RenaissanceRe Holdings Ltd.
Q3 2011 Earnings Call Transcript

Published: 2 Nov 2011

[Operator:]

Good morning, my name is [Dorlean], and I will be your conference operator today. 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.

[Peter Hill:]

Good morning and thank you for joining our third quarter 2011 financial results conference call. Yesterday after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800, and we will make sure to provide you with 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 pass code 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'd now like to turn the call over to Neill. Neill?

[Neill A. Currie:]

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 US land falling 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’ve 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 risk 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 few calls, I have referred to our expectation that we would see a gradual firming overtime in the property catastrophe market. We continue to believe this would 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 underlying 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 clients risk exposure on a standalone basis and treat each client circumstances as being unique, because it is unique. The other important input into our view of risk of course comes from the actual lost 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’s always been our approach since we started RenaissanceRe. So to summarize, 2011 have 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’d like to turn the call over to Kevin. Kevin?

[Kevin J. O'Donnell:]

Good morning and thanks, Neill. I also report that the third quarter investor call does not only signify the end of US hurricane season, but it also is time when we look towards the future and structuring our book for the upcoming year. So before discussing our view on the markets, I’d 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, as I want to spend more time on the cat book and the losses of last 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 our risk-taking enterprise. 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 ventures 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 seen 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 purchasing and existing franchise. That was our goal and we started the platform about two years ago. We’ve built a strong underwriting team with a good risk culture and are growing in accordance with our expectations. We anticipated that as we grow, our financial ratios will continue to improve. Now we believe that we will achieve profitability within the next 18 months, which is consistent with our original plans. 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 those lines. Our strategy in specialty is to build a flexible platform that we can quickly take advantage and grow in specific lines when the opportunities present themselves. We remained disciplined and patient however, with a view that we are more comfortable, missing in opportunity in this market and rushing and taking the wrong risk at the wrong times. This strategy has started 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 cash businesses. Although, we’ve had relatively active months, I’m pleased that outside our exposure to our (inaudible) have lost its aggregate contract. The third quarter was relatively like one through losses. The big stories 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’re 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 productions. 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 will adapt to us. We physically review bonds, use a proprietary system to generate deterministic events to estimate losses and then consult with weather predict. With reconstructs in the event and provide as 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 weather predict 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’ve posted. Now that we have more information, it’s not surprising to see our losses removing 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 is unprecedent as the Japanese earthquake, further development is difficult to predict. The losses of the last year and a half have consumed a lot of category of the reinsurance and insurance market. In the large losses associated with the events in Chilligan, New Zealand and to a lesser extent, Japan, we saw a significant portion paid by reinsurance companies. A greater percentage in fact went for similar size U.S. loss. The U.S. losses have been frequent, but relatively small and therefore are largely retaining except for aggregate contract supply. We’ve 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. A view of risk in that region therefore remains unchanged resulting in our continuing to be seen as a differentiated pleasure. 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 big customized productions for our customers and a strong base to build our portfolio regardless of market conditions. In the US 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 comment. For all in part, we’ve 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 model has allowed us to collaborate effectively with our clients, helping them to solve the challenging transition to the new risk paradigms. 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 on going trend towards rate increases in the US. Additionally, we are 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 financial and are hopeful that these discussions will make increased opportunities for us. Finally, I’ll 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 event. We are well positioned to execute in this market, but we’ll 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 and we will obtain higher prices. Thanks, and I will turn the call over to Jeff.

[Jeffrey D. Kelly:]

