Renaissance Re forced to restate results

Renaissance Re's normally rock-solid reputation took a hit in February when the Bermuda catastrophe reinsurer said it had to restate its results due to an "accounting error".

The mistakes associated with reinsurance ceded by the company were discovered in an ongoing review initiated by the company and ended up amounting to little in the bottom line for the years 2001 to 2003. RenRe also said it had previously understated its nine-month net income in 2004 by $12.5m.

While there was little financial damage in the re-stated results themselves, the implications of having to re-calculate its financials have blotted the company's copy book and ratings agencies reacted quickly and severely.

They cited the delayed filing of the company's annual report as possibly falling foul of the Sarbanes Oxley Act, and said it raised questions about internal accounting and controls.

Fitch Ratings was the only agency to stand by the company, saying the restatements were "immaterial to RenRe's operating results and capital position". But Standard & Poor's placed the credit, debt and financial strength ratings of RenRe and its subsidiaries on CreditWatch with negative implications. It said the potential effect to RenRe's competitive position, including "reputation risk" and the ability to meet filing and regulatory requirements, remained unclear, and this justified the CreditWatch status.

And while Moody's affirmed the insurance financial strength rating of RenRe and the debt ratings of its subsidiaries following the company's announcement, it changed the outlook of all these ratings from stable to negative, stating that, "Although the scope of these arrangements appears limited, it does raise some question about internal financial and accounting controls at the firm."

This came on top of RenRe's uncharacteristically weak operating results in 2004, when it reported $164.2m in net income for 2004, a 73.7% decline from the previous year. This was due to the large catastrophe losses - $570m from hurricanes Charley, Frances, Ivan and Jeanne. The company also posted a 104.4% combined ratio for the year, compared with a 56.4% combined for 2003.