Bermudian reinsurance firm RenaissanceRe significantly increased its appetite to underwrite property catastrophe risks in the first-quarter, thanks to improved market conditions, but subsequently ceded more to third-party capital through its Upsilon RFO and DaVinciRe vehicles.
RenaissanceRe has been dialing down its appetite for catastrophe reinsurance exposure in recent quarters, but it seems that following the impact of the 2017 hurricanes and other loss events, with the promise of an improved rating environment, the reinsurer took the opportunity to underwrite more catastrophe risks in Q1 2018.
In fact, RenaissanceRe has delivered the highest return-on-equity (ROE) it has reported since 2015 and its acquisition of Platinum Underwriters, which suggests that the portfolio the firm has created at January 1st may set it up for a profitable year.
Commenting on the results CEO Kevin O’Donnell said, “I am pleased with our solid results and very strong execution in the first quarter. We delivered an annualized operating return on average common equity of 13.5% for the quarter, highlighted by low catastrophe activity, strong growth in premiums, prior year favorable development and a continued increase in operating efficiency.
“The January 1 renewal was successful, as we increased both the size and efficiency of our portfolio of risk. Moving into the mid-year renewals, we remain focused on implementing our strategy in order to continue to build a diverse and profitable book of business and maximize shareholder value.”
So RenRe underwrote more premiums across its business in January and through Q1 2018, writing $237.6 million, or 25.8%, more premiums taking the total written to $1.2 billion in Q1 2018, with $186.4 million of the growth driven by the reinsurance firms Property segment.
Clearly RenRe found market conditions and pricing more attractive at the January 2018 reinsurance renewals and took the opportunity to grow its book, so the better pricing achieved and the fact the firm reported just a 43.5% combined ratio for the property business, has helped to drive its best return in years.
Catastrophe premiums underwritten rose to $590.3 million in the first quarter of 2018, an increase of $175.9 million, or 42.4%, compared to Q1 2017.
The reinsurer said that, “The increase in gross premiums written in the catastrophe class of business was driven primarily by an improved rate environment combined with expanded participation on existing transactions and certain new transactions in the catastrophe excess of loss market.”
But while the rate environment for catastrophe reinsurance business was clearly much better at the renewal, RenaissanceRe chose not to hold onto all of that premium.
The company ceded $352.9 million of premiums in Q1 2018, up by $122.2 million, or 53.0%, compared to Q1 2017, which this increase in ceded premiums written mainly due to a significant portion of the enlarged amount of catastrophe premiums written being ceded to third-party investors in RenRe’s managed joint venture, Upsilon RFO.
Upsilon RFO represents RenRe’s Upsilon collateralized reinsurance and retrocession funds, a core component of the reinsurers activities in managing third-party investor capital in ILS fund structures these days.
Upsilon has been growing steadily for RenRe, with the reinsurer raising capital for the January renewals that took the Renaissance Upsilon Fund to $800 million of assets as of Jan 31st 2018, including RenRe’s co-invest portion.
It looks like the Upsilon strategy has grown again for RenRe, with the company reporting the issuance of $31.7 million of non-voting preference shares to investors and $26.5 million to itself at April 1st, which left RenRe’s participation in the risks assumed by Upsilon RFO at 16.9%.
The improved rate environment also drove RenaissanceRe to underwrite more business within its DaVinciRe third-party capitalised and rated vehicle as well, with gross premiums nearing $140 million for the quarter, up from just under $117 million in the prior year, an almost 20% increase.
But profitability of the DaVinciRe vehicle was down year-on-year in Q1, with income available to DaVinciRe shareholders falling to $26.9 million, down from $41.2 million in the prior year.
The main cause for the drop in profitability of DaVinciRe was losses on investments, while there was also a lower level of reserve releases from prior year events as well.
RenaissanceRe is known as a catastrophe risk underwriter, so it is no surprise to see the reinsurance firm increase its appetite for catastrophe premiums as soon as rates rose at the renewals this year.
However, the firm is now a more balanced underwriter as well, and also relies on its third-party investor partnerships, so it is also not surprising to see more of the premium growth passed onto vehicles like Upsilon and DaVinciRe, as RenRe looks to leverage its institutional partners to both moderate its own risk appetite and to derive fee income from the growing third-party capital backed portfolios.