Bermuda reinsurer, Montpelier Re, established an asset manager in 2012. It manages a variety of vehicles including funds that are listed on the New York and London stock exchanges. Its President and Chief Executive Bill Pollett spoke to InsuranceLinked about their franchise and developments in the ILS market. He started by explaining the genesis of Blue Capital.
Montpelier has a long track record of leadership and innovation in the alternative capital space, partnering with the capital markets for ten years now. In 2004 we created a vehicle, called Rockridge, in partnership with a hedge fund which managed the assets and we spliced in some remote attachment reinsurance risk. In many ways that vehicle was ahead of its time and looks very similar to the wave of hybrid hedge fund reinsurance vehicles launched a decade later.
Then, in late 2005, following Katrina, we launched a vehicle called Blue Ocean, a collateralized retro vehicle created in partnership with pioneering investors to provide much needed retrocessional capacity to a dislocated market. Blue Ocean was closed and the capital returned when the dislocation opportunity receded in 2007. In 2007,we sub-advised the first listed closed-end fund to include a cat bond portfolio and, in the last five years, have created a number of bespoke private sidecars for a variety of investors.
In early 2012 we decided the time was right to launch a dedicated asset management platform to attract longer-term capital. We felt our reinsurance expertise and track record were well suited to constructing attractive portfolios for investors looking to access the asset class. At the same time, our core insurance company clients were looking for collateralised reinsurance protection in addition to rated protection, and if we didn't have a product to offer we felt like we'd be missing out on business opportunities.
What makes Blue Capital different from the other insurance-linked funds out there?
One key differentiator is our partnership with Montpelier Re. This partnership provides us the systems and infrastructure to price and manage risk efficiently as well as access to the entire market and affords us the flexibility to write business direct on a collateralized basis or, by leveraging Montpelier’s rated paper, on a rated basis, where that makes more sense.
Another key differentiator is where Montpelier and Blue Capital play versus a typical ILS fund. Our approach is more focused on traditional reinsurance type products with the smaller insurance companies, rather than on the more commoditized end of the industry.
How effective has the listed funds structure been?
They have been a great success because they have enabled us to tap into a different set of investors which were underserved by some of the standalone ILS funds. For example, there are investors who can only invest in a fund where there is a secondary market, where there is pricing transparency. So their investment policy effectively precludes them from investing in some of the standalone private funds.
The listing also provides us with a pool of permanent capital, which is very attractive in terms of deploying that capacity to our core clients on a longer-term basis.
We manage two listed products, but we also have private offerings, including open-ended commingled funds which we've seeded for a number of years and which we’re looking to grow over the coming years. When we meet investors we focus on the underlying asset class, which is natural catastrophe risk, but we like to provide them with a menu of options to access that risk.
How do investors view the choice of allocating money to an independent fund versus a fund associated with a reinsurer?
Some of the independent funds might say: "Never invest alongside a reinsurer because there's always going to be a conflict of interest and they're always going to put the risks they don't want on their own balance sheet into your fund". That's the head wind we've got to sell against.
Our response is, “Yes there is an inherent conflict of interest and you have to invest with your eyes open, but with proper controls and procedures, proper transparency and disclosure you can mitigate that potential conflict”.
In our opinion, the potential disadvantage is far outweighed by the benefit of partnering with a reinsurance company that is a recognised leader, which has access to the whole market, providing access to proprietary systems which provide a key competitive advantage. To be able to leverage that infrastructure, to have access to business and that suite of risk management expertise and pricing tools significantly outweighs the disadvantage of any inherent conflicts.
Our structure is a little bit different from many of the hybrid reinsurance models in that the Blue Capital is client-facing, transacting directly with the brokers and their clients. The broker and client decides what business to direct to Blue versus what business goes to Montpelier Re. Importantly, no Montpelier Re underwriter has the authority to allocate business to Blue Capital.
Is an adequate price being charged for catastrophe risk at present?
In our view, there are some areas that look less attractive than others and there are areas where we wouldn't write business. But everyone has their own view on how to price risk and volatility. It is important to make sure the investor properly understands the expected returns and risk so that they can make their own judgement as to whether that investment makes sense.
The segments that tend to be easier to access directly by the capital markets are seeing the most margin compression, with cat bonds and collateralized retro being the most extreme examples. You've seen spreads on cat bonds trading near all time lows due to the imbalance between supply and demand.
What makes the current market particularly interesting is that there are different pools of capital with different return requirements and risk profiles competing for the same business.
Is there any concern that investor appetite could wane?
The majority of the investors we speak with are highly sophisticated and are able to see the value of the asset class from a relative position. If investors continue to view catastrophe reinsurance as providing attractive value relative to other asset classes that will continue to be attractive. That equation changes as rates in our industry go up and down, as it does as risk premium in other asset classes change.
The big question is whether the wall of capital will evaporate after the next big event and we believe the answer to that is absolutely not. There's a lot of smart money out there, ready to allocate capital when the rate environment improves. They're waiting for the catalyst, another big event.
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Posted: Monday, July 28th, 2014