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RenaissanceRe Holdings Ltd. (RNR) reported its first-quarter loss from continuing operations of $242.9 million or $4.59 per share, lower than the Zacks Consensus Estimate of a loss of $4.94. However, the company reported favorable earnings of $116.5 million or $1.91 per share in the year-ago quarter.

The negative impact in the quarter was attributable to the Australian Flooding in January, the New Zealand Earthquake in February and the Tohoku Earthquake in March. Besides the number of significant catastrophic events, Renaissance’s expenses increased largely coupled with the decrease in net investment income.

RenaissanceRe’s operating earnings in the reported quarter excludes adjustments related to net realized and unrealized losses on investments of continuing operations and net realized and unrealized gains on fixed maturity investments and net other-than-temporary impairments of discontinued operations.

However, the prior-year quarter excludes net realized and unrealized gains on investments of continuing operations, net other-than-temporary impairments and net realized and unrealized gains on fixed maturity investments and net other-than-temporary impairments of discontinued operations.

Including these one-time items, RenaissanceRe posted a net loss of $248.0 million or $4.69 per share in the reported quarter, as opposed to an income of $165.0 million or $2.73 per share.

Behind the Headlines

RenaissanceRe reported total revenues of $387.7 million, surpassing the Zacks Consensus Estimate of $283.5 million. This also compares favorably with revenues of $349.2 million in the prior-year quarter.

Gross premiums written for the reported quarter increased $94.5 million to $610.5 million in the quarter, principally due to reinstatement premiums written from the large catastrophes of the first quarter of 2011 and increases across most lines of business within the Lloyd’s segment.

Gross premiums written climbed 1.6% year over year in the quarter, excluding the impact related to reinstatement premiums of $113.5 million and $27.0 million written off in the first quarter of 2011 and 2010, respectively.

However, RenaissanceRe reported an underwriting loss of $397.2 million in the reported quarter, primarily driven by the Australian flooding, the New Zealand earthquake and the Tohoku earthquake, which had a net negative impact on the underwriting result of $565.2 million.

RenaissanceRe generated a combined ratio (the ratio of claims, administration and dividend expenses to premiums earned) of 230.0% in the first quarter of 2011, as opposed to 67.4% in the prior-year quarter.

During the quarter, other income of $43.5 million was generated related to ceded reinsurance contracts accounted for at fair value, as compared to a loss of $1.5 million, as a result of net recoverables on the Tohoku earthquake which are included in the determination of net negative impact from the large catastrophes of the first quarter of 2011.

Net investment income also plunged to $60.3 million in the first quarter of 2011 from $65.7 million in the prior-year quarter. The decrease in net investment income was attributable to the lower level of yields on RenaissanceRe’s fixed maturity investments, partially offset by an increase in net investment income from the company’s hedge fund and private equity investments due to higher total returns.

RenaissanceRe incurred net realized and unrealized losses of $5.2 million on fixed maturity investments in the quarter, compared to net realized gains of $48.2 million in the prior-year quarter.

In addition, RenaissanceRe‘s net loss attributable to the redeemable non-controlling interests of $85.5 million deteriorated from net income attributable to non-controlling interests of $10.6 million, primarily due to the decreased profitability of DaVinciRe as a result of the large catastrophes in the first quarter of 2011 and an increase in the company’s ownership of DaVinciRe to 44.0% at March 31, 2011, compared to 41.2% at March 31, 2010.

On April 1, 2011, DaVinciRe repaid in full $200.0 million borrowed under the DaVinciRe Credit Agreement.

Segment Results

Reinsurance segment, which includes catastrophe reinsurance, specialty reinsurance and certain property catastrophe and specialty joint ventures managed by the company’s ventures unit, reported gross premiums written of $573.7 million in the reported quarter, an increase of 15.1% year-over-year.

The segment generated $368.1 million of underwriting loss and a combined ratio of 227.2% in the reported quarter, as opposed to an underwriting income of $87.4 million and a combined ratio of 64.0% in the prior-year quarter.

Lloyd’s Segment, which includes reinsurance and insurance business written through RenaissanceRe Syndicate 1458, posted gross premiums written of $36.6 million in the quarter, an increase of 161.1% year-over-year. RenaissanceRe’s Lloyd’s segment generated an underwriting loss of $26.3 million and a combined ratio of 267.7%, as against $2.9 million and 141.7%, respectively.

Insurance segment includes the operations of RenaissanceRe’s Bermuda-based insurance operations, reported written gross premiums of $0.3 million in the quarter, as compared to $4.4 million in the first quarter of 2010. The segment incurred an underwriting loss of $2.7 million in the first quarter of 2011 and a combined ratio of 727.6%. The segment incurred an underwriting loss of $2.8 million and a combined ratio of 558.2% in the year-ago quarter.

Evaluation of Capital Structure and Balance Sheet

RenaissanceRe reported an annualized operating ROE of negative 30.7% in the first quarter of 2011, compared to positive 14.8% in the prior-year quarter.

During the first quarter, book value per share decreased 8.9% year over year to $57.01 from $62.58 in the first quarter of 2010.

In the reported quarter, the company’s equity in losses of other ventures was $23.8 million as compared to earnings of $2.2 million, primarily due to the equity in losses of Top Layer Re of $22.5 million as a result of increased estimated ultimate net claims and claim expenses related to the New Zealand earthquake recorded by Top Layer Re.

RenaissanceRe also gained $3.0 million from the sale of Platinum warrants.

In March, RenaissanceRe completed the sale of its U.S. property and casualty (P&C) business to an Australian insurer QBE Holdings, Inc. for about $275 million, which was announced in November 2010.

During the first quarter of 2011, RenaissanceRe repurchased approximately 2.7 million common shares in open market transactions at an aggregate cost of $174.8 million and at an average price of $65.84.

On March 31, 2011, RenaissanceRe paid a quarterly dividend of 26 cents per share, an increase from 25 cents per share, to its shareholders of record as of March 15, 2011.

Comparisons with Competitors

Rival company ACE Limited (ACE) will report its first-quarter results on May 4, 2011, whereas XL Group, plc (XL) will report its first quarter of 2011 on May 3.

Our Take

RenaissanceRe’s dividend and share repurchase program has been an integral part of its continuing capital management program. Recently with the expansion of its stock repurchase program, the company has deployed its excess capital. We believe that the decline in buybacks may prove a negative catalyst for RenaissanceRe’s shares.

With the sale of its P&C business, RenaissanceRe is now positioned well to concentrate more on its U.S. insurance market through the Lloyd’s syndicate, RenaissanceRe Syndicate 1458, on a non-admitted basis.

On the other hand, the acquisition has raised QBE's earnings per share in the first year and helped it in expanding its operations in the market by further enhancing its product diversification and distribution.

The operating subsidiaries of the company also remain well capitalized. With its capital position, we believe RenaissanceRe should be able to take advantage of the increased demand for reinsurance.

However, we expect limited upside potential for RenaissanceRe shares in the coming quarters as it faces increasing challenges in its investment portfolio, though it continues to benefit from its underwriting discipline, capital strength and strong market reputation.

 
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