濱特爾 (RNR) 2002 Q3 法說會逐字稿

Good morning. Welcome to the RenaissanceRe Holdings third quarter conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to your host, Mr. David Lilly. Please go ahead sir.

Good morning. Thank you for joining us on third 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 have reserved an hour for today's call. There will be an audio replay of the call available at 12:30 p.m. eastern time today through October 31st at 8 p.m. The replay can be accessed by dialing 888-203-1112. Or 719-457-0820. The pass code you will need is both numbers is 611812. Today's call is also available through the investor section of www.renre.com and will be archived on our web site through midnight on November 22.

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 discussions. Additional information regarding the factors shaping these outcomes can be found in our SEC filings to which we direct you.

With me today, to discuss the results, are RenaissanceRe's Chairman and Chief Executive Officer, A. Jim Stanard and the Company's Chief Financial Officer, John Lummis. I now like to turn the call over to John to begin with an overview of the financial results.

Thank you, David.

For the third quarter, RenaissanceRe has again produced great growth across all our product lines. To see the detailed breakout, I'd encourage you to look at the supplemental data that accompanies our press release that we issued last night. Comparing this year's third quarter with last years', managed cap premium up over 50%, especially reinsurance premium has more than doubled and our individual risk business increased by over 7 times. I'd also highlight our fee income best seen on a proforma basis for the supplemental data, where our structure products unit has produced fee income just under $17 million for the third quarter, compared with $2.8 million last year, so if you factor out the impact of the 9/11 losses during that period, we're normally number is in the range of $6 million for Q3. That to note 2 -- or 1, rather.

I'd also like to comment on our Seda premium. And here you can see we seeded roughly $90 million this quarter, that Seda premium includes $69 million relating to our own cat reinsurance book and is resulting in our keeping net written cat premium flat compared to last year. In addition, there's $19 million Seda premium from Glencoe to third parties relating to our individual risk business. You can look at the transfer of risks, seeded reinsurance, as a surrogate for putting more equity capital on the balance sheet during a period where we're growing our top line so significantly.

As a related point, net earned cat premium is essentially flat year on year and consolidated net earned premium growth is driven largely by our specialty reinsurance individual risk products units, plus DaVinci. I expect similar results for the full year, and given the earned premium growth that you saw in the first half related to cat, that would mean some decline in fourth quarter net earned cat premium. But I think the real trend will look for year on year and projecting it to '03 is that net written cat will be flat while we envision very strong growth for the individual risk unit and to lesser expense specialty reinsurance. But a strong growth and net written across the lines in '02 as well as the growth in our fee producing business, there's already a lot of earnings power rolling into '03.

One point of clarification, I'd like to remind you what our individual risk unit entails, and that represents business we previously characterized as primary insurance and is intended to capture the business where we're involved underwriting on a risk by risk basis, as distinguished from the portfolio approach that we take relating to reinsurance business.

Turning to the subject of losses for the quarter, the most significant event of the quarter was the European floods. Aside from that the quarter was relative light. So the net result was cat losses below our normalized levels, the difference contibuting roughly a dime to EPS for the quarter both from Cat underwriting and related fees.

Looking at the investment side, the big factor on a quarterly increase compared to last year is all the capital we raised in the fourth quarter, including DaVinci, our common stock offering and the perpetual preferred transaction of '01. In addition, we have had strong operating cash flows since then. That has all been offset by the lower interest rate environment.

Turning to a broader perspective on our annual earnings expectations for the year, as we announced last week, we pointed to EPS in the range of 465 to 480 for 2002. That's assuming a normal level of cat losses in Q4. It's important to recognize that we see approximately $50 million or about 70 cents of '02 EPS as the product of what we describe as luck, essentially the difference between a mid-30s cat loss ratio and much lower results of this year. Accordingly, when you do your year own year comparison at 2002, against '01 or '03, I think you need to factor that out to get a sense of the longer term growth trend.

