ACE & Blackrock launch ABR Reinsurance with $800m capital

ABR Reinsurance Ltd., the much discussed hybrid reinsurance vehicle, has been officially launched by insurer ACE Limited and investment bank Blackrock, having raised approximately $800m of capital, which was at the lower end of its target.

ABR Reinsurance Capital Holdings Ltd., the parent company of ABR Re, had been targeting a capital raise of $800m to $1.3 billion according to the pitch book and as we wrote here recently. In the end approximately $800m was raised in a private placement, with both ACE and a Blackrock affiliate taking minority stakes.

The announcement hails the launch of an “innovative, independent reinsurance company.” ACE Group will be the sole source of reinsurance business ceded to ABR Re, and BlackRock provide exclusive investment management services.

“ABR Re will underwrite a portion of a broad selection of reinsurance treaties that ACE places with the traditional reinsurance market and will invest its assets in a diversified and dynamic alternative investment portfolio managed by BlackRock, the world’s largest investment manager,” the release explains.

Investors in ABR Re are expected to benefit two-fold. Both from the underwriting profit generated by ABR Re’s reinsuring of a wide range of ACE’s primary insurance business, as well as from income and capital appreciation BlackRock generates through its investment management services.

ABR Re is the latest reinsurance vehicle to seek to apply a hedge fund reinsurer type strategy, matching underwriting liability durations with asset side investment strategies and seeking to outperform on both sides of the business. The total return it promises to investors should be very attractive as a result.

However there’s much more to the strategy than just launching a new investment oriented reinsurer. The launch of ABR Re is also a reaction to current reinsurance market conditions and also the evolving reinsurance market landscape.

ACE will benefit from using less international reinsurance capacity, ceding business instead into its own vehicle. That will allow ACE to realise profit from insurance business it has underwritten much further along the re/insurance value-chain. At the same time it will also negate some reinsurance brokerage costs as well.

ACE also stands to benefit from Blackrock’s investment management expertise, which will seek to outperform typical reinsurer asset return benchmarks, generating additional income for ABR Re. Effectively the strategy allows ACE to extract much more of the risk premium from the insurance business underwritten, while Blackrock will benefit from fees and profits on the investments.

William O’Donnell, formerly Senior Vice President, Distribution Management, and Global Client Executive, Global Accounts, at ACE Group, will serve as Chief Executive Officer of ABR Re.

“ABR Re is a unique company that complements the traditional reinsurance market,” O’Donnell commented. “The reinsurance market is undergoing cyclical and structural changes, driven by a substantial increase in alternative sources of capital and new risk technology including data analytics and portfolio management. ACE and BlackRock bring extraordinary vision, experience and a long-term commitment to this endeavor. ACE is a global insurer with a proven track record as an originator and manager of risk that produces a consistent underwriting profit. BlackRock brings superior investment and risk management experience with multi-asset, multi-strategy investment portfolios. With these strengths, as well as significant investor interest, we are excited about the long-term opportunities for ABR Re.”

Interesting that ACE says ABR Re will complement the traditional reinsurance market, as many traditional reinsurers may be feeling more like it disrupts and disintermediates it. It will result in less need for ACE to use traditional reinsurance capacity and if it grows and proves effective could perhaps see a lot of ACE’s business ceded to it in time.

As the reinsurance market evolves and changes structurally, more of these hybrid and partnership approaches are expected to be launched. ABR Re has traits of a captive reinsurer as it reinsures the parent, a sidecar as it allows the parent to share its risks with third-party capital and a hedge fund reinsurer for the asset strategy.

Will it be a success? Well, it’s almost guaranteed to improve ACE’s profile and make its use of reinsurance more efficient and less costly, while adding profit when the Blackrock investment strategy performs.

Will that be successful enough? Over the next few years no doubt, but as an early moved in the rush to establish new business ventures and models will ACE find this is the model that lasts? Almost all large primary insurers have woken up recently and realised they need to be assessing their options for launching new vehicles of this sort.

As more companies develop strategies, to respond to the challenging and structurally evolving reinsurance market, some could find even more effective ways to tap lower-cost capital, add asset side performance and retain more of the risk premium.

If a better way of achieving that emerges, could ABR Re be more of a stepping stone than the “long-term commitment” that it is announced as? If the reinsurance market keeps evolving rapidly it seems to us that nothing will be permanent and everything will be liable to change.

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