濱特爾 (RNR) 2009 Q2 法說會逐字稿

Good morning. My name is Christy and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe second 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)

I would now like to turn the call over to David Lilly. Please go ahead.

Good morning. Thank you for joining our second-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 will make sure to provide you with one. There will be an audio replay of the call available at 2:00 PM Eastern time today through August 12 at 8:00 PM. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The passcode you'll need for both numbers is 18646824.

Today's call is also available through the investor section of www.RenRe.com and will be archived on RenaissanceRe's website through midnight October 7, 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 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 Neill Currie, Chief Executive Officer; Jeff Kelly, Chief Financial Officer; Kevin O'Donnell, President of RenaissanceRe Insurance Ltd.; and Bill Ashley, President and Chief Executive Officer of RenRe Insurance. I would now like to turn the call over to Neil. Neil?

Thank you David. Good morning everyone. I am pleased to report an annualized operating return on equity of 39% and over 11% growth in tangible book value per share for the second quarter. Results reflected strong profitability and growth as well as favorable reserve development in our reinsurance segment.

They also reflect an improvement in the performance of our investment portfolio as markets stabilize and the alternative sector rallied. While we benefited from the tightening of spreads this quarter, we don't foresee this level of improvement in coming quarters.

The strength of the RenaissanceRe franchise above all, our relationship with customers and partners was apparent in our success during the June 1 and July 1 renewal seasons. We saw particularly strong growth in managed catastrophe premiums and attractive rate increases during our June 1 renewals when Florida companies renewed their reinsurance programs. We're pleased with the quality and the efficiency of our reinsurance portfolio particularly our property catastrophe book. Kevin is here today to provide more color on that.

With our strong balance sheet and market position, we were able to add capacity for our clients in Florida this quarter both through organic growth and by the successful execution of our new sidecar, Timicuan Reinsurance II. Tim Re II was created through a collaboration between our ventures unit and reinsurance segment, again demonstrating our ability to access capital for the benefit of our clients and provide good investment opportunities for investors.

In the specialty reinsurance market, we are seeing good deal flow and opportunities. As we have mentioned in the past, this business tends to be lumpy and transactions can be large. So it is difficult to predict how much new business we will write over the coming year.

In individual risk, we continued to execute on our strategy of building out our underwriting platforms. I mentioned the launch of our commercial property arm on the last call. We are seeing the generation of attractive new business there as well as in our agricultural business. Bill Ashley is here today to talk more about that.

We also mentioned on our last call the launch of our new Lloyd's syndicate, syndicate 1458 which began writing business on June 1. This quarter we announced that we have entered into an agreement to acquire Spectrum Partners whose principal operating subsidiary is the managing agent of syndicate 1458.

Bringing the Spectrum team into the RenRe family gives us the opportunity to operate a fully integrated platform at Lloyd's, positioning us to meet our customers needs. Such developments combined with the strength of our balance sheet, strong ratings and resources position us well to take advantage of opportunities in the market as we move into the heart of the Atlantic hurricane season.

Today I'm pleased to introduce Jeff Kelly who joined us on July 6 as Chief Financial Officer, replacing Fred Donner. Fred returned to the US for personal reasons. Fred made many important contributions during his three years with us and we thank us thank him for his hard work.

Jeff's transition into the role has been very smooth and he's already providing value for the company. He brings experience and expertise in a number of key areas including finance, strategy and investments. Jeff will walk us through our results later in the call.

In summary, we had a solid quarter. We continued to demonstrate our ability to generate strong ROEs and book value growth to reinforce our reputation as a stable market and to respond quickly and effectively to the needs of our clients, brokers and partners. With that, I'll turn the call over to Kevin.

Thank you and good morning everyone. We have completed our 6/1 and 7/1 renewals and according to our measurements, we have built an efficient portfolio with risk and return profiles that are well controlled and attractive.

Since our last call, the Florida legislative changes we discussed materialized for the $2 billion reduction in the (inaudible) capacity provided by the [city]. We were pleased to see that the Florida legislature took some meaningful steps towards improving the general conditions in the state and believe that the Glide Path Bill is a positive step for Floridians and the insurance market overall.

[Particular] reduction affected the market in line with our expectations and resulted in an orderly renewal but with increased [rates]. We continue to believe that the highest demand for reinsurance capacity is Atlantic hurricane risk and as it has the largest demand, it offers the most attractive returns and ultimately we commit our largest capacity to this [peril].

