濱特爾 (RNR) 2002 Q2 法說會逐字稿

Good morning and welcome to the RenaissanceRe First Quarter Conference Call. Today's conference is being recorded. At this time for opening remarks and introduction, I would now like to turn the conference over to your host Mr. David Lilly, please go ahead sir.

Good morning. Thank you for joining our second quarter 2002 conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4878, and we'll make sure you get one. We've reserved an hour for today's call. There will be an audio replay of the call available at 12p.m. Eastern time today to July 30th at 8:00 p.m. The replay can be accessed by dialing 888-203-1112 or 719-457-0820. The pass code you will need for both numbers is 300352. Today's call is also available through the investor section of www.renre.com and will be archived on RenaissanceRe's website through midnight on August 23rd. Before we begin, I'm 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 me to discuss today's results are RenaissanceRe's Chairman and Chief Executive Officer, Jim Stanard; and the Company's Chief Financial Officer, John Lummis. I'd now like to turn the call over to John to begin with an overview of the financial results. John.

Thank you David. This quarter Renaissance delivered exceptional premium growth across all our product lines. That growth coupled with relatively light Cat losses in the quarter resulted in an operating earnings result of $93 million or $1.33 per share, substantially ahead of our expectations just a quarter ago. Operating EPS more than doubled comparing this past quarter with last year's second quarter. Given our recent performance and to reflect the low losses of the quarter, we've increased our guidance for the full year operating EPS to $4.45 to $4.60; that's the range. To review the quarter, let me start with the key elements of revenue. First, looking at Managed Cat Premium, our total for the quarter was $145 million compared to $93 million last year. Much of the growth occurred in our joint venture vehicle, and as a result of that, you see very strong growth in our fee income to $17 million in the quarter. That's shown most clearly in the proforma information in our supplemental data, which appears at the end of last night's press release. That $17 million to be compared with the $6 million in last year's second quarter.

Also, in the supplemental data, we have $12 million in our proforma equity pick-up from our participation in the Top Layer Re and DaVinci joint ventures. Both fee income and the equity pick up were somewhat higher than normalized rates, due to the lower level of Cat loss activity this past quarter. To look at the growth of business outside of catastrophe reinsurance, I'd again refer you to the supplemental data. There you'll see specialty reinsurance premium grew substantially to $72 million from $15million in last year's second quarter. That premium consists of various classes of business, including aviation, Cat expose worker's comp, property [per] risk, terrorism and others. Turning to the insurance business, Glencoe subsidiary, premium grew to $71 million in the second quarter compared to only $2 million a year ago. The business here is driven by substantial increase in Cat exposed commercial insurance, where we've seen very large price increases. The [lowest] that we see the significant premium in the quarter, the total volume of $72 million, most of that relates to our Cat portfolio. Looking at net written premiums you can see that grew substantially from $93 million to $199 million, and I'd like to highlight the components. Because of the active sessions of Cat Premium that I mentioned this quarter, net written Cat declined from 80 million to 27 million. Effectively kept all the specialty reinsurance premium net, and so that grew from 16 million in the second quarter of '01 to 72 million this past quarter. Likewise, we see that relatively little at Glencoe and the net written here was 69 million verses $2 million in last year's second quarter. DaVinci contributed $35 million in that written premium in the second quarter, and so that accounts for all the key components of the net written line. I'd also like to comment briefly on the earned premium line.

