Business context and reporting period
RenaissanceRe Holdings Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The Bermuda-based group principally writes property catastrophe and specialty reinsurance, with additional Lloyd’s, insurance, joint-venture and weather-and-energy risk-management operations. Unless noted, amounts below are U.S. dollars in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Gross premiums written | $667.3 | $641.6 | $1,331.5 | $1,252.1 |
| Net premiums written | $427.6 | $428.0 | $920.2 | $880.6 |
| Net premiums earned | $244.4 | $217.2 | $523.1 | $522.7 |
| Underwriting income (loss) | $127.9 | $9.7 | $324.5 | $(387.4) |
| Net investment income | $14.7 | $33.3 | $81.7 | $93.6 |
| Realized and unrealized investment gains | $31.0 | $35.0 | $77.1 | $29.8 |
| Income (loss) before tax from continuing operations | $184.1 | $63.7 | $448.1 | $(259.6) |
| Net income (loss) attributable to common shareholders | $142.3 | $24.8 | $343.7 | $(223.3) |
| Diluted EPS | $2.75 | $0.48 | $6.63 | $(4.39) |
| Combined ratio | 47.7% | 95.5% | 38.0% | 174.1% |
Q2 underwriting improvement primarily reflected a relatively low catastrophe-loss quarter compared with the 2011 U.S. tornadoes. First-half 2012 results also benefited from the absence of the major 2011 New Zealand and Tohoku earthquakes, Australian floods and U.S. tornadoes. The 2011 large losses were estimated to have reduced first-half 2011 underwriting results by $662.5 million before related noncontrolling-interest and other effects.
Prior-year claims reserves developed favorably by $101.3 million in the first half of 2012, versus $88.8 million in the comparable 2011 period. Q2 2012 underwriting income included $45.4 million of favorable prior-year development. The filing notes that reserve estimates are uncertain and may change materially.
Investment income declined year over year, reflecting weaker private-equity returns and low fixed-income yields. First-half realized and unrealized investment gains increased, partly from greater fixed-income portfolio turnover and improved valuations. Other income was a loss of $27.8 million for the first half, versus income of $45.0 million in 2011; key factors included $29.6 million of weather-and-energy trading losses and the nonrecurrence of prior-year Tohoku-related recoveries.
Balance sheet, cash flow and capital
- At June 30, total assets were $8,959.5 million, up from $7,744.9 million at December 31, 2011. Total investments were $6,590.6 million; cash and cash equivalents were $264.2 million.
- Claims and claim expense reserves were $1,801.2 million, down from $1,992.4 million at year-end. Unearned premiums rose to $964.5 million from $347.7 million, while premiums receivable increased to $971.5 million from $471.9 million.
- Debt was $354.3 million, including $100.0 million of 5.875% senior notes due February 2013 and approximately $249.3 million of 5.75% senior notes due March 2020. The company reported no borrowings on its $150 million revolving credit facility; $5.0 million was drawn under the Renaissance Trading facility.
- First-half operating cash flow was $303.8 million, compared with $31.0 million in 2011. Investing activities used $280.6 million; financing activities provided $25.6 million. Cash increased $47.2 million to $264.2 million.
- Shareholders’ equity attributable to RenaissanceRe was $3,843.0 million, versus $3,605.2 million at year-end. Book value per common share was $65.07; book value plus accumulated dividends was $76.53, up 10.7% from year-end on the company’s stated measure.
- Total capital resources were $4,352.3 million. The group reported $446.4 million of letters of credit outstanding and $1,330.9 million of cash and investments pledged or held in trust for counterparties and regulators.
Material changes and significant items
- Gross premiums written increased 6.3% in the first half. Management said underlying Reinsurance growth, excluding reinstatement-premium comparisons, reflected improved risk-adjusted market conditions and new business; Lloyd’s gross premiums written rose 48.6% to $105.1 million.
- DaVinciRe’s external ownership increased and RenaissanceRe’s ownership declined to 31.5% from 42.8% at December 31, 2011. This increased the earnings allocated to redeemable noncontrolling interests; the balance reached $900.9 million.
- The company launched Upsilon Re and Tim Re III, collateralized joint ventures for catastrophe and Florida reinstatement-premium protection business. These entities are consolidated as variable-interest entities; external investors supply part of their capital.
- The QBE reserve-collar dispute relating to the 2011 sale of U.S. insurance operations was settled. RenaissanceRe paid $9.0 million in June and recorded a $1.0 million gain in discontinued operations.
- During the first half, the company repurchased 1.2 million common shares for approximately $91.6 million and paid common and preference dividends of $27.7 million and $17.5 million, respectively. A $500 million repurchase authorization had $412.0 million remaining at June 30.
- Net other-than-temporary investment impairments were $0.3 million in the first half. The company reported no material changes to its significant accounting policies and no material changes in legal proceedings or risk factors from its 2011 Form 10-K.
Outlook, management commentary and risks
- No numerical earnings or premium guidance was provided. Management expected low interest rates and the current investment mix to continue pressuring investment income in the near term.
- Management estimated June–July catastrophe-market pricing was approximately flat on a risk-adjusted basis, with ample traditional and alternative capital offsetting demand. It cautioned that recent favorable market drivers may not persist and that continued portfolio growth or improvement cannot be assured.
- Management warned that the 2012 U.S. Midwest drought could produce significant crop-insurance industry losses, potentially exceeding the prior-year record of $10 billion. RenaissanceRe reported approximately $8 million of 2012 gross crop-related premiums, including about $3 million tied to U.S. multi-peril crop insurance; any company impact could emerge in Q3 or Q4.
- Catastrophe exposure, reserve uncertainty, reinsurance recoverability and counterparty credit remain key risks, particularly for the 2011 earthquake and flood events. The company also highlighted weather-and-energy business volatility; its estimated 99% confidence, one-year VaR for that portfolio was $42.0 million at June 30, while noting actual losses can exceed the estimate.
- Other risks include low investment yields, interest-rate and spread movements, economic and Eurozone uncertainty, inflation, competition and potential changes to U.S. or international catastrophe programs and reinsurance taxation. Management cited possible adverse effects from legislation affecting Florida catastrophe markets and non-U.S. reinsurers.
- The company reported that its Bermuda insurance subsidiaries had $3.0 billion of statutory capital and surplus, compared with a $562.8 million minimum solvency margin; Renaissance Reinsurance and DaVinci exceeded their regulatory target capital levels.
Most important facts for investors to verify
- How much of reported earnings and the unusually low combined ratio depends on catastrophe experience and favorable prior-year reserve development, and how those estimates evolve.
- The remaining ultimate losses and recoveries for the 2011 New Zealand and Tohoku earthquakes and other prior catastrophe events, including collectability from reinsurers and other counterparties.
- The effects of the 2012 drought and crop claims on RenaissanceRe’s relatively small, low-rate excess-of-loss crop exposure.
- Whether investment income remains pressured and whether private-equity valuations, fixed-income marks and realized gains are sustainable.
- Exposure and liquidity implications of DaVinciRe ownership/redemption changes, collateralized joint ventures, letters of credit, pledged assets and the $354.3 million debt balance.
- Actual performance and risk of weather-and-energy operations versus their reported VaR, as well as possible regulatory, legislative and market changes affecting catastrophe reinsurance demand.