May 2, 2020
New York, New York – Kroll Bond Rating Agency (KBRA) assigns an insurance financial strength rating (IFSR) of A to Prospero Re Ltd. (Prospero Re). Prospero Re is a Bermuda Class 3A licensed reinsurer, registered as a segregated accounts company, wholly owned by ILS Capital Management Ltd. (ILS Capital). Prospero Re is utilized in the provision of fully collateralized reinsurance protection for ILS Capital’s institutional fund, The 1609 Fund Ltd. The Outlook for the rating is Stable.
The rating reflects Prospero Re’s sound capitalization, seasoned management team and collateralized reinsurance structure. Prospero Re was incorporated in late 2013 and offers both catastrophe and non-catastrophe reinsurance coverage to a wide range of insurance and reinsurance companies across the globe, predominantly in the United States, Europe, United Kingdom, Canada, Japan, and Australia. Business assumed includes property, marine, and offshore energy, as well as aviation and other sectors within the reinsurance market. In order to address concerns about the opportunity cost of collateral trapped by the catastrophe events of 2017 and 2018, the company is planning to restructure its operating model so that it retains the benefits of the collateralized reinsurance model while adding an element of leverage that is more reflective of traditional reinsurers.
Collateralized reinsurance typically refers to reinsurance contracts that are fully collateralized by investors or third-party capital providers. The capital from the investors plus the premium from the ceding company equals the contract limit dollar for dollar. Under Prospero Re’s revised operating model, reinsurance contracts are to be collateralized by investors to a 1 in 500-year event. The remaining investor funds will be used to assume additional business, creating moderate underwriting leverage, and to support the tail risk of the collateralized reinsurance contracts to slightly more than a 1 in 1000-year event. Prospero Re’s new operating model will bring even greater diversification as additional types of risk are added to the portfolio. Moreover, Prospero Re has a lean, but seasoned management team with nearly 300 years of accumulated experience in (re)insurance and investment management.
Balancing these strengths are Prospero Re’s execution risk, model risk and limited market position. The proposed business plan has yet to be approved by the Bermuda Monetary Authority (BMA); Prospero Re’s current license prohibits the company from implementing this new plan until approval is granted. Additionally, full market acceptance by both investors and ceding companies is undetermined at this time. KBRA notes that the BMA is generally receptive to new, innovative ideas; however, the timing may be inopportune as collateralized reinsurance is currently out of favor among investors. KBRA also notes that while a reduction in collateral may on the surface seem unattractive to ceding companies it still provides enhanced counterparty credit over traditional reinsurance terms and conditions. Further, Prospero Re is exposed to model risk, both from commercially available catastrophe modeling software used in pricing catastrophe covers and from its own proprietary risk management system. KBRA notes that Prospero Re is a small competitor in a large market, dominated by well-capitalized companies with established franchises, some of whom have significant presence in the alternative capital market.
The Stable Outlook reflects KBRA’s expectation that the BMA will approve Prospero Re’s revised business plan as presented to KBRA. Additionally, KBRA expects Prospero Re to maintain sound capitalization and retain its management team while balancing various stakeholder expectations so the company can maintain a BSCR (ECR) ratio within its target range over the medium term.
Full report available on www.kbra.com.