濱特爾 (RNR) 2008 Q4 法說會逐字稿

Good morning. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Renaissance fourth quarter and full year '08 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Mr. Hill, you may begin your conference.

Good morning. Thank you for joining our fourth quarter and full-year 2008 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 at 1.00 p.m. Eastern Time today through February 26 at 8.00 p.m. The reply can be accessed by dialing 800-642-1687 or 706-645-9291. The pass code you will need for both numbers is 79903761.

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 April 23, 2009.

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 these 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 Neill Currie, Chief Executive Officer; Fred Donner, Chief Financial Officer; Kevin O'Donnell, President of Renaissance Reinsurance Limited; and Bill Ashley, President and Chief Executive Officer of Glencoe Group Holdings Limited.

I would now like to turn the call over to Neill. Neill?

Thank you, Peter. Good morning, everyone. In the year which featured the deepest financial market prices most of us have ever seen and which ranked among the top three for industry catastrophe losses, RenaissanceRe achieved strong underwriting results in a growing attractive portfolio of business. Our prudent risk management which underlies all that we do enabled us to avoid some of the more high-profile upsets experienced by parts of the industry, leaving us with a strong balance sheet and a strong capital position.

This allowed us to continue delivering outstanding service to our clients and importantly, places us in an ideal position to capitalize on improving market conditions in several segments of the business. We benefit not only from the strong capital position of our wholly-owned companies, but also of Top Layer Re and DaVinci Re for whom we also underwrite. The combined capital resources of these companies including our stoploss protection within Top Layer Re is in excess of $8 billion. And all of these companies enjoy strong ratings from Standard & Poor's and A.M. best, a testament to this consistency and success of our approach even at a time of great turmoil.

Top Layer and DaVinci are long-term partnerships. In fact, we just celebrated our 10th anniversary with our partner State Farm in Top Layer Re and DaVinci was the first new company to be started in Bermuda after 9/11. This total capacity enables us to punch above our weight, if you will, in the marketplace.

During the soft market conditions that prevailed early last year, we continued to build our franchise, identify opportunities, and invest in the future. We expanded our capabilities organically, made select acquisitions, and also made some important high caliber hires. These new capabilities have been integrated into our organization and are already generating important new business opportunities.

We did, however, sustain losses in our investment portfolio as a result of the extraordinary dynamics of the financial downturn. This is the first year of negative investment returns in our history and the primary driver of this result was our moderate allocations to high-yield private equity and hedge funds.

Our investment philosophy has always been and continues to be to prioritize the preservation in capital, liquidity, and diversification of risk and the large majority of our investments consist of highly rated fixed income securities. Our focus in investing our assets continues to be to support the underwriting risks we assume in our core businesses. And certainly the dislocation in the capital markets is creating very attractive opportunities to grow our book, while also making it more expensive to bring in new capital.

Companies continue to seek ways to reduce their overall risk profile and see the reinsurance markets as a most attractive alternative to accessing the capital markets. The strength of our balance sheet, the strength of our relationships, and our infrastructure position us well to meet our clients' needs.

Kevin, Bill, and Fred will now provide more detail in each of their areas. Kevin?

Thanks, Neill, and good morning, everyone. In most years the picture of the renewal season starts quite early in December with discussions with our customers and the picture becomes crisper as we approach January 1. This year was different in that the world changed drastically since these early discussions and correspondingly, price expectations in the reinsurance business changed dramatically. There are many drivers to the hardening of the market including Ike and Gustav, but the most profound impact is coming from the overall financial crisis.

As we discussed on the last call, the market forces curbing supply and increasing demand are the same in that companies want to manage their risks down to reduce the probability that they need to access the capital market. So buyers are buying more and sellers are selling less. Having supply and demand move in our favor at the same time is a unique situation for this market. More typically as demand grows, capital flows into the business through equity raises from existing players, sidecars, hedge fund retro participations and startups.

In more specific terms, we saw an increase in the overall US market of approximately 10% and an increase in premium paid per dollar of limit purchased. Interestingly almost all of this growth was in the fourth quarter. The changes in price were not uniform with hurricane-exposed limits increasing more than other non-hurricane-exposed limits and low rate online layers receiving the greatest percentage increase in rate.

