Chubb, the global primary insurance carrier and reinsurance company, once again shows the growing importance of strategically important total-return and third-party capitalised reinsurance joint-venture ABR Re, as the amount of premiums it ceded to the vehicle rose, alongside the fee income it earned back and the valuation of its stake in the vehicle.
ABR Reinsurance Capital Holdings Ltd., the parent and ABR Reinsurance Ltd. (ABR Re), the reinsurance underwriting company, were launched in 2015 by Chubb (ACE at the time) as a total-return, or investment oriented, reinsurance joint-venture vehicle.
ABR Re is also a third-party capital play, as it launched with around $800 million of capital supplied by third-party investors and the joint-venture partners, which are Chubb and asset manager Blackrock.
Blackrock provides the investment strategy for the reinsurance vehicle and both parties earn a source of income from ABR Re, in terms of fees and profit shares.
But Chubb also benefits from the reinsurance market efficiencies that ABR Re presents, as it allows the company to leverage a low-cost of capital dedicated source of reinsurance, which is third-party supplied and so additive to its own scale in terms of limit it can deploy, against which it earns fees and likely pays minimal intermediation or brokerage costs.
ABR Re is an internal reinsurance vehicle and has a strict mandate to only underwrite risks ceded to it by Chubb and it is said to follow market terms on that business as well.
So it’s a source of third-party capitalised following capacity, in which Chubb has an ownership and earnings stake.
Ever since its launch, Chubb has been growing its use of ABR Re, ceding more risk to the third-party capitalised reinsurance vehicle each year and in recent years also growing its ownership stake a little each year as well.
ABR Re is now one of Chubb’s largest reinsurers, sitting alongside the likes of the global reinsurance giants (Swiss Re, Munich Re, Hannover Re), Berkshire Hathaway and Lloyd’s, which is significant.
In 2021, ABR Re became even more important to Chubb, with $442 million of premiums ceded to the reinsurer, up 26% from the $350 million ceded to ABR Re in 2020.
Commissions received increased to $133 million in 2020, up from $100 million for 2020, but the reinsurance recoverable Chubb reports associated with ABR Re increased significantly again to $963 million, up from $806 million at the end of 2020.
The significant growth in 2021 once again underscores the strategic and increasingly core role that ABR Re plays for Chubb in its reinsurance arrangements, bringing third-party capital to the heart of its reinsurance tower.
Also of note is the fact fee income earned by Chubb from the ABR Re joint-venture is rising as well.
Chubb and joint-venture partner Blackrock share in some of the additional earnings that come through the reinsurance vehicle, while Chubb provides contractual services to ABR for reinsurance and reinsurance operations, and Blackrock for asset management services.
The parties entered into a fee-sharing arrangement, which sees them equally sharing certain fees payable by ABR under these service contracts with each party.
Chubb received $5.4 million from BlackRock pursuant to the fee-sharing arrangement over 2020.
In 2021, Chubb has recorded $11 million of income under the fee-sharing arrangement, so more than doubling the amount received in the prior year.
$11 million is relatively small change to an insurer with the global scale of Chubb, but it’s a nice addition to the reinsurance synergies and efficiencies it benefits from with ABR Re.
Finally, ABR Re is also increasing in value, at least Chubb’s stake in the joint-venture reinsurer is.
The carrying value of Chubb’s stake in ABR Reinsurance reached $142 million at the end of last year, up from $114 million at the end of 2020.
Over the course of 2021, Chubb increased its ownership stake in ABR Re by 1% as well, so now counts a 17.1% direct equity ownership percentage of the reinsurance vehicle and owns warrants to acquire another half a percent of the equity should it choose.
So, growing reinsurance benefits, synergies and efficiencies, increasing fee income and also growing ownership value, with ABR Re becoming increasingly important and ultimately saving Chubb money on its outwards reinsurance spend.
ABR Re’s role for Chubb remains an interesting take on a third-party reinsurance capital strategy, offering the efficiency of a dedicated source of reinsurance capacity, alongside the flexibility and leverage of an investment oriented underwriting approach, delivering additional benefits through an ownership stake and share in underwriting and investment fee income.
For the investors, ABR Re provides a way to tap into Chubb’s underwriting franchise for insurance-linked returns, while also tapping into Blackrock’s investment acumen at the same time.