During an optimistic earnings call focused on how RenaissanceRe uses $ 1 billion in capital it raised in 2021 last year, the CEO highlighted one negative development for the industry overall: inadequate estimates of COVID-19 losses.
Even as COVID 19 continues to spread, there is some speculation that it will not have as much of an impact on the insurance industry as originally envisaged. I don't believe this is the case, & # 39; & # 39; said Kevin O'Donnell, RenRe & # 39; s president and chief executive officer.
“In many cases, our industry has yet to recognize the losses that will inevitably arise from the pandemic, particularly in relation to business interruptions. Probably this lack of recognition arose because it made extensions on January 1 more flexible, & # 39; continued O & # 39; Donnell.
"I think we have a long way to go before the true magnitude of COVID-19 losses in the industry becomes fully apparent."
O & # 39; Donnell made the comments after describing a successful Jan. 1 season for his company highlighted by better-than-expected reinsurance placements for US victims and E&S business, and having written $ 1 billion in net annual growth. premiums predicted across both property and accident segments for 2021 in total.
Last year, net written premiums increased just over $ 700 million, or 21% to $ 4.1 billion, while net income increased 2.7% to $ 731.5 million. Revenues for the year and fourth quarter increased despite weather-related major losses of $ 166.1 million for the quarter and $ 493.6 million for the year, and despite COVID-related losses of $ 172.7 million for the quarter and $ 286.6 million for the year.
Both O & # 39; Donnell and Chief Financial Officer Robert Qutub said the COVID figure in the fourth quarter is primarily IBNR and is primarily related to business interruption coverage. They said RenRe continues to estimate COVID losses in three categories, as outlined last year:
- Category 1, which includes event-like losses closely related to the virus, such as contingencies, event-based accidents, and certain types of accidents and health. (In the first quarter of 2020, RenRe posted $ 104 million in reserves, primarily for this category.)
- Category 2, which covers economic risks caused by the recession effects of COVID.
- Category 3, which refers to "known unknowns", mainly business interruption.
Last year, O'Donnell explained the categorization of business interruption by saying that "the widespread coverage of pandemic business interruption risks under real estate policy is controversial" and that cedants advised RenRe that they had minimal exposure and intended to combat anything and everything attempts by the prosecutors to impose accountability.
While O & # 39; Donnell reiterated what he said during Wednesday's fourth-quarter earnings call last year – that RenRe continues to monitor how things play out in the courts – he added that the real answer is years away.
So far, he said, "The risk of widespread judicial leakage, with courts applying coverage where it is not expressly provided, currently appears low" in the US.
Still, "while individual court rulings have been relatively favorable for the insurance industry, cases will take years to work through the system and some recent decisions have been unfavorable," he noted.
Importantly, outside the US, "in the UK, Europe and Australia, we have seen a trend towards more positive contractual coverage, and in situations of uncertainty, courts have ruled in favor of the policyholder," he said.
Qutub noted that the recent UK Supreme Court decision in the FCA case not to harm the business interruption had no material impact on RenRe's fourth quarter loss.
During the question and answer portion of the earnings call, analysts asked O & # 39; Donnell to make it clear that he was more concerned about developments outside the US regarding COVID losses in the industry, and also asked him to explaining why the industry's lack of recognition of COVID losses is now more apparent than last year.
Speaking of the rigorous process RenRe has undertaken to estimate its own exposure, he said the reinsurer continues to believe it has less exposure compared to others in Category 3, in part because half of the RenRe property disaster book protects personal rules where it believes that COVID exposure is lower.
“Internationally, we have seen more confirmatory coverage sold for business interruption related to communicable diseases, and much of the reserve we raised in the quarter, although it is in IBNR, would be in consideration of some of the things we did. have learned regarding the international book that was innovating. "
He added, “The US still remains uncertain. I think we'll have a lot of ups and downs with court rulings as we go through this, but we still remain relatively optimistic that courts are rational about their interpretation there. "
As for the increased evidence of confirmatory coverage being sold outside the US, O'Donnell said, "We're not surprised this exposure existed." As a result of cedent-reinsurer discussions that took place during the 1/1 renewals, "it became more estimable," he said, later revealing that RenRe's estimation process involved cedant and reinsurer doing different analyzes independently of each other. to try to assess the information shared during 1/1 renewals.
