Evolving ILS capital landscape an opportunity. Broker facilities no threat: RenRe CEO O’Donnell

RenaissanceRe CEO Kevin O’Donnell explained during the firm’s third-quarter earnings call today that the evolution of the insurance-linked securities capital landscape is an opportunity for the reinsurance company, while he also commented on broker facilities saying that he sees them as disintermediating smaller players in the market.

O’Donnell responded to a question asking how RenaissanceRe views the entry of new investors into reinsurance in support of the growing number of sidecar structures, including casualty ILS structures, as well as more direct routes to access risk such as broker facilities.

RenRe’s CEO stated, “You know, ILS capital is sometimes thought of as one pool of capital, but it’s a constantly changing universe of investors that are seeking the risk that we can accumulate.

“After 2001 or 2005, a lot of hedge funds came in, those exited. Then we had sovereigns, we had pension funds, we had a whole other group of investors.

“So it’s constantly a moving environment and I think we are uniquely equipped to determine what types of risk satisfies the appetite of the capital that’s most interested in the risk that we accumulate.”

O’Donnell then highlighted how much of the new capital is not looking for the kind of pure insurance-linked returns that the ILS market has more typically delivered, through catastrophe bonds and property cat ILS.

“Currently, much of the capital is looking to harvest long-term liabilities to feed their existing investment strategies,” O’Donnell said. “That’s different than what we’ve seen in cat or property ILS capacity, which has been looking for low-beta returns to improve the Sharpe ratio of returns of their existing portfolio. So they’re paying for underwriting on property.”

Speaking to the motivations of these newer investors he said, “They’re paying for access to liability, long duration liability assets for casualty.

“I see it as an increase in supply of capital coming in. I also see it as an opportunity for us to intermediate that capital and risk. There’s no platform that’s better suited to do it. Ultimately, much of this capital will want to have someone come in to accumulate the risk on their behalf.”

Moving to respond to the question on broker facilities, which remains a hot-topic given recent activity such as Aon’s partnership with Blackstone on the Cortina structure, O’Donnell highlighted that he does not see these ventures as a threat to RenaissanceRe’s business.

The CEO explained, “With regard to the facility you mentioned, broker facilities are something that have been in our business for a long time. Those will continue to change and morph. I think we feel protected from those facilities because we bring value beyond the capacity that we bring to a reinsurance transaction.

“Much of the target of those types of vehicles is to monetise the capacity providers on the bottom of the slip. So the disintermediation there is not disintermediating us, it’s disintermediating smaller players with the hope to capture some margin from that disintermediation.”

Summing up on the new capital entering the reinsurance market through ILS structures and facilities O’Donnell stated, “It’s more capacity in the market, we can manage that. It’s a different type of capital, that’s an opportunity.

“We understand how to deploy that capital into the market. It’s just another iteration of the ILS market continuing to evolve, and one in which we see ourselves in an important role between that risk and that capital.”

Also read: RenRe raised $150m for new Lighthouse Cat Bond Fund, reports $81.7m of Q3 fee income.