濱特爾 (RNR) 2011 Q3 法說會逐字稿

At this time I would like to welcome everyone to the RenaissanceRe third quarter 2011 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 call over to our host, Mr. Peter Hill. You may begin your conference.

Good morning, and thank you for joining our third quarter 2011 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 a copy. There will be an audio replay of the call available approximately noon Eastern time today, through midnight on November 23. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The passcode you will need for both numbers is 17212832. 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 January 11, 2012.

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, which may shape the 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, Executive Vice President and Chief Financial Officer; and Kevin O'Donnell, Executive Vice President and Global Chief Underwriting Officer. I would now like to turn the call over to Neill.

Thank you, Peter, and good morning, everyone. In the third quarter, RenaissanceRe produced an annualized operating return on equity of 4.4%. And book value was up 1% compared with the prior quarter. Our underwriting results were relatively good, although investment performance suffered as interest rates reached historical lows, and private equity performance was poor during the quarter. We continue to have a short duration, high-quality liquid portfolio that supports our underwriting activities. Our third quarter losses were modest, despite an active hurricane season in terms of storm formations. There was only one U.S. landfalling hurricane, Hurricane Irene. The past nine months have featured a number of large insured losses, but by the same token they have highlighted the real value of reinsurance.

Our business is about being prepared for years like we have had recently. We model potential outcomes and capitalize the Company accordingly. The product that our customers buy is our promise to pay their claims. Meeting this promise is the cornerstone of our business and the driver of the effort we spend understanding the risks that we accept and managing capital appropriately. Not only do we pay claims, but we do so with market-leading speed. And this, along with strong relationships and our leadership position in the catastrophe reinsurance space, continues to provide us with access to the most attractive business.

On the last two calls, I have referred to our expectation that we would see a gradual firming over time in the property catastrophe market. We continue to believe this will be the case driven primarily by a deeper understanding among underwriters of the potential for large loss activity, and the continuing adoption of the new vendor models. We also believe the low interest rate environment will focus others on underwriting profit, which is always a good dynamic for improved pricing. Discussions around the model changes continue. As we have mentioned many times before, we commit significant time and resources to having a sophisticated proprietary view of risk.

Ultimately though, models are only one component of our risk-evaluation process. We look at each client's risk exposure on a standalone basis and treat each client's circumstances as being unique, because it is unique. The other important input into our view of risk, of course, comes from the actual loss events themselves, from which we learn and recalibrate. Risk-based pricing, or reflecting exposure to the best of our ability, requires underwriting experience and a deep understanding of our client's risk, as well as good models. That has always been our approach since we started RenaissanceRe.

To summarize, 2011 has seen numerous cat events, and we've been busy doing what we are in business to do. We construct our book of business with a long-term view allowing us to withstand the kinds of volatility we have seen over the past few months. We are rewarded for the risk we take over time. Our capital position remains very strong, and our specialty reinsurance and Lloyd's operations continue to strengthen, broadening the product offering to our clients, and positioning us for attractive opportunities when they come. In light of our leading market position and the promising prospects we anticipate for 2012, we are well-positioned to grow our book of business.

Now I would like to turn the call over to Kevin.

I always look forward to the third quarter investor calls. It not only signifies the end of the U.S. hurricane season, but it also is time when we look towards the future and structuring our book for the upcoming year. Before discussing our view on the market, I would like to update you on the progress and developments in our various books of business, starting with our other businesses first, and then moving on to cat. I want to spend more time on the cat book and the losses of past year.

Starting with our ventures team, as part of our annual strategy review, we consolidated the reporting of this group to be consistent with all of our risk-taking enterprises. In everything we do, the emphasis should be on the underwriting businesses and ensuring that all of our risk-taking activities are aligned with the Chief Underwriting Officer. I'm excited about this change in reporting for the ventures unit and look forward to working more closely with Aditya and his team.

The venture team is doing well and our focus over the next 12 months will be on evaluating new opportunities, maintaining and strengthening our joint ventures, and managing our weather and energy business. We're very happy with the success of the ventures team and look forward to continuing to develop our franchises in these areas.

