Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based global provider of property, casualty and specialty reinsurance and insurance. This Form 10-Q covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. Amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Gross premiums written | $625.7m | $640.3m | $2,762.7m | $2,389.8m |
| Net premiums earned | $531.8m | $547.8m | $1,401.5m | $1,296.1m |
| Total revenues | $629.8m | $634.7m | $1,526.9m | $1,612.4m |
| Net income (loss) | $48.8m | ($703.5m) | $392.9m | ($356.9m) |
| Net income (loss) attributable to common shareholders | $32.7m | ($504.8m) | $281.2m | ($241.3m) |
| Diluted earnings (loss) per common share | $0.82 | ($12.75) | $7.02 | ($6.04) |
| Net investment income | $80.7m | $40.3m | $208.5m | $148.7m |
| Net realized and unrealized investment gains (losses) | $13.6m | $42.1m | ($86.4m) | $143.5m |
| Operating cash flow | — | $888.5m | $601.7m |
Q3 underwriting loss was $29.0m, with a 105.5% combined ratio; the Property segment ratio was 115.0% and Casualty and Specialty was 93.8%. For the first nine months, underwriting income was $327.2m and the combined ratio was 76.7% (Property 58.9%; Casualty and Specialty 95.5%). The nine-month result included $197.0m of favorable prior-year reserve development, including $172.9m in Property, largely from revised estimates of 2017 catastrophe losses.
Financial position and liquidity
- At September 30, total assets were $17.10bn, investments $11.55bn, cash and cash equivalents $453.0m, and short-term investments $2.46bn. Cash declined from $1.36bn at year-end 2017.
- Claims reserves were $4.95bn; reinsurance recoverables were $1.20bn, down from $1.59bn at year-end. Management reported 52.5% of recoverables fully collateralized and 46.4% due from reinsurers rated A- or higher.
- Debt was $990.7m, broadly unchanged from year-end; reported fair value was $980.3m. Total shareholders’ equity attributable to RenaissanceRe was $4.89bn, including $650m of preference shares. Common shareholders’ equity was $4.24bn.
- Operating cash flow was $888.5m, while investing activities used $2.06bn, principally reflecting net purchases of investments. Financing provided $270.8m, including net proceeds of $242.4m from Series F preference shares. Cash ended the period at $453.0m.
- Cash and investments of $5.1bn were on deposit or in trust for counterparties and regulatory purposes. The company reported $447.5m issued or drawn under specified letter-of-credit facilities; its revolving credit facility had no draw. Holding-company liquidity depends substantially on distributions from subsidiaries, which are subject to regulatory limits.
- Book value per common share was $105.21; book value plus accumulated dividends was $124.20, up 6.5% from year-end 2017. The quarterly common dividend was $0.33 per share.
Material changes versus prior comparable periods
- Results rebounded from the exceptionally large 2017 catastrophe losses. Q3 2018 catastrophe events reduced common-shareholder income by an estimated $151.9m, versus $615.1m for the Q3 2017 large-loss events. The 2018 events added 34.4 percentage points to the Q3 combined ratio.
- Nine-month gross premiums written rose 15.6% to $2.76bn, driven by growth in both segments. Q3 gross premiums written declined 2.3%, as Property decreased and Casualty and Specialty increased.
- Investment income improved, but nine-month investment gains turned to losses: fixed-income holdings experienced losses amid rising interest rates, contributing to a $230.0m year-over-year decline in total investment result.
- Acquisition expenses increased to $312.5m for the nine months, while operational expenses declined to $119.4m. The company issued $250m of Series F preference shares and made no common-share repurchases in the period.
Outlook, commentary and risks
- No quantified earnings or underwriting guidance was provided. Management described property and casualty/specialty markets as having ample capacity; it saw some favorable rate and terms trends, particularly for loss-affected business, but cautioned that improvement may not persist. Demand may lag available capital.
- Management’s preliminary estimate for Hurricane Michael is an approximately $100m negative impact on common-shareholder income in Q4 2018. The estimate is uncertain and may change materially as claims information and reinsurance recovery assessments develop.
- On October 30, 2018, after quarter-end, the company announced an agreement to acquire Tokio Millennium Re entities, subject to conditions and regulatory approvals, with closing expected in the first half of 2019. The portfolio represents about $1.3bn of incremental reinsurance premium; RenaissanceRe expects to target about $700m of gross premiums after re-underwriting. Management expects near- to medium-term integration expenses. Completion, renewals, integration and realization of benefits are uncertain.
- Also announced October 30, State Farm agreed to buy 1,947,496 common shares for $250m in a private placement, expected to close in Q4 subject to conditions. The company also closed a minority investment in Catalina on October 10.
- Principal risks include catastrophe severity and frequency, reserve estimation, collection of reinsurance recoverables, market competition and pricing, rising interest rates and investment volatility, inflation and social inflation, counterparty credit, regulatory and tax changes, and Florida assignment-of-benefits loss trends. The company noted that litigation and claim outcomes are uncertain; it did not identify any current individual legal matter likely to materially harm its financial condition, business or operations.
- Management stated disclosure controls were effective at September 30, 2018, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How Hurricane Michael’s estimated $100m Q4 common-income impact changes as claims and recoveries are reported.
- Whether favorable prior-year reserve development—especially the 2017 catastrophe revisions—continues or reverses.
- Underlying underwriting performance excluding catastrophe losses, reserve releases, and the $54.2m of net premiums earned and $41.9m of common income from large non-recurring transactions.
- Investment portfolio exposure to further rate increases and the effect on realized and unrealized losses, income, and liquidity.
- Availability of subsidiary dividends and usable liquidity after considering pledged assets, regulatory capital requirements, and catastrophe claims.
- Regulatory approval, financing, renewal retention, integration costs and expected benefits of the Tokio Millennium Re acquisition, plus closing and dilution effects of the State Farm share issuance.