RenaissanceRe Holdings Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. RenaissanceRe is a Bermuda-based global provider of property, casualty and specialty reinsurance and insurance. Unless otherwise stated, financial amounts below are in U.S. dollars; figures are rounded to millions.
Financial results and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Gross premiums written | $977.3 | $827.4 | $2,137.0 | $1,749.5 |
| Net premiums earned | $429.4 | $382.3 | $869.7 | $748.3 |
| Underwriting income | $226.6 | $109.7 | $356.2 | $152.1 |
| Combined ratio | 47.2% | 71.3% | 59.0% | 79.7% |
| Net investment income | $71.4 | $54.2 | $127.8 | $108.5 |
| Realized and unrealized investment gains (losses) | ($17.9) | $58.1 | ($100.0) | $101.5 |
| Net income attributable to RenaissanceRe | $197.4 | $176.7 | $259.7 | $274.7 |
| Net income available to common shareholders | $191.8 | $171.1 | $248.5 | $263.5 |
| Diluted EPS | $4.78 | $4.24 | $6.21 | $6.47 |
- Q2: Total revenues were $479.2 million and net income was $251.9 million. Annualized return on average common equity was 18.6%. Book value per common share was $104.56; book value plus accumulated dividends was $123.22, up 4.6% from March 31.
- Six-month underwriting: Property produced $340.9 million of underwriting income; Casualty and Specialty produced $15.5 million. Their combined ratios were 20.6% and 96.5%, respectively.
- Cash flow, six months: Operating activities provided $349.1 million, investing activities used $1,421.9 million and financing activities provided $262.2 million. Cash and equivalents fell $813.1 million to $548.5 million. Investing outflows included net purchases of short-term investments ($1,062.4 million), fixed maturities ($200.8 million) and other investments ($111.9 million).
- Balance sheet at June 30: Total assets were $17.0 billion; total liabilities were $10.7 billion; redeemable noncontrolling interests were $1.5 billion; and shareholders’ equity attributable to RenaissanceRe was $4.9 billion. Investments totaled $10.7 billion, including $7.4 billion in fixed maturities and $2.0 billion in short-term investments.
- Debt and capital: Debt was $990.4 million, substantially unchanged from year-end 2017. The company issued $250 million of 5.750% Series F preference shares in June, receiving net proceeds of $242.4 million. It paid $26.5 million in common dividends and $11.2 million in preference dividends during the half year; no common shares were repurchased.
- Liquidity resources: The revolving credit facility had no borrowings. Outstanding U.S.-dollar credit facilities, principally letters of credit and the Lloyd’s Funds at Lloyd’s facility, totaled $454.3 million issued or drawn. Cash and investments are subject to collateral, trust and regulatory requirements; $4.9 billion of cash and investments were on deposit or in trust for counterparties at June 30.
Changes versus comparable periods
- Q2 gross premiums written rose 18.1%; six-month gross premiums written rose 22.1%. Growth reflected expansion in both Property and Casualty and Specialty, including selected new and expanded programs.
- Underwriting income increased substantially, while investment results weakened. Q2 total investment result declined to a $53.5 million gain from $112.3 million; the six-month result fell to a $27.8 million gain from $210.0 million. The filing attributes much of the change to rising interest rates and resulting fixed-income losses, as well as lower equity investment gains.
- Common-shareholder income increased 12.1% in Q2 but decreased 5.7% for the six-month period. Six-month diluted EPS declined from $6.47 to $6.21.
- Six-month prior-year reserve development was $187.6 million favorable, compared with $16.1 million favorable in 2017. The 2018 figure included $170.7 million favorable Property development, chiefly reductions in estimated losses from 2017 catastrophe events, and $16.8 million favorable Casualty and Specialty development.
Outlook, commentary and risks
- Management reported that January and June 2018 property renewals were somewhat favorable, but rate improvements were less broad and lower than many market expectations. It expects ample industry capital and relatively flat demand, and cautioned that favorable conditions may not persist.
- Casualty and Specialty markets had generally favorable rate trends and stable terms through the period, but capacity remained abundant. Management intends to maintain underwriting discipline and said it cannot assure growth or sustained favorable market conditions.
- Management highlighted that the $2017 catastrophe-event reserve revisions materially benefited results: decreases in estimated net losses increased Q2 underwriting result by $92.0 million and six-month underwriting result by $125.8 million, before the associated noncontrolling-interest effect. Management emphasized that estimates remain uncertain and may change materially as claims develop.
- Key exposures include catastrophe frequency and severity, reserve estimation, reinsurance recoverability and counterparty credit, investment-market and interest-rate movements, inflation, foreign exchange, competitive and soft-market conditions, and regulatory and tax changes. The filing also discusses uncertainty around U.S. tax reform, NFIP reauthorization and Florida assignment-of-benefits issues.
- Other items: the company terminated its National Australia Bank letter-of-credit agreement in March, stating remaining facilities were sufficient. Mona Lisa Re’s remaining notes were redeemed after quarter-end, on July 6, 2018. Management reported no material change in previously disclosed legal proceedings or risk factors, and stated disclosure controls were effective at June 30.
- The filing provides market commentary, not quantified company earnings or premium guidance. Management notes that catastrophe-exposed results can be volatile and interim results may not indicate full-year performance.
Important facts for investors to verify
- How much of underwriting income and the very low combined ratio depends on favorable development of 2017 catastrophe reserves, and whether subsequent claim experience supports those estimates.
- The adequacy and sensitivity of catastrophe, casualty and specialty reserves, including the remaining uncertainty around 2017 events and reinsurance recoveries.
- The drivers and possible duration of investment losses as interest rates change, alongside the increase in short-term investments and the portfolio’s liquidity and collateral constraints.
- Whether premium growth and segment profitability are sustainable given abundant market capacity, competitive pricing and the potentially nonrecurring nature of bespoke programs.
- Reinsurance counterparty quality and collectibility: recoverables were $1.5 billion, with a $7.8 million valuation allowance; 48.2% was fully collateralized and 50.6% was recoverable from reinsurers rated A− or higher.
- The effect of capital requirements, subsidiary dividend restrictions, outstanding letters of credit and the new preference-share financing on holding-company liquidity and shareholder returns.