濱特爾 (RNR) 2014 Q2 法說會逐字稿

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe second quarter 2014 financial results conference call.

(Operator Instructions)

I would now like to turn today's conference over to Mr. Peter Hill. Please go ahead Sir.

Thank you good morning and thank you everyone for joining our second quarter financial results conference call. Yesterday after the market close we issued our quarterly release. If you didn't receive a copy please call me at 212-521-4800 and we will make sure to provide you with one. They're will be an audio replay of the call of available from about noon Eastern time today through midnight on August 21. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The passcode you will need for both numbers is 63559814.

Today's call is also available through the investor information section of www.renre.com and well be archived on RenaissanceRe's website through midnight on October 8, 2014. 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 us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer, and Jeff Kelly, Executive Vice President and Chief Financial Officer.

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

Thanks Peter and good morning everyone. For this mornings call I'll start with some broad themes for the quarter and I'll turn it over to Jeff to talk about financial results and then I'll come back on force more detailed comments on the renewal. Last night we reported an annualized operating return on equity of 11% for the second quarter. Growth in tangible book value per share plus accumulated dividends was 3.5%.

On a year-to-date basis we have generated net income of $272 million and an annualized operating return on equity of 13.4%. And have grown tangible book value per share plus accumulated dividends by 6.4%. This was a tough renewal for the industry and we saw the same trends continuing namely intense competition and ongoing pressure on rates. Against this backdrop the team executed well putting into practice the playbook we have consistently operated in soft market conditions like these. We cut back on business that did not meet our return hurdles.

We positioned our portfolio and bought seeded retro to reduce risk in line with our consistent strategy to optimize our book of business. Our strategy is based on a long-term view. We have invested in understanding risk, underwriting it, and matching it against capital for over 20 years. Focused always on managing our portfolio efficiently. Our customers value our experience and trust us to help them with the unexpected.

It's been all too easy for the industry to have a short-term memory given the (inaudible) year hiatus without a major land-falling hurricane in Florida and five years without a meaningful event in the Southeast. As we advance through storm season, we are more conscious than ever that good preparation, not good luck, should be the basis of sound risk management.

The ability to properly assess the risk that one takes on and to differentiate between attractive and unattractive business remains more important than ever. At this point I will turn it over to Jeff for his comments on results.

Thanks Kevin and good morning everyone. I'll cover our results for the second quarter and the year to date. We had a profitable second quarter again benefiting from solid underwriting, relatively low catastrophe losses and a favorable investment environment. Our managed cat topline decline in the second quarter to a large extent reflected the competitive market dynamics that we have been highlighting on our recent calls and our decision to pull back on business that did not meet our return criteria.

As competition intensified, we elected instead to reduce the risk in our Florida book through opportunistic seeded retro purchases which I will discuss later on in my remarks. We reported net income of $121 million or $2.95 per diluted share and operating income of $94 million or $2.28 per diluted share for the second quarter. The annualized operating ROE was 11% for the second quarter and our tangible book value per share including change in accumulated dividends increased by 3.5% during the period. For the first six months of the year we reported an annualized operating ROE of 13.4% and growth in tangible book value per share plus dividends of 6.4%.

Let me shift to the segment results beginning with our cat segment and followed by specialty reinsurance and Lloyd's. Managed cat gross premiums written declined $180 million or 29% compared with a year ago during the second quarter. Adjusting for prior-year reinstatement premiums of $10 million, a $27 million multiyear contract written and booked in the year ago period and $28 million less on a single quota shared contract this year relative to the prior-year period managed cat premiums declined approximately 21% in the second quarter and 15% for the first six months of 2014. The topline decline for cat premiums so far this year was driven largely by increased pricing competition, exposure reduction, and repositioning of our portfolio as we moved higher up in layers relative to a year ago.

Year to date decline in managed cat premiums is slightly greater than our full-year guidance for a decline of 15%. Net premiums written in our cap segment declined 47% in the second quarter and are down 34% for the first six months of the year. Reflecting a reduction in gross premiums written as well as increased seeded retro purchases. During the quarter we entered into a retro transaction in which we purchased $180 million of limit on a UNL basis to reduce the frequency or lower layer risk for our peak Florida exposure. Seeded premiums directly related to this deal totaled $23 million.

