The Tower Group, a U.S. insurance firm, is planning to enter a multi-year quota-share reinsurance agreement with an unnamed Bermudian reinsurer, which is in the process of being set up.
Tower is playing a big role in the formation of the new Bermuda company. It has invested $15 million in the firm, and Michael Lee, Tower's chairman, president and chief executive, will also serve as the new company's chairman, president and chief executive.
In addition, several of Tower's senior managers will resign from their posts and join the Bermuda reinsurer. These include Joel Weiner, senior v.p. of strategic planning; Robert Hedges, v.p. of home office underwriting; and Joseph Beitz, managing v.p. of program. Tower director Greg Doyle will resign from Tower's board and become a director of the new company.
Under the quota-share reinsurance agreement with the new company, Tower will cede between 25% and 45% of the premiums and losses of brokerage business that it wrote through retail and wholesale agents and traditional programme business it wrote through programme underwriting agencies. The reinsurance will cover the firm for three years but the reinsurer can cancel the agreement after two years if certain loss ratios are exceeded.
The firm expects the ceding commission for the brokerage business to be 34% of ceded written premiums. This may increase or decrease in future years depending on the loss ratio of the business and other conditions. The company expects the ceding commission for the program business to be 30%, which may increase depending on the loss ratio.
As well as the quota-share arrangement, Tower is also planning to enter pooling arrangements with U.S. domiciled insurance firms that the new Bermudian reinsurer's parent company may buy in the future. Under these proposals, Tower would manage and participate in between 55% and 75% of pools consisting of brokerage and traditional programme business. Tower expects to reduce the amount of premiums and losses it cedes under the quota-share arrangement once this pooling agreement is in place.
Tower is also planning to participate in between 15% and 25% of a pool set up and managed by the future U.S. insurance subsidiaries of the Bermuda parent company. This pool will consist of speciality program business that Tower has not written before.
Tower's fee for managing the pooled brokerage business will initially be 34%, which could be increased or decreased based on the loss ratio or other events. It will receive a 30% fee for managing the pooled traditional programme business. The future insurance subsidiaries of the Bermudian parent company will receive a 30% fee for managing the pooled speciality programme business, which can be increased based on the loss ratio.
The new Bermudian reinsurer appears similar to a so-called sidecar reinsurer. Several of these were set up at the end of last year, and are designed to remove some of the risk of the forming company to free up capital. They typically only accept business from the company that created them.
Bermudian insurance group XL Capital set up Cyrus Re, which has $500 million of capital, to take on some of its property-catastrophe business. Fellow Bermudian group Arch set up Flatiron Re to take property-catastrophe quota-share exclusively from Arch. And Montpelier Re set up Blue Ocean Re to take its retrocession business. Blue Ocean is different from the others because it will also accept business from reinsurers other than Montpelier.