Bermuda domiciled reinsurance firm and third-party or ILS capital manager RenaissanceRe (RenRe) significantly pulled back by 40% on assumed retrocession during the fourth quarter of 2015, and also shrank its Upsilon Fund.
During the firm’s Q4 2015 earnings call, President and Chief Executive Officer (CEO) Kevin O’Donnell, along with Executive Vice President (EVP) and Chief Financial Officer (CFO), Jeffrey Kelly, revealed that a lack of desirable returns on some catastrophe reinsurance transactions caused a cut back in assumed retro business.
“Looking at the retro market, where we are a recognized leader, we have chosen to shrink our Upsilon fund to one-quarter the size it was just two years ago, given the increasingly inadequate returns offered,” said CEO, O’Donnell.
O’Donnell stressed that the firm does not confuse good results with a good portfolio, and it’s decision to contract the fund was supported by many deals offering a risk premium that is “inadequate for any capital.”
“Since assumed retro business tends to consume substantial capital due to the high correlation of losses with the rest of our portfolio, our decision to pull back has resulted in an increase of our modelled excess capital position. We’ve also increased our ceded purchases,” explained RenRe EVP & CFO, Kelly.
So as well as reducing the amount of written retro during Q4 by roughly 40%, RenRe also decided to cede a significantly higher volume of retro, likely owing to market conditions being that they can hedge their portfolio more cost effectively.
“There is also increased competition in both the ceded and assumed retro markets.
“Even in this environment, our flexible approach to retro helped us construct a good portfolio. Overall, across the property portfolio, we have deployed less risk capital, which is the correct decision in a declining rate environment, and this is reflected in our revised guidance on property,” said O’Donnell.
RenRe established the Upsilon Fund, which is mostly a retro targeted reinsurance vehicle in November 2014, and during its recent earnings call underlined how it’s increased and decreased both assumed and ceded retro business portfolios many times before.
O’Donnell added that the current landscape might be the most “undisciplined and competitive market” that the firm has seen, and that they “acted accordingly.”
The CEO also stressed the point that any reduction in assumed retro and therefore its Upsilon fund, was done while being cognisant of its growing base of third-party investors, which the firm actually expanded during 2015.