6 February 2020ILS

Prospero Re plans operating model restructure: KBRA

Prospero Re plans to restructure its operating model to retain the benefits of the collateralised reinsurance model while adding an element of leverage that is more reflective of traditional reinsurers, according to Kroll Bond Rating Agency (KBRA).

KBRA was writing in a note in which it assigned an insurance financial strength rating of A to Prospero Re, a Bermuda Class 3A licensed reinsurer that is registered as a segregated accounts company and wholly owned by ILS Capital Management.

Prospero Re provides fully collateralised reinsurance protection for ILS Capital’s institutional fund, The 1609 Fund.

Prospero is making the changes to address concerns about the opportunity cost of collateral trapped by the catastrophe events of 2017 and 2018, KBRA said.

Reinsurance contracts will be collateralised 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 supporting the tail risk of the collateralised reinsurance contracts to slightly more than a 1 in 1000-year event. This will bring greater diversification as additional types of risk are added to the portfolio, according to the rating agency.

The proposed business plan has yet to be approved by the Bermuda Monetary

Authority (BMA), KBRA warned, with its current license prohibiting it from implementing such changes without prior approval. It is also unclear what investors will make of the changes, KBRA added.

“The BMA is generally receptive to new, innovative ideas,” KBRA said. “However, the timing may be inopportune as collateralised reinsurance is currently out of favor among investors.”

Prospero Re’s rating, the outlook for which is stable, reflects Prospero Re’s sound capitalisation, seasoned management team and collateralised reinsurance structure, KBRA said.

Prospero Re was incorporated in late 2013 and offers both catastrophe and non-catastrophe reinsurance coverage to re/insurance companies globally. It writes coverage for property, marine, offshore energy, aviation and other sectors.