RenaissanceRe, the Bermuda headquartered international reinsurer and third-party reinsurance capital supervisor, has constructed a “deep and chronic moat” round its payment revenue enterprise, CEO Kevin O’Donnell believes, saying that demand from traders for entry to its Capital Companions methods is commonly higher than it will possibly fulfill.
Writing in his annual letter to shareholders, Kevin O’Donnell defined that payment revenue generated by the RenaissanceRe Capital Companions is a big contributor to the agency’s general incomes energy.
“At RenaissanceRe, we’ve got spent the final decade constructing a reinsurance firm designed to unravel any buyer’s downside throughout any line, at scale, by our owned and Capital Accomplice steadiness sheets,” O’Donnell wrote.
Happening to spotlight that, “The payment revenue we earn primarily from our Capital Companions enterprise. As I mentioned final 12 months, we take a singular method to third-party capital. Our pursuits are extremely aligned with our companions and this method has allowed us to organically develop into one of many largest managers of third-party capital.
“For the 12 months, administration and efficiency charges totaled $327 million. Administration charges had been $219 million, up 24%, largely because of progress in our third-party automobiles DaVinci and Fontana. As I mentioned beforehand, we deployed our Capital Accomplice steadiness sheets extensively within the renewal of legacy Validus enterprise, and that is the place many of the progress in our payment revenue originated. Administration charges additionally benefited from some payment recapture from prior years that had been impacted by catastrophic occasions.
“Efficiency charges in 2024 had been $107 million, up 78%, because of robust efficiency throughout our Capital Companions automobiles.”
O’Donnell later mentioned the moat he feels RenaissanceRe has constructed round its third-party capital and insurance-linked securities (ILS) providing from the Capital Companions division.
“I started this letter by describing our means to unravel our prospects’ issues, at scale, by our owned and Capital Accomplice steadiness sheets. This means is the last word final result of our aggressive benefits and the premise for a deep and enduring moat that we’ve got constructed round our enterprise.
“I consider we’ve got constructed an equally deep and chronic moat round our payment revenue enterprise. We provide each rated and collateralized funding automobiles throughout the complete panoply of property and casualty dangers we write (together with disaster bonds). Consequently, it’s simpler and extra worthwhile for an investor to associate with us and profit from our underwriting aggressive benefits on day one, somewhat than making an attempt to independently recreate them,” O’Donnell defined.
“As well as, our Capital Accomplice steadiness sheets are absolutely built-in into our operations (and normally absolutely consolidated into our monetary outcomes). This enables us to take a singular method to third-party capital, beginning with enticing danger after which allocating that danger between our wholly owned and Capital Accomplice steadiness sheets. When our companions expertise an underwriting loss, we additionally expertise an underwriting loss. This will increase alignment with our Capital Companions and reduces company conflicts.”
He additional highlighted the “strong governance and audit capabilities” of the general public reinsurance firm, saying that these equally apply to the third-party reinsurance capital automobiles and ILS funds.
“This additional reduces company battle and will increase belief. It additionally permits us to carry rated entities to third-party capital throughout all our strains, which distinguishes us from friends and offers underwriting leverage and improved liquidity to our Capital Companions,” O’Donnell wrote within the letter.
O’Donnell went on to say that he believes these components have resulted within the long-standing investor relationships RenRe has constructed up by its vary of joint-venture and ILS buildings, saying, “A lot of our traders have been with us for over a decade, typically much more than two.”
To which he added that, “We persistently expertise higher demand for investments in our Capital Companions enterprise than we will fulfill.
“Consequently, when we have to scale this enterprise quickly, as we did once we bought Validus, we’re in a position to take action.”
Lastly, the RenaissanceRe CEO additionally highlighted considered one of its newer joint-venture automobiles Fontana, the casualty and specialty strains centered technique that allows traders to allocate to longer-tailed strains of reinsurance enterprise, which the corporate has been steadily rising over the previous couple of years.
Whereas “smaller margins and decrease capital consumption” could make these strains of enterprise much less amenable to inclusion in a Capital Companions technique, O’Donnell famous that, “Many traders discover its float producing potential enticing which allowed us to create our progressive Fontana car in 2022.”
On how RenRe thinks about shorter-tailed, extra capital consumptive and payment producing strains equivalent to property disaster danger, versus longer-tailed strains, O’Donnell gave the next description.
“Every of our courses of enterprise have totally different danger and volatility profiles and contribute in distinct – however equally essential – methods to our Three Drivers of Revenue.
“Property is extra risky and produces extra underwriting revenue in good years. It additionally generates substantial payment revenue from associate capital.
“Casualty and Specialty, however, is much less risky, producing a smaller however extra predictable underwriting end result, in addition to some payment revenue from Fontana. Its largest contribution in right this moment’s market circumstances, nevertheless, is to our funding revenue, because of the appreciable float it generates from our loss reserves.”
It’s at all times attention-grabbing to see what the CEO of a serious international reinsurance firm has to say about different capital and ILS, particularly so when it comes from the corporate with maybe the most-balanced mixture of own-balance-sheet and third-party capital.
RenaissanceRe has persistently developed new methods for traders to associate with and share in its underwriting returns, leading to vital payment era that now advantages its shareholders meaningfully. Whereas the actual fact investor demand usually outstrips the agency’s means to fulfill it, is telling of how enticing this mannequin has confirmed to be.
In fact, it’s essential to make clear right here, that many ILS funding managers expertise demand from traders outstripping their means to simply accept new inflows at occasions. It’s been a function of the ILS market since its inception and is one other reflection of the cyclical nature of reinsurance.
Lately although, the disaster bond market has seen far fewer funds shuttering to inflows than it used to (it was an everyday prevalence prior to now). So the enlargement of the market and rising use of ILS capability by the insurance coverage business as a complete, helps to maintain these methods open to traders extra persistently as of late. One thing which will proceed to be the case, if the pipeline stays as robust as we’ve seen over the past 12 months or two.
