RenaissanceRe Holdings Ltd.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

At this time, I would like to welcome everyone to the RenaissanceRe second quarter 2013 financial results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Peter Hill, please go ahead.

[Peter Hill:]

Good morning and thank you for joining our second quarter 2013 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive a copy, please call me at 212-521-4800, and we'll make sure to provide you with one. There will be an audio replay of the call available from approximately 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 14199934. Today's call will also available through the Investor Information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on October 10, 2013. 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'd now like to turn the call over to Kevin. Kevin?

[Kevin O'Donnell:]

Thanks, Peter, and good morning, everyone. For today's call, I'll start by giving some high level comments, then I'll turn the call over to Jeff to discuss the financial results, and then I'll come back and I'll give more details about the market. This is the first call without Neill for many years. I'm in the fortunate position of assuming a leadership of the company that's in great shape that's in no small part, thanks to the tremendous job he's done. We will miss Neill, and wish him the very best through his retirement. I've been with RenaissanceRe for 17 years, and during my career here I have held different positions of responsibility, including Chief Underwriting Officer. Over that time, I played a significant role in the development our strategy and have a high degree of ownership in it. So I have great confidence in our continuing approach, in our team and our position going forward. I believe our job as a reinsurer is quite simply to match desirable risk with efficient capital. For 20 years, we have focused on what we call our three superiors; superior risk selection, superior customer relationships and superior capital management. We will continue to invest in our technology, hire the best people and put our customers first, knowing this will lead to the best results. So let's turn now to the results and look at how the quarter unfolded. Last night, RenaissanceRe reported operating income of $96.4 million and annualized operating ROE of just over 12%, and growth and tangible book value per share plus accumulated dividends of just under 1%. I am pleased with these results, which include the impact of losses from European flooding and U.S. tornadoes. They also reflected the impact of rising interest rates and volatility in the financial markets on our investment performance. Maintaining a low duration investment portfolio, served us well during the quarter, and Jeff will provide more details on that in a minute. As we have been saying on our last few calls, we continue to see the impact of ample capacity in the market. But broadly, we've done a good job of seeing the market early and adjusting our portfolio to build an attractive book of business. We worked closely with our customers to meet their needs, and we exercised good discipline in a competitive market by choosing not to write or not to renew certain deals. That said, there is still a significant flow of attractive business for us to find high quality risk and build a great portfolio. During the second quarter much of the focus is, of course, on Florida renewals. And I'll give you more color on how that looked along with comments on key dynamics in the markets in a moment. But first, let me turn the call over to Jeff, to go over our results.

[Jeffery Kelly:]

