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Original Risk: A Society for Change Agents

RenRe’s third-party capital ability said key attraction for potential buyers


The investors who have called for the sale of Bermudian reinsurance firm RenaissanceRe have cited the companies “dominant and unique position in third-party capital management” as a key reason to pursue a sale, saying potential buyers would find that attractive.

In the current global reinsurance marketplace access to capital has become key, as has the efficiency of that capital.

RenaissanceRe, given its long history of managing institutional capital as an underwriting capacity extension, has perhaps unparalleled ability in this area among the traditional equity-backed firms.

As reinsurers face increasing amounts of pressure, due to lower pricing and the resulting squeezed underwriting margins they have to deal with, adding additional and efficient balance-sheets that can work alongside their own equity capital is increasingly seen as not just a valuable tool, but a necessary addition to the traditional model.

As a result TimesSquare Capital Management LLC, a long-standing RenRe investor that has recently called for the firm to consider a sale in order to recognise the value inherent in the franchise, said in its letter to the reinsurer that potential acquirers would “covet” its insurance-linked securities (ILS) and third-party capital management prowess.

“We believe there are a number of potential acquirers that would covet RenRe’s dominant and unique position in third party capital management, as well as the Company’s proven track record of superior underwriting, risk management and tangible book value per share growth. Our opinion is that an active competitive sale process for the Company should be launched, which would likely yield a significant control premium over the current share price.,” TimesSquare Capital Management explained in its letter.

Importantly the investor has also followed the trends in the industry since it has had a holding in RenRe, saying, “We have witnessed a structural transformation of RenRe’s core property catastrophe reinsurance business, driven by the growing participation of alternative capital. In our view, this has had an adverse impact on the long-term risk-adjusted returns achievable in this business. Importantly, the degree of pricing response following large loss events over the past decade has been dampened relative to history and the duration of pricing gains has been ephemeral.”

The investor says that despite RenRe’s positioning, which some would perhaps consider being perfect for this point in the cycle, has not resulted in the valuation they would feel the shares deserve, but they have seen the valuations others have achieved of late thanks to M&A (such as Validus and XL).

Hence the call on the RenRe board to begin “a review of strategic alternatives” including a possible sale, in order to recognise the value that the firm believes it has and the market would ascribe to its shares.

RenRe responded late yesterday, saying that it “welcomes open and constructive communications with all shareholders and values their input.”

RenRe said it has discussed the matter with TimesSquare and is committed to recognising value for its shareholders.

“Our Board and management team continuously focus on enhancing shareholder value through execution of the Company’s strategic plan. We will maintain an open and active dialogue with all of our shareholders as we continue to work to enhance shareholder value,” the Bermudian reinsurance firm said.

It’s an interesting time in reinsurance mergers and acquisitions (M&A) right now, given the calls from investors to enhance share prices and boost values to match market positioning.

But market positioning means nothing, unless you have the efficiency in operations and capital to support the margins you need (or feel you need) to make.

It’s a difficult time for senior executive teams and boards alike, as share prices trading at below expected market values are not unusual when an industry is going through secular and cyclical change.

Reinsurance faces these pressures right now and it’s hard to provide immediate answers to shareholder concerns when you are doing your best to not just keep afloat but keep moving forwards in uncertain and challenging waters.

That’s not to say RenasissanceRe has been struggling in any way, but the firm is subject to the same pressures as others on the more traditional equity-backed side of the market, including rising competition and squeezed margins.

In fact, RenaissanceRe could be considered to be among the best positioned to respond to the challenges the industry faces at this time, with its access to third-party capital and established ILS and joint-venture vehicles a key component of its ability to trade through the cycle of recent years.

Industry equity analysts largely believe that RenRe has considerable mileage still as an independent entity and expect the firm to push hard to maintain its status as such, no matter the pressure they are currently coming under.

Some of the analysts have also cited RenRe’s access to third-party capital and established infrastructure for channeling that capital to risk as a key attraction for any potential acquirer.

Again, this is a sign of where we are in the evolution of the reinsurance market, that efficient capital and the tools to accumulate, manage, deploy and match it with risk are becoming a must-have, rather than just a hedging tool or even as a companion to their own capital.

It’s much more fundamental, that those re/insurance companies with integrated approaches to managing catastrophe risk and matching it with the most appropriate and efficient forms of capital, appear to be those gaining the most desired market positioning.

The fact activist investors are piling pressure on firms to boost their equity returns to shareholders is not that surprising though.

As a result, there is a case for reinsurers who have prime origination expertise, access to risk, as well as the underwriting ability to convert the leads that matter, but who cannot make the margins they used to, to consider downsizing the equity balance-sheet and moving to a more third-party capitalised, fee and service driven model.

The fee and service related income that could be earned by sourcing risk for third-party investors can be significant, but of course such a shift would require tough decisions in terms of expense, headcount and all of the other areas the industry is preparing itself to grapple with over the years to come.

RenRe is already perhaps the most diversified traditional reinsurance company, in terms of balance-sheet capital sources, and has been doing third-party capital management successfully for as long as almost anyone.

If this firm isn’t immune to pressure from investors, it has to make you think that no one is.

The question then is whether a sale process and potential boost to share valuation is actually solving anything, aside from the investors demands for returns, or whether it just puts off the tougher decisions that have to be made and are becoming ever more inevitable.

Ultimately, this discussion reminds us of the one about being able to recognise the value that you bring to the risk-to-capital chain.

Without question RenRe brings significant value(s) to its clients, partners and investors.

What shareholders in every re/insurance firm should perhaps be asking at this time is, are the re/insurers being paid adequately and are they being paid for the right things? Or is industry inefficiency and expense eating away their margins, while the focused response sometimes appears misplaced (and if not how to go about rectifying that).

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