On Jan 16, 2015, we issued an updated research report on RenaissanceRe Holdings Ltd. (RNR). The company’s strength lies in its core operating strength, strong financial position, disciplined underwriting and efficient capital deployments. However, competitive pressure, exposure to catastrophes and weak investment portfolio raise caution.
RenaissanceRe has been focusing on enhancing its core operations for quite some time now. Toward this end, the company has undertaken a number of strategic divestitures and expansion initiatives. RenaissanceRe announced the acquisition of reinsurer Platinum Underwriters Holdings Ltd. (PTP) that on culmination (expected by mid-2015) should help RenaissanceRe strengthen its U.S. specialty and casualty reinsurance platform, complement the risk management framework, and form an entity that will create a vast product portfolio and broker relationships.
Thus, the deal is expected to enhance the book value and earnings going forward. RenaissanceRe has been witnessing a positive trend in gross premiums over the past few years. Particularly, the Lloyd’s segment has shown improvement in this regard. As the company realizes greater benefits of scale, the Lloyd’s segment should improve further, thereby consistently contributing to overall premiums.
RenaissanceRe has a strong mortgage-backed portfolio, which consists of high-rated fixed income securities. The company’s invested asset portfolio of fixed maturities and short-term investments maintain a strong dollar-weighted average rating. Meanwhile, the financial strength of the company is reinforced by its strong debt and credit ratings.
Moreover, the company is adept in deploying its capital efficiently that enhances shareholders’ value. In fact, shares repurchased in the first nine months of 2014 were higher than the amount deployed in 2013. RenaissanceRe also approved an increase in its share repurchase program in the last quarter. The company’s robust portfolio and business growth outlook as well as improved liquidity from the pending acquisition of Platinum Underwriters should further support its capital deployment endeavors in the future.
However, on the flip side, the company is exposed to natural catastrophes that are hampering profits. As a result, the combined ratio has also been deteriorating. Moreover, a persistent slump in market conditions has largely impacted premiums from managed catastrophes. The unpredictable nature of such weather-related events continues to raise caution for the upcoming quarters, thereby posing operating risks.
Additionally, RenaissanceRe being exposed to the weak credit and capital markets is vulnerable to the present volatile interest rate environment. Although the company maintains a strong dollar-weighted average rating on its invested asset portfolio of fixed maturities and short-term investments, the steep decline in interest rates and widening credit spreads has hampered total returns on the fixed maturity investment portfolio.
This, in turn, has led to a decline in net investment income. Moreover, RenaissanceRe faces substantial competition in the catastrophe insurance and reinsurance segments that limits its market share, particularly in the emerging markets.
RenaissanceRe currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the property and casualty insurance space include The Allstate Corp. (ALL) and Arch Capital Group Ltd. (ACGL). Both the stocks sport a Zacks Rank #1 (Strong Buy).
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