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RenaissanceRe expects to incur about $750 million in losses from the January 2025 California wildfires—and anticipates that industrywide impacts should halt the drop in property-catastrophe reinsurance prices observed at 1/1.

Kevin O’Donnell, president and chief executive officer, referencing an industrywide figure of $50 billion for losses from the fires, said, “The industry losses we expect from the California wildfires are at a scale [where] we would expect them to affect supply and demand for reinsurance,” also noting that first-quarter 2025 will mark the third straight quarter of elevated catastrophe losses for the industry and the reinsurer. (Editor’s note: this article originally ran with the wrong byline, which now has been corrected).

Putting RenaissanceRe’s estimated losses at 1.5% of the industry aggregate loss, O’Donnell indicated that given the substantial “step change” in rates and terms that occurred two years ago, and the strength of the reinsurer’s capital position, the company is ready and willing to meet the demand.

“We have the appetite to continue providing the protection that our clients in states like California clearly need. In order to do so, however, property-catastrophe rates need to remain firm or even increase,” O’Donnell said during a fourth-quarter 2024 earnings conference call.

“The California wildfire loss is a good example of the value of our approach to the step change. The magnitude of loss we anticipate paying is consistent with the tail nature of this event, and we were paid appropriately to protect against this risk,” he said.

David Marra, executive vice president and group chief underwriting officer for RenaissanceRe, explained the ways in which reinsurers like RenaissanceRe are likely to absorb losses from the wildfires—most notably through catastrophe excess-of-loss towers, where wildfire is a covered peril. The wildfire losses will exceed retentions for many nationwide insurers, he said, noting that they could even exhaust the towers of some California-specific insurers.

“Should that happen, some treaty language may allow insurers to treat the fires as two separate events. However, were they to do so, they would need to take two retentions,” he said.

Other possible impacts to property reinsurers will come through reinsurance treaties that cover assessments related to the California FAIR plan and through quota-share and per-risk treaties that might respond to large losses for high-value homes and commercial properties. In addition, there could be losses to the casualty reinsurance market through third-party liability claims or specialty claims related to collectibles and fine arts.

“At the upcoming renewals, we will be ready to deploy capacity, but only if prices are commensurate with the additional risk we will assume,” Marra said, echoing O’Donnell.

Marra also gave insight into the reinsurance rate changes that occurred at 1/1, and the difference between the cedents that come to market at midyear vs. 1/1, noting that more loss-impacted accounts are up for renewal later in the year.

“The second-quarter renewals are a mix of Florida, nationwide and California-specific [insurers]. Only a relatively small portion of the pure U.S.-exposed accounts renew at 1/1. So, most of those are to come in the second quarter and will be loss-impacted.”

RenaissanceRe experienced rate reductions of around 8% at Jan. 1, “with top layers down more and bottom layers down less,” while retentions and terms remained stable. Early in the renewal period, rates were more flat,” Marra reported. “But as supply got pushed into the market, rates started to come under more pressure. There wasn’t much differentiation of loss-impacted accounts because they are far fewer of the 1/1s,” he said.

“We think that will reverse,” he said, referring to the competitive downward pressure on rates. “We’ll see better opportunities going into the second-quarter renewals,” he predicted.

(Editor’s Note: Although rates dropped at 1/1, Marra said that RenaissanceRe grew lines on some targeted accounts, which will keep its premium volume for property-cat flat for the period.)

In fact, Marra noted that 75% of the reinsurer’s U.S. property-catastrophe accounts renew over the next six months—and most are loss impacted.

“We were already expecting about $10 billion in new demand coming to the market this year. We now expect this demand to increase as companies’ review their reinsurance needs and likely purchase backup covers for the remainder of the year,” he stated.

While last year’s catastrophe losses didn’t impact renewals at Jan. 1, they had varied impacts on the earnings of insurers and reinsurers who have reported year-end financial results so far. Hurricane Milton, a fourth-quarter event, had a $270 million net negative impact on RenaissanceRe’s overall results, adding 13.9 points to the full-year combined ratio for the company, which landed at 83.9.

Fourth-quarter losses from large events, including Milton, added 17 points to RenaissanceRe’s full-year combined ratio for just the property segment, which still came in at 57.2. The events added 49 points to the fourth-quarter combined ratio for the property segment of 71.6.

In both periods, favorable prior-year loss development erased much of the impact of the event losses.

In fact, in spite of catastrophes, RenaissanceRe’s full-year operating income was $2.2 billion—the highest operating profit in the history of the company, according to Chief Financial Officer Bob Qutub. The figure produced an operating return on average common equity of 23.5%, he reported.

In addition to $1.6 billion of underwriting income from property, casualty and specialty reinsurance businesses, RenaissanceRe also records income from fees for managing third-party capital—a stable source of income for the quarter and the year.