Outside the US for us, the biggest influence on our exposure and our measuring of the market was the exchange rate. So even holding original currency limits flats, we would be down particularly in euro and pound contracts. Finally, retro is hard to classify as it is a highly fungible market so terms as well as price change make macro year-on-year comparisons difficult. It is fair to say, however, that we saw significantly more of the retro that we like to sell.

Moving over to specialty, we had a good 1/1 renewal and grew this book of business. It is difficult to classify the growth in any one area as we had success in several lines of business, some of which are existing lines for us; others are new lines. Although we found some new opportunities to increase the size of the book, we believe that the specialty market is lagging the price changes we are seeing on the US and retro cap markets. The main reason for this is that the primary casualty market has not moved yet. With the financial crisis and the prospect of increasing (inaudible) costs, we expect this to change over the next 12 to 18 months.

We continue to exercise discipline first and foremost and are seeing a healthy flow of new opportunities. In addition to the growth that we achieved, I am very pleased that we also increased the efficiency of our portfolio by adding diversification on the inwards book. Additionally, we increased our ceded purchasing as we built our book for 2009, which added to the improved efficiency as well as improving our expected returns of the portfolio.

I think we have a good pulse on the dynamics of the market and we have been able to quickly identify these opportunities presented by the dislocation. More importantly, we have been able to capitalize on these opportunities due to our integrated understanding of capital and as Neill mentioned, on our long-standing relationships and overall market reputation.

Thank you and I would like to turn the call over to Bill Ashley.

Thank you, Kevin. Good morning. We are pleased to receive an upgrade from A.M. Best from A- to A for the Glencoe Group in the last few weeks. This upgrade is important to our customers given the flight to quality and security in today's market conditions. It is also testimony to our results, solid management team, and superior risk management as part of the Renaissance group of companies.

Despite experiencing multiple hurricane events during 2008 including hurricane Ike, and extremes in commodity price volatility, I am happy to report that we produced an underwriting profit that was well within our expected results for the year. Our agricultural business was profitable for the year and within our expectations for the long-term average.

We believe the ability to make better decisions through data mining and utilization of the meteorological resources within the Renaissance organization are having a positive impact on our expected results. Our integration plans with our acquisition, Agro National, are going well and we are on target within our growth plans for this important segment of our business.

We are starting to see signs that the primary commercial property market may be beginning to harden. Brokers and agents are starting to find it difficult to place lines fully due to capacity constraints. There have been some requests to cancel and rewrite the change effective dates ahead of primary insurers' catastrophe cover renewals. There exists more concern in the market than we have seen prior over credit quality and too large a line placed with a single carrier.

The development of unique technology and hiring of key personnel and support teams over the last several months including our two acquisitions will enable us to take advantage of additional profitable business when the pricing is right. We have spent the last several months building out our own capabilities and are preparing ourselves for what may become a very interesting market in the future. There are some indications that the patterns of price changes for commercial property business in hurricane-exposed critical catastrophe areas are following the same patterns as 2006. It is early days and we are monitoring the market conditions carefully.

There is a little more uncertainty in our 2009 premium projections than usual considering the potential for a hardening market and due to the continuing volatility of commodity prices for corn and soybeans. Given today's commodity prices, premium charged per unit of revenue coverage are projected to be down 10% to 20%; however, we still expect to have a net growth of agricultural premium for the year.

With our upgraded ratings, strong balance sheet, competitive systems advantage, and our recent buildout of internal capabilities, we believe we are well-positioned to take advantage of additional opportunities this market may present to us.

Thank you, and I will now turn the call over to our CFO, Fred Donner.

Thank you, Bill, and good morning, everyone. On today's call, I would like to cover four topics, provide you with highlights from the fourth-quarter and full-year results to give some further detail on our investment portfolio and results. Third, I will provide some insight to our current capital position and I'll close with an update on our topline forecast for 2009.

