4 September 2013

RenaissanceRe: a Bermuda icon

RenaissanceRe has become synonymous with the Bermuda market, its evolution and success. This year the company celebrates its 20th year and welcomes a new CEO, Kevin O’Donnell, to the helm. A pioneer in the management of third party capital and a market leader in property cat, O’Donnell takes the reins of a company that continues to maintain a steely focus on “lasting relationships, superior risk selection and intelligent capital management”.

Established in 1993 in the wake of Hurricane Andrew, RenaissanceRe’s birth, evolution and success have been intricately linked to its response to calls for capacity. From the shortage of catastrophe coverage following Hurricane Andrew in 1992, to events such as September 11, 2001 and the year of Katrina-Rita-Wilma (2005), “every major event has resulted in something of a rebirth, with RenaissanceRe able to commit additional capital to the market whenever there has been a scarcity”. Following each of these events the company has identified customers’ need for protection and been in a position to access and deliver that additional capital, O’Donnell explained. And this focus upon responding to calls for capacity post-event remains within the company’s DNA, a focus that is a lasting legacy from its early days.

As O’Donnell outlined “The most important barometer of success is not returns, but our ability to serve our customers.” In the reinsurance business relationships can be strained at times—particularly on cat business where claims can be infrequent but severe—but O’Donnellsaid that he can “look back over our 20-year history and be proud of the fact that in almost every instance our relationships emerged significantly stronger after a claim than they were before. We believe we have sold a promise to pay and are determined to be there when our clients need us most”.

"Cat business is a core part of the franchise, with RenaissanceRe a recognised expert in the market at 'understanding, underwriting and matching cat risk with capital'."

It is this desire to deliver the best possible service to its customer base that in turn shapes the company’s focus on superior risk selection and the intelligent management of capital. “While any one of these three elements can be replicated by the wider market, our approach is an integrated one that considers all three elements together in order to deliver the best results for our clients. If we deliver in these three areas everything else falls into place—including our results.”

Superior risk selection has formed a key plank of RenaissanceRe’s well-documented success—a consideration that is particularly telling considering RenaissanceRe’s emphasis upon cat. As O’Donnell explained, cat business is a core part of the franchise, with RenaissanceRe a recognised expert in the market at “understanding, underwriting and matching cat risk with capital”.

Addressing its approach to risk selection, O’Donnell said that every transaction is looked at on the basis of two analyses—on a standalone basis addressing whether “there is enough profitability in the deal to support the volatility of the risk we are assuming”; and on a marginal basis where the consideration is: “given the portfolio we have, how much capital would we need to apply to this deal?”. He explained that with a cat book of business the focus tends to be more upon the marginal aspects due to the correlated nature of such business within the wider business, while for more diversifying perils—such as the company’s growing specialty book—the “standalone score tends to be the more dominant analysis in your underwriting decision”.

Addressing diversification within the risk selection process, O’Donnell warned that it is too often misunderstood by the industry as attractive simply for diversification’s sake. “It is the profit in the deal that diversifies, not the risk,” said O’Donnell—a notion linked to RenaissanceRe’s ongoing focus on superior risk selection.

Changing dynamics

Much has changed over the past 20 years. As O’Donnell explained, “we have seen considerable change in the form and structure of capital entering the market” with the company evolving as a result. In its early days RenaissanceRe deployed a rated balance sheet to underwrite risk, but has since blazed a trail in the deployment of third party capital. Convergence vehicles such as its various sidecars, Top Layer Re and DaVinci Re, have seen the company active in the third party space for over a decade and have shaped perceptions concerning the most recent influx of new capital.

“Convergence capital presents both a threat and an opportunity for the industry. The threat is the additional supply that this capitalrepresents; the opportunity is being able to manage and access this additional capacity. Third party capital offers us the opportunity to manage that capital for others, or access that on a retro basis in order to optimise our own portfolios and capital structures”—something that RenaissanceRe has done with considerable success in recent years.

