Harrington Re, AXIS – Blackstone total-return start-up, raises $600m

Harrington Re, the start-up total-return focused reinsurance firm launched by established re/insurer AXIS Capital and investment giant Blackstone, has now officially completed its capital raise and is ready to open for underwriting business.

Harrington Reinsurance Holdings Limited along with its direct, wholly owned subsidiary Harrington Re Ltd., has announced the successful raising of $600m of capital, with $550m raised through equity and $50m through a debt issuance.

The two founding companies behind Harrington Re have demonstrated alignment with the third-party investors backing the total-return reinsurance start-up, with a subsidiary of insurance and reinsurance firm AXIS Capital Holdings has itself contributed $100m to the equity investment in Harrington Re, while affiliates of Blackstone have contributed another $50m.

Harrington Re is AXIS’ entry into the alternative investment oriented reinsurance space, seeking to optimise returns across both the underwriting and asset management side of the business, with Blackstone managing a portfolio of alternative investments for the reinsurer.

In this way, Harrington Re is a similar play to the Chubb & Blackrock reinsurer ABR Re, and borrows from the hedge fund reinsurance strategy, seeking to invest the premium float from medium to longer-tailed reinsurance business.

Harrington Re has been raising capital for some months now and the final results have come some way short of the $850m target that we had previously reported. However, given reinsurance market conditions, the launch of Harrington Re with $600m of capital will still make it a meaningful play within this investment oriented, or total-return reinsurance space.

A subsidiary of AXIS Capital will act as Harrington Re’s exclusive underwriting manager, negotiating and sourcing reinsurance business for recommendation to the management of Harrington Re. Blackstone is acting as exclusive investment manager, managing a multi-asset portfolio of Blackstone alternative investment strategies on behalf of the reinsurance start-up.

The reinsurers strategy is to “combine a multi-line reinsurance portfolio with a diversified allocation to alternative investment strategies to earn attractive risk-adjusted returns.”

Harrington Re will seek to build a portfolio that optimises the risk-reward characteristics of both assets and liabilities, the real secret sauce in this total-return strategy of matching liability float duration with the optimal life-span or duration of the alternative investments selected as assets.

Harrington Re will leveraging both the underwriting strengths of AXIS Capital and investment acumen of Blackstone, while operating a “disciplined and fully integrated approach to both underwriting and investing,” the firm explained.

Albert Benchimol, AXIS Capital’s President and Chief Executive Officer, commented on today’s announcement; “Our relationship with Harrington Re is a key element to our 21st Century approach to capital management whereby 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. Harrington Re’s foundation is made even stronger by having Blackstone as the investment manager of its portfolio.”

Jay Nichols, CEO of AXIS Reinsurance, said of the launch; “Harrington Re is an integral part of our larger alternative capital strategy, which is designed to match the right risk with the right capital. The Company will expand the already broad product offering and capacity of AXIS across medium- to long-tail lines of business to better serve our clients and distribution partners. We look forward to creating value and innovating at the intersection of risk financing and risk transfer.”

Bill Fischer, an executive with more than 30 years of reinsurance industry experience and most recently held the role of Chief Underwriting Officer of AXIS Reinsurance is appointed as Chief Executive Officer of Harrington Re and will serve on its board of directors.

Fischer commented on the launch of Harrington re; “With the market-leading specialty underwriting of AXIS and the proven alternatives expertise of Blackstone, Harrington Re is well-positioned to combine attractive global underwriting opportunities with a diversified portfolio of alternative investments to create value for all stakeholders.”

Once again, this is all about efficiency for the re/insurer AXIS Capital. Yes, the launch of Harrington Re can enable the firm to access another source of third-party capital, yes it can act as a reinsurer or retrocessionaire for AXIS to build its book, yes it can be a lean operation and so competitive in the market, all traits of efficiency.

But it’s also going to have the alternative investments strategy, which if performing could help the reinsurer to report very attractive results in future, boosting any underwriting income with a much higher investment return than a reinsurance firm would typically seek to achieve.

In the current market environment, these total-return reinsurers are a shrewd play, helping their sponsors save costs, access new capital, and generate more return. While at the same time the asset manager partner, Blackstone in this case, will earn fees and profits from managing and investing a pool of longer-term capital from the reinsurance premiums.

The lower than expected capital raise is perhaps also telling of the state of the reinsurance market, with these vehicles likely a harder sell than they would have been a couple of years ago. However performance is what matters and if Harrington Re can demonstrate it can outperform, on both sides of the balance-sheet, raising a second round in future should not be too troubling.

Of course, another start-up bringing an additional $600m of capital to the well-capitalised global reinsurance market further demonstrates the continued attraction to the sector that third-party investors display.

It will augment AXIS’ underwriting capabilities and help to strengthen its position in the market, better enabling the firm to underline its meaningful role as a global player.

Rating agency A.M. Best has given a financial strength rating (FSR) of A- (Excellent) and an issuer credit rating (ICR) of “a-” to Harrington Re Ltd. (Harrington). A.M. Best also has assigned an ICR of “bbb-” to Harrington Reinsurance Holdings Limited.

A.M. Best explained:

The ratings reflect the prudent business plans presented to A.M. Best, strong risk-adjusted capitalization, the credibility and capability of Harrington’s management team, and the strong qualitative attributes of the sponsors. The plan is for AXIS to write business on behalf of Harrington with the goal of building a diversified, multi-line reinsurance book of business with strict limitations on property catastrophe risk. The investment portfolio is structured to have a balance of liquidity, cash flow, diversification by asset class, managed drawdown risk and strong absolute returns.

Negative rating actions could occur if Harrington is unsuccessful in executing its business plans over the long term, experiences outsized investment or catastrophe losses relative to peers or A.M. Best’s expectations, has strained risk-adjusted capitalization, has high debt leverage or loses key personnel.

Positive rating actions could occur if the company meets or exceeds its business plans over the long term while demonstrating sustainable operating results and maintaining strong risk-adjusted capitalization.

Also read:

– Harrington Re to optimise “both sides” of the reinsurance balance-sheet.