Thanks, Kevin, and good morning, everyone. I'll cover our second quarter and year-to-date financial results, and then give you an update to our 2013 topline forecast. The second quarter was a profitable one for RenaissanceRe, despite an uptick in the level of account losses in a rising interest rate environment. The two main catastrophic events during the second quarter were the European floods and the U.S. tornadoes, which had a total net negative impact on our financial results of $39 million. We've included a table in our press release with details relating to our expected claims for each of these events. Our topline held relatively steady in what was a challenging renewal season for catastrophe reinsurance, while at the same time our specialty and Lloyd unit reported strong growth. We also had some one-time expenses in the quarter, and I'll go into each of these in a bit more detail later. We reported net income of $27 million or $0.60 per diluted share and operating income of $96 million or $2.17 per diluted share for the second quarter. An increase in interest rates and credit spreads led to $69 million of realized and unrealized losses in our investment portfolio. The combined ratio was 61.2% in the second quarter and underwriting income totaled $113 million. The annualized operating ROE was 12.2% for the second quarter and our tangible book value per share, including change in accumulated dividends increased by 0.8% during the quarter. For the first six months of 2013, the annualized operating ROE was 17.3% and tangible book value per share plus change in accumulated dividends was up 5.7%. Let me shift to the segment results beginning with our Reinsurance segment, which includes cat and specialty, then followed by our Lloyd segment. In the Reinsurance segment managed cat gross premiums written declined $10 million or 1.6% compared with a year ago during the second quarter. Reinstatement premiums earned totaled $10 million in the current quarter compared with a negative reinstatement premium adjustment of $31 million in the prior year period. While the vast majority of our cat book consists of traditional access of loss contracts, we did write some quota share business in the second quarter that accounted for approximately $38 million of premiums. Adjustments for the reinstatement premiums in the current and prior year periods managed catastrophe gross premium written would have declined approximately $8 million in the second quarter. The topline decline was largely driven by increased pricing competition at the mid-year renewals, due to more than adequate capacity and the catastrophe reinsurance marketplace, and our decision not to renew a number of contracts that did not meet our return hurdles. For the first six months of the year, managed cat gross premiums written declined $40 million or 3.3% relative to the year ago period. Adjusted for reinstatement premiums, managed cat gross premiums written would have declined about 7% for the first six months of the year, which was slightly better than our full year guidance for the segment of a decline of 10%. As a reminder, managed cat includes the business written on our wholly-owned balance sheets as well as cat premium written by joint ventures DaVinci and Top Layer Re, and our side cars Upsilon Re. The second quarter combined ratio for the cat unit of 45.2% benefited from moderate cat loss experienced and some reserve releases. The net impact on the underwriting results related to notable catastrophe losses for the segment totaled $41 million with $20 million relating to the European floods and $21 million from the U.S. Tornadoes. Net favorable reserve development totaled $18 million for the cat unit in the quarter. This was driven primarily by reductions of $5 million for the 2011 New Zealand earthquake, $4 million for the 2008 Hurricanes and other minor reductions for a variety of smaller events. We did not make any reserve adjustment at this point for our ultimate loss estimate related to storm Sandy. For the first six months of the year, the cat combined ratio came in at 33.4% with favorable reserve development accounting for $37 million and lowering the combined ratio by 9.5 points. Specialty reinsurance gross premiums written increased 57% in the second quarter, primarily driven by the inception of new contract. Percentage growth rates for this segment can be uneven on a quarterly basis, given the timing differences and the relatively small premium base. For the first six months of the year, gross premiums written increased 2.2% relative to the year ago period, which was in line with our prior guidance for slight growth for the year. The specialty combined ratio for the second quarter came in at 85.6% with favorable reserve development totaling $5 million. For the first six months of the year, the combined ratio for the specialty segment was 71.7% with reserve releases of $21 million, resulting in a 21.4 percentage point benefit. In our Lloyd segment, we generated $69 million of premiums in the second quarter, an increase of 37% compared with the year ago period. For the first six months of the year, Lloyd's gross premiums written increased 36% to $143 million. This compares with our annual growth rate guidance of above 30% for 2013. The split of premiums for the first six month was approximately 24% in cat and 76% across a number of specialty classes. The Lloyd's unit came in at a combined ratio of 108.4% for the second quarter. Underwriting losses related to notable catastrophe announced in the second quarter totaled $5 million and net favorable reserve development totaled $3 million. The expense ratio remain high at 47%, but has been declining sequentially, as business volume has increased. For the first six months of the year, the Lloyd's combined ratio came in at 99.2%. Turning to investments, we reported net investment income of $27 million in the second quarter. Our other investments portfolio generated a gain of $6.6 million in the second quarter, as our bank loan funds had positive performance, despite a rising interest rate environment. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio, and totaled $23 million for the second quarter. During the second quarter, we instituted a change in our classifications of gains and losses of investment-related derivatives. These gains and losses, which we previously reported as a part of investment income for fixed maturity investments will now be reported as part of our overall net realized and unrealized investment gains or losses. And as such, will not be reported as part of operating income, starting this year. We think this is a better characterization of the results, as derivatives are largely put into place to offset volatility in realized and unrealized gains and losses. For the second quarter, we had put in place a derivative position to lower the duration of our investment portfolio. This position as well as some futures hedges, employed by our third-party investment managers, generated a combined $21 million gain in the quarter. Total realized and unrealized losses were $69 million in the second quarter, and were driven by a sharp increase in interest rates and widening credit spreads. The total return on the overall investment portfolio was negative 0.7% for the second quarter, as recurring investment income was more than offset by realized and unrealized losses. The duration of our investment portfolio remain short at 2.4 years and has remained roughly flat over the course of the year. The yield to maturity on the fixed income portfolio and short-term investments increased slightly from the first quarter to 1.8%, reflecting higher new money rates, due to the higher interest rates in the quarter. Overall, while we were unhappy with the negative return in the quarter, we were pleased with the short duration of the portfolio and we remain comfortable with that duration. As I mentioned on the call last time, in response to a question, we also made a $100 million allocation to public equities during the quarter. This allocation is managed by one of our third-party investment managers and is an index based strategy. As we've stated on recent calls, we believe we have capital in excess of our requirements, given our current portfolio and our outlook for business growth. Share repurchases during the quarter were relatively modest, although we remain committed to returning capital to shareholders and share repurchases will remain our primary method of doing so. During the second quarter, we repurchased 128,000 shares for an aggregate cost of $11 million. For the first six months of the year, we repurchased 1.5 million shares for a total of $122 million. While we don't always repurchase shares during wind season, we did so last year and have a 10b5-1 plan in place to do so this year. Whether or not we execute repurchases this year, it will depend on our view of excess capital and evaluation of the stock. During the second quarter, we issued $275 million of 5.38% Series E Preference Shares and used proceeds to redeem the remaining $150 million of Series D preference shares, and $125 million or half of our outstanding Series C preference shares. We were pleased with our execution here, which gave us one of the lowest cost preferred deals in our sector. Recall earlier this year, we returned $150 million of capital to the third-party investors and DaVinci as well as repaying $100 million senior note issue that matured in the middle of February. Our balance sheet remain strong with considerable excess capital and from a liquidity standpoint over $640 million in cash and securities at our holding company. The last 18 months has been a reasonably active period for capital management. We're happy with where we are here and with what we've accomplished. Our ventures unit had an active second quarter as well. (inaudible) fund, which has in recent years managed the portfolio of catastrophe bonds on our behalf, began accepting third-party capital to manage during the quarter. We expect to increase the level of managed capital in this unit overtime. Corporate expenses were significantly higher in the second quarter, than in either the first quarter of this year or the same quarter last year, approximately $17 million of expenses related to the CEO transition, we had recently announced. Finally, let me turn to update, our topline forecast for 2013. Given that we've written the bulk of our full year premiums during the first half of the year, we are maintaining our prior topline guidance for each of our segments. As a reminder, our forecast is down 10% for managed cat, excluding reinstatement premiums; slight growth in specialty reinsurance and growth of over 30% for our Lloyd segment. Finally, I'd remind everyone that premium estimates of this nature are subject to considerable risk and uncertainty. I'll go on providing them to you, as just to give you our best estimates at this point in time. Thank. And with that, I'll turn the call back over to Kevin.