As most of you know, we increased our guidance for '03 in conjunction with last week's Bermuda angle conference. We pointed to a range of 485 to 515, and for more details of our Bermuda angle commentary, I refer to you that web site, which is www.Bermudaangle.com.

Our projection for '03, 485 to 515, absorbs two items with some negative impact, the depressed investment environment in terms of the interest rate expectations and the impact of expensing options, where we have indicated that we intend to begin expensing stock options for employees beginning January '03. The real story is the positive factors which are very important, comparing our '03 expectations with '02, we're looking for single digit growth in our managed cat book with growth in the range of 10% for specialty reinsurance, and individual risk business growth as a real driver with expectations there in the range of 25%.

So we're excited as we look forward to 2003. At this point I'd like to turn the call over to Jim Stanard for his commentary.

Thank you, John.

I'm going to comment first on market conditions, and then on how we're responding to those conditions. And these comments are ones that I made at the Bermuda angle, I'll make a short summary of them here.

There really are fundamental changes occurring in the worldwide insurance and reinsurance markets. Many companies around the world are experiencing senior management changes. Terrible results based on both unexpected loss exposures and underpricing, balance sheet problems, both in the liability side and reserves, reinsurance recoverables, goodwill, tax asset issues, and on the asset side with the problems in both the credit markets and the equity markets, and then finally equity capital is very expensive. So, in this context, what that is created, and I think that the momentum toward this change has really picked up steam in the last few months, is an increased focus on risk management, and increased focus on specialization and getting back to core businesses, and pricing for an underwriting profit. I don't think these new disciplines will be forgotten quickly by most companies.

And I'm more optimistic about market conditions, the tightness of the reinsurance market and sustainable of that tightness than I've been in quite a while because of what has happened over the last three to six months with all of these problems, particularly the balance sheet issues. These new disciplines in the market are ones Renaissance has effectively executed since we've started. And this puts us in an ideal position in this market. We've got -- turning to how we're responding to these conditions, why are we ideally positioned? First of all our balance sheet is the strongest in the industry, relative to our equity size. Our management team I think is the strongest in the business, period. We have longstanding relationships with our clients and brokers, and that gives us opportunities to grow in many different areas.

The big story I think for Renaissance coming out -- coming out in 2002 is how our income stream is really beginning to be in a real way more, diversified. If I can step back and look at the -- how we've approached the hard market. In the '99 to '01 period, we moved from being one of several cat underwriters, and one with the best results, to being a largest in the world, in cat reinsurance underwriting. We also established joint ventures that began to produce meaningful income to us, in 2001. In 2002, the specialty reinsurance and individual risk businesses have really come online to start producing meaningful results to the bottom line.

Looking forward, I think you can expect us to see a handful of new investments and joint ventures outside of the cat business. Those are not producing -- at this point have not produced any income for us, but going forward I think there's upside there. An example of this would, of course, be the platinum investment we've made.

So looking forward to 2003, and these are comments I made at the angle, the -- portion of our income coming from pure cat reinsurance activities will be about a third of our income. The rest of it coming from fee income, from our joint ventures, especially reinsurance, and individual risks. Now, all of those three activities do have cat exposure associated with them, so in each case we're leveraging our understanding of how to manage cap business in those activities. But this does represent a significant diversification away from pure dependence on the property cat excess reinsurance market.

With those comments, I'll turn it over to questions.

Thank you. Today's question and answer session will be conducted electronically. If you want to ask a question, press the star question, key, followed by the digit 1. We'll queue you in the order you signal. Once again, star 1. We'll pause for a moment for our roster.

Our first question from Jay Cohen with Merrill Lynch.

I guess my question was on the overhead expenses, which have stayed extremely flat. Unchanged from a year ago. I'm wondering, should we expect those to rise at all, going forward?

