RenaissanceRe, the Bermuda headquartered specialty re/insurer and third-party reinsurance capital manager, has raised capital across numerous platforms over the last year, but the company always ensures investors have a “right of incumbency” on the deals they are already on, according to its CEO.
RenaissanceRe (RenRe) has been raising third-party capital for its range of insurance-linked securities (ILS) funds and structures, collateralised sidecar like vehicles, dedicated single investor structures and mandates, plus joint-ventures over the last few years.
The upshot of which has been that RenRe has more capital, in absolute dollar terms, in third-party capitalised vehicles and joint-ventures than it does on its own balance-sheet, leverage aside.
Then, in 2020 as the impacts of the Covid-19 pandemic accelerated, RenRe joined other insurance and reinsurance firms in also adding new balance-sheet capital with an equity raise.
The company raised around $1.125 billion, as investors showed their commitment to supporting its balance-sheet just as much as to its third-party reinsurance capital, ILS style vehicles.
RenRe had also raised another $250 million of fresh capital from third-party investors for its ILS structures in the second-quarter of 2020, showing the re/insurers ability to tap into capital from multiple sources and for multiple vehicles.
But, with new capital flowing into all of these different buckets for RenRe and the company having to select where to deploy each bucket, based on cost-of-capital, investor risk and return requirements, among other considerations, analysts asked the firms CEO whether any preference is given to the equity capital investors.
Speaking during the RenaissanceRe second-quarter 2020 earnings call last week CEO Kevin O’Donnell explained that investors are treated the same, no matter what structure their capital comes through to support RenRe’s underwriting business.
Asked about how RenRe ensures alignment with such a range of investors across multiple strategies and structures, with specific reference to how the company views the equity raised capital versus that from its third-party investors, O’Donnell said that he’d spoken with all of the firms largest investors in the last couple of weeks and the company had spoken with all of its investors over the last few weeks.
On the freshly raised ILS capital amounting to over $250 million that was raised, O’Donnell said that, “We raised $250 million in the quarter and deployed it.”
Asked whether these third-party investors may feel crowded out by the new equity capital, especially in a time of such opportunity due to rate hardening, O’Donnell explained that, “Going into the 1/1 renewals, the way I think about our partner capital is that they have a right of incumbency on the deals that they’re on, just as we do.”
That’s key, as some might have assumed RenRe would have a preference to make returns on balance-sheet capital rather than third-party, but the company acknowledges the need to treat investors fairly and ensure they get the right of renewal on the risks they’ve supported in the past.
In addition, O’Donnell highlighted that as the capital mix adjusts and changes, with new inflows to different strategies and vehicles, the company will use that to its best advantage.
“When I look at how we’re going to structure the portfolios, we weren’t going to de-risk them to deploy the capital that we have. What we’re going to do is optimise the portfolio against the rate environment and the opportunity,” he explained.
At the upcoming renewals he highlighted the strategy will remain one of selecting the right risks for the right ILS or JV vehicle, or balance-sheet and structure.
Using the retrocession market and aggregate reinsurance as examples. O’Donnell said that these are areas where Upsilon would be expected to see further growth, not its own balance-sheet.
That’s despite these being areas of the market where it’s widely expected that rate increases are likely to be at their highest.
Rather than try to put this on the new equity capital raised, it seems RenRe will stick to its strategy of matching the right risk with the right capital.
“We’ll constantly look at how we can best match efficient capital with desirable risk,” O’Donnell explained.
Adding, “But we will not look and it’s not our objective, to cherry pick the investors that we have. We give them the right to participate alongside capital raises and they are true partners to us in the risk that we take.”
Managing the alignment of an underwriting platform with so many divergent capital sources, with so many balance-sheets with a wide-range of strategies and target returns, is not an easy task.
However, RenRe has proved expert at this over the last few years, as its third-party capital pile has outgrown its equity and at the same time started to deliver really significant fee income for the company at the same time.