[Kevin O'Donnell:]

Thanks, Jeff. Looking in more detail at our business and market dynamics now, the main themes of the quarter were

[Operator:]

(Operator Instructions) Your first question comes from the line of Josh Shanker from Deutsche Bank.

[Josh Shanker:]

I'm curious, obviously, we know that some pricing at 6/1 was down relative to a year ago. And I've tried to put it to reinstatement premiums, so my numbers might not be exactly right. But it looks like net premium written in cat grew by 14% this quarter, against that after reinstatement premiums against that backdrop. I'm wondering if you can talk about, maybe away from Florida did you do any business. I'm trying to understand that growth, which is surprising.

[Jeffrey Kelly:]

Josh, let me maybe just touch on the dynamics and the numbers. There is really three things going on here in addition. So the first one is, the reinstatement premium. So recall that we have the negative reinstatement premium adjustment last year of $31 million, and then $10 million in the current period, so that's a swing of $40 million in the period. Then, we also purchased less ceded during the quarter, and happy to discuss some of our thoughts around that later. And then there was also at least as it related, not necessarily in cat, but for the whole, if you look at the whole book, higher gross premium. So I think the combination of gross premium less ceded and the reinstatement swings is really what's driving the net earned premium increase.

[Josh Shanker:]

I'm actually talking written here though. I'm looking at the cat line this quarter 437 of net written premium less dependent for the reinstatements, a year ago 344 less 31. And I think I'm doing the math right there, but maybe I'm not. That's on the written side.

[Jeffrey Kelly:]

So I think you're just looking at a reduction in the ceded there, Josh.

[Josh Shanker:]

No, this is on the net side. I don't know. Maybe I'll go offline and ask some more questions, and I might be wrong about this. But just it looks like there was actually growth in your cat book, during the quarter, at least on a dollar basis?

[Kevin O'Donnell:]

The gross cat book did not grow after adjusting for reinstatement premiums, just to be clear.

[Josh Shanker:]

I think I'm looking at the net written book after reinstatement premium, it would show us about 14% growth.

[Jeffrey Kelly:]

I think the difference there is just a reduction in ceded premiums purchased in the quarter.

[Kevin O'Donnell:]

There is a couple of pieces to that, which I think Tim Re 3 flow through there. So not renewing the side car was a big piece of that. And then there are some other changes. But I think if you look at our ceded, however, are more than just a quarter, you'll see the impact of the reduction in ceded is less over a longer period than it is just quarter-to-quarter, which is timing differences.

[Josh Shanker:]

And the other question was, I'm a little surprised about Oklahoma tornado losses, maybe I needed to know a little bit about that market. It didn't seem like a major insurance loss that would hit the reinsurance layers. So can you talk a little bit about what you do in the mid-west and how we should think about there?

