RenaissanceRe CEO: Casualty Can Cover Its Cost Of Capital Above 100%, But 'Not A Decision' Made
CEO Kevin O'Donnell says investment income per dollar of casualty float is now "closer to $1.30," up from about 20 cents years ago.
RenaissanceRe CEO Kevin O'Donnell said on the reinsurer's third-quarter earnings call that higher interest rates make it rational for casualty underwriting ratios to rise, because investment income on the float now carries more of the profit. Asked whether the company would write casualty above a 100% combined ratio, he said it could earn its cost of capital that way but has not decided to.
Yield curve drives the ratio
RenaissanceRe, a global reinsurer selling property, casualty and specialty cover, has said casualty profit leans toward investments because the line generates large asset leverage. O'Donnell told analysts that underwriting technical ratios "tend to rise and fall with the yield curve," and that the higher-for-longer rate backdrop will likely deepen the skew.
A Mizuho analyst laid out the math: a yield to maturity near 6% and 2.5 times asset leverage would clear a mid-teens return hurdle even at a 100% combined ratio in casualty and specialty. O'Donnell replied, "You are thinking about it correctly."
Several years ago, he said, the company talked about producing about 20 cents of investment income. After the rate shift of recent months, he said, it is "closer to $1.30."
No decision to write above 100
Pressed on whether a combined ratio at or below 100% is still the target, O'Donnell said guidance on that has not changed. Reframing the question, he said that if you wanted to make your cost of capital writing casualty, the answer on going above 100 is yes. "That's not a decision that we have made to do, though," he said.
He said client relationships, margin and share of wallet will shape the casualty call, with investment contribution one component. The company has concerns about casualty trend and about whether primary insurers will keep pushing price, so it will "remain cautious," he said, though it is not worried about portfolio profitability.
If the skew toward investment income grows, the company will keep pulling back on top line and buy more retrocession, meaning reinsurance of its own risk.
A shrinking casualty book
Gross premiums written were $2.1 billion, down $220 million, or 9%, CFO Bob Qutub said, with more than half the decline from planned casualty cuts. The Casualty and Specialty adjusted combined ratio was 109.5%, including a 10.5-point hit from large losses.
Group Chief Underwriting Officer David Marra said the company kept about two-thirds of casualty and specialty net premiums this year after ceded reinsurance, versus roughly 75% a year earlier. He put U.S. general liability trend at double digits, "10% to 12%," and said the company is ready to cut back where rates do not keep pace.
The January 1 renewals will show how much casualty RenaissanceRe trims and cedes, with Marra saying it will cut where profitability falls short.
Sources
- RenaissanceRe (RNR) Q3 Earnings: How Key Metrics Compare to Wall Street Estimates — Yahoo Finance
- Document — sec.gov
- RenaissanceRe anticipates Q4 retained net investment income around $325M amid portfolio duration extension to 4.2 years (NYSE:RNR) — seekingalpha.com
- RenaissanceRe (RNR) Surpasses Q3 Earnings Estimates — Yahoo Finance
- RenaissanceRe Reports $161.4 Million of Net Loss Attributable to Common Shareholders and $512.6 Million of Operating Income Available to Common Shareholders in Q3 2026. – Company Announcement - FT.com — Financial Times
