We are downgrading our recommendation on
RenaissanceRe Holdings Ltd.
) to 'Neutral' based on its declining investment income coupled
with weather-related risks. The company also faces high competition
in the catastrophe insurance and reinsurance segments.
RenaissanceRe reported second-quarter 2012 earnings per share of
$2.14, lagging behind the Zacks Consensus Estimate of $2.49.
However, the results reversed the loss of 21 cents per share in the
RenaissanceRe has witnessed a reverse trend in gross premiums
over 2011 and so far in 2012. Gross premiums written improved 6.3%
year over year to $1.33 billion in the first half of 2012 spurred
by higher risk-adjusted pricing in the catastrophe unit during the
January 2012 renewals, premium growth in the catastrophe, special
and Lloyd's segments and additional premium from the new
reinsurance subsidiary - Timicuan Reinsurance III Limited.
In addition, in order to enhance its reinsurance capacity,
RenaissanceRe announced the creation of a new reinsurance joint
venture named Timicuan Reinsurance III Limited, which will take
over a portion of the property catastrophe reinsurance portfolio of
its subsidiaries - Renaissance Reinsurance Ltd. and DaVinci
Reinsurance Ltd. Apart from boosting RenaissanceRe's capacity to
provide reinsurance in the Florida homeowners market, Timicuan
Reinsurance is expected to increase the earnings of the Reinsurance
segment of the umbrella company as well, which accounts for the
majority of the company's business.
However, natural catastrophes have been impacting the profits of
RenaissanceRe since 2008. The company experiences large
underwriting losses due to natural disasters. Although it witnessed
a significant decline in natural disasters in the first half of
2012, we expect RenaissanceRe to face significant challenges due to
weather-related conditions in the future as well. The company needs
to increase its revenues in order to cope with these losses.
Moreover, the investment portfolio of RenaissanceRe is exposed
to the weak credit and capital markets. While the company's
portfolio is strong, it is nevertheless vulnerable to the present
volatile interest rate environment. Net investment income declined
to $81.7 million in the first half of 2012 from $93.6 million in
the year-ago period, primarily due to lower returns from the fixed
maturity investments, short-term investment and hedge funds and
private equity investments.
RenaissanceRe, which competes with
XL Group Plc.
), carries a Zacks #3 Rank, which translates into a short-term Hold
ACE LIMITED (ACE): Free Stock Analysis Report
RENAISSANCERE (RNR): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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