RenaissanceRe Holdings Ltd. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. RenaissanceRe provides global property catastrophe and specialty reinsurance and insurance. Results include Platinum from its March 2, 2015 acquisition, so year-over-year comparisons reflect both acquired operations and changes in the existing business. Unless stated otherwise, amounts below are U.S. dollars.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net premiums earned | $362.4m | $259.0m | $1,039.0m | $805.9m |
| Total revenues | $358.2m | $266.5m | $1,137.7m | $941.3m |
| Net income | $112.3m | $103.9m | $416.4m | $465.7m |
| Net income available to common shareholders | $75.5m | $67.8m | $316.6m | $339.6m |
| Diluted EPS | $1.66 | $1.70 | $7.19 | $8.26 |
| Underwriting income | $129.7m | $104.8m | $354.7m | $355.8m |
| Combined ratio | 64.2% | 59.5% | 65.9% | 55.9% |
| Net investment income | $28.3m | $24.9m | $106.6m | $98.4m |
| Net realized and unrealized investment gains (losses) | ($41.1m) | ($31.1m) | ($26.1m) | $11.0m |
Q3 common-shareholder income increased, but diluted EPS edged down. For the first nine months, common-shareholder income and diluted EPS declined despite premium growth; underwriting income was nearly flat, and weaker investment results and acquisition-related costs weighed on earnings. The consolidated combined ratio remained below 100%, indicating underwriting profit before investment income, but rose versus both comparable periods.
- Cash flow: Nine-month operating cash flow was $162.1m, versus $393.4m in 2014. Investing cash flow was an outflow of $155.4m, including the Platinum purchase; financing cash flow was a $3.2m inflow. Cash and cash equivalents were $524.5m at period-end, little changed from $525.6m at December 31, 2014.
- Balance sheet and liquidity: Total assets were $11.91bn, versus $8.20bn at year-end 2014; RenaissanceRe-attributable shareholders’ equity was $4.70bn, versus $3.87bn. Investments totaled $9.00bn. The filing says $2.45bn of cash and investments were pledged or held in trust, limiting their availability for general use.
- Debt: Balance-sheet debt was $969.2m, versus $249.5m at year-end. The company issued $300m of 3.70% notes due 2025, assumed Platinum’s $250m 7.50% notes due 2017, and consolidated DaVinciRe’s $150m 4.75% notes due 2025. Management’s capital-resources presentation also includes the $250m undrawn revolving facility in its $1.219bn total debt-and-facility figure; it is not funded debt.
- Capital returns: Common dividends were $0.30 per share in Q3. The company repurchased 2.0m shares for $211.5m in the first nine months; $313.2m remained under the renewed $500m authorization at September 30.
Material changes and unusual items
- Platinum was acquired for $1.93bn aggregate consideration, comprising shares valued at $761.8m and cash consideration of $904.4m, after Platinum’s $253.2m special dividend. The acquisition expanded specialty and casualty operations and materially increased premiums, reserves, assets and debt. Platinum-specific revenue and earnings after acquisition were not separately determinable, according to the filing.
- Q3 results included an estimated $26.0m net negative impact from the Tianjin explosion, equivalent to 8.3 percentage points of the consolidated combined ratio. The estimate is preliminary and subject to meaningful uncertainty.
- Prior-year reserve development was favorable by $125.6m for the first nine months, compared with $59.1m in 2014. Specialty Reinsurance contributed $83.7m and Catastrophe Reinsurance $42.4m of favorable development. Reserve releases meaningfully supported reported underwriting results.
- Investment results were pressured by equity-market declines, widening credit spreads and derivative losses. Management reported that lower interest rates are expected to constrain investment-income growth in the near term.
- Corporate expenses included $51.9m of Platinum transaction, integration and compensation-related costs. A $47.4m reduction in the U.S. deferred-tax-asset valuation allowance contributed to the nine-month $54.3m income-tax benefit; this benefit is not equivalent to recurring operating earnings.
Outlook, risks and contingencies
- Management expects abundant reinsurance capital and soft pricing to persist, absent unusually large or unforeseen events. It does not expect to maintain the size of its aggregate property-exposed book if market terms remain unattractive, and intends to maintain underwriting discipline.
- Management expects casualty capacity to remain abundant into 2016, limiting broad risk-adjusted rate improvement. It sees Platinum as supporting U.S. specialty and casualty growth, while noting increased exposure to inflation, interest rates, longer-tail claims and unforeseen legal or claims developments.
- Key risks include catastrophe severity and frequency, reserve estimation uncertainty, reinsurance recoverability and counterparty performance, investment-market volatility and illiquid-asset valuation, competitive pressure, broker concentration, regulatory and tax changes, and Platinum integration. Management cautions that actual catastrophe losses and reserve outcomes may differ materially from estimates.
- The filing identifies a possible future tax-refund gain of up to $8.5m following a court decision on federal excise tax for foreign-to-foreign retrocessions; realization depends on subsequent legal, IRS and fact-specific outcomes. Management stated that no individual current legal proceeding was likely to have a material adverse effect.
- Management reported adequate capital resources and effective disclosure controls at September 30, 2015. It also noted Bermuda regulatory approval requirements for certain subsidiary capital returns and statutory limits on subsidiary dividends to the holding company.
Important facts for investors to verify
- How much of earnings and underwriting performance depends on favorable prior-year reserve development, and whether that development persists.
- How Tianjin losses develop as claims data and reinsurance recoveries become clearer.
- Platinum’s standalone contribution, integration progress, expected synergies and remaining acquisition-related costs; the filing does not provide clear standalone post-acquisition earnings.
- The sustainability of premium growth and underwriting margins, particularly in specialty and casualty lines and amid soft pricing and increased quota-share business.
- Investment portfolio exposure to market losses and illiquid valuations, and the effect of low yields on future investment income.
- Debt-service capacity, subsidiary dividend restrictions, pledged assets and the availability of liquidity after catastrophe losses and capital returns.
- Whether the deferred-tax valuation-allowance release and any potential excise-tax refund gain affect future reported results.