Fitch Affirms RenRe’s Ratings, Outlook Stable
Fitch Ratings has affirmed the ratings of RenaissanceRe Holdings Ltd. and its subsidiaries, including RNR’s Long-Term Issuer Default Rating [IDR] at ‘A’ and the Insurer Financial Strength [IFS] rating of Renaissance Reinsurance Ltd. at ‘A+’. The Rating Outlook is Stable.
A statement from the ratings agency said, “Fitch’s rationale for the affirmation of RNR’s ratings reflect the company’s continued strong leadership position in property catastrophe reinsurance, increased diversification into casualty and specialty business, reasonable operating leverage and modest financial leverage.
“The ratings also reflect the company’s volatile underwriting results from catastrophe losses, although with low average combined ratios over an extended time period, and Fitch’s negative sector outlooks on global reinsurance and U.S. property/casualty insurance.
“RNR has a leading position in the property catastrophe traditional and alternative reinsurance market derived largely from the company’s ability to provide consistent capacity in the marketplace and its ability to effectively underwrite and price catastrophe-related risks.
“RNR has managed the challenging property reinsurance market environment through increased diversification away from its core property catastrophe risk focus. Property catastrophe business accounted for 37% of total gross premiums written [GPW] in 2016, down from 46% in 2015 and 64% in 2014.
“RNR has increased its casualty and specialty business, helping to reduce RNR’s earnings and cash flow exposure to cyclical conditions in the property catastrophe market. In 2016, casualty and specialty segment business represented 53% of total GPW, up from 47% in 2015 and 31% in 2014. This increase was primarily driven by RNR’s acquisition of Platinum Underwriters Holdings, Ltd. [PTP] in March 2015.
“Given RNR’s historical property catastrophe focus, it is 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 10-year period [2007-2016] was favorable, albeit volatile, at 63.6%, with a standard deviation of 22.7%. Likewise, over this same period, RNR produced a very strong return on equity [ROE] of 14.4%, but with a high standard deviation of 10.2%.
“Most recently, RNR posted strong, but reduced levels of GAAP profitability. The company’s ROEs of 10.9% in 2016 and 10.5% in 2015 are down from 14.6% in 2014. This decline reflects less underwriting income due to increased catastrophe losses, a challenging reinsurance market environment and a shifting business mix. RNR reported a 2016 combined ratio of 72.5%, which included 7.9 points of catastrophe losses from Hurricane Matthew, a number of weather events in Texas and the Fort McMurray, Alberta, Canada wildfires. This combined ratio is up from 64.7% in 2015 and 50.2% in 2014.
“Fitch expects profitability will remain pressured, due to more normalized catastrophe losses and continued difficult reinsurance market conditions. However, financial results may be less volatile as the company continues to shift its business mix away from property catastrophe and more into casualty and specialty [including Lloyd's] lines, which have higher run rate, but less volatile, combined ratios.
“Fitch believes that RNR’s capital position provides an adequate cushion against the operational and financial risks the company faces. Shareholders’ equity increased to $4.9 billion at Dec. 31, 2016, up 2.8% from year-end 2015, due to net earnings partially offset by share repurchases and common and preferred share dividends. RNR’s net premiums written [NPW] to equity of 0.3x in 2016 is up only slightly from 0.2x in 2015 due to the added full year premiums from PTP.
“RNR’s financial leverage ratio [FLR] is reasonable for the rating category at 14.9% as of Dec. 31, 2016 [excluding $150 million of senior notes issued by DaVinciRe in May 2015]. Fixed-charge coverage [excluding DaVinciRe's interest expense and non-controlling operating income before taxes] was a strong 7.2x in 2016, although down from 8.9x in 2015 and 12.9x in 2014 as a result of increased interest costs from the added debt related to the PTP acquisition. Fixed charge coverage averaged a very strong 10.5x from 2012 to 2016.
“Key rating triggers that could lead to a downgrade include deterioration in market conditions that impair RNR’s leading position in the property catastrophe reinsurance market and result in a weakening of RNR’s historically strong profitability, with sustained combined ratios above 85% or operating ratios above 73%, based on the current business mix. Material weakening in RNR’s very strong capitalization, as measured by NPW 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 [10% in 2016] or capital [19% at year-end 2016] 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 nonperformance risk should Fitch view Bermuda’s regulatory environment as becoming more controlling in its supervision of [re]insurers.
“Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results relative to other property-focused reinsurers and comparably rated property/casualty peers; significant improvement in RNR’s competitive position in profitable market segments outside of property catastrophe reinsurance, including its casualty and specialty business and Lloyd’s platform; and material risk-adjusted capital growth.”
