Bermudian reinsurer RenaissanceRe is working to expand its activities in the retrocession space through the renewal and expansion of its Upsilon Reinsurance sidecar series, as it attempts to capture what it sees as attractive opportunities in the retro reinsurance market.
During the reinsurers third-quarter earnings call, President and CEO Kevin O’Donnell discussed a number of third-party capital opportunities and explained that RenRe would seek to target its efforts on areas of the market where it sees the most opportunity to profit.
One of those areas is in the retrocessional reinsurance space, where RenRe believes there is significant demand for worldwide retro covers on a fully-collateralized basis. The size of the opportunity is significant enough that RenaissanceRe believes it can expand its existing retro sidecar, Upsilon, to accommodate more third-party capital and thus underwrite more retro business.
O’Donnell discussed market conditions, saying; “The underwriting environment for property catastrophe and other reinsurance lines remains competitive, with abundant supply of both traditional and non-traditional capacity.”
He acknowledged the increased profile of convergence and non-traditional reinsurance capital in 2013, adding that the participation of this capital in the reinsurance industry is anything but new. RenRe has been managing many forms of capital for over a decade, including capital from third-party investors.
O’Donnell said; “It is our job to find the most efficient capital and deliver it to our clients by matching it with the most attractive risks. Third-party capital is just one more tool making our job easier.”
However the current market is a little different to other influxes of third-party capital, as the rest of the reinsurance market remains well-capitalised and rates were under pressure anyway. O’Donnell added; “What is different about the current environment is that capital is coming in when rates are going down.”
Now, more than ever, discipline is important said O’Donnell, adding that with third-party capital it needs to be deployed or returned to investors. The increased competition and levels of capital do benefit customers, he said, but he added that the capital must be paid adequately for the risks it assumes.
RenRe is seeing client needs which are best served by a collateralized balance-sheet, said O’Donnell, and one of those opportunities lies in retrocession.
O’Donnell said; “We plan to fill that need by raising capital in a targeted manner using our Upsilon joint venture.”
However, opportunities have to be carefully selected and RenRe will not be expanding its DaVinci Re vehicle as current conditions do not warrant it.
O’Donnell explained; “We do not think that increasing the size of DaVinci make sense right now for our investors or for our clients. Clients are still benefiting from the new capital as we have been able to restructure DaVinci’s investor base to make it more stable over the long-term. If we look at the total capital invested into DaVinci by our top investors, that total represents significantly less than 1% under aggregate capital under management. This is patient capital.”
DaVinci tends to target areas of the market where insurance-linked securities (ILS) funds and collateralized reinsurance funds have been making their presence most felt. Conversely, Upsilon targets a more niche product, which does have collateralized competition, but much fewer participants play in that part of the reinsurance market.
RenRe believe that the retro product it offers through Upsilon can be more efficiently delivered using collateralized capacity, hence it looks like it will be a core focus for the firm at the 1/1 renewals and beyond.
O’Donnell commented; “In order to think about third-party capital we tend to look to our clients first and the reason we had decided to increase the size of Upsilon is because we think that there is significant demand for the retro product that we offer, which tends to be more of a worldwide product which is efficient on a collateralized structure, more efficient than on our rated balance sheet.”
He added that DaVinci, because of its focus on U.S. catastrophe risk, is not appropriate to upsize right now, but RenRe has changed the investor profile in DaVinci, which it believes will serve it better in future.
O’Donnell added; “Although we are not increasing the size of DaVinci, we are constantly changing the capital structure supporting it, adding efficiency and longevity to the vehicle.”
The change in investor profile, we understand, involves a reduction in shorter-term investors such as hedge funds and an increase in longer-horizon capital providers, such as global pension funds. This makes sense as the pension funds will be satisfied with the DaVinci Re returns while at the same time prepared to wait out a softer market in the lines it underwrites.
RenRe may see sufficient opportunity in retro to even launch more vehicles, if opportunities emerged at mid-year or around the typical underwriting cycle of the business Upsilon has focused on.
CFO Jeffrey Kelly commented; “Upsilon is targeted as a specific opportunity. I think if there are different opportunities in Florida we could always change the profile of some of the risk or some of the criteria that we have in Upsilon, or we could just start a new vehicle.”
RenaissanceRe again shows that it is an adaptable player in the reinsurance market, prepared to grow and shrink areas of its business, as opportunities allow. It is also prepared to target different kinds of investors with differing return motivations to fulfill its third-party reinsurance capital needs for the opportunities it is focused on.
This approach should see RenRe continue to be a reinsurer with a considerable focus on having mixed balance sheets, with multiple vehicles targeting risk to match its investors and equity capitals return requirements.
A concerted focus on Upsilon this year, which will typically be writing business at higher rates-on-line in the retro space, may also boost RenRe’s income from fees and profit commissions, if it is successful in deploying all the capital it raises for Upsilon.