RenaissanceRe Holdings Ltd. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Amounts are U.S. dollars in millions, except per-share data and ratios. RenaissanceRe provides reinsurance and insurance, including catastrophe, specialty and Lloyd’s business. The 2015 comparison includes Platinum only from its March 2, 2015 acquisition date, so year-to-date comparisons are not fully like-for-like.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $442.5 | $358.2 | $1,373.9 | $1,137.7 |
| Net premiums earned | $346.5 | $362.4 | $1,051.5 | $1,039.0 |
| Net investment income | $51.4 | $28.3 | $134.4 | $106.6 |
| Net realized and unrealized investment gains (losses) | $59.9 | $(41.1) | $191.3 | $(26.1) |
| Net income | $188.1 | $112.3 | $538.8 | $416.4 |
| Net income available to common shareholders | $146.8 | $75.5 | $411.1 | $316.6 |
| Diluted earnings per common share | $3.56 | $1.66 | $9.71 | $7.19 |
| Underwriting income | $112.9 | $129.7 | $281.6 | $354.7 |
| Combined ratio | 67.4% | 64.2% | 73.2% | 65.9% |
| Operating cash flow | — | $370.0 | $162.1 |
The combined ratio is below 100% in both periods, indicating underwriting profitability before investment income. Q3 annualized return on average common equity was 13.5%; nine-month return was 12.6%. Book value per common share was $107.10 at September 30, and book value plus accumulated dividends was $123.51, up 9.0% from year-end 2015.
Balance sheet, debt and liquidity
- At September 30, total assets were $12,659.5; total investments were $9,214.6; cash and cash equivalents were $493.3.
- Claims reserves were $2,861.1 and unearned premiums were $1,434.1. Total liabilities were $6,687.2; shareholders’ equity attributable to RenaissanceRe was $4,807.8, with $1,164.6 of redeemable noncontrolling interests.
- Balance-sheet debt was $951.6, versus $960.5 at December 31, 2015. The company also reported a $250.0 undrawn revolving credit facility; its capital-resources table shows $1,201.6 including that undrawn facility. Operating cash flow was offset by $410.6 of financing outflows, principally $309.4 of share repurchases and dividends.
- Cash decreased $13.6 over the nine months. The company said operating subsidiaries had adequate capital and liquidity; the holding company depends substantially on subsidiary dividends, which are subject to regulatory limits. The group’s Bermuda capital ratio exceeded the BMA target capital level.
Material changes and drivers
- Investment results drove earnings growth. Q3 total investment result was $111.2 versus a $13.0 loss a year earlier; the nine-month result was $325.2 versus $79.6. Q3 gains included $45.2 of unrealized gains on trading equities. Year-to-date gains included $125.5 of unrealized gains on trading fixed maturities, associated mainly with lower Treasury yields, as well as equity gains. These results are market-sensitive and not necessarily recurring.
- Underwriting income declined. Q3 underwriting income fell to $112.9 from $129.7, and the combined ratio worsened to 67.4% from 64.2%, mainly because favorable prior-year reserve development fell to $45.8 from $70.4. For nine months, underwriting income fell to $281.6 from $354.7 and the combined ratio worsened to 73.2% from 65.9%.
- Segment mix shifted. Q3 specialty premiums written rose, but specialty underwriting income declined to $1.3 from $37.2 and its combined ratio rose to 99.2% from 74.5%, largely reflecting reduced favorable reserve development. Catastrophe reinsurance Q3 combined ratio was 20.6%; Lloyd’s improved to 79.1% from 112.3%. For nine months, specialty gross premiums written grew substantially, partly from mortgage reinsurance and Platinum-related business, while specialty underwriting income declined to $16.6 from $81.1.
- Catastrophe losses and reserve releases affected results. Nine-month net underwriting impact from the 2016 Texas weather events and Fort McMurray wildfire was $54.9, reducing common-shareholder net income by an estimated $45.1 and adding 5.6 percentage points to the consolidated combined ratio. Prior-year net reserve development was favorable by $76.6 for nine months, versus $125.6 in 2015.
- Other year-to-date movements: corporate expenses fell to $25.5 from $65.7, primarily because 2015 included substantial Platinum acquisition and integration costs. Income tax shifted from a $54.3 benefit to an $8.0 expense, reflecting U.S. taxable income and prior-year valuation-allowance effects. Net income attributable to redeemable noncontrolling interests increased to $110.9 from $83.0.
Outlook, risks and unusual items
- No specific earnings or premium guidance was provided. Management expected soft reinsurance pricing and abundant capacity to persist, and said it did not expect to maintain the size of its aggregate property-exposed reinsurance book absent changed conditions. It emphasized underwriting discipline and noted increased retrocessional purchases.
- Management expects low interest rates and portfolio composition to constrain investment-income growth in the near term. It also highlighted growing exposure to inflation, interest-rate risk, and unforeseen claims or legal developments as longer-tail casualty and specialty business expands.
- As a subsequent event, the company preliminarily estimated Hurricane Matthew would have an approximately $75.0 net negative impact in Q4 2016. The estimate is uncertain and may change materially, including because of delayed claims information, Florida assignment-of-benefits practices, possible unmodeled flood exposure and reinsurance recoveries.
- Other principal risks include catastrophe frequency and severity, reserve estimation, counterparty recoveries, competition and pricing, regulatory and tax changes, currency movements, and the execution and integration of strategic initiatives. The filing reported no material changes to previously disclosed legal proceedings, risk factors, contractual obligations or market-risk disclosures.
- The company expected to reorganize segment reporting into “Property” and “Casualty and Specialty,” subject to completion of systems work and controls testing. It also disclosed that Renaissance Reinsurance had a mandatory capital-contribution obligation to Top Layer Re of up to $50.0 if specified loss conditions occur.
Most important facts for investors to verify
- Subsequent claims emergence and final net cost of Hurricane Matthew versus the preliminary $75.0 estimate.
- Whether favorable prior-year reserve development continues, particularly in specialty and casualty lines, and the adequacy of reserves for longer-tail business.
- How much reported earnings depend on volatile realized and unrealized investment gains, and the effect of interest rates and equity-market movements.
- Whether specialty growth can produce acceptable underwriting returns amid soft pricing, higher ceding commissions and increased retrocession costs.
- Available holding-company liquidity after share repurchases and dividends, including subsidiary dividend restrictions, capital requirements and the distinction between outstanding debt and undrawn credit capacity.