to capitalise on industry trends and the interest of the capital markets in accessing reinsurance linked returns.
The relationship provides Blue Capital with this ability to achieve “differentiated reinsurance risk selection and portfolio construction” with the support of a team of 29 Sompo International employees actively involved in the operation of some of its ILS fund strategies.
Blue Capital believes that the synergies with its parent mean that it has access to certain property catastrophe reinsurance opportunities that are not available to the independent ILS funds, as the relationship with Sompo provides it with a global network for sourcing risk, as well as deep expertise.
Sompo International maintains a significant stake in some of the Blue Capital Management vehicles, including 33% of its New York stock exchange listed collateralized reinsurer Blue Capital Reinsurance Holdings, aligning its interests with the investors in the investment strategies.
Large insurance and reinsurance groups, like Sompo, will increasingly look to leverage third-party capital alongside their balance-sheets. Through Blue Capital Management, Sompo has a head start on some of its rivals, which to-date only utilise ILS and third-party capital for hedging purposes.
Bringing third-party reinsurance capital from investors into the business structure is becoming key, even for the largest players in the world. As capital efficiency and new sources of revenue become vital in re/insurance, the use of the capital markets and managing money for investors is one way a traditional company can adapt to the times.
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