Fitch Affirms on RenaissanceRe

Fitch Ratings reiterated Issuer Default Rating ("IDR") at 'A' of RenaissanceRe Holdings Ltd. (RNR - Analyst Report). Concurrently the rating agency also reiterated Insurer Financial Strength ("IFS") rating at 'A+' of Renaissance Reinsurance Ltd., the company’s subsidiary.

The outlook of the ratings is stable.

RenaissanceRe’s rating affirmation came on the back of its dominant position in the property catastrophe reinsurance market, modest operating and financial leverage and solid liquidity. The affirmations also account for property catastrophe market rate environment, unstable underwriting performances and instability from alternative investments.

The company attained the dominant position by virtue of its ability to effectively write more catastrophe related risks. Further, both gross and net premiums written in the first quarter increased 9% over the prior-year quarter.

Fitch also noted that RenaissanceRe’s unstable underwriting profitability and returns on capital are to some extent offset by low combined ratios and strong returns on capital.

RenaissanceRe posted net income of $201 million in the first quarter of 2012, rebounding from the year-ago loss, mainly due to lower catastrophe loss. Combined ratio thus improved sequentially to 29.4% from 118.6% in the fourth of quarter 2011.

Nevertheless, Fitch stated that rating upgrade in the near term is unlikely, given the company’s earnings and capital instability. However, they might consider a rating upgrade over the long term if RenaissanceRe continues to deliver solid underwriting results, solidifies market position in specialty reinsurance and Lloyd's business and increases risk adjusted capital.

However, if profitability declines, premiums written to shareholders' equity moves beyond 0.5x, equity-credit adjusted financial leverage crosses the 25% mark, and catastrophe events loss equals 25% or more of shareholders' equity, the ratings will be subjected to downgrade.

We retain our Neutral recommendation on RenaissanceRe Holdings. The quantitative Zacks #2 Rank (short term Buy rating) for the company indicates slight boost on the stock over the near term.

Hamilton, Bermuda-based RenaissanceRe Holdings competes with ACE Limited (ACE - Analyst Report), PartnerRe Ltd. (PRE - Analyst Report) and XL Group plc (XL - Analyst Report).