Jay, I think you should, and I'll also comment that in that line, we are netting down because of the recognition of overrides on our some of our managed cat business, so that actually obscures the gross number which actually shows a little more growth as you would expect. So I didn't give you -- yes, you'll see that number growing. Absolutely.

You say overrides, not in the fee line, obviously. What are we talking about there exactly?

Well, this would be fee-related income, relating to our managed cat business, that could include both joint ventures as well as the Seda quote assured business we've spoken of in the past. So you would see some of the results flowing to that line.

That's great. Thank you, John.

Next to Vin ASaki with Morgan Stanley.

Good morning. Two quick questions. One, Jim, if you could comment more on the pricing environment. During the Bermuda angle you presented a graph where you showed the amount of property cat business that had acceptable return, low return and negative return as of January 1, 2002. If you can give us an update as you're heading into the 2003 renewal season, if those percentages have significantly changed or running roughly at the same level? And the second question is for John, if we look at the sequential level of investment income, it seems to have declined second quarter to third quarter. Although it seems you had strong cash flows. Update as to what is driving that. Thank you.

Okay. Commenting on the cat market and the slide you're referring to which Dave Atkins [ph] presented, showed that as of January 1st, 2002, that we thought about 40% of the business was acceptably priced. And about -- of the other 60%, we felt was unacceptably priced, half of it had positive profits, but not a return adequate for the capital at risk in our opinion. And the other half of the 60% or 30% was actually priced to produce a loss, which would make no sense to write under any circumstances. This -- this is far below the levels of pricing that there was in the 1993, 1994 sort of panic hard market. And we don't expect price levels to get back to the '93, '94 levels. The market I would say is trending positively, but at not a very high rate. There is competition out there. There are -- once programs hit adequate price levels, they are overplaced.

On the other hand, we're excellently positioned with our position with our clients and brokers, and the flight to quality. The markets that are having problems competing are the ones with the lower credit ratings and ones that have been inconsistent in the past in the market. So I would say we're -- our portfolio is adequately priced in the business we're writing now. It was adequately priced a year ago. And so we have not been trying to do any large, across the board reunderwriting or price increases on our existing portfolio. What we're finding as the market hardens is there's more business that we didn't used to write that prices are moving up to meet our hurdle rates, so there are opportunities for us to grow there. I would expect that trend to continue in a modest way for the rest of the year. So I think that there's probably still -- I'm hopeful that there will be some of this negative return business will -- and low [inaudible] return business will have price increases coming from the market that there -- that will allow us to be able to write it.

Great. On the investment income question?

Yes. On the investment income, the issue is the declining interest rate environment and we had also been maintaining a short durations portfolio in -- shortened up quarter on water quarter, and at the end of the third quarter, two and a quarter years. So --

Were there significant maturities in the quarter that caused this to happen?

No, just a normal course rollover of the portfolio with the short-term emphasis and a low interest rate or declining interest rate environment. So there's nothing more profound going on than that.

Okay. So it's fair to assume there were some maturities during the quarter and they were reinvested at lower rates and that offset the increase in the cash flow in the quarter?

Yes.

Thank you.

Next question comes from Lee Cooperman with Omega Advisors.

Thank you very much. I was curious how would you prioritize the use of your cash flow between writing more business, acquisitions, stock repurchase dividends, how do you look at things currently?

Well, I'd say that on the -- our dividend policy has been pretty consistent in the past, and I don't anticipate changing that. So I put that -- I'm going to start from the lowest priority and move up. Acquisitions, you know, never say never, but we are not really focused on acquisitions, old balance sheets scare us a lot. So I'd say in terms of ventures and utilizing the capital, the model that we used in Platinum, where you're capitalizing a new company and taking a book of business into that new company is much more attractive than acquiring an old balance sheet. The -- I think really, the -- in this market, the growth opportunities are huge. And we haven't seen the upside -- we don't see the ceiling on our ability to continue growing in individual risks and especially reinsurance, and our cat business also is we're hopeful will have growth potential, although not at the same rates as those other activities. So in this environment, that's where we're going to deploy our capital.

