RenaissanceRe Holdings (NYSE:RNR)
RenaissanceRe Holdings at Morgan Stanley Financials Conference
June 11, 2013 15:00 ET
Jeffrey Kelly – CFO
Aditya Dutt – SVP
Gregory Locraft – Morgan Stanley
Alrighty. So, thanks, everybody, for coming. Next stop in the insurance line up for the conference is RenaissanceRe. RenaissanceRe has been one of our favorite companies, since we launched in on the reinsurance space in late 2010. A lot has changed since then but our ratings remain consistent.
And so, it's really– it's the only buy that we have actually in the reinsurance space within our coverage universe.
With us today are two members of the senior management team – Jeff Kelly, who is the CFO; and Aditya Dutt, who's– runs the alternative part of the company. RenRe ventures in Renaissance Underwriting Managers.
So, each of them is going to present on the different aspects of the business. There'll be a breakout session following this as well for Q&A because I think we are going to chew up a lot of the time with presentations here. But there'll be plenty of opportunity to ask them questions, either at the end or in the breakout session following.
So, with that, I'll hand it off to Jeff.
Thanks, Greg, and good afternoon, everybody. Today, we're going to give– Aditya and I will be giving you an overview of the company for those of you not so familiar. And then, describe our overall strategy in managing the company. And in particular, our strategy or our approach to managing third – party capital. I'll talk about it more from the overall corporate point of view and Aditya will give you a more detailed view from the advantage point of actually managing our third – party capital relationships.
Before I do, let me call your attention to the Safe Harbor language on the screen covering forward – looking statements in the use of some non – GAAP financial measures.
Okay, so for those of you not familiar with RenaissanceRe, let me spend a minute or two on a very high level overview of the Company.
We are a global provider of insurance of reinsurance coverage with four principle areas of focus– property cat, or probably best known for our expertise in this area, and approximately 80% of our managed premiums are in this segment.
Specialty reinsurance, which we defined– I always say somewhat ironically as anything but cat. Our Lloyd unit, which rise mostly cat and specialty with some insurance coverages, and our Ventures unit, which Aditya runs and is responsible for managing our joint ventures and other activities that we engage and is support of our underwriting.
We're 20 years old. We're celebrating our 20th anniversary in business this year. And the company was established in 1993 to meet market demand for cat reinsurance, after the– after Hurricane Andrew.
We have a market cap– I haven't seen our price today– but right around $3.8 billion, and we've enjoyed very strong financial performance since our inception.
We have leading financial strength ratings that are both reflective of our capital position but I think, also, importantly, our business model.
And finally, we're one of the few global reinsurance and insurance companies or insurance companies to have a very strong ERM rating from S&P.
For those, who haven't been following closely, S&P recently their excellent category as very strong but it remains a very small cadre of companies that have that rating.
Okay. If I could have only one slide and talk about RenaissanceRe, this is the one I'd pick. Our mission is to produce superior returns for our shareholders. We believe the only way you can produce superior returns over the long term is by being a leader in your business. And we think that the– in order to be the leader in your business, you have to be the best underwriter of the risk you choose to underwrite. And the way we approached delivering superior returns over the time is be employing an integrated system of competitive advantages. You'll hear us talk– both us– as I think about this concept as an integrated system throughout our talk here.
So, how are we doing in delivering superior– delivering on our commitment to provide superior returns? Well, to this point, I think, pretty well.
This slide shows our operating return on equity since 1996. We're the blue bars. And our peer group, at least as we defined it, is in the line that waves through those blue bars from 1996 all the way through 2012.
Since our IPO in 1995, our average operating ROE has been about 18%, while our peers have averaged about 10%. We do have years, where we underperformed the peer average and those tend to be in years with large and/or frequent cats or cat events.
One of the things that underpins our success overtime though is our willingness to step into the market to provide capacity after one of those significant events.
For instance, while some retrench or even withheld capacity at the beginning of 2012, we grew our premiums significantly. As a result, the loss that we incurred in 2011 to be sure a difficult year for cats around the world, we earned back in the first quarter of 2012.
Okay. I said that we see our identity or our need to be the best underwriter. What is that? What does that mean?
Well, the way we think about being the best underwriter is that you have to be able to match the most desirable risk with the most efficient capital.
That sounds simple, perhaps, but it requires an ability to source the most attractive risk, select the best risk and structure in ways to help the client needs. And then, match them with capital whose owners find that risk reward trade off attractive. Only by doing all of those, can you construct a superior portfolio of risk.
And only by being able to construct the superior portfolio of risk do we think we can generate superior returns overtime.
