RenaissanceRe has shot to second place in the Insurance Insider ILS leaderboard from fifth only two years ago, and now ranks only behind cat bond specialist Fermat in assets under management.
Its growth in recent years has been supported by new, large launches such as the Fontana sidecar, and PGGM partnership Vermeer. This reflects its strategy of piloting various large-scale rated balance sheets with third parties alongside its own, though it does also offer commingled funds such as cat bond fund Medici and high-risk strategy Upsilon.
The former has grown significantly over the past year in tandem with the bond market, as the latter shrank dramatically with $843mn redeemed by investors after collateral was freed up.
But in discussing the firm’s start to 2024, one of the factors that global head of capital partners Chris Parry is keen to highlight is not its overall growth but its voluntary return of capital, or conscious shrinking.
RenRe returned almost $450mn to investors in its various joint ventures as of 1 January: $250mn to DaVinci investors, an $18mn dividend for Medici investors and $175mn paid out from Vermeer.
DaVinci still experienced net growth during 2023. Despite the capital return, the third-party share of funds rose at 1 January as it took in $300mn including AIG capital, with RenRe reducing its own shareholding in turn. Parry noted the move to keep the lid on this net growth was partly a decision to hand back to investors strong surpluses made in 2023.
Parry also said that returning capital may run “against the grain” amongst asset managers but that it is a core part of the firm’s tactics.
“For us, if there isn't the opportunity to bind business at attractive rates and be accretive to the portfolios, we take the tough decision of returning that capital to investors ... I mean, this is the best market we've seen in years, but for us it's about making sure that we maximize the return.”
“Our capital is invested alongside, so we want to make sure that we're building the most attractive portfolios for them as well as us.”
RenRe’s participations in its various third-party vehicles at year-end 2023 ranged from 12% of Medici to 32% of Fontana, with capital also invested in Upsilon and Top Layer.
In contrast, Parry is somewhat concerned by current cat bond pricing trends as a result of less disciplined tactics.
"It does feel as though some of our peers are deploying capital into the market ... because the cash is on their balance sheets or on their funds.”
During a fast-paced Q1 on the cat bond market, spreads have dropped as investors continued to target this side of the ILS market.
Cat bond preference pressures fees
Naturally, all ILS managers are now hitting the road to hammer out their messaging to investors after strong returns in 2023 that marked the segment out as one of the best performing alternatives.
But Parry believes that some factors will continue to hamstring inflows for some time – one of which is merely investor discipline.
The denominator effect continues to make ILS portfolios look overweight relative to targets. However this time it is 2023 profits that are driving the uptick, rather than mark-to-market losses elsewhere.
“A continued theme is more and more rebalancing we're seeing through the year. And so whilst that is frustrating in a way, actually I think it's a really strong message that there's some discipline from some of the institutional capital.”
“The institutional capital is definitely saying, ‘look, we're moderating our exposure to the asset class even despite the attractive rates that we're seeing’.”
Though he says RenRe has strong investor demand for DaVinci, more broadly he sees market demand as patchy, particularly for collateralised reinsurance strategies. And while investor demand has generally trended towards the cat bond segment, Parry believes some key factors will inhibit this segment from dominating the ILS industry more broadly.
“I don't believe that cat bonds will start drifting down the risk tower,” he said, saying that the risk-remote nature is what has attracted investors.
Cat bonds, however, have traditionally been a lower-fee business for asset managers in this space, pressuring margins. As more ILS managers are stepping into the cat bond segment, Parry called out cases of fees in this space being pressured still further as newer entrants to the field compete on price.
“You can see why it's been so successful and has gained so much traction, but unfortunately it comes back to the fee point.”
For managers trying to establish a foothold in cat bond strategies for the first time, lower fees may be a key lever that they can offer investors.
As the ILS market has matured, it’s not surprising to see “more efficiency” on fees, he admits. “I think there is a point though that you have to draw the line because everyone has costs that they're incurring.”
“If you're trying to make this a sustainable business going forward, fees need to remain at a level commensurate with the skills, resources and expertise that a manager provides. We believe that there is a tangible value associated with this.”
AlphaCat and the co-existence balance
One factor that underscores RenRe’s current standing in the ILS leaderboard is that it got to second spot even without any incremental benefit from the acquisition last year of AlphaCat.
The closure of the franchise reflects upon a broader challenge in recent years for reinsurer-grown ILS shops, which have experienced varying fortunes as many small-scale sidecars have quietly closed.
The AlphaCat unit had around $3bn of AuM but a high percentage was subject to redemption requests, the firm’s 10k filing showed.
Parry said that RenRe had decided “pretty early on” to put the vehicle into run-off. He attributed that to the differing management approach between the two entities. RenRe underwriters handle all business flowing into the firm’s joint ventures, while AlphaCat had more of a “managed account, commingled approach” of assembling portfolios within the ILS unit.
“It was very difficult to take the existing business and slot it into our platform.”
The single point of underwriting focus is one that Parry believes underscores RenRe’s success in growing AuM. This is whilst other reinsurer platforms have struggled to get underwriters to accept the co-existence of sidecars with their parent balance sheet.
We have very clearly defined channels in terms of how our risk flows to our respective joint ventures.
“Our underwriters know all of the balance sheets, they know where the risk flows to each of those balance sheets.So it becomes second nature to them to think about, if I'm looking at international cat, I've got [State Farm joint venture] Top Layer Re. If I've got US cat at the top end, I've got Vermeer.”
"In order to be successful, whilst you have to have separation [of responsibilities] from a fiduciary perspective, you still need an enormous amount of collaboration and integration between the two teams.”
The firm hopes that at some point it will transition some former AlphaCat investors to its own platform, although Parry is guarded on what kind of upside may be possible.
However, the firm has kept some AlphaCat staff, including former CFO Kevin Ronaldson who will oversee run-off of the former funds.
Consolidation phase
After a long phase of instability, Parry believes the ILS market is now entering a “consolidation phase” as it rebuilds trust with investors.
Last year was “a long overdue year for many investors”, he notes.
Parry expects to see further evolution on collateralised structures, but argues that rated entities are “incredibly well positioned to navigate the next few years” due to their inbuilt leverage.