Business context and reporting period
RenaissanceRe Holdings Ltd. is a Bermuda-based global reinsurance and insurance provider. This Form 10-Q covers the quarter and six months ended June 30, 2016. Results include Catastrophe Reinsurance, Specialty Reinsurance and Lloyd’s segments, as well as investment and other activities. Comparisons are affected by the March 2, 2015 acquisition of Platinum: 2016 includes Platinum for the full period, while 2015 includes it only from the acquisition date.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Gross premiums written | $759.1 | $662.0 | $1,621.3 | $1,305.6 |
| Net premiums earned | $351.4 | $379.8 | $705.0 | $676.6 |
| Total revenues | $483.3 | $397.6 | $931.4 | $779.5 |
| Underwriting income | $63.6 | $94.1 | $168.7 | $225.0 |
| Combined ratio | 81.9% | 75.2% | 76.1% | 66.7% |
| Net income attributable to RenaissanceRe | $141.9 | $78.8 | $275.5 | $252.3 |
| Net income available to common shareholders | $136.3 | $73.2 | $264.3 | $241.1 |
| Diluted EPS | $3.22 | $1.59 | $6.16 | $5.56 |
| Net investment income | $54.1 | $38.6 | $83.0 | $78.3 |
| Net realized and unrealized investment gains | $69.8 | $(26.7) | $131.4 | $15.0 |
Investment results were the principal driver of higher earnings: total investment result was $123.8 million in Q2 (versus $11.3 million) and $214.1 million for the first half (versus $92.6 million). Gains reflected lower U.S. Treasury yields and a flatter yield curve, along with equity gains; derivatives partly offset those gains. Underwriting income fell in both comparisons, and the combined ratio worsened.
For the first half, annualized return on average common equity was 12.2% versus 11.8%. Book value per common share was $103.70 at June 30, compared with $99.13 at year-end; including accumulated dividends, the measure rose 5.2% to $119.80.
Financial position, cash flow and liquidity
- At June 30, total assets were $12.54 billion, total liabilities $6.72 billion, redeemable noncontrolling interests $1.12 billion and shareholders’ equity attributable to RenaissanceRe $4.70 billion. Total investments were $9.01 billion; cash and cash equivalents were $455.5 million.
- Balance-sheet debt was $954.6 million, down from $960.5 million at year-end; its disclosed fair value was $1.01 billion. The capital resources table also includes a $250 million undrawn revolving credit facility, bringing its stated total debt-and-facility figure to $1.20 billion.
- Six-month operating cash flow was $117.2 million, compared with cash used of $29.4 million in 2015. Investing activities provided $175.6 million; financing activities used $346.3 million, principally reflecting $265.0 million of share repurchases and dividends.
- The company repurchased 2.4 million shares for $272.3 million during the first half. At June 30, $397.1 million remained under the renewed $500 million authorization. It subsequently repurchased 286,000 shares for $33.1 million through July 25.
- Management reported that group capital exceeded the Bermuda regulator’s target level and that operating subsidiaries exceeded applicable required capital levels. The company relies on subsidiary dividends for holding-company obligations, and those distributions are subject to regulatory limits. Approximately $2.4 billion of cash and investments was pledged or held in trust for counterparties and regulators.
Material changes, outlook and risks
- Q2 underwriting income declined to $63.6 million from $94.1 million, despite higher gross premiums written. The Texas weather events and Fort McMurray wildfire generated an estimated $50.4 million net negative underwriting impact, or 15.4 percentage points on the consolidated combined ratio; the estimated effect on common-shareholder net income was $41.1 million. Management cautioned that event-loss estimates remain uncertain and may change materially.
- For the first half, the same events’ estimated net underwriting impact was $50.4 million, or 7.7 combined-ratio points. Prior-year reserve development was favorable by $30.9 million, below the $55.2 million favorable development in first-half 2015; Lloyd’s had $3.3 million of adverse development.
- Segment combined ratios for Q2 were 64.3% in Catastrophe Reinsurance, 88.8% in Specialty Reinsurance and 103.1% in Lloyd’s. For the first half they were 46.2%, 94.8% and 97.3%, respectively. Lloyd’s was unprofitable on underwriting in Q2.
- Management described reinsurance markets as soft, with abundant traditional and alternative capital, pricing pressure and erosion of terms. It expects supply to continue to outpace demand in the near term and does not expect to maintain the size of its aggregate property-exposed reinsurance book absent changed conditions. It intends to preserve underwriting discipline; no numerical earnings or premium guidance was provided.
- Low interest rates are expected to constrain investment-income growth near term. Management also identified potential exposure from catastrophe frequency and severity, reserve-estimation uncertainty, longer-tail specialty growth, inflation, market and counterparty risk, regulation and taxation, and Brexit-related financial-market and Lloyd’s access uncertainty.
- The filing reports no material change in previously disclosed commitments or contingencies and no currently pending individual litigation or arbitration believed likely to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- Other notable items: first-half corporate expenses fell to $14.0 million from $58.4 million, mainly because Platinum acquisition and integration costs declined. First-half income tax was an expense of $9.4 million versus a $49.7 million benefit in 2015, primarily reflecting the prior-year U.S. deferred-tax valuation allowance release. The filing also reports a planned CFO transition: Robert Qutub was to begin August 8, 2016, and Jeffrey Kelly’s separation was scheduled for September 15, 2016.
Important facts for investors to verify
- Whether catastrophe-loss estimates for the Texas events and Fort McMurray wildfire develop materially from the preliminary amounts disclosed.
- Whether favorable prior-year reserve development persists, particularly given adverse development in Lloyd’s and the greater uncertainty of specialty and casualty reserves.
- How much reported earnings growth is attributable to investment mark-to-market gains versus recurring underwriting and investment income.
- Whether soft pricing, increased retrocession costs and changing business mix affect premium volume, combined ratios and underwriting returns.
- How regulatory restrictions, pledged assets and subsidiary-dividend capacity affect holding-company liquidity and continued buybacks or dividends.
- Whether Brexit, tax proposals, low yields or other market developments alter investment results, Lloyd’s market access or the company’s capital position.