RenaissanceRe Holdings Ltd. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010; balance-sheet comparisons are to December 31, 2009. Figures below are in U.S. dollars; financial amounts are rounded to millions unless noted. RenaissanceRe provides property catastrophe and specialty reinsurance, insurance, and related risk-management services.
Financial results and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Gross premiums written | $841.5m | $855.2m | $1,405.0m | $1,453.5m |
| Net premiums earned | $326.5m | $379.8m | $604.6m | $681.6m |
| Underwriting income | $188.5m | $213.6m | $278.4m | $344.8m |
| Net investment income | $27.6m | $114.3m | $94.8m | $156.4m |
| Fixed-maturity realized and unrealized gains | $71.1m | $18.9m | $119.7m | $41.0m |
| Net income attributable to RenaissanceRe common shareholders | $210.2m | $271.2m | $375.3m | $368.5m |
| Diluted earnings per common share | $3.66 | $4.32 | $6.37 | $5.90 |
| Combined ratio | 42.3% | 43.8% | 54.0% | 49.4% |
- Quarterly performance: Common-shareholder net income fell $60.9m year over year, mainly because investment income declined $86.7m and underwriting income fell $25.1m. Higher fixed-maturity gains and lower foreign-exchange losses partly offset these declines.
- First-half performance: Common-shareholder net income increased $6.8m despite lower underwriting income and investment income. Higher fixed-maturity gains, lower impairment charges, improved other results, and a smaller allocation to DaVinciRe noncontrolling interests helped offset those pressures.
- Underwriting and reserve development: Favorable prior-year reserve development was $86.4m in Q2 and $248.1m in the first half, compared with $106.2m and $99.0m in the respective 2009 periods. The very low combined ratios therefore reflect substantial reserve releases and should not be read as ordinary current-year underwriting margins.
- Catastrophe and unusual losses: The Chilean earthquake and European windstorm Xynthia produced a reported $122.7m net negative impact on first-half results, including $183.3m of net claims, partly offset by reinstatement premiums and other items. Q2 current-year losses included $15.0m of reserves for the Deepwater Horizon event.
- Cash flow: First-half operating cash flow was $288.5m, investing cash flow was $84.2m, and financing cash flow was negative $343.5m. Cash and equivalents ended the period at $285.1m, up from $260.7m at year-end.
- Balance sheet and capital: Total assets were $8.55bn; total investments were $6.23bn; shareholders’ equity was $3.78bn, including $650m of preference shares. Common shareholders’ equity was $3.13bn. Book value per common share was $56.96, up 10.2% from year-end; book value plus accumulated dividends was $66.34.
- Debt and liquidity: Reported debt was $549.1m, versus $300.0m at year-end, following issuance of $250m of 5.75% senior notes due 2020. The company also reported a $150m undrawn revolving facility and $775.6m of letters of credit outstanding under all facilities. About $1.3bn of cash and investments was on deposit or in trust for counterparties and other purposes.
Material changes and management commentary
- Premium volume softened: first-half gross premiums written declined 3.3%, while net premiums written fell 10.2%, reflecting weaker catastrophe-reinsurance pricing, nonrenewal of a joint venture, and increased crop-insurance reinsurance ceded. Insurance gross premiums grew, led by crop business.
- Management described reinsurance markets as increasingly competitive, with ample industry capital and pressure on pricing. It said it would maintain disciplined underwriting and expected competitive conditions to continue through 2010.
- Management expects low interest rates and portfolio allocation choices to pressure net investment income for the foreseeable future. It also warned that recent investment gains from spread tightening and improved valuations may not recur.
- The company began classifying certain fixed-maturity securities as trading in late 2009 and expects this balance to grow. Unrealized gains and losses on those securities flow through earnings, increasing reported income volatility; $48.0m of Q2 and $52.9m of first-half 2010 gains came from trading securities.
- First-half operational expenses included a $6.8m charge for software impairment and severance tied to discontinuing a start-up initiative, and $3.4m related to senior executive retirements.
- In July 2010, RenaissanceRe received $15.8m from a sale of its ChannelRe interest, previously carried at zero; management expected to record the payment as a gain in the quarter ending September 30, 2010.
Outlook, risks, and contingencies
- Results are exposed to low-frequency, high-severity catastrophe losses and can be volatile. Management said ultimate losses from the Chilean earthquake and other recent events remain uncertain and may differ materially from estimates.
- Crop claims estimates are particularly sensitive to harvest outcomes, commodity prices, and estimates of losses ceded to the Federal Crop Insurance Corporation. Changes to the federal crop program’s Standard Reinsurance Agreement could affect economics, but the company said the impact was not yet clear.
- Management cited economic weakness, potential recession or market disruption, inflation, counterparty credit risk, investment valuation uncertainty, and competition as risks. It also noted the possibility of adverse effects from legislative and regulatory changes, including U.S. catastrophe-program proposals, offshore reinsurance tax proposals, and the Dodd-Frank Act.
- Reinsurance recoveries depend on counterparties meeting their obligations. The company remains liable if a reinsurer fails to pay. It also had $150.8m of guarantees outstanding for weather- and energy-risk counterparties.
- The company reported no material change in previously disclosed litigation and stated that no individual ordinary-course matter was likely to have a material adverse effect. Management concluded disclosure controls were effective at the reasonable-assurance level as of June 30, 2010.
Most important facts for investors to verify
- How much of reported underwriting performance depends on favorable reserve development, and whether further releases are supportable.
- Ultimate net losses and recoveries for the Chilean earthquake, Xynthia, Deepwater Horizon, and crop claims, including reinsurer collectability.
- Whether investment income remains under pressure and how trading-security accounting affects earnings volatility.
- How premium growth, renewal pricing, ceded reinsurance, and crop-program changes affect future underwriting profitability.
- Liquidity available after accounting for pledged or trust-held assets, DaVinciRe redemption requests, debt and letter-of-credit commitments, and share repurchases.
- Whether the expected $15.8m ChannelRe gain was recognized in the subsequent quarter and whether regulatory changes create additional costs or market impacts.