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Ace-BlackRock venture causes rethink for reinsurance model: Morgan Stanley

The proposed reinsurance joint venture between Ace and fund manager BlackRock heralds a secular change that could affect the fate of $18bn in US reinsurance premiums, according to Morgan Stanley analyst Kai Pan.

In a note published last week, Pan said the new structure being considered by Ace could have a profound impact on the global (re)insurance world, and could alter how primary carriers buy reinsurance.

In September, The Insurance Insider revealed that Ace was working on an internal reinsurance joint venture (JV) with BlackRock that could see significant amounts of ceded premium siphoned off from the traditional market.

"If successful, the Ace-BlackRock reinsurance JV could be the archetype that other primary players use to secure portions of their own long-term reinsurance relationships," Pan said, adding that he believed that similar vehicles could be pursued by US peers AIG, Allstate, Chubb, Progressive, Travelers, WR Berkley and XL.

The group of insurers cited collectively cede premiums of $18bn annually into the global reinsurance market (see graph).

"Traditional insurers must rethink their long-term business strategies," Pan added.

Sources suggested the Ace-BlackRock vehicle would participate on much of the carrier's outwards reinsurance, and net underwriting returns would benefit from the disintermediation of its reinsurance brokers on business placed into the new entity.

Analysing the potential impact of the move, Pan noted that the insurance group could benefit from lower costs as well as long-term strategic reinsurance. He calculated that the potential JV could be accretive to annual earnings per share by between 1 and 6 percent.

Pan said the proposed structure could lower Ace's reinsurance expense further by reducing or even eliminating the 10 percent of premiums relating to brokerage, as well as traditional reinsurer overhead expenses, which typically equate to 2 to 6 percent of ceded premiums.

The analyst noted that the change would hit brokers because the rise of alternative capital was disintermediating players along the traditional industry supply chain.

A cyclical reinsurance pricing decline has already pressured brokers' organic revenue growth, but the substitution of traditional reinsurance with alternative products could negatively impact both revenue and margins, he said.

Pan explained that the big three global P&C brokers have meaningful revenue exposures to reinsurance and the bottom line impact for them could be greater as, at around 30 percent, reinsurance margins are higher than overall broking group margins.

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