It was the best of times, it was the worst of times. Actually, it was mostly the best of times, at least until another major storm hits.

In the first quarter of 2007, reinsurer RenaissanceRe's (NYSE:RNR) operating income fell roughly 5% to $187 million, because of a 12-point increase in the loss ratio due to the windstorm Kyrill. However, net income and book value both increased by about 6%, thanks to increases in investment income and realized investment gains (see our Fool by Numbers for a breakdown).

As we saw atMontpelier Re (NYSE:MRH), net investment income showed a sharp gain, thanks to a higher level of invested assets and a more favorable interest rate environment. Compared with last year, invested assets were up about 15%. The lack of any major catastrophes in the past year means that reinsurers like RenRe don't have to pay out much in claims, which boosts invested assets and investing income. Growth in hedge and private equity fund returns also accounted for about $10 million of RenRe's $27 million increase in net investment income.

In the earnings call, management noted that so far, U.S. wind catastrophe pricing looks like it is holding up, albeit down from last year's peak pricing. However, specialty reinsurance was soft, and the company is trying to walk the line between staying disciplined and turning away less attractive, but still adequately priced, business.

All in all, it was a decent quarter. Comparisons with last year are tough, because pricing was at a peak after the 2005 hurricanes. However, most reinsurers are able to make up for a slight softening in this year's pricing by increasing investment income. It's also encouraging that the memories of 2005's shocking catastrophe losses linger and pricing has stayed rational, which should help RenRe have another solid year, absent any major catastrophes.

Montpelier Re is a Motley Fool Hidden Gems recommendation and a Stock Advisor recommendation. Try any one of our investing services free for 30 days.

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Fool contributor Emil Lee is an analyst and a disciple of value investing. He owns shares in Montpelier Re. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.

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