RenaissanceRe maintains discipline, grows ILS & third-party assets managed

by Artemis on November 5, 2014

Bermuda-based reinsurer and third-party reinsurance capital management specialist RenaissanceRe has maintained its disciplined approach to the challenging reinsurance market, pulling back on catastrophe business, while growing other lines.

RenaissanceRe has been pulling back from the areas of the reinsurance market which have seen prices softening and terms expanding most dramatically, which has resulted in a big reduction in catastrophe reinsurance premiums underwritten which was once the firms bread and butter.

At the same time RenaissanceRe has been expanding into specialty lines of reinsurance business, in an effort to diversify itself and to secure better priced renewal business while providing a source of revenue to compensate for some of the lost catastrophe premiums.

It’s a strategy followed by many of the Bermudian reinsurers which used to have such a core focus on property catastrophe reinsurance business in the U.S. and Florida. As these reinsurers pull-back from writing catastrophe premiums which they believe to be under-priced they are becoming more expansive in other regions and RenRe is a great example of a reinsurer building a new practice focused on specialty risks.

In its third-quarter 2014 results which were announced yesterday, RenRe revealed another reduction in property catastrophe reinsurance premiums which were down 17.3% compared to a year earlier. However this pull-back in catastrophe risk was more than offset by growth in both the Lloyd’s and specialty reinsurance area at RenRe, with the Lloyd’s segment up 59.8% and specialty up 14.5% compared to Q3 2013.

RenRe generated underwriting income of $104.8 million and a combined ratio of 59.5% in Q3 2014, compared to $151.4 million and 48.6%, respectively, in Q3 2013. The $46.6 million drop in underwriting income was largely due to the pull-back in gross premiums written during the first nine months of 2014 as well as an $8.7 million increase in net claims and claim expenses.

Kevin J. O’Donnell, CEO, of RenaissanceRe commented; “For the third quarter we generated an annualized operating ROE of 11.7% and 1.5% growth in tangible book value per share, plus accumulated dividends. Our results reflect our actions to reduce risk and optimize risk-adjusted returns in a difficult market.”

“In a market that looks set to remain challenging absent a major event, we will continue to provide the capacity, flexibility and scope our clients and partners seek. At the same time, we will maintain the same discipline and focus they have come to appreciate. The investments we have made over the years to develop the platforms and the breadth of products sought by our clients positions us particularly well in this environment,” O’Donnell continued as he explained that the disciplined approach was set to continue.

RenRe had a difficult quarter on the investment side of its business, suffering a $6.5 million loss on its portfolio in Q3, as rising interest rates and widening credit spreads in its fixed maturity investment portfolio resulted in net unrealised losses, lower returns in its portfolio of private equity investments, largely driven by weaker returns in the public equity markets during the third quarter of 2014, took their toll. This compared to an investment gain of $88.2m in Q3 2013 showing just how negatively the current economic environment can affect reinsurers, depending on their investment mix.

In the third-party capital arena, net income attributable to non-controlling interests $30.5 million, down from $44.3 million a year earlier. This was principally due to a decrease in the profitability of DaVinciRe Holdings Ltd. according to the firm, but was partially offset by a reduction in RenRe’s stake in DaVinciRe to 23.4% at September 30, 2014, compared to 32.9% at September 30, 2013.

At the same time as shifting its reinsurance book around in order to maintain a reasonable level of revenue in the challenging market without taking on too much risk or becoming over-exposed, RenaissanceRe has increased its insurance-linked securities (ILS) and third-party reinsurance capital under management at its Renaissance Underwriting Managers Ltd. unit.

In an update provided for Artemis’ Insurance-Linked Securities Investment Managers & Funds Directory, RenaissanceRe disclosed the total assets under management of the unit at $1.9 billion at the end of September 2014, which is up almost 19% from the $1.6 billion it had under management at the end of December 2013.

RenaissanceRe’s insurance-linked securities and catastrophe bond fund, the RenaissanceRe Medici Fund Ltd., has also seen additional inflows of third-party capital as its assets grew to $188m, up by 33% from the $140.9m it managed at the 31st December 2013.

So while RenaissanceRe remains disciplined it continues to be able to find some opportunities for third-party investors in its ILS funds and third-party capital backed reinsurance underwriting ventures.

The decrease in its stake in DaVinciRe, detailed above, likely reflects some of the other third-party capital increase as the firm may have sold some of its shares in the vehicle to a third-party investor. This is presumed to be the main source of the increase in assets managed to $1.9 billion.

RenaissanceRe Underwriting Managers also operates the Upsilon collateralized reinsurance fund which may also have seen some increase in capital, although we don’t have exact figures on this.

As the reinsurance market remains challenging RenaissanceRe continues to pull-back in catastrophe risks, expand into specialty and Lloyd’s, while also leveraging third-party capital and its joint-venture operations, such as Top Layer Re with State Farm. This positions the firm very well for any turn in the market, providing it with multiple options for growth as and when opportunities allow.

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