When rating or commenting on a total-return reinsurance firm, a hedge fund reinsurer, or any insurance or reinsurance strategy that adds more risk on the investment side, rating agency A.M. Best has a habit of warning of the downside, but in affirming the AXIS Capital & Blackstone sponsored Harrington Re Ltd., A.M. Best seems more comfortable.
In ratings affirmations about other total-return or investment oriented reinsurance start-ups, rating agencies like A.M. Best often warn that a key downside risk is the volatility inherent in a more active or alternative asset management strategy.
These reinsurers seek to put the premium float assets to work more aggressively than a traditional company would, seeking to generate a higher investment return while underwriting lower-volatility, longer-tailed reinsurance business.
Rating agencies like A.M. Best have warned on this strategy repeatedly over the years, but the more recent crop of total-return reinsurers, which are largely a third-party capital play as well due to the fact they bring third-party investor capital into the reinsurers underwriting capacity, seem to be generating less concern.
Harrington Re saw established global re/insurer AXIS Capital partnering with investment giant Blackstone to launch a total-return reinsurance strategy with $600 million of capital raised, and follows a strategy that aims to optimise returns across both the underwriting and asset management side of the business.
A.M. Best recently affirmed Harrington Re's ratings, citing the "strong qualitative and quantitative attributes of the sponsors," as well as the reinsurers capitalisation and the "credibility and capability of management."
It seems that A.M. Best has looked into the strategy of Harrington Re and is perhaps more at ease with this total-return strategy over others that have come before it.
"Despite the significant challenges in the reinsurance sector, Harrington is working toward building a diversified, multi-line reinsurance book of business with strict limitations on property catastrophe risk. The investment portfolio is structured to have ample liquidity and diversification by asset class, while managing drawdown risk and seeking to provide strong absolute returns," A.M. Best explained.
A.M. Best does note that any outsized investment loss compared to peers would result in a reassessment of Harrington Re's ratings, but that would be the same for any reinsurer whether a total-return player or otherwise.
Should Harrington Re meets or exceed its business plan over the long-term, and its results seem sustainable while risk adjusted capitalisation remains high, the reinsurer could even be upgraded, A.M. Best notes.
Now this isn't a case of A.M. Best showing favouritism, but it is a sign that the rating agency is becoming more comfortable with total-return strategies, where there are recognised and trusted sponsors, experienced management teams, and business plans that are not too enthusiastic about the prospects of generating enormous investment returns (as some used to be).
Perhaps we're beginning to see the investment oriented reinsurance strategy mature, with the more recent launches of Chubb backed ABR Re, Arch backed Watford Re, AXIS backed Harrington Re and Enstar backed KaylaRe, all being particularly well-received.
For these sponsors the total-return strategy provides significant benefits.
A companion balance-sheet loaded from efficient capital sources, typically a lower-cost operating model, the total-return from the investment side, an ability to generate underwriting fee income, a source of reinsurance or retrocession, a way to keep premiums out of the traditional renewal cycle, and generally a tool that helps them to fine tune their capital and portfolio optimisation, all while boosting margins.
Whether we'll see anymore of these strategies come to market remains to be seen, a very soft market is perhaps not the right time. But there are certainly rumours of other re/insurers looking at this strategy and it's almost certain that other hybrid reinsurance strategies will emerge as market participants look to increase margins and add efficiency to their businesses.
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