Moving to our more insurance and reinsurance related exposures. I will first touch on Lloyd's. We continue to be pleased with the development of our Lloyd's platform and with our decision to organically build the syndicate, in lieu of purchasing an existing franchise. As for their goal when we started the platform about 2 years ago, we have built a strong underwriting team with a good risk culture, and are growing in accordance with our expectations. We anticipate that as we grow, our financial ratios will continue to improve. And we believe that we will achieve profitability within the next 18 months, which is consistent with our original plan. We are well-positioned for 2012, with strong teams in our targeted lines and feel confident about our ability to execute in the market.

Our business in Bermuda is doing well. The specialty team is successful finding opportunities in what is a very difficult market in most lines. Our strategy in specialty is to build a flexible platform so that we can quickly take advantage and grow in specific lines when the opportunities present themselves. We remain disciplined and patient, however, with the view that we are more comfortable missing an opportunity in this market than rushing and taking the wrong risk at the wrong time. This strategy has served us well in the past and is consistent with our risk culture, allowing us to realize more than $1 billion of underwriting income from our specialty business over the life of the firm.

Finally, let me turn to our cat businesses. Although we have had relatively active year -- 18 months, actually. I am pleased that outside our exposure to Irene, the losses aggregate contracts. The third quarter was a relatively light one for losses. The big story for the year has been how the losses -- loss development and model changes will influence the future of the market. With regard to the losses, we are comfortable with our books construction both on an inwards and outwards basis. Jeff will discuss the specific movements of the events in more detail. But I would like to comment on our loss estimation process and reinsurance protections.

With each of the losses, we do both a top-down and bottom-up analysis to help us estimate the losses of each of our customers and how that rolls up to us. We physically review files, use our proprietary system to generate deterministic events to estimate losses, and then consult with WeatherPredict, which reconstructs the event and provides us a detailed analysis of the physical attributes of the event, further aiding our assessment of the damage.

For example, in estimating the Japanese earthquake, we had WeatherPredict map our largest exposures against the high-resolution satellite images to assess the impact of tsunami inundation and shake damage. This allowed us to estimate losses before we had any information from our customers. Simultaneously, we are assessing individual account exposure. This two-pronged, top-down and bottoms-up approach ultimately led us to the estimates that we posted.

Now that we have more information, it is not surprising to see our losses are moving around a bit. With the strong preliminary work that we did and the structure of our ceded book have resulted in these changes to the underlying events to be largely offsetting by the time we estimate our net economic impact. Of course for an event that's unprecedented as the Japanese earthquake, further development is difficult to predict.

The losses of the last 1.5 years have consumed a lot of capital, both the reinsurance and insurance markets. In the large losses associated with the events in Chile and New Zealand, and to a lesser extent, Japan, we saw a significant portion paid by reinsurance companies. A greater percentage impact than for similar sized U.S. losses. The U.S. losses have been frequent but relatively small, and therefore largely retained, except for aggregate contract supply.

We have reviewed our model for North Europe, and have found that many of the enhancements appearing in the new vendor model, such as clustering, were features we already developed several years ago. Our view of risk in that region, therefore, remains unchanged, resulting in our continuing to be seen as a differentiated player. With the combination of the losses, and the North Europe model changes, we feel there is some opportunity for the market to increase price. To date, international rate increases have been limited to areas with losses. About 60% of our international primary reinsurance book is comprised of private players, providing good customized protections for our customers and a strong base to build our portfolio, regardless of market conditions.

In the U.S. market, much of the discussion has been focused around model changes rather than losses. Which is ironic given the losses this year are comparable to the large losses of the past, all of which generated considerably more comments. For our own part, we have evaluated the impact of these model changes. In many cases having previously incorporated the revisions to the release as part of our own robust risk analysis process. This level of sophistication around modeling has allowed us to collaborate effectively with our clients, helping them to solve the challenging transition to the new risk paradigm. As the latest vendor models are adopted more broadly in the lead up to January 1, I believe the market will continue transitioning to the new risk paradigm, which may be reflected in an ongoing trend towards rate increases in the US.

Additionally, we're beginning to have more substantial conversations with our customers and brokers about products that will allow US insurers to reduce the burden of aggregate losses to their financials, and are hopeful that these discussions will lead to increased opportunities for us.

