RenRe’s DaVinciRe to benefit from rates on both sides of the business: Moody’s

DaVinci Reinsurance Ltd. (DaVinciRe), perhaps the best-known of the RenaissanceRe reinsurance joint-venture vehicles, is set to benefit from its access to risk through its parent, as well as higher rates on both sides of its business, according to rating agency Moody’s.

DaVinciRe is a rated and mainly third-party investor capitalised joint venture reinsurer, which operates like a balance-sheet reinsurance sidecar sitting alongside parent RenaissanceRe.

DaVinciRe primarily writes property catastrophe reinsurance alongside RenaissanceRe (RenRe) largely in the form of companion lines.

This sees DaVinciRe writing business at the same terms and price as RenRe, which Moody’s notes “provides ready access to business” for the joint-venture structure.

DaVinciRe has grown into a particularly important vehicle for RenRe, having more than doubled in terms of equity capital in the last roughly five years.

At June 30th 2022, third-party investors owned 66.2% of DaVinciRe’s capital, while RenRe owned the rest.

To ensure alignment with its investors, RenRe has to maintain at least a 15% stake in the vehicle.

Moody’s noted that DaVinciRe has increased its equity capital substantially in recent years, having raised more than $1.3 billion since 2017.

DaVinciRe’s total shareholders’ equity was approximately $2.6 billion as of the middle of 2022.

Being a rated balance-sheet reinsurer, DaVinciRe can write a lot more business thanks to its leverage as well, so has become an increasingly important source of companion underwriting capital for RenRe, akin to a sidecar in the way it participates alongside the parent.

That’s good for its investors as well, given the more meaningful it can be, alongside RenRe, the better the vehicles ability to access prime reinsurance business becomes.

Investors like DaVinciRe as it’s a way to access a portfolio of relatively uncorrelated property catastrophe reinsurance through a structure aligned with its parent RenRe, that is an equity investment, rather than a fund, and also has the ability to generate returns on the investment side of its business as well.

While the investment side took a hit in 2022 so far, with DaVinci Re suffering $194 million in realized and unrealized losses in its investment portfolio because of the sharp rise in interest rates this year, it still delivered net income available to common shareholders of $52 million.

While the initial effects of higher interest rates can be a challenge, going forwards Moody’s believes DaVinciRe will benefit from higher investment income on its fixed income portfolio as interest rates move higher still.

In addition, Moody’s is also positive on the underwriting side, as DaVinciRe reported a combined ratio of 34.6% during the first half of 2022, an improvement from 75.4% in the prior year.

Going forwards, Moody’s also noted that it “expects DaVinciRe’s profitability metrics to benefit from ongoing improvement in property catastrophe reinsurance pricing across most regions globally.”

Importantly, the “strong alignment of interests between RenaissanceRe and DaVinciRe’s third-party investors” is seen as a positive by Moody’s, who affirmed DaVinciRe’s ratings.

In recent years, as some insurance-linked investment strategies suffered repeat years of catastrophe losses, RenRe has successfully continued to grow DaVinciRe, as some investors shifted allegiance to the equity investment model it provides, finding it a more attractive structure to allocate to reinsurance and catastrophe risks through.