RenRe consistently sees greater demand for Capital Partners investments than it can satisfy: CEO

RenaissanceRe, the Bermuda headquartered global reinsurer and third-party reinsurance capital manager, has built a “deep and persistent moat” around its fee income business, CEO Kevin O’Donnell believes, saying that demand from investors for access to its Capital Partners strategies is often greater than it can satisfy.

Writing in his annual letter to shareholders, Kevin O’Donnell explained that fee income generated by the RenaissanceRe Capital Partners is a significant contributor to the firm’s overall earning power.

“At RenaissanceRe, we have spent the last decade building a reinsurance company designed to solve any customer’s problem across any line, at scale, through our owned and Capital Partner balance sheets,” O’Donnell wrote.

Going on to highlight that, “The fee income we earn primarily from our Capital Partners business. As I discussed last year, we take a unique approach to third-party capital. Our interests are highly aligned with our partners and this approach has allowed us to organically grow into one of the largest managers of third-party capital.

“For the year, management and performance fees totaled $327 million. Management fees were $219 million, up 24%, largely due to growth in our third-party vehicles DaVinci and Fontana. As I discussed previously, we deployed our Capital Partner balance sheets extensively in the renewal of legacy Validus business, and this is where most of the growth in our fee income originated. Management fees also benefited from some fee recapture from prior years that were impacted by catastrophic events.

“Performance fees in 2024 were $107 million, up 78%, due to strong performance across our Capital Partners vehicles.”

O’Donnell later discussed the moat he feels RenaissanceRe has built around its third-party capital and insurance-linked securities (ILS) offering from the Capital Partners division.

“I began this letter by describing our ability to solve our customers’ problems, at scale, through our owned and Capital Partner balance sheets. This ability is the ultimate outcome of our competitive advantages and the basis for a deep and enduring moat that we have constructed around our business.

“I believe we have built an equally deep and persistent moat around our fee income business. We offer both rated and collateralized investment vehicles across the full panoply of property and casualty risks we write (including catastrophe bonds). Consequently, it is easier and more profitable for an investor to partner with us and benefit from our underwriting competitive advantages on day one, rather than trying to independently recreate them,” O’Donnell explained.

“In addition, our Capital Partner balance sheets are fully integrated into our operations (and in most cases fully consolidated into our financial results). This allows us to take a unique approach to third-party capital, starting with attractive risk and then allocating that risk between our wholly owned and Capital Partner balance sheets. When our partners experience an underwriting loss, we also experience an underwriting loss. This increases alignment with our Capital Partners and reduces agency conflicts.”

He further highlighted the “robust governance and audit functions” of the public reinsurance company, saying that these equally apply to the third-party reinsurance capital vehicles and ILS funds.

“This further reduces agency conflict and increases trust. It also allows us to bring rated entities to third-party capital across all our lines, which distinguishes us from peers and provides underwriting leverage and improved liquidity to our Capital Partners,” O’Donnell wrote in the letter.

O’Donnell went on to say that he believes these factors have resulted in the long-standing investor relationships RenRe has built up through its range of joint-venture and ILS structures, saying, “Many of our investors have been with us for over a decade, sometimes even more than two.”

To which he added that, “We consistently experience greater demand for investments in our Capital Partners business than we can satisfy.

“Consequently, when we need to scale this business rapidly, as we did when we purchased Validus, we are able to do so.”

Finally, the RenaissanceRe CEO also highlighted one of its newer joint-venture vehicles Fontana, the casualty and specialty lines focused strategy that enables investors to allocate to longer-tailed lines of reinsurance business, which the company has been steadily growing over the last few years.

While “smaller margins and lower capital consumption” can make these lines of business less amenable to inclusion in a Capital Partners strategy, O’Donnell noted that, “Many investors find its float generating potential attractive which allowed us to create our innovative Fontana vehicle in 2022.”

On how RenRe thinks about shorter-tailed, more capital consumptive and fee generating lines such as property catastrophe risk, versus longer-tailed lines, O’Donnell gave the following description.

“Each of our classes of business have different risk and volatility profiles and contribute in distinct – but equally important – ways to our Three Drivers of Profit.

“Property is more volatile and produces more underwriting profit in good years. It also generates substantial fee income from partner capital.

“Casualty and Specialty, on the other hand, is less volatile, generating a smaller but more predictable underwriting result, as well as some fee income from Fontana. Its largest contribution in today’s market conditions, however, is to our investment income, due to the considerable float it generates from our loss reserves.”

It’s always interesting to see what the CEO of a major global reinsurance company has to say about alternative capital and ILS, especially so when it comes from the company with perhaps the most-balanced mix of own-balance-sheet and third-party capital.

RenaissanceRe has consistently developed new ways for investors to partner with and share in its underwriting returns, resulting in significant fee generation that now benefits its shareholders meaningfully. While the fact investor demand often outstrips the firm’s ability to satisfy it, is telling of how attractive this model has proven to be.

Of course, it’s important to clarify here, that many ILS investment managers experience demand from investors outstripping their ability to accept new inflows at times. It’s been a feature of the ILS market since its inception and is another reflection of the cyclical nature of reinsurance.

Recently though, the catastrophe bond market has seen far fewer funds shuttering to inflows than it used to (it was a regular occurrence in the past). So the expansion of the market and growing use of ILS capacity by the insurance industry as a whole, is helping to keep these strategies open to investors more consistently these days. Something that may continue to be the case, if the pipeline remains as strong as we’ve seen over the last year or two.