RenaissanceRe Holdings Ltd. (RNR) Q3 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, my name is Monseratte, and I will be your conference operator today. At this time I would like to welcome everyone to the RenaissanceRe third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. Following today’s presentation there will be a question and answer session. (Operator Instructions) I would now like to pass this call over to our first host Mr. Peter Hill. Sir, you may begin your conference.

Good morning and Thank you for joining our third quarter 2013 financial results conference call. Yesterday after the market close, we issued our quarterly release. If you didn’t get a copy, please call me at 212-521-4800 and we will make sure to provide you with one. There will be an audio replay of the call available from about 1:00 p.m. Eastern Time today through midnight on November 27, 2013. The replay can be accessed by dialing (855) 859-2056 or (404) 537-3406. The pass code you will need for both numbers is 78498780. Today's call is also available for the investor information section of www.renari.com and will be archived on RenaissanceRe's website through midnight on January 15, 2014. Before we begin, I am obliged to caution that today's discussion may contain forward looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer and Jeffrey Kelly, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Kevin. Kevin O’Donnell: Thanks Peter and good morning everyone. I'll start off the call today with making some general comments, then I'll turn it over to Jeff to do the financial results and before taking questions I'll come on to make a few more comments. The third quarter as always is an interesting one for us. It takes place at a time when we transition our focus from the active management of our imposed portfolio to planning for a new portfolio in light of the upcoming renewal. I am pleased to report strong performance for the third quarter. We reported an operating ROE of…

Thanks Kevin and good morning everyone. As Kevin said, I will cover our third quarter and year to date financial results and also provide you with our initial 204 top line forecast. We reported solid results in the third quarter as loss activity was fairly benign and investment performance was favorable. From a top line perspective, the third quarter tends to be light for catastrophe reinsurance renewals, however, our Specialty and Lloyd's units did report continued strong premium growth. We reported net income of $180 million or $4 and 1 cent per diluted share and operating income of $151 million or 3 and 36 cents per diluted share for the third quarter. Net realized and unrealized gains on interments total $29 million. The consolidated combined ratio was 48.6% in the third quarter. The annualized operating ROE was 18.7% and our tangible booked value per share including change in accumulated dividends increased by 4.9% during the period. For the first nine months of 2013, the annualized operating ROE was 17.7% and tangible booked value per share plus change in accumulated dividends was up sharply at 10.9%. Let me shift to the segment results beginning with our reinsurance segment, which includes catastrophe and Specialty followed our Lloyd's segment. Beginning with catastrophe reinsurance, managed catastrophe gross premiums written increased $10.6 million or 13.5% compared with a year ago period during the third quarter. Net of reinstatement premiums managed catastrophe gross premiums written increased 25.7% from a year ago in the third quarter. Ceded premiums total $50 million in the third quarter reflecting increased reinsurance purchases including the issuance of our 144A catastrophe bond through the Monalisa Facility early in the quarter. For the first nine months of the year, managed catastrophe gross premiums written declined $29 million or 2.2% relative to the year…

(Operator Instructions) The first question comes from the line of Sarah DeWitt with Barclays. Sarah DeWitt – Barclays: Hi, Good Morning. Kevin O’Donnell: Good Morning. Sarah DeWitt – Barclays: Given the growth that we are seeing in alternative capital, could you talk about what opportunities you are seeing to manage more sidecars or ventures and I know you mentioned increasing Upsilon Re but not DaVinci and how much could that be the increase in capital of Upsilon Re? Kevin O’Donnell: Sure. We – in order to think about third-party capital we tend to look to our clients first and the reason we had decided to increase the size of Upsilon is because we think there is significant demand for the retro product that we offer which is a – tends to be more of a worldwide product which is efficient on a collateralized structure, more efficient than on our rated balance sheet. DaVinci actually is one in which the market for U.S. catastrophe has been relatively flat over the last 12 months so when look to our client, they don’t need additional capital to be introduced into the more traditional layers being placed. However, we did change the profile of some of our investors within DaVinci, which we think will be long-term beneficial to us and so although we are not changing -- increasing the size of DaVinci, we are constantly changing the capital structure supporting it, adding efficiency and longevity to the vehicle. Sarah DeWitt – Barclays: :

