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

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

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

Occurring to focus on that, “The fee income we earn primarily from our Capital Partners business. As I discussed last 12 months, we take a novel approach to third-party capital. Our interests are highly aligned with our partners and this approach has allowed us to organically grow into certainly one of the most important managers of third-party capital.

“For the 12 months, management and performance fees totaled $327 million. Management fees were $219 million, up 24%, largely as a consequence of growth in our third-party vehicles DaVinci and Fontana. As I discussed previously, we deployed our Capital Partner balance sheets extensively within the renewal of legacy Validus business, and that is where many 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%, as a consequence of 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 started this letter by describing our ability to resolve our customers’ problems, at scale, through our owned and Capital Partner balance sheets. This ability is the last word end result of our competitive benefits and the premise for a deep and enduring moat that we have now constructed around our business.

“I feel we have now built an equally deep and protracted moat around our fee income business. We provide each rated and collateralized investment vehicles across the total panoply of property and casualty risks we write (including catastrophe bonds). Consequently, it is less complicated and more profitable for an investor to partner with us and profit from our underwriting competitive benefits on day one, reasonably than attempting to independently recreate them,” O’Donnell explained.

“As well as, our Capital Partner balance sheets are fully integrated into our operations (and typically fully consolidated into our financial results). This permits us to take a novel approach to third-party capital, starting with attractive risk after which 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 general 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 within the letter.

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

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

“Consequently, when we’d like to scale this business rapidly, as we did after we purchased Validus, we’re in a position to accomplish that.”

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

While “smaller margins and lower capital consumption” could 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 progressive Fontana vehicle in 2022.”

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

“Each of our classes of business have different risk and volatility profiles and contribute in distinct – but equally vital – 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, then again, is less volatile, generating a smaller but more predictable underwriting result, in addition to some fee income from Fontana. Its largest contribution in today’s market conditions, nevertheless, is to our investment income, as a consequence of the considerable float it generates from our loss reserves.”

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

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

In fact, it’s vital to make clear here, that many ILS investment managers experience demand from investors outstripping their ability to simply accept latest inflows at times. It’s been a feature of the ILS market since its inception and is one other 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 an everyday occurrence prior to now). So the expansion of the market and growing use of ILS capability by the insurance industry as a complete, helps to maintain these strategies open to investors more consistently lately. Something that will proceed to be the case, if the pipeline stays as strong as we’ve seen over the past 12 months or two.