濱特爾 (RNR) 2010 Q2 法說會逐字稿

Good morning. My name is Wes and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe second-quarter 2010 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)

Thank you. I would now like to turn the conference over to Mr. Peter Hill. Please go ahead, sir.

Good morning. Thank you for joining our second-quarter 2010 financial results conference call. Yesterday after the market close, we issued our quarterly release. If you did not 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 from approximately 11.30 a.m. Eastern Time today through midnight on August 11. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The passcode you will need for both numbers is 81529862.

Today's call is also available through the investor information section of www.RenRe.com and will be archived on RenaissanceRe's website through midnight on October 6, 2010.

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 on RenaissanceRe's SEC filings, to which we direct you.

With me to discuss today's results are Neill Currie, Chief Executive Officer; Jeff Kelly, Executive Vice President and Chief Financial Officer; and Kevin O'Donnell, Executive Vice President and Global Chief Underwriting Officer. I'd now like to turn the call over to Neill.

Thank you, Peter. Good morning, everyone. The second quarter was relatively benign in terms of catastrophe activity, and this together with continued favorable reserve development and strong underwriting profits resulted in another good quarter for RenRe. We achieved an annualized operating return on equity of 18%, and book value per share increased by 5.8% during the quarter.

Three recurring topics of discussion through the quarter have been the Florida renewals, the anticipated increased storm activity for this year, and the impact of the continued soft market environment in many lines of business. So let me give you my comments on our position vis-a-vis each of these.

Starting with the Florida renewals, which is always the main focus during the second quarter for us, we saw a continuation of many of the trends that began earlier this year. That is that there was adequate capacity and somewhat reduced demand for reinsurance. While pricing was down relative to a year ago, returns for the property catastrophe business overall remained healthy. Our strong market position with brokers and clients in Florida allowed us to build a quality portfolio generating acceptable returns on an expected basis. Kevin is here today to give more detail on that, as well as our specialty and insurance businesses.

Turning to the expected increased event frequency for this wind season, our team of scientists at WeatherPredict concur that we can expect a higher formation frequency along the Atlantic coast and in the Gulf. Seasonal frequency fluctuation is just one of the many inputs we take into consideration when pricing our business. We invest heavily in systems, science, and underwriting expertise to construct our portfolio of business so that our customers can rely on us to help them manage their catastrophe exposure.

We are both willing and able to provide capacity for our customers when they need it the most. From time to time, we will experience earnings volatility, but it's our business model to accept that volatility if we are adequately compensated for doing so. Our consistent presence in the marketplace has been central to our ability to achieve the kind of record we have over time.

Regarding the challenging market environment, it is deeply embedded in our culture to be disciplined. Our focus has always been on the bottom line, not the top line. We have an experienced, talented management team that has successfully managed through cycles like this before. In May, we announced the appointments to our executive committee of Ross Curtis, Chief Underwriting Officer of our European operations; Aditya Dutt, Head of our Ventures Team; Jon Paradine, Chief Underwriting Officer of RenRe Limited; and Mark Wilcox, our Chief Accounting Officer. Each of these executives have considerable experience and insight which they've gained over long careers in the industry.

In terms of other aspects of our business, our insurance operations performed well during the quarter, particularly given the intense competition in many primary lines. Earlier this month we joined with other crop insurance companies to sign the new standard reinsurance agreement proposed by the RMA. The takeaway here is that despite the new changes, this business continues to generate acceptable profitability and to enhance the return profile of the portfolio overall.

Our investment income was less of a contributor to operating income than in recent quarters. However, we manage our investment portfolio to support the risk we take on the underwriting side, which is the most important engine of our profitability.

Lastly, we are focused on continually improving our operations and laying the foundation for the future. To that end, we expanded our Lloyd's platform through key transfers and hires, and have continued to upgrade systems and infrastructure there.

In conclusion then, we had another good quarter. We continued to execute on our long-term objective of generating attractive returns in growth and book value per share for our shareholders. We have an attractive book of business. We believe we are being paid appropriately for the risks we are taking, and we feel we are very well prepared for the season ahead.

So with that, let me turn it over to Kevin.

Thanks, Neill, and good morning. I will update you on the reinsurance segment including cat, specialty and Lloyd's, and then follow with a discussion on our insurance segment. As Neill mentioned, most of the emphasis in the quarter in the cat reinsurance book was around the Florida renewal. There was a continuation of the trend that began in the first quarter, and we saw increased competition during the June and July renewal season.

