RenRe cedes more risk to Upsilon, earns more fee income in Q1 2019

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Bermudian reinsurance firm and third-party ILS capital manager RenaissanceRe has reported that it ceded much of its growth in catastrophe business to its Upsilon vehicle in the first-quarter, while its fee income from third-party capital grew year-on-year.

RenaissanceRe logoRenaissanceRe (RenRe) had increased its third-party reinsurance and insurance-linked securities (ILS) capital under management to close to $5 billion at the beginning of 2019 and the firm has been taking advantage of the growing appetite of its investor base to cede increasing amounts of risk to it.

In the first-quarter of 2019, RenRe underwrote $845.2 million of gross premiums in its catastrophe class of business, which was up $254.9 million, or 43.2%, compared to the first-quarter of 2018.

The company said that this growth in property catastrophe reinsurance was largely driven by expanded participation on existing transactions and also the addition of some new transactions as well, suggesting RenRe has been finding attractive and incremental business for its book and its investors.

Ceded premiums in this segment of RenRe’s book, where all property lines are written, reached $468.2 million in the first-quarter of 2019, a rise of $115.3 million, or 32.7%, compared to the first-quarter of 2018, RenRe explained.

The firm said that this increase was mainly because, “a significant portion of the increase in gross premiums written in the catastrophe class of business noted above being ceded to third-party investors in the Company’s managed joint venture, Upsilon RFO.”

RenRe has steadily grown its collateralized reinsurance and retrocession vehicle Upsilon, completing a new capital raise in time for the January renewal season.

That capital has been put to good work, it seems, in enabling the reinsurance firm to write more catastrophe risk to share with its investors in Upsilon, which is helping to drive increasing fee income for RenRe as well.

Of course, RenRe does continue to grow its third-party assets under management across its range of ILS funds and joint-ventures, most notably with Vermeer (capitalised for up to $1 billion by Dutch pension investment manager PGGM).

Hence, it’s unsurprising that now having moved beyond the losses of the last two years, the companies third-party capital related fee income rose in Q1.

For Q1 2019 RenRe’s fee income from joint ventures (so DaVinci Re, Top Layer Re and Langhorne Re), managed ILS funds (Upsilon and Medici), its Vermeer vehicle and other structured reinsurance products, that include the Fibonacci Re cat bond like issuance vehicle, amounted to an impressive almost $21.8 million.

$9.74 million was from the joint-ventures, while $3.8 million was from the managed ILS funds, and $8.2 million from structured reinsurance products that deliver fee income to RenRe.

On the managed ILS fund side, that is the highest figure for fee income that RenRe has reported in over a year now, suggesting that the company is beginning to see the benefits of the enlarged asset base flowing through to its earnings.

Performance fee income from these third-party capital and fee earning reinsurance businesses rebounded in Q1 2019, having been negative in the last quarter of 2018 and only $1.8 million in Q3 2018.

For Q1 this year RenRe has reported just over $7 million of performance fee income, largely from its joint venture vehicles and structure reinsurance though, as the managed funds segment delivered only $298k for the quarter.

That’s likely due to the fact RenRe continues to work through loss development, reconciliation and deal with any trapped collateral, meaning it isn’t earning much in the way of performance fees for the ILS funds it operates right now.

But this should also bounce back in future quarters, which alongside the increasing management fee income should begin to significantly boost earnings for the reinsurance firm further down the line.

So total fee income came in at $28.8 million, which is the highest figure since the second quarter of 2018 for RenRe.

When the fees really start to deliver for RenRe and all of the hangover of the last two year’s losses is removed, the income benefit from its third-party capital related businesses should be significant and clearly demonstrate why the multiple balance-sheet strategy it has adopted is a differentiator for the firm.

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