Sarah this is Jeff. So taking the first part of your question, I think that the kind of light cat quarter comparison with years ago returns in similar environments are fundamentally a function of the declining interest rate and investment return environment as well as I think depending on where you are starting period is, just pricing in the business overall. So, we would like the pricing in the business. We like our portfolio but pricing is down obviously from some previous period. So I think for a number of reasons even in a light – a very light catastrophe quarter returns are a bit lower than they would have otherwise been in previous years. With regard to your rate question as to how much rates would need to fall, the first point I would like to make is softening but there is still plenty of adequate risk. If we go back to where we traditionally talked about the market is between adequate return buckets, low return buckets and negative return buckets, we believe that over the near term there is ample risk residing in the adequate bucket even though rates are moving down for us to continue produce superior returns. I think to think about it as a binary point which we are in or out of the market, isn’t the way that we think about it. We are constantly looking forward in performing our book. When we perform our book, we are looking at notches rate changes but how we are going to structure our capital, how much third-party capital we are going to have and how much retro we are going to have, so I when I look forward, I see ample opportunity for us to continue to provide capacity. I also see that we are better positioned to sustain market changes because of the flexibility of our platform. Sarah Dewitt – Barclays: Very thanks for the answers.

Sure.

Our next question comes from the line of the Vinay Misquith with Evercore. Please go ahead. Vinay Misquith – Evercore: Hi Good morning. The first question is on top-line guidance. The down 10% seems actually pretty good considering that we’ve had pricing in the prop-cat is done more than 10%. Could you help me understand some of the guidance because my thoughts would be that you would write less business because less of the business would meet your return criteria. Thanks.

Sure, thanks Vinay. The top-line guidance you know right now there is a lot of discussion as to how rates are changing in the market, but it is still pretty early in the one-one renewal cycles but there is not a turn of actual price discovery out there. Again, I would point to the flexibility of the way we build our book of business. So what we provided is what the top-line is but we will significantly look to manage our book through other mechanisms whether it be third party capital, the Upsilon has additional opportunities and also with the way in which we structure our retro programs. So the focus only on one component being the change in our top-line doesn’t really necessarily reflect the way in which we are going to build the book over the course of the renewal. There is still a lot of uncertainty as to what one will look like at this point and we will continue to modify our strategy as we get closer to the renewal date. Vinay Misquith – Evercore: Okay, okay. The second question is you mentioned that rates still meet your return thresholds. What are those return thresholds right now?

The – that’s the way we think about our business is looking at what is our portfolio returning and what’s the marginal difference of each deal that we add, so the – the portfolio really reflects where we think the market is going. So I don’t think it would be the most informal way to think about it that this is a specific hurdle where deals are good or bad. It depends on the way in which we are going to structure the risk and the way we are going to bring it on to our portfolio on a net basis. Vinay Misquith – Evercore: Sure, I mean my question was more in terms of you know, what are we do you think is an adequate return, if you want to share that with us?

Yeah. I would think that you know, that’s again looking at our business. We are dealing on an expected basis and what is ultimately produced is you know, how we have done against that expected basis but we have been doing it for 20 years so I would point it to our long-term returns as an adequate place to start. Vinay Misquith – Evercore: Okay great, and then one last question on share repurchases. Would it be fair to assume that 100% of your earnings are available either for dividends or share repurchases this year or next year?

Yeah. So I think it would be fair to assume that. We have, as I said, a fair amount of excess capital, or we believe there is excess capital and it would be available to the – if there aren’t other business opportunities that develop for it, and as Kevin noted, there are lot of laborers that we can pour in that potential deployment but it is possible that we can return up to that much. Vinay Misquith – Evercore: Sure, and just looking at next year the top line guidance is down 10 but is that mostly due to rate and so therefore I mean no capital frees up or do you actually free up some capital from your top-line being down on the catastrophe side?

I think there is a lot of moving creases where we do this, but I think to keep it simple I would assume that most of that is rate change in the proforma portfolio is a remote – similar risk profile. One thing if we go back to what we said on the last quarter, they were constantly shifting whether we have risk lower in the you know, at more exposed return periods or less exposed return periods. Those sorts of shifts will occur but then in general if you think of the guidance as mostly rate it is probably [indiscernible]. Vinay Misquith – Evercore: Sure and just to clarify, has the growth in the specialty in the Lloyd’s will not require any more capital, correct?

