RenaissanceRe Holdings Ltd. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; selected Q4 figures are noted below. Amounts are U.S. dollars.
Business context
RenaissanceRe is a Bermuda-based reinsurer and insurer focused on property catastrophe and specialty risks, with additional Lloyd’s, venture, investment, and weather-and-energy activities. Reinsurance produced 92.2% of 2011 gross premiums written; Lloyd’s produced 7.8%. The company’s results are highly exposed to infrequent, severe catastrophe losses.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Gross premiums written | $1.435 billion | $1.165 billion |
| Net premiums earned | $951.0 million | $864.9 million |
| Net investment income | $118.0 million | $204.0 million |
| Net realized and unrealized investment gains | $70.7 million | $144.4 million |
| Underwriting result | Loss of $177.2 million | Income of $474.6 million |
| Combined ratio | 118.6% | 45.1% |
| Net income (loss) attributable to common shareholders | Loss of $92.2 million | Income of $702.6 million |
| Diluted earnings (loss) per common share | $(1.84) | $12.31 |
| Operating cash flow | $165.9 million | $494.7 million |
| Total assets | $7.745 billion | $8.138 billion |
| Shareholders’ equity attributable to RenaissanceRe | $3.605 billion | $3.936 billion |
| Debt | $353.6 million | $549.2 million |
At year-end, cash and cash equivalents were $217.0 million, short-term investments were $905.5 million, and total investments were $6.209 billion. The company also had $576.8 million of letters of credit outstanding and $155.6 million of undrawn committed borrowing capacity across the stated facilities. The debt figure is consolidated debt; the filing also describes a $200 million loan from RenaissanceRe to DaVinciRe, which is an intra-group arrangement.
Gross claims reserves rose to $1.992 billion from $1.258 billion; net reserves were $1.588 billion, with $404.0 million of reinsurance recoverables. Prior-year reserve development was favorable by $132.0 million, versus $302.1 million in 2010.
Material changes and unusual items
- Large 2011 catastrophe losses—including the February New Zealand and Tohoku earthquakes, U.S. tornadoes, Australian and Thailand floods, Hurricane Irene, and aggregate-contract losses—created an estimated $725.2 million underwriting impact and an $559.5 million net negative impact after specified offsets. Management emphasized that estimates remained uncertain.
- Gross premiums written increased 23.1%; management attributed much of the increase to catastrophe reinstatement premiums. Excluding reinstatement premiums, Reinsurance catastrophe premiums rose 5.3%, reflecting some improvement in June and July renewals.
- Investment income fell 42.1%, and investment gains fell 51.1%, compared with 2010. Management cited weaker hedge-fund and private-equity returns, lower returns on certain non-investment-grade holdings, widening credit spreads, and historically low interest rates.
- Weather-and-energy operations recorded a $45.0 million loss, principally associated with unusually warm fourth-quarter weather in the U.K. and parts of the U.S. Top Layer Re reported a $37.5 million equity-method loss, mainly from the 2011 earthquakes.
- The company completed the sale of substantially all U.S.-based insurance operations to QBE on March 4, 2011, receiving net proceeds of $269.5 million. It recorded a $10 million liability, the maximum under a reserve collar, for purported adverse development on sold prior-year reserves.
- Book value per common share declined to $59.27 from $62.58; book value plus accumulated dividends declined 3.6%. Common-share repurchases totaled $191.6 million and common dividends were $53.5 million. The board approved a $0.27 quarterly dividend in February 2012 and authorized a $500 million aggregate repurchase program.
Q4 comparison: Net income attributable to common shareholders was $81.8 million in Q4 2011 versus $122.6 million in Q4 2010. The consolidated combined ratio was 36.2% versus 19.8%, respectively.
Outlook, risks and contingencies
- Management saw signs of gradual firming in property-catastrophe reinsurance pricing during January 2012 renewals, following high 2011 industry losses and updated catastrophe models. It cautioned that stronger demand or improved results were not assured. No formal numerical earnings guidance was provided.
- Management expected low interest rates and lower yields to continue pressuring near-term investment income; it also cited uncertain economic conditions, European sovereign-debt risks, inflation, and counterparty credit exposure.
- Catastrophe reserve estimates are inherently uncertain, particularly for recent earthquakes and floods, business-interruption claims, coverage disputes, reporting delays, and recoveries from reinsurers. The company records point estimates rather than reserve ranges.
- Exposure is geographically concentrated: U.S. and Caribbean risks represented 61.7% of company gross premiums written. Three brokers generated 90.7% of Reinsurance segment gross premiums written, including 56.1% from Aon Benfield.
- Regulatory and market risks include potential U.S. tax changes affecting offshore reinsurance, evolving Dodd-Frank requirements, Bermuda group-supervision rules, Solvency II implementation, and government-backed catastrophe programs that could reduce private-market demand.
- Other notable exposures include $144.6 million of remaining private-equity and investment commitments; $371.2 million of guarantees to weather-and-energy counterparties; and a potential mandatory contribution of up to $50 million to Top Layer Re under specified conditions.
- Effective January 1, 2012, the company’s DaVinciRe ownership fell from 42.8% to 34.7% after share sales. It also launched Upsilon Re, a managed catastrophe reinsurance venture. These were subsequent-period developments, not 2011 operating results.
Most important facts for investors to verify
- How actual claims and reinsurance recoveries from the 2011 catastrophe events develop versus the company’s estimates, including reinsurer collectability and the concentration of earthquake losses among large clients.
- Whether the large favorable prior-year reserve development continues to be supported by claims experience, and the potential adverse development in construction-defect reserves.
- Whether catastrophe-market rate firming persists and translates into risk-adjusted underwriting returns, rather than simply higher premium volume or reinstatement premiums.
- Investment portfolio valuation and liquidity, including alternative investments, $144.6 million of unfunded commitments, and the impact of low yields or credit-spread changes.
- Available liquidity and capital after claims payments, collateral requirements, dividends, repurchases, and subsidiary dividend restrictions; confirm compliance with debt and regulatory capital covenants.
- Resolution of the QBE reserve collar and the financial contribution and ownership changes associated with DaVinciRe and Upsilon Re.