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Event Brief of Q3 2007 RenaissanceRe Holdings Earnings Conference Call - Final
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| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 3226 |
PARTICIPANTS
. David Lilly, Kekst & Co., IR . Neill Currie, RenaissanceRe Holdings, CEO . Kevin O'Donnell, Renaissance Reinsurance, President . Bill Ashley, Glencoe Group Holdings, President, CEO . Fred Donner, RenaissanceRe Holdings, CFO . Tom Cholnoky, Goldman Sachs, Analyst . Gary Ransom, Fox-Pitt Kelton, Analyst . Josh Shanker, Citigroup, Analyst . Vinay Misquith, Credit Suisse, Analyst . Kristin Coney, Morgan Stanley, Analyst . Jay Cohen, Merrill Lynch, Analyst . Alain Karaoglan, Banc of America Securities, Analyst . Terry Shu, JPMorgan, Analyst . Brian Meredith, UBS, Analyst . Jonathan Adams, Oppenheimer, Analyst
OVERVIEW
RNR reported 3Q07 operating earnings of $168m or $2.33 per share.
FINANCIAL DATA
A. Key Data From Call 1. 3Q07 operating earnings = $168m. 2. 3Q07 EPS = $2.33. 3. YTD share repurchase = just over $88m. 4. 3Q07 share repurchases = approx.$77m.
PRESENTATION SUMMARY
S1. 3Q07 Business Review (N.C.) 1. Highlights: 1. Co. realized its 3Q07 and YTD results characterized by strong underwriting in investment returns. 2. Growth intangible book value per share grew by over 4% for 3Q07 and by 18% for YTD. 3. Financials results were affected by the like of hurricanes impacting US, an unrealized mark-to-market loss in Channel Re. 4. While it was a light qtr. for property catastrophe loss standpoint, from an event standpoint, it was quite an active qtr. with two Category 5 hurricanes striking Central America. 5. These events reminds of the importance of maintaining Co.'s underwriting discipline even in seemingly the nine periods of low claims. 2. Underwriting: 1. There is always a tendency to focus on losses that have occurred, but it is the potential for losses that will drive Co.'s future results. 1. Understanding this, Co.'s approach to the market remains a
constant. 2. Irrespective of market conditions, Co. will be disciplined. 3. If pricing is acceptable, Co. will write the business. 4. If it drops to levels that do not compensate for the risk
Co. is taking on, it will not write the business. 2. Will continually refine and build its tools and resources that enables Co. to make the best underwriting decisions. 3. Co. is often the first market to shrink, as it did in the late-90s. 1. Conversely Co. is often distinguished by how much it grows
in hard markets, such as in 2002 and more recently in 2006
with US cat book. 4. Focus on underwriting discipline is a core strategy across all of Co.'s businesses, not just property cat. 1. Co. is writing lower premiums in its Individual Risk
segment. 2. Willingness to shrink the topline reflects the tough choices
that Co. is prepared to make if prices are not adequate. 5. Fortunately in many of Co.'s markets, pricing conditions remain fairly good. 6. Optimistic there will be a sizable pool of attractively priced business at Jan. 1. 1. Will be Co.'s goal to write as much of that business as it
can. 7. Co.'s position as a market leader with experienced underwriters who have forged strong relationships with clients and brokers provides it with a competitive advantage in a market where supply is generally greater than demand. 8. Co.'s underwriters are able to deliver quick and innovative solutions utilizing advanced tools. 9. Clients and brokers knows Co.'s track record of bringing substantial capacity to the market when needed, and proven reputation for quickly paying claims. 1. As a result of this, Co. sees more deals and obtain larger
allocations on programs. 10. With ventures, individual risk, and reinsurance operations working together in an integrated manner, Co. is well positioned to take advantage of opportunities in the market and it continue to build on its capabilities. 11. Has brought on several new talented and experienced people to augment its existing team over the past few months. 12. Has given several of its longstanding members of management important new responsibilities. 3. Business Overview: 1. Jay Nichols and his ventures team are forging ahead in an increasingly dynamic capital environment. 2. Continuing to find new JV opportunities and leveraging Co.'s core property catastrophe expertise. 3. This ventures business is [integrall] to strategy and a key source of diversifying profits for the group. 4. Todd Fonner and his investments team continues to do a terrific job during a turbulent time in financial markets by managing investment portfolio prudently, while achieving strong returns.
