Business context and reporting period
RenaissanceRe Holdings Ltd. filed this Form 10-K for the fiscal year ended December 31, 2010. The Bermuda-based company primarily underwrites property catastrophe and specialty reinsurance, with additional Lloyd’s, insurance, investment, and weather and energy risk-management activities. The company’s results are exposed to substantial catastrophe-related volatility.
In November 2010, RenaissanceRe agreed to sell substantially all of its U.S.-based insurance operations to QBE. Those operations are classified as discontinued operations, and comparative periods were reclassified. The sale remained subject to regulatory approval and other closing conditions; closing was expected in early 2011.
Financial and operating highlights
Amounts are U.S. dollars. Unless stated otherwise, figures are for continuing operations; income from discontinued operations is identified separately.
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Gross premiums written | $1,165.3 million | $1,228.9 million | Down 5.2% |
| Net premiums earned | $864.9 million | $882.2 million | Down 2.0% |
| Underwriting income | $474.6 million | $695.2 million | Down $220.6 million |
| Combined ratio | 45.1% | 21.2% | Higher catastrophe losses; favorable prior-year reserve development remained substantial |
| Net investment income | $204.0 million | $318.2 million | Down $114.2 million |
| Net realized and unrealized gains on fixed maturities | $144.4 million | $93.7 million | Up $50.8 million |
| Income from continuing operations | $798.5 million | $1,046.0 million | Down 23.7% |
| Income from discontinued operations | $62.7 million | $6.7 million | 2010 included stronger U.S. crop-insurance underwriting |
| Net income attributable to common shareholders | $702.6 million | $838.9 million | Diluted EPS was $12.31 versus $13.40 |
| Operating cash flow | $494.7 million | $588.9 million | Cash and cash equivalents ended 2010 at $277.7 million |
- Catastrophe losses: The Chilean and New Zealand earthquakes produced a combined estimated net negative impact of $211.7 million, including a 32.0 percentage-point impact on the consolidated combined ratio. Australian flooding also generated reported gross claims of $23.0 million; the filing highlights uncertainty over the event’s covered losses.
- Reserve development: Prior-year reserve changes increased 2010 net income by $302.1 million, compared with $266.2 million in 2009. This favorable development materially supported reported underwriting results.
- Balance sheet and capital: Total assets were $8.14 billion, total investments $6.10 billion, and shareholders’ equity attributable to RenaissanceRe $3.94 billion. Book value per common share was $62.58, up from $51.68; book value plus accumulated dividends increased 23.0%.
- Debt and liquidity: Debt was $549.2 million, versus $300.0 million a year earlier; this included $200.0 million outstanding under DaVinciRe’s facility. Total letters of credit outstanding were $689.0 million. The investment portfolio included $1.11 billion of short-term investments. The filing does not provide a single consolidated liquidity ratio.
- Investments: The portfolio was primarily fixed-maturity and short-term investments. Average yield to maturity on those holdings was 2.1%, down from 2.3%. Other investments were $787.5 million, including less-liquid private equity and other funds; unfunded private-equity and investment commitments totaled $210.8 million.
Material changes versus the prior comparable period
- Underwriting income fell as current-year catastrophe claims rose, particularly from the 2010 earthquakes; the filing attributes a $252.1 million underwriting loss impact and 32.0 points of consolidated combined-ratio impact to those earthquakes.
- Gross premiums written declined as catastrophe-market conditions softened and the company did not renew some large programs that failed its underwriting requirements. Reinsurance-segment gross premiums written fell 7.2%; specialty premiums increased 13.2%.
- Investment income decreased amid lower fixed-income yields and weaker results in certain other investment allocations. Gains on fixed maturities partly offset the decline. RenaissanceRe also substantially increased the proportion of fixed maturities designated as trading, making future net income more sensitive to unrealized market-value changes.
- The Lloyd’s segment, which was still developing, reported an $11.1 million underwriting loss and a 122.1% combined ratio on $50.2 million of net premiums earned. The Bermuda Insurance segment was in runoff and recorded a $31.4 million underwriting loss.
- The company repurchased $448.9 million of common shares, redeemed $100.0 million of Series B preference shares, and issued $250.0 million of 5.75% senior notes. Common dividends were $1.00 per share for 2010, up from $0.96 in 2009.
Outlook, management commentary, risks and unusual items
- Management expected soft and competitive reinsurance market conditions to continue through 2011, potentially putting pressure on pricing and premiums. It also expected low investment yields to weigh on near-term net investment income.
- The filing reports that a magnitude 6.3 earthquake struck near Christchurch, New Zealand, on February 22, 2011. The company had not received meaningful claims reports and gave no clear loss estimate, but said the impact on first-quarter 2011 results would likely be significant and material.
- The QBE sale was estimated to generate cash consideration of approximately $283.4 million, based on the businesses’ December 31, 2010 book value and subject to adjustments. Completion, anticipated benefits, and effects on the continuing business remained uncertain. The agreement also includes a post-closing reserve-development adjustment of up to $10 million in either direction.
- Key risks include catastrophe frequency and severity, uncertainty in loss reserves and reinsurance recoverables, broker concentration (three brokers generated 88.2% of Reinsurance-segment gross premiums), competition and market-cycle pricing, counterparty credit risk, investment valuation and liquidity, and dependence on subsidiary dividends and regulatory capital requirements.
- Regulatory and tax uncertainty includes implementation of the Dodd-Frank Act, Bermuda and U.S. reinsurance regulation, and Solvency II, then expected to take effect in 2013. Management said the eventual effects were uncertain.
- The filing identifies no individual ordinary-course litigation likely to have a material adverse effect. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether and on what final terms the QBE sale closed, including any purchase-price adjustments and the resulting continuing-company capital, earnings, and risk profile.
- Subsequent loss development for the 2010 Chile and New Zealand earthquakes and Australian flooding, and the realized impact of the February 2011 Christchurch earthquake.
- How much of 2010 earnings depended on $302.1 million of favorable prior-year reserve development, and whether reserve estimates for catastrophe and specialty business remain adequate.
- Whether soft-market pricing, premium declines, and low investment yields developed as management expected, and how those conditions affected underwriting discipline and returns.
- Debt, letters of credit, subsidiary dividend capacity, and regulatory capital after facility changes and the QBE transaction; also verify the extent and liquidity of less-observable or restricted investments.