Large loss events in the third-quarter of 2020 dented performance at Bermuda based reinsurance firm RenaissanceRe’s third-party capital joint ventures and managed insurance-linked securities (ILS) funds, resulting in a decline in performance fees.
RenaissanceRe (RenRe) had already pre-announced an expected hit to its third quarter 2020 results of operations from major catastrophe losses experienced during the period.
RenRe confirmed a $321.7 million net negative impact as losses from hurricanes Isaias, Laura and Sally, wildfires in California, Oregon and Washington, the August 2020 derecho which impacted the U.S. Midwest and Typhoon Maysak, as well as impacts to certain aggregate reinsurance contracts.
As ever, it’s natural to expect RenRe to have shared some of these losses with the third-party investors backing its range of third-party capital management and insurance-linked securities (ILS) fund activities, through joint-venture vehicles, managed funds and also the other structured reinsurance undertakings it enters into.
In announcing its Q3 2020 results yesterday, RenRe reported an underwriting loss of $206.1 million for the quarter, driven by these losses that elevated its combined ratio to 120.6%.
These losses also drove a decline in performance fee income, as the third-party capital vehicles and ILS funds shared in RenRe’s loss experience, as you’d expect.
On the other side and before going into the impact to RenRe’s third-party capital fees, the reinsurance company has achieved more significant year-on-year growth in Q3, as it put its new capital to work and gross premiums written increased by $282.0 million, or 32.7%, to $1.1 billion compared to a year ago.
The first sign of an impact to RenRe’s third-party investors is the fact that net income attributable to redeemable noncontrolling interests fell to $19.3 million for Q3 2020, compared to $62.1 million a year earlier.
Underwriting losses in DaVinciRe Holdings Ltd., the third-party capital backed joint-venture reinsurer was the main driver of this, RenRe explained.
The catastrophe losses and subsequent hit to underwriting returns is also evident in the performance fee income RenRe earns from its third-party capital vehicles.
The joint-ventures saw RenRe report a performance fee loss of $1.842 million for the quarter, compared to the prior years almost $5.3 million of positive performance income.
The managed ILS funds saw RenRe report positive performance fee income, but of just $175,000, which is far lower than the prior year periods almost $1.7 million.
The structured reinsurance and other related products that drive risk to capital for RenRe fared even worse, with a performance fee loss reported of $10.4 million for Q3 2020, down on the prior years positive $275,000.
Overall, performance fees were a loss of just over $12 million for RenRe, as the catastrophes dropped this segment of its income considerably, which had driven over $18 million of positive income in the last two quarters for the firm.
The management fee side remained very positive though, helped by RenRe’s increasing third-party reinsurance and ILS capital under management.
Total management fee income across the joint-ventures, ILS funds and structured reinsurance activities rose again to almost $30.5 million for the quarter, up from almost $27.5 million in Q2 2020 and $24.7 million in Q3 of 2019.
RenRe reported that its joint-venture vehicles drove over $13 million of management fee income in Q3 2020, the first time it has reached that high. While the managed ILS funds RenRe operates drove over $8.6 million of management fees (another high) and structured reinsurance and other related products that drive risk to capital another almost $8.8 million.
RenRe is now on-track for around $50 million of combined management and performance fee income from these activities, with between $30 million and $35 million coming from joint-ventures and ILS funds.
With the company likely to raise new third-party capital in advance of the January renewals, it’s likely we’ll see it hit these figures before long and they may keep rising as well, when losses remain lower.
Fee income for the first-nine months of 2020 is now sitting at over $109 million, up on the prior years almost $101 million. Had the last quarter not seen such an aggregation of catastrophe losses, the nine-months 2020 figure would have been much higher.
RenRe also discloses some of the distributions it makes to investors in certain joint-venture structures and one of its ILS funds, which gives a further glimpse of where the impacts fell from catastrophes in Q3 2020.
Investors behind RenRe’s DaVinciRe third-party capitalised and equity based sidecar-like vehicle, took a loss of just over $26.6 million for the third-quarter, reflecting the previously mentioned underwriting losses.
Vermeer Re, the joint-venture vehicle managed by RenRe with investments from the largest ILS investor, Dutch pension manager PGGM as its sole investor, saw the investor taking positive income of almost $12 million for the quarter. This is down from the roughly $17 million earned in the last three-quarters, presumably reflecting investor PGGM’s share in the catastrophe losses experienced during Q3 2020.
Finally, the Medici ILS structure which is an insurance-linked securities (ILS) fund that invests across the spectrum of insurance and reinsurance linked assets, including catastrophe bonds, benefited from much higher distributions and income in Q3 2020.
Investors in the Medici ILS structure took almost $34 million in the period, much higher than previous quarters, which may be a reflection of strong catastrophe bond market performance and the fact the cat bond market avoided any losses during the third-quarter of this year.
It’s also a reflection of the growth of the Medici ILS fund, which is now much larger than it was a year ago, with non-controlling interest now reported at almost $697 million, up from almost $535 million at the end of Q3 2019.
Once again, RenaissanceRe’s results provide a reasonable look-through to how third-party capital investors share in its underwriting performance, as well as its losses. But the clear evidence is that the growth of third-party capital assets at the reinsurer is becoming a key driver of income and profits in catastrophe loss free quarters, while moderating impacts to its own balance-sheet in quarters where losses are higher.
RenRe didn’t disclose any further third-party capital raising this quarter, but Q3 is typically a less attractive time to bring in new capital given its deployment is not as easy through these months. We’re already hearing of a fund-raising push for the end of the year from the reinsurers third-party capital team, which includes the retrocession end of the market through its Upsilon vehicle, so we’d expect its assets to rise further in time for 1/1 renewal deployments.