RenaissanceRe reports highest ever quarterly third-party capital & ILS fee income

RenaissanceRe, the Bermuda based reinsurance and third-party capital management specialist, has reported its highest ever quarterly fee income from third-party capital and insurance-linked securities (ILS) activities, as higher assets under management (AUM) and strong performance drove a 48.3% year-on-year increase.

At $84.1 million, the fee income earnings for a single quarter are significant, especially when compared to total company earnings amounting to $495 million of net income.

Management fees rose by 27.4% to over $55.3 million for the second-quarter of 2024, while performance fees more than doubled, rising by 117% year-on-year to almost $28.8 million for the period.

As we reported, it is the rising assets under management that are a key driver of this, but so too is the performance of the structures in question.

Back in May we reported that RenaissanceRe’s third-party investor capital under management across its range of reinsurance joint-ventures and insurance-linked securities (ILS) funds, managed by its RenaissanceRe’s Capital Partners division, reached $7.17 billion by the end of the first-quarter.

The steady rise in AUM helps in delivering a rising contribution from management fee income, while the fact this year has not seen significant ILS market losses means that the structures and joint-venture vehicles have been performing well too, resulting in this strong fee income result.

RenRe said that the increase in management fee income was driven by growth in the joint ventures and managed ILS funds, particularly DaVinciRe and Fontana, but also the inclusion of fees earned by AlphaCat Managers, which was acquired as part of the Validus deal.

Performance fee income improvement was driven by improved underwriting results and prior year favorable development, primarily in DaVinci and certain structured reinsurance products, the company explained.

Overall, RenaissanceRe reported a return on average common equity of 21.4% and annualised operating return on average common equity of 28.2% for Q2 2024, with gross premiums written rising by $773.9 million, or 29.2%, the prior year, property premiums being up $350.5 million, or 25.0%, and Casualty and Specialty by $423.4 million, or 33.9%.

All this against a combined ratio of 81.1% and adjusted combined ratio of 78.6%, resulting in $495. million of net income and $650.8 million of operating income being generated.

Kevin J. O’Donnell, President and Chief Executive Officer, commented, “We delivered another excellent quarter driven by strong underlying performance from each of our Three Drivers of Profit – underwriting, investment and fee income. The Validus transaction continues to accrete significant value to our shareholders by delivering substantial growth in both premium and invested assets in one of the most favorable business environments in our history. Going forward, our consistent strategy and strong execution will enable our excellent performance to persist and allow us to grow shareholder value at an industry-leading pace.”

During the second-quarter of 2024, RenRe’s capital raising for third-party vehicles and ILS funds slowed, with just $84.5 million added during the period.

Interestingly, the company said this was primarily raised in its Upsilon RFO Ltd. structure, which is a segregated account vehicle that had largely been used for collateralized reinsurance and retrocession in the past, but which has recently also been used to house a managed catastrophe bond account for an investor.

As a result, it’s not clear if this new capital was for the Upsilon Fund collateralized reinsurance and retro strategy, or an aforementioned managed and segregated account for a large investor.

It’s a significant slow-down in capital raising though, as RenRe had raised $566 million in Q1 2024 and had raised $495 million for the 1/1 renewals.

This could be a signal of the company feeling it does not need much more capital at this time and that its third-party capital structures and joint-ventures are right-sized for the opportunity as it sees it today. Also, on the cat bond side, RenRe had grown Medici to more than $2 billion but will also be dealing with significant maturity cash flow and earnings that could be deployed as well, perhaps negating the need to raise too much more.

For end-investors, it is important to see managers of ILS assets slowing down, or more closely managing their capital raising, especially when pricing has peaked in the market. This may be one such example. We have heard of others in recent months.

Another signal of strong capital management and fiduciary duty is visible in capital returns as well and in the last quarter RenaissanceRe returned a lot.

The company said that $340.8 million in third-party capital was returned to investors during the second quarter of 2024.

This included $182.0 million from the catastrophe bond focused Medici Funds Ltd., after strong earnings over the last few quarters, resulting in investors rebalancing their position.

In addition, a further $75 million was returned from the Upsilon Diversified Fund, a reinsurance and retro strategy, as a result of the release of collateral associated with prior years’ contracts, the company said.

As a result and with lower fresh capital raised, it is possible RenRe’s third-party capital AUM may remain relatively flat or even shrink slightly at the end of Q2, but with earnings also retained in some vehicles it’s unlikely to be significant.

One measure, although it is not all of the firm’s third-party capital, of redeemable investor interests has risen slightly from $6.297 billion at the end of March to $6.335 billion by the end of June. But RenRe’s total third-party capital under management sat at $7.17 billion at the end of March 2024, as the aforementioned is the wrong number to track.

It’s also encouraging to see RenRe providing investors a chance to take profits from the Medici cat bond strategy, rather than feeling earnings all need to be deployed which can have ramifications for rates and pricing, of course.

For Q2 2024, RenRe reported that net income attributable to redeemable noncontrolling interests, which is a measure of the returns distributed to third-party capital investors in the period, reached $224.7 million.

This was primarily driven by strong underwriting results in DaVinci and Vermeer Reinsurance Ltd. and strong net investment income from the managed joint ventures and managed ILS funds.

It’s not the highest figure for that metric, this came at the end of Q1, a time when profits are often realised in third-party capital structures. But it does appear to be the second-highest quarterly earnings for RenRe’s third-party investors.

Overall, the third-party capital and ILS management business at RenaissanceRe’s Capital Partners continues to deliver for the company, with record fee income now being earned and significant earnings delivered to investors.

It’s a good bellwether for the performance of ILS strategies in general as well, given other managers will have had an equally profitable first half in some cases.

First-half fee income from the third-party capital and ILS business at RenRe reached over $167.6 million. That’s a significant source of earnings for the company and demonstrates precisely why well-managed ILS strategies can sit alongside a reinsurers own balance-sheet and be additive to its business.

That’s not even to mention the efficiencies and synergies realised through having an additional pool of over $7 billion of capital that can be put to work in underwriting alongside RenRe’s own balance-sheet funds.

As a lever or extension for its own balance-sheet, the third-party capital managed is making a much bigger difference to RenaissanceRe’s business than is immediately clear through the figures announced in its results alone. The benefits run much deeper, which is why so many major reinsurers continue to formalise third-party capital units and launch ILS market offerings.

View information on many dedicated ILS fund managers, as well as reinsurers offering ILS style investment opportunities, such as RenaissanceRe, in our Insurance-Linked Securities Investment Managers & Funds Directory.