“We had an actuarial approach, an underwriting approach, and we worked with outside consultants to check the reality,” he said, describing the process as “strong and robust,” but “not as pure as what you would have from a observable loss of physical damage from a hurricane or an earthquake from an event ”because of the highly uncertain nature of the risk.
When asked how RenRe felt comfortable extending coverage, even though cedants may not be on the same page as the reinsurer about the size of the cedents' COVID loss exposures, O & # 39; Donnell pointed out revised contract language.
"It's a delicate balance to think about how to have those conversations. It also depends on what they know. The real problem is (for) the extensions we had, we ruled out COVID and specifically addressed the communicable disease. . "
“The (past) exposure is the exposure, and it will resolve over time. But going forward, if there has ever been, the granting of coverage is specifically and more precisely excluded in the contracts we have renewed. "
At one point during the call, O & # 39; Donnell described RenRe as a “market leader” in successfully implementing “communicable disease exclusions when needed”. And we have shown our determination by not renewing several deals that do not contain the necessary exclusion, ”he added.
January 1 Summary
O & # 39; Donnell began the call with a brief overview of January 1 business, describing the date this year as “one of the most important innovations in our history”, and he welcomed the fact that the company has completed a capital increase. of $ 1.1 billion as of last year in its underwriting portfolio in the real estate and accident segments.
“In 2021, we expect net written premium growth of approximately $ 1 billion, and believe we have significantly increased the profitability of our underwriting book … while keeping our tail risk consistent with last year's at a percentage rate. of equity and… have enough dry powder to use for new opportunities, ”he reported.
As he promised last year, O & # 39; Donnell said last June's capital increase was used for two offensive purposes: to grow into an improving market and to retain more risk.
Commenting on the market improvement, O & # 39; Donnell said RenRe's expectations last year, and those of the reinsurance sector, pointed to the real estate cat and retro markets as the most promising 1/1 market opportunities. But the dynamics changed late in the renewal period – after mid-December – when there was less demand and more supply.
“In part, I think this was because (insurers') investment portfolios were disconnected from the financial realities of COVID-19 and the economic recession. The resulting rise in book values reduced relative demand for reinsurance by giving many (cedants) the confidence to preserve more risk, ”he said, noting that new capital also entered the retro and real estate markets on the supply side.
“During the extension, however, both the casualty and specialty lines and E&S for real estate continued to experience extremely favorable price dynamics. Overall, they both exceeded our expectations – with both higher rates and improved terms, ”he said.
O'Donnell gave some figures to contrast the magnitude of price changes in different areas of the RenRe book and reported the following:
- Rates rose 20-25% on targeted real estate risks in the US E&S market, while the traditional real estate cat was more muted – with declining demand and interest rate hikes averaging around 10%.
- Retro numbers were up 5-15% as additional supply began to suppress rate hikes as the renewal progressed. Yet four consecutive years of rate increases add up to a cumulative average rate increase of nearly 50%.
While O'Donnell did not provide this kind of detail for accident and specialty businesses, O'Donnell said market disruptions across different classes offer RenRe opportunities to write about $ 500 million in gross premiums by 2021, with lines like GL and D&O particularly attractive. to be.
O & # 39; Donnell also provided some commentary on the impact of a warming climate on natural disaster losses the industry responded to, including 30 named storms and five of the six largest California wildfires in history (measured by acreage burned ).
"We expect the climate to make extreme events more frequent and severe, but this doesn't mean we expect every year to be like 2020," he said. "What has increased is the likelihood of extreme events from the long-term record."
“The insurance industry has always used the past to predict the future. But now the future no longer resembles the past. Our ability to understand this shift in future risks gives us a competitive advantage, enabling us to position ourselves for a changing environment, ”he said.
Earlier this month, RenRe unveiled its mission to “promote climate resilience” as part of its Environmental, Social and Governance (ESG) strategy.