[Kevin O'Donnell:]

From a tornado perspective, I think it was about $1.2 billion from a PCS perspective. So it was a large loss for that region. I think the accounts that were largely affected there are more regional accounts. And we have good penetration, so that if you go back to the Joplin tornadoes and other tornadoes, we had exposure in those as well. So it's not that it's a shift in a way we're writing the book there. It's just we have descent penetration to some of those accounts. And there was some particular once that were relatively more exposed to where these tornadoes hit, similar to what we saw in Joplin.

[Josh Shanker:]

And these were principally personal lines companies ceding the risk, I assume?

[Kevin O'Donnell:]

Yes, smallest regional companies.

[Operator:]

Your next question comes from the line of Mike Zaremski from Credit Suisse.

[Mike Zaremski:]

First question, on third-party capital. So it's my understanding and maybe I'm wrong, that third-party ILS funds took some pretty meaningful market share in Florida during 2Q. So I was curious, is it fair to say that those third-party investors who took the market share have different return expectations versus investors who participate in DaVinci or RenRe's other joint ventures? And I guess just related to that, I was hoping to better understand the portfolio differences in decision making process between business place in DaVinci versus the wholly-owned business in the Renaissance segments?

[Kevin O'Donnell:]

Sure. So the third-party capital, we did see the presence of third-party capital in the Florida renewal. I think their penetration was something that I think we need to think about the market in a little bit more of a segmented way in order to have the discussion around how they play. So mentioned a little bit on RPPs, where we did see pressure. Obviously, to the extent that that the RPPs went to other third-party capital. It would be fair to say they had different return expectations or different underwriting guidelines because we didn't think it was adequate returns for any of our capital. The other thing I would point to within Florida, the market is talked about as a single-block, but when you dive deeply into it there are different sections that behave quite differently. So if you look above the hurricane cat fund. And we saw some efficient transfer to the capital markets or increasingly efficient transfers to the capital markets through cat funds at that level. And if you look at the lower end of the capital structure within Florida or below the hurricane cat fund is, I think the bigger influence there was rated balance sheets and some of those felt better protected because of some third-party capital retro that they were able to purchase. The final segmentation I would draw your attention to is just the different credit qualities within Florida. And we saw the largest rate reduction for the lowest credit qualities, so the spread between the best credits and the worst credits reduced. And I believe that was another area that there was more movement among different players. Some of that may have been third-party capital. So what we look to do in Florida, we tend to be more concentrated towards the high credits and we move our book around where we can find the best returns, so from our perspective the majority of the competition we faced came from rated balance sheets, but there was certainly the overture of the third-party capital in the market.

[Jeffrey Kelly:]

Mike, just to touch on the last part of your question as it related to the business written on RenRe Limited versus DaVinci's balance sheet. There are some types of contracts that we'll write on RenRe's balance sheet. But that we don't write for DaVinci and that the principle one was the one that I mentioned in my primary prepared comments where I think I mentioned the quota share business we wrote during the quarter. So our underwriting criteria for DaVinci and RenRe really hasn't changed, it was just during the quarter, we wrote some quota share business that just doesn't go on DVs balance sheet.

[Mike Zaremski:]

My last question is regarding to the catastrophe bonds that were issued in recent months. So it is my understanding they come with an interest expense, which I need a model in the income statement. So I want to understand, if there is an offset in terms of, is the offset higher premium retention levels witnessed this quarter and that should produce potentially more earnings or is there another dynamic we should take into account? If that question makes sense.

[Jeffrey Kelly:]

It will show up as ceded premium.

[Kevin O'Donnell:]

And from a behavioral aspect, I wouldn't infer any difference in our strategy or behavior when we look to ceded risk. We are indifferent to the form in which we ceded. So the fact that it's a capital market structure or a side car or just traditional retro, it's simply just putting it against our balance sheet, and know the form of which would bring that capital and it won't change in the way in which we write or in which book.

[Mike Zaremski:]

And just to be clear, is there an interest expense associated with it or this all flows through the premiums lines?

[Kevin O'Donnell:]

It will flow through ceded premium.

[Operator:]

Your next question comes from the line of Michael Nannizzi from Goldman Sachs.

[Michael Nannizzi:]

I guess one just basic question, looking at the year-over-year. I also was surprised to see the premium was, I guess, not necessarily the growth relative to the second quarter, but just I was expecting it at slightly lower levels, but I guess on top of that, the underlying were lot better year-over-year. So I was just curious and I am sure, it has to do with where you're writing business and kind of which area is your primarily participating in, but can you just help kind of square the premium levels, the opportunities you saw and the better margins given the kind of rate backup that you've been talking about?

