RenaissanceRe Holdings Ltd. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise indicated. RenaissanceRe provides property catastrophe and specialty reinsurance, insurance, and related services.
Financial results and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenues | $488.3 | $438.6 | $1,291.2 | $1,271.1 |
| Net premiums earned | $309.4 | $296.0 | $914.0 | $977.6 |
| Net investment income | $60.9 | $106.8 | $155.7 | $263.2 |
| Net realized and unrealized fixed-maturity gains | $98.0 | $16.8 | $217.7 | $57.8 |
| Net income | $252.8 | $306.9 | $711.8 | $781.6 |
| Net income available to common shareholders | $204.8 | $258.6 | $580.0 | $627.1 |
| Diluted earnings per common share | $3.70 | $4.12 | $10.04 | $10.03 |
| Underwriting income | $84.6 | $167.7 | $363.0 | $512.6 |
| Combined ratio | 72.6% | 43.3% | 60.3% | 47.6% |
| Operating cash flow | — | $496.4 | $452.6 |
- Underwriting: Q3 net claims and claim expenses were $125.6 million, versus $38.6 million a year earlier. The Q3 combined ratio rose to 72.6%, principally reflecting the New Zealand earthquake; the ratio below 100% indicates underwriting profit before investment income. For the first nine months, claims were $252.4 million, versus $191.6 million.
- Balance sheet at September 30: Total assets were $8.64 billion; total investments were $6.58 billion; cash and cash equivalents were $351.8 million; claims reserves were $1.71 billion; debt was $549.1 million; and shareholders’ equity was $3.97 billion. Total assets were $7.80 billion and debt was $300.0 million at December 31, 2009.
- Capital and shareholder returns: Book value per common share was $60.57, up from $51.68 at year-end 2009. Book value plus accumulated dividends was $70.20. The company repurchased 7.4 million shares for $411.3 million during the first half; it made no program repurchases in Q3. The board authorized a $500 million aggregate repurchase program, which remained available. Common dividends were $0.25 per share in each 2010 quarter.
- Debt and liquidity: The company issued $250 million of 5.75% senior notes due 2020 in March. Debt also included $100 million of 5.875% notes due 2013 and $200 million borrowed under DaVinciRe’s revolving facility. A $150 million RenaissanceRe revolver was unborrowed at quarter-end. Letters of credit outstanding across facilities totaled $753.4 million. Operating cash flow was $496.4 million; investing cash flow was negative $37.2 million and financing cash flow was negative $367.8 million. Cash increased by $91.1 million to $351.8 million.
- Investment portfolio: Fixed maturities and short-term investments had an average credit rating of AA, average duration of 3.0 years, and weighted average yield to maturity of 1.7% at quarter-end. The comparable year-end yield was 2.3%.
Material changes and notable items
- Q3 common-shareholder income fell $53.9 million year over year despite higher reported revenues. Underwriting income declined $83.1 million and investment income declined $45.9 million; higher fixed-maturity gains and a $15.8 million gain on the ChannelRe sale partly offset these declines.
- For the first nine months, common-shareholder income declined $47.1 million. Underwriting income decreased $149.6 million, partly offset by a $72.8 million net improvement in investment results, including higher fixed-maturity gains and lower impairment charges.
- Q3 gross premiums written fell to $126.7 million from $202.4 million. Management cited softer market conditions, reduced participation in certain business, and updated crop acreage reports. Nine-month gross premiums written fell 7.5% to $1.53 billion, principally reflecting lower catastrophe premiums amid softer pricing and terms.
- Three catastrophe events—the Chilean earthquake, European windstorm Xynthia, and New Zealand earthquake—had an estimated combined net negative impact of $196.5 million for the first nine months, after reinstatement premiums, profit commissions, Top Layer Re effects, and DaVinciRe noncontrolling interest. The New Zealand event alone had a reported Q3 net negative impact of $73.6 million; its underwriting-result impact was $80.2 million before the other stated adjustments.
- Prior-year reserve development was favorable by $285.1 million for the first nine months, compared with $169.4 million in 2009. Management attributed this to lower-than-expected claims emergence and reserve estimate changes. The filing notes that actual ultimate claims may differ materially from estimates.
- Fixed-maturity investments classified as trading increased substantially as the company shifted its investment accounting classification. Unrealized gains on trading securities are recognized in current earnings, contributing $63.1 million in Q3 and $116.0 million for the nine-month period; management expects this classification mix to increase earnings volatility.
- Insurance segment underwriting income improved to $19.8 million for the nine months from a $28.1 million loss, helped by favorable crop-year development. The segment also recorded a $6.8 million charge related to discontinued software-related development and severance.
- The company sold its entire ChannelRe ownership for $15.8 million in July and reported no continuing ownership or contractual obligation to provide ChannelRe capital or financial support.
Outlook, risks, and contingencies
- Management expects lower interest rates and the portfolio’s lower yield profile to pressure net investment income for the foreseeable future. It does not provide numerical earnings or premium guidance.
- Management described reinsurance and insurance results as inherently volatile due to catastrophe frequency and severity. Loss estimates for the 2010 earthquakes and windstorm remain preliminary and subject to potentially material revision.
- Management expects competitive conditions to remain challenging, with ample industry capital and softer pricing, particularly in catastrophe and primary insurance markets. It may reduce business written where risk-adjusted pricing is unattractive.
- Risks include reserve estimation uncertainty; catastrophe exposure; investment valuation, credit, and market risk; counterparty nonperformance; low yields; inflation; and economic weakness. Management also highlighted potential impacts from U.S. regulatory and legislative changes, including Dodd-Frank, proposed catastrophe and flood insurance measures, and crop-insurance program changes.
- At September 30, $1.4 billion of cash and investments were on deposit with or held in trust for counterparties, including letter-of-credit arrangements. RenaissanceRe also provided $220.2 million in guarantees to weather and energy counterparties. The filing reports no material changes in previously disclosed legal proceedings and no individual ordinary-course litigation expected to materially adversely affect the company.
- Management stated that disclosure controls and procedures were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Subsequent catastrophe loss reports and reserve development, particularly for the Chilean and New Zealand earthquakes, Xynthia, and the Deepwater Horizon event.
- The extent to which $285.1 million of favorable prior-year reserve development is repeatable, including the effect of actuarial assumption changes.
- How much earnings depend on trading-security mark-to-market gains, and how investment returns respond to low interest rates and changing credit spreads.
- Premium trends and pricing adequacy across catastrophe reinsurance, specialty, Lloyd’s, and crop insurance, including the effect of reduced participation and reinsurance costs.
- Liquidity and capital availability after share repurchases, dividends, DaVinciRe redemptions, debt issuance, and collateral or letter-of-credit requirements.
- Any material changes in crop-insurance estimates, counterparty recoverability, or regulatory developments affecting Bermuda-based reinsurance and U.S. insurance operations.