For Bermudian reinsurance firm RenaissanceRe, ensuring there is alignment between itself and its own balance-sheet capital, with its partner provided and third-party investor ILS capital, is imperative to the companies continued success, according to its CEO.
Kevin O’Donnell, CEO of RenaissanceRe, discussed the relationship that the reinsurer has with its third-party investors and the importance of maintaining its alignment with capital market investors and demonstrating that it has skin-in-the-game when it comes to sharing business it underwrites with them.
Third-party capital is not always the first choice for sharing underwritten business with however, as RenRe would often rather use its own balance-sheet or one of its partner vehicles, such as the Top Layer Re joint-venture, over its third-party or ILS capital it manages.
It all depends on the return profile and capital intensity of the business as to whether it suits RenRe to hold it on the balance-sheet, share it with a partner or cede it to a third-party vehicle. RenRe maintains a share in all its third-party capital and ILS vehicles anyway, through which it demonstrates that it takes on the same risks as its capital providers.
“Something that we think is critical is the flexibility we have between our partner and third-party capital. Our preference is to deploy our capital or our partner’s capital into the business when we can get an appropriate risk adjusted return. Absent that, we will look to return it,” explained O’Donnell during the reinsurers Q3 earnings conference call.
He continued; “I think the blended approach that we have and will continue to execute is the platform which is going to be most resilient as we move into 2015 and beyond. The ability to manage our own capital, manage ceded and manage third-party capital in a very integrated and collaborative way.”
The relationship and demonstration of alignment with the different types of capital, partners and investors is key to RenaissanceRe and part of the reinsurers strategy.
O’Donnell said; “We believe alignment with third-party capital is imperative to long-term success.”
Some types of business just fit better in the ILS and collateralized reinsurance vehicles that RenRe operates, said O’Donnell; “There are times where there is business, which we believe is adequately priced, but based on our models and our weighted balance-sheet is capital intense and therefore better suited to a collateralized vehicle.”
Even within some of its peak catastrophe risk vehicles, such as its retro focused sidecar structure Upsilon, the demonstration of alignment between capital remain keys. O’Donnell explained; “One I’d point to is Upsilon, which started as our worldwide kind of structured retro product, which we thought on a standalone basis was profitable but was capital-intensive. Even in that vehicle we believe investing alongside the capital that comes in is important, to show that we’re not violating the standalone returns that are required to take that risk.”
“So although the return profile doesn’t fit on a rated balance sheet, we believe the standalone returns are still appropriate for certain types of capital,” O’Donnell continued.
RenaissanceRe continues to see strong demand from capital markets and insurance-linked investors seeking to access the returns of the business it underwrites.
O’Donnell explained that the alignment remains an important factor in how the firm thinks about raising new capital for its third-party managed cat business; “We continue to see strong demand from third-party capital to access our market. We are committed to managing third-party capital when it is needed by our customers. Our track record is one of interacting with clients and capital providers as partners, looking out for their best interests and aligning our capital alongside theirs. We believe this positions us well in this market.”
At the same time, if the opportunities to deploy that capital are not attractive or simply not available, RenRe would rather return it than underwrite with it at any cost in the currently challenging reinsurance market environment.
“This has been a good year for us in capital management, which is something we think about holistically. We seek to optimise our capital position and reduce our cost of capital to match underwriting opportunities,” he said. “We are opportunistic with share buybacks this quarter. We will continue to return capital to our shareholders and third-party investors when we cannot find opportunities to deploy at adequate rates of return.”
This again is a demonstration of alignment with capital. Being prepared to downsize across all its capital types, rather than simply shift business over to third-party capital and ILS investors, shows that RenaissanceRe is trying to be a responsible custodian of investors capital which should stand it in good stead in the current market.