Bermudian reinsurance firm and third-party capital manager RenaissanceRe is forecast to gain market share in insurance-linked securities (ILS) management by the equity analysts at Keefe, Bruyette & Woods.
RenaissanceRe (RenRe) is in the process of acquiring Japanese owned reinsurance firm Tokio Millennium Re, a major transaction for the firm and one that sees it building scale, diversity and specialism.
But the KBW analysts project that RenRe may also benefit from the recent spate of losses that have hit the ILS fund market, the impact that this has had on some ILS investment managers, and the fact some ILS end-investors may be looking for change.
The analysts expect that RenRe will “gain share within the ILS-related asset management market in 2019,” which they say is partly because of the conservative way that it modelled the 2017 and more recent catastrophe loss events.
Certain ILS funds have suffered more loss creep than others from the 2017 hurricanes in particular, which has led to some surprises for end-investors.
The analysts clearly think those that came out of that period of losses less affected and with better returns, will stand to raise more capital going forwards.
Of course there are plenty of ILS funds and collateralized reinsurance investment vehicles which did not suffer much in the way of unexpected loss creep as well, having reserved adequately from the start, so RenRe will not have it all its own way when it comes to attracting any investors that do want to move.
The analysts said, “Even sophisticated investors need to rely somewhat on asset managers’ competence and credibility, in which context RNR’s to-date favorable development on its accident-year 2017 catastrophe losses (including its explicit contemplation of rising LAE costs, demand surge, and other factors underestimated by competitors) should enable it to grow its share of global assets under management.”
KBW’s analysts also highlight RenRe’s “virtually unquestioned integrity” as another factor that will help it to attract more third-party capital from investors in 2019.
They expect that as RenRe grows its presence as a manager of third-party ILS assets, this “should itself support overall better expected property catastrophe returns.”
It’s going to be interesting to see whether RenRe’s third-party capital funded balance-sheet begins to overshadow its equity balance-sheet in years to come and how that affects its returns, as well as its business model.
The company has become a prime example for one way of embracing new sources of capital, becoming a hybrid underwriter with equally large balance-sheets and third-party capital pools.
While adding more third-party capital will no doubt add efficiency and drive significant fee income, the balancing act between the scale of the underwriting house and its staff base, which has grown considerably in recent years, against maintaining sufficient returns on its own equity will be fascinating to watch.
It’s also worth noting that RenRe has been looking to capitalise on the crunch in retrocession markets, which could provide a source of opportunity for the firm to acquire more risk to support more third-party capital inflows over the coming months.
The recent launch of Vermeer Re alongside pension investor PGGM is the latest sign of RenRe’s expanding use of third-party capital.
The company effectively raised a $1 billion commitment from a single investor for Vermeer, while at the same time raising further funds for the January renewals for its Upsilon vehicle as well.
The KBW analysts also believe that RenRe’s expanding appetite for managing third-party capital could have a positive effect for the industry as a whole.
They suggest that RenaissanceRe’s, “still-unique analytical strengths mean that its expanding influence on overall catastrophe reinsurance capital allocation should drive “better” industrywide expected results.”
However the increasing flow of efficient capital into the sector does mean higher competition in core property catastrophe lines, suggesting that upwards rate movements may be dampened further as well.
RenRe was always going to grow its third-party assets under management, but in the wake of the losses it may have an opportunity to accelerate that.
However, we do expect that any trend towards reinsurers managing increasing amounts of ILS capital will result in questions regarding their alignment of interest with third-party investors again, so expect that topic of conversation to come up more frequently going forwards.
There is also a good reason to suggest that the major independent ILS fund managers also have a chance to consolidate their market positions at this time, as investors continue to hunt for quality in the market.
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