New Ocean delivers increased value to XL & investors as assets rise

Bermuda domiciled insurance-linked securities (ILS) and reinsurance linked investment manager New Ocean Capital Management Limited (New Ocean) has delivered increased value to its stakeholders and third-party investors over the course of 2016.

New Ocean is part owned by global insurance and reinsurance group XL Group Ltd., private equity specialist Stone Point Capital (SPC) and Japanese conglomerate Mitsui & Co., Ltd., which purchased a stake in the ILS manager last year.

XL Group, the holding entity for re/insurer XL Catlin, reports some details of its stake in the ILS manager in its results, and in the firms 10k reveals that it received $3.9 million of proceeds for the sale of 7.8% of common shares and 6.4% of preference shares when Mitsui bought into New Ocean.

Mitsui purchased a 15% stake in total, with the remainder being acquired from Stone Point Capital.

So XL Group realised some profits from its stake in ILS manager New Ocean through this sale, which enabled it to report a pre-tax gain of $3.5 million in its results.

XL also has some benefits that flow through from its ownership stake in New Ocean, in terms of its share of profits, net income and returns of any ILS funds it has some capital invested in. However XL consolidates these results and deems them “not material” to the re/insurer so they are not broken out.

What is broken out however is the income due to third-party investors in the ILS manager New Ocean itself and some of its investment vehicles, as well as some of the assets under management and the growth in both these areas means that stakeholders XL (as well as Stone Point and Mitsui) are doing increasingly well thanks to the New Ocean ILS management operations.

Firstly, XL highlights the equity interest attributable to third-party investors in the manager itself, New Ocean Capital Management, which is reported as $1.0 million at the end of 2016, more than double the $0.4 million reported at the end of 2015.

Next, XL reports on New Ocean ILS fund vehicles the New Ocean Focus Cat Fund Ltd. (which we understand to be largely focused on collateralized reinsurance) and the New Ocean Market Value Cat Funds, Ltd. (which has a current focus on catastrophe bonds), as well as the New Ocean special purpose Bermuda reinsurance vehicle Vector Reinsurance Ltd (Vector Re), which underwrites collateralized excess of loss reinsurance with a focus on global property catastrophe risks for the ILS managers funds.

XL notes that the total net assets of the New Ocean Focus Cat Fund, New Ocean Market Value Cat Funds and Vector Re ended 2016 at $223.4 million, which is decent growth from the $175.8 million reported at the end of 2015.

It’s important to note that this may not be the full assets under management of New Ocean Capital Management, as it could be running other strategies and private mandates that XL does not report on.

The increase in assets under management in these ILS vehicles at New Ocean explains an increase in increase in the equity interest attributable to third-party investors in the two funds and Vector Re.

XL reports that this figure rose to $112.1 million at the end of 2016, up from $70.5 million at the end of 2015.

Of course XL Group also has a share of the equity interest and also earns underwriting administration and claims services fees for these three New Ocean vehicles, but again deems the amounts it received “not material” to the company.

One other benefit that XL realises from its stake in and relationship with New Ocean is its ability to use third-party capital as a source of retrocession through the ILS managers vehicles.

Since 2014 XL and now XL Catlin entities have retroceded some of their assumed reinsurance business to special purpose reinsurers that are backed by funds under management at New Ocean. Not only does XL benefit from the access to retrocession, but it also earns fee income from underwriting administration services rendered to the New Ocean SPI’s, while the ILS manager provides the investment management.

In the last year XL deems premiums and fee income related to the retrocessional contracts between its entities and the New Ocean SPI’s as “not material” to the company. However this is a platform for the future, positioning XL with access to the capital markets through an ILS manager it owns a stake in, with benefits both from the access to retrocessional capital as well as from the fees it can earn as well.

So New Ocean Capital Management is not just driving growing income to its third-party investors as it scales up, it is driving increasing benefits for XL Group, even though the company deems them still immaterial in the grand scheme of its overall results.

While XL does not reveal the amount of equity and fee income it earns from New Ocean, it’s clear from the results that it is rising in-line with the amounts attributable to third-party investors and the increased assets under management in the three disclosed ILS vehicles. Of course this also means the other stakeholders in New Ocean will be enjoying increasing returns from their equity shares.

What is immaterial now may turn out to be key positioning for XL and XL Catlin in the future, securing access to the capital markets, fee income based underwriting on third-party capital and efficient retrocession when it is needed.