All these things are pointing to the idea that the cusp of the reinsurance hard market has been reached as higher rates have begun to entice carriers to lean into growth, after the Bonfire of Cat Limits throughout 2022.
We have already started discussing what these trends suggest about how long hard market conditions can last, and this topic was clearly on the minds of analysts on the RenRe call discussing the deal.
In this context, the acquisition is the ideal type of land grab for RenRe to have carried out from the viewpoint of the broader reinsurance market, giving the Bermudian the ideal way of acquiring growth with the least impact on competitive conditions for itself and peers.
The Validus portfolio is ready-made and avoids RenRe having to compete on future prices to secure larger lines. Moreover, the consolidation removes a competitor from the market, even if one that was arguably a diminished force in recent years compared to its pre-AIG standing.
One analyst in fact questioned whether taking out a competitor could in fact extend the potential for a hard market – a leap further (and a stretch) from the idea that it does not hinder the hard market.
CEO Kevin O’Donnell did not give a direct yes or no, but said: “I think this market has legs...And we will continue to leverage into the market. So I think it's all systems go, and this just gives us a bigger platform to trade off.”
Of course, pushing together two very similar portfolios might mean some fallout, in terms of cedants looking to reduce their concentration of exposure to one provider. This would be a more favourable trend in terms of prolonging the hard market, as more demand would be freed up, and fresh demand has been slower than reinsurers might have hoped to arrive on the scene.
But the potential for this fallout is diminished because Validus had cut back so much in recent years before pivoting to grow in the 1 January renewals, as had RenRe. O’Donnell said on the analysts’ call that the firm is factoring in a retention of 90% of the Validus book.
On a personnel front, the consolidation should also be somewhat easier than a typical peer-to-peer acquisition because a lot of Validus personnel had already left as the firm bedded in under AIG, even if it will still be disruptive.
It is understood that AIG Re CEO Chris Schaper is highly likely to remain with AIG as a relied-upon executive close to the insurer’s leader Peter Zaffino.
The question of scale
This is RenRe’s third similar acquisition after Tokio Millennium and Platinum, and the deal clearly puts it further down what we described as the lonely road of the focussed pure-play reinsurer.
It also highlights the idea that scale wins in the reinsurance market niche. As we have noted, the combined portfolio would put RenRe as the fifth largest reinsurer, enabling it to move ahead of Scor and Everest by premiums written.
However, the injection of Validus capital that the deal brings, along with a portfolio that is less skewed to cat risk than RenRe’s own, means that even as its exposures grow, the probable maximum losses will be flat to down as a percentage of shareholders’ equity, O’Donnell explained on the analysts’ call.
This is one fiscal advantage of the scale, but there are also gains to be made in terms of negotiating leverage.
In the current hard market, there has been a shift towards more bilateral, early deal-making whereby carriers with big lines to offer can secure early signings and rate.
In contrast, pure subscription market players will not be able to leverage the same gains as larger peers from this phase of higher rates or risk having smaller lines signed down.
On top of cost savings, RenRe also devoted some time on the analyst call to explaining that it will drive some efficiencies from the Validus book from bringing in more third-party retro to support the portfolio. By retaining less Validus risk net, and sharing some of the portfolio with ILS vehicles like DaVinci Re and others, O’Donnell explained that “we require less capital to support this business than Validus Re”.
RenRe already benefits from much larger scale on the ILS market than Validus through its AlphaCat brand, and it’s arguable that the franchise won’t add as much value as Validus itself, although the firm is set to gain an undisclosed investment from AIG for two of its flagship ILS vehicles.
A separate advantage of scale is in the ability to invest in understanding and modelling risk, particularly as the climate warms. Here, RenRe and Validus would probably be seen by the market as relatively efficient spenders on investment in this space already but efficiency savings will be a post-deal target.
However, it is also worth noting that there can be some downsides to reinsurance scale. One of the biggest questions is whether the larger reinsurers simply become an index for market returns, and that investors see such investments as a general market play rather than having more specific individual franchise value if there was more room to outperform.
O’Donnell’s comments on the analyst call around how similar the books were tend to underscore this concern – although his reason for raising this point was simply to discuss the complementary nature of the books and how well the assumed risk was understood by RenRe.
But as reinsurers are having a hard time differentiating themselves with equity market investors, this means that a land grab in itself from RenRe may not be enough to prove the value of this acquisition – even if their peers may be relieved that this is the tactic it has sought to grow into the 2023 market.
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