濱特爾 (RNR) 2009 Q1 法說會逐字稿

Good morning, I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe first quarter 2009 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 first quarter 2009 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we'll 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 May 14, at 8:00 p.m. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The pass code you will need for both numbers is 94217224. Today's call is also available through the investor's section of www.renre.com and will be archived on RenaissanceRe's website through midnight on July 9, 2009.

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 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 RenaissanceRe Insurance Limited; and Bill Ashley, President and Chief Executive Officer of Glencoe Group Holdings Limited. I now would like to turn the call over to Neill, Neill?

Thank you, good morning, everyone. Our results for the quarter reflect the tension in the dynamics of the marketplace we are in. Pricing continues to show every sign affirming, but our results are still impacted by the ongoing financial turmoil. On the one hand, we generated a 15.5% operating return on average common equity thanks to fine execution from our reinsurance segment and a light catastrophe quarter and we are seeing a healthy flow of business, a testament to the strength of our capital position, ratings, reputation and relationships.

On the other hand, our earnings performance reflected continued pressure from the ongoing financial crisis, which reduced our overall investment return. Having said that, we believe our investment portfolio is appropriately positioned given the current climate. It was also a difficult quarter for our crop business as Bill and Fred will explain later in the call. However, we continue to believe that our crop business is well positioned for profitable growth and superior returns. The firming of rates that we observed during the January 1, renewals has persisted in the reinsurance market. New possibilities are opening up in specialty and signs of hardening in the primary market are appearing. We believe these trends will continue for some time. We have both the financial resources to meet the needs of our customers in our traditional lines of business and the ability to respond to opportunities that may be present in a broader range of attractive lines.

For example, after a rigorous period of capabilities development and preparation and with careful application of our traditional risk management discipline we have launched our commercial property business and you may have seen this morning that we are launching a Lloyd's syndicate. This syndicate will enable us to respond more effectively to our customer's needs and develop new opportunities. Our team is excited about our entry into Lloyds and we feel it will become an important part of our organization over the coming years. As we have said on past calls, We believe we have competencies that apply in a range of businesses and we will continue to develop new platforms where we see the potential for generating higher shareholder returns and profitable earnings growth.

We have always been proud of our risk management discipline and as we continue to build out our business, we want to make sure that our risk management function not only keeps pace, but remains best in class. To that end, Ian Branagan was promoted to the position of Chief Risk Officer this quarter. Ian has been instrumental in developing the enterprise risk management systems that have consistently earned us an excellent rating from S&P. He and his team are focused on ensuring that our risk management processes and practices continue to meet the needs of our evolving organization. With June 1, approaching, much of our focus turns to Florida and the significant volume of business up for renewal on that date. There is quite a bit to play out there. Both from a market and a legislative standpoint. As always, we are carefully tracking events, but anticipate an increase in our Florida business at June 1.

To summarize, we are well positioned, focused and energized to capitalize on the opportunities that the Harding market is creating. We are ready to continue providing the quality of service and execution that our customer have come to expect. But also to evolve in growth optimal performance over the coming years. With that, I'll turn the call over to Kevin.

Thanks, Neill, good morning, everyone. As we discussed in the last call we have seen an improvement in our market with the cap market leading other reinsurance lines. We continue to be the First Call market for property cat and are increasing the flow of business for our specialty lines. Specifically with cat, we entered the first quarter with increased demand for our products and enjoyed some rate increases. Although the market slows dramatically after the 1/1 renewals, we did continue to have many discussions with brokers and buyers about potential new demands coming to the market. Most of this is around the Atlantic Hurricane and while we are still early in the renewal process for the Florida book, signs are that more demand could emanate from this market. As with every year at this time, it's difficult to forecast the Florida market as state's supply of insurance and reinsurance plays such a large role in the market and the legislative process around some substantial changes to these programs has not yet been completed.

