RenaissanceRe Holdings Ltd. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. RenaissanceRe provides reinsurance and insurance, principally catastrophe and specialty coverage, and manages related joint ventures. Amounts below are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net premiums earned | $259.0 | $294.7 | $805.9 | $857.9 |
| Underwriting income | $104.8 | $151.4 | $355.8 | $437.8 |
| Net investment income | $24.9 | $59.9 | $98.4 | $129.3 |
| Net realized and unrealized investment gains (losses) | $(31.1) | $28.5 | $11.0 | $(26.8) |
| Net income | $103.9 | $229.7 | $465.7 | $513.3 |
| Net income available to common shareholders | $67.8 | $179.7 | $339.6 | $397.0 |
| Diluted earnings per common share | $1.70 | $4.01 | $8.26 | $8.84 |
| Combined ratio | 59.5% | 48.6% | 55.9% | 49.0% |
Q3 common-shareholder income fell $111.9 million year over year, reflecting weaker investment results and lower underwriting income. The investment result (net investment income, investment gains or losses, and available-for-sale unrealized changes) was a $6.5 million loss versus an $88.2 million gain in Q3 2013. Management attributed quarterly fixed-income losses to rising rates and wider credit spreads, and lower alternative-investment returns to weaker equity markets. Nine-month investment results improved to $108.8 million from $95.0 million, but underwriting income declined.
Gross premiums written increased to $201.0 million from $182.6 million in Q3, while net premiums written rose to $159.7 million from $127.2 million. Net premiums earned declined, reflecting lower catastrophe premiums written in prior periods. Q3 underwriting income was led by Catastrophe Reinsurance ($104.1 million); Specialty Reinsurance earned $5.7 million, while Lloyd’s recorded a $5.3 million underwriting loss. The consolidated combined ratio remained below 100%, indicating underwriting profit, but included favorable prior-year reserve development of $25.3 million in Q3. For the first nine months, favorable prior-year development was $59.1 million, versus $71.7 million a year earlier.
At September 30, total assets were $8.36 billion, including $6.73 billion of investments and $300.5 million of cash. Total liabilities were $3.53 billion; claims reserves were $1.53 billion, debt $249.5 million, and redeemable noncontrolling interests $1.09 billion. RenaissanceRe-attributable shareholders’ equity was $3.74 billion. Book value per common share was $85.78; book value plus accumulated dividends was $99.77, up 7.9% from year-end 2013. Debt comprises $250 million of 5.75% senior notes due 2020; the $250 million revolving credit facility was undrawn.
For the nine months, operating cash flow was $393.4 million and investing cash flow was $128.3 million. Financing used $634.1 million, principally including $475.3 million of common-share repurchases and $51.6 million of dividends. Cash declined $107.5 million to $300.5 million. The company repurchased approximately 5.0 million shares for $478.6 million during the period; $365.3 million remained under the renewed $500 million authorization at quarter-end.
Changes, outlook, and risks
- Catastrophe Reinsurance gross premiums written fell 18.8% year to date, which management attributed to softening markets, lower risk-adjusted pricing, disciplined underwriting, and nonrecurring prior-year business. Management said industry capital was abundant and demand growth modest, and did not expect near-term market conditions to improve absent unusually large or unforeseen events. It did not expect to maintain the size of its aggregate book absent changed conditions.
- Specialty Reinsurance premiums grew, but higher current-year claims and expenses reduced underwriting income. Lloyd’s premiums also grew, while its combined ratio was 101.6% year to date. Management noted that quota-share business can carry higher acquisition costs and more frequent attritional losses.
- Management expects low interest rates and the investment portfolio’s composition to constrain investment-income growth in the near term. Catastrophe losses, reserve-estimation uncertainty, inflation, competition and counterparty performance may materially affect results. The filing gives no specific earnings or premium guidance.
- Private-equity valuations use manager estimates and may be subject to reporting lags; final values may differ materially. The company reported $84.2 million of remaining investment commitments. It had $2.12 billion of cash and investments pledged or held in trust for counterparties and regulators.
- The syndicated letter-of-credit commitment was reduced to $100 million; $74.2 million was outstanding under it. The separate bilateral facility had $190.7 million unused at quarter-end. Total letters of credit outstanding under all facilities were $561.7 million. Statutory and regulatory requirements can limit subsidiary dividends and capital transfers.
- There were no material changes to previously disclosed risk factors or legal proceedings; management said no individual pending matter was likely to have a material adverse effect. Controls were assessed as effective at the reasonable-assurance level. After quarter-end through November 3, the company repurchased 358,000 shares for $35.7 million.
Investor verification priorities
- Assess how much reported underwriting profit and book-value growth depended on favorable reserve development, and monitor future reserve revisions, particularly in specialty lines and catastrophe exposures.
- Reconcile investment performance across net investment income, realized and unrealized changes, and available-for-sale changes; review rate, spread, equity-market, and illiquid-asset valuation sensitivity.
- Track catastrophe pricing, premium volumes, ceded protection, and the profitability of quota-share and Lloyd’s business against management’s soft-market outlook.
- Evaluate capital returned through repurchases against liquidity needs, pledged assets, letter-of-credit capacity, regulatory capital constraints, and subsidiary dividend availability.
- Review the complete filing for reserve sensitivities, major event exposures, investment commitments, and developments in tax, regulatory, and Florida-market risks.