RenaissanceRe Holdings Ltd. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are to December 31, 2010. Unless noted, amounts are U.S. dollars. RenaissanceRe provides reinsurance and insurance, with catastrophe risk a major exposure. The statements are unaudited.
Financial performance
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Gross premiums written | $610.5 million | $516.0 million |
| Net premiums earned | $305.5 million | $250.7 million |
| Total revenues | $387.7 million | $349.2 million |
| Net claims and claim expenses | $628.5 million | $97.3 million |
| Underwriting result | Loss of $397.2 million | Income of $81.7 million |
| Combined ratio | 230.0% | 67.4% |
| Net income (loss) attributable to RenaissanceRe common shareholders | Loss of $248.0 million; $(4.69) per diluted share | Income of $165.0 million; $2.73 per diluted share |
| Net investment income | $60.3 million | $65.7 million |
| Net realized and unrealized investment result | Loss of $5.2 million | Gain of $48.2 million |
The combined ratio exceeded 100%, indicating an underwriting loss before investment income. The reported common-shareholder loss differs from consolidated net loss of $324.8 million because of amounts attributable to noncontrolling interests and preference dividends.
Balance sheet, cash flow and capital
- Total assets were $8.02 billion, including $6.30 billion of investments; total liabilities were $3.98 billion. Shareholders’ equity attributable to RenaissanceRe was $3.50 billion, down from $3.94 billion at year-end.
- Cash and cash equivalents were $252.6 million, versus $277.7 million at December 31. Operating cash flow was negative $6.3 million, investing cash flow positive $299.9 million, and financing cash flow negative $321.0 million.
- Investments included $3.91 billion in fixed maturities and $1.52 billion in short-term investments. Management said it shifted toward short-term investments after the catastrophes to maintain liquidity. $1.1 billion of cash and investments was pledged or held in trust.
- Debt was $549.2 million at March 31. The company reported $150 million undrawn under its revolving facility and $10 million undrawn under Renaissance Trading’s facility. A $200 million DaVinciRe borrowing was repaid April 1 and replaced with a 10-year loan from RenaissanceRe at three-month LIBOR plus 3.5%; $200 million remained outstanding under that loan as of April 25.
- Book value per common share fell 8.9% to $57.01; book value plus accumulated dividends was $67.15, down from $72.46. The company paid $0.26 per common share in dividends and repurchased 2.7 million shares for $174.8 million at an average $65.84. The board increased the repurchase authorization to $500 million.
Material changes and unusual items
- Three major Q1 catastrophes—Australian flooding, the February New Zealand earthquake and Japan’s Tohoku earthquake—drove an estimated $565.2 million underwriting impact. After specified reinsurance recoveries, noncontrolling-interest effects and other items, management estimated their net negative impact at $427.4 million, or 212.3 percentage points on the consolidated combined ratio.
- Loss estimates remain preliminary and materially uncertain, particularly for the New Zealand and Tohoku earthquakes. Management cited delayed and incomplete claims information, business-interruption and coverage questions, concentration among a few large clients, and uncertainty over reinsurance recoveries.
- Prior-year reserves provided $68.2 million of favorable development, compared with $112.3 million in Q1 2010. Current-accident-year claims were $696.7 million, compared with $209.6 million.
- The sale of substantially all U.S.-based insurance operations to QBE closed March 4; net proceeds were $269.5 million. Those operations are presented as discontinued operations. Q1 discontinued operations recorded a $1.5 million loss.
- Other income was $50.1 million, including $43.5 million of income from reinsurance contracts accounted for at fair value, principally reflecting Tohoku-related recoverables, and a $3.0 million gain on sale of the Platinum warrant. Equity in losses of other ventures was $23.8 million, mainly from Top Layer Re’s New Zealand earthquake losses.
Outlook, management commentary and risks
- No numerical earnings or underwriting guidance is provided. Management said catastrophe losses may deplete industry excess capital and could increase demand for the company’s products, but cautioned that demand, pricing improvements and business opportunities are not assured.
- Management described January 2011 catastrophe renewals as softening, with less favorable pricing and terms; excluding reinstatement premiums, catastrophe gross premiums written declined. It expects low interest rates and spreads to pressure investment income in the near term.
- Key risks include catastrophe severity and frequency; uncertainty in reserves and reinsurance recoverables; counterparty credit risk; investment-market and interest-rate volatility; competition and soft pricing; inflation; regulatory and legislative changes; and the potential for liquidity or capital needs after major losses. Management noted that actual catastrophe losses could differ materially from current estimates.
- Management reported disclosure controls effective at the reasonable-assurance level as of March 31, 2011, with no material change in internal control over financial reporting during the quarter. No material change in previously disclosed litigation or risk factors was reported.
Important facts for investors to verify
- How the Australian, New Zealand and Tohoku catastrophe loss estimates and related reinsurance recoverables develop, including client concentration and coverage disputes.
- Whether reserve releases and prior-year favorable development persist, and how the unusually high combined ratio affects future underwriting and capital.
- The realized liquidity and capital effects of the QBE sale, DaVinciRe’s replacement financing, and the $200 million intercompany loan and its covenants.
- Investment portfolio valuation and liquidity, including private-equity commitments, Level 3 assets, pledged assets and sensitivity to low yields or market changes.
- Whether share repurchases and dividends remain consistent with catastrophe-related claims needs and regulatory capital requirements.