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 seeded, loss profit commissions and non-controlling interests 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 in 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 from 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 in accumulated dividends increased by 1.5%. For the first nine 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 negative $4.35 per share. Also for the first nine months, tangible book value per share plus change in accumulated 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 mid year renewals in a timing difference resulting from the shifting of certain Japanese renewals to the third quarter from the second quarter. For the first nine months of the year, managed cat gross premiums written increased 9% from a year ago, adjusted for a $155 million 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 has $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 Australian 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 (inaudible) recoveries on retro programs we have in place that were triggered in part by the size of the industry loss estimates. The cat combined ratio benefited from $1 million of prior-year net favorable reserve development. For the first nine months of the year, the cat combined ratio was a 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 nine 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 nine months of the year, specialty gross premiums written increased 20% compared with the year ago to a total of a $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 nine 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 nine months of the year, Lloyd's gross premium 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. The expense ratio declined overtime from this level as we continue to expand business volume written on this platform. Claims related to Hurricane Irene in the US accounted for $3 million and net negative impact to underwriting results for this segment. For the first nine months of the year, the combined ratio for the Lloyd's unit was 168% largely a result of the sever 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 break down is provided in our financial supplement. Equity and earnings of other ventures was a gain of $5 million driven by gains and 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 the low yields on our bond portfolio in total, the $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 and 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-US 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 (inaudible). The duration of our investment portfolio decreased slightly to 2.5 years. The yield to maturity on a fixed income and short term investments declined slightly to 2%. The sharp decline and the percentage of AAA rated credits reflects the impact of the ratings downgrade of the US 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 in 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 remains strong, despite the higher 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 buyback shares until after hurricane season. Depending on our view of market opportunities and capital utilization as we approached the January renewals, we may re-enter 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 of a small premium based year and we are built in – the building and growth phase for this platform. Finally, I’d remind everyone that premium estimates of this nature are subjected 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’ll turn the call back over to Neill.

[Neill A. Currie:]

Good. Thank you, Jeff. Operator, we’re available for questions.

[Operator:]

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

[Sarah DeWitt:]

Hi, good morning.

[Neill A. Currie:]

Good morning

[Sarah DeWitt:]

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

[Neill A. Currie:]

Sarah, thanks are asking, but we're not going to answer that one. One other thing, we tried to do our best job to give you estimates so that you have a fighting chance guessing where the market is going. It's a combination of rate increases and opportunities to write new programs. Sarah DeWitt – Barclays Capital. Okay. Are you willing at all to speculate on what property cat reinsurance rate increases could be in the US at ‘11?

[Neill A. Currie:]

Not now. Sarah DeWitt – Barclays Capital. 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?

[Neill A. Currie:]

I'll 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 a possibility to buying shares back. Jeff, would you like to elaborate?

[Jeffrey D. Kelly:]

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 on the underwriting business at the January 1 renewals, and I think we’re 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’ll move as aggressively as we can to return that to shareholders. Sarah DeWitt – Barclays Capital. Okay. So should we not be expecting any buybacks in 4Q then?

[Jeffrey D. Kelly:]

No, I wouldn't necessarily say that at all. Sarah DeWitt – Barclays Capital. Okay, all right. Great, thanks for the answers.

[Neill A. Currie:]

Thank you.

[Operator:]

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

[Joshua Shanker:]

Yeah. Thank you for taking my question. I just wanted a little classification on aggregate loss contracts and whether there is a risk if those lost increase, if there is another event in fourth quarter?

[Kevin J. O'Donnell:]

Okay. Couple of things. The aggregates that we have, it’s kind of a split between – we have some retro in some primary aggregate covers. So I think there is always room for aggregate covers to be impaired anyhow the event is, for additional developments for the ones that are already impaired is not the concern that I have being material driving on going forward though, maybe really whether there is something new happens and trigger some additional aggregate covers that we have (Inaudible) involvement of our book generally though.

[Joshua Shanker:]

How do they book precisely, I mean, you’ll correct if something is wrong here that someone bought some cover at the beginning of the year as the accumulation of events occurred, and there that was triggered. If there is additional event I’ll use Re through the layer that Renaissance repays and not the (inaudible).

[Kevin J. O'Donnell:]

Your assessment is that how they work is largely correct. On the retro side they tend to be a little bit more dispo with defined contributions. The retro exposure that we have are specifically is been triggered, will not develop. The primary aggregates that we have in the US there can be room for them to develop with additional events. But yeah, if you want to stress there or not, a big component of our existing book.

[Neill A. Currie:]

Josh, this is, Neill might be I give a little color to. These aggregate contracts have been around for long time. I used to sell them as a broker back in the late 70s, and there 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’s not a particularly large part of our book of business.

[Joshua Shanker:]

I appreciate those answers. Thank you very much.

[Operator:]

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

[Vinay Misquith:]

Hi, good morning. The first question just a clarification on your capital position; given your 10% growth for managed cat, do you still think that you can buyback stock next year equivalent to earnings next year?