Let me begin with the highlights. As you heard Neill mention, strong underwriting results this quarter were overshadowed by disappointing investment returns as a result of the turmoil in the financial markets. Our annualized operating return on equity was 4.8% for the quarter and 7.4% for the full year. For the quarter, our book value per share remained relatively flat, down less than 1%, and for the full year, our book value per share declined by 5.6%, but about 5 points of that decline comes from the share repurchases we made early in the year.

As we mentioned on the last call, given the opportunities we've been seeing to deploy capital, we discontinued our share repurchases late in the second quarter of '08. In terms of underwriting results for the quarter, our combined ratio was 36%, resulting from a low level of cat events during the quarter and favorable loss development.

Gross premiums written increased in both of our segments. In our reinsurance, gross premiums written was up $27 million, a $35 million increase in our cat unit driven by a combination of new business and early renewals of existing business was offset by a $9 million decline in our specialty unit. Our individual risk business premiums increased about $15 million over the prior year primarily from an increase in our agro premiums resulting from higher winter wheat commodity prices in 2008 versus the prior year.

And loss ratio for the quarter was just under 9%, which includes $104 million of favorable loss development, which benefited the loss ratio by about 32 points. I will give you more color on that in a minute, but I want to make two points regarding our claims reserves.

First, we made no change in our carried reserves for Hurricanes Ike and Gustav and continue to be comfortable with the estimated losses we reported at the end of the third quarter. Our robust reserving process took into consideration the depth and the breadth of the storm and we didn't have any significant offshore energy exposure. Seconds, after reviewing our exposures in light of the financial markets crisis, we established approximately $15 million of reserves for potential losses that might emerge from the Madoff-related matter.

Moving on to the full-year results of our business segments, starting with the cat unit of our reinsurance segment. Managed cat premiums on a normalized basis declined about 4% versus prior year. To derive normalized premium, I'm backing out $58 million of [reinstatement] premiums related to Ike and Gustav that we recorded in 2008. Our cat unit combined ratio came in at 69% versus 35% in 2007. 2008 results include $378 million of underwriting losses related to Ike and Gustav, which added approximately 60 points to the full-year combined ratio.

Favorable development on prior-year losses was $132 million, of which $83 million resulted from a review of our reserves relating to the 2005 hurricanes in the fourth quarter. The net positive impact from this development was $46 million after consideration of reinstatement premiums and minority interest in DaVinci.

Specialty gross premiums written declined approximately 44% versus the prior year. The decline principally reflects the impact of one large quota share contract that we originally wrote in 2007 knowing it was not likely to renew at the original terms and that we renewed in 2008 at a low participation percentage and lower premium volume. Our specialty unit generated a combined ratio of 68% as compared to 75% in the prior year, a little better than last year as last year's results included a large number of losses.

Individual risk premiums were up 6% over 2007, principally due to a $94 million increase in the Company's multiperil crop insurance business resulting from higher commodity prices. This growth was offset by our decision to terminate one program in continuing softening market conditions during 2008 in our commercial property book. Individual risk combined ratio came in at 98% versus 89% the prior year. This was driven by our higher level of losses resulting primarily from $40 million of underwriting losses from the hurricanes this year which added 8 points to the combined ratio for the year.

Expense ratio was down from 38% to 31%, which reflects a change in our business mix due to an increase in our multiperil crop business. This business carries a lower net acquisition expense ratio than the other lines in our individual risk segment.

Turning to investments, the total return on our investment portfolio was negative 1.7% for the quarter and negative 2.4% for the full year. The big contributors to the poor results were on investments and private equity, hedge funds, and senior secured bank loan funds. To give you a sense for the returns this year, private equity funds negative 28%; hedge funds returned a negative 17%; and the bank loan funds returned a negative 27%.

It was a difficult year, however, we look at these investments over a longer term and while these sectors have performed well for RenRe historically, we will expect these allocations to reduce over the near term while we develop more clarity at how the current economic crisis will play out.

One item worth noting that in the past we recorded a portion of our private equity funds on a one quarter lag. This quarter we used our best efforts to bring the entire portfolio current to date.

