RenaissanceRe Holdings Ltd. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unless otherwise noted, financial amounts below are in U.S. dollars; millions are used for readability. RenaissanceRe is a Bermuda-based reinsurer and insurer specializing in property catastrophe and specialty risks. Its reported segments are Reinsurance, Lloyd’s and Insurance. The results reflect continuing operations separately from substantially all U.S.-based insurance operations sold to QBE, a transaction completed March 4, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Gross premiums written | $139.9m | $111.5m | $1,392.0m | $1,134.1m |
| Net premiums earned | $229.2m | $212.4m | $751.9m | $675.2m |
| Underwriting income (loss) | $83.2m | $71.3m | $(304.3)m | $322.4m |
| Combined ratio | 63.7% | 66.4% | 140.5% | 52.3% |
| Net investment income (loss) | $(27.9)m | $59.6m | $65.7m | $151.5m |
| Net realized and unrealized investment gains | $17.0m | $92.3m | $46.7m | $210.6m |
| Net income (loss) attributable to common shareholders | $49.3m | $204.8m | $(174.0)m | $580.0m |
| Diluted earnings (loss) per common share | $0.95 | $3.70 | $(3.44) | $10.04 |
Q3 underwriting improved year over year: net premiums earned rose 7.9%, and the combined ratio improved 2.7 percentage points. Q3 results included $8.6m of favorable prior-year reserve development, while aggregate loss contracts and Hurricane Irene produced a combined $54.8m underwriting loss. Favorable development on earlier 2011 catastrophe events partly offset those losses.
For the nine-month period, catastrophe losses drove a sharp reversal: the company reported a $304.3m underwriting loss and a 140.5% combined ratio. Management estimated the Large 2011 Events—including Australian flooding, New Zealand and Tohoku earthquakes, U.S. tornadoes, aggregate loss contracts and Irene—reduced underwriting results by $704.5m. Net favorable prior-year reserve development was $97.4m, down from $229.4m in the comparable 2010 period.
Financial position, cash flow and capital
- At September 30, total assets were $8.12bn, total investments were $6.26bn, cash and cash equivalents were $235.1m, and shareholders’ equity was $3.55bn. Book value per common share was $57.89, down from $62.58 at December 31, 2010; including accumulated dividends, the measure was $68.55 versus $72.46.
- Claims reserves were $2.23bn, up from $1.26bn at year-end 2010; reinsurance recoverables were $434.6m, versus $101.7m. The company cautioned that catastrophe loss and recovery estimates remain uncertain.
- Debt on the consolidated balance sheet was $349.2m, comprising $100.0m of 5.875% Senior Notes and $249.2m of 5.75% Senior Notes. The $200m DaVinciRe revolving facility was repaid and terminated April 1; RenaissanceRe subsequently lent DaVinciRe $200m, outstanding at October 27, 2011. The parent had $150m of unused revolving credit capacity.
- For the first nine months, operating cash flow was $194.5m, compared with $496.4m in 2010; investing cash flow was $262.1m, versus a $37.2m use; financing cash flow was a $500.5m use. Cash declined $42.7m during the period. Investing cash flow included $269.5m of net proceeds from the QBE sale; financing uses included $174.8m of share repurchases, dividends and debt repayment.
- Management described the portfolio as focused on capital preservation and liquidity. Fixed maturities and short-term investments had a weighted-average rating of AA, duration of 2.5 years and effective yield of 2.0%. About $895.5m of cash and investments were pledged or held in trust for counterparties and regulators.
Material changes and unusual items
- Q3 common-shareholder income fell to $49.3m from $204.8m, mainly because investment income and investment gains were substantially lower. Management cited widening credit spreads, a $19.2m negative impact from derivatives and futures, and $25.7m of hedge-fund and private-equity investment losses.
- Nine-month gross premiums written rose 22.7%, driven partly by $154.8m of reinstatement premiums following catastrophe losses, improved catastrophe-market pricing and growth at Lloyd’s. Excluding reinstatement premiums, gross written premiums increased 12.6%.
- QBE’s sale of substantially all U.S.-based insurance operations closed for net proceeds of $269.5m. The company recorded a $10.0m expense for the maximum potential payment under the sale’s reserve collar; no further adjustment was recorded in Q3. The collar provides for payments of up to $10m in either direction based on reserve development.
- The company repurchased approximately 2.7m shares for $174.8m in Q1, at an average $65.84 per share, and made no program repurchases in Q2 or Q3. The authorized program was increased to $500m.
- Two large contractors-liability claims led to $7.2m of adverse prior-year development in the Insurance segment. Management said it would conduct a comprehensive actuarial review in Q4; the related gross reserve was $48.9m at September 30.
Outlook, risks and contingencies
Management said catastrophe losses in 2011 had depleted some industry excess capital and contributed to firmer pricing and terms in certain midyear catastrophe renewals. It expects potential demand for its catastrophe products to improve, but emphasized that improved demand, pricing and underwriting opportunities are not assured. It also noted that adoption of updated catastrophe models could affect demand, with the direction and extent uncertain.
Management expects low interest rates and spreads, together with the portfolio’s composition, to continue pressuring investment income in the near term. The filing gives no specific earnings, premium or combined-ratio guidance. Key risks include further catastrophe losses; uncertainty in reserves and reinsurance recoveries; counterparty credit risk; investment-market volatility and illiquid asset valuations; inflation; competition; and regulatory or legislative changes that could affect private catastrophe markets. The company also disclosed $368.4m of guarantees to counterparties of its weather and energy risk operations and a potential capital contribution obligation to Top Layer Re of up to $50m under specified conditions.
Management reported no material change in previously disclosed litigation or risk factors. It stated that disclosure controls were effective at the reasonable-assurance level as of September 30, 2011, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How estimates of losses and recoveries from the 2011 catastrophe events develop, especially the Tohoku and New Zealand earthquakes, and whether reinsurance counterparties pay recoveries as expected.
- Results of the Q4 actuarial review of the $48.9m contractors-liability reserve and any further reserve development.
- Investment-portfolio performance, including credit-spread exposure, derivatives, alternative investments and the effect of persistently low yields.
- Whether catastrophe-market pricing and demand remain favorable at subsequent renewals, and how updated catastrophe models affect the company’s portfolio and customers.
- Liquidity and capital needs after catastrophe claims, including DaVinciRe’s $200m intercompany loan, collateral and letter-of-credit commitments, and the QBE reserve-collar settlement.