You will notice net earned premium increased significantly compared to last year, up 145 percent that represents 23 percent of growth verses the prior quarter. For the balance of the year, we expect the net earned premium to generally level off in terms of the sequential growth comparisons; largely it's a function of the active sessions of premium this quarter. Turning to the subject of losses for the quarter, you can see that we experienced only light Cat losses, which is consistent with the general industry experience for the second quarter. In a more normal quarter of Cat activity we'd expect to see consolidated -- a consolidated loss ratio in the high 40's. Looking at the investment side, we were pleased that we dodged the bullets. We did not have any significant write downs, I know that we took less than a million dollars charge of WorldCom, and now carry those bonds at less than $200,000. Our total return for the quarter was just under 2 percent. Looking at the balance sheet, you'll see that we had an increase of a $100 million in debt that represents the bank debt within [sheet], which we're required to consolidate as an accounting matter, although Renre itself has no obligations to service that debt. We also noticed that we wrote-off the remaining goodwill on our balance sheet. That goodwill was associated with our acquisition of Novell, where we previously had $9 million of goodwill representing our estimate of the value of the 50 state licenses inside Novell. Given the adoption of FAS 142, we took a hard look at that asset this quarter and decided to adopt more conservative field value. Required presentation has the write down running through our sixth month numbers, below their operating income lines.

Looking at our expectations for the year, we have increased our operating EPS guidance largely as a function of this quarter's light Cat loss activity. But also reflecting the ramp up in our top line. The key factors in Renre's overall growth story at this point are the following. First of all, Managed Cat Premium is growing at more than 50 percent rate on cumulative basis verses 2001. Second, net written Cat premium at Renre excluding DaVinci is looking to be relatively flat comparing 2002 with 2001. We're really focusing more to growth in Cat into our joint venture vehicles and other partners, and that's resulting in an increase in fees and equity pickups from the [JVs]. A third factor is the powerful growth in our specialty reinsurance and Glencoe businesses. We think that we are likely able to accommodate this growth on our existing balance sheet, given that the Cat [allocated] to Cat is likely to remain relatively flat over the course of 2002. At this point, I'd like to turn the call over to Jim for his comments.

Thanks John. I'm going to -- the only thing I'm going to comment on is market condition. And you know I feel like I should have a tape recorder to keep playing on it certain previous quarters on the previous quarter, because that -- my view is pretty similar to what I've had before, although I would say it is somewhat more optimistic now for reasons I'll give. In a Cat business it is a healthy market but it's far from the 1993 to 1994 peak pricing levels. Over the last quarter and including the July 1st business, the increases -- there were price increases that were roughly consistent with the January 1st pricing levels. However, there's still a lot of unattractively priced business out there, one example I can think of is a major US program, it was easily placed, it was oversubscribed, that we thought had expected combined ratios around the 100 percent range, so as a breakeven deal for the re-insurers. There were several large non-US programs that had expected combined ratios well over a 100 percent However, as long as there aren't any losses, you can still make money on programs like that, the quality of a portfolio only really counts when there are losses. And I think that's where we've been able to prove the quality of our portfolios during the loss years.

On the timing side that we are beginning to see some signs of capacity problems in California, and so I think this is the first time that, you know, signs of any capacity issues. So, all in all I'd say there's still more of an upward bias in pricing than a downward bias in the Cat market. Looking at the insurance and reinsurance markets in general, as I said in the call last quarter that there could be another round of tightening, if either we had a big Cat or there might be enough bad news still in the system yet to come that could tighten the market even without another catastrophe. And I think the second scenario is more likely now, you know, obviously we've seen a number of reports of things on -- in the industry of things coming out on balance sheets and I think it's, you know, likely that there's more of that to come, and that it's also less likely that a lot more capital's going to flow into the business with the stocks down now I think. So that makes me more optimistic -- and for us that would feed into growth in the specialty reinsurance area and in Glencoe. The big story is still flight to quality, and there are three aspects to quality I think. First is the financial ability to pay but beyond that second, the willingness to pay. And you know, companies are less likely to want to continue to have [beginning] insurance relationships with counter-parties that -- they are in arbitration with. And I think that's becoming an issue now. And finally, even if you have the ability to pay and the willingness to pay, providing stability of pricing and capacity, if you're re-underwriting your portfolio, if there is some question about whether you going to continue in the line of business, you are less attractive to the reinsurance clients. I think that we're almost uniquely well-positioned in this market environment to benefit from the flight to quality because I think our clients feel that we're very strong in all three of those aspects we're -- and the reason I say we're uniquely positioned is as a combination of being an established, highly rated company with great relationships with both clients and brokers and a stable management team, but at the same time having a limited exposure to the old problems, the things coming through the systems.

