Cat bond commentary from Renaissance Re and PartnerRe in earnings calls

Both Renaissance Re and PartnerRe have held earnings calls for the first quarter of 2008 in the last few days. While these are usually unexciting these two have relevance as the media folk asking the questions got onto the topic of catastrophe bonds. Earnings calls are often a useful way to glean inside information on how companies approach tools such as securitization.

The Renaissance Re call featured the question of ‘why the big drop in catastrophe bonds in the 1st quarter?’ the answer to which was ‘We look at cat bonds very similar to the reinsurance business, and so from as far as our appetite for them it is consistent with what it has been. It is just a matter of whether the bonds that are currently available fit our portfolio.‘ Fred Donner, CFO continued ‘First thing is we have a total return swap in place for our cat bonds, which provides us with liquidity. The accounting for that is a shift from other investments in cat bonds to a line item on our balance sheet called other securitized assets. So I think when you are thinking about acquisition in cat bonds you have to take that line into consideration. But having said that, in addition to that there was some activity in the cat bond area this quarter; we did have about $48 million of maturities coming due. But we also took on about $17 million of additional cat bonds. So it’s not like we are selling them. We did have some short-term ones that matured. And for liquidity purposes we have entered into a total return swap.’

A further question asked of Renaissance Re was ‘are you seeing either a big difference or a change in difference between the pricing in the cat bond market, which seems to have grown dramatically, and the more traditional reinsurance market?’. This was picked up by Neill Currie, CEO who answered ‘One thing is they tend to be at different levels oftentimes where the reinsurance market is participating below the cat bond market. I think over time we have seen cat bond spreads. They look at the cat bonds are looked at largely as a multiple of expected loss, and that multiple has reduced a bit. From a — which can obviously be transferred to a loss ratio. From a loss ratio perspective then cat bond loss ratio have gone up a bit. But so with the market moving the way it is in the reinsurance, reinsurance rates are decreasing. So you’re getting higher loss ratios there, as well. So I think yes, we’ve seen movement but on a relative basis it hasn’t been one moving much more extreme than the other.’

During the PartnerRe call Patrick Thiele, President and CEO said in response to a question about the Florida homeowner reinsurance market and the recent changes to the catastrophe fund and whether PartnerRe would participate ‘Florida-only homeowner-only business is not in a very attractive line to us, and I assume we would continue to be quite prudent in our underwriting of that. I think the one wild-card in this one is, in fact, how much of that increased demand will be met by Catastrophe bonds as opposed to the traditional excess-of-loss product. There seems to be an appetite in the capital markets in some of the hedge funds for Florida homeowner-only risk.’

Also during the call Albert Benchimol, CFO PartnerRe said ‘Within private markets, the execution of our ILS strategy is very promising. While we do not issue insurance-linked securities, we view them as an opportune way to shape our overall reinsurance risk portfolio. We also believe that we have a competitive advantage in the evaluation and management of an ILS portfolio, and our trading these securities on our accounts. Of course, any exposure assumed in the ILS portfolio is captured in our Cat exposure limits.’