CHICAGO--(BUSINESS WIRE)--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 list of ratings follows at the end of this press release. The Rating Outlook is 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, RNR's reasonable operating leverage and low financial leverage, and overall high-quality and liquid portfolio of fixed-income and short-term investments. 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, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions, particularly for property catastrophe risk.
RNR has responded to these harsh conditions by reducing its property risk exposure, with catastrophe reinsurance segment gross premiums written (GPW) down 17% in 2014, with an even greater 28% decline in net premiums written (NPW) due to opportunistic retrocessional reinsurance purchases. Conversely, RNR's specialty reinsurance and Lloyd's NPW was up 17% in 2014. Fitch expects RNR to maintain its historically strong underwriting discipline should future market conditions continue to deteriorate.
RNR is also looking to improve its diversification away from property catastrophe risk and into casualty and specialty business through an expected acquisition of Platinum Underwriters Holdings, Ltd. (PTP), announced in November 2014. Pro forma for the acquisition, property catastrophe reinsurance business declines to about 50% of GPW from 60% currently. Fitch views the transaction as a slight near-term credit negative to RNR given the execution and integration risk inherent in an acquisition. The closing is expected in the first six months of 2015 (possibly as early as March), and is subject to regulatory approvals and approval by PTP shareholders.
RNR's average GAAP calendar year combined ratio over the most recent 10-year period (2005-2014) was favorable, albeit volatile, at 69.4%, with a standard deviation of 33.5%. This includes an average combined ratio of 61.2% for the catastrophe reinsurance segment, with a standard deviation of 59.8%. RNR posted a calendar year combined ratio of 50.2% in 2014, which included relatively low catastrophe losses from U.S. winter storms and U.S. wind and thunderstorm events.
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 comparable with those of other reinsurers with property catastrophe concentrations. RNR's NPW to equity has been about 0.2x-0.3x in recent periods and is expected to increase only slightly following the PTP purchase.
RNR's financial leverage ratio continues to be very modest at 7.6% as of Dec. 31, 2014. Pro forma for the purchase of PTP, financial leverage increases to approximately 16% due to an expected new senior debt issuance ($300 million) to partially finance the cash consideration for the acquisition, plus added PTP existing debt ($250 million), but is still considered reasonable by Fitch.
GAAP operating earnings-based interest and preferred dividend coverage has been strong, averaging 11.0x from 2010-2014, which included negative earnings coverage in 2011 due to the increased catastrophe losses. Fixed-charge coverage was a very favorable 16.8x in 2014 and 19.2x in 2013, due to due to strong earnings and reduced interest expense and preferred dividends with a debt repayment and preference share refinancing in 2013.
Key rating triggers that could lead to a downgrade include failure to successfully integrate PTP, 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, as 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 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';
--$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-'.
Renaissance Reinsurance Ltd.
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (September 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology