RenRe third-party capital fees to be hit by Milton. But full-year record already beaten

Speaking during the RenaissanceRe third-quarter earnings call today, the CFO of the reinsurer said that while management fees from its third-party and ILS capital management business are expected to come in around the same level in the fourth-quarter, the effects of hurricane Milton will dent performance fees.

As we wrote this morning, for the third-quarter RenaissanceRe reported that its Capital Partners business, where third-party capitalised reinsurance joint ventures and managed insurance-linked securities (ILS) funds are operated, saw a 27% increase in fee income earned year-on-year.

For Q3 2024, overall third-party capital linked fee income reached a very healthy $82.1 million, comprised of almost $55 million of management fees, while performance fees reached over $27 million, both well up on the prior year.

Commenting on the forward-outlook for fee income from this area of the business and in light of expected catastrophe losses, CFO Bob Qutub said, “Looking ahead to the next quarter, we expect management fees to be around the same level. We expect performance fees to be down significantly given the impact of Hurricane Milton.”

RenaissanceRe’s Capital Partners division had already grown its third-party investor assets under management to $7.15 billion by June 30th 2024.

It’s worth noting that the growth in AUM at RenRe’s Capital Partners division ensures healthy fee income for managing investor money will persist.

The company has forecast that hurricane Milton is estimated to cause a net negative impact of $275 million to its Q4 results.

While this will dent performance fee income from the range of reinsurance JV’s and ILS funds, the share of losses that investors will take, once spread across the different strategies, will likely mean most or all remain in positive territory for 2024, we expect.

Recall that RenRe reported in its Q3 results, that despite a reported just over $181 million in incurred net claims and claims expenses from hurricane Helene, the net income from the period that was attributable to its redeemable noncontrolling interests, a measure of returns distributed to third-party capital structures in the period, was an impressive $450.2 million.

It’s entirely possible that positive income can again be earned by the JV’s and funds for Q4, even with their share of Milton losses.

Earlier in the Q3 earnings call, RenRe CEO Kevin O’Donnell commented on this area of the business, “Our Capital Partners business, already one of the largest managers of third-party capital, continues to grow while generating consistent management fees and attractive performance fees.”

He went on to say that the recent Validus acquisition has delivered “significant capital and liquidity” highlighting that part of the restructuring of the Validus book onto RenRe owned and managed balance-sheets “enhanced fees associated with our Capital Partners business.”

That was evident in the results announcement, where RenRe said that some additional management fees earned by AlphaCat Managers Ltd., which was acquired as part of the Validus acquisition, was also included in its very positive fee income from the third-quarter.

RenRe has demonstrated well how an at-scale third-party capital business, with a broad range of offerings and structures, can deliver consistent attractive income which is a meaningful contribution to the bottom-line.

While hurricane Milton will dent the performance fee aspect, given where most ILS strategies’ performance reportedly sit following that event it seems likely RenRe will still deliver relatively strong returns to most investors for 2024.

In fact, the fee income run-rate is already on record pace, as for reference, overall fee income had reached almost $249.7 million after the first nine months of this year, so is already a record and running ahead of 2023’s full-year fee income of nearly $236.8 million.

That speaks to the profitability of the Capital Partners business for RenaissanceRe, as this income boosts its earnings, while the significant pool of third-party capital provides meaningful additional and aligned capacity for its business.