Fitch Affirms RenRe’s Ratings, Outlook Stable

February 17, 2018

Fitch Ratings has affirmed the ratings of RenaissanceRe Holdings Ltd. [RNR] and its subsidiaries, including the Insurer Financial Strength [IFS] rating of Renaissance Reinsurance Ltd. at ‘A+’ ['Strong'] and RNR’s senior unsecured debt at ‘A-’ and Issuer Default Rating [IDR] at ‘A’. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

A statement from the ratings agency said, “Fitch’s affirmation of RNR’s ratings reflects the company’s strong business profile in property catastrophe reinsurance, with diversification into casualty and specialty business, strong financial performance over an extended period, very strong capitalization and modest financial leverage. The ratings also reflect the company’s volatile earnings from catastrophe losses, Fitch’s negative sector outlook on global reinsurance and recent U.S. corporate tax reforms that reduce Bermuda’s long-standing advantage over the U.S.

“RNR has a leading position in the property and catastrophe traditional and alternative reinsurance market. Favorably, reinsurance pricing bottomed out and turned positive following the significant 2017 catastrophe loss events, particularly in property and catastrophe business, although it remains to be seen if this trend is sustainable. In response to the challenging property reinsurance market environment, RNR increased its overall product diversification. Property catastrophe business represented 39% of total gross premiums written [GPW] in 2017, up slightly from 37% in 2016 as RNR generated premiums from reinstatements and back up covers late in 2017, but reduced from 46% in 2015 and 64% in 2014, with casualty and specialty reinsurance business growing to about half of total company GPW.

“RNR reported a 2017 GAAP combined ratio of 137.9%, which included 59.4 points of catastrophe losses from Hurricanes Harvey, Irma and Maria, California wildfires, Mexico earthquakes and aggregate loss contracts. The 2017 combined ratio is above the 118.6% posted in 2011 that included 85.4 catastrophe points primarily from Japanese and New Zealand earthquakes, U.S. tornadoes and Thailand floods and is the highest for RNR since the 139.7% in 2005 when Hurricanes Katrina, Rita and Wilma added 85.3 points of catastrophe losses.

“Given RNR’s property catastrophe focus, it is especially important to evaluate profitability over an extended period that includes periods of light and heavy catastrophe losses and different cyclical market conditions. RNR’s average GAAP calendar-year combined ratio over the most recent five-year period [2013-2017] was favorable at 73.8%, although volatile with a standard deviation of 37.6%. Likewise, over this same period, RNR produced a strong ROE of 10.1%, but with a high standard deviation of 9.7%.

“Fitch expects profitability will remain pressured due to continued competitive, albeit improved, reinsurance market conditions. However, financial results may be less volatile as the company continues to shift its business mix into more stable casualty and specialty lines.

“Shareholders’ equity dropped almost 10% to $4.4 billion at Dec. 31, 2017 from $4.9 billion at year-end 2016 as RNR posted a 2017 net loss of $245 million and repurchased $189 million of common shares in 2017. Despite this decline in equity, RNR maintained its ‘Extremely Strong’ score on Fitch’s Prism factor-based capital model at year-end 2017. RNR’s operating leverage ratios increased in 2017 as a result of the equity drop, but are still viewed as very strong.

“RNR’s financial leverage ratio [FLR] is reasonable at 17.3% as of Dec. 31, 2017 [excluding $150 million of senior notes issued by DaVinciRe], up from 15.2% at year-end 2016 due to the shareholders’ equity decline. RNR’s fixed-charge coverage [excluding DaVinciRe's interest expense and non-controlling operating income before taxes] was negative in 2017 due to the increased catastrophe losses. However, assuming more normal catastrophe losses, this should return to strong levels of 7.0x-8.0x.

“The U.S. corporate tax reforms enacted in 2018 narrow Bermuda’s tax advantage relative to the U.S. and could result in [re]insurers such as RNR retaining more business and capital in their U.S. subsidiaries. To the extent that a shift in RNR’s business away from Bermuda results in more than 30% of consolidated capital or earnings residing outside Bermuda, the holding company issuer default rating and debt ratings would be lowered by one notch, per Fitch’s notching criteria. This revised notching for RNR would reflect a change to more conservative standards in place for a “ring-fenced” regulatory environment from the current more favorable Bermuda “group solvency” regulation that allows for freer movement of cash flow and capital from operating to holding companies.

“Key rating sensitivities that could lead to a downgrade include additional near-term catastrophe or other losses that deplete capital, a weakening of RNR’s historically strong profitability, with five-year average combined ratios above 85% or operating ratios above 73%, based on the current business mix. Deterioration in RNR’s very strong capitalization, as measured by a failure to maintain an ‘Extremely Strong’ score on Fitch’s Prism factor-based capital model; net premiums written to shareholders’ equity above 0.5x; FLR above 25%; or a catastrophe event loss that is 25% or more of shareholders’ equity could also result in a ratings downgrade.

“If more than 30% of RNR’s earnings [15% of net loss in 2017] or capital [20% at year-end 2017] is sourced from foreign entities outside of the Bermuda group solvency environment, RNR’s holding company ratings could be lowered by one notch reflecting a ring-fencing environment classification. RNR’s hybrid securities ratings could also be lowered by one notch to reflect non-performance risk should Fitch view Bermuda’s regulatory environment as becoming more controlling in its supervision of [re]insurers.

“Key rating sensitivities that could lead to an upgrade include significant improvement in RNR’s competitive position in profitable market segments outside of property catastrophe reinsurance [including in its casualty and specialty business], a meaningful reduction in the volatility of financial results; and material risk-adjusted capital growth.”

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