Hampden Underwriting Plc, a Lloyd’s of London firm focused on property insurance, reinsurance and motor business and which enables investors to directly access the Lloyd’s market, has renewed a collateralised quota share reinsurance agreement with XL.
The collateralised reinsurance transaction, which Hampden first announced back in July, involved 50% of the firms exposures being ceded to XL Re. This effectively allowed Hampden to release £4.1m of its £8.2m of Funds at Lloyd’s which it aimed to put into new investment opportunities.
The first renewal of this collateralised reinsurance contract, for the 2014 year of account, has now been successfully completed. Again it allows Hampden to free up capital which it can put to work in new investments and acquisitions.
The transaction also benefits Hampden as if the business ceded under the quota share reinsurance transaction outperforms above pre-defined levels, a performance related commission on the profits of the underlying ceded business of between 10% and 20% in each period could be payable to Hampden.
Nigel Hanbury, CEO of Hampden Underwriting Plc, commented; “The quota share reinsurance arrangement is an important part of our broader funding strategy going forward, enhancing our ability to actively grow our underwriting capacity and pursue further acquisitions. It is therefore pleasing that this important first renewal has been effected.”
The transaction utilises a special purpose insurance vehicle. Hampden Underwriting has entered into a reinsurance agreement with a cell of Hampden Insurance PCC (Guernsey) Limited, a special purpose vehicle. It was Cell 6 of this SPV in the July transaction but we’re not sure if the same cell, or another, has been used in this renewal. This special purpose vehicle in turn has entered into a reinsurance agreement with XL Re.
XL pays the profit commission, of 10% to 20% of profits from the business ceded, to Hampden via the special purpose insurer depending on the performance of the book of business. XL also pays a fee to the SPV of 1.5% per year of account of the value of the letter of credit provided to Lloyd’s. The SPV then pay this on to Hampden, less its share of the SPV management fees, costs and expenses which were estimated in July to be approximately £12,500 per annum.
This collateralised reinsurance deal allows Hampden Underwriting to effectively reduce its balance sheet risk, free up capital which can be used to underwrite more business or be invested in new acquisitions and offers a profit commission as well. For XL Re, the attraction will be in making a reasonable profit from its share of the performance of the underlying book of ceded business.