Evan Greenberg, CEO of global insurance and reinsurance firm ACE Limited, said that the new joint-venture backed, captive-style reinsurer ABR Re will purely be a capacity player, following the reinsurance market’s terms.
Greenberg, speaking during ACE’s first-quarter 2015 earnings conference call, was asked about ABR Re and how the vehicle might interact with the wider reinsurance market.
Demonstrating that ACE is fully aware that ABR Re is going to be a disruptive force, essentially helping ACE to realise more of the profit from the business it underwrites while reducing the re/insurers cessions to the reinsurance market, Greenberg said that ABR Re would not provide any “benefit to the general market.”
ABR Reinsurance Capital Holdings Ltd., and the reinsurance vehicle itself ABR Reinsurance Ltd., launched recently with $800m of capital raised. ABR Re is backed by ACE Limited alongside investment bank Blackrock, with both taking minority stakes.
ACE will cede a percentage of its business to ABR Re, effectively reducing its need to use the wider reinsurance market. Meanwhile Blackrock will provide the investment strategy, seeking to make a profitable return on the investment assets and premium float.
This disruptive business model, likened to an equity sidecar, a funded captive hedge fund reinsurer, a third-party capital play and other strategies, is essentially designed to help ACE realise as much of the risk premium from some the business it underwrites as possible.
CEO Evan Greenberg is clearly aware that this benefits ACE but is to the detriment of the reinsurance market, which loses out on participating in some of ACE’s reinsurance programme, which is instead diverted to ABR Re.
First Greenberg reiterated the fact that ABR Re is, at least to begin with, only underwriting risks ceded from ACE. “In essence the only reinsurance business it will be accepting is ACE’s business,” he explained to analysts questions.
Greenberg went on to say that ACE owns 10% or 11% of ABR Re, and has one seat on the board, but that he expects the mandate of only accepting business from ACE will continue for the foreseeable future.
“The Board and the management of the company may decide differently in the future but from everything I can see right now in the next number of years, that will not be the case,” Greenberg said.
Greenberg was then asked whether ACE would be generating new business to cede to ABR Re, or whether it will simply take some of the business that is currently ceded to other reinsurers.
“ABR Re will simply be a following participant on our existing pool of treaties and the intention is they will take a share across the board,” Greenberg explained.
“They (ABR Re) will not be a leading market,” Greenberg continued. “We’re going to maintain the discipline of the third-party reinsurers establishing terms.”
That helps to increase the efficiency of the capital within ABR Re, as compared to a traditional reinsurer. Not only does ABR Re not have to originate any business, it will simply take a share of ACE’s reinsurance programme treaties, it also does not have to underwrite it to the same degree as normal reinsurance companies have to.
That helps ABR Re to have a significantly lower cost of capital, we would imagine, meaning that ACE can extract even more of the risk premium profit from that portion of its business that is ceded to ABR.
“The marketplace establishes terms for reinsurance and ABR Re will be a capacity player,” Greenberg insisted.
Greenberg was then asked whether he saw any “economic benefit” to the wider reinsurance market from ABR Re existing.
Confirming that it doesn’t, Greenberg replied; “I see a benefit to ACE’s investors, I see a benefit to the investors in ABR Re and I see a benefit to ACE. I don’t see a benefit to the general market. We did not create it with that in mind.”
Clearly ACE is aware of the disruptive effect that ABR Re will have on reinsurers, reducing the available business for the traditional market to access at renewals. Of course that also reduces the available business for ILS and collateralized players too.
However, going forwards it is hard to believe that ACE won’t utilise ABR Re as a tool to help it grow, especially if the reinsurance capital it provides is significantly lower cost. That could help ACE to expand, backed by lower-cost capital, which in turn could result in more risk for reinsurers.
So the disruption, while certainly evident now, could actually benefit the global reinsurance market over time.
Of course if ACE decides that ABR Re is the most efficient place to cede business to, and increases the proportion it transfers to the vehicle over time, then that could further reduce the risks that make it to the wider reinsurance marketplace.
Perhaps what would be most disruptive though, would be other large insurers launching similar vehicles. With most large primary players looking at third-party capital, ILS and how to extract more profit from the risk they underwrite, it seems certain that more vehicles (perhaps not quite the same) will follow.