Catastrophe pull-back resumes at RenRe in Q2, but profitability rises

by Artemis on July 26, 2017

In the second-quarter of 2017 Bermuda domiciled reinsurance firm RenaissanceRe (RenRe) resumed its pull-back on catastrophe reinsurance underwriting, with lower catastrophe and managed catastrophe premiums written, but profitability improved including for its third-party capitalised sidecar vehicle, DaVinciRe.

RenRe runs a number of joint-ventures and third-party capital backed reinsurance vehicles, collateralised reinsurance or insurance-linked securities (ILS) funds within its Ventures and RenaissanceRe Fund Management Ltd. units, with the performance and impact on the firm’s results of some of these activities embedded in its managed catastrophe premiums segment.

After having increased both gross catastrophe reinsurance premiums and managed catastrophe premiums in the first-quarter of this year, RenRe has reverted to pulling-back on premiums underwritten in the second-quarter, citing the continued softening and inadequate rates.

Gross underwritten catastrophe reinsurance premiums fell to $411.5 million in the second quarter of 2017, down by $20.5 million, or 4.8%, compared to Q2 2016. Managed catastrophe premiums dropped $19 million or 4.2% to $437.8 million, down from $456.8 million in the second quarter of 2016.

RenRe said that the pull-back on catastrophe underwriting was, “Driven by a challenging pricing environment as the Company continued to exercise underwriting discipline given prevailing market terms and conditions.”

It’s important to note that there was $11.4 million of reinstatement premiums accounted for in Q2 2016, so the decline in catastrophe premiums in Q2 2017 was actually just $9.2 million taking that into account. But still, compared to the growth opportunities the reinsurer found in Q1, the second-quarter definitely saw the company less excited by the underwriting opportunities presented to it.

The June reinsurance renewals of Florida business and the acceleration of rate declines seen, with prices dropping further than anticipated, could well be the reason for the resumption of this pull-back.

While the opportunities for growth found at the January renewals may have been international and less U.S. focused, which would be a positive for third-party investors as RenRe looks to shift a little further away from the highly pressured U.S. property cat market but still finds opportunities it deems attractive.

Following the almost 50% decline in RenRe’s managed catastrophe premiums in the fourth-quarter of 2016 it’s encouraging for that rate to have slowed significantly. The pattern does suggest that the reinsurer continues to find opportunities it finds attractive to underwrite, but perhaps just at different times of year and from different programs, compared to when RenRe was so Florida focused a few years ago.

A lower level of catastrophe losses has also helped RenRe in the second-quarter, boosting its profits and with the property segment, where the catastrophe and managed cat premiums are accounted, seeing the combined ratio come in at a low 44.5% in Q2 2017, compared to 71.3% a year earlier.

The reduction in catastrophe losses has helped significantly in lifting RenRe’s results signficantly above analysts expectations, although most cited the continued shift from property to casualty and cite how that has eroded core margins. Higher than expected reserve releases and some favourable development have also helped the reinsurer in Q2, helping to boost profits.

The DaVinci Re third-party capital backed, sidecar-like catastrophe vehicle that RenRe operates saw gross written premiums for Q2 2017 of $132 million, which is down from just over $146.5 million in the prior year quarter.

DaVinci Re’s combined ratio came in at just 36.9% for the second quarter, down from 67.7% in the prior year, helping the vehicle to total revenues of $71.5 million, compared to $82.1 million for Q2 2016. Much lower expenses in the quarter means that income for DaVinciRe shareholders is up at just over $47 million, compared to $37.2 million a year earlier.

So a much more profitable quarter overall for the DaVinciRe sidecar-like vehicle, with higher earnings for RenRe and the third-party investors in the vehicle, helped by the low level of catastrophe losses the company experienced.

Net income attributable to noncontrolling interests, or third-party shareholders and investors in some of its vehicles, in the second quarter of 2017 was $37.6 million up from $30.6 million in the second quarter of 2016, which RenRe said is “principally due to an increase in the profitability of DaVinciRe Holdings Ltd.”

RenRe reduced its ownership stake in DaVinciRe to 22.6% at June 30th 2017, compared to 24.0% at June 30th 2016.

Overall RenRe reported net income of $171.1 million, or $4.24 per share, for the second quarter of 2017, compared to $136.3 million, or $3.22 per share, in the second quarter of 2016, a significant uplift helped by the lower level of catastrophes, higher reserve releases and improved investment income as well.

Kevin J. O’Donnell, CEO of RenaissanceRe, commented; “We had a good quarter, generating an annualized operating return on average common equity of 10.0% and growing tangible book value per common share plus accumulated dividends by 3.9%.

“Recognizing challenging market conditions, we executed on our gross-to-net strategy to build an attractive net portfolio of risk. We believe that we have the right strategy and necessary flexibility to navigate the market conditions ahead while continuing to maximize shareholder value over the long-term.”

Finally, RenRe continues to be able to attract third-party capital from investors, as evidenced by a continued rise in its reported redeemable non-controlling interest, which includes some of the third-party capital from the collateralized and joint-venture vehicles.

At the end of Q2 2017 this figure had risen to $1.242 billion, which is up around $120 million over the course of the last twelve months, helping the firm maintain its pool of third-party capital which it leverages to complement its own balance-sheet capacity.

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