The concept of an integrated system might sound a bit intangible to you but it defines the way people work together at RenaissanceRe to achieve outcomes every day. We try to convey one aspect of that integrated system in our annual report this year but it's pervasive across the company.
To match multiple sources of risk can capital effectively, you need to operate as an integrate system.
You need to have access to and understand all the various sources of capital and the needs of the seeding insurers and you need to do it at the same time.
This is fundamentally a different structure from a traditional underwriting perspective or a single pool of owned capital is deployed.
RenRe has been investing for 20 years in– to go pools systems, people and culture capable of matching those sources of risk and capital. Even our compensation system supports that integrated activity.
We believe a fundamental skill required in the evolving marketplace is knowing when and why and how to deploy shareholders capital or seek to generate fee income for shareholders by deploying third – party capital.
We think our long experience in this aspect of the business positions us well for that evolving marketplace.
The financial we view as our long – term indicator of success is growth in tangible book value per share plus change in accumulated dividends. This chart shows our record of growth in this financial metric virtually since our inception. The punch line is that we've achieved a 20 percent compounded annual growth rate in this metric since our IPO.
Our philosophy in capital management is aligned with that goal and we seek to enhance the growth rate and tangible book value per share through our capital management actions.
In managing capital, we always seek to deploy capital first in our underwriting businesses. That's why we think shareholders invest in us in the first place.
That's different in some other business models in our industry, where investment returns are primary and underwriting returns secondary.
The nature of the risks we take though in underwriting dictate a conservatively structured investment portfolio.
In the context of maintaining a strong balance sheet from which to conduct our business, if we can't attractively deploy that capital, we return to shareholders. And by and large we've done that via share repurchases.
This chart shows our share repurchase volumes and the average book value multiple at which they were done since our IPO. Since 2007, we repurchased over 40% of our shares for a total of $1.9 billion. And roughly the last 18 months, we repurchased over $600 million of our shares. We've also returned profit and dividends to third – party investors of $1.8 billion since 2011.
As I said on our earnings conference call, we tend to modulate our level of share repurchase based on our share price. And I think our– this chart pretty much demonstrates that.
Today, we remain, as I said, on the call, that we remain the position of excess capital and we expect to manage that down over the remainder of the year.
Okay. Let's– let me switch to one of the more actively discussed topics these days and that's the presence of third – party capital in our market. And Aditya and I will spend the remaining time that we have talking about how we view this trend and our involvement in it.
To put the issue on the perspective though, the traditional market is still the lion's share of the overall limit placed. But alternative sources of capital are growing and growing– and of in importance.
We've always recognized the need to be able to bring alternative sources of capital to our customers to meet their needs. And our client needs are what drives that.
We've been doing it now since 1999, which is why we really don't see the recent developments in this market as being revolutionary but instead see them as more evolutionary.
We have product offerings in most areas of alternative capital and we source risk from all over the world.
Some analyst tend to view third – party capital in its presence as a threat to our business. And I suspect, to some extent, that's true.
However, we use third – party capital vehicles actively as trading partners. If they can source capital at more attractive levels than we can, then we can use their capacity to lay off risk at attractive levels and improve the return on our book for our shareholders.
Our principal market is the property cat– reinsurance market, where we've been leaders for many years. We believe much of the property cat market has attractive returns. And despite the ups and downs that occur over a cycle, we think that it's– and that's been– we think that it's been the case for several– that relative attractiveness. At the same time, we think that simply taking a broad cross – section of the cat market is unlikely to generate attractive long – term returns.
The attractive portions of the business exist in pockets but identifying and accessing them isn't busy.
In our business, you can't call up a broker and just ask for the attractive business. To access the pockets of business that are attractive and avoid the low and negative returning businesses, first you have to see all the business.
We think accompanying also needs then to have superior risk selection capabilities to distinguish attractive from unattractive, superior customer relationships to win the business and superior capital management to manage one's cost of capital.
The result of our competitive advantages, we believe is a book of– with expected returns that noticeably exceed that of the broader market. This is a bit of a self – created exam that we have in front of you here. But we look at it this way.
We've seen nearly every deal written in the US and underwrite it using our systems, even though we may not actually want that piece of particular business.
That overall view of every deal underwritten on our systems forms what we call the US XYZ portfolio or you can think of it as a proxy for the US property cat market.
We, then, compare that proxies with the return profile of our own book and we believe our own book consistently performs better. As I've said, I think it's a bit of a self – created exam to be sure. But we think that if we can't fulfill our mission of providing superior returns for shareholders, if we can't consistently construct a superior of portfolio of risks.
We have had, over the years, numerous third – party capital vehicles. And in some ways, we're really one of the pioneers of that strategy in our market.
