Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based global reinsurer and insurer, focused principally on property catastrophe and specialty reinsurance, with additional Lloyd’s, insurance, investment and weather- and energy-risk operations. This Form 10-Q covers the three months ended March 31, 2012; balance-sheet comparisons are with December 31, 2011. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Gross premiums written | $664.2 million | $610.5 million |
| Net premiums written | $492.6 million | $452.6 million |
| Net premiums earned | $278.7 million | $305.5 million |
| Total revenue | $356.5 million | $387.7 million |
| Underwriting income (loss) | $196.6 million | $(397.2) million |
| Net income (loss) attributable to RenaissanceRe common shareholders | $201.4 million | $(248.0) million |
| Diluted earnings (loss) per common share | $3.88 | $(4.69) |
| Net investment income | $67.0 million | $60.3 million |
| Net realized and unrealized investment gains (losses) | $46.1 million | $(5.2) million |
| Operating cash flow | $171.1 million | $(6.3) million |
The consolidated combined ratio was 29.4%, versus 230.0% a year earlier; underwriting expense ratio was 23.8%, and calendar-year net claims ratio was 5.6%. The current-accident-year net claims ratio was 25.6%. Return on average common equity was 25.6%. Book value per common share rose to $62.68 from $59.27; including accumulated dividends, the measure increased 6.2% to $73.87.
At March 31, 2012, total assets were $8.354 billion, investments $6.412 billion, cash and cash equivalents $261.0 million, total shareholders’ equity $3.798 billion (including $3.795 billion attributable to RenaissanceRe), debt $352.0 million, and claims reserves $1.858 billion. Net claims reserves were $1.579 billion, with $279.4 million of reinsurance recoverables. Total investments increased from $6.209 billion at year-end. The company reported $1.252 billion of cash and investments pledged or held in trust, including $483.0 million for U.S. state regulators.
Cash from operations was partly offset by $190.0 million used in investing activities, principally net purchases of short-term investments; financing provided $61.9 million, including $88.1 million of net third-party DaVinciRe capital flows. Cash increased $44.0 million during the quarter. The company reported $150 million available and undrawn under its revolving credit facility and $600 million of commitments under its principal letter-of-credit facility, of which $307.7 million was outstanding. Both facilities were due to expire in April 2013, and renewal discussions were underway.
Material changes versus the prior comparable period
- Common-shareholder earnings improved by $449.5 million, primarily because Q1 2012 avoided the severe New Zealand and Tohoku earthquakes and Australian floods that drove $565.2 million of 2011 underwriting losses. The prior-year disasters added 212.3 percentage points to the consolidated combined ratio.
- Net premiums earned declined $26.9 million despite higher written premiums, reflecting the timing of premium earning and the absence of prior-year catastrophe reinstatement premiums.
- Investment income increased $6.7 million, and investment gains improved $51.3 million, mainly on tighter credit spreads and stronger private-equity returns.
- Other income deteriorated by $89.2 million to a $39.1 million loss. Weather and energy operations lost $35.5 million, attributed principally to unusually warm weather; fair-value reinsurance contracts also lacked the prior-year Tohoku-related gains.
- Net favorable development on prior-year claims reserves was $55.9 million, compared with $68.2 million in Q1 2011. Reserve changes included $14.4 million of favorable actuarial assumption changes in specialty reinsurance.
- Gross premiums written increased 8.8%; management cited stronger risk-adjusted catastrophe-market conditions at January renewals and growth in specialty and Lloyd’s business. The company launched Upsilon Re, a managed, fully collateralized catastrophe retrocession venture effective January 1, 2012.
Outlook, commentary, risks and contingencies
Management gave no quantitative earnings or financial guidance. It anticipated that catastrophe-reinsurance demand could remain healthy, supported by 2011 industry losses, revised catastrophe models and low investment returns, while emphasizing that demand, pricing and renewal conditions are uncertain and may be offset by ample capital or weak economic conditions. Management expects historically low interest rates and spreads to pressure net investment income in the near term.
Results are exposed to volatile, high-severity catastrophe losses; uncertainty in claims estimates and reinsurance recoveries; investment-market, interest-rate and credit risks; counterparty exposures; and competitive, economic and regulatory developments. Management highlighted uncertainty around older catastrophe claims, including 2010–2011 events, and the possibility that ultimate losses could differ materially from estimates. Weather- and energy-related trading is seasonal and volatile; the filing reports $13.6 million of estimated portfolio VaR at a 99% confidence level at quarter-end, while cautioning that actual losses may exceed VaR. RenaissanceRe had provided $361.0 million of guarantees to counterparties for these operations.
The company was discussing renewal of its April 2013 credit and letter-of-credit facilities; renewal terms or availability were not assured. It also disclosed a potential capital contribution of up to $50 million to Top Layer Re if specified loss-related capital levels are breached. The QBE sale agreement’s reserve collar remains subject to review; a $10 million maximum liability was recognized in 2011 for purported adverse development. Management said no individual pending litigation or arbitration was likely to have a material adverse effect, and reported no material changes to previously disclosed risk factors. Disclosure controls were considered effective at March 31, 2012; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much Q1 profitability depended on unusually light catastrophe losses and favorable prior-year reserve development, and how reserves for past catastrophes evolve.
- Whether the reported investment returns and fair values—particularly private equity, other Level 3 assets and weather/energy derivatives—are sustained or revised as final valuations become available.
- Exposure and potential losses from weather- and energy-risk operations, including the $361.0 million of guarantees and the limitations of the disclosed VaR estimate.
- Renewal terms and availability for the credit and letter-of-credit facilities expiring in April 2013, and the implications of pledged assets and regulatory capital requirements for liquidity.
- DaVinciRe ownership and third-party redemption activity, plus Upsilon Re’s performance and the company’s retained share of its risks.
- Developments in the QBE reserve collar and other catastrophe recoverables, as well as regulatory or legislative changes affecting private catastrophe-reinsurance markets.