At Bermudian reinsurance firm and third-party capital management specialist RenaissanceRe (RenRe) the use of alternative capital and ILS is more of a customer driven activity, rather than one driven by a quest for funds under management, according to CEO Kevin O’Donnell.
In the increasingly competitive world of third-party reinsurance capital management and insurance-linked securities (ILS) asset management, differentiation is becoming more important and RenRe is clearly seeking to highlight what it is that makes its strategy attractive to ceding companies and investors.
RenRe has been underwriting using third-party pools of capital since as long ago as 1998, making it perhaps the first traditional reinsurance firm to embrace the efficiencies of the capital markets for more than just its own retrocession.
Given it is one of the oldest ILS investment managers it is perhaps surprising that RenRe hasn’t accumulated more assets under management in that time, but the reinsurer has its shareholders to also satisfy and so has been less motivated to dramatically increase assets despite its long history of managing institutional investor capital for direct investment into catastrophe reinsurance risks.
Chief Executive Officer (CEO) Kevin O’Donnell explained one of the strategies employed at the firm during its recent earnings call, saying that RenRe’s third-party capital activities have been driven by its customers, not a desire to ramp up its assets under management.
“What we do is really more customer driven and not just seeking to bring funds under management,” O’Donnell commented. “When we think there’s a customer need, and we can bring efficient capital to that customer need, we’ll either bring that from the big capacity that we have, or structure a vehicle to meet the needs of the customer.”
RenRe has long employed third-party capital as a way to strengthen key relationships with reinsurance clients, packaging ILS capacity with its own balance-sheet capacity to bring more efficient products to customers, while also investing in its third-party capital vehicles as well to maintain alignment with allocators.
In this way the company looks to maintain a customer driven approach, both to its use or deployment of alternative capital and in its investor relations and capital raising activities.
Being customer driven is key for reinsurers that leverage third-party capital, as it is the only way to ensure that ILS management activities are incremental to the bottom-line and not dilutionary.
There needs to be a very good reason for venturing into the management of third-party capital and reinsurers cannot hope to have long-term success with the strategy if it is employed simply to gain access to fees. Chasing fees means that chasing assets becomes inevitable, and the more efficient third-party capital then has to be deployed which would erode the value of the reinsurers own balance-sheet capacity.
Hence third-party and ILS capital management activities at re/insurers need to have some degree of synergy with the traditional business, and the strategy needs to be well thought through before it is enacted on.
“Our ventures team continues to actively build relationships with high-quality long-term investors as well as looking for new transactions that can enhance our underwriting franchise,” O’Donnell continued.
And reflecting the reinsurers desire to only accumulate funds under management when it can be gainfully employed, O’Donnell said; “We believe we have developed a unique ability to deploy capital where it is needed most, through our own underwriting platforms or through our managed balance sheet, and to remove it from there when it is not earning a suitable return.”
“I feel great about our access to capital and our access to risk,” O’Donnell said. “I think we can structure anything that we’ve seen structured in the market.”
Given RenRe’s long history working with third-party investors and its desire to be aligned with both customers and investors we have no doubt that is the case.