Bermudian reinsurance company and third-party capital management specialist RenaissanceRe increased the managed catastrophe premiums it underwrote during the fourth-quarter of 2015, year-on-year, and also looks to have raised some new capital from third-party investors.
RenaissanceRe operates a number of joint-ventures, third-party capital backed reinsurance vehicles and collateralised reinsurance or ILS funds, within its Ventures unit.
Among these the DaVinci Re rated and largely third-party capital backed reinsurance vehicle is perhaps the best known. Operating a little like a sidecar for RenaissanceRe and providing the reinsurer with a way to bring third-party capital to the market through an A.M. Best rated vehicle, DaVinci is an important part of its overall business.
In its latest quarterly and full-year 2015 results RenaissanceRe reported a drop in profitability at DaVinci Re during the year, although in Q4 DaVinci actually underwrote more catastrophe reinsurance premiums than a year earlier.
It was the loss experience that affected DaVinci in 2015, which perhaps suggests that the portfolio has changed to one more exposed to aggregations of smaller catastrophe events. This is a trend seen across the ILS and managed reinsurance underwriting space, as funds and sidecars have shifted from the contracts that have seen the highest price declines, taking on additional exposure to more attritional type events.
While the DaVinci catastrophe premiums grew in Q4, the full-year saw them decline on a gross basis from $313m in 2014 to $289m in 2015. DaVinci Re income before tax fell from almost $200m in 2014 to $144.5m in 2015, a steep decline hit by the $22m of net losses reported, as well as foreign exchange and unrealised investment losses.
Still, DaVinci only recorded a 45.6% combined ratio, down from 37.2% in 2014, which remains attractive and allowed the vehicle to provide returns to investors, but back some shares and also let in some new capital as well.
Overall, managed catastrophe premium underwriting grew in Q4 2015, at $17.1m compared to $15.1m in Q4 2014. Interestingly this is more than the reinsurer underwrote on its own balance sheet, with catastrophe premiums written reported as $12.3m.
This shows that RenaissanceRe continues to transition to a more diverse reinsurer, which now allows it to focus the efficient third-party capital it holds in managed and ILS vehicles on catastrophe underwriting, putting its balance-sheet capital to use where it can perhaps make more acceptable returns.
In fact, for the full-year 2015, managed catastrophe premiums outstripped RenRe’s own catastrophe premiums written, underscoring the firms ability to navigate the cycle using third-party capital vehicles. $868.6m of catastrophe premiums were underwritten in 2015, while $969.8m of managed cat premiums were booked. Both full-year figures were down though, as the reinsurer continued to pull-back from unattractive business.
Overall the catastrophe reinsurance segment generated underwriting income of $406.4m and a combined ratio of 34.7% in 2015, compared to $450.1m and 23.8%, respectively, in 2014. The $43.7 decrease is down to a $73.8m increase in net claims and claim expenses, including $27.3m related to a number of U.S. winter storms, $21.6m related to explosions in Tianjin, China and $21.2m related to a U.S. wind and thunderstorm event, with the remainder due to a number of other smaller catastrophe events. This loss experience will also explain the net claims booked under DaVinci Re as well.
As a result of the claims experience RenRe distributed less profit to third-party investors, it appears, reporting that net income attributable to noncontrolling interests fell to just $28.1m in Q4 2015, down from $44.2m a year earlier.
For the full-year 2015 income for third-party investors came to just over $111m, down from $153.5m in 2014. This is largely due to higher loss experience, but also likely due to the decline in pricing and catastrophe reinsurance rates-on-line, which ultimately flow through as lower profits to share in the Venture vehicles.
It looks like RenaissanceRe raised a little new third-party capital for its ILS and joint-venture vehicles during the fourth-quarter of 2015 though, perhaps signalling that it felt that the greater stabilisation being seen in the reinsurance market would translate into better opportunities for deploying new capital.
RenRe reports redeemable noncontrolling interest as $1.046 billion at the end of Q4 2015, up slightly from $1.022 billion at the end of Q3 of that year. However this is a little down on a year earlier, when the reinsurer reported $1.132 billion of redeemable noncontrolling interest at the end of 2014.
Some growth is a positive thing though and it is possible that RenaissanceRe will be able to continue this, especially now the its specialty and casualty underwriting teams acquired with the buy of Platinum are getting embedded in the firm and returning good results.
Through the acquisition of greater diversification opportunities for its balance-sheet underwriting RenaissanceRe may be able to make greater use of third-party capital and its ILS funds for underwriting catastrophe premiums. Hence the fact that managed catastrophe premiums written have overtaken its own balance-sheet premiums in that segment.
It’s perhaps a sensible approach as the reinsurance cycle bottoms-out. The question is whether the cycle stays flatter, as many now expect, due to the influence of efficient, third-party capital.
If it does, could reinsurers like RenaissanceRe keep their stake in some areas of the catastrophe reinsurance market leveraging third-party capital, while their balance-sheet capital is put to work in areas that can meet cost-of-capital? And if that’s the case, what does this mean for reinsurers that have yet to embrace third-party capital management and have no efficient capital levers, such as this, to pull?
RenaissanceRe has been managing third-party capital and joint-venture or ILS vehicles for perhaps the longest of any reinsurer. As a result it has had longer than most to develop a flexible, multiple balance-sheet approach to underwriting. It’s possible that we will see this approach become increasingly evident, for as long as the reinsurance market remains softened and the cycle flattened.