You know, I think -- I've said this before and I think it's still true. We probably have the strongest balance sheet in the insurance -- reinsurance business relative to our size. So all in all, I think that does position us very well to be able to continue growth along the lines that John outlined. With that I'll turn it open to questions.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, firmly press the "*" key followed by the digit "1" on your touchtone telephone. We will take the questions as you've signaled us and can take as many questions as time permits. Once again, that is "*" "1" to ask a question, and we will pause for just a moment to assemble our roster. Once again, that is "*" "1" to ask a question. And our first question comes from Brian Meredith from Banc of America Securities.

Good morning everybody. Two questions for you. The first, I was wondering if you could talk a little bit about -- I mean, John, you said your capital position was fine right now to support the business as you're currently putting on. Do you see any demand out there or desire for people to continue to fund things like DaVinci, and is there any possibility we see some more of these going forward, as you continue to see all sorts of opportunities in this business?

I will say that we are evaluating our capital profile very regularly, both with -- on our balance sheet and also different off balance sheet for [devices], so I think you've got it right that we're in a world where, you know, we could move to scale up either on or off balance sheet, but that would really be more in the context of seizing new opportunities. Clearly, for today's existing portfolio, we're in a very comfortable position, and the real issue is how ready do we want to be for potential future growth and also what are the terms on which we're able to raise the capital.

Let me add the comment that I think really one of our corporate skills is managing joint ventures. Everyone of our joint ventures has been -- has met or exceeded the business plan and expectations and we've established -- so we've established a great track record there and I think that that is an area that we've put a lot of focus on, and I expect will continue to grow. You can't do a lot of these things because each one takes a lot of work and a lot of focus but that is an area that I'd expect overtime to potentially add relationships or expand existing ones.

Could you do one for your specialty business?

Well, I don't want to -- I mean there's a wide range of things we could do, and we're certainly evaluating. I think one of the key things is we -- in terms of being able to execute, we are pretty tough on ourselves and not wanting to get more balls in the air than we feel we can effectively juggle. So there maybe - there's a lot of good ideas that we decide not to do simply because we don't want to be trying to excel in too many things at once.

Okay. And one of the follow-up questions; Jim, I was wondering if you could talk a little bit about what areas in the specialty lines look particularly attractive right now?

Well, I guess, I don't want to go into the specific lines that we think that we're really interested in because then we're just providing a road map for our competition. So it's, you know, the areas we are in are consistent with what we've been in the past. They tend to be more related towards [short-term] business, although not exclusively.

Great, thanks.

We will now hear a question from Vinay Saqi with Morgan Stanley.

Good morning, just a couple of quick questions for you. One is Jim, if you could touch on -- I think we've touched on this before, but if you could touch on what you think the mix of your business is going to look like? If we head out into 2003, how much do you think you're going to get from specialty in Glencoe and does this become a major part of your operations beginning in 2003? Second question is on the -- within your press release you mentioned you reclassified some cash to short-term investments, if you could just give us a little bit more detail as to what's driving that?

Okay and I [may] ask John to take the second question. And on the first one, just in general scale, you know, directionally certainly our -- the majority of our earnings will be coming from the Cat business for the foreseeable future. The Glencoe growth, I'm very optimistic about -- you know, we have -- because that takes a longer to ramp up, we've got growth built in there already before we've already gone, and we're very optimistic in the market conditions, we can be doing more. You know, I think that the specialty business -- reinsurance business will also grow although that is going to be dependent -- that can grow and decline or flatten off quicker depending on market conditions. That will be dependent on continued good environment in the market. So all in all, I'd say that the trends you see in growth now, in terms of relative size of these businesses, I think would continue into -- into 93, not necessarily the growth rates but that relatively Glencoe will be growing faster than the other areas and that Glencoe and specialty together will grow faster than Cat, but Cat will still be the largest profit contributor.