Finally, I will touch on the retro market, which can be particularly difficult to predict. I think we will have increased opportunities in this market due to the loss experienced in the international events. We are well-positioned to execute in this market, but will, as always, remain disciplined. I think the biggest competition will not come from other players, but from increasing amounts of retained risk by our customers, in lieu of paying higher prices.

Thanks and I will turn the call over to Jeff.

Thanks, Kevin, and good morning, everyone. On today's call I would like to go over our results for the third quarter and first nine months of 2011, and also provide our top-line estimates for 2012. The third quarter was a mixed one for RenaissanceRe as it was for the rest of the reinsurance industry. Third-quarter catastrophe losses were relatively moderate. The net negative impact on our financial results from Hurricane Irene totaled $18 million, and the combined impact of losses on aggregate loss contracts totaled $26 million. The third-quarter results also included reserve adjustments for recent large loss events with increased estimates for the 2010 and 2011 New Zealand earthquakes offset by reduced net loss estimates for other events including the Japanese earthquake.

The net impact on the financial results from the various reserve adjustments for large, recent, prior period events was $20 million favorable. The net negative or positive impact is the net loss or profit amount after accounting for reinstatement premiums assumed and ceded, lost profit commissions, and non-controlling interest in joint ventures. We have provided a detailed table in the press release relating to the calculation of net impact of the catastrophe losses.

Investment performance in the quarter was hurt by extremely low interest rates, widening credit spreads on fixed maturity securities, and a challenging environment for alternative assets. We reported net income of $49 million, or $0.95 per diluted share, and operating income of $33 million or $0.62 per diluted share for the third quarter.

Net realized and unrealized gains, which accounts for the difference between the two measures, totaled $17 million. Our annualized operating ROE was 4.4% for the third quarter. And our tangible book value per share including change and accumulated dividends increased by 1.5%. For the first 9 months of the year, we reported net loss of $174 million or negative $3.44 per share, and an operating loss of $220 million, or a negative $4.35 per share. Also, for the first 9 months, tangible book value per share plus change in accumulative dividends, declined 4.7%, largely a result of the severe catastrophe losses in the first quarter.

Let me shift to the segment operating results beginning with our reinsurance segment, which includes cat and specialty followed by our Lloyd's segment. In the reinsurance segment, managed cat, gross premiums written in the third quarter totaled $112 million, an increase of $33 million compared with the year ago period. Managed cat gross premiums written in the current third quarter included $21 million of reinstatement premiums related to the loss activity. Excluding the impact of reinstatement premiums in the quarter and prior year periods, the managed cat growth rate was 24% in the quarter. The top-line growth during the quarter was primarily a result of improved market conditions at midyear renewals, and a timing difference resulting from the shifting of certain Japanese renewals to the third quarter from the second quarter.

For the first 9 months of the year, managed cat gross premiums written increased 9% from a year ago, adjusted for $155 million of reinstatement premiums in the current year, and $35 million of reinstatement premiums in prior year periods. This compares with our full-year guidance of modest growth. As a reminder, managed cat includes business written on RenaissanceRe Limited's balance sheet, as well as cat premium written by DaVinci, Top Layer Re, and our Lloyd's unit.

The third-quarter combined ratio for the cat unit came in at 56.1%. This included underwriting losses of $22 million for Hurricane Irene, and $30 million for aggregate loss contracts. In addition, there were a number of adjustments made to the loss estimates for several large recent catastrophic events. Increases to our loss estimates for the September 2010 and February 2011 New Zealand earthquakes had $38 million negative impact on our underwriting results. This was more than offset by reductions to our loss estimates of $11 million for Cyclone Tasha and $19 million for the Australia flooding and $20 million for the Japanese earthquake. In the case of the Japanese earthquake, an increase to our gross loss estimate was more than offset by anticipated recoveries on retro programs we have in place that were triggered in part by the size of the industry loss estimate.

The cat combined ratio benefited from $1 million of prior year net favorable reserve development. For the first 9 months of the year, the cat combined ratio was 149.2%, primarily as a result of the loss related to the first quarter international catastrophic events. Favorable reserve development for the cat unit came in at $33 million for the first 9 months of the year.