S2. 3Q07 Property Catastrophe Reinsurance (K.D.) 1. Cat Book: 1. 3Q is generally a light one for reinsurance business as far as new and renewal business. 2. Co. is pleased with performance of the portfolio so far this year. 3. Underwriters have developed and managed the portfolio to offer superior economics on an expected basis. 1. It's understanding the difference between a good result and
a good portfolio is a key to evaluating the quality of the
overall business. 2. Likes the construction of the in-force portfolio that Co.
currently has more than any portfolio that it has
constructed over the last several years. 4. Seen more claims activity than a year ago. 1. These were very different events than Co. saw in 2004 and
2005, had:
1. Large windstorm in Europe.
2. Floods in UK and Australia.
3. Earthquakes in Asia.
4. Fires and small earthquake in California.
5. Did not see a major hurricane hit the US to-date.
6. Without a US hurricane, people's concern about the risk
from catastrophe drops pretty dramatically. 2. Two cat files may landfall in same Atlantic season this
year.
1. First time in reported history, it is just fortunate that
they hit in remote areas causing little economic loss. 2. Specialty: 1. Had a few large losses. 2. This book is one that Co. categorized as event-driven and as such is subject to sudden movements relating to losses and not the gradual reduction that most casualty books suffer. 3. The event this qtr did not give cause for concern, they are simply a product of several unrelated losses that affected Co.'s book of business. 4. Expects to pay these types of events. 5. Co. has not changed its view of profitability of this business over the long-term. 3. Overall Market: 1. For international cat, the search for diversifying business from US hurricanes has pushed this business to become very competitive. 2. Specialty, Co. is seeing heavy competition affecting many of the lines of business that it is writing. 3. In Retro, Co. will continue to trade as buyer and seller. 4. Believes tools will position Co. to use both assumed and ceded retro to best enhance the construction of its portfolio. 5. In US cat, saw good increases in the size of cat market over the last 18 months to two years. 1. Increase in demand is particularly interesting in light of
significant increase in government provided reinsurance
within certain geographic areas. 2. Every year one expects the cat business to grow just with
inflation of the protected assets, but the increase over the
last few years results from substantial new entrants to the
business, reassessment of hurricane risks and also the
associated new purchases to protect that risk. 3. Over the same period, Co. saw a substantial increase in
supply capacity, stemming from traditional markets, the
escalation of non-traditional vehicles and JV to take on
this risk. 4. The overall equilibrium point of these supply and demand
dynamics resulted in increased margins for the cat risk in
US. 5. Co. is [now] convinced that it will see the same demand and
supply dynamics in 2008. 4. Summary: 1. Will remain disciplined in estimation and pricing of risk.
S3. 3Q07 Individual Risk Business (B.A.) 1. Highlight: 1. Continues to be pleased with the performance of the Individual Risk business. 1. Combined ratio for 3Q07 finished better than expected. 2. Noting well below expected losses on catastrophe-exposed
property business. 2. Has purposefully chosen program partners over the last several years, that are capable and willing to exercise discipline in the competitive market, and Co. could not be more pleased with their performance. 3. Has chosen lines of business that would hold up better than most in softening market conditions. 4. Believes the strong partnerships that Co. has in place and ability to analyze and react to data and information quickly to be a competitive advantage. 5. Written premium for 2007 will be less than that of 2006. 1. Pleased with the discipline that is in place. 2. Majority of the premium loss is a factor of conscious
decisions made earlier in the year, is not entirely a
symptom of generally softening market conditions. 6. As mentioned in prior qtrs., in 2007 Co. continued to reduce its exposure to personal lines quota shares in Florida. 1. This deliberately reduced Co.'s volatility to Florida
personal lines catastrophes and improved its overall
corporate ROC. 2. In 2Q07, Co. also nonrenewed a large commercial quota share
due to unprofitable performance.
