While overall insurance-linked securities (ILS) and third-party reinsurance capital has shrunk slightly over the last year or so, reinsurer RenaissanceRe bucked the trend and raised around $2.2 billion from investors in just over one-year.
Raising capital has not been the priority for many in the ILS market in recent times, as the impacts from the consecutive years of major catastrophe losses since mid-2017 and the resulting trapped collateral and loss creep, made raising funds more challenging for some and less of a priority for others.
But RenaissanceRe (RenRe) went all out, as it targeted returns from the firming retrocessional reinsurance market, for itself and its third-party capital investors, as well as an enlarged share of higher-layer catastrophe markets, resulting in a significant upsizing of its core ILS vehicles and around $2.2 billion raised.
RenRe uses a range of vehicles and structures to bring investors from the capital markets into its business model, with an aligned approach to underwriting and profit sharing.
CEO of RenRe Kevin O’Donnell recently explained that growth at the reinsurer sees it with the largest underwriting portfolio in its history right now, which he also believes could prove to be the most profitable as well.
That’s quite a boast, given a significant amount of it is underwritten using capital market investors money.
“Our growth occurred across our segments and platforms and has resulted in the largest underwriting portfolio in our history, and, if our assumptions prove correct, the most profitable,” O’Donnell said. “Our success was the culmination of a well-planned and aggressively executed strategy where our expanded footprint, preferential access to partner capital and strong customer relationships uniquely positioned us to recognize and benefit from positive market trends.”
One key area that partner capital, so from capital market investors, was put to work effectively was in retrocession.
After the major losses of 2017 and 2018 and the demise of the CATCo retro strategy, a gap emerged for providers and RenaissanceRe looked to the market as a key growth channel.
“Continuing large losses in the retrocessional space have reduced capacity in this previously oversubscribed market and resulted in material rate increases. As a result, we exposed more of our underwriting capital, buying less retrocessional coverage and selling more retrocessional protection,” O’Donnell said.
This growth in retrocession was one key area capital was raised for through 2019 and into the early 2020 renewals.
O’Donnell explained, “Our capital flexibility and increased scale facilitated this efficient outcome. In 2019 and through early 2020, we raised an additional $1.8 billion of capital through our managed joint ventures and third-party capital vehicles. In addition, we raised $400 million of catastrophe bond capacity in our latest Mona Lisa offering.”
At a time when most other ILS strategies were growing relatively slowly, if at all, RenRe took advantage of retro market dislocation and lack of capacity to step in and build a considerable book.
RenRe’s collateralised reinsurance and retrocession fund vehicle Upsilon was the beneficiary of much of the capital raising.
RenRe reported that balance-sheet assets related to its Upsilon RFO vehicle reached an impressive $3.1 billion at the end of 2019, a 41% increase on the end of 2018’s $2.2 billion.
Growth was also seen in the Medici vehicle, which invests in property catastrophe reinsurance and ILS assets, ended the year with $632 million of noncontrolling interests, a roughly 50% increase on the end of 2018.
2019’s capital raising activities delivered significantly higher fee income to RenRe through its various third-party capital management and ILS fund activities. That trend has continued in the first-quarter of 2020 as well.
We understand a little more capital may have been raised for the April renewals and that RenRe is expected to raise more for the mid-year as well, as long as pricing looks attractive.
This fee income is expected to become one of the main drivers for RenRe going forwards, which means the company will need to keep raising capital when the market and underwriting opportunities allow.
So with reinsurance and retro rates likely to firm further at the mid-year 2020 renewals, potentially more than had originally been expected now that the coronavirus pandemic effects are also taking hold, it’s likely RenRe will take advantage of the market opportunity and investor appetite, where it can, to create an even larger portfolio as we move through 2020.
As we reported recently, RenRe cited another $600 million raise of third-party capital in the first-quarter of 2020 as well, some of which may crossover with the raise for the January renewals but certainly these figures continue to rise significantly.
RenRe continues to become a business platform that generates core underwriting profits for itself and is now augmenting that with a growing third-party capital pool. At some stage, the third-party capital fee income and profit share could get close to matching its retained underwriting profit, in loss free periods.
It’s no wonder others try to emulate this and investors have flocked to the reinsurer, or that investors clearly value RenaissanceRe highly as evidenced by its share price.
So far, so good for the transition to full-hybrid capitalised, insurance and reinsurance underwriter and capital manager, for RenRe. Going to be fascinating to see how this has developed later this year, once we learn how expansive the company has been around these hardening mid-year 2020 renewals.