RenaissanceRe Holdings Ltd. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; balance-sheet comparisons are with December 31, 2016 unless noted. RenaissanceRe is a Bermuda-based global reinsurance and insurance provider, reporting Property and Casualty and Specialty segments. Amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross premiums written | $827.4 | $759.1 | $1,749.5 | $1,621.3 |
| Net premiums earned | $382.3 | $351.4 | $748.3 | $705.0 |
| Total revenues | $505.6 | $483.3 | $977.7 | $931.4 |
| Net income | $214.4 | $172.6 | $346.6 | $350.7 |
| Net income available to common shareholders | $171.1 | $136.3 | $263.5 | $264.3 |
| Diluted earnings per common share | $4.24 | $3.22 | $6.47 | $6.16 |
| Net investment income | $54.2 | $54.1 | $108.5 | $83.0 |
| Net realized and unrealized investment gains | $58.1 | $69.8 | $101.5 | $131.4 |
| Underwriting income | $109.7 | $63.6 | $152.1 | $168.7 |
| Combined ratio | 71.3% | 81.9% | 79.7% | 76.1% |
| Operating cash flow | — | $341.0 | $125.2 |
Financial position, liquidity and capital
- At June 30, total assets were $13.71 billion, investments $9.41 billion, cash and equivalents $623.2 million, and shareholders’ equity attributable to RenaissanceRe $4.96 billion.
- Claims reserves were $2.99 billion, unearned premiums $1.85 billion, and debt $988.9 million. Debt carrying value rose from $948.7 million at year-end; disclosed fair value was $1.02 billion.
- Cash increased $202.0 million in the first half. Operating cash flow was $341.0 million; investing cash flow was $37.5 million provided; financing cash flow was $182.0 million used. The operating cash flow increase reflected, in part, premium and reinsurance payable timing and growth in unearned premiums.
- The company issued $300 million of 3.45% senior notes due 2027 and repaid $250 million of 7.50% notes at maturity. Its $250 million revolving credit facility was undrawn. Outstanding listed credit and letter-of-credit facilities totaled $496.8 million, plus £10 million.
- It repurchased approximately 1.1 million common shares for $149.7 million in the first half, at an average $142.33 per share; $485.1 million remained authorized. Common dividends were $0.32 per share in Q2 and $0.64 for the half-year.
- Book value per common share was $113.08 at June 30; including accumulated dividends, it was $130.44, up 4.9% from year-end. Annualized return on average common equity was 15.2% for Q2 and 11.7% for the first half.
Material changes and management commentary
- Q2 earnings improved: Common-shareholder income rose $34.8 million year over year. Underwriting income increased $46.1 million and the combined ratio improved 10.6 percentage points. Management attributed much of the comparison to lower catastrophe claims and stronger favorable prior-year development; Q2 2016 had significant Texas weather and Fort McMurray wildfire losses.
- First-half underwriting weakened: Underwriting income fell $16.7 million and the combined ratio worsened 3.6 points. Property underwriting income rose to $198.0 million, while Casualty and Specialty recorded a $46.5 million underwriting loss and a 112.6% combined ratio.
- Q2 Property gross premiums written increased 1.1%; catastrophe premiums declined 4.8% amid challenging pricing, while other property grew. First-half Property premiums increased 8.6%. Casualty and Specialty premiums grew 23.7% in Q2 and 6.9% for the half, supported by selective growth and private placements.
- Prior-year reserve development was favorable by $16.1 million for the first half, versus $30.9 million favorable in 2016. Property development was favorable by $24.8 million; Casualty and Specialty development was adverse by $9.3 million, principally due to a $33.5 million impact from the U.K. Ogden discount-rate change, from 2.5% to minus 0.75%.
- Q2 investment income was essentially unchanged, while first-half investment income increased $25.5 million. Investment gains were lower year over year in both periods, mainly because fixed-income unrealized gains were smaller as yield-curve movements differed from 2016; equity investment results were stronger.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management expects abundant industry capital and continued soft, competitive pricing in property catastrophe reinsurance, with supply expected to exceed demand into the January 1, 2018 renewals. It does not expect to maintain the net size of its property-exposed reinsurance book absent changed market conditions, while emphasizing underwriting discipline.
- Management expects abundant casualty capacity and soft pricing in many markets; selective niche opportunities may remain. It cautions that growth and portfolio returns are not assured. Increased proportional business can carry higher premiums and combined ratios, and market ceding commissions have been rising.
- Low interest rates are expected to constrain investment-income growth near term. Higher rates could improve reinvestment yields but may cause near-term investment losses. Investment results are exposed to interest-rate, currency, credit and equity-market risks.
- Major uncertainties include catastrophe frequency and severity, reserve estimation, counterparty recoverability, inflation, competition, and potential U.S. tax reform. Management noted proposals that could materially affect the reinsurance industry but said their form, timing and impact were uncertain.
- Regulatory and market risks include potential changes to catastrophe programs and the U.S. National Flood Insurance Program, Florida assignment-of-benefits claim trends, and international proposals that could reduce private-market opportunities. The company reported no material changes to previously disclosed legal proceedings or risk factors and said no individual current litigation was likely to have a material adverse effect.
- Reserves require substantial estimates; ultimate claim payments may differ materially. The company reported $336.5 million of remaining commitments to private equity and other investments. It also has a potential mandatory capital contribution obligation to Top Layer Re of up to $50 million if specified loss conditions occur.
Most important facts for investors to verify
- Whether Casualty and Specialty claims experience and the Ogden-rate reserve impact develop as expected, and whether the segment can return to underwriting profitability.
- How much Q2’s strong underwriting comparison depended on the absence of large catastrophe losses and favorable prior-year reserve releases.
- Property and casualty renewal pricing, terms, ceded-reinsurance costs, and the resulting size and risk quality of the net portfolio.
- Investment portfolio returns, valuation assumptions and liquidity restrictions, including the impact of interest-rate changes and lagged private-fund valuations.
- Claims reserve adequacy, recoverability of reinsurance balances, and cash-flow effects from premium and claims-payment timing.
- Capital deployment, including share repurchases, debt costs and maturities, and the availability of subsidiary dividends subject to regulatory limits.