We continued to enhance the disclosures of our investment portfolio. We provide additional detail in our press release which highlights some of the changes we made in the portfolio during the quarter. The key take away this quarter is that we repositioned our fixed maturity portfolio, reducing our exposure to (technical difficulty) mortgages and asset-backed securities and increased our allocations of cash, agency debt, and FDIC guaranteed bank debt. While we believe we have taken some of the mark-to-market volatility out of the portfolio, it also resulted in shortening our duration to 1.5 years and reducing or forward yield.

I might also note our accounting policy on other than temporary impairments and its impact in the quarter. We recorded $66 million of OTTI principally from a widening of credit spreads. Our process is that we recognize principally all our fixed maturity investments available for sale that are in an unrealized position. That is, we take the unrealized loss through net income as a component of realized losses.

As Neill mentioned, we remain in a strong capital position and continue to have ample capital. We measure our capital adequacy by considering several factors including our internal risk tests, rating agency tests, as well as the capital resources that we have at the holding company that we can deploy into our operating subsidiaries. All of these indicate ample capital.

Also in January, we increased our ownership in DaVinci to 37.6%, up from 22.7%. Overall, we continue to feel comfortable that from a capital perspective we are well-positioned as we move into 2009 to take advantage of the market opportunities.

I would like to close with our expectations for 2009 and as you heard Kevin mention, we were very pleased with our strong January renewals. Our managed cat renewals were up about 15% year-over-year. Last quarter, I indicated that we expect to be up about 10% for the full year on a normalized basis. While the January renewals were a little better than expected based on where we are today and now expect our managed cat premiums to be up 15% for the full year.

There is no change to our forecast for specialty and individual risk. For specialty, we expect to be up about 20% and individual risk we expect to be flat. As you know, there are a number of significant moving parts that can cause these forecasts to change. This is particularly true given the present substantial economic uncertainty in the US and the world markets and the fairly turbulent conditions in our industry. More than ever, our focus is on discipline and execution.

With that, I will turn the call back over to Neill.

Thank you, Fred. Operator, we are happy to open the call up for questions.

(Operator Instructions) Vinay Misquith, Credit Suisse.

Good morning. First question on the guidance of the managed cat premiums up 15%, I'm curious how much of that is units versus growth. And the second question would be how much capacity do you have to grow EBIT? Do you have more capacity to grow your property cat business this year versus last year?

Go ahead, Kevin.

Cat growth I think is something that is very much driven by what the market is presenting. We saw the US primary market grow, which created some opportunity upward for us to deploy more into that market. And then the other area that we saw a substantial dislocation is in the retro market, where I say our retro book is about as large as it has ever been. And one of the benefits of our writing the retro the way we write it is it helps us diversify our books so it makes our overall portfolio more efficient.

As far as our capital, we do have and we told our brokers going into the renewal season that we had capacity to grow at 1/1 because we had excess capital. We believe that we still have capacity available to deploy. So going into the upcoming renewals for Florida, Japan, whatever else is coming up, we will deploy more capital into the market.

In terms of the guidance of 15%, would you say that most of it is from higher pricing or would you also say that it's from unit growth?

That's a difficult thing to classify for a couple reasons. I think one of the things is we definitely have taken more aggregate into the balance sheet, but the way we have done it is we haven't increased the amount of required capital to support the portfolio. So we have been able to diversify our book. In previous calls, we talked about vertical diversification and horizontal. Horizontal is more geographic diversification. We definitely achieved that at 1/1. We achieved some vertical diversification but I'd say the vast preponderance of our growth was through the horizontal diversification.

So although we were putting out what I would say is more aggregate, the overall efficiency of the portfolio is greater because we've added more diversification. The other thing is though we definitely had that sort of growth. The other sort of growth we had is we are getting more premium per dollar of limit we are putting out particularly in the US. So we had rate increase on the business as well. So it's just a little bit of both.

Fair enough, and your increased investment in DaVinci, how should we look at that in terms of risk?

I'm sorry, can you repeat that?