1. Thus far this has improved Co.'s loss ratios by reducing
the impact of volatile performance of this treaty.
2. Co. is seeing the impact of the loss of written premiums
from both of these decisions.
3. The intense monitoring Co. has in place allows it make
these decisions quickly and deploy capital where the
returns are best for it corporately. 2. Property And Casualty Business: 1. In spite of current market conditions, Co. is pleased this year to add two new program opportunities, which are a mix of both property and casualty business. 1. Both of these programs result from months of diligence and
relationship building. 2. It will not be until 4Q07 and into 2008 that the premium for these programs will begin to impact Co.'s results. 3. Other than the two large transactions that have been reduced or terminated, on avg. Co.'s casualty business produced by Program Managers has retention ratios that are acceptable. 1. Rates for exposure are still at an acceptable and profitable
level. 4. Some of the multivariate or predictive modeling Co. has been working on over the last few years on casualty book appears to be giving an advantage in the softening market conditions that it is seeing in its business segment. 1. Output from this modeling has allowed Co. to segment the
business into appropriate pricing structures, without
adversely affecting retention ratios. 2. Co. is assisting its program partners in some instances, by
using the modeling output to target risk from marketing
perspective that it would like to have as part of its
portfolio. 5. Couple of notable areas in the market that are softening more rapidly than others. 6. Pricing for difference in conditions, earthquake only for California has declined rapidly over the last two quarters. 7. Has reduced writings for primary commercial property earthquake coverage significantly, as a result of inadequate rates. 8. Will continue to remain in this market, but only choosing those risks that meet its return hurdle. 9. Large all risk commercial property coverage has also become very competitive. 1. Typical consequence of this is terms and conditions weaken
and broaden and staggering line sizes are now available. 2. Co.'s partner who is writing this type of coverage is
maintaining great discipline, but has decreased their
overall written premium as a result. 3. Final Comments: 1. Has seen growth in Individual Risk business segment throughout 2007 in risk classes that are diversifying to the overall RNR portfolio. 2. Although this market is challenging, Co. remains positive and believes over last five to six years, it has built a franchise capable of making required returns for long haul, and providing for new opportunities in future. 3. With Co.'s reputation as a good partner especially where creative solutions are needed, continues to be presented with several new deals to review.
S4. 3Q07 Financial Review (F.D.) 1. Results: 1. Operating earnings were $168m or $2.33 per share. 1. Generated an annualized ROE of over 23%.
1. Growing book value per share by over 4%. 2. On YTD basis operating earnings were $549m. 1. Generating an ROE of 27% and book value per share grew by
18%. 2. Cat Unit: 1. Strong qtr. reflected, amongst other things, a lack of hurricane losses. 2. In terms of topline: 1. 3Q is traditionally relatively quiet qtr. 2. On a managed basis, catastrophe unit generated $68m of gross
premiums written which is consistent with last year. 3. Underwriting income amounted to $133m, down from $175m in
3Q06.
1. 3Q06 was a bit unusual with a loss ratio of negative 7.8%,
where Co. benefited from one-off commutations and a lack
of cat events. 4. The main driver this year is a number of small cat losses in
3Q07.