When we look at our economic balance sheet, that’s true. We – we have to put some collateral at Lloyd’s but it’s – the driver in our decision is the economic and we are still going to be dominated by our catastrophe exposure so the marginal capital allocations is very small. Vinay Misquith – Evercore: Okay Thank you.

The next question comes from the line of Michael Nannizzi with Goldman Sachs. Michael Nannizzi – Goldman Sachs: Thanks. So, just one question, on the third-party capital vehicles, what sort of hurdle rate for returns do you have in those vehicles versus your own balance sheet and I am assuming DaVinci is similar but maybe for like Upsilon or some of the other structures, I am just curious kind of how to think about where you know, what is the return profile you need to kind of put business into those structures? Thanks.

Sure. I think it fully depends on the structure so if you look at our catastrophe bond it really is based, you know, on the multiple to excepted losses is to what we were paying. If you look at – you know, which is the single digit return. If you look at things we have did in Tim Re which were kind of concentrated risks mostly in Florida, the expectation for returns actually is quite high. So we try to match the investors that we speak to the written profile of the deal that we have. I think you are right in thinking DaVinci as being in a similar profile to the RenRe cat book but that is a permanent vehicle where something like Tim Re we are going out based on an opportunity. And that is just a risk that we are putting into it to the type of investor we are attracting. Michael Nannizzi – Goldman Sachs: Got it. Thanks, and any movements that you kind of insinuated a change to the profile inductors in DaVinci. Can you elaborate on that a bit more?

Sure. If you go back, you know, when DaVinci or even just going way back when DaVinci was first started and then when we changed the size in old thought, we came in with you know old thoughts certainly with more hedge funds and now we have much more of a pension fund in down type investment profile within DaVinci, so you know that's why I thought of making the comment about this besides the overall assets under management of our investors, you know, compared to what they have allocated into DaVinci, I think is an important point. Michael Nannizzi – Goldman Sachs: Got it, and then just one other question on the ceded premiums, clearly those were higher this quarter. I would have thought though that maybe expense ratio would have benefited a bit more just given how I would imagine the ceding commissions would run through there, I am just curious – is that right or is that not right?

I am not sure I understand your question. Can you explain? Michael Nannizzi – Goldman Sachs: Higher ceded premiums help to reduce the expense ratio because of the ceded commissions that you receive from the counterparties you are ceding the business to?

Yes, a big part of the increase in the ceded premium in the third quarter was the catastrophe bond we issued and there is no ceded premium. Michael Nannizzi – Goldman Sachs: Got it, okay, that makes sense, okay.

Okay. Michael Nannizzi – Goldman Sachs: Thank you.

Your next question comes from the line of Michael Zaremski with Credit Suisse Crystal Liu – Credit Suisse: This is Crystal Liu filling in for mike. My first question is can you help us think about the potential for new reinsurance demand coming in online in Florida as a result of number 1, Citizens drive to depopulate and number 2 Citizens clearinghouse.

Sure. Looking up to this it seems the takeouts are – there are more takeouts going on and citizens rates are going up. The other thing I consider is citizens are also buying reinsurance, so we have got a lot of components of the Florida market that good tailwinds. Additionally, when I mentioned that U.S. catastrophe market has been relatively flat, we did see the Florida market grow modestly in part of it is because of the takeouts. The clearinghouse will come online of the operational next year. So I think we will have better senses to what opportunities really come out of the clearinghouse. You are optimistic that it can serve to reduce the size of some of the state funded reinsurance [indiscernible] but we think it is a good thing long term. Finally we have seen a lot of new startups in Florida and I think again that is again pointing to competence that there will be more migration of risk from the state facilities to the private facilities. It is all that leads up for us to be optimistic but a lot can unfold between now and the June and July renewals. Crystal Liu – Credit Suisse: Hay, great. And I know you currently do not plan on increasing the size of DaVinci but given current insurance linked securities market dynamics, if there are very large catastrophes would it be more likely when we raise more capital within the DaVinci versus from equity investors? Kevin O’Donnell: I think that is the hard thing to forecast. I certainly believe that we will have ample opportunities to raise capital in both but will really depend on kind of what the event is and what the market dynamics are at the time of the loss. I think having the flexibility to access capital from such a wide variety of sources, no matter what the outcome is, it would position us best compared to the other participants in the market.

And, I would just add to Kevin's answer that we feel that we have – we do feel we have a lot of flexibility to raise capital in both balance sheets. Crystal Liu – Credit Suisse: Hay, thank you.

