RenRe expects ILS & third-party capital fees of around $60m per-quarter: Execs

Speaking during the last earnings call for global reinsurance firm RenaissanceRe, senior executives highlighted the significant income contribution that fees from the insurance-linked securities (ILS) and third-party capital management business are now making.

During the second-quarter, RenaissanceRe (RenRe) reported earning fee income through its Capital Partners business of $56.7 million, which was a 65.5% increase on the prior-year.

The main reason for the increase is the much higher third-party investor capital under management of RenRe’s Capital Partners business, which as we reported counted some $6.6 billion of third-party assets within its main joint-venture reinsurance and ILS fund structures at the end of the first-quarter of 2023, a figure that may have risen further in the last quarter as well.

RenRe’s CEO Kevin O’Donnell said during the call, “In Capital Partners, our fee generating activities performed well this quarter with strong management fees and profit commissions, reflecting both growth in partner capital and rebounding profitability.”

CFO Bob Qutub went into more detail on the fees earned, saying, “Fee income rose 65% to a record $57 million. This reflects increased partner capital under management as we grow into an attractive market and a steady increase in performance fees from strong underwriting results.”

Qutub went on to highlight the potential for this to grow further, giving his forecast that quarterly fee income could hit a run-rate of around $60 billion.

“Management fees were up 41% to $43 million as we grow our joint-ventures to underwrite into this attractive market. We continue to expect management fees to run at about $45 million per-quarter for the remainder of the year,” he explained.

Adding that, “Performance fees have largely recovered from prior year deficits, reaching $13 million this quarter. Absent large losses these fees may tick-up slightly in the second half of the year, to about $15 million dollars per quarter.”

On an annual basis that could be a significant $240 million of fee income earned from third-party capital and ILS fund management businesses undertaken by RenRe’s Capital Partners, a very significant input to the overall earnings of the company.

But, of course, the management fees in particular could rise further, if RenRe continues to have success in raising new capital from investors.

With the acquisition of Validus Re from AIG set to complete in the fourth-quarter of this year, there is the potential for assets managed by AIG’s AlphaCat Managers unit to flow to RenRe’s Capital Partners, while there is also more capital to come from investments AIG itself plans to make.

O’Donnell highlighted that, “Another highlight for the quarter, is the AIG intent to invest up to $500 million to our Capital Partners business. ”

Going on to say that, “Overall, we are pleased with the performance of Capital Partners and this is a growing and substantial part of our business that increasingly generates low volatility management fee income.

“This differentiates it from most of the ILS management industry where investor appetite has been diminished by poor performance, trapped capital and collateralization issues.

“Our long-term track record and ability to bring rated balance-sheets to ILS investors distinguishes our Capital Partners business and explains our continued success in raising capital and growing fees in an otherwise difficult environment.”

RenRe’s strategy, when it comes to leveraging third-party investor capital to drive growth and benefits to its business, with third-party capital pools offering a significant additional source of underwriting fire-power alongside its own balance-sheet, looks set to pay dividends, as it reaches a new level of scale and importance for the company.

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