RenaissanceRe Holdings Ltd. (RNR) reported its third-quarter income from continuing operations of $90.9 million or $1.59 per share, way behind the Zacks Consensus Estimate of $2.20. This also compares unfavorably with an income of $242.2 million or earnings of $3.85 per share in the year-ago quarter.
The year-over-year decline in earnings was attributable to lower gross premiums written and a decline in net investment income, along with a rise in expenses during the quarter.
RenaissanceRe’s income from continuing operations excludes net realized and unrealized gains on fixed maturity investments of $98.0 million and a $15.8 million gain on the sale of RenaissanceRe’s ownership interest in ChannelRe in the third quarter of 2010, compared to net realized gains on fixed maturity investments of $16.8 million and other-than-temporary impairments of $0.3 million in the prior-year quarter.
Including these one-time items, RenaissanceRe posted a net income of $204.8 million or $3.70 per share in the reported quarter, declining from $258.6 million or $4.12 per share.
Behind the Headlines
RenaissanceRe reported total revenues of $488.3 million, exceeding the Zacks Consensus Estimate of $329.0 million. This also compares favorably with revenues of $438.6 million in the prior-year quarter.
Gross premiums written for the reported quarter decreased 37.4% year-over-year to $126.7 million as against $202.4 million, principally due to an 81.1% decline in RenaissanceRe’s Insurance segment premiums and 9.9% in its Reinsurance segment premiums.
The underwriting income of RenaissanceRe plummeted to $84.6 million in the reported quarter from $167.7 million of underwriting income in the third quarter of 2009. The underwriting income of the reported quarter included $37.0 million of favorable development on prior-year reserves, compared to $70.4 million of favorable development on prior-year reserves in the year-ago quarter.
RenaissanceRe generated a combined ratio (the ratio of claims, administration and dividend expenses to premiums earned) of 72.6% in the third quarter of 2010, as opposed to 43.3% in the prior-year quarter.
Net investment income plunged to $60.9 million in the third quarter of 2010 from $106.8 million in the prior-year quarter. The decrease in net investment income was attributable to a decrease of $28.8 million from RenaissanceRe’s other investments, driven by lower returns from investments in senior secured bank loan funds, an $8.0 million decrease from its hedge fund and private equity investments and a $9.3 million decrease in net investment income from its fixed maturity investments.
Net realized and unrealized gains on fixed maturity investments climbed to $94.6 million in the reported quarter of 2010, compared to net realized gains on fixed maturity investments of $91.1 million.
During the fourth quarter of 2009, RenaissanceRe assigned some fixed maturity investments as trading, rather than making them available for sale, which resulted in net unrealized gains of $63.1 million. They were recorded as net realized and unrealized gains on fixed maturity investments in the third quarter of 2010 rather than under accumulated other comprehensive income in shareholders’ equity.
Segment Results
Reinsurance segment’s gross premiums written decreased 9.9% year-over-year to $119.3 million in the third quarter of 2010. The segment generated $77.2 million of underwriting income and a combined ratio of 64.8% in the reported quarter, as opposed to $167.0 million and 17.4%, respectively, in the prior-year quarter.
The drop in underwriting income in the quarter was driven by a $67.3 million increase in current accident year losses, a $28.8 million decrease in favorable development on prior year’s reserves and a $10.6 million increase in underwriting expenses, partially offset by a $16.8 million increase in net premiums earned compared to the prior-year quarter.
Insurance segment’s gross premiums written decreased 81.1% year-over-year, to $15.7 million in the third quarter of 2010, due to a decline in all lines of businesses. Crop insurance gross premiums written decreased $37.4 million to negative $16.1 million in the reported quarter.
Gross premiums written in RenaissanceRe’s commercial multi-line, commercial property and personal lines property lines of business decreased $11.9 million, $12.7 million and $5.6 million, respectively, from the year-ago quarter.
The segment also generated $7.5 million of underwriting income and a combined ratio of 91.7% in the third quarter of 2010, as against $0.7 million of underwriting income and a combined ratio of 99.3% in the prior-year quarter.
The underwriting income growth was primarily due to a $9.0 million decrease in net claims and claim expenses and a $2.9 million decrease in acquisition expenses, partially offset by a $3.4 million decrease in net premiums earned and a $1.7 million increase in operational expenses.
Evaluation of Capital Structure and Balance Sheet
RenaissanceRe reported an annualized operating ROE of 11.3% in the third quarter of 2010, compared to 33.3% in the prior-year quarter. Book value per share was $60.57 at the end of September 30, 2010, up from $56.96 at the end of September 30, 2009.
In July 2010, RenaissanceRe sold its entire ownership interest in ChannelRe Holdings Ltd., a financial guaranty reinsurance company, for $15.8 million. RenaissanceRe recorded a $15.8 million gain in its third quarter 2010 financial results from the sale. RenaissanceRe no longer has an ownership interest in ChannelRe and has no contractual obligations to provide capital or other financial support to ChannelRe.
In August, RenaissanceRe approved the expansion of its stock repurchase program to amount to a total current authorization of approximately $500 million. This authorization includes $375.1 million available under earlier authorizations, whereby repurchases will be done from the open market based on RenaissanceRe’s ongoing cash and capital requirement, natural calamities and other market conditions. However, there is no expiration date for this repurchase program.
On September 30, 2010, RenaissanceRe paid a quarterly dividend of 25 cents per share to its shareholders of record as of September 15, 2010.
Our Take
RenaissanceRe’s dividend and share repurchase program has been an integral part of its continuing capital management program. Other than enhancing shareholder value, it also provides earnings accretion. We believe that RenaissanceRe does not require any additional capital requirement in the near term due to its strong capital position. The operating subsidiaries of the company also remain well capitalized. With its capital position, RenaissanceRe should be able to take advantage of the increased demand for reinsurance.
However, we expect limited upside potential for RenaissanceRe shares in the coming quarters as it faces increasing challenges in its investment portfolio, though it continues to benefit from its underwriting discipline, capital strength and strong market reputation.
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