RenRe’s Marra: Validus acquisition will accelerate access to opportunities at 1.1

RenaissanceRe’s pending acquisition of Validus Re is perfectly timed for the combined business to bring expertise and potentially bigger line sizes – supported by the Bermudian’s Capital Partners platform – to meet client needs at 1.1, according to group CUO David Marra.

In May it was announced that RenRe had agreed a deal to buy Validus Re from AIG for around $3bn, with the transaction – which includes ILS manager AlphaCat – slated to close during the fourth quarter.

Talking to The Insurer TV, Marra said RenRe is “really optimistic” about the opportunities it expects to see at the end of the year, after what has been a step-change for reinsurers in 2023 characterised by a hard market in property cat and significant improvements in casualty and specialty classes too.

“And that’s part of why the Validus acquisition has such great timing – we’re able to accelerate our access to that business. It will be in property cat, it will be in non-property cat and we are well-positioned to tackle those in the new year,” he commented.

The combined RenRe and Validus business will amount to over $12bn of assumed premium, but Marra said the scale and number five ranking doesn’t tell the full story.

He suggested that in areas where the expanded reinsurer will focus – such as property cat excess of loss, casualty, specialty and credit classes – it will often be among the top three.

“But it isn’t really just about whether it’s number one, number five or number 10 … it’s about what we do with it, and that’s where we’re really excited,” Marra commented.

The executive said that RenRe and Validus represent two of the best underwriting shops in the market.

“The amount of expertise in the combined companies will be extremely valuable, that will help us develop bespoke solutions, solve our clients’ biggest problems, and just bring more expertise to the market.

“That will help us take bigger line sizes [that will be] up there with some of the biggest in the market,” he continued.

Marra said that as well as the larger balance sheet created by the combination, the availability of bigger line sizes will be facilitated by the joint ventures and other managed capital vehicles that the Bermudian will continue to grow.

RenRe Capital Partners includes a series of joint ventures and other vehicles such as Top Layer Re, DaVinci Re, Vermeer and Fontana, as well as retro fund Upsilon and cat bond-focused Medici.

“Overall, it culminates in what I think will be a very big differentiator [with] our ability to construct portfolios … with these tools and this expertise we will be able to tailor those portfolios to what a client needs.

“So, for example, if a monoline cat client needs a big cat line, we’ll find the efficient capital for that; if a monoline credit company needs a big credit line and some bespoke coverage we’ll be able to provide that product; or maybe a multinational corporation or insurer needs multiclass coverage and a lot of support and expertise as to how those different businesses are running, we’ll be able to approach that too,” said the executive.

Marra said that with previous acquisitions by RenRe there had been some classes that were not within the Bermudian’s appetite.

But the RenRe and Validus underwriting cultures are a “very good fit”, with the acquired company providing more options and abilities to deploy.

“Every class that Validus writes is within our risk appetite,” he explained, adding that after the deal closes the combined business will operate as a single team.

The RenRe group CUO also suggested that the company will be able to more efficiently operate AlphaCat as part of its Capital Partners business because of its capital structure compared to that of AIG.

Strong reinsurance demand expected to continue

Commenting on the upcoming renewals, Marra said his company sees demand as very strong in the reinsurance market because of two key drivers.

“One, companies do not want to retain volatility, their exposures are up due to inflation, the risk is up, the perception of risk is up due to climate change, and they have a higher cost of capital than they had in the past. So for all those reasons, they will want to buy more reinsurance.

“The other thing is that reinsurance is one of the most effective forms of capital out there – it has been for decades. And now that the cost of capital is up across the board, clients are seeing [reinsurance] as an effective [way] to manage their exposure,” he explained.

As previously reported, there had been an expectation in cat ahead of 1 January 2023 that US and global insurers would be seeking in excess of $20bn in new limit, but significantly less than that was actually purchased at the key renewal date.

Marra said that part of that was because clients simply ran out of budget.

Insurers need lead times in order to pass higher reinsurance costs on to clients to generate sufficient premium to put in the budget to buy the amount of cover they wanted to.

“We also saw a situation where new top layers were coming out, but bottom layers were being dropped because of the process … and overall aggregate limit wasn’t purchased as much. And then cat bonds came in as an effective way to cover some of the peak exposures. That was an effective way for clients to manage throughout the last year,” the executive continued.

He also observed that the across-the-board increase in retentions seen this year came after attachment points had remained largely unchanged for around a decade.

With exposures driven up by inflation, the effective attachment points had actually been reducing, which had led in some cases to a misalignment of interests between cedants and reinsurers where insurers could grow exposures protected by the safety of a low cat retention, the executive argued.

“Where we are now is that insurance companies have the challenge of funding all of their retentions with more premium, [and] that is creating a bit of fragility in the insurance and reinsurance market where insurance companies have to charge more to their customers.

“In some cases, they’re able to get the right rate, and in some cases they’re not, and in those cases there’s a chance that they will start to restrict supply, and that’s not good for the overall insurance market,” Marra said.

As previously reported, there has been a significant retrenchment by a number of large US carriers from writing cat-exposed property business in states such as California – especially in admitted personal lines.

The executive said that a more holistic approach is needed to risk transfer in these areas, and that reinsurers have a role to play.

He added: “I’m not sure whether clients will want to pay the price to reinsure these losses that would have otherwise been covered at the lower attachment points. But I do know that once we understand it better, we will be able to work towards solutions.”