RenaissanceRe Upped to Outperform

We are upgrading our recommendation on RenaissanceRe Holdings Ltd. (RNR - Analyst Report) 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 quarter.

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 2011.

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 business.

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 ACE Limited(ACE - Analyst Report) andXL Group Plc.(XL - Analyst Report), currently carries a Zacks #1 Rank, implying a short-term Strong Buy rating.