[Jeffrey D. Kelly:]

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

[Vinay Misquith:]

It’s fair enough. The second question is, there has been some news about the Thai losses, if you could give us your exposure, so that that would be great?

[Kevin J. O'Donnell:]

Sure. As you know the Thai situation is still developing. I think the exposure that will potentially have will come from our retro books. We write no indigenous local Thai business, so we only think that is on world wide or world wide ex-US, Asia specific 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 of large covers potentially planning at reasonably large role particularly with some of the auto and potentially hotel losses. It is really very early to tell how this will flow through particularly to the retro market if at all. But again, we have no local covers there.

[Vinay Misquith:]

Okay, thank you.

[Operator:]

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

[Doug Mewhirter:]

Hi, good morning. You’ve been talking about and actually your all of your peers have been talking about your rate increases in the reinsurance market, particularly with property and/or catastrophe exposures. And I understand that Neill you would – you demurred trying to give a breakdown between unit growth and pricing and I understand that. But if I could I guess ask the question in 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 to buy a proportional amount of extra modeled exposure for like of a better terms?

[Neill A. Currie:]

Right, Doug. It’s a little hard to hear you, but I think I get the gist of your question. I could answer your question definitely say, no servers, there is no [man,] but you know we’ll try to help you out a little bit there. you know part of, I think there will be new opportunities out there for us because peoples as they analyze their exposures they will feel, whey they do buy more cover, they’d be buying some more cover underneath extra. And then I think there will be some rate increases that will be justified by new learnings and from the losses that we had and from the model changes. Kevin, do you want to elaborate.

[Kevin J. O'Donnell:]

I think it’s also helpful sometimes to think about it by book, so you express whether the model changes to measure with exposure change, they 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 model to the other. In the US, we talked about rates increasing over some period of time, and I think that’s a reflection of a gradual incorporation of the new risk paradigm represented within the new models. So 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 is a lot more in flexibility and restructuring a program, so it's harder to compare one year to the next with regard to rate changes, because the structures and the underlying exposure can change pretty dramatically.

[Doug Mewhirter:]

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

[Kevin J. O'Donnell:]

Yeah. 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. So 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 think it would always have some opportunities, some optimistic will continue upon from 2012.

[Doug Mewhirter:]

Great, thanks. That's all my questions.

[Operator:]

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

[Jeffrey Cohen:]

Thank you. Just a couple of questions, first is on the outlook in the cat side; you mentioned 10% as 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.

[Neill A. Currie:]

We’ll get back to you on that Jay.

[Jeffrey Cohen:]

Okay, that’s fine.

[Neill A. Currie:]

We don’t have in front of us right now.

[Jeffrey Cohen:]

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?

[Jeffrey D. Kelly:]

I believe they are Jay. You know the one thing I just clarify on that is, when we give an investment manager an investment mandate, we give them a long, 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 and that is that we’re targeting for the overall portfolio. If they own longer duration security, they hedge those back perhaps as a target duration. So what the investment income loss from derivatives is largely a geography issue that the derivative loss to us close to our investment income and they’d be offsetting in large part, gain is in unrealized gains in the portfolio and in instance like this where interest rates decline sharply.

[Jeffrey Cohen:]

Got it. So book value standpoint, there was an offset obviously.

[Jeffrey D. Kelly:]

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

[Jeffrey Cohen:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Seth Bienstock with Times Square Capital.

[Seth Bienstock:]

Hi. Good morning. I find it interesting that many of the primaries have been disproportionately stung by some of the US cat events this year and that you have seen some of the smaller regional companies reported losses and in some cases are multiples what the reinsurance have announced. So my question is, given that dynamic do you expect to see some of the primary insurers also reassess the retention levels?

[Neill A. Currie:]

The short answer to that is, yes. Why don’t you follow it, Kevin.

[Kevin J. O'Donnell:]

Sure. I think there is a couple different things in your question. For the small regional, they – the lot of these norms that have been small and somewhat localized, so if you are regional in the player, your retention was at a level where under the current spaces you did gave us 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 nation wide accounts, their retentions are set at the level where a lot of it, regional or smaller losses have been retained. I think again, it’s going to be a price to risk question for them as to, I'm sure they will have a good desire to reduce retentions, but I think they are 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 their retention down. I think whenever there is this dynamic where reinsurers in the US and insurers are having a different experience with losses, there’s always an opportunity for new products, and we are actively talking to brokers and customers about filling the need there. But I'm not as convinced there will be simply just driving up retentions.