Just as a follow-up question, this is more of a opinion and everyone has one, do you think that the stock which trades at half the market multiple correctly understands the risk inherent in that business, or does the stock not fully appreciate very strong outlook you seem to be outlining? Just an opinion.

Well, I think I'd rather hear opinions from the investors. Rather than giving opinion on our stock price.

Okay. Thank you very much.

Okay.

Our next question from Ryan Meredith with Banc of America Securities.

Good morning, everybody. A couple questions. John, back on the investment income, was there anything in there on limited partnerships or private equity in investments that may have impacted the quarter?

Nothing that mature. We do have a small allocation to alternatives, which includes predominantly a portfolio hedge funds and also includes a bit of private equity. But I wouldn't point to that as being a material factor.

Great. And then second, on the $69 million dollars of seeded reinsurance that you said on the cat business, is that largely insurance with the commission? That's why you got the fee income?

It's a mix of both the pro rata business and excessive loss.

Okay. And last question, for Jim, when do you see RenRe may be hitting a saturation point with respect to its cat business or managed cat business? Is there any point that you think you've just got a big enough share of the overall worldwide market and you don't want any more, or your models and capital won't let you have any more?

Well, certainly there's a theoretical point because we're -- you can't outperform the market if you're 100% in the market.

Right.

There is a point, although I'd say we're far from that point because, first of all, the cat market is growing. If you think that the underlying raw material for our product is increase and insured exposures in cat exposed areas around the world, as I said in the past, I believe that is growing on a long-term basis faster than GDP or long-term economic growth of the economy, as there's more building on the coast and more insurance and more building in earthquake-prone areas. So I think there's real growth potential just if we kept our market share, although that's long-term growth potential. Of course there will be short-term cycles. But in the -- to answer the short-term perspective to your question, with our current market share, I'm not concerned that that is a limiting factor. In our short-term outlook to be able to grow.

Great. Thank you.

Our next question comes from Elaine Oakland with Deutsche Bank.

Good morning. John in the past you've given some of the assumptions behind your EPS estimates in terms of premiums by the segments and also what sort combined ratio we should expect in round numbers for each of the segments I know you mentioned the growth numbers. Was that on a gross basis or net basis? And could you give us some of that detail that you've given in the past?

Sure. The numbers that I gave were on a gross basis. And I guess to clarify what that means or how you translate this on a net basis, going book by book, the cat book that is sticking to RenRe, that is excluding the DaVinci impact, is close to flat on a net-written basis as I alluded to in my comments. Specialty reinsurance we have virtually no reinsurance seeded up against that. And on the individual risk business, we have Seda a bit under under $20 million this quarter you so can expect to see Seda premium against that portfolio. That gives you a reasonable direction on the gross versus net by line of business. And I think you have to look at it by line rather than trying to derive top down to -- gross versus net. You also need to remember to factor out the DaVinci impact that you look at the consolidated results.

Speaking to the question of where we think we will be in terms of the premium for '02 on a managed cat basis, we pointed to 675 to $700 million of gross written managed cap premium in '02, looking forward into '03 we have indicated that we're envisioning single digit, mid single-digit growth rates against that. But again on a net written cat basis for what sticks to RenRe, we would see the premium being relatively flat '02 against '03, and that would put you in the 240 to $250 million range on a net written basis.

Looking at the specialty business for the year, in '02, I would envision a number in the range of $225 million or so gross, and roughly equivalent number net, perhaps and some upside on that. And then we pointed to some single digit -- I'm sorry, 10% or so growth relative to that as we projected to '03. The individual risk businesses is the one that I think shows the most upside as we delivered in our -- reflected in our comments. The premium in '02 we're looking to be in the range of 230 to $250 million for the gross for the year. And for next year, we're seeing or expecting to see growth in the range of 25% and possibly more against that book.

