The Upsilon strategy has evolved this year, with its book becoming more balanced between retrocession and primary reinsurance, as the collateralized reinsurance vehicle grew to $800 million of limit for owner RenaissanceRe but rates on the retro side were not sufficiently high to deploy all of the capital raised.
The Upsilon strategy used to be a pure collateralized retrocession vehicle, offering investors a way to share in the returns of one of the leading underwriters of catastrophe retro business, in RenaissanceRe.
But the strategy has been evolving over time, with more primary reinsurance added to the mix in the last year or so.
However, at the January 2018 renewals, while growing considerably thanks to its largest Upsilon capital raise to-date, the vehicle also became more balanced, largely due to the fact retro rates were not high enough for RenRe to rate the opportunities available to it.
RenaissanceRe CEO Kevin O’Donnell explained during the reinsurers recent earnings call, “Consistent with our approach of moving from the transactional to the strategic, we grew our Upsilon vehicle from $300 million of limit to more than $800 million of limit year-on-year at January 1st.”
Explaining the change in business mix in the Upsilon portfolio, O’Donnell said, “Upsilon has evolved since we first formed the vehicle in 2012, when it assumed almost exclusively aggregate retrocessional exposure.
“As of today, half of the Upsilon portfolio is retro with the remainder coming from primary reinsurance or enterprise covers.”
That’s a significant shift in the focus of the Upsilon ILS vehicle, reflecting the availability of underwriting opportunities that RenRe found attractive at the renewals.
“This continues to be a great example of sourcing attractive risk and matching it with efficient capital. The manner in which our underwriting and ventures teams work together on these vehicles continues to impress me,” O’Donnell said.
Bob Qutub, Chief Financial Officer at RenRe, added, “Our ventures team was also instrumental in reloading Upsilon for the January renewals, deploying an additional $600 million of capital with a significant portion of that raised from trusted long-term partners.”
RenaissanceRe has grown its retrocession portfolio though, with the help of Upsilon, but at the same time bought more retrocession to hedge its portfolio as well, likely as it may have taken on a little more catastrophe risk due to better rates at 1/1.
CEO O’Donnell recognised that this may send a confusing signal, saying, “I think it could seem a conflicted message, in that we grew retro but we are saying we had better-than-expected access to purchase retro.”
RenaissanceRe continues to pursue what it terms its “gross to net” strategy, leveraging efficient capital to ensure it is not overexposed.
O’Donnell explained, “The positive side of abundant capital, particularly for short tail risk, is our ability to purchase meaningful retro protection for less than we initially forecasted.”
But buying more retro at the same time as increasing the size of Upsilon reflects the fact that what RenRe sells to ceding companies through Upsilon is a different product to the one it prefers to buy to hedge its own book.
“What we are selling through Upsilon is a very different product than what we are buying,” O’Donnell continued, adding, “So what we sell through Upsilon is a heavily loss affected program, mostly worldwide and some aggregate.”
But it does seem that RenRe couldn’t sell as much of its Upsilon product at the rates it wanted to, resulting in the evolution of the portfolio towards one more balanced with reinsurance.
“In addition to the retro that’s in Upsilon, as I mentioned, we also have some enterprise coverage in some larger nationwides,” O’Donnell said.
“That mix is actually because some of the retro pricing wasn’t as high as what we needed for us to commit our partner capital,” he explained.
Buying retro is a little different at RenRe, with the majority coming from long-term or third-party capital partners, participating in the companies main program. So Upsilon is not seen as part of the main retro program at the reinsurer, which is likely a much easier story for investors in the vehicle to digest, than one which suggested they were just getting the risk that RenRe didn’t want.
By selling a product through Upsilon, on the retro side, that it does not sell itself or use itself for hedging purposes, RenRe can ensure a greater alignment with the capital providers.
Of course, the end result is the same though, an efficient source of third-party capital that can augment its RenRe’s ability to write more business at the end of the day. But the messaging is important and something that ILS investors are always looking out for.
Additionally, RenRe felt that it was getting better rates through its Upsilon retro sales, than through its own trading account, which suggests that the investors in the vehicle may be benefiting from this product differentiation approach.
“We were able to scale Upsilon as we have done every year since 2012 to meet the opportunity that our customers present and that capital is efficient for the type of risk that we are writing on to it,” O’Donnell said, adding that some of the business written can consume a lot of capital on a rated balance sheet, but is much more “efficient on the Upsilon structure.”
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