A fundamental question like a company have to answer though is when to deploy shareholder's capital or third – party capital. There are trade – offs in utilizing third – party capital versus your own.
As you go to the left side of that on own capital– as you use more of your own capitals to underwrite your books, your– you should expect to earn a higher profit, dollar profit. You should– but you should expect a lower return on equity because that book is going to consume more capital. And you're likely to experience greater volatility in your financial results overtime.
The other extreme is to utilize only third – party capital or, in other words, be something of an asset manager.
You will have a much lower expected dollar profit but a higher ROE and a much smaller capital base. And you should expect somewhat lower volatility. But in the extreme, your business then becomes quite dependent on the level of fees you can generate.
We've examined both of these extremes and concluded that the optimal position is in the middle, where we can deploy both shareholder capital and third – party capital.
Importantly, we modulate our position along that continuum, based on the supply of attractive risk, the supply of third – party capital and the economics of the various fees structures.
We think we generate superior returns overtime for our shareholders and for our third – party investors. Doing that doesn't come for free, so you have to understand the trade – offs of reducing capital required to write the business and maintaining enough profit to provide attractive returns for your shareholders.
We've been doing this for a long time now and I think we've done a good job at making those trade – offs.
Let me finish by– with this slide, in matching risk and capital, you have to match client and investor needs. Generally, what we see our clients want is good service. They want us to be responsive to them, particularly, in paying claims. Our customers want the lion's share of their coverage in traditional form with reinstatement features and have a level– a minimal level of basis risk relative to the losses they may actually be required to pay.
They want us to be there consistently for them with capacity. And they want us to be able to share with them and inform an expert view of the risk they face.
Increasingly, they also want to deal with a core set of partners; a partner that can meet a broad range of their needs.
What our investor wants are superior returns. That's our mission and we believe it's fundamentally why shareholders have chosen to invest in RenRe.
In our business, it's difficult in the short run to dredge the difference between luck and skill, so investors also want to proven track record.
As I said at the beginning, we're celebrating our 20th year anniversary this year, so we have a longer track record than many in our business.
We think that in order to generate superior returns, you have to be a leader in your business. And the only way that we can do that if we're the best– is if we are the best underwriter of the risk we write. That's why we also have a focused business strategy.
The final point I'd mentioned here is that our clients and our investors want us to be able to tranche risk and utilize the most efficient capital underwriting on our book of business. It benefits both.
So, why don't we wrap up there and turn over to Aditya– and who will describe when and how we use third – party capital.
Thanks, Jeff. Good afternoon, everyone. I'll just spend a couple of minutes going through some of the comments Jeff made regarding our management of third – party capital; what's happening in the market and how it impacts Renaissance.
So, the first– the exhibit we've put up here shows the supply of capital in the industry over the last couple of years. So, as you can see the alternative bucket here is grown by a little bit north of 100% over two years.
But– and the traditional bucket, which is companies like ourselves, other reinsurance companies has only grown 14%. But actually the quantum of capital that coming into the business is greater in the traditional balance sheet.
And where is this capital coming from for the traditional balance sheets? It's mostly retain earnings over the last couple of years of– if reinsurers don't have a high degree of losses, they'll see their capital continue to increase. This is not of buybacks and the alternative capital has really increased due to capital infusions.
So, as Jeff was saying, a lot of the new capital that's coming into our business has been– or that's getting attention at least has been capital infusion. But as you can see, the traditional balance sheets have grown their capital a greater amount that the alternatives, and we'll explain why.
So, let's– why is this happening? What you see– this exhibit is a theoretical portfolio return that's on the Y axis. On the X axis is how diversified is the portfolio.
So, the more– if you're a rated company and you can use a dollar of capital to write more than a dollar of limit or business, you can leverage your balance sheet more.
So, the more diversified you are, the more you can lever your balance sheet. The more focused your portfolio gets, the more concentrated it gets, the more capital it consumes and therefore the difference between a rated balance sheet and a collateralized balance sheet is the same or it's better to be collateralized.
Now, you might run on one of the slides Jeff showed on the breakdown of the market. The majority of the risk placed in the world is United States risk, so we, as an industry, go between– it's not a perfectly diversified portfolio. It tends towards the peak. The peak of all reinsurance portfolio is really is the United States or most of reinsurance portfolios.
So, we believe there's a breakeven point for which the rated balance sheet is the most efficient form of capital. After that point, a collateralized balance sheet or we call it ILS but think of it as fully collateralized balance sheet as the best source of capital.
So, where we want to stay as RenRe is on the most of efficient point on that curve. So, the more diversified we get, we want to use rated balance sheets. The more concentrated we get, we want to use collateralized balance sheet.
