ACE & Blackrock’s ABR Re files offering to raise $800m to $1.3B

ABR Reinsurance Capital Holdings Ltd., the much discussed joint venture reinsurer from insurer ACE Limited and investment bank Blackrock, has filed a securities offering which suggests that the reinsurer will look to raise between $800m and $1.3 billion of capital for launch.

ABR Reinsurance Capital Holdings Ltd. is perhaps better known as ABR Re, they have actually filed a trademark for ABR RE, and is the hybrid reinsurance vehicle that ACE is setting up with the assistance of Blackrock.

ABR Re will act as a Watford type vehicle for ACE, allowing the insurer to cede business to it in a sidecar or perhaps captive type approach, as well as underwriting new business through it, while Blackrock will manage the asset side of the business with a strategy designed to help it outperform.

It seems to us here at Artemis that the strategy is designed to help ACE realise more of the profits from the business it underwrites and cedes to ABR Re, by removing the need to reinsure it traditionally and also seeking an improved return on the asset side.

ACE will also benefit from profit commissions on the business underwritten, said to be as much as 50% when ABR Re is profitable. For Blackrock, who its thought will operate a more aggressive, perhaps hedge fund style approach to the investment portfolio, a typical investment management commission and profit share will be earned.

According to a notice of exempt offering of securities filing with the SEC, ABR Reinsurance Capital Holdings Ltd. is seeking to raise between $800m and $1.3 billion to capitalise ABR Re for launch.

The filing, while a placeholder, perhaps gives some hints on the capitalisation that the vehicle will have for launch. It also shows who’s helping to raise the funds, naming Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. LLC and Morgan Stanley Smith Barney LLC.

It seems that $1 billion is the likely target point for the capital raise, with the document basing estimates of commission to be paid to the brokerages of $16.24m, based on that being 2% of gross proceeds of $1 billion with the promoters buying 18.2% of the shares. The document also estimates another $10m being paid to the promoters for ‘costs’.

The offering document, which is the first SEC filing by ABR Reinsurance Capital Holdings Ltd., doesn’t give away anymore than that, but it shows the development of the ACE Blackrock joint venture continues apace.

ABR Re has been marketed to investors for a while now, a presentation has been doing the rounds. The list of promoters would suggest that it’s being offered to both institutional and also more retail type high-net worth investors as well. The offering cites a $250,000 minimum investment, but smaller investors may be able to access ABR Re’s equity through advisors who bundle clients capital together.

The ABR Re set up has received a lot of attention, partly as it brings together many structural techniques with elements of a captive, a reinsurance sidecar, a hedge fund reinsurer and as it will be backed by third-party capital. But also because it will disintermediate the traditional reinsurance market to a degree.

The business ceded by ACE to ABR Re will effectively never make it to the traditional reinsurance market anymore. With ACE a major insurer, ceding significant amounts of premium into the reinsurance market, the removal of a chunk will only serve to add pressure to reinsurers already facing a challenging environment.

With the vehicle backed by third-party investors it brings another source of capital into ACE’s capital structure, while ABR Re will operate a more efficient business model thus reducing the effective cost of this reinsurance capacity to ACE.

It’s another sign of innovation and disruption in the reinsurance market, a market which is perhaps evolving quicker than ever before right now.

Part of the reason for this increasingly rapid evolution and structural change is of course the influence of insurance-linked securities (ILS) and alternative reinsurance capital, which has demonstrated how efficient capital can be put to work underwriting risk.

As capital becomes more efficient and mobile and increasingly looks to access the returns of insurance and reinsurance business we’re likely to see incumbents launching new initiatives like this, to benefit from lower-cost capital, retain more of the profit from the business they underwrite, and further disintermediate the traditional markets.

Most major primary insurers are actively looking at how they can leverage third-party capital and retain more profit from the risks they underwrite. ABR Re will likely just be the first of many new reinsurance vehicles that launch in the coming years, with a variety of twists on this strategy expected as insurers look to bring new capital into their businesses more permanently.