Statistically with the renewals this year, we saw the largest rate increase on higher layers that have retained a significant portion of low layer business as even with smaller increases, it continues to most improve the returns of our overall portfolio. In general we estimate that overall ratings in the market increased by 10 to 20% on an exposure adjusted basis.

This time of year is relatively quiet for international [debt] and (inaudible) retro. So those books are largely unchanged from last quarter.

Moving over to (inaudible) we created a new sidecar called TimRe II which helped alleviate any supply shortages in Florida this year. Our added capacity was well received by the market and is fully utilized.

After the 7/1 renewals, we also purchased some additional retrospectional protection for our cat book to further enhance our overall portfolio returns and reduce the amounts of Atlantic hurricane risk in our in-force portfolio. With regard to specialty, we continue to see an increased flow of new business which is encouraging.

We remain disciplined and have been slow to add risk in this area as many of the deals are still offering insufficient returns or have broader terms than we were comfortable offering. We view specialty business much as we view our cat business, separating each line into returns (inaudible) estimated rate movements and opportunities.

We have seen some migration among the return profiles from the negative budget to the lower turn budget and from the lower turn bucket to the acceptable return one. However, we believe that more primary rate increases require us to see more of the acceptable business and grow aggressively into some of these lines.

We were happy with the progress we are making with our Lloyd's operation. We have been and will remain disciplined, writing business only at acceptable return levels which has resulted in our top line growth being slower than planned. Today we have gained good traction in the market and that's been well received by brokers.

I feel good about the position we have achieved in the first half of the year. Our balance sheets and ratings are strong and we have outstanding people and systems to respond effectively both to the improved marketplace and to meet our customers' requirements. At this point, I'd like to turn the call over to Bill Ashley.

Thank you Kevin and good morning. In individual risk, we continue to execute according to plan, building out internal capabilities and investing and developing talent to take advantage of opportunities in the marketplace.

During the quarter, we rebranded our US insurance operations from the Glencoe Group to RenRe Insurance to leverage the strength of the RenaissanceRe brand. We are already seeing some of the benefits of that rebranding.

Despite the decline in commodity prices relative to 2008, we experienced growth in the crop business driven by increased market share in targeted areas. The integration of Agro National continues to go well and agribusiness remains an area of targeted growth for us.

From a strategic standpoint, our multi-peril crop insurance business provides us with profitable diversification benefits while allowing us to leverage our strength at weather and risk modeling. We believe due to a combination of some disruption in the marketplace, and our responsive claim service and a difficult 2008 crop year, we will continue to see additional growth opportunities.

It is early days to determine the profitability of the 2009 multi-peril crop insurance book. As you know, eventual results will be primarily based on the prices and yields of corn and soybeans as they stand in October and November.

We're closely monitoring developments in the crop insurance arena relating to the renegotiation of the SRA for the 2011 crop year. While it is still too early to determine the eventual direction that the government will take, we look to adjust our strategy for this business accordingly.

Another growth area for us that we have been highlighting on recent calls is commercial property. We remain focused on building out our platform and underwriting and modeling capabilities to position us for attractive opportunities in this line. During the quarter, we completed staffing at our second office and now have both Atlanta and Hartford open for business.

Pricing for commercial property has been firming similar to what we've seen on the property reinsurance side and we're closely monitoring and evaluating opportunities. We're continuing to see some signs of pricing declines lulling off and in a few cases, firming in the primary casualty market, as there some companies that recently exited the program business. The market, however, remains competitive.

Overall then, we remain pleased with the continued progress we've made. Our recent strategic hires have begun to make valuable contributions. We're excited about growing and servicing our expanding client base in the US, bolstered by strong balance sheets and ratings. I will now turn the call over to our CFO, Jeff Kelly.

Thanks, Bill, and good morning everyone. On today's call, I will cover our second-quarter results, provide some additional detail on our investment portfolio performance and update our top line forecast for 2009. Let me begin with the highlights.

As Neil mentioned in his comments, we experienced strong underwriting results from the reinsurance segment, positive reserve development and significantly improved returns on our investment portfolio during the quarter. We reported net income of $271 million or $4.32 per share and operating income of $254 million or $4.05 per share.

