Bermudian reinsurance firm RenaissanceRe reported an underwriting loss for the third-quarter of 2019 on the back of the impacts of hurricane Dorian and typhoon Jebi, but at the same time has returned significantly more capital to its third-party investors.
Analysts blame the outsized return of capital to so-called noncontrolling interests as the main reason RenaissanceRe’s (RenRe) results missed their estimates.
As the firm delivered $62 million of capital to these third-party investors, despite its own underwriting book proving unprofitable.
But as ever, it’s important to consider the role of third-party capital and joint-ventures in RenRe’s operations and how they might have caused this increase in income delivered to others.
Overall, RenRe beat the prior year, delivering $36.7 million of net income, up slightly from $32.7 million in Q3 2018.
The underwriting performance was generally better as well, as RenRe reported a $3.4 million underwriting loss thanks to a combined ratio of 100.4% in the third quarter of 2019, compared to a $29.0 million loss and a combined ratio of 105.5% in the prior year.
The loss came from the property side of the business, where RenRe had a $7.7 million loss and a combined ratio of 101.7%. Of course this is the side of the business where third-party capital investors will have been taking its share of the losses, through RenRe’s range of joint-venture and insurance-linked securities (ILS) businesses.
Positively, RenRe continued to expand its underwriting portfolio during the quarter, taking advantage of better rates, although this was largely on the casualty side of its business.
Gross premiums written increased by $235.4 million, or 37.6%, to $861.1 million, for Q3 2019 compared to the prior year, but with $222.4 million of that increase coming from the Casualty and Specialty side and just $13 million from the Property segment.
Commenting on the quarter, Kevin J. O’Donnell, President and Chief Executive Officer of RenaissanceRe, said, “In an active period for the industry, we assisted our customers in managing the quarter’s catastrophic events while rapidly paying their claims. I am proud of our team’s hard work during the quarter and pleased to report positive net and operating income and growth in tangible book value per share plus accumulated dividends. Our value proposition lies in quantifying risk and absorbing large losses as they occur, contributing to the resilience of communities and building stronger relationships with our partners. As we look forward to 2020, these strong relationships combined with our differentiated strategy will provide us with many opportunities to continue delivering long-term value.”
Strong relationships with third-party, ILS style investors and its access to the capital markets is a key factor for RenaissanceRe, helping to deliver it growth, fee income and moderate its exposure to extreme catastrophe events.
But in Q3 2019, despite the underwriting loss, RenRe also delivered a large sum back to third-party investors, amounting to $62.1 million of net income returned, compared to just $6.4 million in the third quarter of 2018.
The reason for the outsized delivery of income to its third-party capital investors and partners is that these operations are now so much bigger than before and also the influence of its latest venture, Vermeer.
The reinsurer said that, “The increase was primarily driven by higher net income from DaVinciRe and an increase in net investment income from Medici, combined with the results of operations of Vermeer being included in net income attributable to redeemable noncontrolling interests in the third quarter of 2019. ”
RenRe’s newest joint-venture Vermeer Reinsurance Ltd., which was capitalised for up to $1 billion by Dutch pension investment manager PGGM), has a focus on underwriting more risk-remote layers of U.S. property catastrophe reinsurance where RenRe itself was not so active.
As a result, a significant amount of this return of capital (or income to noncontrolling interests) may have been through this vehicle, given its the first Q3 where Vermeer’s impacts are recorded.
If that is the case, then it is safe to assume that RenRe also earned a decent return of its own in terms of fee income from the Vermeer operations.
In fact, the continued expansion of RenRe’s third-party capital vehicles, aided by the significant inflows of new investor capital raised in Q2, will be delivering greatly increased fee income to the reinsurance firm as well.
In total RenRe reported total fee income that was $9.1 million higher than the prior year, at $32 million, compared to $22.9 million in the third quarter of 2018.
The main reason for this was improved underlying performance, as Q3 2018 actually had more catastrophe impacts in it, as well as the increase dollar value of the third-party capital being managed by RenRe.
Fee income from RenRe’s third-party capital joint-ventures, which include DaVinciRe Holdings Ltd., Top Layer Reinsurance Ltd., Vermeer Reinsurance Ltd. and entities investing in life focused Langhorne Holdings LLC, came out at $11.4 million for the quarter, up from $9.3 million in the prior year.
For the managed funds, so insurance-linked securities (ILS) vehicles including the catastrophe bond focused Medici and the retrocession and collateralised reinsurance focused Upsilon, management fee income rose to almost $4.6 million for Q3 2019, up from $3.3 million in the prior year.
Other structured and third-party capital backed reinsurance products, including the Fibonacci Re vehicle, also delivered RenRe a slightly higher fee income, at nearly $8.8 million, up from just over $8.5 million in the prior year.
Year-to-date, for the first nine months, management fee income from all of the third-party capital activities stands at almost $72.5 million, well up on the prior years $56.3 million.
This increase will largely be down to the increased capital under management in the ILS vehicles and joint-ventures.
Performance fees were also up in some cases, as loss activity was actually lower even though RenRe’s property book fell to an underwriting loss.
RenRe reports almost $5.3 million of performance fees from joint-ventures (up from $853k), the increase in which is likely a lot to do with the existence of Vermeer this year.
The managed ILS funds delivered lower performance fees though, perhaps suggesting that they took a larger share of the losses in Q3 which could be due to their increased sizes. RenRe reported almost $1.7 million of performance fees from them, down from $2.5 million in the prior year.
Structured reinsurance and Fibonacci Re also suffered a little on the performance side, only delivering $275k, although their performance fee was a negative in Q3 2018 of almost -$1.6 million.
For Q3, total fee income from the managed vehicles and third-party or ILS capital activities came out at almost $32 million for RenRe, up from $22.9 million in the prior year.
For the first nine months, the figure is $100.1 million, up significantly from the $81.26 million in 2018.
RenRe’s redeemable non-controlling interest, which represents some but not all of the third-party capital managed in JV’s and ILS vehicles at the reinsurer, also rose a little despite Q3 not being a period of capital raising activity for the firm, reaching almost $2.78 billion, which is up from $2.71 billion at the end of Q2.
Finally, when considering the impact of third-party capital on RenRe’s results it’s also important to think about how the company records investment income from these ILS style vehicles as well.
RenRe reported a gain on its investments of $145.8 million in the third quarter of 2019, compared to a gain of $94.3 million in Q3 2018.
This was partly due to the availability of higher invested assets thanks to capital raising in the third-party capital joint-venture and ILS vehicles, RenRe said and the subsequent investment of those new funds as part of the its consolidated investment portfolio.
Importantly RenRe delivers on profits for its shareholders even when catastrophe losses have knocked its underwriting results, part of which is thanks to the fee income and investment boost the third-party managed capital adds.
While this quarter the outsized return of capital to noncontrolling interests stands out, it’s also important to consider how the fee income benefits will deliver for the reinsurer when catastrophe activity is lighter.
As well, of course, as just how much of its losses may have been ceded to third-party capital and the moderating effect that will be having on RenRe’s performance these days.