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We have upgraded our recommendation on RenaissanceRe Holdings Ltd. (RNR) to Neutral from Underperform based on its improving operating leverage, strategic divestitures and stable ratings. Additionally, efficient capital deployment is boosting investors’ confidence in the stock.

RenaissanceRe reported fourth-quarter 2011 operating earnings of $1.11 per share, beating the Zacks Consensus Estimate of $1.06. However, this compared unfavorably with the year-ago quarter earnings of $3.47.

Over the past few years, RenaissanceRe has been deploying its excess capital to enhance investors’ wealth. Recently, the company hiked its quarterly dividend to 27 cents per share from 26 cents paid in December 2011, thus marking the seventeenth dividend hike in its history.

Furthermore, the company repurchased 2.9 million shares last year and from January 1, 2012 to February 6, 2012, it has bought back 51,000 shares. The company’s decision of consistently returning value to the shareholders’ should help retain investors’ confidence amid the prevailing economic volatility.

Moreover, RenaissanceRe’s comfortable operating and financial leverage, strong market position in property catastrophe reinsurance, low combined ratios and consistent strong return on capital have enabled it to retain the confidence of rating agencies. In December 2011, Fitch affirmed the Issuer Default Rating of RenaissanceRe at “A”, the debt rating of 5.875% senior notes at “A-” and 6.08% series C and 6.6% series D preferred stocks at “BBB”.

However, natural catastrophes have been impacting the profits of RenaissanceRe since 2008. The company was severely hit by floods in Australia and Thailand, earthquake in New Zealand, tornadoes in the U.S. and earthquake and tsunami in Japan last year, which led to underwriting losses of $725.2 million.

Moreover, the company’s poor performance in hedge fund, private equity and high yield funds resulted in dismal investment results in 2011. Although the company maintains a strong dollar-weighted average ratingon its fixed maturities portfolio, the steep decline in interest rates and widening credit spreads have led to lower total returns on the portfolio in 2010 and 2011.

Overall, we anticipate a moderate upside potential for RenaissanceRe shares in the near future. The Zacks Consensus Estimate for the company’s first-quarter 2012 earnings is currently $2.24 per share, up about 149% year over year. For full year 2012, the Zacks Consensus Estimate stands at $8.30 per share, up almost 358% from 2011.

RenaissanceRe carries a Zacks #3 Rank, which translates into a short-term Hold rating. It competes with ACE Limited (ACE) and XL Group Plc. (XL).

 
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