With the announcement today that insurance and reinsurance specialist Vantage Group is set to be acquired by Howard Hughes Holdings, the firm’s third-party collateralized reinsurance capital business AdVantage received a positive mention from the acquirer’s executives during an analyst call.As we reported earlier, making it part of its holding company strategy and the plan is for Bill Ackman’s asset manager Pershing Square to manage Vantage’s investment portfolio going forwards, while the Vantage brand and team will be unchanged.Vantage has a well-established third-party reinsurance capital management and collateralized reinsurance entity that operates under its Partnership Capital platform as AdVantage.During an analyst call after the acquisition was announced, Ryan Israel, Chief Investment Officer of Howard Hughes Holdings, explained that the AdVantage business is seen as one of the attractive features of Vantage.

He commented on Vantage, “The reinsurance that the company does is much more specialty in nature and has almost no exposure to catastrophe insurance, which is what is typically thought of in the industry to be the primary focus of reinsurance.“So it really is differentiated, both in its primary specialty insurance and the reinsurance portfolio, which we think is highly advantageous.” Then turned to AdVantage specifically by saying, “Another thing that we like about the business is AdVantage, which is their third-party, asset-light capital vehicle that does some reinsurance in the property and natural catastrophe space.“What we like about that is, for the business it is actually a high-margin, asset-light fee stream, and that deployed about $1.5 billion of capital this year.” Israel further explained in more detail that the diversification within Vantage’s business is attractive, as well as the fact the specialty re/insurer’s own balance-sheet is not particularly exposed to natural catastrophe risks.

“One of the things we really like about the business is it’s a highly diversified insurer, which Vantage has about two dozen different lines, the advantage of that is you can play in the markets where the pricing is the best.At the same time, to the extent that in the insurance business, you inevitably get certain things wrong, no one mistake is going to have a huge impact on the company, which we think provides a better opportunity for growth, while at the same time being less risky,” Israel explained.Going on to say that it is a, “Similar story with the duration of reserves.

Very strongly balanced portfolio across short tail lines, medium tail lines and longer, pretty evenly balanced between the shorter, medium and longer tail lines of business.“And what’s nice about that is ultimately, the longer tail lines provide more float for investment income, but the shorter tail lines give you more certainty into making sure that the policies that you’ve written, if you made any mistakes, you can quickly fix them.As I mentioned, overall, very important point for us is there is very limited catastrophe reinsurance exposure, less than 1% of overall gross written premiums this year.” It’s a signal that Howard Hughes Holdings finds the third-party reinsurance capital management business under AdVantage an attractive element of the operations of its new acquisition.

Bill Ackman, Executive Chairman of Howard Hughes Holdings later signalled in a further broadcast that he also considers the third-party reinsurance capital management business as attractive.Ackman explained, “We also think of AdVantage as a business where a third-party, an investment firm, puts up capital and Vantage brings its underwriting capabilities and gets a fee and a sharing of the underwriting profit.Sort of an asset management business, you have third-party capital, and you get a management fee and a piece of the upside.

“That’s a very high ROE business, and that’s a business that today has about a billion and a half of third party capital.You know, one of the things that we’re good at is raising third-party capital.“So that business has been run very, very effectively by Vantage’s team, and it could deploy a lot more capital.

“That’s one of the ways we can help make Vantage a more valuable company, is by growing the third-party assets in that operation.” CIO Ryan Israel commented some more on AdVantage, saying, “What’s interesting is AdVantage, effectively, is their off-balance sheet sidecar.They have an executive there, Chris McKeown, who has been able to partner with other people who really seek to have this exposure to natural catastrophe insurance.They raise capital from them.

They get a fee in order to do that.“So basically, just by arranging these structures and helping provide and link up the capital provider with the insurance risk, they’re able to earn fee, which has very little risk to it, takes no capital.At the same time, they actually have a profit participation based upon certain metrics about how well those vehicles perform relative to whether these risks or natural catastrophes materialise or not.

“We think, to Bill’s point, it’s a really interesting growth opportunity.They’ve already done a phenomenal job in that.“But when you think about an insurer as being very capital intensive in order to write its kind of core insurance business, this is a really interesting way to leverage all that work, those insights, the leadership of a very talented executive that they have there in order to be able to grow this business in an asset light way.

And as Bill mentioned, one of the things that Pershing Square can bring to the table in this transaction, in addition to the investment advice and a lot of knowledge about the industry from a very high level, is Pershing Square has been very successful in raising capital.“So I think that is an opportunity that’s very attractive for growth over time.” Bill Ackman further stated on AdVantage, “One of the things that Pershing Square has done very well over-time is it’s one of the few firms that have set up permanent capital vehicles.Beauty of permanent capital is it is not flighty.

So one of the things we may be able to bring to Vantage, particularly in this part of its operation, is a source of capital that is very long-term in nature.“I think the nature of this business, AdVantage, has been a very stable source of capital for the company.“I think we can only improve upon that.”.

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