RenRe’s fee income from third-party capital hits $90m for 2018

RenaissanceRe’s fee income earned from third-party capital management activities, joint-ventures, managed ILS funds and other structured reinsurance backed by capital from investors rose to $90 million for 2018.

The Bermudian reinsurance firm continued to see strong profits from managing third-party capital from investors and matching it with risks it underwrites through the last year.

Had the year been less affected by catastrophe losses the result would have been much higher, as performance fee income took a hit from losses suffered throughout the year in which RenRe’s third-party investors shared and the fourth-quarter itself made the lowest contribution to the years third-party fee income.

RenRe reported its fourth-quarter 2018 and full-year results yesterday, beating some analysts expectations as losses came in a little lighter than anticipated and favourable development on prior period catastrophes, including the major losses of 2017, helped to boost performance for the reinsurer.

The company reported better than expected positive operating income of $1.2 million for Q4 2018, but a net loss attributable to shareholders of $83.9 million.

An investment loss for the quarter of $35.3 million alongside catastrophe impacts that drove an underwriting loss of $82.3 million soured the quarter, but positive impacts from changes to loss estimates for Q3 2018 and year 2017 losses helped to boost the result.

Kevin J. O’Donnell, President and Chief Executive Officer of RenaissanceRe, commented on the results, “Once again in 2018, we benefited from our industry leading ability to construct efficient portfolios of risk through superior underwriting and the application of our gross-to-net strategy. In the quarter, we reported positive operating income, while rapidly paying claims to customers facing significant losses from Category 4 Hurricane Michael and a second consecutive year of record breaking wildfires in California. For the year, we outperformed on multiple metrics, posting a strong operating ROE, delivering robust top line growth, and executing effectively on a number of key initiatives, including the formation of our latest innovative joint venture, Vermeer and our pending acquisition of Tokio Millennium Re. Looking ahead, at the recent January 1 renewal we laid the foundation for a successful 2019 and ongoing shareholder value creation.”

It’s telling that the latest third-party capitalised joint-venture reinsurer Vermeer deserves a mention, as this managed business at RenRe is now delivering significant income that helps the firm in reporting its results, while the investors backing third-party capital vehicles also share in the losses and help the reinsurer manage its performance and deliver on this gross-to-net basis that O’Donnell mentions.

For Q4 2018 RenaissanceRe’s fee income from its joint ventures (so DaVinci Re, Top Layer Re and Langhorne Re), managed ILS funds (Upsilon and Medici) and other structured reinsurance products including the Fibonacci Re cat bond like issuance vehicle, amounted to $8.635 million.

That was the lowest level of third-party capital related fee income for any quarter in the year, as the losses from hurricane Michael and the California wildfire reduced performance fees considerably.

In fact, the managed funds performance fees were negative by -$4.43 million for Q4, while structured reinsurance (including Fibonacci) also took a hit with negative performance fees of just over -$5 million.

Management fees for the joint venture vehicles also came in lower than other quarter, likely due to catastrophe losses hitting DaVinci Re and the other vehicles that were exposed to the quarter’s catastrophe activity.

In fact, RenRe reported a loss to redeemable noncontrolling interests of $49.3 million for Q4 2018, which is largely attributed to more significant losses in DaVinciRe, from hurricane Michael, the wildfires in California and certain aggregate reinsurance losses.

Over the year as a whole total fee income came out at just shy of $90 million for RenRe, $71 million of which is from management fees and the rest from performance fees.

Had Q4 not been hit so hard the total figure could have been well over $100 million for the year, we’d imagine.

Losses is just one factor that hits the deliver of fee income from third-party capitalised vehicles for RenRe, also assets under management is a factor to in how much management fee income is earned.

At $71 million management fee income in 2018 was higher than any year since 2014 for RenRe, reflecting the expansion of its managed catastrophe strategies, joint ventures and third-party capitalised ILS vehicles.

RenRe continues to increase the amount of assets it has under management, with Vermeer (capitalised for up to $1 billion by Dutch pension investment manager PGGM) set to increase this through 2019.

In addition RenRe continues to grow its collateralized reinsurance and retrocession vehicle Upsilon, with another capital raise being completed in time for the January renewal season.

RenaissanceRe said that Upsilon RFO issued $456.8 million of non-voting preference shares to investors, $100 million of which was to RenRe itself and the rest to third-parties.

As of January 1st, RenRe’s stake in Upsilon RFO was 16.9%, the company said and this capital raise may well have taken Upsilon’s assets under management further past the $1 billion mark that it hit last mid-year.

It will be fascinating to see how this fee income boost to RenaissanceRe’s results delivers in a quarter where catastrophe impacts are lighter, but assets under management high.

With Vermeer set to scale up in 2019, Upsilon increasing in size all the time and life and annuity play Langhorne Re still building, the contribution fee income makes to the reinsurers bottom-line is set to become even more meaningful.