Investor interest strong, but opportunities to deploy limited: RenRe

Bermuda domiciled reinsurer RenaissanceRe (RenRe) continues to see strong appetite for its insurance-linked securities (ILS) operations from third-party investors, although the opportunity to deploy capacity remains limited, according to RenRe Chief Executive Officer (CEO), Kevin O’Donnell.

During the reinsurance company and third-party capital manager’s second-quarter 2016 earnings call, RenRe CEO O’Donnell underlined the continued appetite for ILS business across its funds, despite a recent uptick in catastrophe losses and persistent market challenges.

The Bermudian firm utilises alternative reinsurance capital via its Medici ILS Fund, its rated sidecar type vehicle DaVinci Re, and its Upsilon Fund, a third-party capital vehicle with a focus on retrocessional reinsurance.

“I’d say there is still interest in capital coming into this space, where they’re saying that reinsurance, generally, is more attractive against the other alternatives they’re looking at,” said O’Donnell.

“We have been disciplined about keeping our facilities roughly the same size as we have in the past. We did add a little bit of capital, although it’s not worth highlighting it in any material way, to both Upsilon and to our Medici Fund, and we kept DaVinci the same size as it was previously,” continued O’Donnell.

Suggesting that the appetite third-party investors have for entering the reinsurance industry is still strong, but there’s “not a great opportunity to deploy,” added O’Donnell.

Artemis discussed in early June that RenRe had increased the size of its Medici Fund and shrank its Upsilon Fund, likely in response to the challenging and softening reinsurance and retrocession market conditions.

And now, with capital markets investors’ showing a continued willingness to invest in the asset class, despite recent catastrophe losses and the competitive market landscape, RenRe was able to grow the size of both funds during Q2, while keeping DaVinci Re the same size.

It’s unclear exactly how much the reinsurer increased the size of the two funds by, although O’Donnell suggests that it was minimal. This is likely due to the limited opportunities to deploy capital in the competitive space, which shows the discipline of RenRe to not just grow the funds for the sake of it, essentially assuming more third-party backed capital that it can deploy.

RenRe’s Q2 earnings release showed that its DaVinci Re rated vehicle continued to perform well in the second-quarter, remaining profitable despite experiencing catastrophe losses of just over $30 million, prior to reserves.

The reinsurer clearly sees the benefits of working with third-party reinsurance capital and the broad investor base that is growing in sophistication and understanding of the asset class all the time.

Despite a rise in catastrophe losses during the first-half of 2016 when compared with more recent times, which included the Fort McMurray wildfires, earthquakes in Japan and Ecuador and storms in parts of Europe and the U.S., investors continue to see the attraction to insurance and reinsurance-linked business.

True, the losses witnessed so far this year are by no means staggering, but it’s promising to see that even with some ILS funds taking a hit from recent events, as seen with DaVinci Re, investors are keen to commit more capital to the space and aren’t running in the opposite direction.

The diversification and uncorrelated nature of ILS clearly remains attractive to ILS investors, and the ability for RenRe to grow the funds, albeit moderately, during a costlier quarter, is testament to the appetite of investors in the space.

The reinsurer continues to show discipline in a challenging environment, raising capital from third-party investors where it has the ability to be deployed efficiently, but also resisting the temptation to take on more capital than is necessary or that it’s able to deploy in the correct manner.