Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based global reinsurer and insurer, with Property and Casualty and Specialty reporting segments and managed joint ventures. This Form 10-K covers the fiscal year ended December 31, 2016; quarterly information is unaudited. Platinum’s results are included from its March 2, 2015 acquisition, so some year-over-year comparisons reflect a longer period of Platinum ownership in 2016.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Gross premiums written | $2.375 billion | $2.011 billion |
| Net premiums earned | $1.403 billion | $1.401 billion |
| Total revenues | $1.728 billion | $1.515 billion |
| Underwriting income | $385.5 million | $494.6 million |
| Net income | $630.0 million | $542.2 million |
| Net income available to common shareholders | $480.6 million | $408.8 million |
| Diluted earnings per common share | $11.43 | $9.28 |
| Combined ratio | 72.5% | 64.7% |
| Return on average common equity | 11.0% | 9.8% |
| Net cash provided by operating activities | $469.8 million | $414.7 million |
At year-end, total investments were $9.317 billion, cash and cash equivalents were $421.2 million, total assets were $12.352 billion, and shareholders’ equity attributable to RenaissanceRe was $4.867 billion. Balance-sheet debt was $948.7 million; the company also had a $250 million revolving credit facility that was undrawn. A $250 million 7.50% note was due in 2017; management said it anticipated repaying the notes with existing cash and did not plan to refinance them, while noting this was not assured.
Book value per common share was $108.45; book value plus accumulated dividends was $125.17, up 10.7% from 2015. Common dividends totaled $1.24 per share in 2016. The Board subsequently approved a quarterly dividend of $0.32 per share and renewed a $500 million share-repurchase authorization.
Material changes versus prior comparable period
- Gross premiums written increased 18.1%, driven mainly by Casualty and Specialty, whose gross premiums rose 34.5% to $1.263 billion. Property gross premiums increased 3.6% to $1.111 billion.
- Underwriting income fell $109.1 million and the combined ratio worsened by 7.8 percentage points. Higher claims and underwriting expenses more than offset premium growth.
- Investment results improved substantially: total investment result was $321.2 million versus $82.4 million in 2015, reflecting investment gains in 2016 compared with losses in 2015. Net investment income rose to $181.7 million from $152.6 million.
- 2016 catastrophe losses included the Fort McMurray wildfire, Texas weather events and Hurricane Matthew. Their estimated net impact was $87.3 million after noncontrolling interests, adding 7.9 percentage points to the consolidated combined ratio; estimates remained uncertain.
- Prior-year claims development was favorable by $164.1 million, compared with $162.4 million in 2015. The filing cautions that favorable development may not recur.
- Common shares repurchased during 2016 totaled 2.7 million at an aggregate cost of $309.4 million. Cash and cash equivalents declined $85.7 million during the year.
For the fourth quarter of 2016, net income available to common shareholders was $69.4 million, or $1.69 diluted per share, compared with $92.2 million, or $2.09 per diluted share, in fourth-quarter 2015.
Outlook, commentary, risks and unusual items
- Management described property catastrophe reinsurance conditions as soft, with abundant industry capital and continued pressure on risk-adjusted pricing and contract terms. It did not expect to maintain the size of its aggregate property-exposed reinsurance book absent changed conditions.
- Management expected abundant casualty and specialty capacity and a soft overall casualty pricing environment in 2017. It saw selected niche opportunities, including mortgage reinsurance, but emphasized underwriting discipline and gave no quantitative earnings or premium guidance.
- Key risks include catastrophe frequency and severity, climate-related exposure, reserve-estimation uncertainty, long-tail casualty claims and social/legal inflation. Casualty and Specialty reserves were $2.195 billion, including $1.498 billion of IBNR; the filing notes that limited company-specific history in some lines adds uncertainty.
- Broker concentration is significant: Aon, Marsh and Willis Towers Watson generated 80.8% of 2016 gross premiums written. The company also faces counterparty, investment-market, foreign-exchange, cybersecurity, regulatory and tax risks.
- Investment gains were an important contributor to 2016 earnings. The fixed-maturity and short-term portfolio had an average credit quality of AA, but 12.6% of fixed-maturity investments were non-investment-grade or unrated. Low interest rates were expected to constrain investment-income growth in the near term.
- Other notable items: 2016 corporate expenses included $15.4 million related to executive departures; the 2015 comparison included substantial Platinum acquisition and integration expenses. The company reported no litigation it believed likely to have a material adverse effect. Auditors issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether catastrophe-loss estimates and favorable prior-year reserve development change as claims mature, particularly in the Casualty and Specialty segment.
- Whether the company can sustain underwriting profitability as pricing and terms remain pressured, and as its business mix shifts toward proportional casualty and specialty business.
- How much 2016 earnings depended on investment gains, and whether investment returns and portfolio valuations are sustainable under changing rates and credit spreads.
- Liquidity after the 2017 senior-note repayment, including subsidiary dividend restrictions, collateral and letter-of-credit needs, and remaining investment commitments of $249.4 million.
- Whether broker concentration, counterparty recoverables and the company’s catastrophe and long-tail exposures remain within management’s risk tolerances.