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RenaissanceRe Misses, Grows Y/Y

RNR XL PRE

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RenaissanceRe Holdings Ltd. (RNR - Analyst Report) reported third-quarter 2012 operating earnings per share of $2.07, way behind the Zacks Consensus Estimate of $2.48. However, the results improved substantially from 62 cents per share earned in the year-ago quarter.

Operating earnings for the quarter came in at $104.4 million compared with $32.7 million in the year-ago quarter.

Including net realized and unrealized gains on investments of $76.26 million or $1.55 per share in the reported quarter, net income surged drastically to $180.7 million or $3.62 per share from $49.3 million or 95 cents per share in the prior-year quarter. The year-ago quarter includes net realized and unrealized gains on investments of $16.98 million or 34 cents per share and net other-than-temporary impairments of continuing operations of $0.45 million or 1 cent per share.

The improved results were primarily aided by sturdy investment and underwriting results. The decline in total expenses also contributed to the upside.

RenaissanceRe posted total revenue of $390.48 million, up 79% year over year from $217.95 million in the third quarter of 2011. However, total revenue lagged the Zacks Consensus Estimate of $312 million.

In addition, gross premiums decreased 2.6% year over year to $136.4 million, mainly due to substantial reinstatement premiums written during the prior-year quarter, which managed to offset the premium growth in the special and Lloyd’s segments.

Meanwhile, underwriting income jumped to $122.6 million from $83.2 million in the year-ago quarter. Combined ratio also improved to 53.3% from 63.7% in the third quarter of 2011. The improvement in underwriting income and combined ratio was due to lower net claims and claim expenses in the reported quarter along with improved net premiums written, excluding reinstatement premiums in the first nine months of 2012, compared to the prior-year period.

RenaissanceRe reported total investment income (sum of net investment income, net realized and unrealized gains on investments and net other-than-temporary impairments) of $122.7 million in the quarter under review, against total investment loss of $18.6 million in the year-ago quarter. The improvement was primarily attributable to higher returns in the fixed maturity investment portfolio.

Moreover, total expenses of RenaissanceRe marginally dipped 3.6% to $149.78 million from $155.36 million in the prior-year quarter. Additionally, income tax expense came in at $0.14 million against income tax benefit of $1.44 million in the year-ago quarter.

Segment Results

Reinsurance segment reported gross premiums written of $107.6 million, down 12.4% from $122.8 million in the prior-year quarter. Underwriting income came in at $134.2 million compared with $95.1 million in the third quarter of 2011, while the combined ratio improved to 41.8% from 54.3%.

Lloyd’s segment’s gross premium written came in at $28.7 million, expanding 67.7% from $17.1 million in the year-ago quarter. Underwriting loss was recorded at $11.5 million, compared with $6.9 million in the year-ago quarter. Combined ratio inched up to 135.6% from 133.3% in the prior-year quarter.

Insurance segment’s underwriting loss was $0.46 million compared with $5.0 million in the year-ago quarter.

Financial Position

RenaissanceRe exited the reported quarter with total assets of $8.79 billion, up from $7.74 billion as of December 31, 2011. Long-term debt totaled $358.6 million, up from $353.6 million at the end of 2011.

Meanwhile, cash and cash equivalents stood at $249.1 million, up from $217.0 million as of December 31, 2011. Shareholders’ equity totaled $3.84 billion compared with $3.61 billion at the end of 2011.

As of September 30, 2012, RenaissanceRe’s annualized return on average common equity (ROCE) was 22.0%, improving substantially from 6.6% as of September 30, 2011.

Stock Repurchase Update

During the reported quarter, RenaissanceRe repurchased 2.4 million shares at an average price of $75.41, totaling $180.3 million. Further, from October 1 to October 31, the company repurchased 111,000 shares at an average price of $77.01, aggregating $8.5 million.

Our Take

RenaissanceRe’s operating results for the reported quarter improved significantly over the prior-year quarter, owing to higher underwriting income arising from lack of any major catastrophic events in the quarter. The company generally faces significant challenges due to weather-related events as well as high competitionin the catastrophe insurance and reinsurance segments.

While premiums exhibited growth in the special and Lloyd’s segments, total expenses declined. This, coupled with lower share count, buoyed the bottom line. Moreover, the company’s financial position strengthened with improved cash balance and increased ROCE.

Peer Performance

One of RenaissanceRe’s competitors, PartnerRe Ltd. (PRE - Analyst Report) reported third-quarter 2012 operating earnings per share of $3.90, which significantly surpassed the Zacks Consensus Estimate of $2.06 and the year-ago earnings of $2.41. As a result, operating net income soared to $244.4 million from $164.5 million in the prior-year quarter.

Another peer, XL Group plc (XL - Analyst Report), will report its third-quarter 2012 financial results on November 5, 2012, after the market closes.

Currently, RenaissanceRe carries a Zacks #2 Rank, which translates into a short-term Buy rating. However, we maintain our long-term Neutral recommendation on the shares.

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