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Insider in Full: Ex-Odyssey underwriter O’Connell seeking up to $1bn for monoline cyber re start-up

Former Odyssey Group cyber chief Robert O’Connell is looking to raise up to $1bn of capital to launch a monoline cyber reinsurer, this publication can reveal...

Sources told this publication that O’Connell has engaged Bank of America Merrill Lynch to work on the raise for the start-up vehicle, which is being branded as Cyber Re.

The cyber market is currently suffering from a lack of capital, with particularly acute challenges at the reinsurance level, creating real client need for new markets writing the line.

The challenges of securing sufficient reinsurance capital to support a primary market that is seeing structural growth primarily reflects the fact that cyber reinsurers sit at the apex of the market’s acute risk aggregation problem.

O’Connell and Bank of America have been pitching the enterprise to a range of private capital, and the start-up CEO has told potential backers that the business could be trading as soon as the January 1 renewals.

A number of private equity sources expressed scepticism around the fundraise given that a cyber reinsurer has huge downside in a cyber catastrophe, like a cloud outage, reflecting the accumulation of exposure between different clients.

The cyber market is currently highly focused around finding a solution to the issue of the aggregation of catastrophe risk. Beazley is currently working on a cyber cat definition with a view to potentially sub-limiting risk, while Chubb is working to create separate “risk” and “cat” policies.

Other initiatives are also underway elsewhere in the market to seek solutions to the need to define, delineate and price for cyber cat risk.

But to date the issue has not been effectively addressed, and most players are seeking to handle this by charging a risk premium, controlling aggregates and balancing cyber cat risk with diversified exposures from other lines.

O’Connell was global cyber practice leader for Odyssey for around five years. He joined the Fairfax Financial business from Chubb, where he worked between 2011 and 2016.

Raising money for balance sheets has been challenging since a fundraising burst in 2020 and early 2021, spurred by the hardening market and the pandemic. Balance sheet investments in insurance have performed much worse for private equity than capital-light businesses like brokers and MGAs.

Cyber, however, is currently a hot area – something which may fuel expectations that investors can be found for an ambitious start-up.

The cyber reinsurance market in particular has seen hard market conditions for the past 18 months – reflecting the supply-demand imbalance amid tight availability of capacity.

The predominant structure is quota share, where reinsurers are benefitting from surging underlying insurance rate rises and are able to negotiate sharp reductions in ceding commissions.

In the underdeveloped aggregate stop loss market, the rate on line is in the region of 20%, according to the July renewal rate figures published by Gallagher Re.

Cyber insurance rates started to surge in the fourth quarter of 2020 after an unexpected increase in ransomware attacks, and the market has fundamentally re-rated since.

  

 

Rate rises peaked well in excess of 100% but are trending down closer to 50% now with clients as they face their second round of punitive increases.

The combination of rapid rate rises, structural growth and the adjacency to technology have generated investor excitement around the fee businesses operating in the space.

MGA CFC secured a valuation of £2.5bn – equivalent to more than 40x Ebitda – when it sealed its equity refinance with EQT last October, as this publication revealed.

And – even as other InsurTechs struggled amidst a massive correction in tech – cyber MGA Coalition succeeded in securing a $5bn valuation through a Series F funding round.

O’Connell declined to comment. Bank of America Merrill Lynch had not replied to a request for comment at the time of going to press.

 

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