RenaissanceRe Holdings Ltd. (RNR) reported its fourth-quarter income from continuing operations of $189.1 million or $3.47 per share, way ahead of the Zacks Consensus Estimate of $2.05. This also compares favorably with an income of $177.7 million or earnings of $2.82 per share in the year-ago quarter.
The fiscal 2010 operating earnings of the company were $536.4 million or $9.32 per share, exceeding the Zacks Consensus Estimate of $8.05. However, the results lagged the prior year income of $768.2 million or $12.25 per share.
The impressive results in the quarter were attributable to improved book value per share and robust underwriting results, despite softening market conditions in many lines and a number of significant catastrophic events, besides the rise in expenses and decline in investment income.
RenaissanceRe’s operating earnings in the reported quarter excludes net realized and unrealized losses on fixed maturity investments of continuing operations of $66.1 million or $1.23 per share and a $0.35 million or 1 cent per share of net realized and unrealized losses on fixed maturity investments and net other-than-temporary impairments of discontinued operations.
However, the prior-year quarter excludes net realized and unrealized gains on fixed maturity investments of continuing operations of $35.5 million or 58 cents, net other-than-temporary impairments of $1.3 million or 2 cents and a $0.13 million net realized and unrealized loss on fixed maturity investments and net other-than-temporary impairments of discontinued operations.
Both fiscal years 2010 and 2009 exclude the adjustments for net realized and unrealized losses on fixed maturity investments of continuing operations; and net other-than-temporary impairments of continuing and discontinuing operations. Moreover, fiscal 2010 also exclude the adjustment for gain on sale of ChannelRe.
Including these one-time items, RenaissanceRe posted a net income of $122.6 million or $2.23 per share in the reported quarter, declining from $211.8 million or $3.38 per share. In fiscal 2010, RenaissanceRe reported a net income of $702.6 million or $12.31 per share, as against income of $838.9 million or $13.40 per share.
Behind the Headlines
RenaissanceRe reported total revenues of $187.1 million, lagging the Zacks Consensus Estimate of $339.0 million. This also compares unfavorably with revenues of $294.4 million in the prior-year quarter. Revenue in fiscal 2010 was $1.22 billion, lagging the Zacks Consensus Estimate of $1.46 billion and the prior-year revenue of $1.27 billion.
Gross premiums written for the reported quarter increased $31.0 million to $31.2 million in the quarter, principally due to a $28.2 million and an $8.6 million increase in RenaissanceRe’s Reinsurance and Lloyd’s segments, respectively, and partially offset by a $9.4 million decrease in the company’s Insurance segment. Gross premiums written declined 5.2% year over year in 2010 to $1.17 billion.
RenaissanceRe posted a strong underwriting income of $152.2 million in the reported quarter, from the $84.6 million in the third quarter. However, the underwriting income declined as opposed to $170.7 million in the prior-year quarter. The underwriting income of the reported quarter was favorably driven by a low level of insured catastrophes combined with $72.7 million of favorable development on prior year reserves in the quarter.
The underwriting results of the company includes the increase in RenaissanceRe’s estimated net claims and claims expenses associated with the New Zealand earthquake which occurred in the third quarter of 2010.
RenaissanceRe generated a combined ratio (the ratio of claims, administration and dividend expenses to premiums earned) of 19.8% in the fourth quarter of 2010, as opposed to 13.0% in the prior-year quarter.
The company generated $474.6 million of underwriting income and had a combined ratio of 45.1% in 2010, compared to $695.2 million of underwriting income and a 21.2% combined ratio in 2009.
Net investment income plunged to $52.5 million in the fourth quarter of 2010 from $59.3 million in the prior-year quarter. The decrease in net investment income was attributable to the lower absolute level of yields on RenaissanceRe’s fixed maturity investments, partially offset by tighter credit spreads and an increase in net investment income from the company’s hedge fund and private equity investments due to higher total returns.
Net investment income in fiscal 2010 declined to $204.0 million from $318.2 million in 2009.
RenaissanceRe incurred net realized and unrealized losses of $66.1 million on fixed maturity investments in the quarter, compared to net realized gains of $35.5 million. However, fiscal 2010 posted net realized and unrealized gains on fixed maturity investments of $144.4 million, compared to $93.7 million in 2009.
During the fourth quarter of 2009, RenaissanceRe assigned some fixed maturity investments as trading, rather than making them available for sale, which resulted in $89.1 million of net unrealized losses on these securities in the quarter and $24.8 million gains in fiscal 2010.
They were recorded in net realized and unrealized gains on fixed maturity investments in the company’s consolidated statements of operations in the fourth quarter and fiscal year of 2010 rather than in accumulated other comprehensive income in shareholders’ equity, compared to $10.8 million of net unrealized losses both in the fourth quarter and fiscal year of 2009.
Segment Results
Reinsurance segment, which includes catastrophe reinsurance, specialty reinsurance and certain property catastrophe and specialty joint ventures managed by the company’s ventures unit, reported gross premiums written of $17.9 million in the reported quarter, as opposed to the negative $10.2 million in the prior-year quarter.