So, we want the optionality of having a hybrid corporate structure of capital structure so that we can go between both of these.
So, we have– to stay on that efficient frontier, we've got owned balance sheets that are rated. That's the public company. We've got balance sheets that we do not own that are also rated. And then, we've got balance sheets we don't own that are collateralized.
So, when a customer walks into our shop, they get a choice that's most efficient for the risk that they're trying to place with us.
So, from our perspective, this is the structure that it yields. So, we look at the market. We look at the source of capital that are available to us and we create balance sheets.
On the left side of this page are various balance sheets that we employ to service our clients. On the top is what type of investors are out there.
So, we've got– I'll just go through a couple of these. Renaissance Reinsurance Limited is an owned and rated balance sheet. And that capitalize with public investors, such as yourselves.
Then, we've got an entity called DaVinci Reinsurance. It's $1.04 billion capital and it's capitalized by private institutions.
So, pension plans, endowments, in certain cases, clients. And that right, to companion line to RenaissanceRe.
We've also– we also have what we call sidecars, or what's known as sidecars in the market. We call them joint ventures Tim III and Upsilon Re. These are (riffle shots).
So, this is squarely in the area that were shaded yellow in the previous exhibit where collateralized balance sheets are more efficient for our customer than one of the rated balance sheet.
So, what we try and do is match the right capital with the right risk at the right time. All three of those stars have to align in some way for us to create these balance sheets.
So, we have a very active practice of continually bringing risk in the door and then figuring out which house– which home is right for it from a capital perspective.
So, from a client's point of view, what do they see when they interact with a company RenRe? So, I'll walk you through the slide for those not familiar with reinsurance.
A sample lost is really what is the lost profile of our customer? So, at the bottom, our customer will retain a certain portion of their risk and then they'll buy reinsurance.
So, working layer is right above their retention. Then, you'll get typical cat XOL means cat excess of loss. And as you go higher up, you're becoming more remote. You're going farther away from the risk.
To us, each of those tranches produces a return profile and a P&L profile that's suitable for a different balance sheet. So, what you'll see here is Top Layer Re, creatively named, right the top layer business. Top layer meaning the top of our client’s reinsurance program, that's financed by– it's a joint venture between ourselves and state farm, so rated double A.
So, if you're an international client, non – US client, you're seeking double A. capacity– very efficient, large – sized, Top Layer Res is one of the few balance sheets in the world that can provide that.
As you go down the risk tower, you see different balance sheets from us. And if you're a client that's placing the entire tower, RenaissanceRe has the ability to offer each of those pieces. So, what we can do is construct inefficient solution of– insufficient reinsurance solution for our customer across multiple balance sheets.
So, from our perspective or from your perspective, how do we look from a capital point of view? So, if you just look at the capital company, which is all the way on the left side of this page, it will look like a standard reinsurance company. We've got equity debt preferred.
Then, we've got this management of third – party capital. As I said, some of it is rated. Some of it is collateralized.
So, we managed– we're putting out capacity or capital that's in excess of what our public company has today in our managed structures. And the managed structures contained both rated and unrated capacity, so DaVinci have got a similar cap structure to RenaissanceRe but it's financed and capitalized completely separately. We manage it. We paid fees for managing it.
Top Layer Re provides $4 billion of capacity to non – US clients. Again, rated double A. We manage it. We paid fees for it.
And then, from time to time, we'll establish a limited life vehicle. So, if a certain market opportunity comes up and the right home for that is a collateralized balance sheet, we establish vehicles like Tim Re III and Upsilon II.
For the sum of that is what you're actually seeing as client is about $9 billion, right? But we look like a $4 billion company.
So, that– this is a very important part of our management, of our client relationships, of our– and our capital management. This allows us– management – third – party capital actually allows us, as Jeff said, in an integrated fashion to practice all of our competitive strengths in support of our clients.
So, with that, I will pass it back to Jeff and open it up for questions. Thank you.
I think given the time we've used for probably at the end, I think I probably– either Aditya or I have touched on virtually all of these. The punch line to us is the title. We think things will continue to change and evolve in our business but we see the company as being very well positioned for whatever lies ahead.
So, with that I'll just end there. Thanks, Greg.
Great. Thanks to Jeff and Aditya. We'll go over to the Metro West to do the Q&A. And just a couple of things, I think they're a bit– RenRe is one of the few financials that has driven a 20% compound of return in book value for 20 years, so they've done a heck of a good job. They're obviously very focused on returns. Recently, they've bought back about 15% of shares outstanding in the last 12 months. So, somebody up there were on the last share. And come to the breakout and we can talk more.
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