We estimate that the reinsurance market supply was consistent, but the demand for reinsurance capacity purchased was down just under 10%, resulting in a lowering of the market clearing price. Additionally, we saw more competition for insurers with better credit worthiness and more price competition for higher layer business than for lower layer business.

The financial health of the primary Florida home insurers remains a concern. We have always looked at other risks incorporated into deals and are pleased to see additional market emphasis on credit risk at this renewal. We worked with our brokers and customers to structure transactions that addressed the transfer of credit risk, and we believe allowed for an orderly renewal with good reinsurer support.

It is important to keep in mind that most homeowners' companies have taken steps to increase their returns through rate increases, more careful underwriting, and reinsurance, and we believe that they are on a path to obtaining rate adequacy and becoming more stable.

Overall, we are pleased with the book of business that we were able to construct. Our book looks largely like it did last year with a higher marketshare of smaller losses than larger losses, and continues to produce strong returns.

Of course, we have sensitivity-tested our portfolio by adjusting for increased seasonal frequency, and the adjusted portfolio continues to produce adequate returns.

Through the second quarter we were able to enhance our overall portfolio with the addition of some retrocession protection for our cat book. Overall, we think of ourselves as portfolio managers and will buy or sell at any time if we see that those changes to the portfolio enhance overall returns.

With the assistance of our tools and very experienced underwriters, I believe that having the flexibility to buy or sell risk at any time is the best way to create superior portfolios and optimize returns.

We did not make any adjustments to our loss estimates for the Chilean earthquake or for European windstorm Xynthia. We were hopeful that the Chilean loss would create opportunities, and while we did see price increases for Chile-only covers, we still did not find many opportunities that met our return hurdles.

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 are comfortable offering. While we continue to closely look at lines of business in which pricing and terms have improved in the aftermath of the financial crisis, we have written very little of this business.

We did not experience meaningful losses related to the Deepwater Horizon oil rig disaster, but did make a loss provision. We will evaluate opportunities that may arise following this event.

We are happy with the progress we are making with our Lloyd's operation where we continue to expand modestly in property and specialty classes. While growth has been slower than our initial plans, our Lloyd's platform represents a long-term strategy and has access to business which is written to that market.

In our insurance segment, we continue with the process of evaluating strategies and aligning our underwriting processes across the Company. I will divide my comments first to discuss our crop insurance business and then give an overview of the primary P&C business.

The majority of the annual crop insurance premiums we write are reflected in the second-quarter results as contracts incept in June. The increase in crop insurance policy count was partially offset by lower commodity prices, which is stipulated in the contracts.

The final version of the SRA did incorporate some improvements for insurance companies compared to prior versions, but is not as beneficial as the expiring SRA. We evaluated the impact of the new SRA for next year, and feel very comfortable with the profile of our book. Over the last 12 months, we actively worked to rebalance our portfolio, spreading our risk within Group 1 and adding more Zone 2 business, which will prove beneficial under the new SRA.

Additionally, we tirelessly focused on the efficiency of the group and believe that we are well positioned from a profitability perspective. Most importantly, we've not comprised on our service, account manage and product delivery, which has helped keep us as a preferred provider. Our initial analysis suggests returns on this business remain adequate, and it continues to enhance the overall return profile of the group portfolio.

It is early days to determine the probability of the 2010 multi-peril crop insurance book. Our results will primarily be based on the prices and yields of corn and soybeans as they stand in October and November.

Turning to our P&C insurance business in the US, the marketplace remains competitive and we're focused on classes of risk that meet our return hurdles. We continue to take steps to reshape this portfolio and position it for long-term profitability.

We've targeted several programs for improvement, and all of these discussions with our partners are progressing well. Additionally, we have modified our ceded structures for both the agricultural business and the partner business, which has enhanced returns to the group.

In the competitive market, it becomes far more important to be diligent in terms of modeling, selecting the right risks, and managing capital. We believe we have the right people and tools in place to continue to put together an attractive book of business.

Thanks, and I turn the call over to Jeff.

Thanks, Kevin, and good morning, everyone. On today's call I would like to go over the second-quarter financial results and also provide an update to our topline forecast for 2010.

We reported another quarter of solid operating results, again benefiting from meaningful favorable reserve development in cat and specialty reinsurance, and generally benign loss experience. Investment income was hurt by declining yields and weaker returns on alternative assets, although lower interest rates did result in sizable realized and unrealized gains during the quarter.

We reported net income of $210 million or $3.66 per share, and operating income of $140 million or $2.40 per share. Our annualized operating ROE was 18% for the second quarter, and our tangible book value per share including change in accumulated dividends increased 6.3%.