The property bills adopted by both House and Senate would, among other changes reduce the cat fund by approximately $2 billion this year and each subsequent year until the 12 billion (inaudible) layers are eliminated. We have been in discussions with customers about how the proposed changes would affect them and have updated our portfolios to reflect some growth. If this occurs we believe there is adequate supply to meet the increased demand. And the market will renew at some rate increases, but in an orderly fashion. We have continued to actively manage our book and approach the Florida renewals with enthusiasm and a very well constructed portfolio.

Moving over to specialty, we continue to see a good flow of deals but have been slow to push into many new areas as the risk seems to outweigh the reward. In general we are finding the market somewhat fragmented with different lines of business at various points along the pricing curve and while we are seeing some lines adequately priced, not all are. We remain optimistic that we will see rates firm up in the coming months.

Following up on Neill's comments we are excited about our entry into Lloyd's. We think Lloyd's is well positioned in the current market environment and believe the combination of our franchise and the Lloyd's franchise will provide great opportunities to RenaissanceRe and increase our ability to access diversifying business due this platform. Thanks and I'll turn the call over to Bill.

Thank you, Kevin, and good morning. Consistent with the trends we are seeing in our reinsurance business, we are seeing signs that some segments of the primary market are hardening and we are well positioned to address our customer's need for capacity. Throughout 2008, we had discussed on prior calls that we were pleased with the integration of our acquisition of AgriNational. One of our many efforts in 2008 was to make sure that given the additional growth AgriNational would continue to deliver responsive claims service which is an important hallmark for the rest of our companies. The 2008 crop year presented us with approximately two-times as many claims as prior years, caused predominantly by an unprecedented drop in commodity prices in October and November.

As we continued to settle claims during the first quarter the average severity per claim increased beyond our original estimates at the end of Q4. Given the extremes we were presented with for the 2008 crop year we are confident of our claims handling and reserving capabilities going forward. We are hearing from our customers that they are pleased with our claim service and will continue to commit even more business to us in the future as a result. In 2008, we also targeted additional opportunities to grow our multi crop business in the most profitable states even though commodity prices are down year-over-year which lowers the premiums to charge for 2009, we have increased commitments from our customers, which we estimate will result in a small increase in premium from 2009 versus 2008.

As we have discussed on past calls during the last several quarters, one of our key areas of focus was building out our internal capabilities. We have implemented our new commercial policy system which coincided with the recent opening of our first regional office for commercial property in Atlanta. The timing could not be better. Pricing continues to firm in commercial property, particularly for hurricane exposed risk and we are seeing signs that the commercial earthquake market may be turning the corner as well. Throughout 2009, we will be bringing on line one or two more regional offices.

The discipline we use to write commercial property is consistent with that we have instilled throughout the RenaissanceRe organization. Each office will be staffed not only with underwriting teams, but modeling teams that will work side by side with their underwriters, our risk management and pricing will be consistent with the rest of RenaissanceRe. Importantly we have the ability to aggregate risk in each office with the remainder of the RenaissanceRe group which giving us the ability to make corporatewide decisions on how to best deploy our capital for the highest returns. We feel good about the prospects of our other segments as well.

We are seeing signs of hardening in the primary casualty market. There are also a few carriers who have recently entered the program business consistent with prior market cycles, as carriers pull back to writing only business that they consider core. Overall, we are pleased with the progress we continue to make as we build out our capabilities for the future and look forward to the opportunities we have to serve an expanding base of customers as they seek out stable, financially strong insurers that can meet their needs. I will turn the call over to Fred Donner.

Thanks, Bill. Good morning, everyone. Last night after the close, we reported operating income of $94 million or $1.52 per common share. We generated an operating return on average common equity of 15.5% for the quarter and our book value per share grew by just over 2%.

