Collateralized reinsurance makes ‘strong contribution’ at Montpelier Re

The collateralized reinsurance operations at Bermuda-based short-tail and specialty reinsurance firm Montpelier Re continue to make a “strong contribution” to results, helping the firm offset a decrease in its traditional underwriting in Bermuda.

The collateralized reinsurance operations Montpelier Re’s third-party reinsurance capital and fund management unit Blue Capital Management continues to make a positive contribution to Montpelier’s overall growth. With over $600m of assets under management at Blue Capital, it provides a substantial chunk of the reinsurers underwriting capability and is helping the firm to offset some of the impacts of the soft market environment.

In its latest quarterly results, Montpelier Re reports that net premiums written in Q2 were flat when looked at across the whole Montpelier Re business.

Premiums written actually declined at the firms Bermuda reinsurance arm, likely due to pulling back from business which did not meet the return requirements of its own balance sheet capital, but this was offset by growth increased premiums written at the firms collateralized reinsurance segment Blue Capital as well as the firms Lloyd’s operations.

Once again this is a good example of a reinsurer leveraging third-party, lower-cost capital to enable it to continue to maintain premiums and underwriting levels, while shifting from the balance sheet to the unrated capital instead. This flexibility means that Montpelier Re can continue to service clients, writing lines on programmes through Blue Capital, where the cost of capital is lower, while using its balance sheet elsewhere.

This approach, of a flexible capital model where different capital has different risk and return appetites and costs associated with it, could give reinsurers the ability to position themselves for a rebound in rates. By maintaining lines on third-party capital and growing that side of the business, the balance sheet can come back in to grow those lines when the market is more appealing. In the meantime the collateralized capacity continues to access reinsurance returns at levels which will still be attractive to investors with a lower cost of capital.

Christopher Harris, President and Chief Executive Officer of Montpelier Re, commented; “Despite a high frequency of smaller industry loss events, we produced solid underwriting profitability with a 77% combined ratio, reflecting strong contributions from our growing Montpelier at Lloyd’s and Collateralized Re segments, as well as the benefit of prior period development. We believe our nimble underwriting approach, flexible capital base, and excellent client relationships continue to position us well in the current environment.”

Nimble, flexible, building and maintaining client relationships. These are qualities that third-party capital is now providing to traditional reinsurance companies which have invested the time and effort in building a solid platform focused on ILS and reinsurance linked investments.