RenaissanceRe Holdings Ltd. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial amounts are in U.S. dollars; figures are in millions unless otherwise stated. Results include Platinum from its March 2, 2015 acquisition, so comparisons with 2014 are not fully like-for-like.
Business context and reporting period
RenaissanceRe provides global property catastrophe and specialty reinsurance and insurance, including business written through Lloyd’s Syndicate 1458 and managed ventures. The company completed its $1.93 billion acquisition of Platinum on March 2, 2015, expanding its U.S. specialty and casualty platform. Platinum contributed $106.7 million of Q2 revenue; its Q2 net loss attributable to RenaissanceRe common shareholders was $5.0 million, including acquisition-related costs.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Gross premiums written | $662.0 | $511.5 | $1,305.6 | $1,216.8 |
| Net premiums earned | $379.8 | $260.4 | $676.6 | $547.0 |
| Total revenues | $397.6 | $331.2 | $779.5 | $674.8 |
| Underwriting income | $94.1 | $99.7 | $225.0 | $251.0 |
| Net income attributable to RenaissanceRe | $78.8 | $126.3 | $252.3 | $282.9 |
| Net income available to common shareholders | $73.2 | $120.8 | $241.1 | $271.8 |
| Diluted earnings per common share | $1.59 | $2.95 | $5.56 | $6.52 |
| Net investment income | $38.6 | $34.5 | $78.3 | $73.5 |
| Net realized and unrealized investment gains (losses) | $(26.7) | $27.1 | $15.0 | $42.1 |
Underwriting and margins: The Q2 combined ratio was 75.2%, versus 61.7% a year earlier; the six-month ratio was 66.7%, versus 54.1%. Both periods remained below 100%, indicating underwriting profitability before investment income. Q2 underwriting income fell despite higher earned premiums, as claims increased, including U.S. wind and hail losses and higher attritional losses in specialty business. Favorable prior-year reserve development was $33.1 million in Q2 and $55.2 million for the first six months.
Investment results: Q2 total investment result was $11.3 million, compared with $61.6 million in Q2 2014, primarily reflecting rising rates and losses on fixed maturities, along with weaker private-equity returns. For the first six months, total investment result was $92.6 million, down from $115.3 million. Management expects low interest rates and the portfolio mix to constrain investment-income growth in the near term.
Cash flow and liquidity: Operating cash flow was $(29.4) million for the first six months, compared with $173.4 million in 2014, largely reflecting premium receivable, prepaid reinsurance premium and acquisition-cost growth. Investing cash flow was $(310.4) million, including the Platinum purchase; financing cash flow was $219.1 million. Cash and cash equivalents were $398.1 million at June 30, versus $525.6 million at year-end. Total investments were $9.28 billion, including $1.54 billion of short-term investments. The company reported $2.46 billion of cash and investments pledged or held in trust for counterparties and regulators.
Debt and capital: Balance-sheet debt was $972.4 million, compared with $249.5 million at year-end. Debt rose with the Platinum acquisition and related financing and included $300 million of 3.700% notes due 2025, Platinum’s 7.50% notes due 2017, existing 5.75% notes due 2020 and DaVinciRe’s 4.750% notes due 2025. The $250 million revolving credit facility was undrawn. RenaissanceRe shareholders’ equity was $4.84 billion. Book value per common share was $96.43; book value plus accumulated dividends increased 7.6% from year-end. The quarterly common dividend was $0.30 per share.
Material changes versus prior comparable periods
- Q2 common-shareholder earnings declined to $73.2 million from $120.8 million, and diluted EPS fell to $1.59 from $2.95. The lower investment result and weaker underwriting contribution outweighed premium growth.
- For the first six months, underwriting income fell $26.0 million and investment result fell $22.7 million year over year. Higher premiums reflected Platinum and growth in specialty and Lloyd’s business, while catastrophe premiums declined amid soft market conditions.
- Corporate expenses rose to $58.6 million for the first six months from $8.5 million, including $48.2 million of Platinum transaction, integration and employee-related costs.
- The company recorded a $49.7 million income tax benefit for the first six months, primarily after releasing a $47.4 million U.S. deferred-tax valuation allowance based on expected U.S. profits following the acquisition.
- Balance-sheet assets increased to $12.05 billion from $8.20 billion at year-end, reflecting the acquisition and expanded investment and underwriting balances. Common shares outstanding also increased following issuance of 7.435 million shares as part of the Platinum consideration.
Outlook, commentary and risks
- Management expects abundant traditional and alternative capital to continue pressuring catastrophe pricing and terms. It does not expect near-term market conditions to improve absent unusually large or unforeseen events, and does not expect to maintain the size of its aggregate property-exposed reinsurance book while prioritizing underwriting discipline.
- Casualty and specialty capacity is also expected to remain abundant, limiting risk-adjusted rate improvement. Management intends to pursue business meeting its standards but gives no assurance of growing or maintaining the combined in-force book.
- The Platinum acquisition is expected to support U.S. specialty and casualty growth, but increases longer-tail exposure and related sensitivity to inflation, interest rates, claims development and legal or tort developments. Additional acquisition and integration costs were expected in 2015 and could be significant.
- Key risks include catastrophe severity and frequency, reserve-estimation uncertainty, counterparty and reinsurance recoverability, competition and terms erosion, investment volatility and low yields, and regulatory, tax and market changes. Management notes that specialty reserves have greater uncertainty in some lines because of limited company-specific experience.
- Management reported adequate aggregate capital resources and cash-flow capacity. However, subsidiary dividends are subject to regulatory limits; Bermuda subsidiaries had been asked to obtain prior approval for 2015 dividends or capital returns. The company’s holding-company liquidity depends substantially on permitted subsidiary distributions.
- A court decision concerning federal excise tax on foreign-to-foreign retrocessions could result in a future $8.5 million gain, but recognition is contingent on further legal developments and application to the company’s circumstances; no gain was recorded in this filing.
- The filing states no individual current litigation or arbitration matter is likely to have a material adverse effect. Bermuda’s Solvency II equivalence remained under review; management anticipated additional compliance processes and costs and noted potential uncertainty if equivalence treatment differs from that of competitors.
Important facts for investors to verify
- How Platinum’s premium growth, underwriting results and integration costs develop, and whether expected synergies and U.S. specialty/casualty growth materialize.
- Whether reserve development remains favorable, particularly for acquired specialty liabilities and longer-tail casualty lines; acquired Platinum claims reserves were approximately $1.4 billion at closing.
- Whether underwriting margins hold as pricing and terms soften, and how catastrophe and attritional losses affect segment combined ratios.
- Investment portfolio sensitivity to interest rates, private-equity valuation estimates and market movements; the filing notes that final fund valuations may differ from estimates.
- Debt servicing, holding-company liquidity and regulatory restrictions on subsidiary dividends, including the effects of the acquisition-related increase in leverage.
- Developments affecting the potential $8.5 million tax-related contingent gain, Bermuda’s regulatory equivalence status, and relevant U.S. tax proposals.