[Kevin O'Donnell:]

When you said the underlying, I am not sure what you meant?

[Michael Nannizzi:]

So it was like ex-cat, ex-PPD combined ratio?

[Kevin O'Donnell:]

I think I am still little confused on your question. I think what you're asking is do we see a significant shift in opportunity at this quarter to last quarter?

[Michael Nannizzi:]

I guess the question is so and then let me know if these numbers are wrong, but action year combined ratio ex-cat was 49.7 in the second quarter of last year, it was 44.2 this year in the second quarter. And you wrote the decent amount of business and you've talked about some rate pressure. So I would think that in the period where you have rate pressure, you would see margins deteriorate, but it doesn't look like that happened. So I was just trying to understand that.

[Jeffrey Kelly:]

What really renewed in this quarter was largely the Florida book, so lot of the comments around rate this time of year. We tend to be focused on that. And we did see rate reduction in Florida. The rest of the book we've written somewhat quota share and specialty. And that is proving to continue to be beneficial for our portfolio in two ways. One is, on a standalone basis, we're finding it attractive, but then on a marginal basis it's a very efficient for us to bring it on our portfolio. So the growth in Lloyd's has been largely related to the specialty businesses. And then on the recent foray we have into the U.S., and some of the other things that we're doing is also looking to expand some of those lines, which on a standalone basis are beginning to look better, particularly some of the professional lines.

[Michael Nannizzi:]

And I guess, one question on DaVinci, if I could, what is the fee structure their in terms of the unrealized losses or gains. I mean do you get fees based on underwriting income or do the fees that you get include that change in unrealized?

[Kevin O'Donnell:]

Without going into the specific fee structure, our fees are generated off, of underwriting income. And then we do get a percent of the overall profits of the company, which would include investment results.

[Operator:]

Your next question comes from the line of Greg Locraft from Morgan Stanley.

[Greg Locraft:]

I wanted to get a sense as to your priorities in the lead job. How will they differ from Neill in front end from the past?

[Kevin O'Donnell:]

As I said, we will still remain focused on the same thing as I've been part of this company for a long time and I've been influential for the strategy. I think if we continue to focus on finding good business and finding efficient capital and managing our capital effectively, we will produce superior returns over the long-term. I think investing in our people, investing in our technologies, something that's been an important part of our success and will continue to be. I think the market is shifting a bit. We have a track record of being able to respond to that, before many others see changes, and in ways that again lead the market that will continue. And the emphasis we have maintaining our cat franchise will continue along with continuing to build out our Lloyd's operation and our specialty franchise. So large-in-large, it will be a very consistent story to what you have seen, but as the market changes, so our position within it. Again that's consistent, but we can look different from year-to-year based on the opportunities that are available.

[Greg Locraft:]

So I guess, digging into the underwriting side. One of the things, and I think we're sort of circling it on this call, it's been net to gross, I was surprised to see it rise year-over-year. I would have thought in this market that you all would have been laying more risk off. It sounds like you've moved more down low. If you could give us some color, I mean do you have now more exposure to a big event in Florida this year than previous years or can you maybe talk a bit about how you were thinking about laying-off things in the retro market et cetera?

[Kevin O'Donnell:]

I think Jeff touched on some of the more tactical points, as with the bond and with Tim Re 3, which are affecting our ceded premium. The one thing I think focusing specifically on ceded premium can be a misleading metric. And thinking about ceded at the very highest level, you can think about whether you're protecting your balance sheet or you're protecting your income statement. So looking at the 144A deal that we did, that's clearly out of more remote level or what I would consider more of a balance sheet protection. A lot of the trading and a lot of what's been available in the market right now, our income statement protections, which tend to attach significantly lower and have more premium associated with them. The net effect can be very, very different on the risk profile of the book that you're building. So I think, thinking past just, premium is important. I think the other thing is how you write your book. So what we do is look forward and looks at what we think the market will present and then build our portfolio around what that opportunities set look like. Included in that is we structure what we think is likely to be a ceded portfolio that optimizes against our inwards book. And we did that going into the Florida renewal, which produced I think a very attractive portfolio, but one that is structured not only on the outwards basis, but on the inwards basis definitely. We mentioned, we're hot down low, so we do have a greater market share of smaller losses within the Florida. But across most of Florida we're up a small amount, but not as much as we are at the bottom end of the distribution.

