RenRe’s third-party capital fee income drops on Q3 catastrophe impacts

RenaissanceRe, the Bermuda-based reinsurance firm and third-party capital management specialist, revealed that investors in its managed insurance-linked securities (ILS) fund strategies and joint-ventures took their share of catastrophe losses in the third-quarter, denting fee income from these activities during the period.

Despite the significant natural catastrophe losses though, RenaissanceRe (RenRe) still demonstrated the benefits of its expanding third-party capital, insurance-linked securities (ILS) and structured products business, as total feel income earned still added $28.34 million to its results for Q3 2021.

Having pre-announced that net Q3 natural catastrophes losses would amount to $725 million last week, RenRe announced last night that the latest estimate is only very slightly higher at $726.8 million.

But the catastrophe losses were significant to drive a $450.2 million net loss to RenRe’s common shareholders, as a combined ratio of 145.1% across the business resulted in negative results.

However, with RenRe’s third-party capital investors taking a share, the total net claims and claim expenses impact of Q3 catastrophes and weather related losses was actually $1.271 billion.

RenRe reported that noncontrolling interests, which includes and largely comprises its third-party capital and ILS investors, would have over $322 million of these claims attributable to them.

The net impact to noncontrolling interests, the same third-party investors, came out at $198.5 million, reflecting the net negative impact of catastrophes and weather events to RenRe’s joint ventures and managed ILS funds during the third-quarter.

So it’s clear some investors in RenRe’s third-party capital vehicles and ILS funds will have taken a reasonable hit in the last quarter, which of course was to be expected given the significant catastrophe and weather losses experienced.

However, the fee income RenRe earns from its managed capital activities continued to flow, as the scale of its third-party capital and ILS activities continued to drive positive income for the reinsurance company.

Management fee income came out at $23.8 million, $8.6 million attributable to the joint venture reinsurance vehicles, $6.6 million to the managed ILS funds and $8.65 million to structured reinsurance activities.

But performance fee income was hit by the catastrophe loss activity, as you’d expect, so totalled only just under $4.5 million for the quarter, $2.98 million from joint ventures, just $264,000 from the managed ILS funds and $1.24 million from structured reinsurance activities.

So it looks like at least a portion of the managed ILS funds were in the red for the quarter, all but wiping out performance fees from this segment for RenaissanceRe.

We suspect that the higher risk and collateralized reinsurance or retrocession funds, under the Upsilon brand, may have fallen to losses (or at least seen their performance dented significantly) for the period, as events like hurricane Ida and the European floods will have impacted them. Where as the Medici branded catastrophe bond focused strategies may have still delivered positive returns, allowing some positive performance fees to be recouped.

While the catastrophe losses and the ramifications of them are clearly going to be in focus after such a quarter, it’s also notable just how much RenaissanceRe grew its portfolio during the period.

In fact, the company reported that gross premiums grew by $631.1 million, or 55.2%, across the business during Q3 2021, although notable that reinstatement premiums related to the Q3 2021 Weather-Related Large Losses in RenRe’s Property segment accounted for roughly one-third of the overall growth.

In the property segment gross premiums were up 80.9%, but this was largely due to the aforementioned reinstatement premiums and then strong growth in the other property segment, where rate improvements drove growth in new and existing business, especially within catastrophe exposed U.S. property excess and surplus lines, RenRe said.

In property catastrophe reinsurance, growth was 86.7%, but excluding the reinstatement premiums gross premiums written in the property catastrophe class of business actually declined, due to timing of certain transactions and also favourable development on prior year losses that came through in Q3 2021.

Interestingly, this favourable developments impact on the claims and claim expense ratio amounted to 28.3% for property catastrophe reinsurance and 5.3% for other property business in the quarter, which was primarily related to the 2017 to 2019 accident years.

These are quite significant movements in prior year losses it seems and it would be interesting to understand how this might have affected RenRe’s third-party capital and ILS vehicles, as it is possible some trapped capital may have been unlocked or returned to investors through such a large recovery on prior year events.

Commenting on the results announcement, Kevin J. O’Donnell, President and Chief Executive Officer, said, “This was another active season for natural catastrophes and while our results for the third quarter reflect this volatility, we have maintained a robust capital position and our business fundamentals remain strong. As we look forward to 2022, our fortress balance sheet provides us with great flexibility to create value for shareholders. We believe we will have ample capacity to renew existing risk and underwrite new opportunities if sufficiently profitable, but are equally motivated to return excess capital to shareholders at what we consider very attractive multiples.”