As noted in the earnings release, operating income excludes net realized gains on investments net of other than temporary impairments on fixed maturity investments available for sale which totaled $17 million in the quarter. Our annualized operating return on equity was 39% for the quarter and 28% for the first six months of the year. Our book value per share increased 11% in the second quarter and was up 14% in the first half of the year.

I'll walk through the operating results, starting with the reinsurance segment. Reinsurance gross premiums written were up $68 million or 14% in the second quarter from a year ago.

This was driven by an increase of $94 million in the cat unit which benefited from improved market conditions. Cat premiums included $42 million written on behalf of our new sidecar, TimRe II, of which we retain a 17% ownership stake.

For the first six months of the year, managed cat gross premiums written are up 20%. The cat unit combined ratio came in at negative 9.5% driven by lower reported losses and $77 million of favorable loss reserve development.

The favorable development was principally driven by a reduction in our estimated ultimate losses for certain events including Hurricanes Gustav and Ike in 2008 along with reductions on a variety of smaller events. Specialty gross insurance premiums written declined by $26 million relative to a year ago.

The decline in specialty reinsurance premiums was primarily the result of the non-renewal and portfolio transfer out of our personal lines quota share contract. This contract resulted in $24 million of negative gross premiums written in specialty in the quarter.

As we've mentioned in the past, premiums in this unit are prone to quarterly volatility since it is composed of a relatively small number of large contracts. The specialty unit combined ratio came in at 72%, benefiting from $19 million of favorable loss development.

In individual risk, premiums declined 5% in the second quarter from the second quarter of 2008. This was largely attributable to our decision in late 2008 to eliminate some program manager relationships in the commercial property quota share contract and in the second quarter to reduce participation in a personal lines quota share contract.

The impact of the reduction in the quota share contract in the second quarter was a reduction of $12 million of gross premiums written. This was slightly offset by growth in our multi-peril crop insurance business which we'd anticipated.

Our individual risk segment came in at a 99.2% combined ratio for the second quarter compared with an 88.5% in the comparative quarter last year. The unit experienced higher reported losses in our commercial property business this quarter which drove the higher combined ratio.

Individual risk experienced just under $10 million of favorable loss development during the quarter. As you heard Neil mention, we did begin writing business through our Lloyd's platform in June although the operation had an insignificant impact on our results for the quarter.

You may have noticed a significant increase in our operating expenses for the first six months of 2009 versus a year ago. The increase reflects compensation and other expenses related to the expansion of our operating platform as well as a few one-time expenses which totaled $8 million.

Turning to investments, it's clearly nice to be able to report a quarter of strong performance after a number of difficult quarters. We reported investment income of $114 million and the total return for the portfolio was 2.5% for the quarter, driven by strong performance from our senior secured bank loan funds and other fixed income assets.

The strong returns were driven by the unusually large decline in spreads during the quarter. And while we are pleased with the investment performance during the quarter, we do not expect the magnitude of spread tightening that occurred during the quarter to extend into future quarters. As a result, and as I think Neil mentioned, we do not anticipate investment results of the sort we saw in the second quarter for the foreseeable future.

Our investment portfolio does remain defensively positioned. We took steps early in the fourth quarter of 2008 to reduce the credit exposure in the portfolio primarily by reducing exposure to non-agency securitized sectors. We continue to maintain a highly liquid profile in our investment portfolio given the continued economic uncertainty that exists.

However, as the credit markets began to stabilize during the second quarter, we reduced our allocation to short-term investments and put some cash to work in the longer duration sectors with modest credit exposure including FDIC guaranteed corporate securities and agency mortgage-backed securities. The duration of our investment portfolio remains low at 2.5 years although it is up from 1.3 years at the close of the first quarter.

We draw your attention to an accounting change this quarter with the adoption of FAS 115-2. This required us to take a cumulative effect adjustment in shareholders equity to reclassify certain other than temporary impairment charges previously taken through earnings.

This had no impact on our book value or previously reported net income or operating income. Our policy has historically been to recognize all of our available for sale fixed income securities that are in an unrealized loss position as other than temporary impairments.

We will now recognize impairment losses if we intend to sell securities, are required to sell securities or have credit related losses. Going forward, net that we expect our OTTI losses to be less than in the past given this new accounting standard.

Finally let me turn my comments to our guidance for 2009. As you heard Kevin mention, we were pleased with our strong renewals in June and July. Our managed cat premiums are up 20% year to date.

