U.S. insurance group Chubb Ltd. has revealed that it ceded $115m of reinsurance premiums to ABR Reinsurance Ltd. in 2015, its captive-style and total return reinsurer joint-venture with Blackrock, recognising commissions of $30m in the year.
ABR Re was launched in April 2015 by ACE Limited, after raising $800m of capital for the joint-venture between the insurer and investment bank Blackrock. ABR Re acts like a captive, in that it only takes ceded reinsurance premiums from its parent (now Chubb after ACE acquired the company and took on the name) but also operates an investment oriented approach thanks to Blackrock.
Evan Greenberg, CEO of the then ACE and now Chubb, said himself that ABR Re was merely a capacity player and that it would follow the market terms. But of course ABR Re is really an efficiency play, as Chubb seeks to reduce the amount of premiums it cedes to the wider reinsurance market, enabling it to extract more of the risk premium from the business it has ultimately underwritten.
Judging by the ratio of reinsurance premiums ceded, at $115m, to ceded commissions recognised, at $30m, for 2015, the strategy appears to be working quite nicely.
Chubb says that it is merely an investor in ABR Re, which of course on paper it is, however the strategy has allowed the insurer to bring new capital into its business model, reduce its spend on reinsurance, effectively extract additional premium from insurance business it writes and then cedes to ABR Re, while also operating an investment oriented approach on the ceded premiums to earn greater capital appreciation.
All this while leveraging the new pool of third-party reinsurance capital which capitalised the ABR Re vehicle in the first place.
The efficiency play is key to large insurers and reinsurers in the current market environment. With rates down and the market under pressure on the investment side, initiatives like ABR Re are a response to many of the market conditions seen to affect these companies today.
Much of a re/insurers intellectual capital value is diluted through the risk-insurance-reinsurance-retrocession value-chain. By taking steps out of the chain, or disrupting it entirely, a re/insurer can recognise more of the intellectual capital and effort that it puts into the underwriting of business in the first place.
ABR Re enables exactly that for Chubb, resulting in a greater proportion of premium profit from the business that flows through to it. While at the same time responding to some of the issues on the investment side, through Blackrock’s management of the float for further capital appreciation.
Chubb explains it well, saying it expects to “Benefit from underwriting profit generated by ABR Re’s reinsuring a wide range of Chubb’s primary insurance business and the income and capital appreciation BlackRock, Inc. seeks to deliver through its investment management services.”
Additionally both Chubb and Blackrock benefit further by being; “Entitled to an equal share of the aggregate amount of certain fees, including underwriting and investment management performance related fees, in connection with their respective reinsurance and investment management arrangements with ABR Re.”
So Chubb avoids spending as much on reinsurance, both brokerage and ceding costs, earns more fees from the reinsurance premiums that it cedes to ABR Re, retains and extracts more of the premiums as a result in commissions coming back and performance fees, as well as benefiting from a different investment strategy.
Chubb wins on all sides with the ABR Re vehicle, particularly while the market remains relatively loss free. Even when ABR Re itself faces losses Chubb will have extracted more of the profit from that business prior to losses being recognised in the reinsurance vehicle.
It’s a strategy that we would expect to see replicated by others. There are initiatives that achieve similar outcomes, but rarely do they address both the greater retention and extraction of premium profit while also targeting greater investment appreciation on the premium float as well.
ABR Re likely isn’t targeting a particularly high investment return, it’s not a hedge fund reinsurance vehicle, but it does give Chubb the flexibility to be more adventurous with its returns, with Blackrock’s help. Blackrock is, after all, incentivised through sharing in performance fees from ABR Re, to make that investment portfolio work as hard as it can, while maintaining the liquidity required to meet claims obligations.
And for the investors backing ABR Re? Well they get to benefit from “Investing in a share of ACE (now Chubb) underwriting combined with BlackRock’s investing prowess” as the insurer said itself in the past.
ABR Re takes a share of all the premiums Chubb cedes to the traditional reinsurance markets and helps the insurer keep more if and generate more profit from that business. In the currently competitive market environment that approach is both disruptive and exceptionally savvy.