Multi-Strat Re Ltd. has been approved by the Bermuda Monetary Authority to serve as a Special Purpose Insurer in Bermuda and act as the master reinsurer for a number of other reinsurers that participate in our program.
Our Swiss owned parent has made a considerable investment in legal R&D and infrastructure to provide a turnkey solution for asset managers who want to follow Buffett, Einhorn, Loeb, and Cohen into the reinsurance business whereby the asset manager gets to manage all of the investable assets of the reinsurer without having to commit the considerable amounts of internal resources and capital that Einhorn, Loeb, and Cohen did or incur the substantial compensation guarantees and deal risks that they had to undertake.
The typical investment centric reinsurer requires a commitment of internal resources for 18 months to two years and costs more than $1 million to launch if an offering memorandum is needed to raise capital from investors unaffiliated with the asset manager. If the launch requires reinsurance executives to be on board in order to raise capital, compensation guarantees may be as high as $25 million (in the case of Max Re) and the minimal capital target may have to be as high as $500 million to attract reinsurance talent and/or absorb the compensation guarantees.
Despite these non-trivial hurdles, success can be worth the effort. These reinsurers are a virtual certainty to outperform funds and managed accounts managed by the same asset manager in an identical style and can provide daily liquidity for investors (instead of lockups, notice periods, and periodic redemption restrictions) if they become publicly traded.
Aside from outperformance and daily liquidity, there is a tertiary benefit for taxable investors in in the UK, Canada, Australia, the U.S., and many other jurisdictions. Taxable investors in the UK, Canada, Australia, and many other jurisdictions are taxed at higher rates in funds and managed accounts than they will be taxed for identical returns in a reinsurer. In the U.S., taxable investors are taxed annually on returns, often at ordinary income rates, but will only be taxed on sale of their shares in a reinsurer and at much lower capital gains rates.
Furthermore, the asset manager significantly increases AuM from sources otherwise unavailable to him or her and secures permanent capital so that he or she never has to face the fates of Tiger and Pequot, which were once the largest hedge funds in the world but went out of business when poor performance or reputational issues and their attendant redemptions caused a run on the “bank”.
Unfortunately, the hurdles to a successful launch are so significant that many, many, many more asset managers have tried and failed to launch a reinsurer than have succeeded, but no one ever reads about the failures. By contrast, reinsurers participating in our program can be operational in roughly 90 - 120 days (instead of 18 months to 2 years) for startup expenses of $100,000 (instead of $1 million).
Furthermore, we provide the managerial infrastructure so that no compensation guarantees are necessary and our Participating Reinsurers can recover their startup costs and outperform the asset manager’s funds or managed accounts by the end of the first year with as little as $2 million in equity capital, $1 million of which is provided by our parent as part of its commitment to our asset manager partners.
As the master reinsurer, we assume risks from multiple sources such as: (1) Captive insurers; (2) Profitable, growing, privately held insurers and reinsurers, where a capital shortage inhibits growth; (3) Profitable, privately held insurers and reinsurers, where shareholders want to take capital out and redeploy it in another investment without undermining the insurer or reinsurer; (4) Insurers and reinsurers under regulatory capital or ratings stress, particularly when Solvency II is implemented in 2015; and (5) Publicly held insurers and reinsurers that would like to make an actuarially asymmetrical earnings play.
We then retrocede all of the risks we assume (reallocate the premiums) to our Participating Reinsurers. Because we are not rated, we must fully collateralize all of our limits with letters of credit from highly rated banks.
Once our parent has made the initial investment to provide the statutory capital to obtain a license for a Participating Reinsurer, the remainder of the initial capital comes from some combination of the asset manager, his or her investors, and/or his or her funds and the sponsoring asset manager will manage all of the investable assets of that reinsurer. The diagram below illustrates the concept:
There are several analogies for this model. In one sense, we are an incubator allowing a reinsurer to start small, access expertise and opportunities only available to much larger reinsurers, let its Sponsor learn by doing, prove the concept without having to raise hundreds of millions of dollars at the outset or make significant compensation guarantees without assurance that the capital can be raised, grow at its own pace, and transition to a fully independent reinsurer with its own staff, capable of being publicly held and weaning itself away from us.
In another sense, we are the reinsurance equivalent of a fund of funds. Reinsurance premiums come into the master reinsurer and are then reallocated to each Participating Reinsurer. Finally, we are also analogous to Lloyds: one (re)insurer takes the lead on a given risk and syndicates the balance of the business to other Lloyds’ members.
The aggregate capital of our Participating Reinsurers should enable us to assume a large number of risks and gives each Participating Reinsurer the benefits of diversification from a broader portfolio of risks than it could access on a standalone basis. The magnitude of this aggregate capital should grow exponentially over time and we expect to become a top 50 global reinsurer within 5 years.