KBRA Affirms Prospero Re’s Insurance Financial Strength Rating

KBRA affirms the A insurance financial strength rating of Prospero Re Ltd. (Prospero Re). Prospero Re is a Class 3A licensed reinsurance company domiciled in Bermuda and is wholly owned by Resolute Global Partners Ltd. The company offers both catastrophe and non-catastrophe reinsurance to a wide range of insurance and reinsurance companies across the globe, predominantly in the US, Europe, UK, Canada, Japan, and Australia. Prospero Re assumes reinsurance on a fully collateralized basis as well as against its balance sheet.

Key Credit Considerations

The rating reflects Prospero Re’s progress in its transition to becoming a levered reinsurer, strong risk-based capitalization, conservative underwriting leverage, high credit quality investment portfolio, strong liquidity profile, and seasoned management team. During 2022, Prospero Re assumed 85% (2021: 64%) of its written premium against its balance sheet. For those treaties that continue to be written on a collateralized basis, the company is focused on implementing appropriate penalties to discourage the future trapping of collateral. At end-2022, Prospero Re’s BSCR coverage ratio was 607% (2021: 523%). Both premium and reserve leverage remain materially more conservative than Bermuda peers. At end-2022, 49% (2021: 94%) of Prospero Re’s invested assets were held in cash and money market funds while 42% (2021: 0%) were held in high credit quality, liquid fixed income securities. The average credit quality was AA+ with an average duration of 0.7 years. With a current liquidity ratio of 190% (2021: 196%), KBRA views Prospero Re’s liquidity profile as strong. KBRA also believes that the collective expertise of management will be pivotal to the successful transition of the company to a fully levered reinsurer over the medium term.

Prospero Re continues to report calendar year combined ratios greater than 100% due to adverse prior year development caused by its portfolio incepting mostly at different points over the course of the year, rather than on January 1. However, accident year combined ratios have trended favorably over the past five years and appear to have stabilized around 70%, a level that compares favorably to the company’s Bermuda peers.

Balancing these strengths are the company’s limited market presence and exposure to model risk. With a capital base of approximately $160 million at end-2022, Prospero Re is a relatively small competitor in the global reinsurance market whose ability to execute on its business plan may be constrained by cedants with minimum counterparty size requirements. Prospero Re relies on vendor catastrophe models and standard actuarial methods based on historical loss information then overlays its own proprietary ReSolution™ risk management system to price, construct and manage its underwriting portfolio. KBRA notes that Prospero Re’s proprietary system has not been independently peer reviewed.

Rating Sensitivities

Favorable capital trends and an independent peer review of the company’s proprietary risk management system could result in a positive rating action.

A change in risk profile or material deterioration in the accident year combined ratio could result in a negative rating action.

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