RenRe expected to capitalise on retro opportunities again

RenaissanceRe, the Bermuda-headquartered global reinsurance firm and one of the biggest users of third-party capital within its business, is expected to capitalise on the retrocession market opportunity being seen this renewal season.

RenaissanceRe (RenRe) has always underwritten some retrocession, both on its own balance-sheet paper and through third-party capitalised fund vehicles and joint-ventures, but in recent years its appetite for this has clearly grown.

Helping to drive RenRe’s retro appetite has been its access to third-party capital using its Upsilon collateralised reinsurance and retro fund vehicle, as well as market conditions which seemingly played into the companies hands at a time when investors were looking for the type of opportunity Upsilon presented.

RenRe increased its third-party reinsurance and insurance-linked securities (ILS) capital under management to close to $5 billion at the beginning of 2019, taking advantage of market dislocation and investor appetite to increase its capacity for underwriting.

The company’s CEO Kevin O’Donnell has previously explained that it took advantage of the disappearance of Markel CATCo’s pillared retrocession product from the market, as it aimed to provide continuity to some protection buyers.

Analysts believe RenRe will be looking to capitalise even more on retro market dislocation and the fact such a proportion of available ILS capital for retrocession has been trapped, at the upcoming January renewals.

Wells Fargo Securities analysts said they are expecting RenRe to take further advantage of retrocession market conditions at this renewal, in order to expand its book in that space while rates are more attractive.

We’d say this will also result in an increase in third-party capital managed, particularly likely in the Upsilon ILS fund vehicle, as this is where the appetite for higher-return retro lies and can deliver attractive fee income for RenRe as well.

The analysts also believe RenRe may be less affected by the cost of retrocession as well, which is also a function of its access to third-party capital (we believe).

The analysts wrote, “We believe RNR will be able to write more business and won’t be as dependent on buying retro at higher prices as some other reinsurers who do not have as much capital flexibility.”

The use of third-party capital has given RenRe the flexibility and platform to allow it to write more retrocession and benefit from the current state of the market.

With some expecting retro rates will rise 20% to 30%, even more in some lower and loss bearing layers, the opportunity to add to revenues with even a relatively small book of retro are clear at this time.

Hence the return to active quoting and binding of retro by Berkshire Hathaway, quoting (if not binding) by DE Shaw and some others, which we revealed last week.

With the renewal market expected to show the largest rate improvements at either end, retrocession being one of them, it would be no surprise for RenRe to add some further size to Upsilon and bring more third-party capital into its structure to support a growing retro portfolio.

RenRe recently returned to the catastrophe bond market as well, with a new Mona Lisa Re 2020-1 transaction that seeks $250 million of capital for the firm.

Whether retrocessional capital for RenRe, or another way to bring third-party capital into its business to augment its own underwriting, the Mona Lisa Re 2020 cat bond is another clear sign of the reinsurer leveraging market conditions to build its book and protect its profitability.