Your increased investment in DaVinci, I think it is now about 37.6% versus roughly 20% last year. How should we look at that in terms of the risk reward? Obviously it gets higher return this year should things be fine, but how should we look at it in terms of risk? Does it increase your risk profile this year versus last year?

We manage the DaVinci portfolio the same -- with the same kind of robust process that we managed the RenRe portfolio, the difference being that not all the businesses in RenRe is in DaVinci. Anything that is in DaVinci is already in RenRe. So if it -- the way I would probably think about the investment in DaVinci is that we are able to deploy more capital into the property cat area directly through our investment in DaVinci where if we -- as we are putting more money into Renaissance, we are investing more in the diversified portfolio than Renaissance is able to achieve by writing the specialty lines and some non-DaVinci lines in the property cat market.

All right, fair enough. One last question is on the individual risk. What would be your target combined ratio on this business? Historically it's been low 90s. This year we had about 98%. Just curious what the guidance is for the future? Thank you.

The targets really haven't changed. Obviously with a softening market, it moves around from 90-ish to low 90s. The 98% you are seeing, as Fred mentioned, 40-million-ish or 8 points of that was directly related to catastrophe losses, net losses during the year. So we really haven't changed our mind on appropriate targets for that.

Thank you.

Jay Cohen, Banc of America.

It's Banc of America Merrill Lynch. Several questions. I guess first, on the capital, have you explored other options? You guys in the past have been very good about finding other capital options and vehicles when opportunities do arise. Has that been a big issue for you guys to explore at this point?

Jay, this is Fred. We are always exploring other options for our capital whether it's bringing additional capital into DaVinci. Whether it's the establishment of a sidecar, whether it's using retro as capital, whether it's cat bonds, there's lots of different things that we would look we would be looking at lots of different sources today as well. You know, there is still opportunities to raise capital today. It's a little different than it's been in the past. It's obviously a little more expensive.

But certainly based upon what we are seeing, while we don't believe we have to go out and raise any capital, today we feel very comfortable with our capital position. In addition, we feel comfortable that we can continue to grow with our current capital position. Had we -- if we need to go out and raise capital, I feel pretty good that there are some sources available to us.

That's great, and then the second question, I think it was about a year ago you added to your reserves on the clash side because of the potential claims from the credit crisis. Two questions. Have you -- other than the Madoff reserve addition, have you added more to those reserves? And are you beginning to see any claims activity at all?

Yes, you know, first let me answer the first part of that question. We haven't made any significant changes to those reserves. You know, we are still comfortable with the amount we put up, which was approximately $60 million last year. You know, there continues to be some notices coming in, but there's not a lot of activity yet in terms of claims or claims payments relating to those exposures.

Great, thank you.

[Terry Shu], Pioneer Investment.

If you could give an update on the Florida situation, both the general market conditions and any kind of political or regulatory update, that's my first question.

Terry, it's Neill. (multiple speakers) then perhaps Kevin can add a little color if you'd like. Florida is a very fluid situation. There has been commentary in the press recently about the possibility of changing the structure of the Florida hurricane CAT fund. There are some good ideas floating around out there. We have been part of the dialogue. Obviously at RenRe, we will do everything that we can to help the folks down in Florida. We've worked with them for several years now and we will continue to work forward.

So if the structure changes with bigger coinsurance or if they decide to drop down in coverage, we will continue to work around and with the Florida hurricane CAT folks. Kevin, do you have anything to add to that?

Sure, I think one of the things -- Florida, as we've talked about before, is a large market for us. I think Neill is absolutely right that we are fully aware of the proposals that are being put forth for the regulatory changes. I think your second question which I will talk more about, is the rates in Florida. I think it's really kind of an integrated situation between what's going to change from a legislative process (technical difficulty) if anything and then what's going to happen on the ratings side.

So with most of the renewals coming up at 6/1 and 7/1, there really isn't a lot of price transparency as to what the market is going to do and with the uncertainty as to whether there is going to be changes to the amount of FHCF coverage provided or how much private reinsurance is going to be needed, it's difficult for us to have a full picture as to what the rates are going to do.