This was an attractive transaction for us and allowed us to enhance expected returns on our portfolio while also reducing expected volatility and freeing up some capital. The second quarter combined ratio for the cat unit of 48.2% benefited from overall benign catastrophe loss experience. The main contributor to losses in the quarter was a series of smaller wind and thunderstorm events in the US and net favorable reserve development totaled $1.7 million for the unit during the quarter. The main moving parts were a reduction to our ultimate loss estimates for 2011 April and May tornadoes. Offset partially by some adverse development for the 2010 New Zealand earthquake and 2012 wind hail and flooding event in Texas.

In the specialty reinsurance segment, gross premiums written declined by 12% in the second quarter compared with a year ago reflecting a generally competitive environment for specialty casualty. For the first six months of the year specialty gross premiums written are up 46% driven primarily by the inception of a small number of large financial lines in mortgage insurance quota share transactions in the first quarter. As we have often stated in the past percentage growth rates for this segment can be uneven on a quarterly basis given the size and nature of the transactions.

The growth rate in the quarter compares with our full-year 2014 guidance of up over 20%. The specialty reinsurance combined ratio for the second quarter came in at 78.9% as loss activity was again generally benign. Favorable reserve development here totaled $5 million in the quarter. In our Lloyd's segment we generated $72 million of premiums in the second quarter, an increase of 5% compared with the year ago period. For the first six months of the year, gross premiums written are up 9%.

This compares with our full-year guidance for premiums to be up over 20% with the shortfall reflecting challenging market conditions. The Lloyd's unit came in at a combined ratio of 101.3% for the second quarter also benefiting from generally low loss activity. The favorable reserve development of $9 million was principally driven by the application of the companies formulaic reserving methodologies for establishing IBNR reserves and did not relate to any particular events. We believe the financial results for the first six months of the year are more indicative of the run rate results for this segment.

The expense ratio remained high at 48.6% but has generally been trending down as the unit grows its premium base. Offsetting the improvement in the operating expense ratio has been an increase in the acquisition expense ratio due to higher ceding commissions on quota share contracts. Turning to investments, we reported net investment income of $35 million in the second quarter. Our private equity portfolio generated a gain of $8 million in the second quarter driven by continued favorable equity market conditions. Recurring investment income from fixed maturity investments included approximately $3 million in gains on the bank loan portfolio, which we began reporting late last year as a part of fixed income securities.

Adjusting for that gain, fixed maturity investment income remained under pressure from low interest rates. But was reasonably consistent with prior year periods. The total return on the overall investment portfolio was 0.9% for the second quarter benefiting from strong alternative investment returns and sizable realized and unrealized gains and the values of fixed income securities due to a decline in interest rates and credit spreads. Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure. The duration of our investment portfolio remains short at 2.2 years, and has remained roughly flat over the course of the year.

The yield in maturity on fixed income and short-term investments declined slightly to 1.5%. Turning to capital, as we've stated in recent calls, we continue to believe we have capital in excess of our requirements given our portfolio and our outlook for the business. We endeavor to optimize the size of our capital base to business opportunities, and seek to return excess capital to our investors when it is the most suitable option.

Our preferred method of returning capital has historically been through share repurchases, and we expect that will remain the same. As we've often said the timing of share repurchases on a quarterly basis will depend on a number of factors including the capital needs of our underwriting portfolio, our projected liquidity requirements and the valuation of our stock. For the second quarter, we repurchased 385,000 shares for a total of $37 million. Year-to-date we repurchased $3.4 million shares for an aggregate cost of $314 million.

Effective July 1, we also sold part of our existing shares in Da Vinci to a third-party investor which further reduced our state to 23.4% from 26.5% prior to the transaction. While we are not seeking to increase the size of Da Vinci, given the current competitive market environment, we have gradually reduced our ownership stake in order to bring in high-quality investors who we believe will be excellent long-term partners.

Finally, let me turn to update our topline forecast for 2014. We have already written the bulk of our cat premiums for the year and year to date managed cat premiums are down slightly more than the 15% guidance we have been giving. At this point, we expect that will probably play out through year-end. For specialty reinsurance, we are maintaining our topline guidance to be up over 20%, recognizing that premium trends can be volatile on a quarterly basis.

In our Lloyd's unit we are lowering our topline guidance to growth of approximately 10%. This is a function of the competitive dynamics in the marketplace, that have reduced the opportunities for profitable expansion. Thanks and with that I'll turn the call back over to Kevin.

Thanks Jeff. This is the quarter where much of the focus, of course, is on the June 1, Florida renewals. While we saw both strong demand with increased purchases and new limit bought in Florida there was ample capacity to meet this demand and the result was a very competitive renewal. The increase demand in the Florida market and strengthening health of primary companies over the past couple of years are all long-term positives. Many companies are also electing to use cost savings for low reinsurance rates to purchase more protection.

