Itasca Re’s secret sauce—made in Bermuda

A key reason for new re/insurers to choose Bermuda as their domicile of choice is to satisfy investors seeking a robust regulatory environment—as well as an infrastructure packed with talent and know how in the risk transfer space. It is also a place packed with capacity—a double-edged sword for a reinsurer pioneering into a new(ish) asset class.

That is the view of the chief executive officer of Itasca Re, a new reinsurer launched on Bermuda, which will offer insurance financing solutions to buyers and owners of commercial aircraft assets.

Kostya Zolotusky is an aviation industry veteran who most recently led the Integrated Finance Linked Insurance (IFLI) division of Piiq Risk Partners, an insurance broker focused on the aviation sector associated with The Ardonagh Group.

He has embarked on the venture with the backing of Castlelake, a global alternative investment manager specialising in investing in, financing and managing aviation assets, especially aviation assets. Itasca Re will look to enable competitive financing rates for aircraft asset buyers by transferring the non-payment risk traditionally held by financiers to third parties via an insurance policy issued by Starr Insurance Companies that is reinsured by Itasca Re and other potential third-party reinsurers.

As to why he chose Bermuda first, Zolotusky said it was an easy decision for him—and one embraced by investors seeking high standards.

“I am familiar with Bermuda, its credibility and track record of being truly exceptional from a regulatory standpoint,” he said. “But that was also the case with our investors. We’ve shown them the economics of alternatives, and they absolutely wanted that level of conservatism, the strictness of Bermuda’s regulatory environment relative to others. It was never really a debate.”

The overarching decision was around the quality of the Bermuda Monetary Authority’s (BMA) regulatory infrastructure and track record. He added that the BMA was very responsive during the formation.

“A class 3B reinsurer is a pretty big beast. Ours was unusual in the amount of maths and actuarial analysis that went into it, but the speed with which BMA came back with questions, supplemental questions—and was response—was impressive. They clearly digested everything quickly. They were exceptional,” Zolotusky said.

The talent on Bermuda was also important, he added. “The people part was very important. There is a depth of talent here, whether it’s setting up the local accounts, managing the audit processes, or the compliance processes. There are endless infrastructure elements that essentially make the life of our team much easier because those skills are core to the Island.”

Many of the operations will be managed by Strategic Risk Solutions (SRS) on Bermuda, which Zolotusky describes as Itasca Re’s strategic risk partner. “It was important that we could concentrate on being a specialty reinsurer with our core expertise in aircraft and aircraft finance—and how to structure and manage that risk. But we did not want to have to build an in-house capability to properly manage a reinsurance company.”
As of early 2023, the Itasca Re team was five strong, with senior management based in the US or UK. Its footprint on Bermuda represents its back office capability for now, with board meetings also held there, but he expects this footprint to expand with an executive presence also moving on the Island, commensurate with the scale of the business. He suggests the team in Bermuda could reach 10 to 12 in the medium term with a much bigger network of advisers.

Copycats?
Now the company is up and running, Zolotusky eyes big potential for its growth—and the possibility of becoming a catalyst for an entirely new asset class on Bermuda. He is clear that what the company is doing is intricate and complex, but it is already seeking quota share arrangements with other reinsurers. Once these take shape, he would not be surprised if others start to take a closer look at the asset class.

“That would take time. The reason we wanted to create our own capacity is that it is so complicated. But I also imagine a momentum being created,” Zolotusky said.

“There can always be an element of a herd mentality: if you do enough volume of something, people notice and come in. Markets are efficient in that sense. Generally, markets notice if somebody’s doing a lot of something, and they seek opportunities.”

He reiterated the complexity of the asset class. “It can be hard to connect the regulatory environment, the insurance structuring environment, and aircraft aviation market expertise.

“Yes, it is a secret sauce and that means I’m pretty relaxed. But it’s not that simple either. I could describe the secret sauce and still sleep well, because whoever was listening to the recipe is still not going to be able to replicate it,” he said.

The sector has another thing in its favour. In the context of COVID-19, when international travel virtually stopped, the sector went through the biggest market disruption ever. Yet it had no real losses. “It is a staggering data point that you are not losing your premiums even through an order of magnitude larger than the market has ever seen previously,” Zolotusky said.

Then there is the size of the opportunity. He estimates that the market is worth somewhere between $150 and $200 billion a year annually of aircraft that need to be financed or refinanced. It was back in 2016 that he first pioneered the idea of bringing insurance into aircraft finance, complementing the banks and export credit agencies.

Over time, the importance of insurance has become greater, becoming more important when commercial markets are dislocated. At present, the participation of the insurance industry in that $150 and $200 billion is only around 7 percent. This means a lot of room for growth.

“Our view is that over the next decade, there should be no reason why the broader insurance market does not get to somewhere in the 25 to 30 percent type of annual participation, which means quite a bit of both premium and underwriting.

“Our ability on the Itasca side is to originate volume. We think we will start with a billion-plus in underwriting and we’ve been going only for a few months. So let’s see where this goes,” he concluded.