Bermudian reinsurance firm and third-party capital manager RenaissanceRe will have pleased shareholders and the institutional investors backing its insurance-linked investment strategies with its second-quarter results, as it revealed a significant drop in loss estimates for the 2017 catastrophe events.
Expectations for the second-quarter 2018 results season had been for a raft of announcements on further loss creep from the 2017 catastrophes, particularly due to hurricanes Harvey, Irma and Maria.
But RenaissanceRe (RenRe), despite maintaining a significant U.S. property catastrophe reinsurance portfolio, appears to have reserved extremely prudently following the events, allowing the reinsurance firm to make a significant adjustment to its estimates and release some of those reserves to the benefit of its Q2 2018 results.
RenRe reported net income of $191.8 million for the second quarter of 2018, compared to $171.1 million in the prior year period. But on an operating income basis the result was $209.6 million, significantly higher than the $116.8 million it reported a year earlier.
Annualised return on average common equity is reported as 18.6% and annualised operating return on average common equity as 20.3% in the second quarter of 2018, again well up on the 15.2% and 10.3% reported in the prior year.
The major factor in the out-performance is the decline in loss estimates for the 2017 catastrophe events, which resulted in a net positive impact to the underwriting result of $92 million and as a result reduced the combined ratio by 23.5%, primarily in the property underwriting segment.
The firm noted that there is still plenty of uncertainty left in the estimates of losses from the 2017 catastrophe events, but it seems confident in its ability to make this adjustment in Q2, which suggests that any creep would be minimal by comparison.
Investors in RenRe’s third-party capital vehicles, ILS funds and joint ventures are likely to also have benefited from an element of release due to the lowering of loss estimates from the 2017 catastrophes.
Perhaps evidencing just how much the reduced estimates can benefit a third-party capital vehicle or joint venture, RenRe’s DaVinciRe third-party capitalised and rated sidecar-like vehicle benefited from the loss estimate reductions.
For the quarter DaVinciRe reported negative claims and claims expenses of almost $40 million, caused by almost $50 million of prior year improvement versus nearly $10 million of claims in the current period. The result is a negative claims expense ratio and an overall combined ratio of -14.9%, with almost $64.5 million of profit for the DaVinciRe shareholders.
That suggests a very profitable quarter for RenRe’s capital partners in the DaVinciRe vehicle and perhaps for investors in some of the firms other ILS or third-party capital vehicles as well.
During the second-quarter RenRe continued to underwrite more premiums within its property catastrophe area and for third-party capital vehicles, as the improved rate environment encouraged the firm to upsize on its underwriting portfolios.
Catastrophe premiums written rose by 6.4% to $437.7 million taking into account a reduction in assumed reinstatement premiums, without which the growth in catastrophe reinsurance premiums underwritten would have been as high as 14%.
“The increase in gross premiums written in the catastrophe class of business was driven primarily by expanded participation on existing transactions and certain new transactions,” the company explained.
The company also ceded an increased amount of risk, saying that it ceded $254.8 million of property premiums in the second quarter of 2018, up $91.9 million or 56.4% compared to the second quarter of 2017.
RenRe said that this was “principally due to additional purchases of retrocessional reinsurance as part of the management of the Company’s risk portfolio,” but likely also reflects higher cessions through to third-party capital vehicles as well.
RenRe’s property catastrophe segment also reflected the large reduction in loss estimates to end the quarter with a negative combined ratio of -64% and underwriting income of over $195 million for the quarter, almost double the prior year period.
Again, that suggests the potential for some of the reinsurance firms other ILS strategies to have benefited from its loss estimate reduction, perhaps enhancing returns for the third-party investors.
The growth in the catastrophe book is also evident in RenRe’s measure of managed catastrophe premiums underwritten for the quarter, which rose to almost $464 million at the end of Q2 2018, up from almost $438 million in the prior year period.
Kevin J. O’Donnell, CEO, comments perhaps suggest that the trend of better results is set to continue, “I am especially pleased that we were also able to construct our best portfolio of risk in years. Moving forward, a combination of top line growth, an effective gross-to-net strategy, rising interest rates and improved operational efficiency should provide the foundations for continued superior shareholder return.”
It will be interesting to see whether other reinsurance firms can buck the loss creep trend, showing that they reserved prudently for the 2017 catastrophe loss events and boosting their second-quarter results.