Specialty reinsurance gross premiums written totaled $26 million in the third quarter, which was up compared with $22 million in the prior year quarter. For the first 9 months of the year, specialty gross premiums written increased 20% compared with a year ago, to a total of $125 million. This compares with our full-year forecast for top-line growth of 10%. The growth rate for this segment can be uneven given the relatively small premium base.

The specialty combined ratio for the third quarter came in at 44.5%. There was no meaningful large loss activity during the quarter, and the combined ratio included $13 million of favorable reserve development. For the first 9 months of the year, the specialty combined ratio was 65.6% and benefited from $72 million of favorable reserve development.

In our Lloyd's segment, we generated $17 million of premiums in the third quarter, compared with $9 million in the year ago period. Specialty premiums accounted for most of this amount. For the first 9 months of the year, Lloyd's gross premiums written increased 53% to $88 million compared with the year ago period. This compares with our guidance of growth in excess of 50% for the year. The Lloyd's unit came in at a combined ratio of 133.3% for the third quarter, primarily driven by 65.3% expense ratio. We expect the expense ratio to decline over time from this level as we continue to expand business volume written on this platform.

Claims related to Hurricane Irene in the U.S. accounted for $3 million in net negative impact to underwriting results for this segment. For the first 9 months of the year, the combined ratio for the Lloyd's unit was 168%, largely a result of the severe catastrophe losses from the first quarter.

Moving away from our underwriting results, other income was a loss of $2 million in the third quarter. There were a few moving parts here and the breakdown is provided in our financial supplement. Equity and earnings of other ventures was a gain of $5 million driven by gains in Top Layer Re and Tower Hill Companies.

Turning to investments, we reported a net investment loss of $19 million, which was driven by a few factors. Our alternative investments portfolio generated a $37 million loss for the quarter. Performance was negative across our private equity, hedge fund and bank loan and high-yield funds, as investors fled risky asset classes during the quarter. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio, and totaled $11 million for the third quarter.

Net investment income from fixed maturity investments includes approximately $19 million in derivative related losses in the quarter, resulting from hedging strategies employed by our external managers. The total return on the overall portfolio was negative 0.3% for the third quarter. Net realized and unrealized gains included in income totaled $17 million during the quarter. Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure.

During the third quarter we reduced risk in our fixed maturity portfolio to some degree by reducing our allocation to corporate bonds and to non-U.S. fixed income funds. At the same time, we increased our allocation to short-term investments. We believe our current allocation more accurately reflects our outlook to the investment risk and reward in a potentially more uncertain economic environment. We do not have exposure to sovereign debt issued by distressed European countries. Our exposure to securities issued by financial institutions in these peripheral European countries is approximately $18 million.

The duration of our investment portfolio decreased slightly to 2.5 years. The yields to maturity on the fixed income and short-term investments declined slightly to 2%. The sharp decline in the percentage of AAA rated credits reflects the impact of the ratings downgrade of the U.S. debt that we hold by S&P earlier in the quarter. One thing I would point out on our alternative investments is that these are accounted for at and incorporate estimates of current market values. They are not lagged. All of our hedge fund managers give us estimated market values, and the vast majority of our private equity fund managers do as well. Where we do not get estimates from the sponsor, we make estimates ourselves. Those estimates are trued up in the following quarter when managers have final values for the quarter. Those true ups have typically been relatively small.

Our capital position remained strong despite the high-loss activity of recent quarters, and we have ample capital and liquidity at the holding company to meet market opportunities we see. During the third quarter, we did not repurchase any of our shares. Recall that we have stated in recent quarters that we did not expect to buy back shares until after hurricane season. Depending on our view of market opportunities and capital utilization as we approach the January renewals, we may reenter the market for buying back our shares. We remain committed to returning excess capital to our shareholders, and continue to believe that buying back stock is an attractive means of achieving this goal given the valuation of our shares.

Finally, let me give you an initial top-line estimate for our units for 2012. For managed cat we estimate premiums will increase 10% in 2012, excluding the impact of reinstatement premiums. We expect this increase to be driven by a combination of price increases and exposure changes. In specialty reinsurance we estimate the top line to be up over 20%. Keep in mind that growth in this segment can be somewhat uneven due to the relatively small size of the premium base. In our Lloyd's unit, we estimate premiums will be up 50%. Recall that growth is also off of a small premium base here and we are in the building and growth phase for this platform.