And John, in terms of the combined ratio between the segment, there's a big difference between the managed cat and the specialty. What should we think about?

In the cat book in terms of what sticks to RenRe, we're looking at low 60s, combined ratios in our assumptions. In the individual risk unit, mid-70s. And in the specialty reinsurance, mid-80s. And those obviously are ballpark numbers. Each of those numbers is subject to fluctuation based on microlevel business mix issues and so on. So those are indicative, not precise.

Okay. Okay, so if we look at the return of -- and project 12 months your equity will grow by 25%, yet the premiums and I assume the exposures are not growing anything close to that, only the individual risk business is growing by 25%, does that mean there is significantly more opportunities or does that mean we're going to generate significant amount of excess capital a year from now? And you guys need to think about what you're going to do with that?

I think if you assume only the top line assumptions and margin assumptions I gave you, then at the end of '03 we would have an excess capital question to work through. But at this point, that's not something that we're spending a lot of time worrying about. As Jim commented, we are optimistic looking for new opportunity, and so I don't worry about that issue at the moment. We're in a dynamic and evolving market, and having a little bit of dry powder is something that I think is advantage on, not a negative. If that grows to huge proportions, then I'd start to have a concern. But if we're still delivering ROEs north of 20%, I don't think there will be many people complaining about excess capital.

Thank you.

The next question is from [inaudible] of Global partners.

Good morning. Couple of quick questions. During the quarter, what proportion of your written premium was earned entirely during the third quarter?

Very little. The reinstatement premium that we would see associated with losses is all that would have earned immediately, and I guess there was one other item. So it's a mid-single digits kind of number, I'm estimating now in the 5 million, 7 million range.

Okay. Great. And with your plans for diversification, do you have any plans it take on any longer tail liability exposures?

I wouldn't rule out any activity. I mean, we're not crossing anything off our list. We have a screen that we apply to any new activities. We're looking for three things, clear market opportunity, a cultural fit with our existing business, is it a business that our management team belongs in? And are we leveraging our core skills to develop a competitive advantage in the area? So we're not going to enter a market just to play across section of that market news we think we've got a competitive advantage in that market. We have, up to this point, not been involved in long tail liability to that heavy an extent.

On the other hand, our management team has a successful track record from making a lot of money in the hard market of the 80s in the liability, long tail business. So I think we've got people who know how to make money in the right markets in that business. Right now, we don't really like what we see in general in that market. It still isn't, you know, seeing 50% price increases when you've had year after year of 20% price declines. It's not really exciting. In terms of getting to adequate price levels. However, I think that market is one -- is one that is -- that there's continuing substantial upward pressure on prices, as there should be, and at some point we could see some attractive opportunities there.

Okay. Can you give an example of what types of longer tail exposures you might be interested in if that were a possibility or is that too far out at this time?

Well, you know, we like to look at business where -- where we think there is some way of understanding the underlying exposure, and where there are some limits as to the amount of time claims can be out and some limits as to what your downside is. So I guess my -- sort of my least -- least favorite line of business applied against that criteria would be something like umbrella or just general liability, where it's hard to predict what is going to cause the claims 10 years from now. Is there some new court decision? If you're writing on a current basis, you're out there forever. So I'd say that's probably the -- that type of business is the kind that least fits our profile of how we approach the business. Now, that's not to say that business isn't good business. I think it can be. It's just not the kind of thing that fits Renaissance's screen.

Thank you.

To ask a question, press star key followed by the digit 1. Next to Marco Gonzales with Salomon Smith Barney.

Hi. Good morning. I was wondering if you could give us a better understanding of your underlying assumptions that go into your expected growth rates by line of business. Specifically, how much of that relates to exposure growth versus expected rate increases?

