NEWS
Topsail Re mulls forming sidecar to leverage $1.5bn opportunity
A capacity shortfall has created opportunities in the US programmes market.
Dislocation caused by the exit or retraction of key players and subsequent capacity shortfalls in the US programmes market combined with hardening rates has given David Johnson, chief executive of Topsail Re, a dilemma. It is a time of potential opportunity for the reinsurer—but he is wary of deviating too far from its model of cautious growth based on long-term relationships.
“The market needs more capacity right now; we have received enquiries from brokers worth more than $1.5 billion in market replacement premium. But we’re working out if we want to handle that. We’re focused on creating a balanced book of business, so we have to look at these opportunities and consider what makes sense,” he said.
Johnson is circumspect with good reason. The privately-held reinsurer was formed in 2018 with investment from three high-net-worth individuals, including Johnson. Its core ethos is to develop a sustainable, long-term business model to serve the interests of its shareholders.
Johnson was previously a veteran reinsurance broker with JLT Re and the president and chief operations officer of Axiom Re.
Other key team members include Jay Bishop, who was formerly head of the regional practice for Arch Re; Robert Harnatkiewicz, who has also held senior roles at JLT Re and Axiom Re; Jacqueline May, who joined from Beach Re and has been associated with Axiom Re, Aon Re, and Willis Re; and Brian Green, who had previous roles at Axis Re and Arch Re.
Those hires mean Topsail has built out significant underwriting and actuarial teams with previous roles at Arch Re, RenaissanceRe, Swiss Re, SCOR, and Zurich among others. More recently, RobLee Womack took the role of senior vice president of underwriting. His CV contains stints with Argo Group, NewCo Re, Qatar Re, and Endurance Specialty.
“All our collateral comes from large well-known US banks.”
David Johnson, Topsail Re
Seeking balance
Although Topsail Re is domiciled in the Cayman Islands, it has elected to be treated as a US tax-paying entity under section 953(d) of the US Tax Code. As such, Johnson describes it as a traditional reinsurer that happens to be based in Cayman. But, because it is not AM Best-rated, it still has to post collateral under Schedule F, which addresses the admitted/non-admitted status of a reinsurer and the related collateral being held, so that its clients get credit for their reinsurance.
“We’re a balance sheet reinsurer, so we have a traditional balance sheet, and we have to post collateral as well,” Johnson says. “All our collateral comes from large well-known US banks and is sitting in the US. That gives clients the ultimate security.”
Those clients are now increasingly turning to Topsail Re following the withdrawal of some large lines of capacity in the US programmes market. Hence Johnson’s dilemma, for which one potential solution could be the use of sidecars or retro, allowing the business to source new capacity without unbalancing its existing book of business.
“The fallout is certainly making the market an even better place to operate, but we have a long-term strategy; this is a generational business. We’re very focused on capital preservation because we’re a privately-held company, so we’re not taking large opportunistic deals on which we can make or lose a bunch of money.
“As such, we don’t want to be out of balance on any part of our book of business. One solution to that, given the scale of the incoming enquiries we are getting, could be to partner with third party capital.”
“I’m a very big believer in alignment of interests.”
He stresses that Topsail Re was growing anyway—before the market capacity restriction created additional opportunities. Since its launch in 2018, its “controlled premiums” have increased from $95 million in 2019 to $530 million in 2022 and they are predicted to exceed $850 million this year. This could change dramatically, however, depending on some of the strategic decisions Johnson makes in the coming months.
“Our growth could change dramatically. We’ve logged over $1.5 billion of premium requests—all coming from brokers to replace other participants. The market needs more capacity right now, but we are cautious. We don’t want to be out of balance in any location and that’s leading us to consider sidecar capacity or using further retro where we can underwrite it.”
He stresses that, whatever it does, he wants to consider it long-term. “I’m a very big believer in alignment of interests. If anybody partners with us down the road, we’re aligned, and we’re taking a majority of the risk. That is because we think for the long term.
“You’ll never see Topsail Re exit a line of business. Will we reduce our footprint? Yes. But we’re never going to wholesale say we don’t write a line of business that we have previously committed to,” he concludes.
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