Finally I would remind everyone that premium estimates of this nature are subject to considerable risk and uncertainty. Our goal in providing them to you is to give you our best estimates at this time.

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

Operator, we are available for questions.

(Operator Instructions) Your first question comes from the line of Sarah DeWitt with Barclays Capital.

I was wondering if you could expand upon your guidance for the managed cat premium growth, and what -- embedded in that, what is your assumption in terms of rate increases versus writing more business?

Sarah, thanks for asking, but we are not going to answer that one. One of the things -- we try to do our best job to give you estimates so that you have a fighting chance of guessing where the market is going. It's a combination of rate increases and opportunities to write new programs.

Okay. Are you willing at all to speculate on what property cat reinsurance rate increases could be in the US at 1/1?

No, ma'am.

Okay, fair enough. And then turning to your excess capital position, could you elaborate a little bit more on that in terms of what you're thinking about in terms of the size and your appetite for buying back stock?

I will start off and then turn it over to Jeff. Stock buybacks at appropriate prices have been part of our corporate strategy since we started the Company. We do have excess capital and as Jeff said, I think there's the possibility of buying shares back. Jeff, would you like to elaborate?

The only thing I would add to that is as I mentioned in my comments, we do want to look closely at what we think will be the opportunity to deploy capital in the underwriting business at the January 1 renewals, and I think we are beginning to get a pretty clear picture of that. So as soon as we make a determination of what capital we can deploy there, we will move as aggressively as we can to return that to shareholders.

Okay, so should we not be expecting any buybacks in 4Q then?

No, I would not necessarily say that at all.

Okay. All right. Great, thanks for the answers.

Your next question comes from the line of Josh Shanker with Deutsche Bank.

I just wanted a little clarification on the aggregate loss contracts, and whether there is a risk that those loss increase if there is another event in the fourth quarter?

A couple things, the aggregates that we have, it is kind of split between we have some retro and some primary aggregate covers. So I think there is always room for aggregate covers to be impaired, depending on where the event is. For additional developments for the ones that are already impaired, is not the concern that I have being material driver going forward, though. If you really -- whether something new happens and triggers some additional aggregate covers that we have. It is not a big component of our book, generally though.

How do they work precisely? You'll correct me if I get something wrong here, that someone bought some coverage at the beginning of the year if accumulation of events occurred, and then that was triggered? If there are additional events, are we through the layer that RenaissanceRe pays and not the cedent?

Your assessment as to how they work is largely correct. On the retro side they tend to be a little bit more disposed with defined contributions. The retro exposure that we have specifically that has been triggered will not develop. The primary aggregate that we have in the US, there can be room for them to develop with additional events, but I do want to stress, they're not a big component of our existing book.

Josh, this is Neill. Maybe I can give a little color to you. These aggregate contracts have been around for a long time. I used to sell them as a broker back in the late '70s, and they are wonderful things to buy. They are tough to sell. And we tend to be a little expensive on aggregate covers, so I would guess we probably have fewer aggregate covers out there than some other folks. It is not a particularly large part of our book of business.

I appreciate those answers. Thank you very much.

Your next question comes from the line of Vinay Misquith with Evercore Partners.

The first question, just a clarification on your capital position. Given your 10% growth for managed cat, do you still think that you can buy back stock next year equivalent to earnings next year?

Vinay, we don't generally forecast how much we will buy just because circumstances can change. So I would not say how much -- what percent of next year's earnings we would buy. I don't see any reason why given our current capital position and what we know at present, that we could not repurchase shares next year. But I would not speculate on the exact dollar amount.

Fair enough. And the second question, there has been some news about the Thai losses. If you could give us your exposure to that, that would be great.

Sure. As you know, the Thai situation is still developing. I think the exposure that we will potentially have will come from our retro book. We write no indigenous local Thai business. So the only one we have is on worldwide or worldwide ex-US Asia Pacific retros that we are writing. I think there is some discussion in the market as to how this is ultimately going to flow through with the Japanese interest abroad covers, potentially playing a reasonably large role particularly with some of the auto and potentially hotel losses. But it is really very early to tell how this will flow through particularly into the retro market, if at all. Again, we have no local coverage there.

