Rating unchanged on ILS Capital’s Prospero Re after business plan update: KBRA

According to rating agency Kroll Bond Rating Agency (KBRA), the now approved updated business plan for ILS Capital Management’s reinsurance company Prospero Re Ltd., which allows it to write both fully collateralized and traditional reinsurance with an element of leverage, does not warrant any change to the vehicles rating.

Bermuda headquartered ILS fund and investment manager ILS Capital Management had been looking add an element of leverage to Prospero Re, to enable it to utilise the structural efficiencies that would offer, expand its product offering, and better deal with tail risk of collateralized reinsurance contracts.

Prospero Re Ltd. is wholly owned by ILS Capital Management and was first licensed as a Class 3A reinsurance vehicle back in 2013. Prospero Re now has $250 million in statutory capital.

Prospero Re received an insurance financial strength rating (IFSR) of ‘A’ from Kroll Bond Rating Agency (KBRA) earlier this year.

Now, rating agency KBRA has reviewed the rating again, in light of the recently announced approval from the Bermuda Monetary Authority (BMA) for an expansion of the operating model of ILS Capital’s reinsurance company Prospero Re Ltd.

KBRA explained that, “The Insurance Financial Strength Rating (IFSR) of A for Prospero Re Ltd. (Prospero Re) remains unchanged following the Bermuda Monetary Authority’s approval of the company’s amended business plan.”

The rating agency added that, “The planned changes to Prospero Re’s business plan were fully reflected in KBRA’s credit analysis prior to their approval.”

Further, KBRA summarises the updated business plan as giving Prospero Re the ability to, “Write non-collateralized reinsurance business while maintaining its Class 3A license.

“Under the amended business plan, reinsurance contracts will be capitalized by investors in The 1609 Fund to a 1 in 500-year return period. 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 to slightly more than a 1 in 1000-year return period.”

This confirmation provides further weight to the strategy adopted by ILS Capital Management and we understand that Prospero Re has been active in the current renewal market.

As well as opening up new demand, from counterparties seeking rated and leveraged traditional reinsurance coverage, Prospero Re also helps ILS Capital Management in other ways.

The ILS manager previously explained that implementation of Prospero Re’s amended and updated business plan would help to reduce the amount of potential trapped capital it could experience in the future.

The introduction of some leverage and the ability to write traditional, rated covers as well as collateralized reinsurance through Prospero Re should reduce the amount of capital the investment manager has exposed to trapping from major loss events.