The key drivers for the quarter are better than expected results in our reinsurance segment, offset by highly expected losses in our individual risk seg machine and continued pressure on our investment results. I'll take you through these, starting with our reinsurance study, Cap premiums were up $87 million or 22% over the same period last year driven by a combination of new business and higher rates on our January 1, renewables. Our cat unit combined ratio came in at 22% versus 29% in 2008 and our current year loss ratio came in at 11% versus 17% last year resulting from lower than average cap losses this quarter. The combination of this lower level of cats and $12 million of favorable development on prior year losses produced strong underwriting results for the quarter. The favorable development mostly stems from small caps in 2008 and prior underwriting years. Specialty growth premium writtens declined by approximately 10% versus the prior year. As I mentioned in the past the specialty book is made up of a small number of large contracts. So it doesn't take much to cause a significant movement in premium.

The combined ratio came in at 59%, as compared to 62% in the prior year, a little better than last year, driven primarily by a lower level of the number of losses in the most recent quarter. Individual risk premiums, declined about $15 million or 19% over the prior year, primarily from prior decisions that we made to not renew certain programs. The individual risk combined ratio came in at 140%, versus 94% the prior year. Higher than anticipated losses in our 2008 prop book accounted for $27 million of the $32 million in prior year development we recorded in this business segment. This is due to slightly higher than expected price severity as a result of wide springs of commodity prices and lower than expected crop yields that you heard Bill mention.

Our original estimate, (inaudible) by approximately 10% of the ultimate net losses. The impact on our combined ratio is about 34 points, however, the first quarter is a particularly light quarter in terms of earned premium for our individual risk business. The majority of our premiums in this segment are in terms of third and fourth quarters and as such, we caution you to continue to focus on full year results rather than the quarterly results for this segment.

Turning to investments. The total return on our investment portfolio was 2.6% for the quarter generally in line with our expectations given the ongoing upheaval in the financial markets. Our core portfolio which includes our short term and available for sale portfolios generated an annualized return of 2.9%. Our other investments generated a negative return of a little over 1% driven by cost setting facts. Our private equity and hedge fund portfolio returned to negative 21%. However, our other investments, principally senior secured bank loan funds and foreign high yield investments generated a 23% return.

This quarter, we continue to reposition our portfolio by reducing nonagency securitized exposure, we have also put some cash to work in FDIC bank data and ADC mortgage backed securities, which was a shift from cash to bonds with either the explicit or implicit guarantee of the U.S. government. We continue to maintain a highly liquid position in our investment portfolio in light of the current economic conditions. While we believe we have continued to take some additional volatility out of the portfolio it has shortened the duration of our portfolio to 1.3 years and reduced that bond with yield.

One item you will note when you're deriving sales is that our operating expenses are up. Driven in part by the cost of our investments in our new business platforms, including Lloyd's and a commercial property business. Over time, we believe that these growth initiatives will provide us with opportunities for attractive growth and shareholder returns.

Let me touch on capital as Neill indicated, we believe we are well positioned for the upcoming June loan renewal season. We continue to have excess capital at our operating companies and have ample capital resources at our holding company to pursue the significant opportunities we see ahead. We are comfortable where we are in terms of rating agency capital and our own internal tests.

I would like to close with our expectations for 2009. Last quarter, we indicated that we expected managed cap premiums to increase approximately 15% over 2008 on a normalized basis. We still believe that's the case. In specialty, while it's lumpy and while we expect to non renew certain contracts, we are still seeing good yield flows, and we are maintaining our 20% growth forecast for the full year. For individual risk, we are maintaining our forecast that our result to be flat with 2008 and this takes into consideration the growth that will crop up that Bill mentioned.

These forecasts also take into account the new commercial property platform, as well as the current business plan for our new loan syndicate. As you know, there are a number of significant moving parts that can cause these forecasts to change. This is particularly true, given the ongoing and significant economic uncertainty in the U.S. and world markets and the fairly turbulent conditions in our industry as well as the potential for legislative changes, particularly in Florida. More than ever, our focus is on discipline and execution. At this point, I'll turn the call back over to Neill.

Thank you, Fred. Operator, we are happy to take questions, now.

