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Upsilon over 50% smaller on losses & trapped capital: RenRe CEO O’Donnell


After another challenging year of catastrophe losses in 2021, Bermuda based reinsurance firm and third-party capital manager RenaissanceRe went into the January 2022 renewals with its Upsilon collateralized reinsurance and retrocession vehicle significantly smaller than the prior year, its CEO revealed today.

Kevin O'Donnell RenaissanceReSpeaking during an ongoing earnings call event, RenaissanceRe (RenRe) CEO Kevin O’Donnell said that over the last year his company continued to demonstrate its strong capital management abilities, alongside strong risk selection, with third-party capital one key lever that helped to boost the firms full-year performance, as we explained earlier today.

RenRe added $453 million of new third-party capital in time for the January 2022 reinsurance renewal season, with some flowing to the Upsilon RFO Re collateralized structure.

But still, this vehicle is now significantly smaller than a year ago, as the effects of catastrophe loss activity and the resulting trapped capital saw some investors shifting priorities as well.

RenRe CEO O’Donnell commented on the importance of third-party capital and the insurance-linked securities (ILS) business for the reinsurer.

“Our superior capital management was also distinguished by the continued growth of our Capital Partners business,” he explained.

Adding that, “It is difficult to overstate the competitive advantage that Capital Partners provides us, which is most obvious in the fee stream that generates.

“Equally important is the ability to use our Capital Partners business to provide flexibility and optimise our gross to net strategy across all our balance-sheets and thereby complements our superior risk selection.”

At the recent renewals this was evident in most of the new assets under management being raised for the DaVinci Re vehicle, which operates a little like a balance-sheet sidecar for RenRe.

DaVinci underwrote more property catastrophe risks at the renewal and we understand may have picked up some of the slack, as a shrunken Upsilon could not take on as much risk for 2022.

Demonstrating the importance of flexible third-party capital to RenRe, O’Donnell explained, “This was evident at January 1, where we grew DaVinci by $500 million and increased the percentage of property cat business we allocated to it, a win for our customers as we continued to support their programs during a period of market dislocation.”

“It was win for the third-party capital investors who continue to have opportunities to grow by investing into DaVinci and a win for our shareholders who will benefit from increased income and optimised portfolio construction across all vehicles,” he continued.

RenRe’s Upsilon was always assumed to be one of the collateralized reinsurance and retrocession vehicles that took a significant hit in 2021, after the multiple major catastrophe loss events.

The structure writes a reasonably low-down book of reinsurance and retro, with some aggregate covers included. As a result, 2021’s catastrophe losses were always going to have an impact, but now O’Donnell has made it clear just how big that impact was.

“Finally, with respect to Capital Partners, Upsilon was significantly smaller at January 1 due to losses and trapped capital, offering less than half the limit it did in 2021,” O’Donnell said.

As well as losses and capital trapped, there may also have been some investor exits from Upsilon, we’d imagine, as some will have looked to shift their capital into something a little less volatile and perhaps better protected.

Which is where DaVinci Re has really come into its own, in terms of its usefulness, this year.

As O’Donnell implied in his comments, DaVinci Re provided investors an opportunity to continue growing into reinsurance and ILS and it’s likely some capital could have cycled out of Upsilon and into the equity-based reinsurer that offers a sidecar-like source of underwriting capacity to RenRe.

That’s the real benefit of having a well-established and diverse third-party capital platform, alongside the significant fee income the Capital Partners operation continued to drive for RenRe in 2021, as we explained earlier today.

Kevin O’Donnell had previously forecast that retro funds, like Upsilon, could have been as much as 70% or more trapped or lost after the impacts of hurricane Ida, on top of catastrophes from earlier in the year.

Upsilon had over $2 billion of capital available to deploy at January 1 2021, which had fallen to $1.892 billion as of June 30th last year.

So, O’Donnell’s comments that it is now down to offering less than half the limit it did a year ago, suggests Upsilon could be smaller than $1 billion now.

How much smaller is hard to say at this stage, but it is important to drive home the optionality DaVinci Re has provided for RenRe this year, providing a home for some investors keen to continue deploying into the property catastrophe reinsurance space.

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