Your next question comes from the line of Doug Mewhirter with RBC Capital.

You have been talking about, and actually all of your peers have been talking about rate increases in the reinsurance market, particularly with property and/or catastrophe exposure. I understand that you had [demured] trying to give a breakdown between unit growth and pricing, and I understand that. But if I could ask the question a different way, when you talk about rate increases, especially with regard to model changes, how much of that is a true risk adjusted rate increase? And how much is the rate increase accompanied by a proportional amount of extra modeled exposure for lack of a better term?

All right, Doug. It is a little hard to hear you, but I think I get the gist of your question. I can answer your question differently and say no, sir, versus no, ma'am. But we will try to help you out a little bit there. Part of -- I think there will be new opportunities out there for us because people, as they analyze their exposures, they will feel the need to either buy more cover, maybe buy some more cover underneath, et cetera. And then I think there will be some rate increases that will be justified by new learnings and the -- from the losses that we have had and from the model changes. Kevin, do you want to elaborate?

I think it is also helpful sometimes to think about it by book. You expressed whether the model change is commensurate with exposure change. I will highlight the European model changes where our view of risk doesn't change. So if there is a market movement that is all benefit to us, but potentially not benefit to those who are moving from one model to the other. In the US, we talked about rates increasing over some period of time, and I think that is a reflection of the gradual incorporation of the new risk paradigm represented within the new models.

As rates increase, it really depends on where people are on the curve of adoption to the new models. And retro is always a little bit more complicated because retro -- there is a lot more flexibility in restructuring a program, so it is harder to compare one year to the next, with regard to rate changes because the structures and the underlying exposure can change pretty dramatically.

Thanks for that. If I could just ask a follow-up on the retro side, Kevin you mentioned there has been some dislocation in retro, and some of it -- that benefit could accrue to you on the inwards basis. Does that cut your flexibility on the outwards retro basis? Is there still opportunities to manage your book that way?

Yes. I think it is -- we have several different types of products that we purchase on a retro basis. Some of our core retro is what I would consider much more stable long-term. I think that will be a core component of our book this year, next year, and hopefully many years into the future. I think we also have a little bit more of a trading account that we also participate in the market where we see specific opportunities. That does change depending on where we are in the pricing cycle, but in every year I have been here, we have always found some opportunities and I'm optimistic we will continue to find some in 2012.

Your next question comes from the line of Jay Cohen with Bank of America Merrill Lynch.

Just a couple questions. First is on the outlook on the cat side, you mentioned 10% ex reinstatement premiums. Do you happen to have the reinstatement premiums by quarter handy for us? We can just make sure we have that right in our models?

We will get back to you on that, Jay.

Okay. That's fine.

We don't have them in front of us right now.

And then on the investment income, obviously, on the fixed-income portion, the hedges took away from some of that income. Are those hedges still in place as you go into the fourth quarter?

I believe they are, Jay. The one thing I would just clarify on that is when we give an investment manager an investment mandate, we give them along -- as a part of that, a target duration. So they may buy securities in their portfolio. They have the flexibility to own securities that are longer than the duration that we are targeting for the overall portfolio. If they own longer duration securities, they hedge those back, perhaps, to the target duration. So what the investment income loss from derivatives is largely a geography issue that -- where the derivative loss flows through investment income and the offsetting in large part, gain is in unrealized gains in the portfolio in an instance like this where interest rates decline sharply.

From a book value standpoint there was an offset, obviously.

For the most part, there was an offset. We did have one manager that was short, their duration benchmark and had a reasonably bad quarter kind of all-around. But for the most part, the duration that is lost in these hedges is incorporated in unrealized gains in the securities that they do own.

Your next question comes from Seth Bienstock with TimesSquare Capital.

I find it interesting that many of the primaries have been disproportionately stung by some of the US impediments this year, and that even seeing some of the smaller regional companies report losses that in some cases are multiples of what the reinsurers have announced. So my question is, given that dynamic, do you expect to see some of the primary insurers also reassess the retention levels?

