RenaissanceRe Holdings Ltd. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where relevant. Amounts are U.S. dollars.
Business context
Bermuda-based global reinsurer and insurer focused on property catastrophe, specialty reinsurance and Lloyd’s business. The company reports Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments; its strategy emphasizes risk selection, customer relationships and capital management. Catastrophe Reinsurance accounted for 69.7% of gross premiums written, Specialty Reinsurance 16.2% and Lloyd’s 14.1%.
Financial performance and position
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Gross premiums written | $1,605.4 million | $1,551.6 million |
| Net premiums earned | $1,114.6 million | $1,069.4 million |
| Underwriting income | $626.7 million | $451.5 million |
| Combined ratio | 43.8% | 57.8% |
| Net investment income | $208.0 million | $165.7 million |
| Realized and unrealized investment gains | $35.1 million | $163.1 million |
| Net income available to common shareholders | $665.7 million | $566.0 million |
| Diluted earnings per common share | $14.87 | $11.23 |
| Operating cash flow | $795.7 million | $716.9 million |
- Return on average common equity was 20.5%, versus 17.7%. Book value per common share rose to $80.29; book value plus accumulated dividends increased 19.5% to $93.41.
- Year-end total assets were $8.18 billion and total investments were $6.82 billion. Cash and cash equivalents were $408.0 million.
- Gross claims reserves were $1.56 billion, including $1.46 billion net of $101.0 million reinsurance recoverables. Prior-year reserve development reduced incurred claims by $144.0 million and increased reported income.
- Debt was $249.4 million, all associated with 5.75% senior notes due 2020. The company also had $584.4 million of letters of credit outstanding and a $250 million undrawn revolving credit facility.
- Bermuda insurance subsidiaries reported statutory capital and surplus of $3.2 billion against a $562.1 million minimum solvency margin. Management expected principal Bermuda insurers to exceed target capital requirements, subject to final regulatory filings.
Material changes versus prior period
- Underwriting income increased $175.3 million, chiefly as catastrophe claims were lower than in 2012. The 2013 combined ratio improved to 43.8% from 57.8%.
- Investment results were weaker overall: investment income rose, but realized and unrealized gains fell substantially from 2012 amid rising interest rates and less favorable fixed-income returns. An investment in Essent contributed significant gains; its year-end fair value was $121.1 million.
- Gross premiums written grew 3.5%. Specialty premiums increased 23.6% and Lloyd’s premiums increased 41.6%, while catastrophe premiums declined 5.2%, reflecting lower risk-adjusted pricing and selected non-renewals.
- Segment underwriting results varied: Catastrophe Reinsurance earned $558.5 million; Specialty Reinsurance earned $73.8 million; Lloyd’s recorded a $5.0 million underwriting loss and a 102.9% combined ratio.
- Book value per common share increased from $68.14 to $80.29. The company repurchased 2.5 million shares for $207.9 million during 2013.
Outlook, risks and unusual items
- Management anticipated continued pricing pressure through 2014 in catastrophe markets, with supply from traditional and alternative capital expected to exceed demand. It cautioned that underwriting discipline could limit premium growth. No earnings or premium guidance was provided.
- Catastrophe losses, reserve uncertainty and climate-related changes in event frequency or severity are major risks. Reserve estimates are management point estimates, not actuarial ranges; large-event and specialty claims may develop materially differently from current estimates.
- Broker concentration is significant: three brokers generated 88.2% of Catastrophe and Specialty segment premiums. The company also cites customer and counterparty concentration, reinsurer collectability, competition from alternative capital, and investment-market risks.
- In October 2013, the company sold its weather and energy risk unit, REAL, for $60.0 million cash and recorded an $8.8 million loss on sale. The operations are presented as discontinued; Munich agreed to indemnify RenaissanceRe for specified guarantees, which totaled $50.8 million at year-end.
- CEO Neill Currie’s announced transition to Kevin O’Donnell took effect July 1, 2013. The transition generated $16.8 million of 2013 expense.
- The Board increased the quarterly common dividend to $0.29 per share in February 2014 and renewed a $500 million share-repurchase authorization. Subsequent to year-end through February 19, 2014, the company repurchased 2.0 million shares for $185.8 million.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. The company said no individual pending litigation was likely to have a material adverse effect.
Important facts for investors to verify
- How much of FY 2013 earnings and book-value growth depended on favorable prior-year reserve releases, and whether catastrophe and specialty reserves remain adequate.
- Whether 2014 pricing pressure and reduced catastrophe premiums affect underwriting returns, renewal volumes or portfolio quality.
- The valuation, liquidity and concentration risks in alternative investments and Essent shares, including Essent’s post-IPO trading performance.
- The collectability and concentration of reinsurance recoverables, broker exposures and other counterparties, plus capacity and collateral available under credit and letter-of-credit facilities.
- Execution and profitability of the growing Specialty and Lloyd’s businesses, and the effects of management transition and REAL-sale guarantees or indemnities.