RenRe feels catastrophe reinsurance price pressure, expands specialty

Bermuda-based reinsurance and third-party capital management specialists RenaissanceRe has given a clear example in its results of the increasing move by property catastrophe focused reinsurers to grow their business using specialty lines.

RenaissanceRe has reported gross premiums written of $705.3m in the first quarter of 2014, up $69.8m, or 11.0% from a year earlier. The increase has been driven by the firms specialty reinsurance and Lloyd’s operation, with RenRe growing its specialty premiums by a huge 87.4% for the quarter and Lloyd’s by 12.1%.

At the same time RenaissanceRe has seen a reduction in its property catastrophe premiums written and managed, reflecting the general reduction in risk adjusted pricing currently available in the marketplace.

Kevin J. O’Donnell, CEO, commented on the results; “We reported a solid first quarter, generating $151.0 million of net income, an annualized operating ROE of 15.9% and 2.8% growth in tangible book value per share plus accumulated dividends. Our results were driven by strong underwriting in each of our segments and good investment performance.”

Gross catastrophe reinsurance premiums written declined to $467.7m in the first quarter of 2014, a drop of $11.1m compared to a year earlier and primarily driven by reduced risk-adjusted pricing for the first quarter reinsurance renewals. RenRe’s managed catastrophe premiums were down $33.7m, or 6.4%, to $496.0m in the first quarter of 2014, compared to $529.7m a year earlier, reflecting the reduced risk-adjusted pricing environment.

RenRe reduced its ownership share of the DaVinci Re vehicle to 26.5% at March 31, 2014, compared to 32.9% at March 31, 2013, which helped it to grow its income from noncontrolling interests slightly to $42.8m in the quarter, up from $38.6m a year earlier.

Catastrophe premiums written in the DaVinci Re vehicle dropped by around 14% in the quarter to $144.96m.  Catastrophe premiums written in RenaissanceRe’s Top Layer Re joint venture more than halved, down to $14.1m. Catastrophe premiums managed by the whole firm came in at $496m for the quarter, down from approximately $530m a year earlier.

The results give the look of a reinsurer that is looking to skirt the worst priced business in the market during the soft and competitive period we are currently experiencing, while at the same time expanding its specialty lines business where rates are more palatable.

The result though is a decline in income, reported net income dropped to $151.0m, or $3.56 per diluted common share, in the first quarter of 2014, compared to $190.5m, or $4.23 a year earlier. At the same time RenRe’s return on equity of 17.6% and an annualized operating return on average common equity of 15.9% in the first quarter of 2014, compares to 24.3% and 22.5%, respectively, in the first quarter of 2013.

The drop in income and return on equity are primarily driven by a decrease in favourable development on prior accident years and claims expenses. There is also likely some reflection of the adjustment to RenRe’s book of business and the soft catastrophe pricing environment.

RenaissanceRe continues to pursue its increasingly diversified reinsurance approach, building out its specialty business, continuing to manage third-party capital where appropriate and also now putting more emphasis on its Lloyd’s unit, while at the same time controlling its catastrophe premium exposure in the currently difficult market.

This approach could set the firm up for a much more diversified future, with less focus purely on property cat as had been RenaissanceRe’s way in the past. We still need to see how these Bermudian reinsurers perform for another couple of quarters, particularly if price declines continue or show no sign of abating, to really understand the impact of the competitive and soft reinsurance market.

CEO O’Donnell said; “Pressure on pricing persists, as abundant supply from many forms of capital continues to outstrip demand. Despite the challenging environment, we are well positioned to bring efficient risk management solutions to clients and to build an attractive portfolio through our unique mix of owned rated balance sheets, non-owned rated balance sheets, and collateralized vehicles.”

It’s also worth reading our piece from yesterday on Bermuda reinsurers:

– Third-party capital adds fuel to fire for Bermuda reinsurers: S&P.