RenaissanceRe Holdings Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company provides property catastrophe and specialty reinsurance, insurance, and related services. Results include Platinum only from its acquisition on March 2, 2015, so year-over-year comparisons are not fully like-for-like.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total revenue | $381.9 million | $343.6 million |
| Net premiums earned | $296.8 million | $286.5 million |
| Net income | $213.1 million | $199.4 million |
| Net income available to common shareholders | $167.8 million | $151.0 million |
| Diluted earnings per common share | $4.14 | $3.56 |
| Net investment income | $39.7 million | $38.9 million |
| Net realized and unrealized investment gains | $41.7 million | $14.9 million |
| Underwriting income | $130.9 million | $151.3 million |
| Combined ratio | 55.9% | 47.2% |
| Operating cash flow | $(118.6) million | $46.6 million |
- Net premiums written declined to $404.0 million from $450.3 million; gross premiums written declined to $643.6 million from $705.3 million. Underwriting income fell despite higher earned premiums, reflecting higher claims and acquisition expenses.
- The combined ratio remained below 100%, indicating underwriting profit before investment income. It includes $22.1 million of favorable prior-year reserve development; current-accident-year claims ratio was 33.4%, versus 26.4% a year earlier.
- Investment results improved: total investment result was $81.3 million versus $53.7 million, mainly reflecting fixed-income gains and higher average invested assets. Management said low interest rates are expected to constrain investment-income growth near term.
- Operating cash flow turned negative, principally due to premium receivable, deferred acquisition cost and prepaid reinsurance premium movements, partly offset by higher unearned premiums. Cash and cash equivalents ended at $557.6 million, up from $525.6 million.
Financial position and acquisition
- Total assets were $11.29 billion at March 31, 2015, versus $8.20 billion at year-end 2014. Total investments were $8.68 billion; shareholders’ equity attributable to RenaissanceRe was $4.78 billion.
- Balance-sheet debt was $826.8 million, versus $249.5 million at year-end. It included $300 million of 3.700% senior notes due 2025, $249.5 million carrying value of 5.75% notes due 2020, and $277.8 million carrying value of Platinum’s 7.50% notes due 2017. No borrowings were outstanding under the $250 million revolving facility at quarter-end.
- RenaissanceRe acquired Platinum for stated aggregate consideration of approximately $1.93 billion, comprising 7.435 million RenaissanceRe shares valued at $761.8 million and cash consideration. Platinum paid a $253.2 million special dividend before closing; the reported net purchase price was $1.68 billion.
- The acquisition added $1.4 billion of claims reserves at closing, and the quarter-end claims reserve rose to $2.78 billion from $1.41 billion. Platinum contributed $40.1 million of revenue from March 2 through March 31 and a $19.4 million loss attributable to RenaissanceRe common shareholders, including employee termination costs.
Material changes, outlook and risks
- Common-share earnings rose 11% year over year, but the increase was supported by a $47.9 million income tax benefit. The benefit principally reflected release of a $47.4 million U.S. deferred-tax-asset valuation allowance based on expected U.S. profits following the Platinum acquisition.
- Q1 corporate expenses increased to $45.6 million from $4.5 million, including $40.4 million of Platinum transaction, integration and termination-related costs. Management expected additional acquisition-related costs in 2015, potentially significant.
- Management described property catastrophe reinsurance markets as soft, with abundant traditional and alternative capital pressuring risk-adjusted pricing and terms. It did not expect near-term market conditions to become more favorable absent unusually large or unforeseen events, and did not expect to maintain the size of its aggregate property-exposed book absent changed conditions.
- Management expected abundant casualty capacity and limited potential for overall risk-adjusted rate improvement. It emphasized underwriting discipline and gave no assurance of maintaining or growing the combined book.
- Platinum expands specialty and casualty exposure. Management noted increased sensitivity to inflation, interest rates, unforeseen claims and tort-law developments, as well as potential adverse reserve development. Reinsurance reserving estimates are inherently uncertain, particularly for catastrophe events and longer-tail specialty business.
- Liquidity is affected by regulatory limits on subsidiary dividends. The Bermuda Monetary Authority requested prior written approval for certain 2015 dividend or capital-return payments. The revolving credit facility was scheduled to expire May 17, 2015; the filing does not state whether it was renewed.
- Subsequent to quarter-end, DaVinciRe issued $150 million of 4.750% notes due 2025 and repaid its $100 million loan from RenaissanceRe. Management reported no individual pending litigation expected to have a material adverse effect; disclosure controls were assessed as effective.
Investor verification priorities
- Verify post-acquisition underwriting performance and integration costs, especially whether specialty and casualty growth meets expected returns.
- Assess reserve adequacy and future development, including the $22.1 million favorable prior-year development and the acquired Platinum reserves.
- Separate recurring earnings from the $47.4 million tax valuation-allowance release and $40.4 million of acquisition-related expenses.
- Review renewal pricing, terms and premium volumes in catastrophe and casualty markets, and the impact of alternative capital and competition.
- Confirm renewal or replacement of the revolving credit facility and monitor debt, subsidiary dividend restrictions, and liquidity after the acquisition.
- Evaluate the sustainability and volatility of investment gains, the portfolio’s interest-rate exposure, and operating cash-flow movements.