For the first half of the year, we generated an annualized operating ROE of 16%, and book value per share including change in accumulated dividends increased 11.3%.

I will walk you through the operating results, starting with the reinsurance segment. Managed cat gross premiums written declined 12% compared with the year-ago period. For the first half of the year, managed cat gross premiums written declined 12%, excluding the $30 million of reinstatement premiums related to the Chilean earthquake and windstorm Xynthia.

The topline decline was primarily a result of softening market conditions during the mid-year renewals, and our decision to exit treaties did not meet our return hurdles. Managed cat includes cat premiums written by RenRe, DaVinci, Top Layer, and our Lloyd's unit.

The first-quarter combined ratio for the cat unit came at a negative 0.4%, driven largely by favorable reserve development and benign weather. Reserved releases for the cat unit totaled $61 million and lowered the combined ratio by 35 points. Of this amount, $34 million related to a re-estimation of losses for mature large events, $11 million was from more recent large events such as the 2004 and 2005 hurricanes, and the 2009 Australian floods. The remaining $16 million of reserve releases related to a number of smaller events.

For the first six months of the year, the cat unit combined ratio came in at 50.6%. Managed specialty gross premiums written totaled $13 million in the second quarter compared with negative $3 million in the prior-year period. Excluding the impact of the nonrenewal and portfolio transfer out of a personal lines quota share contract in the year-ago period, managed specialty gross premiums written declined 35%.

The current quarter figure includes $7 million of premiums written by our Lloyd's unit. For the first six months of the year, managed specialty gross premiums written increased 40% with the year-ago period. As we have mentioned in the past, premiums in this unit are prone to quarterly volatility since it is dominated by a relatively small number of large contracts.

Underwriting results for this unit benefited from $20 million of favorable reserve development, which related largely to business written during the underwriting years 2008, 2005, and 2004. We did set up a $15 million loss provision for the Deepwater Horizon loss related to the potential for excess casualty reinsurance claims, although we have not received any client notices up to this point. The specialty unit combined ratio was 74.4% in the second quarter and negative 41.2% in the first six months of 2010.

Our Lloyd's unit generated $35 million of premiums in the second quarter. This consists of approximately $7 million of catastrophe premiums, $7 million of specialty premiums, and $21 million of insurance business. The Lloyd's unit generated a profitable combined ratio of 95.5%. We would expect continued expense ratio improvement as the premium volume increases here.

For our insurance segment, gross premiums written increased 11% with the year-ago period. The increase was largely driven by the expansion of our crop insurance business, for which premium volume increased 12% during the quarter. A higher policy count in the crop business was offset partially by lower commodity prices as stipulated in those contracts.

The second-quarter results tend to reflect the bulk of our annual crop insurance premium renewals due to our focus on corn and soybean crops. Net premiums written declined 15% relative to a year ago, as the result of premium cessions in the crop insurance business.

For the first six months of the year, insurance gross premiums written increased 5% from a year ago. The insurance segment came in at a 93.7% combined ratio for the second quarter. The segment experienced $5 million of favorable reserve development. For the first six months of the year, the insurance combined ratio was a profitable 91.2%.

Moving away from our underwriting results, other income was a loss of $3 million in the second quarter. This was driven by a $1.7 million decrease in the valuation of the platinum warrants the Company holds, which are mark-to-market, and a $1 million loss from other assorted items. RenRe Energy Advisors Limited, our weather and energy derivative-based risk management business, also had a loss of $500,000 for the quarter.

Other operating, our operating expenses totaled $50 million in the current quarter compared with $47 million in the year-ago period, with the increase largely attributed to higher headcount and compensation.

Turning to investments, recurring investment income was hurt by declining yields on our fixed maturity portfolio and weaker alternative asset returns. We reported net investment income of $28 million, and there was no net contribution from our portfolio of other investments. The total rate of return on the portfolio was 1.4% for the quarter.

Net realized and unrealized gains totaled $71 million during the quarter. Of this amount, $48 million of unrealized gains related to appreciation and fixed income securities now designated as trading rather than as available-for-sale, as we have continued to transition our investment portfolio to that accounting treatment.

Our investment portfolio remains conservatively positioned with high liquidity and modest credit exposure. During the second quarter, we continued to modestly increase our allocations to US Treasuries and investment-grade corporate bonds, while reducing our exposure to agency residential mortgage-backed securities and FDIC guaranteed corporate debt.

The duration of our investment portfolio ticked up slightly to 2.8 years, but remains relatively short, and the yield to maturity on fixed income and short-term investments dropped slightly to 2%. The average credit quality of our fixed income portfolio remains high at AA, with 67% of our fixed maturity securities rated AAA.