[Neill A. Currie:]

Seth, I might add this in as well. I think, we don’t know that all of our competitors just to obviously, but we’ve done a good job here at RenRe trying to analyze exposures like tornado, hail, wall of fires things like that. So we probably have some insights that some others don’t. If we can share this insights with our clients and they’re willing to pay for the products bearing those insights into account and we have some opportunities.

[Seth Bienstock:]

Good. Thank so much and good luck with the upcoming renewal.

[Neill A. Currie:]

Thanks.

[Kevin J. O'Donnell:]

Thanks

[Operator:]

Your next question comes from the line of [Kevin Craft] with Morgan Stanley.

[Gregory Locraft:]

Hi, guys this is, Greg Locraft I assume that…

[Neill A. Currie:]

(Inaudible)

[Gregory Locraft:]

The firm is correct. Well, good morning. I wanted to just follow up on the managed cat guidance up 10 versus I guess this year, you’re kind of trending up nine. Neill, I missed your comments at the beginning, but I wanted to confirm that the multiyear growth trajectory you outlined at midyear was in place and then try to tie that comment to you know the sequential of lets say, an up nine going to an up 10, which really is you know its certainly is growth, but its not much of an acceleration.

[Neill A. Currie:]

That’s right it’s 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’ve made in the past so that we are looking for some increases both at ’11, and for contracts that renew later in the year. Kevin, do you want expand on that?

[Kevin J. O'Donnell:]

I think it depends on, there is different dynamics in different books of business. Within the US, we’ve really focused the comments about the (inaudible) in conjunction with the adaptation of the new modeling, the new vendor models. I think this is the first one where that vendor model is going to be incorporated at all and so we expect to see some increased demand because of it. I think we’ll go through the rest of 2012 with more uncertainty as 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'll be an increased demand based on that throughout the rest of the year.

[Gregory Locraft:]

Okay. If I look at Guy Carpenter's rate online index and I take the midyear renewal and just flat line is into Jan 1.

[Kevin J. O'Donnell:]

Yeah.

[Gregory Locraft:]

It looks like rate should be up solidly in the double digits, 10% plus. And I guess said, differently the comp for the Jan 1 renewals is easier than the comp for the June 1 renewals that you just lapped, and the numbers are pretty good so far this year. So, given the easier comp at Jan 1 given the amount of the book that renews at Jan 1 unless rates are going down, I'm not sure why up 10 in managed cat has guidance is in conservative. I’m trying to – is there a disconnect, am I analyzing the marketplace incorrectly in terms of what's occurring?

[Kevin J. O'Donnell:]

Greg, I think one of the things as we look at this, as we do not try to predicate a rate increase, as we don't feel like that’s appropriate in our stands to predict rate. So we look at it as we said in the 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 time to predict rate increases, we tried to give you an area to look at, but I wouldn't get too fine out on these numbers, their estimates.

[Gregory Locraft:]

Okay. Okay, great. And then actually totally different topic, just on ROE, again in the year like this, I just wanted to sort of baseline the business. What sort of an ROE profile is RenaissanceRe shooting for, given where current interest rates are at? Has it changed and what should we be thinking about in ’12 and beyond?

[Neill A. Currie:]

Greg, this is not something that we’ve ever disclosed publicly. I mean, obviously if you look at the type of returns that we’ll have in a very low interest rate environment it will be lower than in the higher interest rate environment. But that’s not something that we’ve disclosed historically.

[Gregory Locraft:]

Okay, great thanks. I’ll jump back in the queue.

[Neill A. Currie:]

Thanks. And operator, if we could right now there was a question earlier that Jay Cohen answered, we’ve got the answer of that question. So Jeff, if you could respond to that.

[Jeffrey D. Kelly:]

Yeah. There was a question earlier about the reinstatement premiums by quarter end. So, I think in my prepared remarks I said that there were $155 million year to date in the third quarter once we are $21 million. So the second quarter reinstatement premiums were $22 million and first quarter reinstatement premiums were $112 million.

