PartnerRe’s Lorenz sidecar grows at mid-year, expands investor-base

Bermuda headquartered pure-play reinsurance firm PartnerRe has significantly increased the amount of collateralized quota share retrocessional support its portfolio receives from the capital markets, with growth evident in the firms Lorenz Re sidecar vehicle at the mid-point of 2018.

Earlier this year and as reported by Artemis, PartnerRe started to implement a change in its third-party reinsurance and ILS capital management strategy.

This saw the reinsurer shift away from running an actively managed insurance-linked securities (ILS) portfolio, to a focus on leveraging quota shares to allow investors to participate in its reinsurance underwriting returns.

The shift in focus is showing signs of success already, with the firm growing its core quota share sidecar strategy Lorenz Re by roughly 50% for the mid-year renewals.

As of the middle of 2018, the Lorenz Re collateralized reinsurance sidecar had grown in size to $195 million, a significant uplift from the $133 million size of the vehicle in 2017.

At the same time PartnerRe also has strong and stable relationships with third-party investors and collateralized markets in private quota share arrangements, which Herve Castella, Head of Third Party Capital at the firm, told Artemis now amount to $230 million of capacity.

Castella told Artemis that the recent switch in strategy has better aligned PartnerRe with its third-party capital partners.

“Before, quota shares were a smaller portion of our ILS activities, but now they are growing. From our perspective, we realigned our strategy in third-party capital to align it more closely with our business strategy,” Castella explained.

Continuing, “We’re a pure-play reinsurer and aren’t competing with our clients. But increasing our support to our client requires more capacity, especially in catastrophe risks, so quota shares help us. It’s also more aligned with our investors.”

So as this new quota share focused strategy is developing at PartnerRe, the reinsurer is now bringing an increasing volume of third-party capital into its underwriting structure, adding efficiency to its own capacity, providing additional capital support for the catastrophe risks of its key clients, and also earning the firm fees at the same time.

As well as growing the size of its collateralized capacity in quota shares, PartnerRe also expanded the investor base supporting these deals, Castella said.

“We also want to broaden the panel of investors backing Lorenz,” Castella explained, saying “In terms of numbers of investors we were able to get roughly 50% more, including traditional asset managers and other types of investors, so not just ILS funds.

The Lorenz Re sidecar vehicle has  delivered an annualised 14% on average each year since its launch in 2013.

The Lorenz book of business features a share of the reinsurers book of its largest clients, which Castella explained as, “Significant programs where we want to support clients and so we have an interest in having this capital to help us support them.”

“In our experience there is more demand for these types of transactions now,” Castella went on, adding that on quota shares, “It’s also simpler to understand, from an investor perspective as there is a clearer alignment of interest than in managed funds.”

This is crucial, as the quota share model can provide a very easy to understand way for ILS investors to access the returns of the reinsurance market, through a slice of a portfolio that benefits from the global reach and risk selection of a major player like PartnerRe.

Additionally these quota shares can have a higher target return  for investors, than other ILS industry benchmarks such as cat bond indices or the ILS Advisers Index.

Of course that can also come with higher risk, but working with a global reinsurer does mean greater diversification is also possible within the quota share portfolio and additionally the reinsurer will be retaining a large share of the same business, so alignment is considered tight.

PartnerRe has also wound down its Mercalli Re collateralized reinsurance vehicle and catastrophe bond fund, following the shift in ILS strategy.

PartnerRe intends to continue focusing on its quota share strategies for now.

Castella said that the company is pleased with the progress made through this strategic shift, “It’s a first step, but I view it as successful and going in the right direction, both in terms of capacity for our clients and support from a broad base of investors.”

For more details on reinsurance sidecar investments and transactions view our list of collateralized reinsurance sidecars.