RenaissanceRe Projects 4Q CAT Loss

Global reinsurer, RenaissanceRe Holdings Ltd. ( RNR - Analyst Report ) anticipates about $45 million in pre-tax catastrophe (CAT) losses from the Thailand floods, which occurred in October and November of last year. This will be recorded in the fourth quarter results of 2011.

However, RenaissanceRe along with its subsidiaries – DaVinciRe and Top Layer Re – does not project any substantial net impact on its CAT losses from the earthquakes in New Zealand and Japan, both of which occurred in the first half of 2011. Meanwhile, the loss estimates are expected to change significantly since more charges related to the claims and claims expenses are expected from the severe exposure to catastrophes that took place last year.

Until the third quarter of 2011, RenaissanceRe had incurred a total charge of about $498 million against the earthquakes in Japan and New Zealand and the tornadoes in the US. This was already ahead of $252.1 million recorded in 2010, nil in 2009 and $276.2 million in 2008.

RenaissanceRe has also estimated pre-tax losses worth $31 million in the fourth quarter of 2011, related to the company’s weather and energy risk management operations – RenRe Energy Advisors Ltd. The weather risks under this primarily include the extraordinary warm weather in the UK and certain parts of the US during the last quarter of 2011.

Industry Status

Nevertheless, RenaissanceRe is not the only reinsurer in the industry whose earnings are being effaced by CAT losses. Early this month, PartnerRe Ltd. ( PRE - Analyst Report ) also projected pre-tax CAT losses of about $120 million from the Thailand floods, while total CAT losses are now projected to be about $208 million for the fourth quarter of 2011.

The total insured industry loss from Thailand floods is estimated to be over $15 billion. The company’s estimated loss came at par with management’s prior expectation of incurring CAT loss against these floods to lie within 0.5–1.0% of the total industry loss. In December 2011, another reinsurer Everest Re Group Ltd. ( RE - Analyst Report ) estimated to incur about $100-125 million in CAT loss arising from these floods, during the fourth quarter of 2011.

Our Take

We expect RenaissanceRe to face significant challenges due to weather-related conditions in the future as well. Such uncertainty and volatility in the magnitude of catastrophic losses apart from reducing financial flexibility and reserves of the company also weakens the underwriting capacity, thereby draining out all the earnings resources.

Moreover, while RenaissanceRe’s operating cash flows are significantly in excess of its operating commitments, a hefty portion of it goes in covering losses from unpredictable natural calamities, leaving almost nothing for boosting the company’s operations. Cash flows are impacted adversely as the actual losses from such events varies from their preliminary estimates.

Consequently, the Zacks Consensus Estimate of earnings for the fourth quarter of 2011 is currently pegged at $1.51 per share, down by a significant 57% year over year. Over the last 30 days, 7 of the 14 analyst firms lowered their estimates, while one upward revision was witnessed.

However, a loss of $2.66 per share is expected in 2011, declining over 128% over 2010, thereby reflecting increased CAT losses. RenaissanceRe is scheduled to release its results after the market closes on February 7, 2012.

Hence, we maintain an Underperform recommendation on RenaissanceRe in the long run, in line with the Zacks Rank #3, reflecting a short-term Hold recommendation.