Leadenhall Capital Partners LLP, the London headquartered specialist insurance linked securities (ILS) and reinsurance related investments manager, is backing a new rated reinsurance underwriting platform in Bermuda, with a Class 3A reinsurer Nectaris Re Ltd.
Insurance-linked securities (ILS) managers have been expanding their underwriting infrastructure in recent years, with some choosing to move beyond using fronting or transformer service providers by owning their own reinsurance platforms.
Leadenhall Capital Partners is a little different, as it has been using its partner MS Amlin to provide a rated front for many of its transactions.
But the establishment of the Nectaris reinsurance platform will provide the ILS manager with greater optionality, as well as a more efficient way to manage capital and collateral on behalf of its investors and counterparties.
A holding company, Nectaris Holdings Ltd. and operating subsidiary reinsurer Nectaris Re Ltd., were both originally set up in Bermuda last September, according to government registrar information.
But Nectaris Re Ltd. has now been officially licensed and confirmed as a Class 3A re/insurer by the Bermuda Monetary Authority (BMA).
In addition, Nectaris Re Ltd. has now been rated by AM Best, which has given the new reinsurance company a Financial Strength Rating of A (Excellent) and a Long-Term Issuer Credit Rating of “a”.
AM Best noted, “The ratings reflect Nectaris Re’s balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).”
Backing a rated reinsurance underwriting platform can add a number of benefits for an ILS fund manager, like Leadenhall Capital Partners.
There could be expense efficiencies, in not having to pay for access to a transformer or front for every transaction entered into, using your own platform instead.
Depending on the structural set-up, there can be capital efficiency benefits as well, which effectively make your underwriting collateral more efficiency and even go a little further.
Other benefits include an ability to underwrite business for a broader range of counterparties, particularly with a rating as some cedents prefer to transact with a rated reinsurer.
As well as the potential to offer reinstatements, which are an important reinsurance contract feature to many counterparties.
Leadenhall said that initially Nectaris will focus primarily on underwriting non-life reinsurance and retrocession, covering the risk using collateralised capacity from Leadenhall managed investment funds and segregated accounts, net of any hedging and retrocession.
Nectaris Re will be managed and administered by ILS market facilitator and specialist service provider Horseshoe.
Leadenhall employee Ben Adolph will join the company as a Director and act as Nectaris Re’ Head of Underwriting, on a part-time basis.
Adolph will also continue to be an employee of Leadenhall Capital Bermuda Limited and as a Managing Partner of Leadenhall Capital Partners LLP, where he is Head of Non-Life Portfolio Management.
The company said that Nectaris Re will “complement the transactional options available to Leadenhall in building a broad book of insurance linked relationships.”
This already includes collateralised insurance linked investments and transactions underwritten in cooperation with and via Leadenhall’s Joint Venture partner MS Amlin, with Nectaris Re now offering extra optionality to the firm and its ceding counterparties.
MS Amlin and Leadenhall partner on the deployment of its ILS capacity, with MS Amlin acting as a rated front for the manager’s funds.
Ben Adolph commented on the launch, “Nectaris Re will deliver cost efficient structural efficiencies to Leadenhall funds in transacting non traded insurance linked risk, including making alternative rated paper available to our counterparties, and providing greater efficiencies in the collateral posting, collateral release and commutation processes.”
Speaking to Artemis, Leadenhall CEO Luca Albertini explained that Nectaris Re will effectively underwrite and create mini-portfolios of risk, each related to a fund, to which the fund posts collateral.
Collateral may be posted to around the 1-in-1000 year level where joint-venture partner MS Amlin remains included in the transaction, or around the 1-in-2000 year level where Nectaris Re is underwriting without the joint-venture partners’ involvement.
As a result, the equity of the rated reinsurer Nectaris Re is only ever exposed to the remote tail-risk of the portfolios it creates.
Leadenhall will derive significant benefits to its business model through the launch of Nectaris Re, including that the management and posting of collateral, as well as releasing it on deal maturity, or rolling it over into new transactions, may become easier.
The company said that underwriting business that does not currently face MS Amlin will go via Nectaris Re, where the counterparty wants it to.
In addition, having the new option of transaction with Nectaris Re could also be appealing to some longstanding counterparties as well, to introduce a new trading counterparty to their programs.
This all means that Leadenhall can invest in non-life reinsurance assets through catastrophe bonds, structures like ILW’s, fronted rated deals via MS Amlin and rated deals through Nectaris Re for its funds and investor-base.
Albertini told us, “It’s all about having all of the tools to be able to access the risk we like for our investors, in the most efficient manner possible.”
The capital efficiencies and additional optionality Nectaris Re brings to Leadenhall’s infrastructure will provide direct benefits to the ILS managers operations and investors.
Nectaris Re will sit alongside Horseshoe Re II, a segregated cell company managed by Horseshoe and supported by capacity from Leadenhall ILS funds and segregated accounts.
AM Best said that Nectaris Re’s strategy will be to retrocede all of its business to Horseshoe Re II, with its cells funded by insurance-linked securities funds managed by Leadenhall Capital Partners.
Horseshoe Re II can also provide direct collateralised reinsurance and retro cover to counterparties that prefer to benefit from high quality collateral posted in trust accounts.
Horseshoe Re II is also expected to provide fully collateralised protection to Nectaris Re in support of its underwriting as well.
Approximately 90% of the limits ceded to Nectaris Re is anticipated to be written via MS Amlin and then 100% retroceded to Horseshoe Re II on a fully-collateralised basis.
In this case, where MS Amlin is on the business, the 1-in-1000 aggregate exceedance probability return period collateralisation will be in effect, while MS Amlin will retain the tail risk.
The other approximately 10%, where Nectaris Re directly faces counterparties itself without cooperation with MS Amlin, will see the business retroceded to Horseshoe Re II and collateralized at the 1-in-2000 level, while Nectaris Re itself will retain the tail.