Investor scepticism high, ILS fundraising to be challenging: RenRe CEO

Managers of third-party reinsurance capital and insurance-linked securities (ILS) should anticipate a more challenging fundraising environment in 2022, as investor scepticism is currently high after recent years of catastrophe losses, according to RenaissanceRe CEO Kevin O’Donnell.

This isn’t affecting all parts of the insurance-linked securities (ILS) market though and O’Donnell noted that the catastrophe bond funds are faring better as investors “flock” to them.

Catastrophe bond funds have grown strongly through 2021, as our data on the assets of UCITS specific cat bond funds shows.

Speaking during the RenaissanceRe (RenRe) fourth-quarter earnings call yesterday, O’Donnell explained the current state of the ILS market fundraising environment.

His company had more success raising capital in time of the January reinsurance renewals, having added $453 million of new third-party investor capital in time for 1/1.

But, even RenRe has experienced a significant change to its capital mix, as most of those new third-party investor assets flowed to the equity based DaVinci Re strategy, which acts as a kind of sidecar for the company.

At the same time, RenRe’s collateralized reinsurance and retrocession focused Upsilon strategy shrank considerably, entering 2022 with less than half the limit available that it had in the prior year.

Trapped capital and losses were the drivers of Upsilon’s shrinking and O’Donnell explained that this has driven investor scepticism about some ILS strategies.

“With regard to trapped capital, it’s been difficult for particularly the more volatile funds, for those that are exposed to retro, for the past several years,” O’Donnell said.

Asked whether some of that trapped capital could find its way back into the market in 2022, he added, “Some of the older years there might be some roll of capital, but I don’t think it’s going to be meaningful.”

O’Donnell stated that, “I think investor scepticism is extremely high.”

Adding that, “Investors are flocking to cat bonds and if you look at the spectrum of transparency and simplicity to enter a cat market and take diversifying risk, cat bonds are a good place to do that.

“As you move through the spectrum of reinsurance and then all the way to retro, the lack of transparency increases and understanding diminishes materially.

“I think there’ll be continued scepticism at the more risky end of the risk spectrum from ILS investors.”

Which aligns with where money has flowed at the start of this year, with continuing strong investor appetite for catastrophes bonds, that should help to drive a buoyant cat bond market again in 2022.

We understand some collateralized reinsurance funds have raised new capital for this year. But, we’re told that this has largely been towards the lower and mid-volatility strategies.

As you move away from lower-volatility ILS and reinsurance funds, higher up the risk curve, we understand that where new capital has been raised it has been more about replacing capital that is trapped, rather than adding significantly to deployable assets.

Despite this, O’Donnell remains confident in RenRe’s ability to continue attracting new funds from investors, particularly because of its multiple joint-venture platform approach that involves a range of strategies and ways to access reinsurance linked returns.

“I think a company like us with our track record, and with the flexibility of our platform, we maintain opportunities for ILS investors to continue to deploy across our platform. So I think we still have opportunities for third party capital,” O’Donnell said.

“But I think it’s going to be a difficult year for third-party capital managers to continue to solicit funds.”

All of which suggests that, for ILS fund managers and those offering investors access to reinsurance-linked returns, it’s going to be a key year for explaining strategies, levels of volatility and also providing comfort in how portfolios have been constructed this year.

At the same time, in a higher-priced reinsurance environment, we could also see some managers launching new lower volatility strategies, that deliver cat bond like returns but offer more stability through modelled periods of heavy loss activity.

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