DaVinci Re, the joint-venture largely third-party capitalised reinsurance sidecar, is both “core and strategic” to Bermudian reinsurer RenaissanceRe’s business and future, according to rating agency Moody’s Investors Service.
The DaVinci Re sidecar vehicle has been a growing piece of RenaissanceRe’s catastrophe reinsurance business since its launch in 2001. Over time it has grown in importance to the reinsurer, as part of its mixed-capital strategy of utilising its balance-sheet, third-party capital through joint ventures and its use of directly collateralized vehicles and ILS funds.
Today, DaVinci Re is almost 77% capitalised by third-party investors, who enjoy the returns possible from an established underwriting vehicle that gives them broad exposure to catastrophe reinsurance risks. RenRe itself owns the other portion.
Moody’s has affirmed DaVinci Reinsurance Ltd. with a stable outlook, despite having a negative outlook on parent RenaissanceRe, due to the proposed acquisition of Platinum Underwriters Holdings, Ltd. which in Moody’s opinion, “might not deliver the expected revenue synergies and would nearly double financial leverage as a result of the financing plan.”
The fact that DaVinci Re is considered stable likely reflects the fact that, as an underwriting vehicle which is largely third-party capitalised, it is extremely efficient and a little removed from the effects of the proposed acquisition of Platinum.
In fact the merger with Platinum would likely benefit DaVinci Re and its third-party investors, as the additional access to catastrophe business could help DaVinci to grow further and become even more important under the combined firm.
Moody’s says that the planned acquisition of Platinum “will not adversely impact DaVinci’s A3 financial strength rating,” noting that DaVinci will not write any of the casualty business that RenRe inherits from Platinum.
DaVinci and RenRe have a “contractual alignment of interest” between them and DaVinci’s track record is both profitable and strongly correlated to that of RenRe. DaVinci Re underwrites property catastrophe reinsurance alongside RenRe at generally the same price and terms, Moody’s notes, with RenRe making all underwriting decisions on behalf of DaVinci (in return for fee income and profit share).
It’s a classic relationship between a reinsurer and a reinsurance sidecar vehicle and one of the best established in the market due to its long duration. This helps to make DaVinci Re very attractive to investors looking to access the returns of catastrophe reinsurance business.
Moody’s notes that the investors in DaVinci Re typically expect a lower return than would shareholders of traditional reinsurance companies, which the rating agency says bodes well for “maintaining and attracting capital despite a very challenging reinsurance market.”
Of course this lower-cost of capital within DaVinci Re will also serve RenaissanceRe well, enabling it to approach underwriting new and renewal catastrophe business in tandem with a lower-cost pool of reinsurance capital.
Moody’s says “We regard DaVinci as core and strategic to RenRe’s business.”
Just how core is evidenced by the amount of catastrophe reinsurance premiums that are written through DaVinci Re. Moody’s notes that “about one-third of the catastrophe reinsurance premiums managed by RenRe are written on DaVinci’s balance sheet.”
DaVinci Re reported gross premiums written of $ 313.7m and total shareholders’ equity of approximately $1.4 billion as of 30th September 2014.
The sidecar, or joint-venture, is a key component of RenaissanceRe’s capital agnostic underwriting platform, giving it an edge by lowering its cost-of-capital, which in the currently challenging reinsurance market is a key contributor to underwriting strength.