RenaissanceRe sees the potential to raise new third-party reinsurance capital for the June 1st renewals, as its view of the market particularly in retrocession suggests profitable opportunities will be available, CEO Kevin O’Donnell explained recently.
O’Donnell expects growth to come from the collateralized reinsurance and retrocession vehicle Upsilon, which RenaissanceRe (RenRe) had already increased in size at the January renewals this year.
RenRe is one of the few insurance-linked securities (ILS) and third-party reinsurance capital managers to raise fresh capital and boost its assets under management (AuM) in 2019, as many have been waiting out the end of the loss creep and to recover capital that had been trapped.
RenRe powered ahead to increase its third-party reinsurance and insurance-linked securities (ILS) capital under management to almost $5 billion at the beginning of 2019 and the firm has been taking advantage of the growing appetite of its investor base to cede increasing amounts of risk to it ever since.
While RenRe reported growth in its property catastrophe reinsurance book, largely driven by expanded participation on existing transactions and the addition of some new transactions, the company ceded a greater proportion of the catastrophe premiums written, with the Upsilon RFO the main beneficiary.
But with reinsurance and retrocession pricing looking promising for the mid-year renewal season, with broad rate increases expected on catastrophe exposed accounts in Florida, with loss affected likely to rise even more, then more rate opportunities expected at July 1st, RenRe is keen to ensure it maximises on this for itself and its third-party investor base.
Speaking during the reinsurers recent earnings call CEO of RenRe Kevin O’Donnell explained, “Based on our view of the retro and reinsurance markets, we believe that Upsilon could continue to grow capacity at June 1.”
He went on to explain that this would primarily be driven by new retrocessional deals that RenRe underwrites, as well as opportunities in areas of risk including wildfire programs and Florida reinsurance transactions, where some of the highest rate increases are likely to be seen.
Interestingly though, the increasing retrocession rates, while deemed attractive for third-party investors in RenRe’s Upsilon vehicle, may mean the reinsurer itself is less well-protected after these renewals.
O’Donnell explained that, “As risk-adjusted prices increase and buying retro becomes less efficient, we will likely be exposing more of our equity, both on an absolute and relative basis, compared to the last several years.
Continuing, “We will only do this, however, if we believe the risk return characteristics justify the increased exposure to our shareholder and partner capital.”
So RenRe isn’t afraid to take on a little more risk if the returns are right and buying less retrocession for itself is one way this will manifest itself.
But of course, RenRe’s third-party capital has grown quicker than its balance-sheet in recent years, so it is the third-party investors in the firms joint-venture vehicles, ILS funds and other collateralized reinsurance structures that will pick up the bulk of any exposure to risk, as less retro is purchased.
O’Donnell explained how the gross to net strategy at RenaissanceRe has seen the reinsurer expanding its underwriting significantly, while not expanding its own capital too much in the process.
“Since the beginning of 2015, we have grown our gross written premiums by 150%, while only increasing shareholders’ equity by 44% and operating and corporate expenses by 16%,” he explained.
With most of the premium growth going to third-party capital it seems, despite RenRe’s greater level of diversification achieved since the Platinum acquisition.
“This makes us increasingly efficient with our capital, which should result in superior returns over the long-term,” O’Donnell continued.
The increasing use of third-party capital has also become a major contributor to RenRe’s results in recent years and the firm clearly wants to make sure it capitalises on the rate environment at the upcoming renewals, meaning it is likely to activate more capital inflows where necessary and opportunities allow.
For the Upsilon vehicle, there could be an opportunity in the retro market, given this is where the greatest opportunities have been seen throughout much of the year.
In fact given the capital constraints seen in retrocession, it could be that retro market opportunities are more attractive than even the Florida property catastrophe reinsurance market around this renewal season.
O’Donnell is increasingly bullish about RenRe’s work with third-party capital, saying that it’s become “an increasingly important contributor to our results” and that the company feels it is well-positioned to capitalise on it as, “We believe that we continue to be the preferred provider of cat risk to all forms of capital.”
Investors are currently looking to track records and the ability of managers to provide a relatively low-volatility ILS style product, while still delivering a reasonable level of return.
RenRe’s ability to write larger reinsurance and retrocession lines on the front-end of its business, then chop them into pieces for each of its third-party balance-sheets (where appropriate) means the peak exposures within these portfolios can perhaps be more easily managed, offering greater diversification too.
But being a reinsurer writing business for its own balance-sheet as well, the questions of conflicts of interest will always persist.
“We have always been good stewards of capital and we’ll continue to be so going forward,” O’Donnell explained.
The best way for RenRe and others to answer those questions is through the results that are delivered, to both equity shareholders and third-party investors, of course. Something RenRe will be keen to do, with its higher-performing portfolios after the rate increases of recent and soon to come renewal seasons.
Of course, the fact new capital is being raised for the renewals will perhaps not be viewed as favourably by RenRe’s competitors, as any new capital flowing in has the potential to dampen the level of any increases secured.
RenRe won’t be the only one deploying more capacity at the June and July 1st renewal season though. All of the big four reinsurers are expected to look to grow their books in Florida and more widely in U.S. programs as well.
In a renewal that looks destined to be late in some cases, the emergence of more capacity just a few weeks before contract signings could make things even later, as buyers look to swing the negotiations back in their favour.
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