RenaissanceRe pulls back on catastrophe risk, DaVinci profits rise

Bermuda-based reinsurer and third-party reinsurance capital management specialist RenaissanceRe has pulled back dramatically on catastrophe premiums written as the firm showed it will do whatever is necessary to avoid underpriced business.

RenaissanceRe has always said that it would not underwrite catastrophe reinsurance at any cost and the firms second quarter results show that it has stuck to this, reducing its total gross premiums written to $511.5m, which is down $191.7m, or 27.3%, compared to the second quarter of 2013.

The decline in gross premiums was driven by a pull-back in the catastrophe reinsurance segment, which were down by $188.8m, or a huge 32.7%. RenaissanceRe said that this was “driven by the continued softening of market conditions, including reduced risk-adjusted pricing for the second quarter renewals.”

The reinsurers managed catastrophe premiums written were $437.9m, which is the equivalent of a 28.0% decrease, compared to the second quarter of 2013. For the first six months of the year managed catastrophe premiums, net of reinstatement premiums written, totaled $933.9m, a decrease of $204.2m, or 17.9%, compared to the first six months of 2013.

Kevin O’Donnell, the reinsurers CEO, explained; “We believe that over the long-term the proper assessment of risk and disciplined underwriting will continue to be key differentiators in our industry. Our strategy of matching well-structured risk with efficient capital across cycles has been the basis for our success for over two decades. We intend to continue this strategy going forward, providing customers and capital providers with a suite of innovative and flexible solutions along with industry-leading underwriting expertise and customer service.”

So, as far as RenaissanceRe was concerned, there was insufficient attractively priced catastrophe reinsurance business at the recent renewals to enable it to continue to deploy as much capital into the sector.

RenaissanceRe has historically been a catastrophe, particularly Florida property catastrophe, reinsurance specialist firm, so for it to decide to pull back quite so dramatically, while other reinsurers have not, could be an interesting distinction to watch over the course of the next few quarters.

Net income attributable to non-controlling interests, the firms third-party sourced reinsurance capital and partnership capital, in Q2 was $36.1m, up from $14m a year earlier. This increase is principally due to an increase in the profitability of DaVinciRe, the firms joint-venture entity.

RenRe also decreased its ownership in DaVinciRe to 26.5% at June 30, 2014, compared to 32.9% at June 30, 2013, selling some of the entities shares to an existing third-party shareholder.

DaVinci Re catastrophe premiums written declined from $208m in Q2 2013 down to $148m in Q2 2014, as the firm showed that it is not simply shifting risk to third-party capital.

That is actually a refreshing thing to note, as many reinsurers have been using third-party capital to maintain premiums written, moving less attractively priced business off balance-sheet and into the hands of third-party capital. That strategy is fine as long as your investors fully understand the risk and return equation of the business you are underwriting.

Clearly RenaissanceRe felt that pricing was insufficiently attractive for its third-party investors as well, something it will no doubt have arrived at in conjunction with its investors expression of risk appetite.

RenRe also pulled back on catastrophe premiums written in its Top Layer Re sidecar facility, which is a joint venture with State Farm. Premiums written at Top Layer Re declined from $25.6m to $23.1m, as again RenRe showed that neither it or its third-party partners would underwrite catastrophe risk at any cost.

It’s worth remembering that RenaissanceRe actually wrote more premiums in Q1, showing that it is being selective in its underwriting and likely moving away from U.S. catastrophe reinsurance and looking to new opportunities. It will be interesting to see how it approaches the January renewals if there is no change in rate trajectory by that time.

CEO O’Donnell said that he was pleased with the way the firm had navigated the difficult renewal conditions in such a challenging market environment. “Our team executed well in tough market conditions and I am pleased with the book of business we constructed,” he stated.

If these market conditions continue it will also be interesting to see whether RenaissanceRe chooses to return any capital to investors, rather than being unable to put it to work. Again we will likely discover that after the January renewals, as much of its third-party capital will have been deployed for this full year.