Fitch Affirms RenaissanceRe's Ratings; Outlook Stable
KEY RATING DRIVERS
Fitch's rationale for the affirmation of RNR's ratings reflect the company's increased diversification into casualty and specialty reinsurance, continued strong leadership position in the property catastrophe traditional and alternative reinsurance market, 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 outlook on global reinsurance.
RNR has managed the challenging reinsurance market environment through increased diversification away from its property catastrophe risk focus and more into casualty and specialty reinsurance business. Through the first six months of 2016, specialty reinsurance and Lloyd's of London (Lloyd's) segments increased to 53% of total gross premiums written (GPW) from 41% of GPW in the first six months of 2015. This was driven by a 100% increase in specialty reinsurance business, as 2016 included a full six months of business from Platinum Underwriters Holdings, Ltd. (PTP), which RNR acquired in March 2015. Catastrophe reinsurance business declined to 47% of total GPW in the first half of 2016 from 59% in the comparable prior year period.
The company posted a calendar-year combined ratio of 76.1% for the first six months of 2016, up from 66.7% for the first six months of 2015. This increase was due to higher catastrophe losses from a number of weather events in Texas and the Fort McMurray, Alberta wildfire.
Reported annualized return on equity (ROE) was 12.2% in the first half of both 2016 and 2015. Fitch expects that future underwriting results and overall profitability will not be as favorable, 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 into casualty and specialty reinsurance, which has a higher average, but less volatile, loss ratio.
Fitch believes that RNR's capital position provides an adequate cushion against the operational and financial risks the company faces. Shareholders' equity of $4.7 billion at June 30, 2016 is flat from year-end 2015, as net income was offset by share repurchases and dividends on common and preference shares. RNR's operating leverage ratios are conservative with net premiums written (NPW)-to-shareholders' equity of about 0.3x.
Financial leverage ratio is modest for the rating category at 15.4% at both June 30, 2016 and Dec. 31, 2015. Fixed charge coverage was reduced to 7.7x in the first half of 2016 from 10.4x in 2015 as a result of increased interest costs from debt added related to the PTP acquisition but is still viewed as strong.
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. Evidence of such weakening would be demonstrated by sustained combined ratios above 80% and returns on common equity below 13%, material weakening in the company's current balance sheet strength, as measured by NPW-to-shareholders' equity above 0.5x or equity-credit adjusted financial leverage above 25%, a catastrophe event loss that is 25% or more of shareholders' equity.
Under Fitch's notching criteria, if more than 30% of RNR's earnings or capital 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 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 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 (re)insurer peers, significant improvement in RNR's competitive position in profitable market segments outside of property catastrophe reinsurance, including its specialty reinsurance and Lloyd's business, and material risk-adjusted capital growth.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings with a Stable Outlook:
RenaissanceRe Holdings Ltd.
--Long-Term IDR at 'A';
--$125 million 6.08% series C preference shares at 'BBB+';
--$275 million 5.375% series E preference shares at 'BBB+'.
RenRe North America Holdings, Inc.
--$250 million 5.75% senior notes due 2020 at 'A-'.
RenaissanceRe Finance Inc.
--$300 million 3.7% senior notes due 2025 at 'A-'.
Renaissance Reinsurance Ltd.
--Insurer Financial Strength at 'A+'.