United Insurance Holdings Corp. (also known as UPC Insurance), a coastal and homeowners insurance focused property and casualty holding company, launched a novel collateralized reinsurance facility named Promissum Re earlier this year.
It appears that Promissum Re has a lot in common with a sidecar, being fully collateralized by third-party capital (ILS) market investors and providing its reinsurance capacity directly to UPC Insurance. However the structure also acts as a kind of fully (third-party) funded captive for the insurer, while also allowing for a profit share to be paid back to UPC in loss free years.
United likens Promissum Re to the venture launched by re/insurer ACE and Blackrock last year, in fact claiming responsibility for the idea of an internal reinsurance facility as it had been working on Promissum Re for some time. However, with Promissum Re being a fully collateralized vehicle, it is definitely more akin to a sidecar or quota share type vehicle.
It appears that United has chosen the Cayman Islands for its sidecar reinsurance vehicle, as a Class C company named Promissum Re SPC Ltd. was registered there on 28th April 2015 and is being managed by Horseshoe Services (Cayman) Limited. The SPC in the name perhaps reflects that the vehicle is being used for its segregated portfolio company status, but we cannot confirm at this time.
Promissum Re was originally disclosed in a filing that United made around the June reinsurance renewal, when it revealed that it had added the vehicle as a reinsurance counterparty for the first time. More information has become available thanks to United’s leadership discussing Promissum Re during the insurers second-quarter earnings call.
At the time of the initial filing United said that it has “added Promissum Re, a newly formed fully collateralized reinsurance facility dedicated exclusively to UPC Insurance, and which will share profits with UPC Insurance in a no-loss scenario.”
It’s an interesting third-party reinsurance capital play for a primary insurer like United, allowing the firm to leverage the lower-cost of third-party capital, while also extracting more of the risk premium from the business it underwrote than if it reinsured it with another company.
The first time that Promissum Re assumed insurance risk from United (or UPC Insurance) was at the 1st June 2015 renewal.
Brad Martz, CFO at United Insurance Holdings, explained; “We added Promissum Re as a new trading partner. Promissum is an unaffiliated facility dedicated exclusively to UPC Insurance, which will share profits in a no loss scenario.”
John Forney, the insurers CEO and President, explained some of the background to the vehicle. United and UPC have a trademarked slogan of “Keeping the Promise” hence naming the reinsurer after the Latin for the word promise, Promissum Re.
Promissum Re is “100% dedicated to providing reinsurance capital to UPC Insurance via third-party investors,” Forney continued.
He likened it to the ACE – Blackrock reinsurer ABR Re, saying Promissum Re is “very similar to that transaction, although I think ours was done first.”
“I’m not saying that ACE and BlackRock copied us but we were working on this for a year,” he said.
United worked with a partner on establishing the vehicle, Forney said, and the partner helped the insurer to attract third-party investors to allocate capital to the vehicle raising around $90m in the process.
“I think we ended up with $90 million into it spread across our programme,” continued Forney, adding that the vehicle features a profit share in it meaning that United will recoup some of the premiums if the Promissum Re vehicle can go loss-free for the year.
Promissum Re helps United to gain access to capital market investors, while also offering the investors with access to the returns of reinsurance business that they had been seeking, Forney said; “It’s a neat way to get access to independent investors who may find an inability to deploy capital into the increasingly competitive reinsurance space but want to deploy capital.”
“It’s a really neat mechanism, it will be in place in future years, has lots of flexibility on what we can do with it and we are really excited about it,” Forney stated.
CFO of United Martz explained the investor base backing Promissum Re as; “typical sort of third-party capital investors of pension funds and others that are looking to deploy money into the reinsurance space.”
Over time these internal reinsurance vehicles will likely become mainstays of some re/insurers programs, as they allow for greater value to be extracted from the firm’s underwriting, while enabling lower-cost reinsurance capital to be tapped.
Sidecar, internal reinsurance vehicle, quota share vehicle, fully funded captive reinsurer; whatever you want to call these initiatives they look destined to be a growing trend in the marketplace.
Having Promissum Re fully-collateralized by investors makes perfect sense, rather than seeking to raise equity capital or self-funding the reinsurance vehicle like a captive. Investors have a strong appetite for the risk, the capital is efficient and the profit share mechanism will allow United to benefit greatly in loss-free years.
As these internal vehicles gain scale for the companies that set them up, they could prove a much cheaper source of reinsurance capacity than going out to the traditional marketplace. In United’s case, it also allows the insurer to develop relationships with third-party investors such as pension funds which is another plus.
These vehicles are another example of the structural change being seen across the reinsurance market, being driven by the use of capital market investor money and new structural approaches to reducing costs of risk transfer, increasing efficiencies and extracting more value from the underlying risk.
United has shown that it is forward thinking in being one of the first to establish such a vehicle in Promissum Re. It certainly won’t be the last to do so.