[Jeffrey Kelly:]

I'll just add to that. The other thing to keep in mind although ceded premium was down about $95 million in the second quarter over last year, it was actually up about $27 million in the first quarter of this year. And then as Kevin, mentioned in the cat bond, we issued that will have the effect of adding another $11 million or so in ceded premium. I guess the message in all that is we purchased ceded protection and traded opportunistically that that opportunity really occurs on a even calendar quarter basis. So I think you do have to look at it over a bit longer period of time as well.

[Greg Locraft:]

I guess my takeaway is that it sounds like you're more protective than before against a very large loss. But you've got more exposure to frequency given that, Kevin, said you're just hot down low, so is that the way takeaway?

[Kevin O'Donnell:]

I think that's a reasonable way to think about it. Actually one other thing I want to touch on within ceded is, we have a core of portfolio ceded, which is our CPP's or the quota share like instruments, and that's been pretty consistent throughout the year.

[Greg Locraft:]

And then one other question just on the return characteristics, all of this supply coming in that you articulated, much of it has a lower return hurdle than you guys do and historically have driven. Also you've talked and shown data in the past on the amount of business in the market that's acceptable versus low versus negative. Have you ever articulated what those thresholds are? And will those, shift at all, given that more supply that is willing to accept a lower return is coming in?

[Jeffrey Kelly:]

The classification we talk about is are, adequate returns, lower returns and negative returns. And so what we saw here? We saw some migration within adequate returns, where returns were still adequate, but they have reduced a bit. We saw some movement between adequate returns to low return, but still very little move in the Florida market to negative return. Your question about the returns for capital, I think it's one that is a shifting environment, is a shifting market right now with regard to that. And we have traditionally built the portfolio that we like to participate in. I think that's an important part of how we manage capital and are stewards of capital for third parties. Right now, if you map the clock back and look at just rated balance sheets when we started, a lot of rated balance sheets started and thought about taking risk on a single model. You won't find many rated balance sheets that rely solely on a single model. I think what's going in the capital market is somewhat similar to that, but beyond relying in some instances, on just a single model, they are relying on a single point. And they are taking the expected loss and then they are applying a multiple to it, where I think it's very important to understand the shape of the distribution, not just the mean. And overtime, I think the reason we do two analyses, the standalone analysis and the marginal analysis is to make sure that we or our partners are paid adequately on a standalone basis for the risk that they're assuming and then we can match it with capital. The first part will not change, because I think that is just the risk inherent in the deal. But we continue to change how much return capital needs to be able to match with that standalone return. And that's really where the pressure is coming into the market. So I think it's good underwriting discipline, but it's also the changing market is to the types of capital and return they need based on the margin in terms of their portfolios.

[Greg Locraft:]

I am trying to compare the alternative capital collateralized vehicles, like if they are willing to accept a seven or an eight return on nine, let's say, what is the equivalent for rated balance sheet? Is the equivalent of 12, or 13, or 14? How would you compare the two? That's really not a RenRe question, that's more of a traditional versus alternative return question given the leverage inherent in the rated balance sheet versus the unrated?

[Kevin O'Donnell:]

That's a hard question, because I think different people have different measures of return. Where we've seen some of the new capital come and saying, okay, it's a BBB, it's paying 100 basis points more, therefore I will allocate. That's a very different thought process than we would engage in, as to how to think what's an adequate return for the capital? So it's hard to come up with it comparatively. The one thing I'd say is, we're very comfortable with the return profile of our book, for our third-party investors and for our owned balance sheets. And one simple analogy, I sometimes think of, we can double the capital within DaVinci and cut the returns in half. But I'm not sure that's serving anyone's interest. All we've done is managed more capital. What we do is we bring in what we think is the right amount of capital and produced a portfolio that provides we think, adequate returns for the risk that they are assuming. It's difficult for me to comment on each of the models of the individual capital. But there are going back to the BBB1, there are different ways in which people are thinking about it.

[Operator:]

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

[Vinay Misquith:]

Sorry for beating a dead horse, but trying to just wrap my head around the net premium increase for the cat segment. So that's about $90 million roughly up this quarter versus the year-ago quarter. And I believe you mentioned about $40 million came from reinstatement premiums. And say roughly about $38 million came from the quarter share. So that's about $78 million of the $92 million. So it seems that the net premiums were up even more than those two items. So was that because of buying less reinsurance on the lower layers like you mentioned? Just trying to get a sense.

[Jeffrey Kelly:]

I think the principal variables that you're trying to identify in the two comparisons is the fact that we didn't write Tim Re 3 this year compared to last year, which was about $31 million.

[Vinay Misquith:]

Right. So that would have lowered your gross premiums too, right? But your gross premiums were roughly flat. So you actually wrote more gross payments this year adjusting for Tim Re 3, correct?