(Operator Instructions). Your first question comes from the line of Vinay Misquith. Vinay, your line is open. There is no response from Vinay's line.

Hello.

Go ahead, sir.

On the managed cap premiums your top line guidance is maintained at 15%, where as the first quarter, you grew much more than that, I'm just curious as to what that bakes in for the rest of the year and what your assumptions are for the Florida market?

Vinay, this is Fred, I think the way we look at it we look at it on a full year basis and we are aware that there will be certain contracts nonrenewing during the year, so, when you put it all together and look in on a full year basis, there is going to be growth in the Florida business when you compare it to last year. And when you put it all together, overall, year-on-year, we are looking at a 15% growth.

Would it be fair to assume that you got more business on January 1, and would write less business going forward because you have nonrated the business?

I think there is more moving features than that, actually, it's the fact that we have some contracts that we have that are coming up, some timing differences on contracts that we are aware of that are going to affect the premium, I think we did already comment, we did grow in 1/1. We do expect to grow at 6/1, but there are some things that are moving around within the portfolio that we are just trying to be reasonable about how it is going to flow through after the six month renewal. Including the growth that we perceive in that market.

As respect to the Florida market, Kevin, you mentioned that you feel that there's adequate capacity to meet additional demand. Are we talking about just the $2 billion that is supposed to come out of the market, or are you also factoring maybe the potential for homeowners insurers to buy more of the insurance because of the whole -- because of the funding liquidity at the Florida-Oregon gas fund?

Those are good questions. I think what we are seeing, we are pretty close to the customers down there. We are having conversations on all the aspects that may move demand. What we're seeing is I think the $2 billion is certainly something I was contemplating in the comment that I had. I think there will be some growth beyond that coming from the market, which the reinsurers assured me should be able to supply. It could be much more than we expect, but at this point, from the information we have, I think it will be reasonably well-balanced, although probably some rate increases.

Fair enough, are those rate increases more than what happened on the January 1 renewals? I know we talked about how much storage here, but do you think they are going to be higher than the January 1 renewals?

I think it's difficult to categorize it as one number where you may see smaller rate increases at the bottom of the program and more rate increases at the top where the capacity charge relative to the risk charge is greater. So think of it as one uniform premium change through the whole distribution of what people are buying may not be the way to think about it.

Fair enough. And the 15% top line guidance, does it include the $2 billion of capacity coming out or does it assume some more of the insurance? (Inaudible).

It assumes our best guess, as to what we think the demand will come out from Florida. At this point, there is both the House and Senate are pushing for that to happen. It would be likely to -- so that is built into our assumption at this point.

Fair enough. The second question is really on the net investment income, (inaudible) when he talked this quarter, Fred, I was wondering whether you plan to put more money to work, I think your short term securities, are quite significant about $2 billion. Just wondering whether you plan to more money to work in riskier assets or you expect this level of low yield to continue at least in the next few quarters?

I think while we feel pretty good about the state of the fixed income markets, actually, a little better than we did several months ago, we continue to believe that we still need to be cautious, both with respect to credit, exposure, to rising rates. We have repositioned some of the cash and instituted three year duration securities, as I said, supported by the explicit -- or implicit U.S. government guarantees, at this stage, those are the types of moves that we are making. We manage the issue on a real time basis. Some things could change, but as of right now, we are not looking to add any significant risks to the assets on our balance sheet.

All right, thank you.

(Operator Instructions). It appears there are no further questions. Neill, do you have any closing remarks?

Certainly, thank you, sir, well, we must be getting pretty good at this in terms of delivering information, if we don't have very many questions. We thank you all for listening in today. I would just close by saying that we really do feel like we are in a very good position in today's marketplace. We feel it's an interesting market. The next two or three years will be interesting for us and we hope it will be good ones for our shareholders as well. So look forward to talking to you next quarter. Thank you.

Ladies and gentlemen, that concludes today's RenaissanceRe first quarter 2009 financial results conference call. You may now disconnect.