Larger buyers were generally loyal to their existing panels intended to maintain core relationships. However, as we had anticipated, there was greater pricing pressure resulting from non-core participants competing hard for market share. This resulted in price reductions in excess of what we were originally expecting. Nonetheless, we were able to construct a good portfolio of Florida risk. Our long-standing relationships with brokers and clients provided us with access to the business we sought to write. And we continue to draw upon our suite of options to manage inwards and outwards.

Retro pricing and capacity has followed the general market trend, giving us the opportunity to increase our ceded protections. During the quarter we successfully executed a ceded retro transaction specifically for Florida decreasing our exposure to more frequent return periods. So in our vernacular, we are less hot down low than we were last year. Interestingly, as market participants have had greater access to models and tools to understand risk, one might have expected a more efficient market.

However, instead of greater efficiency, the clock seems to have turned back to the 1990s and there is instead been a return to a single view of risk and a resulting decline in risk assessment quality. We believe that the right way to price risk is to consider multiple views understanding the full distribution of outcomes. We have seen an increasing focus on the single point answer than expected loss reached by finding the mean of all outcomes which we believe is flawed. This overreliance on a single view of risk not only encourages poor pricing behavior, it can also lead to poor portfolio construction. We believe that good underwriting will continue to be the key differentiator among reinsures and capital providers and it's the best path for long-term success.

There has been a lot of discussion about whether the current softening is permanent or cyclical. One permanent factor is the many sources of capital available to accept cat risk. We have believed this for a long time which is why we structured RenaissanceRe to include third party capital many years ago. Not all this capital will be permanent. It's important to point out that different types of capital are attracted to this business at different times. The forms we are managing now are very different to post- Katrina capital and understanding how to manage all forms of capital and all pricing environments is required for long-term success.

As for cycles, I believe all markets have cycles. The key is knowing what the characteristics of the cycle are and how to recognize them. More interesting than whether the market change is cyclical or permanent is the question about how to compete in any given market environment. We believe you need great risk assessment, great access to business and you need to rigorously manage your cost of capital. Our track record across all cycles has been market-leading in that regard and our business model has the flexibility to manage a variety of forms of capital no matter what the market dynamics. I'm very confident that we are well-positioned to continue to find good risk and to match it with the most efficient capital going forward.

Turning to our international book now, our midyear renewals were Japan and Australia and in both markets we saw general pricing pressure dynamics. Our established relationship served us well and we maintained our participations in those regions as well as finding attractive opportunities. Collaboration across our different business units and platforms allowed us to expand our product offering and serve the needs of our multi-regional clients.

In specialty, we have continued to establish our franchise across all lines despite a general competitive market. I am pleased with the book we have constructed. We have achieved this by leveraging opportunities provided by our new platforms and working with customers we have known for a long time who recognize the value of the RenRe franchise. Our Lloyd's operation continues to make good progress. Much of the expansion has resulted from capitalizing on relationships in Bermuda especially on the property side.

Five years on, we continue to be measured and deliberate in our growth. We know have the infrastructure fully in place to scale this business when we see attractive opportunities. As we look to the future, our rated and unrated balance sheets provide us with unique flexibility to match well structured risk efficiently with appropriate capital.

At the same time we continue to offer value beyond capital for our clients and partners by blending market insight and experience with financial strength. I believe the combination makes RenaissanceRe one of the best placed companies not just in today's market but over the years to come. And with that, we're ready to take questions. Thank you.

(Operator Instructions)

Josh Stirling from Sanford Bernstein.

Hello, good morning. Thanks for taking the questions.

I recognize this is a challenging renewal, and it's easy for us all to be difficult because we don't actually work in the business. But we are trying to sort of frame this. And I wonder, Kevin, a really big picture question. If you take the view of your career at RenRe, when you started the business and broadly was probably a 20% plus ROE kind of business. And then after Hurricane Katrina, the higher capital standards came into the rating agencies; and maybe it came down to 15%.

You'll have a better sense of all these numbers. But I would guess over the past two years, pricing must be down something like 20% or 30% on some sort of risk-adjusted basis. I'm wondering if I can simplify this to say the property cat is now really just a 10% ROE business. And if that is not the right high-level math, I'm wondering if maybe you could walk me through the way you think about it.