Our next question comes from the line of Josh Stirling with Sanford Bernstein. Josh Stirling – Sanford Bernstein: Hi, good morning, thank you for taking the call. I am wondering if you could just talk through a little bit more of some of what's your growth in Specialty and in Lloyd's, obviously you are coming on small basis but you know generally the market is getting a bit more competitive and would love to get a sense of sort of what to go to market strategy is here and sort of what opportunities you guys think of taking advantage of"? Thank you. Kevin O’Donnell: I think you hit the nail on the head just in your comment there that it is of the small base but let me talk a little bit more specifically about each of platforms. In the Lloyd's platform we build out and built more into each of the underwriting teams, so we are really just accessing business that we have been accessing for the last couple of years with ample opportunity to grow. It is a very large market and we are still small participant. On the Specialty side, we have opened a new office in the U.S. which will allow us a little bit more flexibility to raise some of additional vote of share type business that we wanted to have higher degree of touch and what we are comfortable with from the premier to base balance sheets. So we feel that will create some opportunity. We think there is some positive movement in certain classes on the primary side, so we will look to leverage into that. The final piece is just regarding your economic capital model which I touched on earlier. This is very efficient growth for us because it really does not…

Let me take your first question which is regarding economic and hard capital returns. I think it is a great question and one of the things we do on each deal is we look at absolute standalone returns for a deal and then we look at the marginal returns and the gating issue we have had on this specialty business is the standalone returns for the deals. So is there enough profit in the deal for us to accept that level of risk because we know once we had even a small degree of profit against the overall portfolio that we have the marginal return will be higher. So we are very, very focused on that and careful to make sure that the standalone return is understood and appropriate for the risk overtaking. Kevin O’Donnell: Regarding what types of specialty lines, I think it does change a bit over time. If you look at where we have been more successful, you know, we talk about specialty and casualties together, we have been more successful on the Specialty lines and then I would say more in some of the professional lines within specialty. That is really where we have seen some of the better rate change. As far as the worker's comp, you have mentioned that that's not focus where we are trying to grow up the business. Josh Stirling – Sanford Bernstein: Great, thanks, Good luck one-one. Thank you.

Your next question comes from the line of Joshua Shanker with Deutsche Bank. Joshua Shanker – Deutsche Bank: Following [indiscernible] questions and quota share cede at what point in this market does it become for a better market to be a buyer of reinsurance than a seller? Are we at the inflection point, you know, how are you thinking about things here? What is the average gross opportunity? Kevin O’Donnell: So, I think that is really a straight question. So if you go back over history, we are more kind of, what I would consider to be a nontraditional buyer retro in that we when we are looking our portfolio, we are looking at inwards business, outwards business, or sessions to see which and how to optimize the portfolio. We have ceded in, in what I would consider to be the hardest markets and we have ceded more what I would consider to be the softest markets, so it is not the specific point where we are going to be on one side of the fence or the other, it is really how are shaping our portfolio and how we are able to capture the best economics we can on a net portfolio basis. Joshua Shanker – Deutsche Bank: In negotiations do you need to make clear your appetite to buy retro early on, or is it widely available for you after one-one? Kevin O’Donnell: So, I am not sure if you are asking do we disclose to our clients how are managing our risks? Joshua Shanker – Deutsche Bank: No, no, no. More or less if you find someone who would like to see the business to, I mean, are you able to see where your book stands and then make the decision or do you have to have…

The next question comes from the line of Jay Cohen with Bank of America. Jay Cohen – Bank of America: Thank you. I guess the question is on the specialty business. The [indiscernible] your last ratio is quite a bit lower than it had been running, if my numbers are correct and I am wondering what is behind that. At the same time the acquisition expense ratio is quite a bit above what it had been running. So I guess maybe a shift in business mix, but I am wondering if you can explain why these numbers look a bit different in the previous quarters? Kevin O’Donnell: Let me talk of just the acquisition. The acquisition one is the mix is shifting a little bit from XOL to little bit more quarter share. Part of that is you know, just the way we are repositioning some of our balance sheets and the U.S. platform and as far as the acquisition loss ratio, just looking to numbers here.

Yeah. I think it is just a relatively light loss period Jay. I don’t think there is anything special going on. Jay Cohen – Bank of America: Great, Thank you.

