Lightyear, Lehman launch reinsurer

Lightyear Capital, Lehman Brothers Merchant Banking and hedge fund West End Capital are the latest to make a play in the reinsurance space, launching Flagstone Reinsurance Holdings with $715 million.

The string of hurricanes that battered the Southern United States last summer created a dislocation in the reinsurance marketpace – private equity is trying to fill in that gap. The latest firms to target the sector are New York-based Lightyear Capital, Lehman Brothers Merchant Banking, and hedge fund West End Capital, which together launched Flagstone Reinsurance Holdings Limited, a Bermuda-based global reinsurance company capitalised with more than $715 million (€604 million).

The formation of Flagstone follows similar private equity-backed vehicles launched in recent months. In January, The Blackstone Group, Texas Pacific Group, Thomas H. lee Partners and others plugged $1 billion into the launch of Ariel Reinsurance, and in October, Stone Point Capital, based in New York, created Harbor Point Limited to buy the ongoing business of Chubb Corp.’s reinsurance arm.

Other private equity firms to make recent plays in reinsurance include Capital Z, Aquiline Partners and hedge fund/buyout shop hybrid Highfields Capital Management, among others.

The timing of these vehicles is directly related to the catastrophes that battered the South. Hurricane Katrina, for example, dealt a significant blow to the insurance industry. That created a supply and demand imbalance between the insurers and the reinsurers, with the pricing power shifting toward latter.

David Brown, who was tapped to head Flagstone as CEO, alluded to this trend in a statement. “There is a significant demand for underwriting capacity as a result of the hardening market and the aftermath of Hurricanes Katrina, Rita and Wilma,” he said.

However, despite the rush into the space, existing reinsurers don’t necessarily thrive on catastrophe. Montpelier Re, for example, a publicly held reinsurer, recently reported a $61 million loss in the fourth quarter, versus a $102.4 million profit a year earlier, thanks largely to the damage done by the hurricanes.

Flagstone will centre its activities on the property and specialty reinsurance business, and according to a statement, the company has underwritten “a substantial amount of business” already this year.

Brown, who is serving as president and CEO of Flagstone, comes from West End, where he serves as a principal at the Bermuda-based hedge fund. West End’s founder Mark Byrne, meanwhile, will take on the chairman’s role at the reinsurer.

The investment, for Lightyear, comes less than a year after the firm poached Stewart K.P. Gross from Warburg Pincus. Gross had led Warburg Pincus’ investment in Renaissance Reinsurance prior to joining Lightyear.