On the capital management front, we repurchased 3.7 million of our shares in the second quarter at an aggregate cost of $208 million. For the first six months of the year, we repurchased 7.4 million shares for a total of $411 million. We expect to reduce the pace of share repurchases over the duration of the wind season in the third quarter to maintain additional dry powder.

Following the close of the second quarter, we reached an agreement to sell our stake in ChannelRe for a total of $16 million. Recall we had written down the value of our holding in ChannelRe to zero in the fourth quarter of 2007. As a result, we will book a one-time $16 million gain in the third-quarter results, which will impact net income but not our operating income.

Finally, let me provide an update to our guidance for 2010. For managed cat, which includes premiums written on behalf of RenRe, DaVinci, Lloyd's and Top Layer Re, we continue to expect premiums to decline approximately 10% in 2010.

In managed specialty reinsurance, we are maintaining our prior guidance of up in excess of 20%. In insurance, we would expect premiums to be down around 10% for 2010, driven by a likely decline in our non-crop premiums, market softening, and continued efforts to realign our underwriting processes.

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

Thank you, Jeff, and we're available for questions.

(Operator Instructions) Josh Shanker, Deutsche Bank.

Thank you. Good morning, everyone. I wanted to talk about the reinsurance and primary cede, and a little bit about where markets are. And not to use the word -- it's somewhat a dirty word -- but the extent to which market changes are allowing you to arbitrage opportunities and become more profitable.

Okay, I think we would look at the risk that we are keeping from a net perspective. And if we can buy or sell and build a net portfolio that produces more expected profit, we will do that. I think an arbitrage is sometimes used in a way that has kind of bad connotations associated with it.

It's our hope that when we trade with people, it's a deal that is accretive to them because of the construction of the portfolio that they have, but is accretive to us because of the construction of the portfolio we have. Otherwise, it's not going to be a lasting partnership.

I think we have a very good understanding of the risks that we are taking, so we have a high degree of clarity as to how our portfolio changes with ceded, and there are different times where more ceded is available. I think we're moving into a part of the cycle where we're hopeful that more continues to be available.

Is there any way to describe how exposure has changed compared with a year ago?

The way -- I think one of the things I said is the book I just renewed was Florida, and our book looks largely the same as it did last year. We tend -- which is not a desire of the way we build the portfolio, but an outcome from the opportunities that we see -- that we have a larger percentage marketshare for smaller losses than larger losses.

Overall, we look at our book in many different ways and we are not in violation of our internal risk measures, obviously, or any of our rating agency measures. So from that perspective, I would say that we are equally comfortable with the portfolio this year as compared to last year.

So risk hasn't meaningfully declined from a year ago?

Our net risk is -- I think it's difficult to put it into that context because I think you are probably thinking Atlantic hurricane, and I am thinking of the overall construct of the portfolio. We measure our returns based on the return on required capital. The return on required capital was down slightly from last year to this year, but the book still looks very, very attractive from a historical perspective.

Okay, my other question relates to the favorable development. Can you describe the sources a little bit?

In which area, Josh?

We will take the top down. Look, there's been a lot of favorable development for a number of quarters in a row. It's always a pleasure to see, but it's always difficult to forecast. So I'm trying to become smarter about it from your perspective, so any color you can add is welcome.

Yes, I think there's some -- there's a description on that on page 2 of the release, but probably the largest single component of the reserve releases this year was in our cat unit, and it related to some older, more mature events. I think about $34 million of the $61 million in the cat unit related to these older, mature events.

As I said after the first quarter, we regularly do an in-depth analysis on certain portions of the reserve. This quarter -- or last quarter we chose to do that on these events. We engaged an independent actuarial firm to help us look at those, and they brought I think a fair amount of industry data and knowledge to bear in our evaluation of those. And we concluded that we did not need all of the reserves that we had held against those older events to support those.

When you say older events, is there any way to be more precise? '04, '05 hurricanes, or what in particular?

No, these would relate to some European windstorms as old as 1999, and up through it would include the World Trade Center, some reserves that we had against World Trade Center losses, and even European windstorm Erwin in 2005. So roughly that time period. It was a series of actually a fairly large number of events that the reserve release was related to.

And reserves for the hurricanes over the last few years have generally remained stable?

The reduction as it related to '04 and '05 was $11 million, so those -- we think those hurricanes are mostly fully developed, but we do have our reserves remaining against the 2004 hurricanes of $15 million and $50 million -- $57 million of reserves remaining against the '05 events. Hurricanes, I should say.

