Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based provider of property catastrophe and specialty reinsurance and insurance, including business written through Lloyd’s and managed ventures. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Gross premiums written | $511.5m | $703.2m | $1,216.8m | $1,338.6m |
| Net premiums earned | $260.4m | $291.9m | $547.0m | $563.1m |
| Underwriting income | $99.7m | $113.4m | $251.0m | $286.4m |
| Combined ratio | 61.7% | 61.2% | 54.1% | 49.2% |
| Net investment income | $34.5m | $26.2m | $73.5m | $69.4m |
| Net realized and unrealized investment gains (losses) | $27.1m | ($69.5m) | $42.1m | ($55.3m) |
| Net income attributable to RenaissanceRe common shareholders | $120.8m | $26.8m | $271.8m | $217.3m |
| Diluted earnings per common share | $2.95 | $0.60 | $6.52 | $4.83 |
- Q2 income from continuing operations before taxes was $162.2m, versus $45.9m a year earlier. Six-month income before taxes was $361.8m, versus $271.6m.
- Q2 total investment result, including net investment income, realized and unrealized gains and available-for-sale investment changes, was $61.6m versus a loss of $44.6m. For the six months it was $115.3m versus $6.8m.
- Q2 catastrophe reinsurance underwriting income was $82.4m (combined ratio 48.2%); specialty reinsurance income was $11.3m (78.9%); Lloyd’s recorded a $0.6m underwriting loss (101.3%). Six-month segment combined ratios were 34.2%, 77.1% and 97.2%, respectively.
- At June 30, total assets were $8.52bn, total investments $6.71bn, cash and equivalents $294.5m, claims reserves $1.55bn, and debt $249.5m. Shareholders’ equity attributable to RenaissanceRe was $3.84bn. Total liabilities were $3.66bn, with $1.02bn of redeemable noncontrolling interests reported separately.
- Six-month operating cash flow was $173.4m, investing cash flow $209.1m, and financing cash outflow $493.4m; cash declined $113.6m from year-end to $294.5m.
- Six-month capital resources were $4.34bn, including $250m of 5.75% senior notes due 2020 and a $250m undrawn revolving credit facility. The company reported $571.4m of letters of credit outstanding under all facilities.
Material changes versus the prior comparable period
- Common-shareholder earnings rose substantially, chiefly because investment results improved by $106.2m in Q2 and $108.5m in the first half. Management attributed the improvement largely to yield-curve flattening, compared with steepening in 2013, and higher average invested assets.
- Underwriting income declined $13.7m in Q2 and $35.4m in the first half. Catastrophe premiums fell amid softer risk-adjusted pricing and underwriting selectivity; catastrophe ceded premiums also increased as the company bought more retrocessional protection, including Florida windstorm cover.
- Q2 claims were lower partly because the 2013 European floods and U.S. tornadoes did not recur. Prior-year reserve releases were $33.8m for the first half, down from $64.5m in 2013; management cautioned reserve estimates may change materially.
- Net income attributable to noncontrolling interests increased to $36.1m in Q2 and $78.8m for six months, principally reflecting higher DaVinciRe profitability and RenaissanceRe’s reduced ownership share.
- During the first half, the company repurchased 3.4m common shares for $314.5m at an average $93.53 per share. The board renewed a $500m repurchase authorization in May; $500m remained available at June 30.
Outlook, risks and unusual items
- No numerical earnings or premium guidance was provided. Management expected near-term investment-income growth to remain constrained by low interest rates and said it did not expect reinsurance market conditions to improve near term absent large or unforeseen events.
- Management described abundant traditional and alternative capital, softening risk-adjusted catastrophe pricing, and demand growth that may lag capital supply. It emphasized disciplined underwriting, while noting it cannot assure that it will maintain the size or quality of its portfolio.
- Catastrophe exposure, reserve uncertainty, long-tail specialty claims, inflation, investment-market movements, counterparty and retrocessionaire performance, and regulatory or tax changes are key risks. Management also cited possible economic weakness and uncertainty around Florida and government-backed catastrophe and flood programs.
- Q2 included a $6.2m release of profit commissions following commutations of several former insurance-segment quota-share agreements. Corporate expenses fell to $4.0m from $21.5m, principally because 2013 senior-management-transition costs did not recur.
- After quarter-end, the company sold part of its DaVinciRe holding for $38.9m; ownership declined from 26.5% at June 30 to 23.4% effective July 1. Trupanion’s July IPO produced a subsequent observable value of $25.1m for the company’s shares at July 28; those shares were subject to a lock-up through January 14, 2015.
- The syndicated letter-of-credit commitment was reduced to $100m effective June 30, from $250m at the start of the year, following reassessment of collateral needs. The company stated that no individual pending litigation was expected to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much earnings growth reflects recurring underwriting and investment income versus mark-to-market investment gains and nonrecurring items.
- Whether softer catastrophe pricing, reduced written premiums and increased retrocession costs persist, and how these affect underwriting returns and exposure mix.
- Whether favorable reserve development continues and how estimates for catastrophe and specialty claims evolve, particularly for older large events.
- The valuation and liquidity of Level 3 and other illiquid investments, including private equity partnerships, and the effect of market movements on reported earnings and capital.
- Capital, liquidity and cash needs after share repurchases, DaVinciRe ownership changes, collateral requirements and potential catastrophe losses.