RenaissanceRe reveals Upsilon Fund for third-party capital in results

by Artemis on February 4, 2015

Bermuda-based reinsurance firm RenaissanceRe launched a new third-party capital vehicle at the end of 2014, to accommodate investors looking to share in the returns of its underwriting business and investments in ILS, the RenaissanceRe Upsilon Fund Ltd.

Revealed in the reinsurers fourth-quarter and full-year results today, the RenaissanceRe Upsilon Fund Ltd. is a segregated cell company which the firm established on 13th November 2014.

The Upsilon Fund was established by RenRe to provide it with a fund structure through which third-party investors can access the returns of reinsurance risks underwritten and managed by RenaissanceRe.

The Upsilon Fund will underwrite reinsurance and retrocessional covers, both on a fully-collateralized  basis, as well as investing in insurance-linked securities (ILS).

The firm said that it had raised third-party capital effective the 1st January 2015, which suggests that the Upsilon Fund was active in underwriting at the January reinsurance renewals. An amount was not put on the capital raised.

The Upsilon Fund will be managed by affiliates of RenaissanceRe, likely Renaissance Underwriting Managers, Ltd., which is part of the firms Ventures unit that manages the majority of RenRe’s third-party capital and managed catastrophe underwriting business.

RenaissanceRe said that the Upsilon Fund will underwrite risks that are “a continuation of business written through predecessor entities since 2012.” It’s not clear whether this means that the Upsilon Fund will replace the RenaissanceRe Medici Fund Ltd., a catastrophe bond fund the firm had used since 2009 for investing its own capital and from 2013 for third-party capital. It’s also not clear whether the firm’s latest collateralized reinsurance sidecar, Upsilon Reinsurance Fund Opportunities Ltd. which launched a year ago, is still in use or has been replaced by a fund structure instead.

RenaissanceRe reports its total redeemable non-controlling interest as just under $1.132 billion at the 31st December 2014, which will be redeemable third-party capital spread across its various vehicles including DaVinci Re, the Medici ILS fund (if still in use and not superseded by the Upsilon Fund), and the Upsilon sidecar (also if still currently in use).

The reinsurer continues to evolve its offering to third-party capital, with a segregated cell vehicle that can offer fund structures likely a very efficient way of allowing numerous investors to access the risks it underwrites, invests in and manages.

Capital management as a whole remains important to the firm and RenaissanceRe regularly shifts its share and investors participation in vehicles, particularly the DaVinci Re joint-venture sidecar, as market conditions and underwriting opportunities dictate.

For the fourth quarter of 2014 RenRe reported net income attributable to noncontrolling interests of $44.2m, down from $54.2m in Q4 2013. The reduction was principally due to a decrease in the profitability of DaVinciRe Holdings Ltd., the reinsurer said, which is likely due to price declines in property catastrophe risks the vehicle underwrites. RenRe said the decline was partially offset by a decrease in its ownership in DaVinciRe to 23.4% at December 31, 2014, compared to 27.3% at December 31, 2013, again showing how it manages its capital and the size of these vehicles.

Once again DaVinciRe redeemed a portion of its outstanding shares from some of its existing investors, including RenRe itself, a further sign of active capital management. The net redemption from these transactions was $225m. RenRe’s noncontrolling economic ownership in DaVinciRe subsequent to these transactions was 26.3%, effective 1st January, it said.

During the whole of 2014 RenaissanceRe underwrote considerably less catastrophe risk, as a result of the less attractive market environment, with total cat premiums down by $186.4m, or 16.6%, to $934m in 2014, compared to $1.1204 billion in 2013. This reduction was, “primarily driven by the continued softening of market conditions, including reduced risk-adjusted pricing for the January and June renewals, the Company’s underwriting discipline given prevailing terms and conditions, and reduced participation on certain quota share deals,” the firm said.

Managed catastrophe premiums, which are written for the various third-party capital vehicles and joint-ventures, decreased by $217.6m, or 17.5%, compared to 2013, to $1.0286 billion in 2014.

