RenaissanceRe Holdings Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are against December 31, 2015. Amounts below are U.S. dollars. The year-over-year comparison is affected by Platinum, acquired March 2, 2015: Q1 2016 includes a full quarter of its results, while Q1 2015 includes results only from the acquisition date.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Gross premiums written | $862.1 million | $643.6 million |
| Net premiums written | $511.7 million | $404.0 million |
| Net premiums earned | $353.6 million | $296.8 million |
| Total revenues | $448.1 million | $381.9 million |
| Underwriting income | $105.2 million | $130.9 million |
| Net income | $178.2 million | $213.1 million |
| Net income available to common shareholders | $128.0 million | $167.8 million |
| Diluted EPS | $2.95 | $4.14 |
| Net investment income | $28.9 million | $39.7 million |
| Net realized and unrealized investment gains | $61.7 million | $41.7 million |
Underwriting margins: The consolidated combined ratio was 70.3%, versus 55.9%; the claims ratio was 35.8%, versus 25.9%, and the underwriting expense ratio was 34.5%, versus 30.0%. A combined ratio below 100% indicates underwriting profit before investment income. Annualized return on average common equity was 11.8%, compared with 17.1%.
Balance sheet and liquidity: Total assets were $12.15 billion, total investments $9.04 billion, and cash and cash equivalents $449.1 million at March 31. Shareholders’ equity attributable to RenaissanceRe was $4.76 billion. Claims reserves were $2.81 billion and unearned premiums $1.26 billion. Balance-sheet debt was $957.5 million; the capital-resources table reports $1.208 billion of total debt when it also includes the $250 million undrawn revolving credit facility. The company reported $754.7 million of issued or drawn U.S.-dollar credit facilities, plus £85 million of letter-of-credit facilities.
Operating cash flow was negative $9.7 million, investing cash flow positive $101.1 million, and financing cash flow negative $154.4 million. Cash declined $57.7 million during the quarter. The filing attributes operating cash use largely to premium receivables, prepaid reinsurance premiums and deferred acquisition costs increasing with premium volume. Book value per common share was $101.19, up from $99.13 at year-end; book value plus accumulated dividends rose 2.4% to $116.98. The company repurchased 769,000 shares for $85.2 million and paid a $0.31 per-share dividend.
Changes versus the prior comparable quarter
- Premiums increased, but underwriting income fell $25.7 million as claims and acquisition expenses rose. The company cited Specialty Reinsurance as the principal driver of the higher combined ratio.
- Specialty Reinsurance gross premiums written increased to $369.0 million from $124.3 million, with the comparison substantially affected by Platinum’s partial-quarter inclusion in 2015. The segment recorded a $32,000 underwriting loss and a 100.0% combined ratio, versus $21.3 million of underwriting income and a 77.5% ratio.
- Catastrophe Reinsurance gross premiums written declined 7.4% to $360.4 million amid challenging pricing and disciplined underwriting. Underwriting income was $99.3 million and the combined ratio 27.5%.
- Lloyd’s underwriting income rose to $5.9 million from $1.7 million; its combined ratio improved to 90.4% from 97.0%.
- Net investment income decreased $10.8 million, including weaker private-equity results. Total investment result nevertheless rose $9.0 million, supported by fixed-income valuation gains as U.S. Treasury yields fell and the yield curve flattened.
- Net income was also lower because Q1 2015 included a $47.9 million tax benefit, primarily related to a U.S. deferred-tax valuation allowance change. Q1 2016 recorded $2.7 million of tax expense. Corporate expenses fell $37.3 million, largely because Q1 2015 included substantial Platinum acquisition costs.
- Prior-year reserve development was $1.6 million favorable overall, versus $22.1 million favorable in Q1 2015. Specialty Reinsurance had $3.5 million adverse development, including a $20.8 million reserve increase for a small number of relatively large losses, primarily from the 2015 accident year.
Outlook, commentary and risks
- Management expects competitive, soft reinsurance conditions to persist, including at the June 1, 2016 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 capacity is also expected to remain abundant.
- Management expects low interest rates and portfolio composition to constrain investment-income growth in the near term. Investment results remain sensitive to interest rates, equity prices, credit conditions and private-investment valuations.
- Texas hailstorms in March, Houston-area flooding in April and April earthquakes in Japan and Ecuador were under review. Management’s preliminary view was that their combined net impact could be significant but was not likely to be material; it said it was too early to estimate the flooding and earthquake impacts accurately. Further development was expected to be reflected in Q2 results.
- Management identifies catastrophe frequency and severity, reserve estimation, reinsurance recoverability and counterparty credit, competitive pricing and terms, longer-tail casualty exposures, inflation, regulatory and tax changes, and investment performance among key uncertainties. It cautions that actual losses and reserve development may differ materially from estimates.
- The company reported no material changes to previously disclosed legal proceedings, risk factors, contractual obligations or market-risk disclosures. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- No specific earnings or financial guidance was provided. Management stated it expects some additional Platinum integration costs in 2016.
Important facts for investors to verify
- Track Specialty Reinsurance loss experience and reserve development, especially the large-loss reserve increase and the segment’s transition to a 100.0% combined ratio.
- Monitor estimates and subsequent development for the March and April 2016 catastrophe events; initial assessments were preliminary and the filing gives no clear dollar estimate for the April losses.
- Assess premium growth and segment comparisons in light of Platinum’s unequal inclusion in the 2015 and 2016 periods, and the effect of increased ceded reinsurance.
- Review the sustainability of investment gains, the private-equity valuation loss, and the effect of low reinvestment yields on future investment income.
- Verify liquidity and capital availability, including subsidiary dividend restrictions, collateral and letter-of-credit needs, the share-repurchase pace, and the distinction between funded debt and debt plus the undrawn revolver.
- Monitor catastrophe-market pricing, contract terms and management’s stated intention to reduce property-exposed business if market conditions remain unchanged.