But I would, suffice it to say that we are about as well-versed on the topic, and as Neill mentioned, we are part of the dialogue. So that as things develop, we should be very well positioned to determine how the market is going to change in response to anything that comes up.

Okay, but generally speaking, you find it a very attractive market for RenRe?

Historically, yes.

And any proposed changes you don't see your relative position change a lot, right? Is that a fair way to look at it?

I think it depends on the change, to be perfectly honest. I think that whatever might change, there could be some real benefits with additional reinsurance purchase from the private market or other things. It's too early to tell kind of what will ultimately materialize down there.

If you can also elaborate on the comment that having the highest amount of retrocession business that you have had at the current time, you said you've been able to achieve greater -- I would assume horizontal diversification. So it's more geography?

Yes. I think the way we typically write the retro book on an ex-US basis so not including the United States perils, and the reason we do that is to help us diversify our book. We find that we have good penetration into the US primary cat market and we have good penetration to the international primary cat market. But the way we measure our capital, we look at kind of the best areas to deploy, whether it be even individual risk or US primary or retro. And we will make determinations as to how to allocate into those markets based on how much capital we are using by deploying into them. So with that, a lot of the retro that we write is on a non-US basis, helping to diversify the book geographically.

Can you talk a bit more about the international markets? Are there still many areas where rates are not quite attractive and any movements there?

Yes, I think it's hard to talk about that market as one thing, because each area is different. I think if you would look at the UK, there's been some model changes around some of the perils within the UK market. And, Neill, I think you might even say that the UK total limits purchased are down in original currency. That would be amplified in a dollar basis, but correspondingly Europe is probably up slightly. So you need to kind of talk about it by region.

The way we kind of think about the world is with an adequate return market, a low return bucket, and a negative return bucket. I'd say on the international side looking at it on a very macro bases, allocations into each of those three buckets, there is about the same in 2009 as what we saw in 2008.

Thank you.

Jay Cohen, Banc of America and Merrill Lynch.

And that is these Australian wildfires and the storm in Europe as well, I forget the name of it, top of my head, can you talk about your potential exposure? And if you have any sense of what the magnitude of the industry loss could be for both of those events?

There's been a couple storms in Europe. I think the one you are probably asking about is Klaus. Klaus is a -- well, there's actually a pretty broad range on industry estimates at this point and it's very early days. But I think the range is probably from what we have seen people reporting it's about $350 million industry loss to potentially as big as $2 billion.

Our participation in an event like that will probably come from our retro book and I wouldn't expect, although it's way too early for us to make a determination, I wouldn't expect it to be that material to us. As far as the Australian wildfires, I think we've seen estimates in the range, and again this is very early days, of about Australia $500 million for insured loss and possibly as much as $2 billion economic loss.

From RenRe's perspective, we have a different view of the non-major perils in Australia, so not typhoon and earthquake, but wildfire, hail, and some of those perils, which has precluded us from writing the lower layers of cat programs typically in Australia. So I would expect that this wildfire will probably attach some of the lower layers within Australia, but that probably is not a big impact to us because of the difference in how we look at the noncritical cat expected loss to those layers.

Those are helpful comments. Thanks, Kevin.

(Operator Instructions) Vinay Misquith, Credit Suisse.

Thanks, one follow-up on the guidance. Once again, the 15% guidance, does it include significant growth and for the June renewals?

Vinay, if you look at our book, approximately half -- let's say comes in in the January 1 renewal, so that's up about 15%. So we have another 50% to come through. On average you can expect that to be a 15% as well. So while we don't go into specifics and it's tough for us to go into specifics, that is exactly where the business is coming from, you could assume that it's a 15% across the board [from there].

Okay, that's great. And on the alternative front, do you have a sense of for how they've done so far year to date?

No, it's really too early to tell. I couldn't even begin to guess, to be honest with you.

Okay, thank you.

Thank you, everyone, for joining us today. I would like to close by saying that we have an experienced talented team that is excited about our growth opportunities in 2009 and beyond. So I look forward to sharing our progress with you over the coming quarters and look forward to talking to you in about 90 days. Thank you very much.

This concludes today's conference call. You may now disconnect.