[Jeffrey Kelly:]

No. In cat it was about flat.

[Vinay Misquith:]

But the Tim Re was $31 million and last year it was in the numbers in gross, correct? And then you ceded it out, correct?

[Jeffrey Kelly:]

Right, so Tim re was about $40 million in last and the reinstatement premium swing from quarter-to-quarter was about $40 million as well. So those two things cancel one another out roughly.

[Vinay Misquith:]

Maybe I will just follow up, but it just seems that the gross number then would be higher than what it would normally be, so if you take Tim Re out. Second question. The growth in RenaissanceRe's topline seems to be higher than DaVinci and you mentioned because you wrote the quarter share in RenaissanceRe's balance sheet versus DaVinci's. But just curious as to, should you choose to, can you take more premiums from your other balance sheets that you use and put them on the your own books if you want to, so grow your own premiums?

[Kevin O'Donnell:]

Yes. So we can change DaVinci in lots a different ways, we can change our ownership in DaVinci. We can change the absolute size of DaVinci and we can change signings to the DaVinci, which is something that we look at each renewal and also on each deal that to figure out what's optimal. We try to keep the DaVinci cap portfolio to be closely correlated with the RenRe portfolio, but we have a lot of discretion as to how to do that and to make sure that each of the balance sheets are being treated fairly and appropriately.

[Vinay Misquith:]

Sure. But let's say that you saw less opportunities in the market. Could you take more premiums from your other balance sheet and put them on your own balance sheet, therefore generating more premiums for yourselves

[Kevin O'Donnell:]

Yes, we can do that. But I don't want to leave you with the feeling that we would do that. If we look at DaVinci as a long-term vehicle and in that capital, in that vehicle, are partners to us. So thinking about changing it from quarter-to-quarter wouldn't be necessary. The way we think about it, we think about constructing a portfolio that is largely very similar to RenRe portfolio. And we're more likely to adjust capital on our ownership than to change inward lines, simply to benefit the RenRe limited balance sheet.

[Jeffrey Kelly:]

And to just add to that, Vinay, that the way we look at managing third-party capital is like most things here over a very long-term basis and we want to provide excellent returns for our investors in all of our third-party capital vehicles over the long-term. And we will also want to cultivate good long-term partners in our third-party capital vehicles. Well probably to the extent we'd willing to adjust those, we'd probably be more willing to do it in side cars than in DaVinci and such was the case with not renewing Tim Re 3 this year.

[Vinay Misquith:]

Just one last question with the buybacks. Just curious as to whether you guys were blacked out this quarter, that's why the share repurchases were low?

[Kevin O'Donnell:]

No. I wouldn't say that. During the quarter we had a 10b5-1 Plans in place coming into the quarter. I think through the first half of the month that our shares were trading above the cap that we had set on that. We instituted one after the announcement of Neill's retirement that took place in late May. And by the time that one actually became active, that took us to kind of the last week or so in June. So there was a period of time where we weren't in the market, but I would say that the principal factor during the quarter was just the relative valuation during, at least, the first half of the quarter.

[Operator:]

Your next question comes from Ryan Byrnes from Janney Capital Markets.

[Ryan Byrnes:]

Quickly, obviously there was some pressure on cat rates in Florida. And you guys rearranged or restructured your portfolio. Just wanted to figure out year over year how your new portfolio stacks up against last year's on a risk-adjusted basis.

[Kevin O'Donnell:]

We touched some of this earlier in the call, but we did restructure the book in Florida. Thinking about the topline rate change in Florida, let say, it's down 15%, I think is not necessarily the way to think about how we construct our portfolio. We did a very good job this quarter working closely with our brokers and clients early. We did a good job working with our ventures unit to bring capital to the market in non-traditional ways. So although the market generally was down pretty significantly, we were largely able to play around that, because of our strong relationships and our ability to bring capital in many forms. So it's one. I touched earlier that the lower credits were more heavily affected by or received better benefit from the rate reduction than the best credits in Florida. And most of our larger relationships are with among some of the best credits in the market. The rates were down, but I think this is something that we've seen before. Our relationships and then are access to clients and our ability to structure non-traditional deals is very beneficial.

[Ryan Byrnes:]

And then shifting over to the new U.S. platform, wanted to see what types of risk you guys are looking to write there and where you see the opportunities?

[Kevin O'Donnell:]

I think the new platform is going to be a Bermuda-based balance sheet, but a U.S. tax paying balance sheet and we have an office that we're opening in Connecticut, that office will really focus on certain types of risk that they don't come to Bermuda. And most of that really is quota share, specialty lines quota share, and the type of quota share that needs more contact, more ability to audit the book, more ability to understand as the book is changing overtime, which can be difficult to do with an offshore balance sheet.

