Regional mutual market needs further step-change at 1.1: RenRe’s O’Keefe
Fresh from its combination with Validus Re, RenaissanceRe’s North America and Bermuda CUO Justin O’Keefe said one of the firm’s focuses is entrenching its catastrophe market leadership.
The property catastrophe reinsurance space is generally set for a much smoother 2024 renewal, but dislocation remains acute among Midwest mutuals and regionals – a topic O’Keefe expected to spark a lot of discussions at the APCIA annual meeting in Boston this week.
Further significant corrections are required from this regional market, he argued.
It’s a critical time for the regional mutual market, O’Keefe said, due to a combination of inflation, auto casualty results and heightened severe convective storm losses that compounded more than five loss-making years for (re)insurers.
RenRe has a leading share in the regional space, after entering the market with the acquisition of Platinum Re in 2015. Since then, its portfolio has quadrupled, O’Keefe added.
The Bermudian is still “very happy to support our clients over the long term”, according to the CUO, who was promoted to his current role earlier this year after a longstanding career at the firm since joining in 2004.
“However, at 1 January, there needs to be a step change in pricing and terms and conditions for many carriers in that marketplace, due to the financial results and the underlying inflationary loss trend pressures we've seen,” he added.
Asked what that “step change” might look like, O’Keefe said RenRe’s underwriters will be focusing on structural and term changes rather than pure pricing changes.
Pricing is an important component, he added, but what has been observed from the reinsurers’ side – particularly on excess-of-loss (XoL) retentions – is that Midwest cedants “just have not adjusted with inflationary pressures over the last decade or two”.
Validus bolt-on entrenches cat, cyber leadership
On 1 November, RenRe completed the $3bn acquisition of Validus Re – a move initially forecast to grow the company’s premiums by $2.7bn, with RenRe hoping to retain around 90% of Validus business.
However, on its Q3 earnings call, CEO Kevin O’Donnell told analysts bolt-on premiums have the potential to come in higher.
In an interview with Insurance Insider, O’Keefe said: “One of the great advantages of this Validus acquisition is that we're able to deploy a material amount of capital on a materially sized portfolio in an immediate way, on lines of business we want to grow in and have appetite for.”
He pointed to US cat property and cyber as being two examples of core books of business where RenRe wanted to grow further with Validus acquisitions.
“RenaissanceRe was the largest US cat reinsurer on a standalone basis – now, with Validus, we will aim to create an even bigger spread between us [and competitors] in the next 1.1,” said O’Keefe.
Cyber reinsurance is another segment where RenRe has a leadership position, as it and other Bermudians have built out in the space in recent years.
Validus had done a “fantastic job” in building its cyber business over the past few years, O’Keefe said.
“The combined RenRe portfolio for cyber reinsurance as of today, we believe, is one of the largest cyber reinsurance portfolios in the world,” the executive said.
As a combined entity, RenRe will move into the position of fifth-largest reinsurer heading into 2024 renewals.
In terms of how the combination will change the entity’s underwriting strategies, O’Keefe said it would continue its research on natural catastrophe risk, “scaling that up to offer more in-depth tools and insights for a larger number of our clients globally than ever before”.
It will also look to expand its insight and technology in specialty and casualty.
“With the size and scale combined with our ability to match risk with capital… our capability to look at a client holistically and trade over the long term through various market cycles will be stronger than it's ever been,” O’Keefe said.
Our capability to look at a client holistically in trade over the long-term through various market cycles will be stronger than it's ever been
He described the firm as being “arguably the premier broker-market reinsurer”, alluding to the fact some of its larger peers also write more direct and primary business.
However, the CUO argued that greater scale would not prevent it from actively repositioning its portfolio.
"Absolutely we are going to continue to be as nimble in trading and executing in the market, like our brokers and clients think of RenRe doing,” he said.
“We built a very efficient global platform, and that will continue with this acquisition… with under 1,000 employees and about 100 underwriters.
“And our integrated system and technology allows us to be nimble, to be creative and to be coordinated across multiple lines and multiple regions.
Aggregates – on offer but mismatched expectations
A year of many small-to-mid-sized cat losses has led to a renewed focus on aggregate coverage in this year’s reinsurance conference season. Brokers have urged reinsurers to consider offering such covers again, as insurers have been left with a heavier loss burden than reinsurers.
RenRe has reduced the number of US property-exposed aggregates it wrote “significantly” over the past 18 months. “But that doesn't mean we're not willing to sell an aggregate product, if structured and priced correctly,” O’Keefe told this publication.
However, given the limited amount of capital willing to support aggregate products, he forecast very few cedants will end up buying aggregate reinsurance coverage at the 1 January 2024 renewals, as pricing and attachment points for such programs remain higher than what they are willing to pay.
In hard markets, “the bid/ask spread becomes too big for the client to want to pay the money for the product,” O’Keefe added. “Looking forward, I can see that happening at January 1, where many will be in the market wanting to buy, but very few will end up buying the aggregate product.”
Given the results we've had, having one good year doesn't make up for that
1 January prospects
Allied to the debate on aggregates is the implicit question from brokers and reinsurers on whether the correction in the cat reinsurance markets went too far, with reinsurers set for +20% returns this year. Yet there is little expectation of any reversal on attachment points, given the slow inflows of new capital to the market.
In an interview with Inside P&C a year ago, O’Keefe suggested the hardening market after Hurricane Ian would be a “multi-year transition”, after several years of industry returns falling below reinsurers’ cost of capital.
The 1 January 2023 renewals, indeed, turned out to be a win on all fronts for reinsurers, where they achieved meaningful advances in pricing, terms and condition, as well as attachment points. This year, they will head to the negotiation table with drastically improved income statements in their hands.
However, the CUO reiterated that this year is “only one year”.
The Bermudian’s capital providers are expecting “the right returns” for the volatility it takes as a reinsurer, he added.
“Given the results we've had, having one good year doesn't make up for that,” he said. “We're looking forward to many years in the future to continue the adequacy of rates across lines to provide the returns our investors are requiring.”
The changes at 1 January 2023 brought about a “much more equitable sharing of risk between the insurance and reinsurance marketplace”, after a decade of low-cost capital allowed clients to cede risk that should have been retained in the insurance market.
“It only needs to continue to change, as we see continued increase in inflationary pressures and cost of capital,” he said.
Moving on to 1 January 2024, O’Keefe said RenRe now feels comfortable with changes achieved to the global property catastrophe XoL portfolio and property aggregate structures.
On the contrary, global property per risk treaties, smaller regionals and the general casualty market are areas where some work is still needed.