The short answer to that is, yes. Why don't you [do the follow-up], Kevin?

Sure. I think there is a couple different things in your question. For the small regionals they -- a lot of these storms have been small and somewhat localized. So if you are regional in the player, your retention is at a level where on the current basis, you did get some recoveries. I think it will be difficult from a pricing perspective for them to reduce their retention materially. They may look to do it or find alternative structures. I think on the large -- the nationwide accounts, their retentions are set at a level where a lot of regional or smaller losses have been retained. I think again, it is going to be a price-to-risk question for them as to, I am sure they will have the desire to reduce retentions, but I think they're going to need to look at a more creative structure in order to materially share some of the aggregate losses that they experienced. Over the course of this year, rather than just taking the retention down.

I think whenever there is a dynamic where reinsurers in the US and insurers are having a different experience with losses. There is always an opportunity for new products. And we are actively talking to brokers and customers about filling the need there. But I am not as convinced it will be simply just the dropping of retentions.

Seth, I might add this in as well. We don't know what all of our competitors do, obviously. But we have done a good job here at RenRe trying to analyze exposures like tornado, hail, fire, wildfires; things like that. We probably have some insights that some others don't. If we can share these insights with our clients and they are willing to pay for the products bearing those insights into account, then we have some opportunities.

Great. Thanks much, and good luck with the upcoming renewals.

Your next question comes from the line of Kevin Kraft with Morgan Stanley.

This is Greg Locraft. I assume that's--.

That's good. We thought it might have been your brother.

The firm is correct. I wanted to just follow up on the managed cat guidance. Up 10% versus -- I guess this year you're kind of trending up 9%. Neill, I missed your comments at the beginning, but I wanted to confirm that the multi-year growth trajectory you outlined at midyear was in place and then try to tie that comment to the sequential of, let's say, at an up 9% going to an up 10%, which really is -- it certainly is growth, but it is not much of an acceleration.

That is right. It is very difficult for us to project growth. We do the best that we can to help give you guys some guidance. But, yes, it is in keeping with the comments that we have made in the past so that we are looking for some increases both at 1/1 and for contracts that renew later in the year. Kevin, do you want to expand on that?

It depends on, there is different dynamics in different books of business within the US. We have really focused the comments about the rate changes as -- in conjunction with the adaptation of the new modeling, the new vendor models. I think this is the first 1/1 where that vendor model is going to be incorporated at all. So we expect to see some increased demand because of it. I think we will go through the rest of 2012 with more certainty as to how the rating agencies are going to be looking at companies using different models, Lloyd's, and different companies on their own risk-assessment parameters. So I think there will be increased demand based on that throughout the rest of the year.

Okay, if I look at Guy Carpenter's rate online index and I take the midyear renewal and just flatline it into January 1, it looks like rates should be up solidly in the double digits, 10% plus. I guess said differently, the comp for the January 1, renewals is easier than the comp for the June 1 renewals that you just lapped. The numbers are pretty good so far this year. Given the easier comp at January 1, given the amount of the book that renews at January 1, unless rates are going down, I'm not sure why up 10% in managed cat as guidance isn't uber conservative -- I'm trying -- is there a disconnect? Am I analyzing the marketplace incorrectly in terms of what's occurring?

Greg, I think one of the things as we look at this, is we do not try to predicate a rate increase. We don't feel like that is appropriate in our stance to predict rates. So we look at it as, as I said in my opening comments, we look at it on a client-by-client basis. There is always a wide swing. If you look back over the history of the Company in terms of trying to predict rate increases, we try to give you an area to look at. But I would not get too finite on these numbers. They are estimates.

And actually, totally different topic. Just on ROE again, in a year like this, I just wanted to baseline the business. What sort of an ROE profile is RenaissanceRe shooting for, given where current interest rates are at? Has it changed? What should we be thinking about into 2012 and beyond?

Greg, that is not something that we have ever disclosed publicly. Obviously, if you look at the type of returns we will have in a very low interest rate environment, they will be lower than in a higher interest rate environment. But that is not something that we've disclosed historically.

Okay, great. Thanks. I'll jump back into queue.