Sure. I have been here for a long time. And I've seen a lot of different markets going back to when I started in 1996. Each market I have seen has been different. And when I look at the portfolios that we've built in those markets, we have built them in a way which matched the right amount of risk to the right amount of capital.

In the late '90s, our portfolio was very much constructed to be a net portfolio with little third-party capital; and then over the years, we've have built in more third-party capital. Thinking about the returns in this business, it is one in which rates are certainly down. And one is being paid less for the risk they are taking today than they were last year, for sure. But it's a business where I believe the portfolios we are constructing still afford attractive returns.

The other piece that has fed into the returns is really what is going on with investments. And that is really more universally affecting people. But from the risk portfolio, we have seen a decline in the overall returns of the risk portfolio. But it's one in which we are not at the lowest levels that I've seen since I've been here, for sure.

Okay. That's helpful. A different question, but a similar topic on pricing and all of us trying to second-guess how much longer the pricing pressure might last. You both play in the traditional reinsurance market as well as a lot of the collateralized. You do a lot of different things all throughout the market.

One of the markets that I would look to guidance for in some ways is the cat bond market. And I am wondering when you think about cat bond spreads, what investors are paying for risk, and you compare it with things like similarly-rated junk bonds, which are at all-time lows, how much more margin is there for new money to be allocated into this space?

And how much pricing pressure in the future, if you believe that there are ultimately true conversions and similar ratings for similar margins or similar spreads, how much more pressure would that put on this business? Do we still have 10% or 20% pricing declines to come?

I think cat bonds still trade largely at the more remote return period, so let's just focus on that for second. We did see some pushback on cat bond pricing earlier this year when new spreads were continuing to contract. And the way that market has been trading is really just a multiple of expected loss rather than considering the full uncertainty of the bond being offered.

I think if you take our perspective on the cat bond market, we have managed a smart portfolio of cat bonds. And we are no longer actively looking for cat bonds with where the current pricing is.

Okay, thank you for the time and good luck this summer.

Thank you, appreciate it.

Vinay Misquith from Evercore.

Hello, good morning. Just wanted to follow-up on Josh's question. So it seems that the property cat businesses now is barely a double-digit ROE. Would you say that given the retro purchases that you have done that, yes, while it is a double-digit ROE, the reduced profile is now lower because of higher retro purchases?

I think that's a great question. And I think one of the things we are constantly looking at is getting the right risk mix into the book to match it against the return. We highlighted one retro purchase which we made, which was the Florida-specific. That materially reduced our exposure to the more frequent type events, particularly in Florida.

I think the other thing to focus on is we share a lot more risk today than we have in the past across all the different mechanisms that we have, from third-party capital to traditional seeded to other vehicles that we have in place. So I think thinking about our book from a gross to net perspective, there is certainly a big spread between the two.

And it's one in which there is significantly less risk in the net than there is in the gross, particularly comparing to last year, highlighting the biggest changes, that one Florida purchase, which materially changes the exposure to more frequent events.

That is helpful. The second thing is on pricing.

We have heard that some deals have been returned because the prices were too low. Just trying to see if we are heading towards the bottom, close to the bottom. I think we tried to see something about a couple quarters ago; and then last quarter, things got worse. So at the risk of being wrong again, just curious from your perspective as to where do we think we are in terms of pricing on property cat.

The 6/1/14 renewal is a very different composition than other renewals around over the course of the year. I think it's difficult to extrapolate what we saw in the Florida renewal to what is going to happen to a much more diversified renewal at 1/1/14. I will say that absent some surprise or some catalyst, I think its difficult to see the direction of pricing change.

I think its more to think about what is the magnitude of the price change. And at this point, we are going into win season. A lot will change between now and then, but that is the way we would position ourselves.

We will build our pro forma for the 2015 year in the October/November timeframe. Which is when we will really get down to making estimates as to what is going to happen with pricing going forward.

Okay, so it seems that you are not really optimistic that pricing has reached the bottom yet.

I think that there was resistance, particularly as we got closer to the June 1 renewals. But I think markets often don't change without some catalyst. So whether the market flattens out or continues to decline is something that remains to be seen.

That is helpful. And one last point. On the retro, you bought a lot of retrocessional reinsurance. You have not bought back any stock. Just curious about the capital, so the excess capital position right now. And does the purchase of retro give you additional room to manage capital? And also your views on given where the stock price was trading, it seems that you have held back on share repurchases. Would you be open to a special dividend too?

