RenaissanceRe Holdings Ltd. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. RenaissanceRe provides property catastrophe and specialty reinsurance and insurance, including business through its Reinsurance and Lloyd’s segments. Unless noted, figures below are in U.S. dollars; financial results are for continuing operations except where identified.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net premiums earned | $294.7m | $262.6m | $857.9m | $785.7m |
| Total revenues | $391.6m | $390.5m | $975.3m | $1,083.9m |
| Underwriting income | $151.4m | $122.6m | $437.8m | $447.2m |
| Income from continuing operations | $239.4m | $240.7m | $510.9m | $714.5m |
| Net income available to common shareholders | $179.7m | $180.7m | $397.0m | $524.4m |
| Diluted earnings per common share | $4.01 | $3.62 | $8.84 | $10.24 |
| Net investment income | $59.9m | $46.1m | $129.3m | $126.7m |
| Net realized and unrealized investment gains (losses) | $28.5m | $75.3m | $(26.8)m | $151.0m |
| Combined ratio | 48.6% | 53.3% | 49.0% | 43.1% |
Q3 underwriting improved primarily on higher earned premiums and a relatively light catastrophe-loss quarter. The 9M underwriting-income decline reflected less favorable prior-year reserve development, higher acquisition expenses, and losses from the European floods and May 2013 U.S. tornadoes. Nine-month investment results fell sharply as rising interest rates pressured fixed-maturity valuations; net investment income was slightly higher.
At September 30, total assets were $8.35bn, total investments $6.43bn, cash and cash equivalents $266.4m, and shareholders’ equity attributable to RenaissanceRe $3.71bn. Claims reserves were $1.68bn, down from $1.88bn at December 31, 2012. Debt was $249.4m, versus $349.3m year-end; the company repaid $100m of 5.875% notes at maturity. Capital resources were $4.21bn, including $250m of undrawn revolving-credit commitments. Operating cash flow for the nine months was $385.8m, compared with $535.7m; cash declined by $28.6m before the separately reported discontinued-operations cash movement.
Common dividends were $0.28 per share in Q3 and $0.84 for the nine months. Book value per common share was $74.58 at September 30; book value plus accumulated dividends rose 10.7% from year-end. The company repurchased 1.7m common shares for $140.9m during the nine months and had $489.2m remaining under its renewed $500m authorization at quarter-end.
Material changes and unusual items
- Q3 common-share earnings were broadly flat year over year, while diluted continuing-operations EPS rose to $4.23 from $3.62. The nine-month decline in common earnings was principally associated with the $177.8m year-over-year deterioration in investment gains and losses.
- The consolidated combined ratio improved in Q3 to 48.6%, but increased to 49.0% for the nine months. Lloyd’s remained above 100% for both periods: 105.3% in Q3 and 101.5% year to date.
- Prior-year claims development was favorable by $71.7m for the nine months, versus $121.6m in the prior-year period. The filing emphasizes that reserve estimates are uncertain and actual outcomes may differ materially.
- Management estimated a $38.8m net negative impact from the European floods and May 2013 U.S. tornadoes, including a 6.1 percentage-point impact on the consolidated combined ratio; estimates remain subject to meaningful uncertainty.
- The sale of REAL, the U.S. weather and energy risk unit, closed October 1, 2013, after quarter-end, for $60m cash subject to adjustments. The company recorded an $8.8m loss on sale. Its results are presented as discontinued operations; Q3 discontinued operations were a $9.8m loss.
- At quarter-end, RenaissanceRe guarantees of $318.8m to REAL counterparties and a $25m guarantee supporting its margin facility remained in effect. Munich agreed, effective October 1, to indemnify RenaissanceRe for covered liabilities related to those transactions.
- The company issued $275m of 5.375% Series E preference shares and redeemed $150m of Series D and $125m of Series C preference shares. The Series E dividends are non-cumulative and payable only if declared.
- CEO Kevin O’Donnell assumed the CEO role July 1. The company recorded $16.8m of CEO-transition-related compensation and other costs in Q2.
Outlook, commentary and risks
- Management expected continued pressure on catastrophe reinsurance premiums and risk-adjusted pricing at the January 2014 renewals, citing abundant traditional and alternative capital and demand not expected to outpace supply. Underwriting discipline could constrain premium volume; no numeric earnings or revenue guidance was provided.
- Management expects low interest rates and the portfolio’s composition to constrain investment-income growth in the near term. Interest-rate movements may also cause significant mark-to-market gains or losses.
- The business is exposed to severe catastrophe losses and volatile results. Key uncertainties include catastrophe and casualty reserve estimates, delayed or incomplete cedant claims information, reinsurance recoveries and counterparty credit risk.
- Liquidity and capital movement depend in part on regulated subsidiaries’ ability to distribute funds. At quarter-end, total letters of credit outstanding were $505.8m; $1.70bn of cash and investments was pledged or held in trust for counterparties and regulatory purposes.
- Other material risks discussed include competition from alternative capital, economic weakness and inflation, potential changes to U.S. catastrophe programs and reinsurance tax rules, and regulatory developments. Management said it was not aware of a material adverse litigation matter; ordinary-course claims disputes and proceedings remain possible.
Important facts for investors to verify
- Track catastrophe and specialty reserve development, especially the still-uncertain flood and tornado loss estimates and the extent to which favorable prior-year releases continue.
- Assess whether underwriting growth and segment profitability persist as pricing softens; review Lloyd’s results, acquisition costs, and the mix of quota-share versus excess-of-loss business.
- Monitor interest-rate sensitivity, investment gains and losses, private/Level 3 asset valuations, and the post-IPO value and April 2014 lock-up on the Essent investment. Essent was valued at $48.0m at quarter-end; its November 4 market value was stated as $110.8m before any lock-up discount.
- Confirm the completion and final proceeds of the REAL sale, post-closing adjustments, and release or continuing exposure under guarantees and indemnities.
- Review liquidity and capital constraints, including subsidiary dividend capacity, letters of credit, pledged assets, DaVinciRe redemption rights, and capital returns or repurchases.