RenaissanceRe Holdings Ltd. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. RenaissanceRe is a Bermuda-based reinsurer and insurer focused on property catastrophe and specialty risks. In March 2011, it completed the sale of substantially all U.S.-based insurance operations to QBE; those results are presented as discontinued operations.
Financial performance
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Gross premiums written | $641.6 | $506.5 | $1,252.1 | $1,022.6 |
| Net premiums earned | $217.2 | $212.2 | $522.7 | $462.8 |
| Net investment income | $33.3 | $26.2 | $93.6 | $91.9 |
| Net realized and unrealized investment gains | $35.0 | $70.1 | $29.8 | $118.3 |
| Underwriting income (loss) | $9.7 | $169.4 | $(387.4) | $251.1 |
| Net income (loss) attributable to RenaissanceRe common shareholders | $24.8 | $210.2 | $(223.3) | $375.3 |
| Diluted earnings (loss) per common share | $0.48 | $3.66 | $(4.39) | $6.37 |
| Combined ratio | 95.5% | 20.2% | 174.1% | 45.8% |
- Catastrophe losses: First-half underwriting results included an estimated $662.5 million net underwriting impact from Australian flooding, the February New Zealand earthquake, the Tohoku earthquake and U.S. tornadoes. After DaVinciRe noncontrolling interests, ceded-contract recoveries and Top Layer Re losses, the company estimated a net negative impact of $495.8 million on RenaissanceRe.
- Q2 tornadoes: Estimated net impact was $70.8 million after DaVinciRe noncontrolling interests, including a $99.9 million adverse underwriting impact and a 51.8 percentage-point effect on the consolidated combined ratio.
- Reserve development: Prior-year reserves generated favorable development of $20.7 million in Q2 and $88.8 million in the first half, versus $80.2 million and $192.5 million, respectively, in 2010. Current-year catastrophe losses and lower favorable development drove the year-over-year deterioration.
- Investment and other items: First-half investment gains fell $88.5 million year over year. Other income was $45.0 million, including $42.5 million of income from fair-value-accounted reinsurance contracts, principally related to Tohoku recoverables. The company recognized no other-than-temporary investment impairments in the first half.
Balance sheet, cash flow and capital
- At June 30, total assets were $8.17 billion, total investments $5.80 billion, cash and cash equivalents $237.7 million, and shareholders’ equity attributable to RenaissanceRe $3.52 billion. Book value per common share was $57.30, down from $62.58 at year-end 2010; book value plus accumulated dividends was $67.70, versus $72.46.
- Claims reserves rose to $2.17 billion from $1.26 billion at December 31, 2010, largely reflecting catastrophe losses. Reinsurance recoverables were $333.2 million, compared with $101.7 million at year-end.
- First-half operating cash flow was $31.0 million, down from $288.5 million. Investing cash flow was $401.4 million, including $269.5 million net proceeds from the QBE sale. Financing used $475.7 million, including $174.8 million of share repurchases, dividends, and debt repayment. Cash declined $40.0 million during the period.
- Debt was $349.2 million at quarter-end: $100.0 million of 5.875% senior notes and approximately $249.2 million of 5.75% senior notes. The $200 million DaVinciRe revolving facility was repaid and terminated; RenaissanceRe then made DaVinciRe a $200 million intercompany loan due in 2021 at three-month LIBOR plus 3.5%.
- Capital resources, including equity, senior notes and available credit facilities, totaled $4.02 billion, down from $4.65 billion at year-end. The main stated drivers included the first-half loss, dividends, share repurchases and repayment of the DaVinciRe facility. The company reported $600 million of commitments under its principal letter-of-credit facility and $300 million under a bilateral facility; total outstanding letters of credit were $528.5 million.
- Management reported Bermuda statutory capital and surplus of $2.6 billion against a $505.9 million minimum solvency margin. Subsidiaries’ ability to remit dividends is subject to regulatory and solvency restrictions.
Material changes, outlook and risks
- Gross premiums written increased 26.7% in Q2 and 22.4% in the first half. Management attributed growth to reinstatement premiums, stronger catastrophe pricing and terms at June renewals, and expansion at Lloyd’s. The Q2 Reinsurance segment generated $12.9 million of underwriting income; Lloyd’s recorded a $3.3 million underwriting loss.
- The QBE sale closed March 4 for net consideration of $269.5 million. A $10.0 million liability and expense was recorded in Q2 under the transaction’s reserve collar, the maximum amount payable by RenaissanceRe for adverse prior-year development; the company said it would reassess the matter quarterly.
- Management said catastrophe losses may have reduced industry excess capital and could support demand and pricing for catastrophe coverage, but cautioned that improved demand or underwriting opportunities are not assured. June/July catastrophe renewals showed reported risk-adjusted price increases under the prior RMS model; pricing was reported flat or down using newer models. Casualty reinsurance pricing remained soft.
- Management expects low interest rates and spreads to pressure near-term investment income. It also described economic uncertainty, inflation, market volatility, competition, regulatory changes and counterparty credit as risks. Weather and energy activities are seasonal and volatile; management noted less favorable Q2 trading conditions.
- Catastrophe loss and recovery estimates remain materially uncertain because of developing claims, reporting lags, business-interruption exposures, concentrated client losses and reinsurer collectability. Management cautioned actual losses could differ materially from estimates. No formal earnings guidance was provided in the supplied filing text.
- The filing reported no material change in litigation or risk factors from the 2010 Form 10-K, no material change in internal control over financial reporting, and no off-balance-sheet arrangements as defined by the cited SEC rule.
Important facts for investors to verify
- Subsequent development of reserves and reinsurance recoverables for the 2011 catastrophe events, especially Tohoku, New Zealand and Australian flooding.
- Whether Q2’s favorable prior-year reserve development continues and how large the remaining catastrophe claims estimates prove to be.
- DaVinciRe’s results, redemption requests, capital position and the terms and repayment capacity of its $200 million intercompany loan.
- Liquidity and collateral needs, including letter-of-credit usage, guarantees for weather and energy counterparties, and regulatory limits on subsidiary dividends.
- Progress and use of the expanded $500 million share-repurchase authorization, given the first-half decline in book value and capital resources.
- Investment portfolio valuation and liquidity, particularly private equity and other Level 3 holdings, unfunded commitments, and expected returns in a low-yield environment.