RenaissanceRe Holdings Ltd. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. RenaissanceRe is a Bermuda-based reinsurance and insurance group focused principally on catastrophe and specialty risks, with Reinsurance, Lloyd’s and Insurance reporting segments. Unless otherwise indicated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net premiums earned | $262.6m | $229.2m | $785.7m | $751.9m |
| Underwriting income (loss) | $122.6m | $83.2m | $447.0m | ($304.3m) |
| Net investment income (loss) | $45.2m | ($27.9m) | $126.9m | $65.7m |
| Net realized and unrealized investment gains | $76.3m | $17.0m | $153.4m | $46.7m |
| Net income available to common shareholders | $180.7m | $49.3m | $524.4m | ($174.0m) |
| Diluted earnings per common share | $3.62 | $0.95 | $10.24 | ($3.44) |
| Combined ratio | 53.3% | 63.7% | 43.1% | 140.5% |
Q3 results included a $23.6m underwriting impact from Hurricane Isaac, partly offset by noncontrolling interests, for a net negative impact of $15.6m. Q3 underwriting benefited from $20.3m of favorable prior-year claims development. The nine-month result also reflected $121.6m of favorable prior-year development; reserve releases materially contributed to reported underwriting income.
At September 30, total assets were $8.79bn, total investments $6.76bn, cash and equivalents $249.1m, and shareholders’ equity attributable to RenaissanceRe $3.84bn. Debt was $358.6m. The company reported $950.8m of redeemable DaVinciRe noncontrolling interest. Operating cash flow for the first nine months was $535.7m, investing cash flow was negative $343.4m, and financing cash flow was negative $161.5m; cash increased $32.1m to $249.1m.
Material changes versus comparable periods
- Q3 common-shareholder income rose to $180.7m from $49.3m, driven by improved underwriting and a swing to positive investment income and gains.
- Q3 combined ratio improved to 53.3% from 63.7%. Reinsurance underwriting income rose, while Lloyd’s and specialty reinsurance recorded underwriting losses; the specialty combined ratio was 121.9% and Lloyd’s was 135.6%.
- Nine-month common-shareholder results moved from a $174.0m loss to $524.4m of income. The comparison is heavily affected by 2011 catastrophe losses: the filing attributes $704.5m of nine-month 2011 underwriting losses to major events including the New Zealand and Tohoku earthquakes, Australian floods, U.S. tornadoes and Hurricane Irene.
- Investment income and gains were substantially higher in 2012, including gains from tighter credit spreads and improved valuations. Nine-month other income also deteriorated to a $28.7m loss, principally from $29.4m of weather-and-energy operations losses and the absence of 2011 Tohoku-related recoveries.
- Total assets increased $1.05bn from year-end 2011; attributable shareholders’ equity increased $233.8m. The company repurchased 3.6m common shares for $271.9m during the first nine months.
Outlook, risks and unusual items
- Hurricane Sandy: The late-October event is a subsequent event, not reflected in Q3 results. Management said the impact was likely to be significant but could not provide a financial estimate because information and loss data were insufficient. Losses were expected to be recorded in Q4 2012.
- Market outlook: Management described June–July catastrophe renewal pricing as approximately flat on a risk-adjusted basis, with traditional and alternative capital broadly offsetting demand. It expected continued demand for catastrophe coverage but noted ample market capital and uncertainty about further market improvement. No quantitative earnings or premium guidance was provided.
- Investment outlook: Historically low interest rates and spreads were expected to continue pressuring investment income in the near term. Rising rates could reduce fixed-income market values and investment gains.
- Claims and reserving: Management emphasized that catastrophe and reinsurance reserves are estimates subject to material uncertainty, including for prior large events. The company booked $23.5m of estimated ultimate losses related to potential LIBOR claims in Q3, despite having received no loss notifications; the matter was described as complex and developing.
- Other risks: Weather and energy operations are seasonal and volatile; estimated 99% one-year VaR was $43.4m. RenaissanceRe had provided $299.4m of guarantees to counterparties for those operations. Regulatory, counterparty, catastrophe, interest-rate, and Florida market risks were also discussed. Management reported no material change in previously disclosed litigation or risk factors.
- The QBE reserve-collar settlement was completed in June 2012: RenaissanceRe paid $9.0m and recorded a $1.0m gain in discontinued operations.
Important facts for investors to verify
- How Hurricane Sandy estimates developed and the amount ultimately recognized in Q4 and later periods.
- Whether favorable prior-year reserve development continues, and the sensitivity of remaining reserves to catastrophe claims emergence and cedant reporting.
- The development and ultimate cost of potential LIBOR-related claims, including whether notifications or claims are received.
- The sustainability of investment returns and the valuation, liquidity and redemption restrictions of private equity, bank-loan and other less-liquid investments.
- DaVinciRe’s contribution to results and the effect of its changing ownership and third-party redemption rights.
- Capital deployment, including remaining share-repurchase authorization, liquidity needs after catastrophe losses, and compliance with credit and regulatory capital requirements.