1. Primarily from the July UK floods and hurricane Dean.
2. Overall an 11.7% loss ratio for 3Q07 and 28.5% YTD. 3. Specialty Unit: 1. Experienced some losses. 2. Topline gross premiums written grew to $39m from $29m last year. 1. Which was negatively affected by $28m on written premium
relating to termination of certain assumed reinsurance. 2. Excluding the impact of those commutations, Co. is down for
3Q07. 3. YTD its about 29% ahead of last year. 3. Underwriting loss was $6m. 1. Current accident year losses amounted to $47m, higher than
expected.
1. Driven by number of small losses. 2. Prior year favorable development was $1m vs. $49m for 3Q06.
1. Which included $32m of reserve and leases from
commutations. 4. Performance in specialty book can jump around a bit from QtoQ. 1. From a historical prospective, actual claim emergence has
been lower than expected. 2. In 3Q07, had higher than expected claim emergence and on YTD
basis running at 38.2% loss ratio. 4. Individual Risk: 1. Gross premiums written of $101m vs. $166m for 3Q06. 2. Declines were experienced in all lines of business. 1. On YTD basis, Co. is down around 15% with biggest percentage
decline coming from commercial property and personal lines
property business.
1. Reflecting decisions made earlier this year. 3. Underwriting income was $18m vs. $3m last year. 1. Generated combined ratio of 85.8%, somewhat better than
expectations. 2. Reflecting lower level of attritional losses and $4m of
favorable loss reserve development. 4. On YTD basis, combined ratio is running just under 90%. 5. ChannelRe: 1. Co. took $36m charge related to its share of ChannelRe's anticipated unrealized mark-to-market adjustment and its financial guaranty products. 2. Contracts that gave rise to adjustment are principal financial guarantees that because of their terms are considered under GAAP to be derivatives for finance recording and therefore are carried at fair value. 1. Charge Co. is taking stems directly from a mark that channel
is taking in 3Q and is a reflection of current environment
in the structured credit markets, an environment that is
evolving. 3. Excluded the channel mark from operating earnings. 1. Co. presents operating earnings to provide measure to
evaluate the underlined fundamentals of its operations. 2. Goal is to represent operating earnings excluding
variability.
1. That is not considered to be relevant indicators of
business operations. 4. Prior to 3Q07, Co. has not had any sort of measurable mark on ChannelRe's book. 1. Believes that mark-to-market adjustment is not relevant
indicator of Co.'s business. 6. Investment Portfolio: 1. Continues to perform well with over $95m net investment income. 2. Total return was 6.8% driven in part by higher invested assets and strong returns in alternate book portfolio. 1. This portfolio has been conservatively positioned with
respect to exposure to credit and securitized profits. 2. With widening spreads Co. saw an opportunity to take on
slightly more risk including an increase in securitized
products.
1. But staying away from anything with sub prime exposure and
continuing to avoid CLOs and CDOs. 3. All securitized exposure remains in AAA rated tranches. 7. Capital Management: 1. Continues to purchase shares in open market under share repurchase plan. 2. Purchased approx. $77m of Co.'s stock bringing YTD total to just over $88m. 3. Board increased the share buyback authorization to [$500m]. 1. Giving the opportunity to increase the amount of share
buybacks. 4. Can expect to continue discipline, opportunistic approach to buybacks and return of capital generally. 8. 2007 Topline Forecast: 1. As of 09/30/07, has substantially written the majority of managed cap premium for 2007. 1. Very little comes in during 4Q07 and Co. is slightly down
from last year where it expects to be for the full-year. 2. In specialty, expects YTD trend to continue and expects to be up around 30% for full-year over last year. 3. Even the downward pressure Co. experienced in 3Q07 in individual risk, now expects to be down at least 15% over last year. 9. Outlook 2008: 1. Believes there are a number of good opportunities to write good business across all lines of business. 2. In managed cap, expects to be down around 10%. 3. In specialty market, continues to soften as Co. had one large transaction less qtr., which does not expect to renew during 2008, and expects to be down 25%. 4. In individual risk, sees opportunities but being selective in discipline and currently would estimate that it might be down around 5%.
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