Aggressive capital deployment to dampen mid-year renewals: RenRe CEO O’Donnell

The early indications on the upcoming mid-year June and July 2018 reinsurance renewals are that capital is being deployed “aggressively”, according to RenaissanceRe CEO Kevin O’Donnell, suggesting that any rate increases achieved may be dampened to a degree.

O’Donnell expects that the weight of capital and capacity available for the mid-year reinsurance renewals will result in anticipated rate increases disappointing underwriters, something that he says his firm RenaissanceRe had expected would be the case.

“Unfortunately, the early signs indicate that capital is being deployed aggressively, as third-party capital continues to seek share in the Florida market,” O’Donnell explained during RenRe’s first-quarter earnings call yesterday.

The appetite of the ILS fund market and ILS investors to grow their share of the reinsurance and retrocession market in 2018 is clear, as investors have been attracted by the increases in rates available at renewals so far this year.

While the rate increases are often cited as disappointing to many, particularly on the traditional side of the marketplace, for those looking at reinsurance as an asset class that is diversifying and exhibits low correlation with broader financial markets, the rate increases (while not as steep as expected) have been sufficient to only heighten the attractiveness of ILS.

Hence many ILS funds, collateralized reinsurance vehicles and their investors have been looking to fill their boots in 2018, taking advantage of better rates where they can, a trend that was always likely to continue and that the buoyant catastrophe bond market clearly reflects in recent months.

RenaissanceRe has itself underwritten much more in the way of catastrophe reinsurance premiums in the first-quarter of the year, as we reported yesterday, but with a significant proportion of that growth ceded to third-party capital through its vehicles like Upsilon, is it perhaps also guilty of feeding the beast it now blames for dampening rates?

It’s a delicate balancing act, between taking on more third-party capital which can deliver fees, commissions and profit share income, over walking away from business that does not meet a reinsurer like RenRe’s own balance-sheet return requirements.

Without doubt the appetite of the ILS market to grow is significant this year and it may be the case that traditional players looking for steeper rate increases are being outbid on the early renewal programs, again the cat bond market pricing experience in recent months would indicate that to possibly be the case.

O’Donnell also said that his firm does not anticipate any significant new demand for reinsurance in Florida, so with capacity targeting business on the peninsula having increased again the pressure on rates is likely to be strong.

“These factors lead us to expect that rate increases at mid-year are likely to be single-digit risk adjusted,” O’Donnell said.

He continued, saying that RenaissanceRe does hope to find some opportunities to grow its book at the key June 1st renewals, but added that he does not expect this to be at anywhere near the rate of growth experienced at January 1st.

O’Donnell implied that RenRe had anticipated this scenario would unfold at the June renewals, saying, “This is part of the reason why we grew so assertively in the first-quarter.”

He went on to say later in the call that RenRe had expected the best rate increases to be on offer at January 1st, which is why it opted to grow its book more significantly then.

The fact there is so much capacity looking to be deployed into the Florida reinsurance market is the reason that RenRe has, “A muted view of rate change in Florida compared to what we saw at 1/1,” O’Donnell explained.

There was a time when the Florida reinsurance renewals were absolutely key to RenaissanceRe, but the reinsurer is now much more diversified and balanced, meaning the U.S. hurricane peak zone risk is not the vital profit lever it once was.

In fact catastrophe risks as a whole appear less important to RenRe now, as evidenced by much of its premium growth from Q1 being passed onto its third-party investor base through vehicles like Upsilon. Although it should be noted much of that growth was actually in retrocession, an area RenRe’s appetite has moderated in recent years.

Commenting on the Florida reinsurance market, O’Donnell said, “Florida continues to be an important market for us, we will always be there to support our customers and rapidly pay claims in the aftermath of natural disasters as we did last year with Hurricane Irma.

“That said, Florida plays a significantly less substantial role in our portfolio now, than it did even just five years ago. Consequently, rate changes in the Florida market do not affect our bottom-line profitability as much as they once did.”

O’Donnell explained that Florida risk now only makes up roughly 5% of RenRe’s overall premiums, a significant drop on just a few years ago.

But while O’Donnell highlights third-party capital’s mission to grow its share in Florida as a key reason rates won’t rise as much as hoped for, the firm increasingly relies on ILS and third-party capital to drive additional profits.

O’Donnell explained, saying, “Our Ventures unit is a critical component of the execution of our strategy as it provides us with the flexible capital to meet the needs of our customers. The uniqueness of our structure and access to rated and ILS capacity is critical in today’s market.”

Critical, but also having a dampening effect on rates, that’s the role of ILS capital in reinsurance as it exerts the efficiency and lower-cost of capital to make the end-product more affordable, through the diversification and distribution of risk into the broader institutional markets.

O’Donnell is so pessimistic on the June renewals that he believes we could even see some layers of risk coming in at risk adjusted reductions, although he doesn’t think that will be widespread in the wake of hurricane Irma.

Overall he said, “I do think the amount of capacity seeking to be deployed in Florida will outstrip demand, which will definitely mute the level of price increase that’s achievable.”

Of course, none of this will be surprising to those tracking the ILS market along with us. The entry of new capital, to replace that lost in the 2017 catastrophes was extremely rapid and the upsizing of ILS funds and strategies in January has left some with more to deploy this June. While at the same time there are start-up ILS vehicles targeting Florida and the efficient execution in the catastrophe bond market has shown what is possible on rates.

All of this adds up to a Florida and mid-year reinsurance renewal that will disappoint some, but likely be pleasing for others. As in many ILS strategy cases, single-digit increases and larger shares are exactly what is required to deliver enhanced returns.

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