Fitch Affirms RenRe's Ratings; Outlook Stable
KEY RATING DRIVERS
Fitch's rationale for the affirmation of RNR's ratings reflect the company's continued strong leadership position in the property catastrophe traditional and alternative reinsurance market, increased diversification into casualty and specialty reinsurance, reasonable operating leverage and modest financial leverage. The ratings also reflect the company's volatile underwriting results from catastrophe losses, but with low average combined ratios over an extended time period.
In addition, the ratings reflect Fitch's negative sector outlook on global reinsurance. The current stressful reinsurance market conditions are promoting weaker pricing and more generous terms and conditions, particularly for property catastrophe risk. Fitch expects RNR to maintain its historically strong underwriting discipline and leading competitive market position in the consolidating reinsurance sector.
RNR continues to manage the challenging reinsurance market environment through increased diversification away from its property catastrophe risk focus and more into casualty and specialty reinsurance business. In 2015, specialty reinsurance and Lloyd's of London (Lloyd's) segments increased to 57% of total gross premiums written (GPW) from 40% of GPW in 2014. This was driven in large part by RNR's March 2015 acquisition of Platinum Underwriters Holdings, Ltd. (PTP) and the continued strong growth of Lloyd's business. Likewise, catastrophe reinsurance business declined to 43% of total GPW in 2015, down from 60% in 2014 and 70% in 2013.
RNR's average GAAP calendar-year combined ratio over the most recent 10-year period (2006-2015) was favorable, albeit volatile, at 61.9%, with a standard deviation of 22.6%, including an average combined ratio of 44.4% for the catastrophe reinsurance segment, with a standard deviation of 33.1%. Similarly, over this same period, RNR produced a favorable return on equity (ROE) of 16.9%, but with a high standard deviation of 12.2%. In 2015, RNR posted a calendar-year combined ratio of 64.7% with an ROE of 10.5%.
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 increased to \\$4.7 billion at Dec. 31, 2015, up 22% from year-end 2014 due to net earnings and \\$762 million of RNR shares issued for the PTP purchase. RNR's operating leverage ratios are conservative with net premiums written (NPW)-to-equity of 0.25x in 2015, up only slightly from 0.21x in 2014 with the PTP purchase.
RNR's financial leverage ratio is reasonable for the rating category at 15.5% as of Dec. 31, 2015. This ratio is up noticeably from 7.6% as of Dec. 31, 2014, reflecting a \\$300 million senior debt issuance in March 2015 to partially finance the cash consideration for the PTP acquisition, plus \\$250 million of added PTP existing debt. In addition, DaVinciRe Holdings Ltd. issued \\$150 million of debt in May 2015.
RNR's fixed charge coverage has been very strong, averaging 10.9x from 2011-2015, which included negative earnings coverage in 2011 due to increased catastrophe losses. Coverage declined to 10.4x in 2015 from 16.8x in 2014 as a result of increased interest costs from the added debt related to the PTP acquisition, but is still viewed as very strong.
RATING SENSITIVITIES
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.
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 Issuer Default Rating at 'A';
--\\$125 million 6.08% series C preferred stock 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+'.
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