RenaissanceRe Holdings Ltd. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015. RenaissanceRe is a Bermuda-based global reinsurer and insurer, with catastrophe reinsurance, specialty reinsurance and Lloyd’s operations. Results include Platinum from its acquisition date, March 2, 2015; therefore, year-over-year comparisons are not fully like-for-like.
Key financial results
| Metric | 2015 | 2014 |
|---|---|---|
| Gross premiums written | $2.011 billion | $1.551 billion |
| Net premiums earned | $1.401 billion | $1.062 billion |
| Underwriting income | $494.6 million | $529.4 million |
| Combined ratio | 64.7% | 50.2% |
| Total investment result | $82.4 million | $164.9 million |
| Net income | $542.2 million | $686.3 million |
| Net income available to common shareholders | $408.8 million; diluted EPS $9.28 | $510.3 million; diluted EPS $12.60 |
| Operating cash flow | $414.7 million | $660.7 million |
| Cash and cash equivalents at year-end | $506.9 million | $525.6 million |
| Total investments at year-end | $9.0 billion | $6.7 billion |
| GAAP debt at year-end | $966.1 million | $249.5 million |
| Book value per common share | $99.13 | $90.15 |
Book value per share plus accumulated dividends increased 11.3% in 2015, compared with 13.7% in 2014. Return on average common equity was 9.8%, down from 14.9%. Common dividends were $1.20 per share for the year.
Material changes versus 2014
- Premium growth primarily reflected Platinum, acquired for net purchase consideration of approximately $1.679 billion. Gross premiums written rose 29.7%; Specialty Reinsurance premiums more than doubled and Lloyd’s premiums increased 39.7%, while Catastrophe Reinsurance premiums declined 7.0%.
- Underwriting income fell $34.7 million. Increased current-year claims and acquisition expenses more than offset higher earned premiums. The consolidated combined ratio rose to 64.7%, remaining below 100%.
- Investment results declined by $82.5 million, chiefly reflecting unrealized losses on fixed-maturity and equity investments amid rising interest rates and weaker equity markets. Net investment income nevertheless increased to $152.6 million, partly due to Platinum’s acquired assets.
- Common-shareholder net income declined $101.5 million. A $45.9 million tax benefit, mainly from releasing much of the U.S. deferred-tax valuation allowance after the acquisition, partly offset the weaker underwriting and investment results.
- Claims reserves increased to $2.767 billion from $1.413 billion, including $1.394 billion acquired with Platinum. Prior-year reserve development was favorable by $162.4 million, versus $143.8 million in 2014.
Segments, liquidity and capital
- Catastrophe Reinsurance: Underwriting income was $406.4 million, down from $450.1 million; combined ratio was 34.7%. Current-year catastrophe claims included U.S. winter storms, the Tianjin explosion and a U.S. wind and thunderstorm event.
- Specialty Reinsurance: Underwriting income was $98.0 million, compared with $60.7 million; combined ratio was 82.1%. Growth included acquired Platinum business, while current-year claims and underwriting expenses also rose.
- Lloyd’s: Underwriting loss was $9.7 million, compared with income of $5.8 million; combined ratio deteriorated to 104.2% from 97.3%.
- Operating cash flow was $414.7 million. Investing activities used $339.0 million, including $678.2 million net cash consideration for Platinum; financing activities used $83.7 million. Year-end cash was $506.9 million.
- Shareholders’ equity attributable to RenaissanceRe was $4.732 billion. The company issued $300 million of 3.70% senior notes due 2025; acquired Platinum’s $250 million 7.50% notes due 2017; and DaVinciRe issued $150 million of 4.75% notes due 2025. A $250 million revolving credit facility was undrawn at year-end.
- Bermuda insurance subsidiaries reported statutory capital and surplus of $4.9 billion, above the stated $686.9 million minimum. Management expected the principal Bermuda insurers to exceed their required target capital levels, subject to completion of 2015 regulatory filings.
Outlook, commentary and risks
- Management described reinsurance markets as soft, with industry capital and alternative capacity outpacing demand. It did not expect near-term market conditions to improve absent significant loss or other unexpected events, and anticipated a continued decline in its in-force property reinsurance portfolio while maintaining underwriting discipline.
- Management expected abundant casualty capacity and limited scope for broad risk-adjusted rate improvement in 2016. It said prevailing terms on many programs did not meet its pricing standards and gave no assurance it could grow or maintain the combined specialty book.
- Low interest rates were expected to constrain investment-income growth. The acquisition expands specialty and casualty exposure, increasing sensitivity to long-tail claims, inflation, interest rates and legal or social changes. Management expects catastrophe-exposed business to remain the main driver of expected returns and capital needs.
- Key risks include catastrophe frequency and severity; uncertainty in reserve estimates, especially acquired and long-tail reserves; broker concentration (three brokers generated 81.5% of segment gross premiums written); counterparty and retrocessionaire credit risk; investment-market losses; competition and soft pricing; climate-related exposure; tax and regulatory changes; and execution and integration risks from Platinum.
- The filing reports no individual pending litigation or arbitration expected to have a material adverse effect. A $5.6 million impairment was recorded on goodwill and intangibles associated with an equity-method investment. Platinum integration and transaction expenses were $53.5 million in 2015; management expected some additional costs in 2016.
Important facts for investors to verify
- How acquired Platinum premiums, claims reserves, expenses and synergies affect future results; 2015 includes Platinum only from March 2.
- Whether favorable prior-year reserve development continues, particularly given the $2.767 billion gross reserve and large acquired specialty reserve component.
- Whether current-year underwriting performance and pricing remain adequate as catastrophe premiums contract and casualty exposure grows.
- How investment returns respond to interest rates, credit spreads and equity markets after 2015’s $68.9 million net realized and unrealized investment loss.
- Debt service, collateral and liquidity needs, including the undrawn revolver, letter-of-credit facilities and restrictions on subsidiary dividends.
- Whether broker concentration, retrocession availability, regulatory or tax developments, and the Platinum integration create material changes to earnings or capital.