RenaissanceRe Holdings Ltd. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 8, 2018. RenaissanceRe is a Bermuda-based global provider of property, casualty and specialty reinsurance and insurance. Its reportable segments are Property and Casualty and Specialty.
Financial performance and condition
- Premiums: Gross premiums written rose 17.8% to $2.80 billion from $2.37 billion; net premiums earned increased 22.4% to $1.72 billion from $1.40 billion. Property gross premiums grew 29.6% and Casualty and Specialty grew 7.4%.
- Profit and underwriting: Net loss attributable to common shareholders was $244.8 million, or $6.15 per diluted share, versus net income of $480.6 million, or $11.43 per diluted share, in 2016. The combined ratio was 137.9%, compared with 72.5%; the ratio above 100% indicates an underwriting loss. Underwriting loss was $651.5 million, versus $385.5 million of underwriting income.
- Segments: Property recorded a $574.9 million underwriting loss and a 161.7% combined ratio (2016: $363.2 million income; 49.6%). Casualty and Specialty recorded a $78.2 million loss and a 109.9% combined ratio (2016: $21.2 million income; 96.9%).
- Catastrophe and other losses: Hurricanes Harvey, Irma and Maria, the Mexico City earthquake, California wildfires and 2017 aggregate losses produced an estimated $989.2 million underwriting impact before redeemable noncontrolling interests, equivalent to 59.4 percentage points on the consolidated combined ratio. The reported net negative impact after noncontrolling interests was $720.2 million. Estimates remain subject to substantial uncertainty.
- Investments: Net investment income was $222.2 million versus $181.7 million. Net realized and unrealized investment gains were $135.8 million versus $141.3 million; total investment result was $358.0 million versus $321.2 million.
- Cash flow and liquidity: Operating cash flow was $1.05 billion, compared with $484.8 million. Cash and cash equivalents increased to $1.36 billion from $421.2 million. The filing attributes part of operating cash flow to $602.4 million received in advance for Upsilon RFO preference shares issued January 1, 2018, as well as catastrophe-related reserve and reinsurance-recoverable movements. Investing activities used $142.4 million; financing activities provided $28.9 million.
- Balance sheet and capital: Total assets were $15.23 billion; total investments were $9.50 billion. Gross claims reserves were $5.08 billion, including $1.59 billion of reinsurance recoverables. Balance-sheet debt was $989.6 million, versus $948.7 million; a $250 million revolving credit facility was undrawn. Shareholders’ equity attributable to RenaissanceRe was $4.39 billion, down from $4.87 billion. Book value per common share fell to $99.72 from $108.45; book value plus accumulated dividends declined 6.9%.
- Returns and capital returns: Return on average common equity was negative 5.7%, versus positive 11.0%. Common dividends were $1.28 per share. The company repurchased 1.3 million common shares for $188.6 million during 2017 and renewed a $500 million repurchase authorization.
Material changes versus 2016
- Catastrophe losses drove a reversal from profitable underwriting to a substantial underwriting loss. Current-year net claims and claim expenses rose to $1.90 billion from $694.957 million; favorable prior-year development narrowed to $41.0 million from $164.1 million.
- The Property segment’s catastrophe loss burden was the principal earnings driver. Casualty and Specialty also moved to an underwriting loss, reflecting higher claims, including catastrophe-related and attritional claims, and adverse prior-year development of $6.2 million; 2016 had $58.1 million of favorable development.
- Income tax expense increased to $26.5 million from $0.3 million, including a $36.7 million deferred tax asset write-down following the U.S. corporate tax rate reduction from 35% to 21%.
- Cash flow increased sharply, but included advance Upsilon RFO investor funds and large claim-reserve/recoverable movements. Reinsurance recoverables rose to $1.59 billion from $279.6 million.
Outlook, commentary and key risks
- Market outlook: Management reported improved terms and conditions broadly at the January 2018 renewal season, particularly for loss-affected property programs. Rate increases were less broad and less pronounced than after some prior large-loss years. Management expects ample capacity in casualty and specialty markets and intends to maintain underwriting discipline; it gave no quantified earnings or premium guidance and cautioned that favorable conditions may not persist.
- Reserving uncertainty: Claims reserves are estimates, with significant uncertainty around 2017 catastrophe losses, business-interruption claims, coverage issues, reporting lags and recoveries from reinsurers. Casualty and Specialty reserves also face long-tail, inflation, legal and social-inflation risks. Management’s reserve sensitivity analyses are not actuarial reserve ranges.
- Capital and ratings: The company contributed a net $242.3 million to principal operating subsidiaries during 2017 to support capital adequacy, liquidity and ratings requirements. S&P affirmed key operating-company ratings but assigned a negative outlook, citing industry challenges. A downgrade could affect business, collateral requirements and financing access.
- Other exposures: Risks include catastrophe frequency and severity, climate-related losses, reinsurance counterparty collectability, broker concentration (three brokers generated 76.4% of gross premiums), soft-market competition, reserve development, U.S. tax changes and regulatory developments. The filing says no individual pending litigation was expected to have a material adverse effect.
- Unusual items: The 2017 catastrophe losses, $36.7 million deferred-tax-asset write-down and the Upsilon RFO advance subscription are notable items affecting results or cash flow. Management stated that the near-term economic effect of U.S. tax reform was currently estimated to be minimal, while noting continuing uncertainty.
Important facts for investors to verify
- How 2017 catastrophe loss estimates, including reinsurance recoveries, develop as claims data and coverage decisions mature.
- Whether the $1.59 billion reinsurance recoverable balance is collected as expected, and whether counterparty credit or disputes require additional allowances.
- Whether underwriting profitability and pricing improve after the January 2018 renewals, and whether management sustains its stated underwriting discipline.
- How casualty and specialty claims, prior-year reserves and long-tail trends develop, including the effect of the U.K. Ogden discount-rate change.
- Whether S&P’s negative outlook or other rating actions affect business volumes, collateral requirements, capital access or costs.
- The sustainability and composition of operating cash flow, distinguishing ordinary operating cash generation from advance investor subscriptions and catastrophe-related balance-sheet changes.
- Regulatory and tax developments, including the effects of U.S. tax reform and Bermuda, U.S. and U.K. capital requirements.