Given that our cat premiums are heavily weighted towards the first half of the year, we're raising our full-year guidance for managed cat growth to 20% from our prior forecast of 15% growth. As you may recall, our guidance is based on growth in managed cat premiums less reinstatement premiums and in 2008 reinstatement premiums were $60 million.

In specialty reinsurance, gross premiums written are down 34% year-to-date. As a result, we are lowering our top line guidance for specialty to a decline of 20% for the year which is down from our prior forecast of 20% growth. Keep in mind please however the volatility of premium volume in this unit that I mentioned earlier in my comments.

For individual risk, our prior guidance was for flat premium volume. Our best guess today is that we could see a modest decline for the year, perhaps in the area of 10%. With that, I'll turn the call back over to Neil.

Thank you, Jeff, and we would like to open the call up questions operator.

(Operator Instructions) Josh Shanker, Citigroup.

Two quick questions, really. One long and one quick. The quick -- the long question I guess is given that 7/1 renewals were probably not as good as some were hoping, I know that 6/1 is much more important to Renaissance, I was wondering in light of that how you see capacity in the marketplace.

And I realize 1/1 is a long way off but whether you think at this point right now there's a Lot of capacity in the market or you think that capacity is meeting demand. And the second question involves -- I wonder if you can talk a little bit about your investment portfolio and in terms of partnerships and funds, what sort of lag effects there might be going on to third quarter after a very nice Q2 2009?

Josh, good questions. It's Neill. I'll start off. You know, beauty is in the eye of the beholder in terms of the renewal periods.

With our strong market position and relationships, we have had good renewals. So it's I think some of our competitors maybe that have had a renewal situation that wasn't quite to their liking as much as ours were. So I just wanted to throw that out and turn it over to Kevin.

I think Neill summed it up well. I think we did a very good job of estimating how the 6/1 and 7/1 renewals would plan out in our planning for the year. So I didn't -- if others were experiencing surprises as to how the renewals shaped up, it's not a view that I would share.

As far as the supply or demand going forward, I think there's a long path between now and 1/1 which is the next major renewal date. So much can change that it's difficult for us to predict what's going to happen then, I would say. But where will be kind of -- my view is that with the information we're able to collect, we will be in a good position going into the 1/1 renewal to have (inaudible) what happened 6/1, 7/1.

Do you think there is a lack of -- a lack of capital out there in the market for the business?

Well I think if you look at -- as far as I'm aware, everything 6/1 and 7/1 was fully placed. So I think that there was some price increases but I think it's just a healthy market where it's the normal give-and-take with the right amount of movement, more supplies is provided into the market.

Okay, that's great. Thank you. And on the timing of recognizing investment gains?

Yes, Josh. The way I would answer that is we are current on all of our investment results. There are a few out there that we don't get timely reports for. And to the extent that we don't have those, we use the ones that we do have to estimate returns. But basically, we are comfortable that all of our returns are current.

Doug Mewhirter, RBC Capital Markets.

I just had one question regarding the TimRe II sidecar. Could you remind me what the tenure of the sidecar is with your investors? Is it a three-year sidecar or a one-year?

That's a good question. While we have other joint ventures such as Top Layer Re and DaVinci that we perceive as perpetual, TimRe is for a specific circumstance and it's a rifle shot, it's one-year tenure.

Okay and you mentioned that it is full up in its capacity, $43 million are premiums?

That's right.

Okay. That's all my questions. Thank you.

(Operator Instructions) Ian Gutterman, Adage Capital.

Hey, I just had a few numbers questions. I guess first -- I don't know if this one qualifies as numbers. But on the Spectrum acquisition, can you give us some kind of sense of what you paid? In one of the trade journals, it said you paid $700 million which sounds crazy. So, I was wondering if you could clarify that. I don't know if you saw that report.

I didn't see that. If we paid $700, I would lose my job. (multiple speakers)

No, we're not disclosing that. Sooner or later, it will double be disclosed but it's a relatively modest amount of money.

Okay, that's what I was hoping. Specifically on TimRe, could you just help me understand on the managed cat numbers, that whole number is within managed cat, right? Even though only part of it is RenRe premium, correct?

That's right.

