Bermudian reinsurance firm and third-party capital manager RenaissanceRe wants to be seen as the best underwriter of property catastrophe risks, particularly with regards to third-party capital management from investors, according to its CEO.
As the reinsurance and insurance-linked investments space continues to develop, alongside a highly competitive traditional market place, companies like RenaissanceRe increasingly want to demonstrate their underwriting prowess to third-party or ILS investors.
When rates decline and capital in the sector grows, one of the best ways to demonstrate to investors that you’re the best home for their capital is to generate the best and most sustainable underwriting returns.
RenaissanceRe, with its long history of managing third-party investor capital in underwriting vehicles alongside its own balance-sheet, has perhaps some of the best evidence of a successful track record for this in the world today.
CEO Kevin O’Donnell is clearly aware of this and recognises the importance that the track record plays, as well as the important role that third-party capital plays today in RenRe’s business and that it will play in the future as well.
“Our objective is really to be seen as the best underwriter, particulary the best underwriter of property cat with regard to third-party capital,” O’Donnell explained during the reinsurers recent third-quarter earnings call.
Matching risks with the right source of capital has been part of RenaissanceRe’s business model for many years and O’Donnell doesn’t expect that to get any less important going forwards. The multi-balance sheet approach provides efficiency for the reinsurer and enables it to deliver returns that investors find attractive.
But it all comes down to expertise, O’Donnell said; “Our view is that we want to be paid for underwriting expertise and that underwriting expertise will bring good risks to whichever efficient capital we decide is the best pool to put it to.”
But RenaissanceRe isn’t going to rush out to bring in new capital and it certainly isn’t going to underwrite risks on third-party funded balance-sheets that it would not underwrite on its own. That’s been the mantra since day one, as RenRe follows an aligned approach to being a reinsurance firm managing third-party investors capital.
O’Donnell explained some of the market dynamics; “There is already more capital than required for the risk in this business. We have set a very high hurdle for any deal that brings additional capital into the market.”
That high hurdle for the quality of business that RenRe is willing to deploy capital against means that the reinsurer is more likely to turn down offers of new capital and even return some, as has been seen in recent months from the companies quarterly reports and downsizing of vehicles such as DaVinci Re.
“One of our core skills is knowing how much capital we can deploy while still achieving our target returns and at this time we are far more inclined to return capital to investors than to accept new capital,” he explained.
The continued influx of capital as well as some managers inability to turn it down has led to the softening of rates, O’Donnell suggested, implying that this has become a race-to-the-bottom.
He continued; “In the current pricing environment, with relatively flat demand for property cat, managers accepting new capital entering the business are competing on price alone to deploy each new dollar.”
“In a more competitive environment this new capital is sure to bring lower expected returns.”
And here’s how RenRe wants to be thought of, when it comes to how it aligns itself with investors and how it manages their third-party capital, according to O’Donnell; “As a manager we eat our own cooking and treat our partners capital as if it’s our own.”
As a result, O’Donnell believes that RenaissanceRe has positioned itself as one of the leading markets for any capital provider seeking access to attractive risk.
“Everyone looks like a good underwriter when there are no losses, this will change,” O’Donnell said, adding that RenRe believes its franchise is best suited to adapt to this challenging and changing reinsurance market.
And how will a reinsurer like RenaissanceRe continued to succeed and hope to outperform the market?
O’Donnell said that he doesn’t feel its prudent for RenaissanceRe to try to arbitrage between risk and capital and so won’t take on risk it deems inappropriate, regardless of the cost of the capital it is going to be matched with.
“We will accomplish this by saying yes when we can, no when we can’t and by continuing to match desirable risk with efficient capital,” O’Donnell said, words that will no doubt comfort the firms investors.