We reiterated our ‘Neutral’ recommendation on RenaissanceRe Holdings Ltd. (RNR) based on the company’s earning prospects and the increasing challenges it faces in its investment portfolio.
RenaissanceRe reported a second quarter operating loss of 21 cents per share, as opposed to the Zacks Consensus Estimate of operating earnings of $1.64, showing a sharp decline from operating earnings of $2.40 per share reported in the year-ago quarter. Net income plunged 88.2% to $24.8 million from $210.2 million in the prior-year quarter.
Results deteriorated primarily due to high losses arising as a consequence of U.S. tornadoes. Premiums, particularly from the reinsurance business, improved, reflecting improving market conditions, but the huge catastrophe loss more than offset the improvement.
On the positive side, RenaissanceRe has a strong capital position. The company has a limited sub-prime exposure, with its mortgage-backed portfolio consisting of highly rated fixed income securities. Moreover, the financial strength of the company is reinforced by its strong debt and credit ratings. Besides, RenaissanceRe has no investments in collateralized debt obligations and collateralized loan obligations.
Further, the company has been divesting its redundant assets in order to enhance its operating leverage over the past several quarters. The company has also been deploying its excess capital to enhance shareholders’ wealth. After posting favorable results in the fourth quarter of 2010, RenaissanceRe hiked its dividend payment and also expanded its stock repurchase program.
However, natural catastrophes have been impacting the profits of RenaissanceRe since 2008. During the first quarter of 2011, the company was severely hit by floods in Australia, earthquake in New Zealand and an earthquake and tsunami in Japan, leading to a total loss of $427.4 million. Moreover, devastation caused by tornadoes in the US led to a net negative impact of $70.8 million in the second quarter of 2011, making the first half of 2011 the costliest semi-annual period for the company.
Though RenaissanceRe’s cash flows from operating activities are significantly in excess of its operating commitments, a hefty portion of it goes in covering losses from unpredictable natural calamities, leaving petty-something or almost nothing for boosting the company's operations. Moreover, the investment portfolio of the company is exposed to the weak credit and capital markets. While RenaissanceRe’s portfolio is strong, it is nevertheless vulnerable to the present volatile interest rate environment.
Additionally, RenaissanceRe faces substantial competition in the catastrophe insurance and reinsurance segments that limits its market share, particularly in the emerging markets. Moreover, the weak underwriting pricing cycle and weak rate environment are negatively affecting both the top- and bottom-lines. Furthermore, the catastrophe reinsurance market is highly unpredictable and the volatility in the business is leading to a considerable decline in gross premiums written.
The Zacks Consensus Estimate for third-quarter 2011 is currently $1.15 per share, down 27.4% year over year. For full year 2011, the Zacks Consensus Estimate stands negative at $1.40 per share, down 115% from 2010.
RenaissanceRe carries a Zacks #3 Rank, which translates into a short term Hold rating, indicating no clear directional pressure on the shares over the near term. It competes with ACE Limited (ACE) and XL Group Plc. (XL).
On Friday, the shares of the company closed at $65.89, down 1.2%, on the New York Stock Exchange.
ACE LIMITED (ACE): Free Stock Analysis Report
RENAISSANCERE (RNR): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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