Prospero Re exceeds expectations on business plan execution: KBRA

Prospero Re Ltd., the rated reinsurance vehicle of Bermuda headquartered ILS fund and investment manager Resolute Global Partners, (formerly ILS Capital Management), has exceeded rating agency KBRA’s expectations on the execution of its modified business plan.

Prospero Re Ltd. received approval from the Bermuda Monetary Authority (BMA) in late 2020 for an expansion of its operating model, allowing the company to underwrite collateralized reinsurance as well as traditional re/insurance with an element of balance-sheet leverage.

KBRA had said before that the revised business plan would result in a more productive use of capital and after its first year of operating the new model through 2021, the rating agency noted its shift to writing less property catastrophe reinsurance and more insurance focused risk as a positive.

ILS Capital Management changed its name to Resolute Global Partners back in early April 2022, also saying at the time that its scope of investment had expanded to include additional insurance and reinsurance related opportunities.

KBRA’s latest rating report for Resolute’s main reinsurance vehicle, Prospero Re, explains that, “During 2021, Prospero Re’s execution of its modified business plan exceeded initial expectations.”

Commenting on the execution of the modified business plan KBRA said, “Prospero Re was successful in assuming approximately 64% of its 2021 net written premium on its balance sheet, driven primarily by related insurance business along with several property catastrophe reinsurance treaties.

“In addition, Prospero Re continued to strategically shift its portfolio away from inadequately priced property catastrophe reinsurance to more adequately priced insurance.”

Highlighting that, “At end-2021, 78% of the portfolio was insurance, compared to 67% at the end of the prior year.”

KBRA was also impressed with Prospero Re’s risk based capitalisation, saying that, “Prospero Re’s end-2021 Bermuda Solvency Capital Ratio of 523% compares very favorably to its reinsurance peers with similar exposure profiles.”

KBRA also noted that the reinsurers’ premium and reserve leverage are conservative compared to peers, but noted that this is “despite continued adverse prior year development, particularly related to natural catastrophes over the past five years.”

Like many other third-party capitalised and ILS backed reinsurers, as well as traditional reinsurance companies, the last five years of natural catastrophe industry losses continue to take a toll.

But the revised business plan means the shift towards insurance risks, as well as Prospero Re’s diversification within its underwriting portfolio, should deliver earnings even when nat cat losses across the industry are higher.

Importantly the ILS-backed reinsurer has stabilised its accident year combined ratio in the high 60% range, with KBRA noting that this is, “driven primarily by the shift in the business mix to lower volatility insurance business and the reduction in property catastrophe reinsurance.”

Looking ahead, KBRA did note some potential exposure to the Russia – Ukraine conflict, with aviation war risk policies the source.

We reported on the potential for some ILS strategies that invest in specialty lines business to have exposure to the conflict recently here.

However, the rating agency said, “These policies would only be triggered if the loss of aircraft was deemed to be an act of nationalization. Through the end of May 2022, no loss notices have been received and no loss reserves have been established.

“Going forward, Prospero Re will seek to minimize aviation war exposure and focus purely on marine and energy risks.”

In addition, Prospero Re holds $3.4 million of COVID related reserves, but with no formal loss notices filed in respect to this still, these reserves are entirely IBNR, KBRA explained.

It’s also worth noting Prospero Re’s use of financing to aid it in providing liquidity to investors, something the reinsurer evidenced in its manager’s innovative securitisation of trapped capital back in 2020.

KBRA said, “To simplify providing liquidity to its investors, the Fund issued USD 25 million 5-year senior unsecured notes in June 2021 and an additional USD 25 million in November 2021. The proceeds from the notes were for working capital and general corporate purposes. Interest accrues at 4.5% per annum. At end-2021, the outstanding amount of the notes was USD 50 million, and the Fund was in compliance with all covenants under the notes.”

Prospero Re remains an interesting reinsurance vehicle in the insurance-linked securities (ILS) space and KBRA’s reports are helpful in understanding some of its strategy and how the business plan continues to develop there.

Recall, just the other week we reported that Prospero Re had made a senior appointment to its Board, in securing the services of well known insurance and reinsurance industry leader Martin Reith.