Let me start, and I will turn it over to Jeff. One of the things that I think is unique about RenaissanceRe is the way we integrate our thinking about risk and capital. So every time we make a decision to write a piece of business, every time we make the decision to purchase seeded, we understand how much capital that is using and how much capital it is releasing.

So to think that when we purchase the retro, we do recognize we are taking risk off. And we fully understand how that flows through into the excess capital position that we have.

Jeff?

Just adding to Kevin's point on the Florida seeded purchase and what it did to the capital position, I think you have to look at the overall book itself. So with premium being down, as well as the Florida seeded purchase, while the Florida seeded purchase and the reduction and exposure had the effect of increasing access capital, if you will, the reduced expected profit in the book has the opposite effect to some degree. But on balance, we do see the excess capital and the portfolio having gone up in the quarter, largely as a result of the seeded purchase but offset a bit by the reduction in the expected profit of the book.

I would say just on the amount of excess capital, we -- as I mentioned in my prepared remarks -- we think we have a fair amount of excess capital. And we stand ready to buy shares at what we think are attractive prices. As it relates to a special dividend, I think whenever we get asked this question, I think our response is always (inaudible) that we look at every option available to us to manage excess capital; and that would certainly include that.

And historically, while we have done most of our capital management via share repurchases, we have altered the capital structure as well by paying down debt and calling preferred stock. So we do look at every available option to us, and that would include a special dividend.

That is helpful. In the past, you mentioned the $300 million of excess capital number. Would you care to update that number?

I don't recall having mentioned $300 million. It would be denominated in several hundred million dollars, and actually somewhat more than that amount.

Okay, thank you.

Kai Pan from Morgan Stanley.

Good morning. Thank you for taking my call.

And the first question is just -- Have you quantified what exactly the cat losses are for the quarter?

Cat losses for the quarter. Yes, we have. I don't think we disclosed it. I would say at a very high level, Kai, there weren't any major cats during the quarter. It was really a series of smaller PCS events. I think there were a total of six. On a gross basis, it was probably around $50 million in losses. On a net basis, about $38 million for the cat unit.

Great, that is great. So if you look back for the quarter, its a very low cat quarter. And you got 11% or you're certainly below your long-term average.

I just wonder. Is that because the business you write inherently has a lower ROE then your hurdle rates, or you just simply couldn't find enough because this is right after you have an abundance of excess capital out there?

Firstly, let me just be clear. The portfolio we built was based on decisions we've made. It wasn't due to access to business. It was based on what we saw from a pricing environment and how we wanted to construct the portfolio.

The first piece of the pricing environment is gross rates are down. And that is been part of the conversation throughout 2014. So with that, risk has less premium associated with it. The portfolio that we are building is really one in which how much capital are we putting against the risk that we are taking. And it's something that when we design that, it is based on providing an optimal return.

One of the Return on Equity components which Jeff touched on is that we are carrying a lot of excess capital. The other piece is that we have increased the sessions we have, both to third-party capital and through secured relationships. So it's a matter of the portfolio construction rather than just what the price is and how that's flowing through to return on equity.

Okay, and just following up on that. With all the pricing and searching out there, I just wonder, how long do think you need to hold on to this so-called excess capital just sitting there and waiting for the pricing to return? Or being probably more proactive in terms of capital management? ¶ Because if you think the pricing isn't going to stay where it is now, apparently you have less available high-return business to write. And then you don't need this much else capital. Then probably you should think more about buying back some stocks or somehow reducing your capital base.

If you look back over our historic record, we have been good stewards of managing capital. And it's one of the primary levers which we believe we need to manage to achieve our long-term return objectives. And it's something that, as Jeff had mentioned, we will continue to work on through the course of 2014.

Measuring capital returns or share buybacks in any one quarter is not the way we think about it. We think about it over the long term, and there will be periods in which we are carrying more excess capital. Having gone through the renewal and adjusting the way in which we built the portfolio added excess capital to our portfolio. And we will continue to manage that in the quarters to come.

Thank you so much.

Michael Nannizzi from Goldman Sachs.

Thanks. I just have a couple questions. One on the expense side, I guess.

Are you able to scale down notional operating expenses on the cat reinsurance side as earned premiums decline, at least for the next six months or so? Just trying to get an understanding of the sensitivity there. Thanks.

Sure. One of the big expenses we have is acquisition cost, so that's a variable expense that comes in. So obviously that will scale with the amount of premium that we are writing. Additionally, I think we run an organization that maintains the ability to scale up one opportunity is there, and I think that is important.