Okay, because it was a little unclear in the presentation. I wasn't sure. The other one that I had trouble with is the earnings calculation. When I just divided your operating and net income by the numbers of shares reported, I get something that's about $0.10 off. Is there some kind of adjustment that needs to be made?

Yes, I'd say there will be a reconciliation of that and it's going to be in the 10-Q that we're going to file this afternoon.

Is it the share difference or is it that adjustment to the earnings for that accounting change?

It's actually about the dilutive effects of restricted stock.

Okay, okay. I know what you're talking about. Okay. Then on the accident years for both specialty and individual risk were over 100. I'm guessing there were some large losses in there. Is there anything you could talk about?

On specialty, I guess in particular, there were two losses, two events. One was in aviation, one was a surety loss that accounted for about 19% -- or 19 points on a loss ratio.

So as we said. it's a business with a small number of large contracts that -- it impacts it on the premium side, also on the loss side. So the impact of those two was the primary driver of the increase in the loss ratio.

Okay, that make sense. Anything on the individual side? Maybe any of the programs [outperformed] adversely or --?

Sure, the program business actually performed very well. We had a commercial property rather large loss that came in in a couple instances.

Okay and then I guess -- I think the last one I have. Can you just talk little bit more about that personalized quota share that I guess you transferred out and sort of -- is that just you needed the capacity to right wind that you liked better or was there something that concerned you about that contract? Just a little more detail.

Are you talking about the portfolio transfer out (multiple speakers)

Right, right.

That was a deal that actually we wrote I think it was two years ago originally that we didn't have an expectation it would be a long-term deal. It was a -- so something that upon restructuring, the economics of it were no longer attractive to us.

I think it's important that not only can the deals be lumpy, but we can change the composition of the specialty book pretty dramatically just by taking a deal out or putting a deal in. So I think it's just something to expect from time to time.

Okay, great. I think those are all I have. Thank you very much.

Josh Smith, TIAA.

Thanks for taking the question. Firstly there's been some concerns about drought in Texas. Can you just -- I know you've written a modest amount of premium there on the crop. Can you just talk about how that's going to play out and sort of size when we find out whether that's a big deal or not? I don't think it is but if you could just speak to that?

Sure, sort of specifically on Texas without getting into numbers, what we did or didn't do in Texas for our (inaudible) strategy. We actually saw the drought coming, forecasted through our weather predictive analysis that we did earlier in the year.

So, just have to trust me for now that we changed our seed strategy accordingly to what we thought would be forecasted in the future there. So we're actually pretty happy with our decisions there.

Okay.

As you know, all these crops are (inaudible) the ground, production plays a part of it as well [in the yield part] as opposed to just the price verticals too (inaudible) both sides of that (inaudible)

Can you just tell me when we would typically find out the results of let's say the cotton crop in Texas, which quarter that usually happens in?

Sure, it's starting to happen now, will happen through the third quarter. But actually that cotton book in total is such a minor portion of our portfolio, you won't really see the total impact of the multi-peril crop results until they all come out of the ground and are noted more towards the end of the year.

Got it. Then I guess just the last question is what is the thought process between doing something like TimRe or just writing more business yourself and keeping all the profits and (inaudible) the risk as opposed to doing things like TimRe and then writing more business and then buying retro in the back end?

It's actually the same process. We're looking at it as just as to how the returns look on the net portfolio we are retaining. And depending -- we're somewhat indifferent as to what structures we use to achieve the net portfolio we're looking for.

So it's purely an optimization we're running. It's not a -- we don't have a specific set of guidelines that guide us to one or the other. It's the opportunity set for where we can see seed risk and then the economics of the [session] based on the gross portfolio that we have.

So the economics would not be materially different, I can surmise, from doing it on your own and buying it retro as opposed to doing the sidecar?

I wouldn't make that conclusion. I think different people are going to have different portfolio constructions. So it's something that may relieve a lot of tail capital for us, can have a material effect on the overall returns of our book and still offer our investors or our seedants very attractive returns.

I would add this comment as well. We know that there's capacity problems in Florida and with our market position, we to try to bring capital to bear to help out the situation.

(Operator Instructions) There are no further audio questions. I would now like to turn the conference back over to Neill please.

Thank you operator. So in closing, I'd like to say that I'm pleased with our positioning for future opportunities. We have added depth and breadth to our already strong team and we are excited about the future. We look forward to talking with you next quarter. Thank you very much.

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