K2 International retains Stonybrook to raise $250mn for reinsurance vehicle

Fast-growing MGA consolidator platform K2 has hired investment bank and reinsurance intermediary Stonybrook Capital to raise as much as $250mn for a new reinsurance vehicle that is intended to provide catastrophe capacity to K2 International, The Insurer can reveal.

Sources have said the two sides are out in the market for the capital raise talking to ILS investors, and are also actively engaged in discussions with some of K2 International’s existing clients to potentially participate in the new entity.

Sources alternatively described the new outfit as a sidecar and a collateralized reinsurer, which would look to provide reinsurance capacity to K2 International’s roster of clients, which sources have suggested tops 100 cedants.

The money raised would specifically be used to support clients of K2 CAT, K2 International’s property catastrophe reinsurance MGA.

K2 CAT focuses on the US, Japan, Canada and the Caribbean. The business has three property facilities for Japan and another three US cat facilities.

The Insurer previously reported that Peak Re exited its relationship with K2 this past summer, over challenges faced by the Fosun International-owned reinsurer.

K2 International was formed with the San Diego-based K2 Insurance Services April 2020 acquisition of business from Lloyd’s coverholder Pioneer Underwriters.

Its property cat business is led by David Carson, who founded Pioneer CAT in 2013 and previously worked at Hardy, DP Mann / Faraday and RA Edward.

It also has K2 Property D&F in its stable, which is backed by Everest Re capacity.

Stonybrook has made a name for itself in both the US and UK acting as an advisor - particularly in the arena of surplus notes - to cat-focused regional carriers, insurtechs, and mutuals.

The investment banking firm has been involved in a number of company formations including reciprocal exchanges, as well. In 2018, Stonybrook launched a reinsurance broking arm that has been increasingly gaining traction in the market.

The move comes as K2 International looks to capitalize on tough property cat market conditions, where heavy losses have led to an ongoing shrinking of capacity and a surge in pricing.

Industry executives had already been expecting the capacity picture for property catastrophe to remain bleak for the foreseeable future, and last month’s Hurricane Ian that devastated Florida is expected to bring the segment to the brink of a true hard market.

That has led industry executives in recent weeks to wonder where the additional need for cat capacity is going to be met - with added pressure on (re)insurance buyers being driven by soaring inflation - and also led executives to explore ways to bring more capital into the market.

The Insurer broke the news last weekend that at least three major reinsurance brokers have been eyeing the start-up of new property cat facilities intended to help meet an expected shortfall of capacity at the upcoming 1 January renewal.

Brokers have also expressed uneasiness in recent weeks over messaging from reinsurers, and uncertainty regarding how reinsurers will ultimately respond to strained market conditions at the 1 January renewal.

Much of the uncertainty is currently being driven by the current level of ambiguity around the scope of industry losses from Hurricane Ian - with claims being slow to come in and industry players attempting to evaluate the extent to which Florida’s litigious claims environment may factor into amplifying claims values.

Earlier this week The Insurer reported that property cat behemoth MGA Amrisc had advised its capacity partners that its modeled loss for Hurricane Ian sits somewhere around $800mn.

But sources have told The Insurer that hard market conditions in the property market in recent years - referring mostly notably to a jump in the scope of deductibles - could ultimately drive industry losses from the event lower than they might have otherwise been in softer market conditions.

On Wednesday United Insurance Holdings said it was expecting a gross loss from Hurricane Ian of around $1bn, which came on the heels of publicly-traded Florida peer Universal projecting a similar level of gross losses from the storm.

K2 International is not the only business looking to deploy more capital in the strained property cat market.

Earlier this week, The Insurer also broke the news that former Guy Carpenter specialty executive Kevin Fisher was exploring a deployment of capital into the retro market, as part of his new role as president of London-based business IQUW.

K2 Insurance Services is currently engaged in a sales process, with its main private equity sponsor Lee Equity Partners looking to monetize its holding, and K2 founder Bob Kimmel looking at funding the business’s next leg of growth.

Sources have indicated that bankers involved in the deal have engaged both financial sponsors and potential trade buyers in discussions and that no formal bidding deadline has yet been set for a sale.

In an interview with The Insurer earlier this year, Kimmel told this publication that his firm was closing in on $1.4bn in premiums under management for 2022 and boasts an operating margin in the region of 40 percent.

K2 and Stonybrook declined to comment.