RenaissanceRe Holdings Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. RenaissanceRe is a Bermuda-based global reinsurance and insurance provider, with Property and Casualty and Specialty reporting segments. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Gross premiums written | $922.1 | $862.1 |
| Net premiums written | $544.1 | $511.7 |
| Net premiums earned | $366.0 | $353.6 |
| Total revenue | $472.1 | $448.1 |
| Net income | $132.3 | $178.2 |
| Net income attributable to RenaissanceRe | $97.9 | $133.6 |
| Net income available to common shareholders | $92.4 | $128.0 |
| Diluted earnings per common share | $2.25 | $2.95 |
| Underwriting income | $42.4 | $105.2 |
| Combined ratio | 88.4% | 70.3% |
| Net investment income | $54.3 | $28.9 |
| Net realized and unrealized investment gains | $43.4 | $61.7 |
| Operating cash flow | $221.0 | $(1.6) |
- Segment underwriting: Property produced $91.4 million of underwriting income and a 51.1% combined ratio (40.3% in Q1 2016). Casualty and Specialty recorded a $49.3 million underwriting loss and a 127.5% combined ratio, versus $0.5 million of income and 99.7% in Q1 2016.
- Balance sheet at March 31, 2017: Total assets were $13.32 billion, total investments $9.46 billion, and cash and cash equivalents $454.1 million. Shareholders’ equity attributable to RenaissanceRe was $4.86 billion; claims reserves were $2.93 billion.
- Debt and liquidity: Reported balance-sheet debt was $945.7 million, compared with $948.7 million at year-end. The company had $250 million available under its undrawn revolving credit facility. Separately, its capital resources table includes that undrawn facility in a $1.196 billion total of debt and facility capacity. The company expected to repay its $252.1 million Series B 7.50% notes at 2017 maturity using cash and did not plan to refinance, while noting this was not assured.
- Capital returns: Common dividends were $0.32 per share. RenaissanceRe repurchased 550,000 shares for $80.0 million during the quarter; $460 million remained under its renewed $500 million authorization. Through April 28, it repurchased a further 163,000 shares for $22.8 million.
- Book value per common share was $109.37 at quarter-end; book value plus accumulated dividends was $126.41, up 1.1% from year-end. Annualized return on average common equity was 8.3%, versus 11.8% in Q1 2016.
Material changes and drivers
- Common-shareholder net income declined $35.6 million year over year. Underwriting income fell $62.8 million as claims and acquisition expenses rose; investment results and lower income allocated to redeemable noncontrolling interests partly offset the decline.
- Net claims and claim expenses increased to $193.1 million from $126.6 million. The calendar-year loss ratio rose to 52.7% from 35.8%; the underwriting expense ratio rose to 35.7% from 34.5%.
- Casualty and Specialty prior-year reserves had $30.3 million of adverse development, principally a $33.5 million charge from the U.K. Ogden discount-rate change for bodily injury lump-sum awards, from 2.5% to negative 0.75%. Attritional experience was partly favorable. Total prior-year development was $29.0 million adverse, compared with $1.6 million favorable in Q1 2016.
- Property gross premiums written increased 17.0%, to $520.5 million, as the company increased participation on selected transactions and wrote new business. Casualty and Specialty gross premiums written declined 3.7%, to $401.6 million, largely reflecting the absence of a large multi-year mortgage reinsurance contract written in Q1 2016.
- Investment income rose $25.5 million, mainly from higher average fixed-maturity assets and stronger private-equity returns. Total investment gains nevertheless declined $18.3 million, as lower fixed-maturity gains—associated with rising short-term yields—more than offset stronger equity results.
- Operating cash flow improved from an outflow to $221.0 million. Management attributed the quarter’s cash generation in part to January renewal timing, which increased unearned premiums and reinsurance balances payable. The filing cautions that interim cash flows are seasonal and may not indicate full-year performance.
Outlook, risks and contingencies
- No numerical earnings or premium guidance is provided. Management expects abundant capacity and continued risk-adjusted pricing pressure in property catastrophe reinsurance, including at June and July renewals. It does not expect to maintain the size of its aggregate property-exposed reinsurance book absent changed market conditions, while emphasizing underwriting discipline.
- Casualty and Specialty markets are also described as soft, with abundant capacity and many programs below the company’s pricing standards. Management sees selected niche opportunities but gives no assurance of growing or maintaining the combined book.
- Management expects low interest rates to constrain investment-income growth in the near term. Higher rates could improve reinvestment yields over time but may create near-term realized or unrealized losses on existing holdings.
- Principal risks include catastrophe frequency and severity, reserve-estimation uncertainty, counterparty credit, investment and interest-rate volatility, competition and soft pricing, inflation, foreign exchange, regulatory and tax changes, and reliance on subsidiary dividends. Proposed U.S. tax reforms were identified as potentially materially adverse, but their form, timing and impact remained uncertain.
- Approximately $2.7 billion of cash and investments were pledged or held in trust for counterparties and regulatory purposes. The company reported no material changes to previously disclosed commitments or contingencies, and stated no individual current litigation or arbitration was likely to materially adversely affect it. Renaissance Reinsurance is obligated to contribute up to $50 million to Top Layer Re if specified losses reduce that venture’s capital below a defined level.
- Management said it believed the group would exceed its Bermuda enhanced capital requirement. The 2016 group capital filing was still being completed at the report date. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- How the Ogden discount-rate change and other casualty reserve assumptions develop, including subsequent-period reserve adjustments.
- Whether the Casualty and Specialty combined ratio improves and whether current accident-year claims remain elevated.
- Renewal pricing, terms, and volume in property and casualty markets, and the extent of any reduction in the property-exposed book.
- The repeatability of investment income and gains, including private-equity valuations, and the effects of interest-rate movements.
- Cash-flow seasonality, availability of subsidiary dividends, pledged assets and letter-of-credit capacity, and repayment of the 2017 notes.
- Potential effects of U.S. tax legislation and other regulatory changes; the filing provides no clear quantified impact.