[Operator:]

Your next question comes from the line of Josh Stirling from Bernstein.

[Josh Stirling:]

I will end with a one, sort of, big picture question. Margins are coming down, so we're seeing the margins, sort of, less acceptable business. And you guys have your three superiors and long track record is a big advantage, but you've got a few different strategic choices you're, sort of, playing out. It sounds to me you're trying to synthesize, you're trying to get closer to your customers with quota shares and distribution in the U.S. You're trying to leverage your expertise to grow into other stuff, specialty in Lloyd's. And then finally you, sort of, source and use more third-party capital. The big question I struggle with a little bit is just trying to figure out how you think these things will balance out over the longer term and should we be looking at you guys, sort of, growing more in these businesses in a meaningful way or are these, sort of, modest pieces of the story? And in fact maybe should we be thinking about you more, in a sort of, shrinking the topline over time and repositioning to being primarily a third-party capital manager? I would love to get your sort of long-range thinking on what you guys look like.

[Jeffrey Kelly:]

So let me start with Lloyd's specialty and then I'll come to the cat piece. The Lloyd's is something that, you know, going back four years ago. We decided to start the Lloyd's balance sheet and it was something that very much is a long term view and we took the position that it was better to integrate it and grow it slowly overtime rather than to acquire it, that strategy has not changed. And we're continuing to see good opportunities in Lloyd's where small player in a large market. So I've remained optimistic that will continue to grow at a good clip there. The specialty business is one that is still significantly smaller than it has been, you know, going back in 2004 and those years. But it adds the same benefit to the portfolio that it always has, which is diversifying profit. So I think we are continuing to expand that platform. Our recent expansion into the U.S. is nothing more than again trying to get close to the customer, but also trying to access business that we otherwise wouldn't be able to access. So again that's a strategy that's been in place for a long time, and one that I see good opportunity with that will continue. The cat business, specifically about third-party capital and I think we believe third-party capital will be part of the market for the long-term. So if you go back we wouldn't have been managing or wouldn't have built the infrastructure that we have to manage third-party capital, we didn't believe that. But we also believe that in each of the optimizations that we run, our preferred position is to have a balance between a rated balance sheet and third-party capital. And looking forward, I think that will continue. So I think the market will go though cycles, where capital is more available at certain periods of time like it is now and it's less available at other times like we've seen in the past. But our ability to play between a rated balance sheet and third-party capital, I believe will be the optimal structure within the vast majority of scenarios. I think we have time for one more question here, operator.

[Operator:]

Your next question comes from the line of Amit Kumar from Macquarie.

[Amit Kumar:]

Just two quick follow-up questions. First of all, just going back to RenaissanceRe's specialty U.S., that operation has roughly $100 million shareholders' equity. How are you sort of thinking about the premiums going forward? And I'm not looking for a specific number, but I'm sort of thinking about how long will that take to sort of ramp up and become a meaningful contributor?

[Kevin O'Donnell:]

I think, again, we wanted to match the size of the capital to the opportunity and we're prepared to scale up the capital, as the opportunity grows. We retooled our another balance sheet, our old Glencoe balance sheet in a similar way and to write quota share business, the quota share business here in Bermuda. And we've achieved our three-year plan in two years. That isn't necessarily what we're intending to do with the U.S., but I think it will be a reasonably small platform for the foreseeable future. And one that really be around opportunity-based growth. I think there is an opportunity now, but it's not one, in which we want to deploy significant amount of capital, until we have more of a foothold in the market.

[Amit Kumar:]

And I guess, the only other question, going back to the discussion on the Florida marketplace. I appreciate the discussion on retooling of the book. But let's say, as we go forward in rates, rates are down let's say another 10%, 15% in 2014. Do you still think that there are slivers of acceptable return at that time or do you have to sort of meaningfully relook at the lower layers at that time?

[Kevin O'Donnell:]

Yes. As we talk a little bit about on the call, I don't think rates tend to move uniformly among all participants in the market and for all reinsures. I don't anticipate that any realistic scenario for renewal of the Florida book in 2014 will require us to leave the market. We will certainly need to change our strategy, think about what capital we're going to apply to the opportunity. And think about it from a collaborative or from a coordinative perspective between our inwards and our outwards. But in pretty much any scenario, I see that we will have a strong presence in Florida market. So we can be surprised by things, but I think that's extremely unlikely. Well, thanks everybody. And we look forward to speaking to you next quarter.

[Operator:]

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