Fitch Affirms RenaissanceRe Ratings

Recently, Fitch Ratings affirmed the issuer default rating (IDR) of RenaissanceRe Holdings Ltd. ( RNR - Analyst Report ) at “A”. The rating agency also affirmed the insurer financial strength rating of the company’s subsidiary Renaissance Reinsurance Ltd. at “A+”. Further, the rating on another subsidiary RenRe North America Holdings Inc.’s $250 million 5.75% senior notes due 2020 was affirmed at “A-“. All the above-mentioned ratings carry a stable outlook.

The rating affirmation was driven by RenaissanceRe’s long-standing market-leading position in the property catastrophe reinsurance business, moderate operating and financial leverage and its portfolio of fixed-income and short-term investments, which scores highly on both liquidity and quality. The improving rates in the property catastrophe market, high competition, fluctuating underwriting results and the possible volatility in the alternative investment portfolio are also reflected in the ratings.

Fitch believes that RenaissanceRe’s strong capitalization will help absorb the expected negative impact from Hurricane Sandy. Moreover, a strong capital position protects the company from the operational and financial risks. Although the company’s underwriting profits and returns on capital vary significantly from year to year, the strong long-term run-rate profitability offsets the negative impact of this volatility on the ratings. The rating agency opines that the run-rate profitability reflects the company’s proficiency in underwriting and catastrophe modeling.

Although the stable outlook indicates low possibility of a revision in RenaissanceRe’s ratings in the near term, some factors such as a material decline in profitability (indicated by continued underwriting losses and investment losses), significant deterioration in the balance sheet position (demonstrated by a rise in the net premiums written to shareholders’ equity beyond 0.5x or equity-credit adjusted financial leverage above 25%) and a catastrophe loss higher than one-fourth of the shareholders’ equity could lead to a lower rating.

On the other hand, if RenaissanceRe continuously outperforms peers in terms of underwriting results, maintains its enhanced market position in the other business lines apart from the property catastrophe reinsurance, particularly specialty reinsurance and Lloyd's, and witnesses substantial improvement in the risk-adjusted capital, it can achieve a rating upgrade. However, this is possible only in the long-term as Fitch does not expect an upward revision of the ratings in the near term due to the volatile nature of the property catastrophe reinsurance business.

RNR currently carries a Zacks #3 Rank (Hold). We maintain a long-term ‘Neutral’ recommendation on the stock. Other companies in the reinsurance business such as AmTrust Financial Services Inc. ( AFSI - Snapshot Report ) and EMC Insurance Group Inc. ( EMCI - Snapshot Report ) carry a Zacks #1 Rank (Strong Buy).