CHICAGO--()--Fitch Ratings has affirmed the ratings of RenaissanceRe Holdings Ltd. (NYSE: RNR) and its subsidiaries, including the Issuer Default Rating (IDR) for RNR at 'A', and the Insurer Financial Strength (IFS) rating of Renaissance Reinsurance Ltd. at 'A+'. A full rating list is shown below. The Rating Outlook is Stable.
Fitch's rationale for the affirmation of RNR's ratings reflects the company's continued strong leadership position in the property catastrophe reinsurance market, RNR's reasonable operating and financial leverage, and overall high-quality and liquid portfolio of fixed-income and short-term investments. The ratings also reflect the competitive but improved property catastrophe market rate environment, volatile underwriting results, and potential volatility from the company's alternative investments.
RNR announced an initial estimated net negative impact from Hurricane Sandy of $130 million on its fourth quarter 2012 results of operations. Fitch considers this level to be manageable given the company's solid capitalization (representing about 3% of shareholders' equity at Sept. 30, 2012), although the loss estimate is still subject to significant uncertainty.
Fitch views RNR's year-to-year underwriting profitability and returns on capital as volatile, as reflected by the company's unfavorable results in 2011, when sizable catastrophe losses led to a net loss. However, the effect of this volatility on the company's ratings is mitigated somewhat by RNR's strong run-rate profitability over the long term, with low combined ratios and high returns on capital in most years. Fitch considers this an important factor supporting the company's ratings and as evidence of the company's underwriting and catastrophe modeling skills.
RNR posted a much improved GAAP calendar-year combined ratio of 43.1% for the first nine months of 2012, compared to 118.6% for full year 2011, which included 85.4 points for catastrophe losses from the Japanese and New Zealand earthquakes, Thailand floods, U.S. tornadoes, aggregate loss contracts, Hurricane Irene, and Australian flooding. Excluding the impact of significant catastrophes (3.6 points) and favorable reserve development (15.5 points), RNR's combined ratio for the first nine months of 2012 was 55.0%, up from 47.1% for the full year 2011 accident year period excluding catastrophes, due to estimated ultimate losses related to potential exposure to LIBOR related claims.
RNR has been able to take advantage of the more recent favorable market conditions in its core property catastrophe reinsurance business following the significant catastrophe losses in 2011. Through the first nine months of 2012, the company's total gross premiums written increased by 5% over the comparable prior year period. However, excluding the impact of sizable reinstatement premiums in 2011 and negative reinstatement premiums adjustments in 2012, growth in gross premiums written was much more pronounced at 21% for the first nine months of 2012.
Fitch believes that RNR's capital position provides an adequate cushion against the operational and financial risks the company faces. RNR utilizes a reasonable amount of operating leverage with a ratio of net premiums written to shareholders' equity of 0.2x-0.3x in recent periods, which is low compared to the overall reinsurance industry, but in line with those of other reinsurers with property catastrophe concentrations. To the extent that the premium rate environment continues to improve, Fitch expects RNR's operating leverage to increase somewhat, although it is not expected to exceed 0.5x.
Key rating triggers that could lead to a downgrade include significant deterioration in RNR's historically strong profitability, as demonstrated by sustained underwriting losses or adverse investment portfolio results, material weakening in the company's current balance sheet strength, as measured by net premiums written to shareholders' equity above 0.5x or equity-credit adjusted financial leverage above 25%, and a catastrophe event loss that is 25% or more of shareholders' equity.
Fitch considers a rating upgrade to be unlikely in the near term due to the earnings and capital volatility inherent in the company's property catastrophe reinsurance focus. Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results relative to other property catastrophe reinsurers and comparably rated property/casualty (re)insurer peers, 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.
Fitch affirms the following ratings with a Stable Outlook:
RenaissanceRe Holdings Ltd.
--IDR at 'A';
--$100 million 5.875% senior notes due 2013 at 'A-';
--$250 million 6.08% series C preferred stock at 'BBB';
--$300 million 6.6% series D preferred stock at 'BBB'.
RenRe North America Holdings, Inc.
--$250 million 5.75% senior notes due 2020 at 'A-'.
Renaissance Reinsurance Ltd.
--IFS at 'A+'.
Additional information is available at www.fitchratings.com.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.
Applicable Criteria and Related Research:
-- Insurance Rating Methodology (October 18, 2012)
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Amended