For insurance and reinsurance group AXIS Capital Holdings, the launch of new venture total-return reinsurer startup Harrington Re, is considered part of the firms “21st century” approach to managing its capital, with the help and backing of third-party investors.
AXIS Capital has partnered with global investment giant Blackstone on the latest total-return reinsurance start-up to get up and running. The pair, targeting combining underwriting returns with an investment oriented approach in order to generate a total-return across the reinsurance balance-sheet, raised $600m of capital for launch of Harrington Re, with around $450m of the total from third-party investors.
Just last week we explained that Blackstone sees the Harrington Re venture as a key strategic move, offering it a source of more permanent and leveraged investment capital, helping it to distribute its funds more widely and ultimately expecting it will end in an attractive IPO exit opportunity.
Now AXIS Capital has also extolled the virtues of Harrington Re, explaining in its quarterly results that the total-return reinsurance vehicle is a central part of a “21st century” approach to reinsurance capital management.
Albert Benchimol, President and CEO of AXIS Capital, commented on the start-up by saying; “The launch of Harrington Reinsurance Holdings Limited, co-sponsored by AXIS Capital and The Blackstone Group L.P., significantly advances our 21st century approach to capital management .”
Harrington Re sits firmly in the third-party capital management activities for AXIS Capital, enabling the firm to bring capital from a broad range of third-party investors into its reinsurance underwriting business, with a separate balance-sheet able to augment the group’s underwriting strategy.
These total-return reinsurance vehicles are designed to be efficient as well, with minimal overheads, leveraging the underwriting, administration and investment management skills of the joint-venture partners behind the start-up, which can enable the capacity they deploy to be extremely cost-effective.
Thus, for AXIS Capital, Harrington Re offers a second balance-sheet which is largely third-party funded that it can put to work, either alongside or in complement to its own, or into lines of business where the more efficient capacity can be more profitably put to work.
Using Harrington Re, “We complement our existing balance sheet with a broad range of third-party capital to deliver enhanced capacity, innovation and tailored solutions to our clients and brokers and generate a growing stream of attractive fee revenue,” said Benchimol, explaining the benefits to the re/insurer.
AXIS Capital is already involved in some third-party reinsurance capital activities through its AXIS Re Ventures unit, where it manages investor capital in ILS funds and sidecar type vehicles.
The addition of Harrington Re greatly expands the access to third-party capital and takes it beyond the pure institutional type money that is more typically invested in ILS funds and sidecars, with these total-return reinsurance vehicles able to raise capital from more retail like, or high net worth, investors as well.
Fee income, for underwriting services rendered through an AXIS Capital subsidiary are an additional benefit, meaning AXIS gains from underwriting and management fees, underwriting performance, some profit share of the investment income generated by Blackstone, as well as due to having its own capital invested in Harrington Re.
The other important thing to note with Harrington Re, is that due to its investment oriented or total-return approach it will seek out medium to longer-tailed reinsurance business opportunities, which provide a greater duration for the float to be invested by Blackstone.
As a result, Harrington Re can help AXIS Capital expand into lines of business more rapidly, helping it to navigate the softer reinsurance market and shift its business mix further away from short-tailed property catastrophe risks.
In terms of 21st century capital management, the total-return reinsurer is a very strategic tool for larger reinsurers, one which we may see become increasingly attractive if the cycle is indeed considerably flatter in future, as we’d expect due to the expectation of third-party capital and ILS maintaining and in future growing its share of the market.
Being able to profit from (and optimise) both sides of the reinsurance balance-sheet is very attractive in this low-yield world, where negative interest rate policy (NIRP) has impacted re/insurers ability to rely on investment portfolio returns. Harrington Re means an extra source of investment yield for AXIS, which is partially generated off third-party money.
So all in, Harrington Re seems a great strategic move and fit for AXIS Capital, as it does for joint-venture partner Blackstone.
“We are pleased with our progress along strategic and operational initiatives, and are committed to continuing the diligent execution of our plans to position AXIS Capital as a leader in specialty risks, delivering superior value creation to its shareholders,” Benchimol commented, which perfectly sums up the firms aim with this new venture.
– Blackstone: Harrington Re = permanent capital, distribution & IPO exit.
– Harrington Re, AXIS – Blackstone total-return start-up, raises $600m.
– Harrington Re to optimise “both sides” of the reinsurance balance-sheet.
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