The next question comes from the line of Brian Meredith with UBS. Brian Meredith – UBS: Yes Thanks. Jeff, just one quick numbers question. The yield on your fixed income portfolio for the quarter, does that incorporate the bank loan facilities in there for the full quarter or will we receive change, you know, in the fourth quarter result of the switch?

That’s a great question. I – I think it will probably change it slightly. I mean in the context of the overall portfolio it is, you know, it is a relatively small number but it will be included now as part of the fixed income securities portfolio as opposed to private investments or private – privately held other investments, so it should take it up. Brian Meredith – UBS: Take it up a little bit. Okay great.

It will be very minimal based on the size though. Brian Meredith – UBS: Got it, and Kevin, two questions, first I was wondering if you could just expand your comment about the slowdown and demand which has been seen from alternative capital providers? Kevin O’Donnell: Sure. What I was saying is this seems the first time of that and what that is, is really a shifting dialogue at this point where we have seen a lot of conversations with different types of capital either that walk in the front door and then go out and solicit and you know we are hearing a lot discussion on market and rates for changing and they are trying to understand how that is going to impact the returns on the capital that they are putting forth. So I think it is one that it is that if you go back you know, seven months ago, that dialogue wasn’t there and there was just an eagerness to have discussions without catastrophe returns. I think right now that discussions are more yielded because of the discussions for price change. Brian Meredith – UBS: Got you, and my second question Kevin, I’m just curious. As we look at your current portfolio going forward in the catastrophe book in which you retained in your balance sheet versus what you seated out to third parties in retro, do you expect that because of what is going on with alternative capital it may be which you retained on your own balance sheet will be kind of lower peak exposure and more the peak exposed, or there is going to be seated off. So we see a kind of a shift going on here?, confess with the collateral as market typically is more competitive? Kevin O’Donnell: Yeah. I think…

The next question comes from the line of Ian Gutterman from BAM. Ian Gutterman – BAM: Kevin, I guess my first question is in the press release you mentioned that results were helped by decision early in the year to adjust your portfolio. Can you just give a little more color on that or are trying to say that you got off some risks that caused losses for the market this year or are you trying to say something else? Kevin O’Donnell: : Ian Gutterman – BAM: Yeah I got it. That makes sense. On Upsilon, I just wanted to refresh my memory a bit, the retro that vehicle writes, how much is that for you know external parties reinsurance or is that for your own reinsurance book buying retro or [indiscernible] on that? Kevin O’Donnell: You know it is – we said it is protection of third parties, so it is not – Upsilon is not writing a retro on what we are going to achieve. Ian Gutterman – BAM: Okay I certainly make sure, and then is there any appetite to expand from just being collateralized retro to doing collateralized reinsurance given it seems the primary insurers are looking into allocate portions of the program to collateralize? Kevin O’Donnell: I think we – when we talk about, I mean, generally the ponderance of risk that is currently under this retro will be doing flexibility [indiscernible] insurance as well. Ian Gutterman – BAM: :

We did write some risk later in the year last year as well. So I think we could. Epsilon is targeted as specific opportunity. I think if there are different opportunities in Florida we could always change the profile of some of the risk or some of the criteria that we have in Epsilon or we could just start a new vehicle. Ian Gutterman – BAM: Okay. Got it. Got it. And then I guess [indiscernible] come up with the reserve releases were the lowest in several years. Was there any pockets of adverse that offsets the normal level or releases or were they just favorable less than usual? Kevin O’Donnell: Yes. It is just favorable less than usual. Ian Gutterman – BAM: Okay. And, any specific lines that came from or types of risk that came from [indiscernible] expected versus actual events or anything like that?

No. Favorable development in all segments of the business were very light this quarter. Ian Gutterman – BAM: Okay. Got it.

Favorable and unfavorable were very light this quarter. Ian Gutterman – BAM: Got it. Great. I think that is all I have for you now.

Thanks.

The next question comes from the line of Matt Carletti with JMP Securities. Matt Carletti – JMP Securities: Thanks, Good Morning. Just a quick question for Jeff that late reported claim at Lloyd had a little bit of adverse prior period. Can you quantify that so we can see what the underlying trend was there?

It was about $3.0 million. Matt Carletti – JMP Securities: $3 million. Alright, great. Thanks a lot.

And there are no further questions at this time. I would like to pass the call back to your presenter for any closing remarks.

I would just like to thank you all for your time and I look forward to speaking to you in next quarter.