Could we say it's going to be roughly 60-40 with Cat and the other two accounting for roughly 40 percent?

I don't have a figure for you...

Okay.

...at this point.

Vinay, if you are looking at Managed Premium, you know, that number is like that, you know, could make some sense. I do think you have to be [indiscernible] from our managed gross or net written. But on a managed basis that sounds, you know, like a reasonable range to talk about.

Okay.

Turning to your second question, the question of reclassification of our cash line item.

Yes.

The logic of that really was that we wanted to segregate more clearly the cash that was really operating cash as distinguished from the investment portfolio actively managed by our chief investment officer, and so really, this is intended to indicate that the short-term investments are allocated into the investment portfolio and there is a decision, you know, at this point to have that very short term oriented and there -- the focus of the investments or position [planning] could be thought of as almost cash, commercial paper, treasury bills, money market funds, floating rate notes, the like.

And you -- do you expect to deploy a lot of that short-term investment into bonds over the course of the next six months?

Yes. We would expect that that would be rolling into longer term positions, although, we've been cautious in extending duration in this interest rate environment.

Okay, final question is in terms of payments in the World Trade Center, it doesn't seem like you made a whole lot of payments, given your -- the movement in your reserves. Can you just update on -- us on that?

It is correct that the World Trade Center loss is picking up slowly and the number we paid to date is about $10 million. So that gives you an indication.

Thank you very much.

Moving on we'll hear from Susan Spivak with Wachovia Securities.

Good morning Jim and John; I was wondering -- and I'm sorry if you went over this already. But could you talk about your decrease in -- or the additional reinsurance purchase in the quarter.

Well, we are -- you know, we are always on the outlook for, you know, on the look out for additional reinsurance capacity from quality security and you know, I think we are finding more both on an excess basis and on a quota share basis and I think that trend -- I would expect that trend will continue. Otherwise, they will continue to purchase more reinsurance.

Well, is it on your new books of business that you're reinsuring until those have more of a pattern or is it on you existing catastrophe business?

No, no I'm sorry. It's all on the Cat business. I shouldn't say all, but it's essentially all on the Cat business.

Okay, thanks Jim.

We will now hear from Steven [Gavios] with [indiscernible] Corporation.

Good morning gentlemen. I'm just wondering if we can pursue this issue a little bit more about your Cat Premiums, you know, not only in terms of what you're [seeking] out to reinsure, but also the fact that what I heard you say Jim that you were writing more of your new Cat business in your JVs. Are you trying to tell something about what you think the attractiveness of the profitability of that business is going forward and give us some color on why you've taken the actions you've taken?

Well, our Cat portfolio is close to as good as its ever been. I mean the market is not back to the 93-94 level on average, but because we are in so much of a stronger position now in the market than we were in 93-94 actually relatively our portfolio is in great shape in terms of how we view expected return on risk. So you know it has nothing to do with any concern about portfolio quality. It's just, you know, we've grown -- it's capital management, and we have grown our top line a lot in the Cat business and in terms of, you know, our own risk management we feel its appropriate to use not only our own capital but retro, excess retro and JV capital, so I mean -- I view it as a balancing act; that the gross portfolio is in great shape and -- but the -- you know, I believe we -- as we -- as long as we see the opportunities to grow on a JV basis, you know that's where we see the short-term growth going.

So you've got about as much Cat risk in your balance sheet as you want to have?