But it is something that when you look at the primary levers that you have to control return, it is investment income, underwriting income expenses and then moving to equity. So it something that we are constantly looking at and trying to optimize against the environment that we see, both in the short term and the long term.

But specifically the operating expense piece, so the non- variable, I would imagine that's mostly fixed costs. I am just curious. If you scale back to -- if this kind of the run rate of premiums just for the near-term, should we expect the notional number of operating expenditures to stay the same? Or should we expect the ratio of operating expenses to stay the same?

I think the way we would look at it is more on the notional basis to make sure that we are maintaining the capabilities within the Organization. I think the other thing to look at how much risk we are retaining and how much we are seeding. So not only looking at our gross premium, but our net premium.

Got it. And then I guess on the top line, is it possible the specialty or Lloyd's businesses could sort of recapture the decline in premiums that we're seeing on the cat side sort of one-for-one or other potential growth initiatives? Is that something that is plausible in the near-term, or is that more of a headwind?

Sure. Let me start with specialty. A lot of what we were writing is specialty is quota share business. And we did see increased opportunity, but we saw pressure on seeding commissions within that business. And the return profile for writing that business is different than the return profile of writing cat business due to the volatility embedded in it.

From a top-line perspective, we still have room to continue to grow the speciality. But it does have a different risk profile and a return profile than cat premium. Within Lloyd's, we have more of a mix between insurance/reinsurance and, within reinsurance, between quota share and XOL. And I think we still have opportunities there.

But there is some headwind on pricing for the business coming into Lloyd's as well. That's one of the reasons we're more cautious about the growth forecast for that business unit.

I think I would just add that I think the answer to your question, Mike, is I think there is flexibility in both the business and even in the expense line. But that flexibility comes in different time frames. In the very short term, there is not a lot of flexibility in either of either of those; but over the longer term, there is.

Great, thanks. And then thinking about where competition is coming from, is it still primarily coming from alternative vehicles? Are you seeing some of that competition coming from other more traditional reinsurers that are maybe looking to redeploy capital in different placements or different geography in the stack? Just trying to understand what are the sources of that competition at this point that you see?

The competition is broad. So we are seeing it both from traditional and non-traditional players. I think one of the concerns the market has is to how much new capital is truly interested in entering the space, which is feeding a feeling among traditional reinsurers that they need to protect market share over margin.

I think within the alternative space, I think there is pressure to deploy capital. So I wouldn't point specifically to one area of the market or the other. But I think they are highly connected. And we are seeing competition from a reasonably broad spectrum of competitors.

Got it, great, thank you so much.

Jay Cohen from Bank of America Merrill Lynch.

Thank you.

First question. I think a lot of us are struggling when it comes to reinsurance. And specifically with the cat market, what the potential margin or specifically the loss ratio impact is of lower prices.

Obviously, you see these big declines. You are doing things to offset those declines -- whether it's buy more retro, managing your capital. But can you say at all, given the changes in the pricing environment, given the changes in your portfolio, what does your loss ratio, on an expected basis, look like now versus, say, a year ago?

I think that's one measure to think about. Really what we're trying to think about is, across the full distribution how much capital are we using at a given point. What is the likelihood of loss associated with that capital at a given point. So thinking about it as simply a loss ratio, you can talk about it in a specific region or specific line. But we think about it much more broadly across the portfolio.

I think rates are under pressure, so loss ratios are going up. But we are building portfolios that I think have greater diversification from some of the specialty that we are bringing in. And then changing the profile of the risks we are taking, both by what we are accepting on the inwards basis and then how we're thinking about it from a seeded perspective. So I don't think it's as simple as just thinking about Loss Ratio A versus Loss Ratio B.

I understand that.

Second question. The Lloyd's business, with the growth slowing there, presumably it will continue to slow given the direction of market conditions. I guess one of the issues with that business is the expense ratio is relatively high because you haven't scaled up yet.

Slowing down the growth in that business, does that push out the eventual decent returns you would expect to earn in that business?

Yes, I would rather trade on a higher expense ratio than taking greater risk/greater uncertainty for writing in thinly or underpriced business. It's something that, yes, we are prepared to be patient to continue to build that franchise. Spread over the long term, it is an industry-leading franchise within Lloyd's.

Got it. Thanks, Kevin.

Sure.

Ryan Byrnes from Janney Capital.

Great. Thanks for take my questions.

Firstly, I wanted to talk about your appetite for new mortgage insurance or reinsuring that product. I know you did a lot in the first quarter of this year, but just wanted to see your appetite going forward now that there may be some new capital requirements on the primary guys.

