Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based reinsurance and insurance group specializing in property catastrophe, specialty reinsurance and Lloyd’s business. This Form 10-K reports the fiscal year ended December 31, 2014, with comparisons to 2013 and 2012; it is not a standalone fourth-quarter filing. The company’s principal segments are Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s.
Financial results and key metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Gross premiums written | $1.551 billion | $1.605 billion |
| Net premiums written | $1.068 billion | $1.204 billion |
| Net premiums earned | $1.062 billion | $1.115 billion |
| Underwriting income | $529.4 million | $626.7 million |
| Net investment income | $124.3 million | $208.0 million |
| Net realized and unrealized investment gains | $41.4 million | $35.1 million |
| Net income | $686.3 million | $841.8 million |
| Net income available to common shareholders | $510.3 million | $665.7 million |
| Diluted earnings per common share | $12.60 | $14.87 |
| Combined ratio | 50.2% | 43.8% |
| Return on average common equity | 14.9% | 20.5% |
| Book value per common share | $90.15 | $80.29 |
Book value per share plus accumulated dividends increased 13.7% in 2014, to $104.43. The calendar-year claims ratio was 18.6%, including favorable prior-year reserve development of $143.8 million; the current-accident-year claims ratio was 32.2% and the underwriting expense ratio was 31.6%.
At year-end, total assets were $8.204 billion, total investments were $6.744 billion, cash and cash equivalents were $525.6 million, and shareholders’ equity attributable to RenaissanceRe was $3.866 billion. Gross claims reserves were $1.413 billion, including $1.346 billion net of reinsurance recoverables. Debt was $249.5 million and preference shares totaled $400 million. Outstanding letters of credit were $624.9 million; the $250 million revolving credit facility was undrawn and scheduled to expire in May 2015.
Operating cash flow was $660.7 million, investing activities provided $141.7 million, and financing activities used $694.7 million. Cash increased by $117.6 million during the year. Common-share repurchases totaled $514.2 million for 5.4 million shares; the Board renewed a $500 million repurchase authorization. Common dividends were $1.16 per share for the year.
Material changes versus the prior comparable period
- Net income available to common shareholders declined $155.3 million, or about 23%, and underwriting income fell $97.4 million. Net premiums earned decreased $52.2 million, acquisition expenses rose $19.0 million and current-year net claims increased $26.5 million.
- Gross premiums written fell 3.4%. Catastrophe Reinsurance premiums declined 16.6% to $934.0 million, while Specialty Reinsurance grew 33.6% to $346.6 million and Lloyd’s grew 19.0% to $269.7 million.
- Segment underwriting income was $450.1 million for Catastrophe Reinsurance, $60.7 million for Specialty Reinsurance and $5.8 million for Lloyd’s. Their combined ratios were 23.8%, 76.0% and 97.3%, respectively. Catastrophe results remained strong but underwriting income fell as premiums earned decreased and ceded reinsurance increased; Specialty results faced higher current-year claims and expenses; Lloyd’s moved from an underwriting loss to a modest profit.
- Net investment income fell $83.7 million. Management cited lower returns from private-equity and other investments and the prior-year Essent valuation gains. The total investment result, including realized and unrealized gains and other comprehensive income effects, declined to $164.9 million from $235.1 million.
- Gross reserves decreased from $1.564 billion to $1.413 billion. Prior-year reserve releases increased 2014 net income by $143.8 million, broadly similar to the $144.0 million benefit in 2013.
Outlook, management commentary and risks
- Management reported that abundant traditional and alternative capital continued to exceed demand, putting pressure on risk-adjusted pricing, including during the January 2015 renewal season. It does not expect near-term market conditions to improve absent unusually large or unforeseen events and does not expect to maintain the overall size of its book without changed conditions. Management intends to remain disciplined in underwriting.
- RenaissanceRe agreed to acquire Platinum Underwriters for expected aggregate consideration of approximately $1.9 billion, including a $10-per-share special dividend, 7.5 million RenaissanceRe shares and cash. At the filing date, shareholder approval was pending, with a vote scheduled for February 27, 2015 and an expected closing date of March 2, 2015; completion was not assured. The company anticipated using cash, investment sales and short-term financing, followed by a planned $300 million debt issuance. Platinum had $1.4 billion of claims reserves at December 31, 2014, which would be consolidated upon completion.
- Management cited expected strategic benefits from the acquisition, including expanded products and broker relationships and growth in U.S. specialty and casualty reinsurance. Risks include integration costs and execution, potentially increased long-tail casualty and reserve uncertainty, contract cancellations or non-renewals, additional regulation, financing needs and possible ratings changes. The company had recorded $6.7 million of merger expenses in 2014 and expected total transaction and integration costs could exceed $50 million; a $10 million investment-banking fee was payable upon closing.
- Following the merger announcement, S&P and Fitch affirmed RenaissanceRe ratings with stable outlooks; A.M. Best affirmed ratings but placed them under review with negative implications, and Moody’s affirmed ratings with a negative outlook. A downgrade could affect business retention, borrowing costs and counterparties.
- Key risks include catastrophe frequency and severity, climate-related loss trends, uncertain claims reserves and coverage disputes, competition and soft pricing, dependence on a small number of brokers (three accounted for 89.2% of Catastrophe and Specialty segment gross premiums), and counterparty credit risk. The filing notes that reserve estimates are point estimates and ultimate claims may differ materially; recent catastrophe events and specialty lines carry particular uncertainty.
- Other exposures include investment-market and interest-rate risk, illiquid or model-valued assets, currency and credit risk, regulatory and tax changes, and potential limits on subsidiary dividends. Management reported no individual litigation or arbitration then expected to have a material adverse effect. The independent auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Track the Platinum transaction’s completion, final funding mix, debt issuance, total integration costs and realized strategic benefits.
- Assess whether 2014 earnings and returns remain supported if favorable prior-year reserve development moderates; monitor development of catastrophe and specialty reserves.
- Monitor renewal pricing, premium volume and underwriting discipline, particularly the decline in catastrophe premiums and growth in specialty and Lloyd’s business.
- Review investment income sustainability, the valuation and liquidity of alternative investments, and the contribution and concentration of the Essent holding.
- Confirm post-acquisition financial-strength ratings, available holding-company liquidity, debt and letter-of-credit capacity, and the impact of regulatory restrictions on subsidiary distributions.
- Evaluate broker concentration and the company’s exposure to catastrophe losses, reinsurance recoverables and other counterparties.