By returning capital to its third-party investors, when it cannot generate adequate returns, reinsurance firm RenaissanceRe hopes to generate loyalty, demonstrate that it works on behalf of its investor-base and encourage them to increase capital commitments when the time is right.
RenaissanceRe operates a number of vehicles, funds and structures which are backed by third-party investors, ranging from the rated joint-venture reinsurance vehicles such as DaVinci Re, to the Upsilon retrocessional reinsurance focused ILS fund.
As a result the reinsurer manages a significant amount of capital from third-party investors which is put to work within underwriting, often alongside or in tandem with its own balance-sheet capital. Being a good steward of investor capital is a key trait that capital markets investors look for in a manager and in demonstrating that it is prepared to return capital RenRe hopes that is exactly how it is perceived.
During the reinsurance firms recent fourth-quarter earnings call RenaissanceRe COO and CFO Jeffrey Kelly explained; “Switching to our ventures unit, we returned $100 million of capital to shareholders of DaVinci in early January. We have the same philosophy for our third-party capital backed investments that we utilize and manage our own balance sheets with.”
By applying the same rules to how it manages and deploys its third-party capital and its own capital RenRe can select the right form of capital for the right opportunity, based on the risk adjusted returns on capital required by its different balance-sheets.
It also allows RenRe to better understand when capital should be returned, to third-party investors or to shareholders, as operating a standard set of metrics and rules across the reinsurers multi-balance sheet business enables it to ensure the most efficient capital is used at all times.
Kelly said that by taking this approach the reinsurer hopes to generate greater loyalty from its third-party investor partners, something the reinsurer believes could result in more capital being allocated to it when the market has the opportunities available to allow it to deploy more capacity.
“We return capital to our partners when we cannot deploy it at adequate returns. We believe our partners appreciate us working on their behalf and will look to increase their capital commitment to us when market conditions improve,” Kelly explained.
Kevin O’Donnell, CEO of RenaissanceRe, also discussed the reinsurers decision to pull-back in certain areas of the market where the returns no longer met its expectations. Interestingly one such area was the retrocessional reinsurance market, where others have cited the rates as holding up better than primary first-event reinsurance.
But for RenRe the retro market returns no longer meet its return requirements, either for itself or for its third-party investors.
O’Donnell explained; “We have made the decision to pull back on cat reinsurance when some returns on some transactions no longer met our return threshold. This was particularly the case in the assumed retro book as we cut back on risk across our own balance sheet and that of our third-party capital backed vehicle Upsilon Re.”
O’Donnell also discussed the importance of the managed catastrophe premium business and third-party capital management, or joint-ventures, at RenaissanceRe. He also explained that the unit managing this business is constantly in touch with investors as it manages capital and risk appetite.
“Our Ventures team is a successful part of our franchise, providing us capital flexibility in many ways. For example, we significantly reduced the size of Upsilon which I discussed previously. Our reduction was conscious and closely choreographed in conjunction with our investors. We like to think that no one does this better in real time than RenRe,” he explained.
At the same time the Ventures unit also adds new investors to the business without having to take on too much additional capital, something that requires careful management of investor expectations. It’s important to achieve this as by expanding the investor-base RenRe will have a larger pool of capital to call on when the market is more conducive to deploying it.
O’Donnell continued; “We continue to balance capital management with the addition of new high-quality investors in our joint venture platforms and we’re able to do so without deploying additional capital. We remain a first call for high-quality insurers seeking capital and strategic advice and we raised attractively priced capital when it was efficient to do so.”
And most importantly the way RenRe approaches capital management is kept consistent, across its own balance sheet or the third-party capitalised ones. Interestingly O’Donnell referenced nine balance sheets, which demonstrates just how complex this job must be.
“For us, capital management should be looked at holistically, both across the public company and in our joint ventures. Our actions were consistent across the board and represent a coordination of nine balance sheets at all times, something we are uniquely set up to do,” he said.
And reiterating the importance of continually growing the investor base, while not necessarily growing the amount of capital under management, O’Donnell stressed; “We got a great group of third-party investors which we actually expanded in 2015 and we expanded that without needing to increase the size of the vehicles which I think is great.”
It’s important to demonstrate that you’re willing to return capital and apply the same standards to third-party sourced capacity as you are to your own balance-sheet. By building a loyal following of investors now, while the reinsurance market remains challenging and softened, RenaissanceRe will be hoping to be paid back for that loyalty if the market returns and it finds opportunities to upsize its third-party capital and joint-venture vehicles considerably.