Let me start. One of the things when we look at lines that are written, more financial-based lines, we are very careful to make sure that there is some value that we are bringing from the structure that we are offering. And to the extent that we get over that hurdle, we become interested in a line such as mortgage.

I think our appetite continues to be strong for that business, assuming that we can determine that we are bringing a unique solution compared to a straight capital market solution for the products that we're offering.

Would your expected returns from that business be similar to the cat business for you right now?

I think there are two questions in there. One is on a standalone basis, and one is on a marginal basis.

Marginally, we look at that risk in conjunction with the overall risk of the Organization, including our investment portfolio. And on a marginal or on a diversified basis, the returns on that business are very attractive.

Okay, great. And then my last one. It looks like you were potentially an investor with Trupanion, which had an IPO a couple of weeks ago. Just wanted to think about how we should think about that mark running through earnings going forward? Will that be running through operating in the third quarter, or would that run through realized gains going forward?

Thanks. The way we handle that is when an investment prior to going to IPO, we generally mark that through operating earnings. Once it gets to IPO and becomes an equity security in our portfolio, it's in what we classify as equity trading; and it gets mark-to-market.

Great, thanks.

Josh Shanker from Deutsche Bank.

Thank you.

Mr. Cohen asked my question more eloquently that I possibly could, but I just wanted to go one step further. With your concern, Kevin, that we might not have seen a bottom or directionally or whatnot. To what extent do you have an appetite for taking on the same portfolio of risk you have right now with a lower expected return?

The way we would think about it is, I think it is difficult to say this portfolio cheaper, is that still acceptable? Because it would need to think about, what is the cost of the capital we are putting against it? Is it likewise experiencing a reduction in cost?

I think going forward, a different way to ask the question is -- Do we feel like we are going to be positioned at 1/1 to write a portfolio in which we will provide adequate returns for the capital we are putting to work? The answer to that is absolutely yes.

I think the flexibility that we have as to how much we are retaining, and then all the different vehicles in which we are sharing risk, is extremely important to focus on. And how we are thinking about constructing not only this portfolio, but portfolios that will renew 1/1 and beyond.

Fair answer, and good luck in the turbulence.

I appreciate it, thanks.

Ian Gutterman from Balyasny Asset Management.

Thank you.

I want to clarify some numbers first, and then I had a question on competition. The $38 million of small PCS events in cat, can you just give us a sense? There are only some, right? It's pretty rare there is zero?

You obviously don't show attritional loss ratios at zero at any time. Is $38 million sort of the normal? Is it a little high? Is it a lot high? Just sort of a sense of how that fares versus expectations.

I characterized it as I think relatively low, And I would say it's relatively low compared with other quarters. I think compared with second quarters in the past, we have certainly had second quarters where it's been higher than that. But it's actually marginally above-average.

Got it, got it. And then on the retro, you said it would probably be $180 million of cover. You didn't say where it attached. Can you give us that?

I think rather than get into specifics if it's a single transaction, I think the guidance we are giving on that is it is at that the more frequent return periods for Florida-specific events.

Got it, got it. Okay. And then just on the market, I guess I'm curious on your perceptions of the following. A lot of companies have talked about how they have bought "cheap" retro to make up for the softening market. And yet I think you are one of the only ones who have actually not just done that but also shrunk your top line and gotten off accounts.

It seems like a lot of others have been either flat or even grown there top line and said -- Oh, but we bought this cheap retro, so it's okay. I'm just wondering how you view. A, is that sort of making the market softer? Or do we need people to get off gross accounts to find the bottom?

And, B, what is the risk? And you obviously could have done that too and maybe bought more retro to keep relationships. What are the risks to just saying -- We'll keep the count for distribution and retro it out?

Firstly, if everyone is trying to renew what they have or more, obviously that's going to add to the supply side and pricing pressure.

With regard to retro and purchasing retro, if rates are down, in order to hold your top line the same, you need to write more and then match that up against the retro. So they are growing and then buying retro against it. I think it is potentially a strategy to think about doing that, but there's never a perfect match between a retro and an inwards book. One needs to think about what is the risk that is resident around the purchase that you are making.

I think from thinking about different capital levers that one can pull, we have more access to (technical difficulty) just retro. I feel comfortable it's decisions that we are making and how (technical difficulty) renewal or others will be something that we will either (technical difficulty) or provide opportunity.