It's -- you know -- it's a balancing act and we don't -- I wouldn't make the statement that strongly, but I'd say at this point we -- you know, we look at different forms of capital. We utilize our own equity capital and other forms of capital we have on the balance sheet. We have our JVs, and you know, we really want to grow in all areas. For example, as we continue to generate earnings at this high ROE, we're adding to our own capital base very rapidly, and you know, we -- you know we'd look to redeploy that capital back into the Cat business, but it's, you know, it's not really a strategic change in direction, it's more of a tactical how we see balancing the JV capital versus our own capital, so we could choose to grow more in our own capital and also depends on it actually, you know, it also depends on geographic area. I mean there are certain areas that we're heavier -- more heavily exposed in our own portfolio than we're in the JVs, and at that point, we look to write more of that new business [indiscernible] stock in the JVs. Obviously, we want to write more of the new business into the JVs to balance and then the other [indiscernible] make us sit on a -- looking on a consolidated basis the risk profile has to include the specialty reinsurance in Glencoe businesses, and so you know, that is consuming some capital so we're really -- we are balancing the different calls on capital with the different sources of capital and since we view our equities a dear commodity we're trying to manage capital by getting it from other sources.

Thanks, and that makes good sense. Jim, are you surprised at how quickly the availability of Cat retro has come to you?

Not really because it's not coming from sort of the old traditional sources back in the market. It's -- when we talk about our Cat retro, it's more heavily on our quarter share basis. It's coming from -- it's -- we almost -- we look at it somewhere that we look at the JVs except we're putting our paper upfront. It's quarter share back to companies who are not traditionally in the Cat market.

And last question, John you had mentioned about, you know, how you had to consolidate the DaVinci debt on to your balance sheet. How do you see the rating agencies handling that situation? Have you talked to them about it?

We talked with each of the three rating agencies about that, and in general, their approach is to exclude it. It's not quite that simple. The methodologies vary somewhat, but it's not affecting our overall leveraging capacity in that on a material way.

So if I'm going to look at your debt to capital, I should kind of take that out?

Yes, I -- that's probably right as I short answered. There are a number of different ways to do it. You could add back DaVinci equity all of it. There's another way to go at it or just give us a prorata slice of the DaVinci debt. So you can see the range of different ways to correct [for] it.

Got you. Thank you.

Jay Cohen with Merrill Lynch has our next question.

Actually, I just have a couple of questions. The first is were there any meaningful financial related deals in the quarter?

Are you referring to [finite] reinsurance, Jay?

Well, you are not taking a lot of risk, but would obscure the comparison.

No.

Okay. Secondly, on the specialty reinsurance and the insurance business, Glencoe, I assume you're not seeing a lot of loss activity. What kind of loss ratio or combined ratio you're booking this business at?

Can you repeat the question Jay?

Yes, I'm looking at the specialty reinsurance and the insurance business. I'm wondering what kind of loss ratio or combined ratio are you booking this business at? Is it similar to the overall or is it a little bit higher?

Currently, those are being booked to higher combined ratios, and I will say we're being conservative given that these are new books of business, but the combined ratios are in the 85 to 90 range.

Okay. And lastly, what were the paid losses in the quarter?

They were about 20 million.

Great. Thanks a lot.

We will now hear from Michael Smith with Bear, Stearns.

Yes, just following up on that. John, do you've a cash flow from operation figure?

Yes, just a moment. For the quarter Mike, it was $215 million.

Okay 215. Just also, Jim, could you expand a little bit on the concerns you've mentioned about the California capacity? You said that you're starting to see some developments there.

Well, I think we're hearing about markets starting to fill up their California buckets. And you know, that's the -- even some of the new capital, which -- you know, it's the first time I think we've begun to hear some capacity concerns. I mean, it's always been strong upper price movement, but -- that's you know, which I think is a positive to began to hear that.

You know, what's driving that all of a sudden?

Yes, I think -- well, first of all, I think the understanding that workers compensation catastrophe exposure is something to be concerned about. It came out of the World Trade Center and all the [white] market is accessing that. So, you know, now the workers comp Cat covers are, you know, perceived to have heavy California Cat exposure, whereas in the past, I think, people may not have been looking at it that way.

