Retro funds could be 70% – 80% trapped or lost: RenRe CEO O’Donnell

Retrocessional reinsurance focused ILS investment funds and strategies could find as much as 70% to 80% of their capital trapped or lost after the challenging catastrophes of 2021, according to RenaissanceRe’s CEO Kevin O’Donnell.

The CEO of RenaissanceRe, the Bermuda-based reinsurance firm and third-party capital management specialist, explained that 2021 has delivered another “body blow” to the insurance-linked securities (ILS) market and that this is expected to hit retrocession funds and strategies the hardest.

In fact, the CEO implied that his company may end up shrinking its collateralized reinsurance and retrocession strategy Upsilon for the next year, as investor demand is uncertain following yet another difficult year of catastrophe losses.

Speaking during the reinsurance firms latest earnings call this week, Kevin O’Donnell said explained how 2021 will impact the ILS market in his view and also that he feels RenaissanceRe’s platform gives it an advantage.

He started by saying that, despite losses of recent years, “There has been more persistence in some of the ILS money than we originally expected.”

Adding that, “We enjoy great relationships and we have a different platform than others.”

But challenges are ahead, even for RenaissanceRe, in its third-party capital management and ILS business it seems.

O’Donnell explained some of the factors likely to affect ILS capital after the 2021 losses, “I think if you look back, there’s been several large ILS managers that are not going forward, compared to 2020. I think that plays a role.

“I think retro funds, if appropriately managed, will have 70% to 80% trapped or lost. That’s another very difficult year to explain to investors.”

“So frankly, I believe we will shrink our Upsilon portfolio,” he said.

But RenRe has some flexibility that will allow it to continue writing business, even where its third-party investors might lose some of their appetite for it.

“The good news for us is we tend to restructure those deals so that they more comfortably fit within RenRe Limited and DaVinci so that we can still manage them on our platform,” O’Donnell explained.

But there is no getting away from the challenges this year’s losses are delivering to some strategies.

O’Donnell said that, “So I feel as if it’s another body blow to the ILS market with the enhanced volatility this year and also the fact that a lot of it will shift to the retro market.”

It is this expected shift of losses to retrocessionaires and the ILS funds that invest in retro which could have the biggest impact for some it seems, particularly on the go-forward basis into 2022.

In particular, O’Donnell feels that the European flood loss is particularly challenging and he expects some companies will have to increase their loss picks for the event, while retro will be hit again.

“I think about 75% of the Bernd loss will come to reinsurance, and that will make its way into retro as well,” O’Donnell explained.

O’Donnell remains confident in RenRe’s ability to go-forward with sufficient capital and the flexibility in the multi-balance-sheet and capital platform is seen as key.

“I don’t feel impaired or encumbered in our ability to access capital and I think it’s because of our track record and our unique structures. So what I’m saying is an industry phenomenon, not a RenRe phenomenon,” he explained.

He doesn’t expect a wave of new capital to enter the industry this year at the upcoming renewals and his remarks suggest raising fresh capital may be challenging in some quarters, especially for those that faced the largest losses and trapped capital impacts from 2021 catastrophe events.

“We could be wrong and capital could come flooding in but we haven’t seen that as of yet,” he said.

Adding that, “There are some capital raises going on in the industry, which gives some transparency and it’s our expectation that we’ll probably increase our capital managed under the DaVinci platform, at least.

“I anticipate that DaVinci will be a little bit larger next year, which should benefit the fees that we’ll generate out of that.”

Which is another example of the flexibility RenaissanceRe has in its third-party reinsurance capital platform, as it can shift transactions and even investors into different types of vehicles and always has an opportunity to raise capital, even as some strategies may shrink.

O’Donnell’s comments are telling as always and drive home the challenges those strategies that have been particularly impacted by recent losses, especially retrocession portfolios, may now face in going forwards into 2022.

Of course, RenRe itself had raised a significant amount of capital going into and through 2021, with the Upsilon fund one of the destinations for a lot of it. So the reinsurance firm will also have had its own challenging conversations with investors this year after the significant catastrophe loss events.