AXIS Capital plans to increase the amount of business it will cede with Harrington Re, the new total-return focused reinsurer formed in July this year, the main beneficiary, the leadership team at AXIS Capital revealed in a recent conference call covering its second quarter earnings.
Harrington Re was established by AXIS and investment company Blackstone in July. It raised $600 million of capital, with $550 million raised through equity and $50 million through a debt issuance. AXIS contributed $100 million to this and Blackstone $50 million.
It is similar in many ways to ABR Re, the vehicle Chubb (then ACE) and Blackrock formed in 2015, which now manages the majority of the company’s reinsurance portfolio giving it direct access to third party capital.
Also similar to that formation, Blackstone will manage the ‘float’ from reinsurance premiums to invest in a portfolio of alternative investments.
AXIS Capital, via a subsidiary, will earn fee income by acting as Harrington Re’s underwriting manager.
In AXIS’s second quarter results conference call, Albert Benchimol, the company’s chief executive, said that the venture “significantly advances our 21st century approach to capital management, whereby we complement our own balance sheet with a broad range of third-party capital to deliver enhanced capacity, innovation and tailored solutions to our clients and brokers”.
He said that thanks to Harrington Re, AXIS will be able to deliver “more capacity to profitable opportunities, have enhanced capital flexibility and generate an attractive flow of fee revenue.”
Joseph Henry, the chief financial officer of AXIS, also gave more context and detail on the way the company sees the venture.
He noted that AXIS has already increased retrocessions, the ceded premium ratio of its reinsurance segment increasing to 10 percent in the second quarter. However, he expects these to increase further now Harrington is up and running.
“Half of these sessions were to third-party capital providers and that will increase in the second-half of the year and beyond with our new Harrington relationship,” he said.
He went onto say that as the company cedes more of its reinsurance premiums, this would lead to mid-single-digit growth in net reinsurance premiums. “This increase in cessions will accelerate in the second-half of the year, as we start sharing some of the risk with Harrington Re. And that will happen through quota shares of business that we write for ourselves, to ensure the right kind of alignment between ourselves and our capital partners,” he said.
He said it was his expectation that Harrington will be writing at a net premium to capital ratio in the range of 0.25 to 0.321 “and this will be entirely sourced from AXIS. There will be increased impacts on our financial results prospectively, as our third-party capital activities ramp-up, including a growing stream of fee income,” Henry said.
He argued that this increase in cessions in both insurance and reinsurance is consistent with the company’s “21st century capital management philosophy”.
“We intend to respond constructively to our clients and brokers, when terms and conditions make sense, all the while expanding our risk funding flexibility and matching risks with the best source and form of capital,” he said.
Benchimol also explained during the call that Harrington will also be given an opportunity to participate in AXIS’s established reinsurance panels. But he stressed that this would not change the underwriting appetite of AXIS. "
AXIS Capital, Bermuda, Insurance, Reinsurance, Harrington Re, Risk management, Joseph Henry, Results