RenRe disciplined on catastrophe reinsurance, third-party capital drops

by Artemis on May 6, 2015

Bermudian reinsurance firm and third-party capital management specialist RenaissanceRe continued to display its disciplined approach to market conditions, pulling back further on catastrophe reinsurance underwriting across managed and owned premiums.

And discipline matters in a reinsurance market environment that sees prices continuing to soften, while terms and conditions continue to expand. RenaissanceRe demonstrated the importance of being disciplined by beating analyst estimates for the first-quarter.

RenRe reported net income of $167.8m, or $4.14 per share for the first quarter of 2015, compared to $151m, or $3.56 for the prior year period. Operating income is reported as $126.1m, or $3.10 per share which comfortably beat Wall Street analysts estimates.

Kevin J. O’Donnell, CEO of RenRe, commented on the results; “We reported a solid first quarter, generating $167.8 million of net income and an annualized operating ROE of 12.9%. Our results were driven by strong underwriting profits and investment performance.”

But while reporting good profits and attractive results, the underlying theme at RenRe has been one of discipline and a continual pull-back on catastrophe premiums underwritten at all the renewals over the last year or two.

Overall gross premiums written were $643.6m, a decrease of $61.7m or 8.7%, in the first quarter of 2015, compared to the prior year period. The catastrophe reinsurance and specialty reinsurance segments both decreased premiums written, by $78.5m and $30m, respectively. However, showing that attractive opportunities still exist, if you can access them, RenRe grew premiums written by $46.9m in its Lloyd’s segment.

Catastrophe reinsurance premiums decreased by $78.5m or 16.8% to $389.2m for the quarter. The reinsurer explained that this was primarily driven by “the continued softening of market conditions” including the risk adjusted price reductions seen at the January renewals.

The reduction in catastrophe reinsurance premiums underwritten is also a result of RenRe’s “underwriting discipline given prevailing terms and conditions” the reinsurer explained, showing that the firm continues to find it preferable to pull-back rather than to deploy its capacity and third-party capital managed at any price.

RenRe also reduced its managed catastrophe premiums, which are the premiums underwritten in its joint ventures, such as Top Layer Re, the DaVinci Re vehicle and its Upsilon sidecar and ILS funds. Managed catastrophe premiums dropped 14.7% or $72.9m, to $423.1m in the first quarter of 2015, compared to $496m a year earlier.

Catastrophe reinsurance results have continued to be boosted by a very low combined ratio for the quarter. Underwriting income of $108.2m and a combined ratio of 24.8% were reported for the first quarter of 2015, compared to $130.6m and 20.7% in the first quarter of 2014.

For the third-party capital investors in the various ILS vehicles that RenRe operates, a slightly lower return on capital was seen for the quarter.

Net income attributable to non-controlling interests in Q1 2015 was $39.7m, down from $42.8m a year earlier, which the reinsurer largely puts down to a modest decrease in the profitability of DaVinciRe. RenRe’s ownership in DaVinciRe was 26.3% at March 31, 2015, very slightly down from 26.5% at March 31, 2014.

It looks like the amount of third-party reinsurance capital managed at RenaissanceRe fell during the quarter, likely due to some being returned to investors, as the reinsurer reported its total redeemable non-controlling interest as $968.4m at the end of Q1 2015, compared to $1.132 billion at the 31st December 2014.

This redeemable non-controlling interest is spread across various third-party capital and insurance-linked securities vehicles, including DaVinci Re, the Medici ILS fund strategy and two Upsilon ILS fund strategies.

The reduction in non-controlling interest amounts to approximately $163m. It’s possible that this is due to capital being returned to investors as a result of the continued pull-back on catastrophe premiums being underwritten in the managed cat segment at RenaissanceRe.

RenaissanceRe, as with many of the reinsurers to have reported results in recent days, shows that while catastrophe losses remain light reinsurers remain profitable even in the challenging market environment. However RenRe is clearly taking steps to avoid what it considers poorly price business, or business with unattractive terms, as evidenced by the continued pull-back.

That discipline may prove extremely valuable if catastrophe losses tick up over the remainder of the year.

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