We are upgrading our recommendation on
RenaissanceRe Holdings Ltd.
) to Outperform from Neutral on the heels of the positive trend in
premiums growth, increase in reinsurance capacity through the
formation of Timicuan, stable ratings and regular dividend hikes.
Moreover, improved financial leverage, cash balance and return on
capital employed has boosted its financial position.
With second quarter earnings release scheduled on July 31 after
the bell, the Zacks Consensus Estimate is currently pegged at
$2.50, compared with a loss of 21 cents incurred in the year-ago
RenaissanceRe has witnessed a reverse trend in gross premiums
over 2011 and so far in 2012. While tough market conditions and
selective underwriting exercised by the company led to premium
declines from 2007 to 2010, respectively, substantial increase in
reinstatement premiums written and the impact of improved market
conditions on the company's catastrophe unit led to a 23% jump in
Further, gross premiums written improved 8.8% year over
year in the first quarter of 2012, spurred by higher risk-adjusted
pricing in the catastrophe unit during the January 2012 renewals
along with premiums growth in the Lloyd's segment.
Further, in order to enhance its reinsurance capacity,
RenaissanceRe announced the creation of a new reinsurance
subsidiary named Timicuan Reinsurance III Limited. Apart from
boosting the company'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
However, natural catastrophes have been impacting the profits of
RenaissanceRe since 2008. Although the first quarter of 2012
witnessed a significant decline in natural disasters, we expect the
company to face significant challenges due to weather-related
conditions in the future and it needs to increase its revenue in
order to weather these losses.
Moreover, while RenaissanceRe's cash flows from operating
activities are significantly in excess of its operating
commitments, a hefty portion of it goes in covering losses from
unpredictable natural calamities, leaving petty-some or almost
nothing for boosting the company operations.
RenaissanceRe faces substantial competition in the catastrophe
insurance and reinsurance segments that limits its market share,
particularly in the emerging markets. Additionally, the catastrophe
reinsurance market is highly unpredictable and any significant
change in the catastrophe loss activity or change in the capital
invested in the industry can foster significant changes in pricing,
policy terms as well as demand for products.
Consequently, the insurance industry has been experiencing
volatility in the business, which casts a cautious outlook on
future earnings potential.
RenaissanceRe, which competes with
XL Group Plc.
), currently carries a Zacks #1 Rank, implying a short-term Strong
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