Harrington Re to optimise “both sides” of the reinsurance balance-sheet

by Artemis on April 25, 2016

Harrington Re Ltd., the start-up total return style reinsurance venture from re/insurer AXIS and alternative asset manager Blackstone, will have a flexible investment strategy, helping it to optimise both sides of the balance-sheet, after it completes a proposed capital raise of $850m.

AXIS Capital Holdings and Blackstone have partnered to sponsor and launch Harrington Re, in a similar venture to ACE (now Chubb) and Blackrock’s ABR Re hybrid and investment-oriented reinsurance venture.

Harrington Reinsurance Holdings Limited has been registered as a holding company and will be 100% owner of Harrington Re Ltd., the reinsurance underwriting vehicle.

These hybrid, total return style reinsurance vehicles provide a number of benefits to their sponsors, in terms of efficiency and cost-savings, as well as another balance-sheet for the re/insurer sponsor, and access to longer-term capital for the asset manager.

AXIS and Blackstone are actively out in the market now seeking to raise $850m, according to an investor presentation seen by Artemis. With Harrington Re the sponsors are seeking to have a more flexible strategy, both on the underwriting and investment side of the business.

Most of these hybrid reinsurance strategies have to date followed relatively fixed approaches to the investment side.

The typical hedge fund reinsurer strategy sees a single asset manager investing the float, perhaps exposing the reinsurer to more downside risk, as has been seen in recent quarters with exponents Third Point Re and Greenlight Re.

ABR Re meanwhile follows a more flexible strategy, but across what were originally quite tightly defined asset classes. We can’t confirm whether ABR Re’s strategy has room to broaden this, or may already have done so.

Meanwhile Fidelis, the total return insurance and reinsurance firm launched by ex-Lancashire execs Richard Brindle and Neil McConachie, has an even more flexible approach, leveraging the underwriting side when market conditions are conducive, but ploughing money into investing when that is the more attractive use of capital. Fidelis also operates an investment strategy allowing it to allocate capital to multiple managers, with differing strategies.

Harrington Re though hopes to be even more flexible than its peers, as it seeks to combine the underwriting experience of AXIS with Blackstone’s alternative asset management platform to generate attractive risk-adjusted returns.

Blackstone will provide Harrington Re with “access to a dynamically managed portfolio of investment strategies”, while AXIS’s specialty underwriting experience will help Harrington Re gain “access to globally diversified reinsurance underwriting opportunities,” the presentation explains.

Meanwhile Harrington Re will seek to outperform by looking to “optimize both sides of the balance sheet via diversified, medium to long tailed liability portfolio and broadly diversified alternative asset portfolio.”

The presentation goes onto explain that “In comparison to other alternative reinsurers, Harrington Re’s investments will not be limited to single product categories such as long-short equity or credit.”

AXIS and Blackstone are hoping to raise $850m in start-up capital for Harrington Re, with $125m contributed by the pair ($100m from AXIS and $25m from Blackstone). The financing plans include $575m of equity capital raise and the potential for an additional $150m of preferred financing or term loans to be issued, taking the overall raise to the $850m.

The potential $150m of additional financing will be targeted at institutional investors, while the equity layer is likely also targeted at high-net worth retail type investors.

Harrington Re will operate a little like a sidecar for AXIS, taking quota shares from AXIS Reinsurance and AXIS Accident & Health. That will help AXIS to optimise its book, take greater advantage of the third-party capital balance-sheet operated by Harrington Re, and also to reduce its need to cede risk to the global reinsurance markets.

Harrington Re will also source premiums from reinsurance placed in the private market by AXIS Insurance, suggesting the vehicle will become a particularly important reinsurance counterparty for AXIS as a whole. Harrington Re will also source premiums from other third-party cedents, the presentation explains.

Harrington Re’s underwriting will cover multiple lines of business, with a focus on medium to longer tailed liabilities, including such lines as agriculture, credit, surety, liability, professional lines, property, motor and even some catastrophe exposure, as well as the risk sourced through quota shares with AXIS.

On the investment side, the portfolio will be diversified by asset class and strategy, across Blackstone products, with around 45% of the assets kept in funds with liquidity available within 30 days, in order to meet claims and capital needs. However, the presentation does note that there can be no guarantees that Harrington Re will achieve the assumed level of liquidity.

By the fifth year of operations, it’s targeted that Harrington Re will have around 35% of its assets in Blackstone UCITS strategies, which would then ensure a significant proportion of the assets are in strategies that can have daily liquidity for claims payment.

Asset classes suggested include the UCITS, liquid alternatives, long credit positions, real estate, tactical opportunities, private equity, private alternatives and real estate liquid debt.

Explaining the benefits to investors, the document explains that Harrington Re’s investment return “may be magnified by the investment of float inherent to the (re)insurance business, whereby premiums are invested during the time between collection and payment of claims, which may be several years.”

Another benefit is the access that AXIS has to longer-tailed reinsurance business, which may provide Harrington Re with the ability “to generate substantial float to invest over the long term.”

At launch, Harrington Re will enter into a 9 year agreement with AXIS and Blackstone for their services, with AXIS managing the reinsurance portfolio and Blackstone the investment portfolio. Both parties will earn their fees from performance, as well as standard agreements.

AXIS will generate standard fees on underwriting contracts, 3% of gross premium on proportional and 12% on non-proportional, as well as performance fees of 25% of Harrington Re’s underwriting profit as long as the combined ratio is under 100%.

For Blackstone, a 1.5% management fee of the net assets is applicable as well as performance fees of 20% of net capital appreciation.

The fees make these hybrid vehicles even more attractive to a re/insurer like AXIS. Overall Harrington Re will enable it to save money, retain more profit from the risk it underwrites, spend less on reinsurance, leverage another balance-sheet for underwriting growth, and earn fees on top of it.

The efficiency play in these hybrid, total return reinsurance vehicles is clear, in a challenging market as we see today this type of start-up makes perfect sense for the traditional re/insurer.

It will be interesting to see exactly how total return reinsurers like Harrington Re, and other similar ventures, participate at renewal time. Whether they wield their efficiency in order to offer very competitive underwriting capacity, or rather take a more simplistic approach and follow market rates.

Our feeling would be the latter, to begin with, but as the market pressures continue reinsurers like Harrington Re could exert some additional pressure on pricing, if their sponsors choose to make the most of their efficient operational model.

According to the investor presentation, Harrington Re will look to target an initial public offering (IPO) of its shares within 5 years, if market conditions are deemed supportive. Clearly that will also depend on results of the firm once it is up and running.

The targeted launch for Harrington Re could be as soon as the middle of the year, with the $850m capital raise offering expected to close during the second-quarter. As Harrington Re will likely start its underwriting life with a quota share from AXIS it would be straightforward for the vehicle to launch as soon as the capital has been raised.

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