Montpelier Re and other investors have set up Blue Ocean Re, which will write property-catastrophe retrocession cover. Blue Ocean will offer fully-collateralised cover to companies other than Montpelier Re.
The new company has been capitalised with $300 million of common and preferred equity, with Montpelier Re investing $133 million. It will write gross aggregate policy limits above $350 million. Montpelier Agency, a subsidiary of Montpelier Re, will underwrite for Blue Ocean. John Bassett, a director of Montpelier Agency who was previously responsible for Montpelier Re's retrocessional business, will oversee the underwriting for Blue Ocean.
Bassett says the establishment of Blue Ocean will allow Montpelier to free up capital and still benefit from underwriting retrocession business. "The reason for setting up Blue Ocean was the cost of writing retro business. It seemed to us more efficient to have a separate vehicle," he says.
The retrocession market stands to benefit from the fallout from last year's hurricane season. Prices are relatively high because few players underwrite this capital-intensive line of business. Bassett says demand for retrocession cover is also likely to rise.
"Certainly the climate for the retrocession market is as good as I have seen it," he says. "There's a shortage of retro capacity and I don't think that will get any easier. There will also be increased demand. It is not just the losses flying around. Rating agencies are demanding greater protection against capital and modelling agencies are also forecasting increased pricing."
The new company does not plan to seek a financial strength rating because it will fully collateralise its obligations. Niphila Capital and CIG Re offer retrocession cover in a similar way. Bassett believes this is attractive to clients because rating agencies view collateralized cover favourably.
"From the point of view of the client, ceding out cat business in a rated vehicle uses a lot of capital. Collateralization is a more efficient way of operating this kind of business," he says.
Montpelier Re wrote $105.2 million of gross retrocession premiums in the first nine months of 2005, including $45.1 million of reinstatement premiums attributable to Hurricane Katrina losses.
