Insurance company RenaissanceRe (NYSE:RNR) has had perhaps more than its fair share of challenges this year. In addition to seeing an unprecedented amount of hurricane damage in Florida, the company has watched less prudent competitors drive down prices in many of its major markets.
Results for the fourth quarter, though, were all right. Operating income climbed to $189 million from $152 million a year ago, and total premiums written fell by only about 5%. Although the company did a good job of managing expenses, some leftover hurricane-related costs pushed the combined ratio up to 58.1% (from 53.8% a year ago).
Fools should also be aware that the company will be restating certain financial items for 2001-2003. The issue involves reinsurance recoverables and timing issues on ceded premiums -- and the adjustments all balance out over the three years. Consequently, while it's an embarrassing lapse for management, it does not change the current balance sheet at all.
Looking ahead, management stated the same sort of outlook that we've heard from other insurers, such as RenaissanceRe's Bermuda brethren Arch Capital (NASDAQ:ACGL). Namely, that numerous aggressive players are pushing down prices in many segments of the industry. At one point, management even proclaimed some parts of the market "sloppy."
That said, not only is RenaissanceRe one of the largest catastrophe reinsurers in the world, but it is a soundly run company as well. It has never had an annual loss since going public, and return on equity was always at least in the high teens before this year.
RenaissanceRe has been around for the ups and downs of the insurance cycle, and its management knows better than to chase undesirable business.
Accordingly, while the company is looking for modest growth in its specialty and individual risk lines, the cat business (that is, catastrophe insurance) will post double-digit declines in 2005. That all translates into EPS guidance for 2005 of $6.30 to $6.70 per share, down from the $7.25 earned in 2003 and the perhaps more than $8 that the company might have earned in 2004 without the hurricane losses.
As the market gets tougher, it will become increasingly difficult for the company to continue growing book value. Rather than take on business that fails to meet the company's standards, investors should expect management to return capital to shareholders if it can't find enough profitable business to underwrite.
As befits a high-quality player, RenaissanceRe has generally traded at a slight premium to its peers (on a price-to-book basis). That should continue, given the company's tight underwriting discipline and strong balance sheet. That said, however, if the downturn in property/casualty insurance leads to an overall decline in industry valuations, RenaissanceRe shares will suffer, as well. Investors who can brave a cyclical downturn and/or think that the market has already overdiscounted such an occurrence would do well to investigate these shares on their own, but investors with no particular take of their own on the industry might do better to wait for management to sound the all clear.
Fool contributor Stephen Simpson , CFA, has no ownership interest in any stocks mentioned.