Okay. Okay. Let me go line by line. Obviously, there are different assumptions around each of the lines. On managed cat, we talked about single digit type growth, and I think that that will be a modest mix of both unit and price increases. But obviously, limited on both counts by our current expectation of single digit growth in the aggregate. On the specialty reinsurance side, that will be more unit growth than price. And I would say both in specialty and in cat, there's turnover of some large deals in the portfolio. There's some transactions that we've done on one off basis in '02 and that we will not see renew for valid reasons on both sides in '03, and where we will be entering into new contracts effectively replacing that premium in '03 under the current expectations. In the individual risk business, the growth there is really driven by unit increase, although that's overall environment the price increase as well but really is the unit story.

Okay. So it almost strikes me that giving Jim's comments earlier about market conditions and what struck me as being pretty favorable views, that there actually could be some decent upside to the growth numbers that you're looking at here.

I think that's a fair comment. We are working our numbers from the ground up, talking with our underwriters and what they think we can plan on for '03. We're certainly looking for an upside on top of these numbers.

Great, thank you.

Our next question comes from Stan Kidsen of Black Rock.

Yeah, hi, guys. Just one quick point of clarification. On the individual risk business, is this all facultative business that you're writing? Or is it -- excuse me?

It is -- it's a combination -- no, it's not all facultative, specifically. But it is all business where we are getting the underwriting information and looking at it on a risk by risk location by location basis. From a contractual point of view, that can come to us either through insurance policies that we're providing through directly to an owner of a building, it can come through facultative where we're providing reinsurance on an individual risk to the owner of that building, or it can come through treaties which are really more like what would be called automatic fac agreements, where we are getting a portfolio this business that we're underwriting that we're able to look through and underquote on a risk by risk basis.

Okay and what sort of the average policy size in that area? In the individual risk area.

Five million dollars, 10 million dollars, limit.

Okay. Thank you.

Once again, star 1 to ask a question. Next to Jim Versoni with Delphi Management.

Good morning. Quick question on the investment portfolio. I did the not catch what the duration is and what that is invested in.

The investment portfolio is dominated by short duration investment grade fixed income. The duration at the end of Q2 was 2.2 years.

That was last quarter?

I'm sorry, I misspoke. I meant to say Q3.

Okay. And on the three areas that you focus on, the writing specialty, the individual and cat, what are you using for hurdle rates on those three classifications.

We don't specifically talk about our hurdle rates. But we are using consistent hurdle rates across the Company. So that is really one of the strengths of our cat modeling is that we're using the same risk reward criteria, looking at a piece of cap reinsurance business, looking at an individual risk -- or look at an individual risk opportunity.

Okay. So same rate across all three classes then?

Correct.

And future next to year, on the cat, you're looking at possibly single digit growth, gross and essentially flat net?

And single digit growth, yes.

Okay. Thank you.

Next John Golden with Gilder.

Yes, gor Jim, earlier you stated you didn't think that the current cycle would be as strong or vibrant as the '93, '94 time frame. Could explain why you think that is, especially given where rates are, rating agencies, vigilance today versus back then, the world's appearance or view of risks today versus back then? Thank you.

Okay. And actually, thanks for the question, as I want to clarify that my comments about it not being as strong or vibrant is specifically to the cat excess reinsurance portion of the business.

Oh.

This cycle change is much broader, deeper, and just more of a fundamental change.

I'm sorry if I missed that. Thank you.

And -- I didn't make it clear, so thank you for allowing me to clarify. So I think that the cat -- the thing is, it was totally shocked companies in '93 is what their exposure was on the cap side, and there was a period of 12, 18 months where there was panic buying because they didn't have models, they didn't have their arms around their exposure. Now companies have better understanding around their cat exposure, so we don't expect that same panic situation to prevail. On the other hand, I think you're seeing -- because surprises are now coming from different directions, I think you're seeing the potential for panic markets in other areas now.

Thanks.

No further questions at this time. Turn the conference back over to you.

Well, I don't have any further remarks beyond what we've made. So, thank you.

This does conclude today's conference call. You may disconnect at this time.