RenaissanceRe, the Bermudian reinsurance firm, has a long history of bringing third-party capital from institutional investors and joint-venture partners into its underwriting business. The reinsurer believes that its ability to play between a rated balance sheet and third-party capital is the optimal structure for most scenarios.
At the recent mid-year reinsurance renewals RenaissanceRe managed to construct a portfolio that it was happy with, despite increased competition from third-party capital and from traditional reinsurers with abundant capacity. CEO Kevin O’Donnell commented; “We built a great portfolio, and one which I believe has separated us from the market.”
The aim was to build a portfolio that enabled the reinsurer to continue to meet its return target without becoming over-exposed. O’Donnell commented; “Overall, despite more competitive market conditions, we’re able to build a high-quality portfolio at the mid-year renewals, generating acceptable returns on an expected basis.”
The reinsurer changed both its inwards and ceded reinsurance strategies at the renewals to take advantage of the best returning opportunities where it felt the risk was commensurate with the rewards offered. It also took advantage of market conditions to increase its own retrocession, with the Mona Lisa Re catastrophe bond a prime example of this.
O’Donnell commented; “We closed a 144A deal through our Mona Lisa facility and are pleased with our execution there. Declining spreads in the cat bond space provided us an attractive form of risk transfer to the capital markets.”
On the impact of third-party capital and the capital markets, O’Donnell commented that RenRe is seeing increased competition, but not just from capital markets capacity. Rated reinsurers are also awash with capacity and have been battling back against price decreases by reducing their own prices and loosening terms on renewals. This increased appetite from rated balance sheets is a factor that has affected Florida in particular, he said.
At the same time, there is no evidence of increased demand for reinsurance protection in the U.S. and so you get the falling prices. A factor affecting competition was pressure on traditional players managing collateralized capacity who felt they had to deploy their new capital, said O’Donnell. He continued; “Our approach has always been to bring alternative capital to the market, when it’s needed by our clients.”
Credit quality of capital is a topic O’Donnell was keen to discuss, saying that the largest declines in pricing and rates were seen where capacity with low credit quality was being deployed. This is interesting as you could easily exchange ‘credit quality’ for ‘cost of capital’ here, a topic many traditional players have been keen to avoid in recent discussions on third-party capital.
There seems to be an unwillingness to admit that cost of capital, rather than credit quality, which to some degree is irrelevant when considering fully-collateralized covers, may be the key factor enabling third-party capital to be deployed at lower rates.
CFO Jeffrey Kelly then discussed RenRe’s strategy for managing third-party capital, saying; “The way we look at managing third-party capital is, like most things here, over a very long-term basis and we want to provide excellent returns for our investors in all of our third-party capital vehicles over the long-term. We will also want to cultivate good long-term partners in our third-party capital vehicles.”
O’Donnell added; “We did a very good job this quarter working closely with our brokers and clients early on. We did a good job working along with our ventures unit to bring capital to the market in non-traditional ways.”
The multi-capital source strategy is one that RenRe is keen to promote at the moment. O’Donnell continued; “Although the market generally was down significantly we were largely able to play around that because of our strong relationships and ability to bring capital in many forms.” Stressing the importance of leveraging non-traditional capital and structures, O’Donnell said; “Our relationships and then our access to clients and ability to structure non-traditional deals is very beneficial.”
Kelly closed the discussions on third-party capital, saying; “We believe third-party capital will be part of the market for the long-term. So if you go back we wouldn’t have been managing, or wouldn’t have built the infrastructure that we have to manage, third-party capital if we didn’t believe that.”
The executives comments show that the mix of traditional and third-party reinsurance capital is key to RenaissanceRe’s future strategy. Clearly it sees this strategy as the right one for the foreseeable future for any major reinsurance underwriter.
Kelly said; “Our preferred position is to have a balance between a rated balance sheet and third-party capital.” He then said that he expects capital to be more or less available at times, in line with market cycles, but the ability to leverage all forms will be important to RenRe.
Kelly closed with; “Our ability to play between a rated balance sheet and third-party capital, I believe, will be the optimal structure within the vast majority of scenarios.”
Now RenaissanceRe has been doing this for a good few years, it was one of the first to launch joint-ventures and sidecars, both opportunistically when rates were on the up and in more permanent facilities. It has also been managing its own capital in a catastrophe bond focused insurance-linked securities (ILS) fund, Medici, for a number of years and has only recently begun to take in third-party capital into that fund structure, as we wrote last week.
This suggests an escalation of its focus on third-party capital as a reaction to current opportunities and investor interest. It will also allow RenaissanceRe to attempt to find the right balance for rated balance sheet versus third-party capital, not an easy task given the different profit margins and investor demands for each type of capacity.
Finding this ‘optimal structure’ in terms of the correct mix between rated and third-party capital will not be easy and we expect some trial and error at reinsurers with capital markets divisions over the months to come. For a firm the size of RenaissanceRe it is the right strategy though and we expect others will seek to emulate its increased use of third-party capital going forwards.