RENAISSANCERE HOLDINGS LTD. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. RenaissanceRe provides property, casualty and specialty reinsurance and insurance. Unless stated otherwise, amounts are U.S. dollars.
Business context
The results include the Tokio Millennium Re (TMR) Group Entities from their March 22, 2019 acquisition date; Q2 was the first full quarter reflecting TMR. Accordingly, year-over-year growth comparisons include acquired business and are not fully like-for-like.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Gross premiums written | $1,476.9m | $977.3m | $3,041.2m | $2,137.0m |
| Net premiums earned | $911.5m | $429.4m | $1,461.5m | $869.7m |
| Underwriting income | $170.8m | $226.6m | $324.9m | $356.2m |
| Net investment income | $115.8m | $71.4m | $197.3m | $127.8m |
| Realized and unrealized investment gains (losses) | $194.0m | $(17.9)m | $364.6m | $(100.0)m |
| Net income available to common shareholders | $367.9m | $191.8m | $641.6m | $248.5m |
| Diluted earnings per share | $8.35 | $4.78 | $14.81 | $6.21 |
| Combined ratio | 81.3% | 47.2% | 77.8% | 59.0% |
Premiums written rose 51% in Q2 and 42% year to date, reflecting TMR, expanded participation, new business and rate improvements. Common shareholder income increased, but included substantially higher investment gains: management attributed the gains principally to fixed-income performance as interest rates declined, equity returns and investment-related derivatives. Underwriting income fell year over year despite premium growth; the comparison was affected by unusually large favorable reserve releases related to 2017 catastrophe losses in 2018.
Q2 Property underwriting income was $151.7m, with a 64.3% combined ratio; Casualty and Specialty income was $19.0m, with a 96.1% combined ratio. The six-month combined ratios were 57.5% and 97.2%, respectively. Q2 annualized return on average common equity was 28.9%; six-month annualized return was 26.4%. Book value per common share plus accumulated dividends increased 7.6% during Q2 and 15.1% from year-end to $139.17.
Cash, balance sheet and capital
- Operating cash flow was $784.0m for the first six months, versus $349.1m in 2018. Cash and cash equivalents declined $437.3m from year-end to $670.6m. Investing cash outflow was $2.077bn, including $276.2m net cash paid for TMR; financing cash inflow was $856.2m.
- Total investments were $16.388bn at June 30, up from $11.886bn at year-end; total assets were $26.087bn versus $18.676bn. The acquisition and third-party capital activity contributed to the balance-sheet expansion.
- Debt carrying value was $1.383bn, up from $991.1m. The company issued $400m of 3.6% notes due 2029; proceeds repaid a $200m revolving-credit-facility balance used in part to fund the acquisition. No amount was drawn under the revolving facility at June 30.
- Shareholders’ equity attributable to RenaissanceRe was $5.913bn. Reinsurance recoverables were $2.865bn; 59.4% were fully collateralized and 37.6% were due from reinsurers rated A− or higher. Management reported statutory capital above applicable minimums.
Material changes, outlook and risks
- TMR acquisition: Closed March 22 for aggregate consideration of $1.564bn, including a $500m special dividend to Tokio; net purchase price was $1.064bn. The filing reports $40.0m of TMR-related corporate costs for the first half. The purchase included a reserve-development agreement covering substantially all adverse development on specified acquired reserves, subject to terms and conditions.
- Reserves: First-half prior-year reserve development was $4.1m favorable, versus $187.6m favorable in 2018. Q2 2018 benefited from a $92.0m underwriting improvement tied to revised estimates for 2017 large-loss events; this materially flatters the comparison. Management notes continued uncertainty in estimates for catastrophe losses and reinsurance recoveries.
- Market commentary: Management described generally stable January renewals and some improved terms for loss-affected business, while saying June rate increases generally did not offset exposure growth, social inflation and prior years of rate declines. It sought to keep southeast windstorm exposure relatively flat and reduce modeled net exposure to Florida. Casualty and specialty pricing was described as generally favorable, but underlying loss costs continued to rise. No quantitative earnings or revenue guidance is provided.
- Investment and operating risks: Management expects declining rates could reduce yields on new and reinvested funds, notwithstanding current-period gains. Other stated risks include catastrophe frequency and severity, reserve estimation, inflation and social inflation, counterparty and retrocession recoverability, competition and ample industry capital, currency movements, and integration of TMR. Alternative capital supply may affect future market conditions.
- Contingencies and controls: The company reported no material change in previously disclosed legal proceedings or risk factors and said no individual current litigation or arbitration was likely to materially harm its financial condition, business or operations. A potential Top Layer Re capital contribution of up to $50m is disclosed if a loss reduces its capital below a specified level. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much premium growth and earnings improvement are attributable to TMR versus organic growth, and whether integration costs and expected benefits develop as planned.
- Underlying underwriting profitability after separating acquisition effects, investment gains and the unusually favorable 2018 catastrophe-reserve development.
- Subsequent development of 2017–2018 catastrophe claims, casualty reserves, and collection of reinsurance recoverables, including the terms and effectiveness of TMR’s reserve-development protection.
- Renewal pricing and exposure trends, especially Florida and other catastrophe-exposed business, and the impact of social inflation on casualty results.
- Investment portfolio sensitivity to rates and markets, liquidity available for claims and collateral needs, and compliance with debt covenants and regulatory capital requirements.