With the company’s long track record of managing third party capital, underwriting talent and the structures it has available to deploy additional capital, O’Donnell is bullish about RenaissanceRe’s prospects of being a home for yet further convergence capital. “At a high level, our job as underwriters is to go out into the market, find desirable risk and match it with efficient capital. If that capital is coming into the market in new ways we need to anticipate that. I expect that following the next event we will be deploying not only more of our own capital, but also capital sourced from third party sources.”

Whereas in the past underwriting and capital management functions were quite separate, “these days if you are going to be successful at accepting and understanding risk you need to be equally adept at understanding capital,” said O’Donnell. “Today we spend a great deal of time determining what type of capital we source, where the market is likely to go, how much capital is needed, and what kind of structures are needed to ensure we can attract capital in investor-friendly ways.” Gone are the days when underwriters only considered risk.

Not that RenaissanceRe is slavish in its pursuit of deployable capacity. As O’Donnell explained, the company decided not to renew its Timicuan Re sidecar earlier this year, citing ample supply and an inability to deliver adequate returns to investors. The decision reflects another of RenaissanceRe’s convictions, “that not only are our clients partners, but so too is the capital we deploy”. O’Donnell said that the company had learned to return capital to investors when it could not be appropriately deployed, encouraging a close and mutually beneficial partnership with third party participants. “We have been diligent with our own equity, but equally so with that of our third party partners— an approach on which we are consistently complimented by investors.”

Capital management is a key aspect of the company’s success and as O’Donnell explained is “highly integrated” into both its underwriting philosophy and customer focus. “We do a lot of work to optimise the capital structures we employ,” said O’Donnell, with the focus being upon “building optimal portfolios of risk and delivering superiorreturns”. This entails working closely with the client, with frequent conversations occurring around the structuring of programmes in order to reduce the cost of capital. “Rather than saying yes or no to a deal, we explore alternative structures that enable us to engage with customers and drive down the cost of capital needed to deploy to their risk.”

It is through its exploration of alternative structures such as DaVinci Re and Top Layer Re that RenaissanceRe has led the field in the delivery of capacity in the convergence space. As O’Donnell outlined, these structures have been “critically important to the company’s success”, helping to create “permanent vehicles with long-standing and trusted partners”. For its partners these vehicles have in turn enabled RenaissanceRe to deliver “greater security across the spectrum of rated balance sheets and third party capital”.

Talent and innovation

While the company has been innovative in its use of reinsurance and capital structures, RenaissanceRe has also deployed marketleading technology to strengthen its offering. As O’Donnell detailed, investment in technology has been central to the company’s success, providing it with an independent view of risk that has proved invaluable to clients.

“From very early on we believed in having an independent view of risk drawn from our in-house risk assessment and evaluation system. While we have the vendor models, having this additional overlay of insight enables us to talk with clients about different ways to view their risk and challenge their assumptions.” This can prove invaluable, particularly in the face of challenging and unexpected events, said O’Donnell.

"We explore alternative structures that enable us to engage with customers and drive down the cost of captial needed to deploy their risk."

Citing Superstorm Sandy as a case in point, he said that the company had applied its internal surge models to help clients map exposures and deploy their adjusters. This new, collaborative approach had been “well received by the market”, so much that the company will be sharing similar insights with its customers in future. “Technology is an opportunity to bring that knowledge to bear; to help clients understand their losses and exposures during times of stress.” This again returns to the theme of lasting relationships and service to the client.

RenaissanceRe is also serious in its commitment to the best and brightest people, viewing intellectual capital as an investment, not an expense, said O’Donnell. “It is hard to explain just how special things are within these four walls. We have built a company that brings together the brightest people to solve the most complex risks.” And it is the strength of this talent that has enabled the company to achieve truly world-class underwriting results and capital management.

O’Donnell added that such intellectual and technological capital will be all the more telling as the pace of change within the industry quickens. RenaissanceRe finds itself uniquely positioned to navigate a successful course through industry waters experiencing profound change.