ACE-Chubb deal is bad news for reinsurers

The deal between ACE and Chubb revealed yesterday (Wednesday, June 1) will be bad news for reinsurers, especially if the combined entity uses the recently formed ABR Re fund, a joint venture between ACE and fund manager Blackrock designed to manage ACE’s reinsurance needs.

ABR Re raised $800 million of capital earlier this year. ACE was to be the sole source of reinsurance risks ceded to ABR Re, and BlackRock will be ABR Re’s exclusive investment management service provider.

The joint venture will underwrite a portion of a broad selection of reinsurance treaties that ACE places with the traditional reinsurance market and will invest its assets in a diversified and dynamic alternative investment portfolio managed by BlackRock.

ACE ceded $5.6 billion of premium last year while Chubb ceded just under $1 billion. While ABR Re has described itself as a complement to the traditional reinsurance markets designed and driven by cyclical and structural changes in the reinsurance and risk-transfer markets, the fact is that it will likely remove a very large chunck of business from other players long term. “That is a lot of money suddenly being removed from the traditional reinsurance markets,” said one source.

To put this in context, in its SEC filing for the end of 2014, Chubb commented on some of the challenges of dealing with the traditional reinsurance markets.

“The availability and cost of reinsurance are subject to prevailing market conditions that are beyond our control. For example, reinsurance may be more difficult or costly to obtain following a period with a large number of major catastrophic events. No assurances can be made that reinsurance will remain continuously available to us in amounts that we consider sufficient and at rates that we consider acceptable, which would cause us to increase the amount of risk we retain, reduce the amount of business we underwrite or look for alternatives to reinsurance. This, in turn, could have a material adverse effect on our financial condition or results of operations,” it said in that filing.

In theory, a structure such as ABR Re could make that availability of reinsurance much more predictable and easy to manage. But this will not be good news long term for the traditional reinsurance market.