Founded in Bermuda in 1993, RenaissanceRe was one of a clutch of property cat reinsurers that were formed in the wake of Hurricane Andrew. It’s grown steadily since that time, diversifying from its founding cat focus while maintaining its reputation for quiet continuity combined with technical prowess.
Perhaps not surprisingly for a business that’s traded through so many market moving cycles, RenRe’s operations have been relatively unruffled by COVID-19. Although, as CEO Kevin O’Donnell admits, the full impact on business across the firm’s lines is harder to read right now.
“We went in mid-March from having everyone working in our offices around the world to having everyone working remotely. That transition was remarkably smooth: our technology has been robust and our ability to efficiently execute has been unimpeded by the transition,” O’Donnell told Reactions, speaking from home in windswept Bermuda last month, while Hurricane Teddy was in full force.
O’Donnell sees an acceleration in the use of technology like Zoom and Teams that has the potential to transform peoples’ working lives: “I think the ease with which financial services businesses can work remotely has been surprising to many. Over time, we’ll see a new model for working reflected in how companies are structured. It will also change how individual employees adapt their lives in relation to their contribution to the company.
“At RenRe we will assess what we have learned and optimise our efficiency against these learnings. It will take time for us to arrive at a new normal but the structure of the company in five years’ time will likely be a balance of the new and ‘old’ worlds,” O’Donnell says.
Counting the cost of COVID-19
From an underwriting business perspective, the long-term loss development from COVID-19, remains unclear, O’Donnell says:
“We’ve divided COVID-19 related losses into three categories. First and most transparent is event-like losses such as event contingency, event-based casualty clash and some Accident & Health. We went out early with the Q1 earnings release that all of our events to year-end would be cancelled. We believe we are correct in our estimation but only time will tell.”
O’Donnell’s second loss group to watch relates to casualty type risks that will develop over time, such as D&O losses where companies have restructuring issues that lead to D&O claims.
“The third and most difficult potential loss outcome to assess at this stage is business interruption related claims. Ultimately a lot of BI claims will end up being settled in the courts. There are a lot of different wordings in use and each may need to be interpreted differently,” O’Donnell says.
Much of the COVID-related activity reported at Q2 was event-based losses and O’Donnell reckons that there’s potential for further reports: “And court judgments will likely produce different decisions. It will take a long time before the full impact of the pandemic on the industry – and the economy – will be fully known. But ultimately it will inevitably be a very large loss for the industry.”
Better pricing environment
The shutdown is another catalyst for harder reinsurance market conditions already firmed by industry loss experience and increased cedant appetite, O’Donnell believes: “The trend for better pricing was already there before the shutdown. The storms this quarter will add further stress to the re/insurance industry. It means there will be a better pricing environment for reinsurers at 1/1.
O’Donnell, an underwriting veteran who’s been at RenRe since 1996, thinks that primary insurers recognise the value of reinsurance in the current market environment: “Primary companies will see the benefit of reinsurance. They are getting better rate on their product. In the casualty market especially, which is more of a quota share market, that rate improvement will transfer to reinsurers.
“Also, primary insurers are going to have less appetite for volatility, which will drive reinsurance demand,” he adds.
It was against this background that RenRe successfully raised $1.1bn of new common equity in June: “On the supply side, we raised capital because we anticipated our customers would be asking for more protection and consolidating purchases with their preferred carriers. We do see a long-term opportunity to deploy additional capital,” O’Donnell explains. “I think it’s clear that this momentum will continue as we move towards the 1/1 renewals.”
ILS uncertainties remain
O’Donnell concedes that the lockdown’s effect on the ILS market, and investor sentiment, is less clear. It’s an important market for RenRe, which has been an active participant since the late 1990s. The company manages invested capital worth over $9bn and ILS is an important component of its own general risk management strategy.
Capital supporting alternative reinsurance has stagnated between $90bn and $95bn in aggregate and represents approximately 15%-20% of available reinsurance capacity, according to a new report from Fitch Ratings. The rating agency foresees little market growth for the rest of 2020 and into 2021.
“The ILS market is facing a challenge because of the trapped capital issue that came of the 2017-19 loss years. Added to that, there are concerns among investors about cat frequency this year as well as the uncertainties around COVID-19,” O’Donnell says. “As COVID-related losses come into the ILS market – in addition to a global recession – investors such as pension funds could reasonably start to ask if ILS is still a zero-beta asset.”
Investors expect losses from hurricanes and they expect losses from earthquakes – they didn’t expect that a pandemic could produce losses as well, he explains.
“RenRe has different structures we can offer the market. Each one is based on what we think is the most efficient capital to bring to our customers’ needs. We have rated vehicles like Vermeer, Top Layer Re or Da Vinci. But we also have the more traditional cat bond fund vehicles Medici and Upsilon,” O’Donnell says.
“We are not concerned about our ability to take the risks our customers want, whereas other ILS funds might be more challenged if they can’t release the collateral to take risk in 2021. The situation will become clearer in the next several months,” he adds.
The allocation of capital from new investors into the space is uncertain because of physical restrictions as much as sentiment: such investors like to visit prior to allocation and that won’t be possible in this environment, O’Donnell reckons.
“Finally, the governance element of ILS funds is an increasing focus for allocators because of some of the loss reserving problems encountered by some players in market. We expect to see a flight to quality take place, resulting in some market consolidation.”
The evolution of RenRe
O’Donnell has seen enormous change in his 24 years at RenRe that’s accelerated in recent years. In 2015 the company made a major diversifying move by acquiring Platinum Underwriters; last year it completed the acquisition of Tokio Millennium Re AG and Tokio Millennium Re (UK) Ltd in a deal valued at $1.5bn in cash and RenaissanceRe common shares.
“The transition we have made from being a property cat company to being a diversified reinsurer is because our customers wanted to transact with us more broadly and consolidate their reinsurance panels,” O’Donnell says.
“We acquired the expertise we needed organically, and through acquisitions like Platinum. The Tokio deal brought even more depth. These two acquisitions furthered our strategy and we have executed on them in a way that’s been accretive to the group and benefitted our customers.”
O’Donnell reckons that Bermuda is one of the best places in the world to set up and run companies like RenRe but stresses that the supervisor needs to remain vigilant: “We have a great regulator in the Bermuda Monetary Authority. They understand reinsurance, insurance and ILS. They have done a good job of ensuring the recognition of the Island as an equivalent regime on the world stage.
“As structures change, especially around collateralised structures, the regulator will need to maintain oversight on how fronts are being deployed and how collateral agreements ensure the right level of longevity is achieved in relation to the risks assumed.”
Climate change risk warning
Looking at the bigger issues facing the industry as a whole, O’Donnell singles out climate change and weather risk as a major challenge. It’s a message that his peers should take note of given RenRe’s leadership in understanding and managing cat risk.
“We believe climate change will have long-term impacts on our business. We published a paper in 2017 on wildfire trends which pointed to the risks posed by climate change. That’s proved to be prescient in view of what’s been happening in the U.S. and elsewhere.
“We have developed models to look at the future risks posed by climate change: for example the frequency of Category 4 hurricanes in 30 years’ time. There won’t be a uniform shift where all hurricanes are more frequent: but more severe hurricanes will happen more often,” O’Donnell warns.
“It is crucial to look at what climate change and, for example, the warming oceans, could mean for customers’ risks over time. I believe RenRe is leading the industry in understanding how climate change will affect our clients and we are at the forefront of model development and using their output to better understand the risks we take.”
This article was originally published in Reactions.