[Neill A. Currie:]

Thank you. Operator, back over to the queue.

[Operator:]

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

[Ian Gutterman:]

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

[Neill A. Currie:]

If you could just give a second, Ian.

[Ian Gutterman:]

Just that underwriting income, your underwriting income is at this level, usually it would have been 20 something million.

[Kevin J. O'Donnell:]

Well, it was related to the losses in the quarter, the effected DaVinci and also just the investment income in the quarter.

[Ian Gutterman:]

How does investment income affect DaVinci? I thought it was a share on the operating income, do you actually allocate investments to DaVinci versus rent?

[Kevin J. O'Donnell:]

Investment yes, DaVinci has its own investment portfolio.

[Ian Gutterman:]

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

[Jeffrey D. Kelly:]

I wouldn’t say they have more loss. It just wasn’t as strong as it’s been in recent quarters.

[Ian Gutterman:]

Okay got it. So if given the markets rebounded if those marks unwind in the fourth quarter may be minority interest would be higher than we normally expect for Q4?

[Jeffrey D. Kelly:]

I think that’s possible, sure. I think there is a pretty detail breakdown of the income statement for DaVinci on page 10 of our supplement.

[Ian Gutterman:]

Right

[Jeffrey D. Kelly:]

I think it will help you with that.

[Ian Gutterman:]

I think I will take a closer look at that. The other question is, probably asked for a bit still, I’ve made that it every quarter. The paid losses year-to-date are actually down from last year and last year it was actually a very low pay budget historically, so it had two years at very low pay losses with two years at very high cats. What’s going now with the paid you know the pay out trends on these cats versus normal, are they lot slower because everything I’ve read about Japan says the Japanese pay out very fast.

[Neill A. Currie:]

I think there is, one thing we talk about before is, half of our loss in Japan comes from retro and the retro component tends to be a little slower, quakes tend to be slower than wind, a lot of reserves that we posted over the last year or so have been quake related. What in Japan, the high percentage of paid that is being discussed is really around probably one or two accounts and that’s one that is emerging in the market as a paid number, but its just one component of the overall loss. When I think– but in general, you should expect to see quake pay outs to be significantly slower than winds pay outs and then retro to be slower than primary.

[Ian Gutterman:]

Okay. So, if I'm looking I mean there, it’s actually hard for us to might – on the outside. The way I tried to do is I look at the big historical events like you know '04, '05 and years like that and sort of what the lag is in pays. Is it just that it’s slower this time or is there something about the pattern that maybe as many pays have already happened and just everything else, there's something offsetting elsewhere.

[Kevin J. O'Donnell:]

One day, that's Japan. The other one, it depends on the retention level of the contracts that we're writing as well.

[Ian Gutterman:]

Okay.

[Kevin J. O'Donnell:]

So if you go back to the losses that effected at Florida in '04 in particular, the retentions on many of those deals are actually quite slow for the reinsured participation comes in very early in the lost power.

[Ian Gutterman:]

Okay.

[Kevin J. O'Donnell:]

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

[Ian Gutterman:]

Got it, okay. So it sounds like pay 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?

[Kevin J. O'Donnell:]

I think, I can’t comment for others on this. The way we look at it is we’re eager to pay in ’04 and ’05. We’ve prepaid a lot of our losses.

[Ian Gutterman:]

Okay.

[Kevin J. O'Donnell:]

We've offered on some of these, some instances here to prepay some of our losses, but it hasn't been a quite profound as wasn’t ’04 and ’05. So whether it moves into cash flow now or in the future. It won't affect our view of risk for our assessment of how we're going to take risks. I can’t really comment on how the rest of industry will look at it.

[Ian Gutterman:]

No, that's very – I wasn't thinking about as far as the development issue more about just trying to get my moderate on cash flow invested assets to...

[Neill A. Currie:]

You're just trying to calculate those huge investment returns.

[Ian Gutterman:]

Exactly. All right, thank you guys.

[Neill A. Currie:]

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

[Operator:]

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

[Neill A. Currie:]

Well, good. It sounds like we had a Southern operator today always makes me feel good. Thanks everyone for joining in, and look forward to discussing the renewal season with you next quarter. Thank you.

[Operator:]

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