Fourth-quarter operating income was $407 million, producing an annualized operating return of 16%, but RenaissanceRe reported a bottom-line net loss of $199 million for the quarter after accounting for mark-to-market losses in its investment portfolio.

On the top line, for both the property reinsurance segment and the casualty and specialty segment, RenaissanceRe reported 30-plus percent jumps in premium last year, attributing the jumps to the successful integration of Validus, acquired from AIG in late 2023.

Casualty Questions

In spite of reporting an underwriting profit across the company overall, analysts questioning management on the earnings conference call focused their attention on the casualty and specialty business, where the combined ratios deteriorated 6 points in the quarter and 5 points for the year.

RenaissanceRe writes general casualty, professional liability, credit and specialty business lines, and O’Donnell flagged the general liability line as the largest driver of elevated loss trends during his opening remarks. “We have done a good job keeping up with this trend,” he said, later noting that RenaissanceRe assumes loss trend in the 10-12% range but sees rates jumping 15%.

“General liability falls into the category of an underperforming line right now,” O’Donnell said, reporting, however, that Renaissance Re had meetings with primary insurers during the second half of 2024, which have satisfied the reinsurer that profits will return. “I believe that the industry is improving its underwriting and claims management. In addition, underlying rate increases have accelerated to an extent that they exceeded our forecast,” he said.

“That said, at January 1 we continued our proactive management of our general liability book. We have reduced on programs where we saw greater exposure to loss trends,” he said, characterizing the prospective changes to earned premium as relatively small—and likely to be offset by increased rate over the next few years.

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Marra likewise reported that RenaissanceRe kept the majority of its casualty portfolio at the Jan. 1 renewal but reduced lines on some treaties where exposure to loss inflation is greatest.

“Insurers made good progress in the quarter by accelerating rate increases and improving their claims handling and defense against an aggressive plaintiffs bar. We are optimistic insurers will continue to improve in 2025, which should have a positive effect on the profitability of future underwriting years while also benefiting prior-year claims,” he said.

“Casualty business needs to be managed over a 10-year cycle. While we aim to generate an underwriting profit every quarter in casualty and specialty, this quarter we reported a small loss. This was from our current accident year loss ratio and is within the range of potential volatility that we may experience,” he said.

CFO Qutub also noted that the current accident year loss ratio “ticked up through the year as we prudently increased our initial loss ratios to reflect trend in general liability.”

The CEO and CUO said they are comfortable with the loss reserve position for the Casualty/Specialty segment overall, with O’Donnell pointing out that the segment had favorable development for both the quarter and the year. Marra and O’Donnell both pointed to the benefits of a diversified portfolio in support of assessment of loss reserve adequacy.

That didn’t sit well with analysts who wondered why for prior years on its casualty insurance business this quarter, but RenaissanceRe did not.

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Why are you booking current accident year higher and not worried about prior years, they asked using different words at different times.

“Thinking about where the reserves are really requires us to go back to think about the underwriting as well,” said O’Donnell. “From an underwriting perspective, within GL we are targeting what we believe to be the best accounts” and avoiding problematic business. “So, we’ve been underweight in auto, and we reduced our excess casualty portfolio several years ago,” he said.

“Everything we’re seeing on the underwriting side adds comfort to where we are with the portfolio decisions we’ve made and the way we’ve reserved each class,” Marra added. “At 1/1, we did engage with customers, and we got a lot more information on what they’re seeing, how they’re managing their claims. [We’re] very optimistic that rates are improving. That will lead to improvements, but that will take time, and we’ll wait for the business to season for that to come through before we reflect that in what we’re booking.”

“But the rate they’re getting and then the way that they’re managing claims is definitely a differentiator, which will lead to improvements in the future,” Marra said.

O’Donnell also referred to RenaissanceRe’s track record of “taking bad news quicker than good news.”

“We don’t book where our clients book. So, what [you] see in the market doesn’t necessarily mean that we’re going to see that as well,” he noted. “Nothing we’re seeing on the underwriting side or out in the public domain gives us any more concern about where we are,” he said, reiterating that RenaissanceRe’s assumed loss trend for GL is below the level of current rate hikes.

As to the conservatism on the current accident year, O’Donnell framed it as just that. “We’re adding a buffer of concern to the loss ratio because we need to make sure that the affirmative behavior we’re seeing today persists,” he said. “Ultimately, if the markets continue to exhibit the behavior [we’ve seen, then] that will come back [as] prior-year favorable” development over time, he said.

This in Å˽ðÁ«´«Ã½Ó³»­ Journal’s sister publication, .

Related:

• Everest Group Boosts Casualty Loss Reserves $1.7 Billion

Topics Catastrophe Natural Disasters Wildfire Reinsurance Property