The development of Fontana Holdings, RenaissanceRe’s newly announced, third-party capital-backed casualty and specialty reinsurance joint venture vehicle, sought to answer investor questions and respond to their needs for an efficient access point to these lines of business, Chris Parry explained to Artemis.
Speaking to us after the launch of Fontana Holdings was announced yesterday, Parry explained that the vehicle offers investors an aligned approach through which to allocate to casualty and specialty reinsurance lines, with evident benefits for RenRe as well.
Importantly, the RenaissanceRe Capital Partners team sought to answer the key questions raised by investors, when it comes to investing in longer-tailed lines, or less typical lines, of insurance and reinsurance business.
One area within that was providing an efficient exit point for investors, something Parry explained is embedded within the Fontana structure.
Recall, yesterday RenRe announced the launch of Fontana Holdings L.P. with $475 million of capital, as the latest joint venture from the company and with a focus on casualty and specialty risk.
Institutional investors contributed $325 million of Fontana’s launch capital, with the remaining $150 million coming from RenRe itself, to provide the aligned approach the reinsurer is known for in its ILS and third-party capital activities.
Fontana takes a quota share of RenRe’s casualty and specialty reinsurance lines book, providing investors with a route to access the underwriting returns of this part of the reinsurers’ business.
We spoke with Chris Parry, Global Head of Capital Partners at RenRe, who explained that investor demand drove the development of this new JV vehicle.
“One of the initial catalysts for developing Fontana came from institutional investors, telling us that they were seeking access to risk other than property cat.
“It’s also partly a reflection of the evolution of RenRe’s own underwriting footprint, growing our casualty and specialty segment, combined with clear investor demand for our capital management expertise,” Parry explained.
Parry discussed the importance of alignment in this structure, so investors know RenRe has its own stake in the performance of the joint venture.
He said, “It’s important to note that there’s a strong alignment of interest, because it’s a whole account quota share of RenRe’s casualty and specialty book, including our credit book, in which RenRe retains a meaningful share of the risk on our own balance sheet but also co-invests in Fontana.
“Other vehicles have relied more heavily on the investment portfolio to generate returns for their investors. However, for Fontana, the expected return is more underwriting focused.”
Also key was the efficiency of the way investors access the returns of the casualty and specialty lines underwriting, while, as ever, investors also wanted an exit point from the opportunity as well.
Parry explained that these were key considerations, but at this stage with Fontana not a market-facing underwriting vehicle, the need for a rating was not so clear.
“It was also clear that investors wanted an efficient access point into the Casualty and Specialty market,” he said. Adding that, “Fontana Holdings is not currently rated, but may pursue a rating in the future.”
But on the exit point, Parry also noted, “The vehicle is perpetual, which aligns with our long-term strategy at RenRe. There is a short lock-up period, but thereafter, investors benefit from an embedded liquidity feature.”
These features help to get over some of the challenges surrounding ILS investments into casualty and longer-tailed lines, where relying on a counterparty to provide a commutation exit also means a valuation must be applied.
In the past, casualty ILS opportunities have often involved long lock-ins of more than five years.
While some others have seen the commutation route used, but where the original source of the risk is the only party able to provide that liquidity opportunity, which investors can find more challenging come to terms with.
Finally, Parry explained some of the benefits of the structure, for RenRe and its investors.
“RenRe is uniquely positioned to offer this kind of investment opportunity. Our underwriting footprint is significant, with over $4.5B of premium, and about 50 underwriters writing casualty, specialty and credit business globally. We combined this underwriting expertise with our deep experience in creating and sustaining successful joint ventures for investors,” he told us.
Adding that, “This partnership with large institutional investors speaks to the sophistication and scale of our casualty and specialty franchise and our successful capital management of this book of business.
“Fontana supports one of the three drivers of profit for RenRe, allowing us to generate stable fee income, alongside underwriting and investments. We view this as a growth area in the future.”