Okay good. Thank you.

And secondly, you know, I think, just a general tightening in the quiet market in California.

Moving on, we'll hear from [Sam Twiston] with Black Rock.

My questions are already been answered.

Once again, if you'd like to ask a question, please press "*" "1." We'll now hear from Alain Karaoglan with Deutsche Bank.

Good morning and congratulations on these great results. I have a couple of questions; John in the past you've given us the assumptions behind the earnings guidance in terms of premium, can you do that again?

Sure. You're talking about the yearly?

The yearly, yes.

Yes. The key drivers looking at the top line would be gross Managed Cat Premium in the range of 650 to 700 million for the year. And looking at the Cat business, on a net written basis to Renre the range would be somewhere north of $215 million. Specialty, we're looking at something in the range of $200 million in Glencoe as well. On a net written basis was the content numbers that we're viewing, and I'd caution again that those are written not earned so you obviously will have to built those on to your earnings model.

Okay. The other question is, in the first quarter you referred to a buck of luck from the weather. Is there any similar sort of concept this quarter that we can look at?

Yes, it's a short answer. I think you can say that there was another buck of luck give or take...

But the buck is 30 cents because of the split?

Yes, pre-split. So I think, it's correct to look at the normalized EPS backing out something like 35 cents or so.

Okay, and then going back to the purchase of reinsurance. Would it be fair to think about it, as you're trading off, some of your premium for increased certainty of your results and less risk obviously on your book, is that what you're doing? Because obviously, I think the questions are why aren't you writing this business on your books, given how profitable it is?

Well, absolutely, I think that's exactly how we look at it. And I think, we're building a, you know, meaningful -- meaningfully large amount of fee income through this. So yes, that's a tradeoff we're making and it's in the context of growing of strong growth in our Managed Cat Premium. So we're really channeling the growth into that tradeoff.

Okay, and on the California, are you at your maximum capacity in California? You mentioned that others were filling up their capacity.

California is one of our heaviest exposed zone, so it's one of our peaks. We're not out of capacity, but it is one of our peaks.

Okay. Thank you very much.

Once again, if you'd like to ask a question, please press "*" "1" now.

Okay, well I guess that there is no more questions.

We actually do have one more question and that comes from Sam Twiston with Black Rock.

Yes, just a follow up on your -- on that, you mentioned California, one of your peak, what is -- what's your exposure on a, you know, on a percentage basis California and what is -- what are your other peak zones?

Well, I think we tend to be -- you know, all the major zones we're relatively heavy and I'd say we owe it -- throughout our history we intended to be heavy -- relatively heavy in areas where there was just the last loss. So after '99 we were -- became -- grew quite a bit in France, after '98 we grew quite a bit in Caribbean. We're, you know, relatively heavy in writing terrorism risk on, you know, deploying control basis, because that's a very tight market. We are -- you know, as I said relatively heavy in California, in Europe. Florida is a big peak for us, but I think, actually, we probably have more available capacity in Florida than we do in some of the other major peaks around the world.

Okay, but on a -- you know, I don't know if you guys look at, you know, sort of a percentage of risk, I mean, would California represent, you know, more than 15 percent of risk held or something like that?

Yes, I really can't in a short description kind of describe it...

Okay.

...describe it that way.

Okay. Thank you.

And we do have a follow-up question from Alain Karaoglan.

On the pattern of the premiums, John you mentioned that the net premiums -- these were net premiums written. What should we assume with respect to the Specialty and Glencoe, are these premiums earned, generally relatively over a 12-month period or is there a pattern that we should keep in mind?

It would earn relatively over a 12-month period, it's a general rule. Specialty reinsurance could include some one-off contracts that might have since, you know, funny earnings patterns, but in general I'd say a straight-line over 12 months is the way to assume for the model.

Thank you.

Okay, I guess that was the last question. So thank you for your questions and your attention. And look forward to talk to you next quarter.