Got it. And then just lastly, this one might be a little more cynical. But there's been a lot of commentary about companies rebalancing their portfolio. This goes back to Jay's question about the impact of lower price on margins. And again, for the strategy you have been taking, I can understand it. But it seems there's a little bit of Lake Wobegone, where everyone seems to suggest that they've rebalanced their portfolio; so they are not taking that much of a margin hit versus the headline rate cuts.

Does that make sense? Is it that the traditional market has been able to do that and sort of the worst business has gone to alternative markets? Or should I be more skeptical that most of the traditional markets have been able to rebound favorably in what seems like a hard market to do that?

I think from our perspective, thinking about how to build a portfolio, you need to recognize and be honest with what is going on with the market around you. And if rates are down, there is less premium associated with risk. I haven't seen areas in which we have seen increasing in pricing in specialty or in cat. So I think thinking about adding more risk and rebalancing the portfolio without taking more net risk is a difficult proposition in today's market.

I think if you're going to use seeded to make up the difference, you have two options. One is, you need scale. Because if the [art] is not big, you need to write a lot more and then seed a lot more, hoping the spread between the two captures the lost income. Or you need a very large spread in pricing between primary reinsurance and retro. And at this point, we haven't seen a complete dislocation between retro and primary.

Got it. On the growth side, specifically, should I assume that there is better business to change your gross mix to, that everyone kind of would realize that, and most people would gravitate there, and that is probably the more competitive business? Or are there really pockets?

Obviously, there is (inaudible) mortgage insurance. But within cat, are there pockets where you think there is unrecognized value that not everyone can get access to?

I think if you take what we did, we at 1/1/14 put our guidance out. And then the reduction that we had was less than the guidance that we put forth because we had an expectation that 6/1/14 was going to be more competitive than 1/1/14. So frankly a little bit more than we thought; but directionally, it was pretty close.

So being thoughtful as to how you're going to position your book before the renewal is important. And I think we did that well going into this year. So our guidance of down of 15% is not far off where we ultimately were. But we wrote it very differently, declining less at 1/1/14 and more at 6/1/14.

Got it. Thank you.

Brian Meredith from UBS.

Hello, Kevin. I'm just curious. It looks like the industry was pretty good at holding off changes in terms and conditions. I'm curious. Is that your view?

And then looking forward, do you think there will be continued pressure on terms and conditions in cat reinsurance contracts?

Yes, if you look at what was going on at 6/1/14, or even over the course of all of 2014, there have been different attempts to substantially increase the amount of additional exposure put into cat contracts. Our view is additional exposure into a contract is just a different way to achieve a price reduction.

I think, in general, we're reasonably pleased with how the market held up from a terms and conditions standpoint. But I think the pressure will continue going into the 1/1/15 renewal.

Do you think there is a possibility that maybe the actual level of rate decreases, pricing actually subsides. But then there is more push or more loosening of terms and conditions?

I think that's always a risk. The way we think about it, we will price in any change in exposure. I think an easy way, if someone is looking to have a different headline number, is to expand coverage and keep price the same.

I don't know whether that will be a strategy. It certainly will not be our strategy. We will reflect the risk we're taking for the price we are getting.

Got you. And the last question is, I'm just curious. You reduced your investment in Da Vinci and a new investor coming on board.

What are your conversations like with third-party capital that wants to invest with RenRe right now? Are you saying -- Yes, go ahead, let's get into the business right now? Or are you telling them to be cautious? And what does demand look like from that perspective?

We have a lot of capital that has expressed interest in coming into our vehicles. And one of the reasons they are particularly interest in our vehicles is the alignment that we offer between the capital -- our capital and their capital. So we are constantly making an assessment as to whether we are giving them good risk or not. And that's extremely valuable to third-party investors.

We, at this point, have not actively been looking for new investors to come in. But when we see long-term partners that we want, we will, in many instances, make room for them. From a return perspective, they look at the alignment and then the ability for us to provide a home for their capital and risk-adjusted rewards that are acceptable to them over the long term. And we continue to have good interest in the vehicles that we offer.

Great, thank you.

At this time, there are no further questions. I will now turn it back over to management for closing remarks.

Thank you, everybody, for your attention and your questions. There is a lot changing in the market. And I believe the results that you are seeing are based on conscious decisions that we've made, which are soundly based on providing the best risk-adjusted returns that the market can afford.

So we are comfortable with the portfolios that were built. And we look forward to continuing to work for you and communicate with you at the next earnings call. Thanks again.

Thank you. That concludes today's conference call. You may now disconnect.