We are downgrading our recommendation on RenaissanceRe Holdings Ltd. (RNR) to ‘Neutral’ based on its declining investment income coupled with weather-related risks. The company also faces high competition in the catastrophe insurance and reinsurance segments.
RenaissanceRe reported second-quarter 2012 earnings per share of $2.14, lagging behind the Zacks Consensus Estimate of $2.49. However, the results reversed the loss of 21 cents per share in the year-ago quarter.
RenaissanceRe has witnessed a reverse trend in gross premiums over 2011 and so far in 2012. Gross premiums written improved 6.3% year over year to $1.33 billion in the first half of 2012 spurred by higher risk-adjusted pricing in the catastrophe unit during the January 2012 renewals, premium growth in the catastrophe, special and Lloyd’s segments and additional premium from the new reinsurance subsidiary - Timicuan Reinsurance III Limited.
In addition, in order to enhance its reinsurance capacity, RenaissanceRe announced the creation of a new reinsurance joint venture named Timicuan Reinsurance III Limited, which will take over a portion of the property catastrophe reinsurance portfolio of its subsidiaries – Renaissance Reinsurance Ltd. and DaVinci Reinsurance Ltd. Apart from boosting RenaissanceRe’s capacity to provide reinsurance in the Florida homeowners market, Timicuan Reinsurance is expected to increase the earnings of the Reinsurance segment of the umbrella company as well, which accounts for the majority of the company’s business.
However, natural catastrophes have been impacting the profits of RenaissanceRe since 2008. The company experiences large underwriting losses due to natural disasters. Although it witnessed a significant decline in natural disasters in the first half of 2012, we expect RenaissanceRe to face significant challenges due to weather-related conditions in the future as well. The company needs to increase its revenues in order to cope with these losses.
Moreover, the investment portfolio of RenaissanceRe is exposed to the weak credit and capital markets. While the company’s portfolio is strong, it is nevertheless vulnerable to the present volatile interest rate environment. Net investment income declined to $81.7 million in the first half of 2012 from $93.6 million in the year-ago period, primarily due to lower returns from the fixed maturity investments, short-term investment and hedge funds and private equity investments.
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