Primary insurance and reinsurance group Chubb Ltd. continued to make greater use of its total-return vehicle ABR Reinsurance Ltd. in 2017, with the amount of premiums ceded through to ABR Re up around 19%, while the vehicle also took a significant increase in losses from the hurricanes and other catastrophe events.
ABR Reinsurance Ltd. is Chubb’s captive or self-reinsurance vehicle, which it set up in 2015 as a third-party investor backed, joint-venture reinsurer, with investment bank Blackrock providing a more active investment management strategy to deliver the total-return and raised $800 million for the strategy.
ABR Re is akin to a third-party capital strategy for Chubb, in that the vehicle provides reinsurance and retrocession, capitalised by third-party investors, so providing a lower-cost source of reinsurance capital and with the added benefit of the total-return generated through the investment work of Blackrock it is likely paying efficiency dividends.
Chubb needs to buy less open-market reinsurance as a result, as ABR Re helps it to retain more of the profit from underwriting business, generating a higher return for that business through the total-return investment strategy than it would if it managed the investments itself, while also avoiding paying fees to cede that risk into the open market through a normal reinsurance program.
So it’s not surprising that ABR Re is growing under Chubb and that in its third year the amount of reinsurance premiums Chubb ceded into the vehicle grew by 19% to reach $342 million, up from $288 million in the prior year.
In 2015, Chubb ceded $115 million of reinsurance premiums to ABR Reinsurance Ltd. and recognised ceding commissions of $30 million in the year. In 2016 the amount of reinsurance premiums ceded to ABR Re jumped by an impressive 144%, to $288 million, while the commissions more than doubled to $66 million.
Now, with premiums ceded rising 19% the amount of ceding commissions recognised rose by 42% to $94 million in 2017.
ABR Re is therefore generating efficiencies for Chubb, in helping it avoid paying commissions to third-party reinsurers, instead retaining as much as it can and leveraging the appetite of institutional investors to source a growing chunk of its reinsurance provisions.
The strategy is also proving increasingly helpful at paying claims as well, something much more evident after the loss-heavy 2017 year due to the hurricanes, wildfires and other loss events.
Chubb reports that the amount of reinsurance recoverable on losses and loss expenses that ABR Re holds for the insurer rocketed almost 150%, from $148 million at the end of 2016 to a huge $365 million at the end of 2017.
The increase will be down to the losses of 2017, showing that ABR Re and its investors have been paying their share of Chubb’s major catastrophe losses from last year.
Also providing evidence of the losses ABR Re has been taking, the value of Chubb’s stake in the reinsurance vehicle fell during 2017, suggesting that third-party investors stakes will also have dropped in value.
Chubb holds an 11% stake in ABR Re, which it valued at $94 million at the end of 2015, then $97 million at the end of 2016. But at the end of last year the value of Chubb’s ABR Re stake had dropped back to $93 million, despite the stake remaining at 11% of ABR Re’s $800 million of issued share capital.
That’s a roughly -4% drop in the value of Chubb’s ABR Re stake, suggesting that for third-party investors in the vehicle the return for the year was also around -4%, so a similar level of decline to many ILS fund strategies for 2017.
ABR Re remains an efficiency and value play for Chubb, making reinsurance arrangements cheaper, the risk it underwrites work harder, includes a greater chance of investment performance through the total-return element, generates underwriting fees, commissions and profit share, all while extracting more profit from the intellectual capital that Chubb outlays upfront in its underwriting.
ABR Re only takes risk from Chubb, so it’s represents a reinsurance-linked investment strategy that allows investors to back Chubb’s underwriting and Blackrock’s investment business at the same time, so while acting like a sidecar vehicle it is a unique proposition for the investor-base.