Bermudian start-up Validus Re has entered into a two-year, quota-share reinsurance contract to cede 75% of its marine and offshore energy business to Petrel Re, a newly-created sidecar. The arrangement had been in the pipeline for between four and five weeks.
Bermuda-registered Petrel Re is a $200 million special-purpose vehicle backed by investment funds managed by First Reserve Corporation, a global investment portfolio of diversified energy firms with $4.7 billion of assets under management.
Ed Noonan, chairman and chief executive of Validus Holdings, explains that this arrangement will allow the reinsurer to increase its capacity to write certain types of marine and offshore energy risks, and give private equity investors the chance to capitalize on short-term opportunities as rates harden in catastrophe-affected lines.
“First Reserve saw the same opportunity as we did,” says Noonan. “It is simply that there was a commonality of interests, which allows Validus Re to establish a bigger presence in the market than we could on our own.”
Like other recent sidecars, Petrel will provide retrocession cover solely to Validus Re for a fee. This was the model adopted by Cayman Islands-based sidecar Rockridge Re, for example, which provides cover solely to Bermudian reinsurer Montpelier Re.
Petrel will pay Validus a reinsurance premium for generating the business based on a percentage of the original premium, a consideration for underwriting the risk, and a profit commission based on the performance of the business over the 2006 and 2007 underwriting years of account.
Noonan adds that the two-year deal could be extended and is not necessarily limited to marine and energy. As well as marine and energy business, Validus writes property-catastrophe, property per risk, property retrocession, aviation and satellite, war and terrorism, workers’ compensation, and other speciality short-tail lines. “There is always the potential that if the business goes well and our interests continue to be aligned, we might consider extending it,” says Noonan.
First Reserve does not plan to seek a financial strength rating for Petrel Re because its obligations will be collateralized partly in cash and partly through letters of credit. There was no official advisor involved in its formation.
Validus was formed in December 2005 with initial capitalization of $1 billion provided by private equity firm Aquiline Capital Partners, which is run by Jeff Greenberg, and a number of institutional investors. It is rated A- by AM Best.
