Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based reinsurer and insurer focused on property catastrophe and specialty risks, with additional business through Lloyd’s Syndicate 1458, joint ventures, investments, and weather and energy risk operations. This is its Form 10-K for the fiscal year ended December 31, 2012; the filing reports full-year results, not a standalone fourth-quarter earnings summary.
Management emphasizes long-term growth in tangible book value per common share plus accumulated dividends. Results are inherently volatile because catastrophe losses can be large and infrequent.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Gross premiums written | $1.552 billion | $1.435 billion |
| Net premiums earned | $1.069 billion | $951.0 million |
| Total revenues | $1.406 billion | $1.095 billion |
| Net income attributable to common shareholders | $566.0 million | $(92.2) million |
| Diluted earnings per common share | $11.23 | $(1.84) |
| Underwriting income (loss) | $451.3 million | $(177.2) million |
| Combined ratio | 57.8% | 118.6% |
| Return on average common equity | 17.7% | (3.0)% |
| Operating cash flow | $716.9 million | $165.9 million |
| Cash and cash equivalents, year-end | $325.4 million | $217.0 million |
- Gross premiums written increased 8.1%; excluding reinstatement premiums associated with large losses, they rose 20.1%. Specialty premiums and Lloyd’s business grew, alongside improved pricing in core renewals.
- Investment income was $167.4 million and net realized and unrealized investment gains were $164.0 million. Both improved from 2011; investment gains reflected, among other factors, tighter credit spreads.
- Year-end investments totaled $6.361 billion, including $821.2 million in short-term investments. Debt was $351.8 million; total assets were $7.929 billion and shareholders’ equity attributable to RenaissanceRe was $3.503 billion.
- Gross claims reserves were $1.879 billion, net of reinsurance recoverables of $192.5 million. Prior-year reserve development benefited 2012 net income by $158.0 million, compared with $132.0 million of favorable development in 2011.
- Book value per common share was $68.14; including accumulated dividends, it was $80.14, up 16.8% from year-end 2011. The company paid $1.08 per common share in dividends and repurchased $494.4 million of common shares.
Material changes versus 2011
- Results rebounded from a loss in 2011 as current-year catastrophe claims fell substantially. The 2011 major losses generated $725.2 million of underwriting losses and added 85.4 percentage points to the consolidated combined ratio.
- 2012 underwriting included $149.1 million of losses from storm Sandy and $26.3 million from Hurricane Isaac; together these added 19.0 percentage points to the combined ratio. Management noted that 2012 was nevertheless among the most costly years for industry insured property catastrophe losses.
- Reinsurance segment underwriting income was $481.0 million, versus a $124.8 million loss in 2011. Lloyd’s underwriting loss narrowed to $25.8 million from $47.6 million, but its 121.0% combined ratio remained above 100%.
- Net investment income rose by $49.4 million and investment gains rose by $93.3 million. Equity in earnings of other ventures improved to $23.2 million from a $36.5 million loss, principally as Top Layer Re avoided the significant 2011 earthquake losses.
- Weather and energy operations still lost $20.8 million, an improvement from a $45.0 million loss in 2011. Other loss was $22.9 million, partly because prior-year Tohoku-related recoveries did not recur.
- Capital actions included redemption of $150.0 million of Series D preference shares and $494.4 million in common-share repurchases. The $100.0 million 5.875% notes matured and were repaid on February 15, 2013.
Outlook, commentary, and risks
- Management described global reinsurance capital as historically high and competition as increasing, including from alternative capital. It expected supply to remain ample or rise and market pricing to soften outside loss-impacted areas. No specific earnings, premium, or combined-ratio guidance was provided.
- Management expected historically low interest rates and yields to continue pressuring near-term investment income.
- Reserving is a major judgment area. The company uses point estimates rather than reserve ranges; losses from Sandy, the New Zealand and Tohoku earthquakes, and Thailand flooding remained uncertain because of developing claims, coverage questions, reporting delays, and counterparty recoveries.
- Three brokers generated 84.6% of Reinsurance segment gross premiums written, and U.S. and Caribbean exposures represented 63.4% of total gross premiums written. Broker concentration and catastrophe concentration are material sensitivities.
- Other risks include catastrophe severity and climate-related uncertainty, counterparty and reinsurance collectability, volatile weather and energy trading, investment valuation and liquidity, and regulatory or tax changes affecting Bermuda-based reinsurers and catastrophe markets.
- A loss portfolio transfer for a Glencoe contractor’s liability book transferred $29.1 million of net liabilities for $36.5 million consideration, producing a $7.4 million loss. The filing also included $16.0 million of estimated 2012 Reinsurance specialty claims exposure related to potential LIBOR claims.
- Management said no individual litigation or arbitration was believed likely to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- How much of the 2012 earnings rebound depended on favorable prior-year reserve releases and investment gains, and how current-year underwriting performs without those benefits.
- Subsequent development of Sandy, Isaac, New Zealand, Tohoku, and Thailand loss estimates, including reinsurance recoverability and coverage disputes.
- Whether soft market pricing, abundant alternative capital, broker concentration, and U.S. catastrophe exposure affect renewal volumes and risk-adjusted returns.
- Investment portfolio valuation, liquidity, and yield sensitivity, including the duration and redemption limits of private equity, bank-loan, and other less-liquid holdings.
- Effect of the 2013 note repayment, further share repurchases, subsidiary dividend restrictions, and outstanding letters of credit on holding-company liquidity and capital flexibility.