The segment generated $168.4 million of underwriting income and a combined ratio of 12.5% in the reported quarter, as opposed to $178.5 million and 7.8%, respectively, in the prior-year quarter.
In 2010, gross premiums written in this segment plummeted 7.2% year over year to $1,123.6 million. Underwriting income was $517.0 million and the combined ratio was 38.4% in 2010, compared to $719.2 million and 15.4%, respectively in 2009.
Lloyd’s Segment, which includes reinsurance and insurance business written through RenaissanceRe Syndicate 1458, posted gross premiums written of $8.6 million in the quarter. RenaissanceRe’s Lloyd’s segment generated an underwriting loss of $5.6 million and a combined ratio of 144.6%.
The segment reported written gross premiums of $66.2 million, an underwriting loss of $11.1 million and a combined ratio of 122.1% in 2010.
Insurance segment includes the operations of RenaissanceRe’s former Insurance segment that are not being sold pursuant to the Stock Purchase Agreement with QBE; and reported written gross premiums of $1.3 million in the quarter, a decline of 88% year over year, primarily as a result of the non-renewal of the previously in-force book of business written in the Insurance segment. The segment incurred an underwriting loss of $10.6 million in the fourth quarter of 2010.
Gross premiums written in the segment decreased $28.2 million to $2.6 million in 2010, while underwriting loss increased $7.4 million to $31.4 million in 2010.
Evaluation of Capital Structure and Balance Sheet
RenaissanceRe reported an annualized operating ROE of 22.5% in the fourth quarter of 2010, compared to 22.7% in the prior-year quarter. In fiscal 2010, RenaissanceRe reported a 16.5% operating ROE, compared to 27.6% in fiscal 2009.
During the fourth quarter, book value per share increased 3.3% year over year to $62.58, compared to $60.57 in the fourth quarter of 2009. At the end of December 31, 2010, book value per share increased 21.1% year over year from $51.68 at the end of December 31, 2009.
In the reported quarter, the company’s equity in losses of other ventures decreased $9.9 million to a loss of $10.4 million, primarily due to the equity in losses of Top Layer Re of $9.4 million during the fourth quarter of 2010, as a result of increased estimated ultimate net claims and claim expenses related to the New Zealand earthquake recorded by Top Layer Re.
The company’s equity in other ventures decreased $22.8 million to a loss of $11.8 million in 2010, compared to earnings of $11.0 million in 2009.
In November, 2010, RenaissanceRe sold its U.S. property and casualty business to an Australian insurer QBE Holdings, Inc. for about $275 million. RenaissanceRe’s U.S. property and casualty business was underwritten through managing general agents, and its crop insurance business through Agro National Inc. and its commercial property insurance operation.
RenaissanceRe stated that as its entire insurance business will be sold, it will become immediately accretive to RenaissanceRe’s tangible book value per share.
RenaissanceRe generated $11.1 million in income from discontinued operations in the fourth quarter, which is net of an after-tax loss of $9.5 million associated with the planned sale, after considering transaction expenses.
At the end of December 31, 2010, the company’s consolidated balance sheet reflects $872.1 million and $598.5 million of assets and liabilities of discontinued operations held for sale, respectively, substantially all of which will be transferred to QBE upon closing the transaction.
In December, 2010, the company redeemed all of its issued and outstanding 7.30% Series B Preference Shares for $100.0 million plus accrued and unpaid dividends thereon.
During the fourth quarter of 2010, RenaissanceRe repurchased approximately 782,000 common shares in open market transactions at an aggregate cost of $49.0 million and at an average share price of $62.74. During 2010, the company repurchased approximately 8.2 million common shares in open market transactions at an aggregate cost of $460.4 million and at an average share price of $56.15.
Subsequent to December 31, 2010 and through the period ending February 7, 2011, RenaissanceRe has repurchased approximately 1.2 million common shares in open market transactions at an aggregate cost of $75.3 million and at an average share price of $64.21.
On December 31, 2010, RenaissanceRe paid a quarterly dividend of 25 cents per share to its shareholders of record as of December 15, 2010.
On January 20, 2011, RenaissanceRe sold its Platinum warrants for an aggregate of $47.9 million and expects to record a gain of $3.0 million in the first quarter of 2011 as a result of the sale. The warrants had provided the company the right to purchase 2.5 million common shares from Platinum for $27.00 per share.
Comparisons with Competitors
Rival company ACE Limited (ACE) reported fourth-quarter results on February 3, 2011 with operating earnings of $2.05 per share, beating the Zacks Consensus Estimate by 20 cents. Full year EPS of $7.79 surpassed the Zacks Consensus Estimate of $7.56.
Another competitor XL Group, plc (XL) reported fourth-quarter profit from continuing operations of 74 cents per share on February 8, well ahead of the Zacks Consensus Estimate of 67 cents. Full-year 2010 core operating earnings were $2.40 per share, ahead of the Zacks Consensus Estimate of $2.34.
Our Take
RenaissanceRe’s dividend and share repurchase program has been an integral part of its continuing capital management program. 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.
ACE LIMITED (ACE): Free Stock Analysis Report
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