Total-return reinsurance vehicle Harrington Re, established earlier this year by re/insurer AXIS in partnership with Blackstone, has become an integral part of the firm’s broader alternative capital strategy, according to AXIS Capital Holdings President and Chief Executive Officer (CEO), Albert Benchimol.
Speaking on the insurer and reinsurer’s third-quarter 2016 earnings call, Benchimol described Harrington Re as an “integral part” of the company’s “larger alternative capital strategy, which is designed to match the right risk with the right capital.”
Harrington Re is the latest vehicle from AXIS that sees the firm utilise alternative reinsurance capital, with previous insurance-linked securities (ILS) fund or sidecar type vehicles facilitating alternative capital growth under its AXIS Re Ventures brand.
Earlier this year Artemis discussed how Benchimol had said that the Harrington Re vehicle substantially advances the firm’s 21st century approach to capital management, underlining that the re/insurer was likely to increasingly utilise the wealth of capital markets capacity to benefit the firm.
The majority of reinsurers now utilise alternative reinsurance capital in some form or another, whether this be via collateralised reinsurance, retrocession, or sidecar type ventures and catastrophe bonds, for example. And AXIS is clearly one of the firm’s that is taking advantage of its presence in the marketplace and looking to use ILS to enhance its capital management needs.
“For us, Harrington Re provides first a broader platform to underwrite risks, support key clients and grow relationships with our clients and distribution partners. Second, capital flexibility through a permanent and growing capital base and third, additional fee income to overwrite the profit commission.
“It’s an important part of our strategy to assemble a broad portfolio of third-party capital partnerships and over time, we will look to increase the portion of our business that we share with our partners,” continued Benchimol.
Harrington Re, notes Benchimol, is a vehicle that sees the firm match a longer duration asset portfolio with medium to long-term business. Launched with $600 million of capital of which $550 million was raised through equity and the remaining $50 million through a debt issuance, Benchimol explained in the firm’s Q3 earnings call that the vehicles capital base is currently “very satisfactory.”
Adding that with regards to Harrington Re and its broader third-party capital utilisation, AXIS will continue to grow the volume of capital that it partners with, but that this won’t necessarily be with Harrington Re.
“I think our view is obviously there is an opportunity to grow capital at a strong return for our shareholders. That would be our preference, and if not, we will reduce the equity that we have if we can’t use it, but we will continue to grow third-party capital as a percentage of our overall capital that is utilized to support the risk that we produce,” said Benchimol.
So clearly the firm has broader plans for utilising the ILS space and is pleased with how its use of alternative capital strategies has assisted the firm so far, seemingly eager to increase its participation in the space when the time is right.
Discussing broader, challenging market conditions, Benchimol further underlined the growth of third-party reinsurance capital within the re/insurance industry, and the need to utilise its strengths.
“My view on this is that whether we like it or not there is going to be a growing amount of third-party capital in the industry and the successful companies are going to be ones that make money in whatever market conditions result as a result of the capital condition, and optimize their sourcing opportunities and their portfolios in the best way possible.
“I tend to believe that because of the capital that there is out there we’re going to have less of the old cycles of up and down and so people who just wait for the pricing to improve to make money may wait a long time. I think we need to make money under the current market conditions, and at AXIS that’s what we’re doing, we are organizing ourselves, we are selecting the right risks and we’re building portfolios that will make money in the current market conditions,” said Benchimol.
Insurance and reinsurance market conditions remain challenging, and companies continue to adjust their strategies in search of efficiency and yield. Alternative capital has become a more important element of the reinsurance space, increasing competition but also creating opportunities for firms to improve capital management and ultimately increase efficiency.
As noted by Benchimol, failure to utilise the wealth of alternative reinsurance capital, which is now widely viewed as permanent market capacity, could come back to haunt some companies further down the line as the softening market prolongs.
For AXIS the alternative capital approach is clearly working and providing the firm with what it requires in challenging market environment, so it will be interesting see how the firm utilises Harrington Re and other forms of ILS in the future.