RenaissanceRe Holdings Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise. RenaissanceRe provides property catastrophe and specialty reinsurance, insurance, and related services. Management cautions that interim results are seasonal and may not indicate full-year performance.
Financial results and key metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Gross premiums written | $703.2 | $667.3 | $1,338.6 | $1,331.5 |
| Net premiums written | $559.1 | $427.6 | $995.9 | $920.2 |
| Net premiums earned | $291.9 | $244.4 | $563.1 | $523.1 |
| Underwriting income | $113.3 | $127.9 | $286.3 | $324.5 |
| Net investment income | $27.3 | $17.7 | $70.5 | $83.1 |
| Net realized and unrealized investment gains (losses) | $(69.5) | $28.1 | $(55.3) | $75.7 |
| Net income | $48.3 | $184.6 | $283.7 | $448.5 |
| Net income available to common shareholders | $26.8 | $142.3 | $217.3 | $343.7 |
| Diluted earnings per common share | $0.60 | $2.75 | $4.83 | $6.63 |
| Combined ratio | 61.2% | 47.7% | 49.2% | 38.0% |
Q2 underwriting remained profitable, but income fell year over year as catastrophe claims increased and favorable prior-year reserve development declined. The combined ratio remained below 100%; a lower ratio generally indicates more profitable underwriting. For the first half, prior-year reserve development was favorable by $64.5 million, versus $101.3 million in 2012.
At June 30, total assets were $8.47 billion, investments $6.17 billion, cash and cash equivalents $285.6 million, and shareholders’ equity attributable to RenaissanceRe $3.57 billion. Claims reserves were $1.71 billion. Debt was $250.4 million, principally the $250 million 5.75% senior notes due 2020. Operating cash flow for the first half was $177.4 million, compared with $303.8 million a year earlier; cash declined $39.8 million during the period.
Material changes and notable items
- Catastrophe losses: European floods and May 2013 U.S. tornadoes had an estimated net negative impact of $38.8 million in Q2, including a 17.8 percentage-point effect on the quarterly combined ratio. Management described the loss estimates as preliminary and subject to meaningful uncertainty.
- Investment performance: Q2 investment losses were primarily attributed to rising interest rates and widening credit spreads, including $95.7 million of unrealized losses on trading fixed-maturity investments. First-half net investment income also declined from 2012.
- Underwriting mix and market: First-half gross premiums written were broadly flat, while net premiums written rose. Management said reduced catastrophe pricing, particularly in Florida, and non-renewals reduced catastrophe premium volume; the company retained more selected risks by reducing ceded premiums.
- Segments: Q2 Reinsurance underwriting income was $116.9 million; Lloyd’s recorded a $3.5 million underwriting loss and a 108.4% combined ratio. First-half Lloyd’s underwriting income was $0.6 million, with a 99.2% combined ratio.
- Capital actions: The company issued $275 million of 5.375% Series E preference shares and used the proceeds to redeem $150 million of Series D and $125 million of Series C preference shares. It repurchased 1.5 million common shares for $122.0 million in the first half; $489.3 million remained under the $500 million authorization at quarter-end. The $100 million 5.875% senior notes matured and were repaid.
- Liquidity facilities: The revolving credit commitment increased to $250 million, with no borrowing reported under it. Total letters of credit outstanding under all facilities were $503.6 million.
- Management transition: CEO Neill Currie retired from his officer and director roles effective July 1, 2013; President and Chief Underwriting Officer Kevin O’Donnell succeeded him. The company recorded $16.8 million of related compensation and transition costs in Q2.
Outlook, risks and contingencies
The filing provides no quantified earnings or premium guidance. Management anticipated continued pressure on catastrophe premiums and risk-adjusted rates amid ample traditional and alternative market capital, and said underwriting discipline could limit the company’s ability to maintain the size of its portfolio. It expected investment income growth to remain constrained in the near term despite higher portfolio yields following interest-rate increases.
Key risks include the frequency and severity of catastrophes; uncertainty in loss reserving and reinsurance recoveries; investment-market, interest-rate, credit and counterparty risks; volatile weather and energy operations; competition and soft pricing; and regulatory or legislative changes that could affect private catastrophe markets, including Florida and U.S. federal proposals. Management reported no individual litigation or arbitration expected to have a material adverse effect and no material changes to previously disclosed commitments and contingencies. Disclosure controls were deemed effective as of June 30, 2013, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether estimates for the European floods and U.S. tornadoes, and related reinsurance recoveries, develop materially from the preliminary $38.8 million net impact.
- How reserve development and current-year catastrophe and specialty claims evolve; first-half favorable prior-year development was lower than in 2012.
- Whether softer catastrophe pricing and available market capacity affect renewal volumes, rates, and underwriting returns, especially in Florida.
- Investment portfolio sensitivity to interest rates and credit spreads, alongside valuation and liquidity risks in less-liquid investments.
- Capital and liquidity needs, including DaVinciRe redemption activity, letters of credit, subsidiary dividend restrictions, and the CEO transition costs.