Lumen Re Ltd., the rated, Bermuda domiciled Class 3A reinsurance underwriting vehicle of LGT ILS Partners, has been called out for exhibiting “significant innovation, while its capital adequacy is cited as being “strongest” by rating agency A.M. Best.
The comments in the reinsurance vehicles latest ratings review highlight the robust business model that combines a rated reinsurance balance-sheet, with the fully-collateralised approach of an insurance-linked securities (ILS) fund management business.
Lumen Re is used by LGT ILS Partners, the ILS specialist unit of investor LGT Group’s alternative asset manager LGT Capital Partners, to underwrite a growing majority of its reinsurance business, combining the best of both world’s for the firm, offering a rated reinsurance company to front with the counterparties of the LGT ILS management business.
A.M. Best said that it has affirmed Lumen Re Ltd’s Financial Strength Rating of A (Excellent) and Long-Term Issuer Credit Rating of “a”, both with stable outlooks.
The rating agency calls Lumen Re’s balance-sheet strength and capital adequacy both “strongest” and expects the reinsurance companies risk-adjusted capital, as measured under the rating agencies Best’s Capital Adequacy Ratio (BCAR), to remain at the strongest level over the next few years at least.
Given the business model, of underwriting reinsurance and retrocession but then ceding the majority of that risk back to LGT ILS Partners’ ILS funds, with the risks fully collateralised in trust, Lumen Re itself does not hold much risk, largely tail exposures that the reinsurers balance-sheet can absorb.
Underwriting profits are key, A.M. Best notes and with the profitability of the business underwritten by Lumen Re an increasingly important driver of the returns LGT’s ILS fund investors generate, the focus will always be on creating robust, well-diversified portfolios that generate profits and are underwritten for strong cedent partners.
A.M. Best highlights the sophisticated management of Lumen Re, citing the sophistication of the pricing strategy, modeling capabilities including the vendor models, as well as applying coverage exclusions for start-up cedents or those with unrealisting growth plans, all of which points to a relatively conservative and sophisticated underwriting strategy.
In addition, A.M. Best says that where Lumen Re is concerned, “innovation is assessed as significant”, explaining that where innovation is concerned this has “direct and positive impact on the top line growth and bottom line results.”
It’s a glowing report and as well as the manner in which Lumen Re is operated and managed by the LGT ILS Partners team and Lumen Re operating team, it’s also a reflection of the business model of writing reinsurance business using a traditional company, but with a fully collateralised, fund management structure at the back-end of the vehicle.
The LGT ILS Partners team derive a significant percentage of their underwritten business through Lumen Re now, which has also removed their reliance on fronting partners for many cedents.
Having the rate balance-sheet to offer to their clients has clearly been helpful over recent years as well, with the use of a rated reinsurer minimising the trapping of collateral for the ILS management group as well and bringing more of the infrastructure needed to run an ILS investment management business under LGT ILS Partners direct control.