Well, thank you. That's great additional color.

Doug Mewhirter, RBC Capital Markets.

Hi, good morning. I just had a couple questions, a couple of different subjects. First of all, do you have or could you remind me what I guess your official Lloyd's capacity for this year is that you are approved for?

Yes, we are in the process of doing a new one, so I'm trying to remember what the in-force one -- it's just about $100 million.

About $100 million?

Yes.

Is there a seasonality or I guess less seasonality to your Lloyd's business than your regular reinsurance business, where it's a little more evenly spread out through the quarters rather than being concentrated in the first and second quarter?

Yes, I think it depends on the book in which we are writing. So one of the components of it is we are writing some cat business, some cat reinsurance business, that will be largely the same as the reinsurance profile that we have within limited.

The rest of it is -- should be more evenly spread. We are writing a D&F book there that has different cyclicality than the cat stuff, and then the specialty lines on the insurance side are more evenly spread throughout the year. On the reinsurance it's concentrated potentially a little more in the summer months than the cat book.

So when you add all those lines together, it should be a smoother earning -- or profile of written premium than what we have in the reinsurance company.

Okay, that's helpful. My second question deals with crop insurance. You said you had a higher policy count this year. Was that -- I'm unfamiliar with the dynamics of how you would bring in business in crop insurance in general. Would they -- I guess your brokers more aggressive with marketing, or whether there more people coming to you, or is there certain -- I'm just -- are you contracting more business intentionally or is it just -- was this sort of a natural flow of business into your --?

No, we were actively looking to change the profile of the book. Business comes to us through agents, so a lot of it is building relationships with agents in new geographies. So it wasn't as if we took down the peak that we had within Zone 1, as much as it was we looked to build more spread within Zone 1 and then go out and make new relationships and have access to new books within Zone 2, is the predominant difference.

Okay, and last question deals with -- I just noticed in your investment schedule that you have been I guess gradually increasing your allocation of cat bonds, which I think you explained a while back that is indistinguishable from reinsurance in terms of how you treat it. It's less of an investment than it is an insurance contract.

Given that you seem to be building your portfolio there, is that saying something about the pricing of cat bonds relative to high layer, I guess, custom reinsurance contracts where it seems to be more favorable?

I think going way back when the first cat bonds were out, we were one of the largest players in the cat bond area. It's an area that we have a lot of expertise in understanding the underlying risk, whether it's based on indemnity or parametric or other indexes, so we can bring that expertise to the market.

I wouldn't say we are seeing a fundamental shift within the cat bond market. It's just the way our portfolio is constructed, we've seen more opportunities that naturally fit within the book that we've had. So I wouldn't say it was a fundamental shift. We are -- we understand the risks very well, we understand the structures very well, and it's more that there's been a few more opportunities that are accretive to the overall portfolio.

Okay, thanks. That's all my questions.

(Operator Instructions) Brett Shirreffs, KBW.

Good morning. I was wondering if you could talk a bit about why exactly your outlook for the crop business changed. I know in the first quarter you kind of said the writing would be reduced, but clearly that changed in the second quarter here.

Yes, I think these things are always difficult to forecast. It's a matter of the fact that we have lots of things changing with the -- depending on whether -- I think previously we've talked about acres, we've talked about policy count, and we've talked about premium.

It's a difficult thing to get a handle on because of the way the volatility and the prices are set by the MRA through the SRA. And I think all in all, it's a book that we would like to continue to see grow, and we were successful in some of the efforts that we put forth, probably more successful than we originally anticipated.

Okay, great. Just one other follow-up on the investments. Where are you guys looking to put new money now, with your Treasury holdings up so much?

Well, we are actually really comfortable with where we are right at the moment. I guess I would say that fundamentally, we think that interest rates are so low and credit spreads have narrowed so much that we just don't see a lot of upside in taking on much in the way of fixed income risk here.

So I'd just remind you, we do manage the portfolio on a total rate of return basis, so our investment strategy is really focused on the expectation for total rates of returns in those sectors, not necessarily yield.

So we are constantly talking to our external investment managers, reviewing our allocations internally, but basically we like where we are right now. We don't -- as I said, we don't think there's a lot of upside to be had by taking on much more risk or much more duration, much more credit risk or more duration.

Okay, great. Thanks very much.

(Operator Instructions)

Operator, if there are no more questions, we would just like to thank everyone that dialed in today, and look forward to talking to you again at the end of October. Thank you very much.

Ladies and gentlemen, that concludes the RenaissanceRe second-quarter 2010 earnings conference call. We appreciate your time. You may now disconnect.