Operator, if we could right now, there was a question earlier that Jay Cohen answered (sic). We've got the answer to that question. So Jeff, if you could respond to that.

Yes. There was a question earlier about the reinstatement premiums by quarter, and so I think in my prepared remarks I said that there were $155 million year-to-date and the third quarter ones were $21 million. The second quarter reinstatement premiums were $22 million, and first quarter reinstatement premiums were $112 million.

Thank you, operator back over to the queue.

Your final question comes from the line of Ian Gutterman with Adage Capital.

I had two numbers questions for you. First, can you explain the DaVinci minority interest was only $5 million this quarter, and normally when you have this kind operating income would have been $20 million or more. Why is it so low?

Just a second, Ian.

I should have said underwriting. When your underwriting income is at this level, it usually would have been $20 million-something?

It was related to the losses in the quarter that affected DaVinci and also just the investment income in the quarter.

How does the investment income affect DaVinci? I thought it was a share of the operating -- do you actually allocate investments to DaVinci versus REMS?

Investment -- yes, DaVinci has its own investment portfolio.

Okay. So they had more losses on the investment side than the Renaissance balance sheet?

I would not say they had more losses, it just was not as strong as it has been in recent quarters.

Okay, got it. Given the market's rebounded, if those marks unwind in the fourth quarter, maybe a minority interest would be higher than we'd normally expect for Q4?

I think that is possible. Sure. I think there is a pretty detailed breakdown of the income statement for DaVinci on page 10 of our supplement.

Right.

That I think will help you with that.

Okay. Thank you. I will take a closer look at that. The other question is, I probably asked this before, but I am amazed at it every quarter. The paid losses year-to-date are actually down from last year. And last year was actually a very low paid lost year historically. So you have had two years of very low paid losses with two years of very high cats. What is going on with the paid -- the payout trends on these cats versus normal? Are they a lot slower because everything I read about Japan says the Japanese pay out very fast?

I think there is one thing we've talked about before, is half of our loss in Japan comes from retro. The retro component tends to be a little slower. Quakes tend to be slower than wind. A lot of the reserves that we posted over the last year or so have been quake related. In Japan the high percentage of paid that is being discussed is really around probably 1 or 2 accounts. And that is one that is emerging in the market as a paid number. It is just one component of the overall loss. In general, you should expect to see quake payouts to be significantly slower than wind payouts, and then retro to be slower than primary.

So if I'm looking -- it is obviously hard for us to model on the outside, the way I try to do it is I look at the big historical events, like '04 and '05 and years like that and what the lag is in paids. Is it just that it's slower this time? Or is there something about the pattern that maybe as many paids have already happened and just everything else? There is something offsetting it elsewhere?

One thing, that is Japan. The other one, it depends on the retention level of the contracts that we are writing as well.

Okay.

So if you go back to the losses that affected at Florida in '04 in particular, the retention on many of those deals are actually quite small so the reinsurer participation comes in very early in the loss tower.

Okay.

Something like New Zealand, a lot of the exposure on the primary side is concentrated with very high retention deals which will slow down the primary and also slow down the retro.

Got it. So it sounds like paid losses, maybe by next year, maybe in '13, are going to be higher than trend and maybe that puts a little bit of pressure on cash flow; is that fair?

I can't comment for others on this. The way we look at it is we are eager to pay. And the other thing in '04 and '05, we prepaid a lot of our losses.

Okay.

We offered on some instances here, to prepay some of our losses, but it has not been as quite profound as it was in '04 and '05. Whether it moves into cash flow now or in the future, it will not affect our view of risk or our assessment of how we're going to take risk. I can't really comment on how the rest of the industry will look at it.

That's fair. I was not thinking about it as far as a development issue, more about just trying get my model right on cash flow and invested assets to--.

Yes. You are just trying to calculate those huge investment returns.

Exactly. (Laughter) All right. Thank you, guys.

Good. Thank you very much. Operator, is that it for us today?

This concludes the Q&A portion. I would now like to turn the call back over to Mr. Neill Currie for closing remarks.

Sounds like we had a southern operator today. Always makes me feel good. Thanks, everyone, for joining in and we look forward to discussing the renewal season with you next quarter. Thank you.

This concludes today's conference call, you may now disconnect.