AQR Capital Management to exit reinsurance business

Global investment-management firm AQR Capital Management told Artemis today that it has decided to exit the reinsurance business and wind-down its AQR Re unit.

AQR Capital Management has been operating in the reinsurance space for around three years. AQR Re Management, its Bermuda-domiciled reinsurance linked investments business, had around $400m of third-party assets invested in the space through two ILS funds it manages, with some more managed through AQR itself.

The reason for the exit from the reinsurance business is perhaps understandable, given the fact that AQR Capital has over $130 billion invested for mainly institutional clients in alternative asset classes. As a result the reinsurance business, while an attractive one has always been a small piece of the overall asset manager.

AQR told Artemis that the reinsurance business and its relative returns remain attractive, but that given the way the market’s fundamentals have moved it worries about the ability to continue to put clients’ money to work in the quantity and quality of business that will enable it to generate the risk-adjusted returns it desires.

With the way the reinsurance market has changed structurally this makes perfect sense, as maintaining the quality of business and access to sufficient business, in order to satisfy clients and maintain the portfolio is only going to become more challenging.

An AQR Capital Management spokesperson told us:

“The fundamentals of the reinsurance industry have changed significantly since AQR’s entrance into the business in 2011. While the diversification benefits and relative returns of reinsurance as an asset class remain attractive, we have come to the conclusion that due to consolidating market dynamics, it will become increasingly difficult to put larger amounts of capital to work to achieve attractive risk‐adjusted returns for our investors, and ever more important to be in multiple lines of business, many of which we are not currently in. Accordingly, we have decided to wind up the AQR Re business and will cease writing any new or renewal business after April 1.

We are pleased that AQR’s reinsurance business has performed consistently across both of its funds, having provided investors with annualized net returns of 4.7% and 15.8% respectively, since its inception. We thank CEO, John Lummis; Chief Underwriting Officer, Martin Vezina; Chief Actuary, Lester Pun; and the entire reinsurance team for their dedication and contributions to the firm.”

This news is certain to cause considerable discussion both in the insurance-linked securities (ILS) space, as well as in Bermuda where much of the AQR reinsurance activities have been carried out.

AQR told Artemis that the portfolio would be wound down after April 1^st, with risks being held until run-off. In that time a core team will be kept on to manage the reinsurance business.

The AQR Capital Management representatives we spoke with said that reinsurance does still interest the firm and that it would not rule out re-entering the space, but likely in a different way.

As a major global asset manager, AQR could find its services in demand from large insurers or reinsurers that may want to partner to create some kind of joint-venture vehicle. Perhaps for AQR that would be a more profitable opportunity than directly managing portfolios of risk, more aligned with its core asset management competencies and also maybe more likely to happen once the potential conflict of its own reinsurer is wound down.

The key message from AQR is that this decision to exit reinsurance is less about the returns and attractiveness of the reinsurance business, which it believes remain clear but are more about being able to maintain growth and a target run-rate within the space when the future looks increasingly challenging and pressured.

Perhaps better for AQR to exit from a sector that is not its core focus now, than to end up embroiled in increasingly challenging reinsurance renewals in the future where deploying its capacity may become more difficult.

When you have a $130 billion asset manager, a much smaller reinsurance linked investments unit may look like a bit of a distraction at times. No doubt AQR will maintain investments in the reinsurance space, and perhaps we’ll see them emerge as a partner in a joint venture some years down the line.