The formation of Lumen Re, LGT ILS Partners’ Bermuda-based Class 3A reinsurance underwriting vehicle, was driven by a number of factors and sees the ILS manager try to combine the best of both worlds.
This is according to Michael Stahel, Partner at LGT ILS Partners Limited, who, speaking as part of a panel at the 2019 Bermuda Convergence conference recently, discussed the benefits of leveraging a rated carrier as opposed to a fronting company.
Towards the end of 2017, LGT upgraded its fully collateralised reinsurance vehicle to a Class 3A, renamed the carrier Lumen Re from Collateralised Re Ltd., and achieved an all-important rating of ‘A’ from A.M. Best.
The reinsurer provides LGT ILS Partners with a rated platform for underwriting reinsurance business, offering the ILS manager a way to access underwriting business that might not be available on a fully collateralised basis.
Addressing an audience as part of the panel focused on why insurance-linked securities (ILS) matters, Stahel explained the main reason for the launch of Lumen Re links to the firm’s shift towards reinsurance from retrocession, a resulting increase in counterparties and demand for rated paper.
“Now, hiring a fronter on such a transaction for us completely dilutes the whole concept of ILS, because you bring the collateral, which is the safest element you can put up, and that in my view is always one of the main reasons an insurance or reinsurance company would want to trade with an ILS market.
“When you put it all behind the fronter, the fronter is just using its balance sheet to then grant that protection, and so the counterparty is facing the credit risk again, that’s one thing. Secondly, the fronter doesn’t do it for free and so there is a cost element that comes with it. And then thirdly, and increasingly for us, we felt that using a fronter is a business risk because it begs the question who owns the piece of business.
“Once the fronter dies, and it does happen every now and then that a fronter may go out of business, you are there and the fronter is shifting away, who owns the renewal rights? Who owns the piece of business?
“So, that element led us to the formation of Lumen Re, and what Lumen Re is, is really just a rated fronter on behalf of our funds,” said Stahel.
With Lumen Re, cedants benefit from ‘A’ rated paper and also the security of full collateralisation, with the collateral always there to pay any claims. For LGT, a rated vehicle helps the ILS manager expand the reach of its collateralised reinsurance solutions, with some cedants demanding rated paper.
“Post 2017 and 2018,” continued Stahel, “we have discovered that Lumen Re can do much more, as it can also provide that little run-off element on top of the collateral structure that is a bit of an issue in the ILS market.
“We talked about adverse development, clearly, that has not affected us because we have internally allocated the level of reserve that we feel fit and if that level of reserve is not suitable, and thus is not justified and there is loss creep, we will have to increase that.
“So, for us, the element that we use here is that we try to combine the best of both worlds. We try to act as a rated reinsurance company to those who want to see a rating, but we are still an ILS manager, I can’t stress that enough. We are an ILS manager, we have the collateral, that is what we do and that has served us and our clients well,” said Stahel.