Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based global reinsurer and insurer, focused on catastrophe reinsurance, specialty reinsurance and business written through Lloyd’s Syndicate 1458. This Form 10-Q covers the three months ended March 31, 2014; comparisons are with the first quarter of 2013 unless otherwise noted. The results exclude REAL, the weather and energy risk unit sold in October 2013, which was reported as discontinued operations.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparator |
|---|---|---|
| Total revenue | $343.6 million | $333.5 million |
| Net premiums earned | $286.5 million | $271.3 million |
| Underwriting income | $151.3 million | $173.0 million |
| Net investment income | $38.9 million | $43.2 million |
| Total investment result, as defined by the company | $53.7 million | $51.4 million |
| Income from continuing operations | $199.4 million | $225.6 million |
| Net income attributable to RenaissanceRe common shareholders | $151.0 million | $190.5 million |
| Diluted EPS | $3.56 | $4.23, including $0.22 from discontinued operations; continuing-operations EPS was $4.01 |
| Combined ratio | 47.2% | 36.2% |
| Operating cash flow | $46.6 million | $128.5 million |
Net premiums written were $450.3 million, up from $436.8 million. The combined ratio remained below 100%, indicating underwriting profitability before investment income; however, it increased 11.0 percentage points year over year. The annualized return on average common equity was 17.6%, versus 24.3%. Book value per common share was $82.30 at March 31, up from $80.29 at year-end; including accumulated dividends, the measure rose 2.9% to $95.71.
At March 31, total assets were $8.16 billion, including $6.52 billion of investments and $327.2 million of cash and cash equivalents. Shareholders’ equity attributable to RenaissanceRe was $3.76 billion, down $142.1 million from year-end, principally reflecting share repurchases and dividends. Debt was $249.5 million, primarily the 5.75% senior notes due 2020. The company also reported a $250 million undrawn revolving credit facility. Total letters of credit outstanding under facilities were $568.1 million; $2.03 billion of cash and investments was pledged or held in trust.
Cash declined $80.9 million during the quarter: operating activities provided $46.6 million and investing activities provided $301.2 million, while financing used $428.2 million. Financing outflows included $262.7 million of common share repurchases, dividends and net returns of capital to DaVinciRe investors.
Material changes versus the prior period
- Common-shareholder net income fell $39.5 million. Underwriting income declined $21.7 million, as prior-year favorable claims development was smaller and current-year claims were higher, partly offset by increased earned premiums.
- Prior-accident-year claims development was favorable by $16.7 million, compared with $37.6 million of favorable development in Q1 2013. Current-accident-year net claims were $75.6 million, up from $64.9 million; the company characterized catastrophe losses as relatively light and reported $11.3 million related to U.S. winter storms in Catastrophe Reinsurance.
- Gross premiums written increased to $705.3 million from $635.4 million. Specialty Reinsurance premiums rose 87.4% to $154.3 million, and Lloyd’s premiums rose 12.1% to $83.3 million; Catastrophe Reinsurance premiums declined 2.3% to $467.7 million.
- Investment results were relatively flat overall. Net investment income decreased $4.3 million, principally due to lower returns in private equity and bank loan fund investments. Investment gains included stronger trading fixed-income marks, offset in part by weaker public equity results and losses on investment-related derivatives.
- Net income attributable to noncontrolling interests increased to $42.8 million from $38.6 million, principally reflecting RenaissanceRe’s reduced economic ownership in DaVinciRe. The company’s share repurchases totaled approximately 3.0 million shares for $277.1 million during the quarter.
Outlook, management commentary and risks
Management expects supply of traditional and alternative reinsurance capital to continue outpacing demand, putting pressure on premiums and risk-adjusted rates through 2014, absent large or unforeseen events. It reported that January renewals and business renewing at April 1 remained attractive, while emphasizing continued underwriting discipline and noting it could not assure the size or quality of its portfolio would be maintained. Low interest rates and the portfolio mix are expected to constrain investment-income growth in the near term. The filing provides no quantified earnings or revenue guidance.
Key risks include catastrophe frequency and severity, uncertainty in loss reserves—especially for longer-tail specialty business and prior major events—competitive pricing, inflation, investment-market volatility, illiquid or model-valued assets, and reinsurer or other counterparty failure. Management also discussed potential adverse effects from changes to U.S. catastrophe and flood programs, Florida market conditions, tax rules and regulation. It noted that subsidiary dividends and capital movements are subject to regulatory limits. The company believed each relevant Bermuda insurer would exceed its target capital level, although the 2013 capital filings were still due at the time of the report.
The company reported no material changes to previously disclosed commitments or contingencies and stated that no individual litigation or arbitration was likely to have a material adverse effect. RenaissanceRe retained $32.6 million of guarantees relating to the sold REAL business; Munich agreed to indemnify it for related liabilities. The syndicated letter-of-credit facility commitment was reduced from $250 million to $180 million effective March 31, 2014, with potential increases subject to conditions. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether underwriting performance and the very low reported combined ratio are sustainable, given the quarter’s favorable prior-year reserve development and joint-venture fee effects.
- How catastrophe losses, including winter-storm claims, and reserve estimates for major historical events develop in subsequent quarters.
- Whether specialty growth can be maintained profitably, particularly as current-accident-year claims and the segment combined ratio increased.
- Whether competitive pricing pressure and low yields continue to constrain underwriting returns and investment income.
- How share repurchases, DaVinciRe capital returns and regulatory collateral requirements affect cash, capital and liquidity; the filing reported $408.7 million remaining under the repurchase authorization at March 31.
- Whether valuation estimates for Level 3 investments and fund interests with reporting lags differ materially from eventual realizations or final valuations.