Gen Re – TransRe deal hikes efficiency of Buffett’s reinsurance capacity

by Artemis on July 6, 2016

Interesting news last night as an announcement came out from Alleghany owned TransRe to explain that the reinsurance firm has entered into an agreement with Warren Buffett’s Gen Re which will effectively see it produce business for the firm.

Gen Re, one of Warren Buffett’s flagship reinsurance businesses, has a long history of being a direct only market, avoiding the use of brokers whenever possible in order to own the client and raise its own efficiency by reducing the cost of intermediation.

But this arrangement with TransRe shows a change of tack, with Gen Re set to provide its balance-sheet to TransRe for broker sourced reinsurance and retrocession business. While this may sound like a less efficient way to deploy capacity, as intermediation costs increase, it’s actually perhaps even more efficient than the direct model.

The announcement from TransRe explains that the pair have entered into a five-year agreement during which time TransRe will act as an underwriting manager on behalf of Gen Re for U.S. and Canadian property and casualty treaty reinsurance and retrocession business produced by brokers and intermediaries across the U.S. and Canada.

For Gen Re this is a change of direction as it becomes more open to broker-sourced reinsurance business, and for TransRe this is also a shift in strategy as it opens up to sharing risk it has underwritten with a third-party.

As a result, brokers and intermediaries will gain access to Gen Re’s capacity through the new underwriting platform fully managed by TransRe. Essentially, Gen Re will augment TransRe’s capacity, while TransRe provides all the underwriting and claims services for the broker-sourced business, allowing the pair together to offer the market broader capacity and larger line sizes.

So this helps TransRe to become even more relevant in the broker produced reinsurance renewal market, while Gen Re gains access to reinsurance business it would otherwise not have seen.

This facility, which is essentially what it is with Gen Re following the form of TransRe’s underwriting, is a win for both parties. It will see identical terms written on both TransRe and Gen Re balance-sheets as separate lines on each account, so a good thing for clients who gain diversification of reinsurance counterparties and access to increased capacity.

“This arrangement between Gen Re and TransRe creates a unique and compelling new capability in the North American broker reinsurance market. We are combining the strengths, capacity, and reputations of two outstanding organizations to enable improved panel diversification and creditworthiness with one-stop seamless service,” commented TransRe President and CEO Michael Sapnar.

Kara Raiguel, Gen Re President and CEO, added; “We are enthusiastic about partnering with TransRe to bring Gen Re’s industry-leading security to clients through the brokered market. TransRe’s proven underwriting track record and excellent broker relationships make them the ideal partner for Gen Re for this important long-term strategic initiative.”

For Warren Buffett’s Gen Re, this arrangement could be an even more efficient way to source risk than its own direct to market strategy has been. With the arrangement really only requiring its capacity and balance-sheet, TransRe is expending the intellectual capital to underwrite and manage the reinsurance business, while Gen Re just takes a cut of the risk and ultimately the premium float and profits.

Of course, for Berkshire Hathaway, an efficient and incremental source of reinsurance float is a very attractive thing, enabling it to source new business with less corporate expense related outlay.

It’s a very similar arrangement to a follow-form, or facility, which is interesting given it is a traditional reinsurer following the form of another traditional reinsurer, something that now you might expect a third-party or alternative capital provider to be doing.

But then Warren Buffett’s reinsurance companies are not traditional, in the traditional sense of the word, given their ambition to build float to be used within the Berkshire Hathaway group’s investment strategies.

So this arrangement means that float can now be sourced from a new pipeline, through the broker market, while spending much lower underwriting expense, thus incrementally increasing the float under management at Berkshire Hathaway in an efficient manner.

For TransRe this arrangement augments its capacity, with a sold balance-sheet partner, allowing it to underwrite larger lines on broker-sourced accounts and as a result increase its market relevance.

So, yes the arrangement between the pair shows that Gen Re’s strategy has changed and it is more open to acquiring reinsurance business through relationships and now through brokers.

But, perhaps more importantly, like the arrangement we saw between Berkshire Hathaway and Aon at Lloyd’s of London, this deal demonstrates the desire to acquire risk more efficiently (while being expansive), in order to lower the cost-of-capital at Buffett’s reinsurance businesses, so importantly reducing the cost to grow its float as well.

Analysts at KBW said that this shows Gen Re being willing to accept higher combined ratios in return for the ability to sustain premium volume and float, as well as showing that the reinsurer recognises the limitations of its distribution methodology.

In an era when ILS players are looking to more directly access risk and to shorten the reinsurance value-chain, it’s perhaps telling that one player seeks to lengthen that chain in return for increasing the efficiency of its capacity and accessing new business, a sign of just how competitive the market is becoming.

One final point on this arrangement. You would have to imagine that the cost to TransRe of working with Gen Re is lower than working with third-party capital, otherwise why enter into such an agreement with a competitor when the reinsurer could have established similar arrangements to augment its capacity using third-party, capital market sourced capital.

TransRe does of course leverage third-party capital within its Pangaea collateralised reinsurance sidecar vehicle. It’s questionable whether that vehicle could have been increased sufficiently to replicate this arrangement, using solely TransRe paper and partly backed by third-party capital.

However, had TransRe partnered with an ILS manager, it might have been possible to establish this arrangement even more efficiently, we would imagine. At some stage in the future, we expect to see a major reinsurer partnering in this kind of way with a third-party capital manager, in order to achieve the same efficiency and increase of capacity and relevance in the marketplace.

So perhaps TransRe and Gen Re are just showing another way, for different capacity providers to work more closely together in symbiotic relationships that provide benefits to both sides, and ultimately to the clients themselves? While the reinsurance market remains softened and competitive, we’re likely to see many more such relationships develop.

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