RenRe also bought more retrocessional reinsurance as a result of the soft market, which it said included, “coverage specific to U.S. windstorms in the State of Florida, given the softening retrocessional marketplace in 2014, compared to 2013.

RenaissanceRe maintained the profitability of its third-party capital and managed catastrophe business though, with net income attributable to noncontrolling interests in 2014 coming in at $153.5m, an increase from $151.1m in 2013. However a large part of this was again capital flexing, with the decrease in the firm’s ownership in DaVinciRe but again partially offset by the decrease in DaVinci Re’s profitability.

The reinsurers results have again been helped by a light catastrophe year and some positive reserve development from a number of the larger events to have occurred in recent years, which perhaps provide evidence of prudent reserving strategies.

The firm explained its 2014 catastrophe losses:

The Company’s Catastrophe Reinsurance segment experienced a relatively low level of insured catastrophe loss activity in 2014, resulting in current accident year net claims and claim expenses of $67.3 million, compared to $109.9 million in 2013, primarily attributable to a number of relatively small U.S. wind and thunderstorm events.

During 2014, the Company experienced $65.5 million of favorable development on prior year reserves within its Catastrophe Reinsurance segment, compared to $102.0 million in 2013. The favorable development in 2014 was principally comprised of favorable development of $20.1 million, $13.9 million, $9.3 million, $7.6 million, $6.7 million and $6.6 million related to Storm Sandy, the 2011 April and May U.S. Tornadoes, the 2011 Thailand Floods, the 2013 Eastern European Floods, a 2013 U.S. wind and thunderstorm event and the 2008 Hurricanes (Gustav and Ike), offset by adverse development of $24.7 million related to the 2010 New Zealand Earthquake, each principally the result of changes in estimated ultimate losses for each respective event, with the remainder due to net favorable development on a number of other events.

However, overall RenaissanceRe’s net and operating income to shareholders, while still healthy, were down year-on-year. This is a reflection of challenging market conditions plus the increasing shift to a different business mix, with more focus on its specialty risks and Lloyd’s businesses.

The firm significantly beat expectations from the street though, with earnings per share for the fourth-quarter of $3.62 was well above the analyst consensus of $2.29 demonstrating its strong progress even in the challenging reinsurance market.

Kevin J. O’Donnell, CEO, commented on the results; “I am pleased with RenaissanceRe’s performance, both for the fourth quarter and for the full year. We achieved solid growth in tangible book value per share plus accumulated dividends of 5.5% for the quarter and 13.9% for the year, while demonstrating discipline and objectivity about the risk we assumed and the pricing required. Our underwriting team executed extremely well during the most recent renewal period, as pressure on pricing from abundant capacity persisted.”

“Over the past few years, we have steadily developed the spectrum of products, platforms and scale we offer, in anticipation of the evolving needs of our customers. The acquisition of Platinum Underwriters Holdings, Ltd. will accelerate our efforts, broadening our client and broker base and our capital flexibility. The preparation for the integration of the two entities is on track and we are looking forward to welcoming our new team members,” O’Donnell continued.

RenaissanceRe has a diverse and capital agnostic underwriting platform that allows it to shift the mix of business and the capital or balance-sheet it is underwritten on. The reinsurer continues to demonstrate discipline in its use of capacity and the way it manages and returns capital in some of its joint-ventures. This can and does result in some fluctuation in results, but also allows the firm to maintain key market shares.

As the intended acquisition of Platinum Holdings comes on-line the fluctuation may increase, but the third-party capital investment vehicles will continue to play a vital role in the softened property catastrophe market for the firm.

Also read:

DaVinci “core and strategic” to RenaissanceRe’s reinsurance business: Moody’s.

Mixed ratings view of RenaissanceRe – Platinum reinsurance combo.

RenaissanceRe to buy Platinum Underwriters in $1.9 billion deal.

RenaissanceRe maintains discipline, grows ILS & third-party assets managed.

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