RenaissanceRe Holdings' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: RenaissanceRe Holdings (RNR)

RenaissanceRe Holdings Ltd. (NYSE:RNR)

Q3 2013 Earnings Call

November 6, 2013 10:00 AM ET

Executives

Peter Hill – IR

Kevin O’Donnell – President and CEO

Jeffrey Kelly – EVP and CFO

Analysts

Sarah DeWitt – Barclays

Vinay Misquith – Evercore

Michael Nannizzi – Goldman Sachs

Crystal Liu – Credit Suisse

Josh Stirling – Sanford Bernstein

Joshua Shanker – Deutsche Bank

Jay Cohen – Bank of America

Brian Meredith – UBS

Ian Gutterman – BAM

Matt Carletti – JMP Securities

Operator

Good day ladies and gentlemen, my name is Monseratte, and I will be your conference operator today. At this time I would like to welcome everyone to the RenaissanceRe third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. Following today’s presentation there will be a question and answer session.

(Operator Instructions)

I would now like to pass this call over to our first host Mr. Peter Hill. Sir, you may begin your conference.

Peter Hill

Good morning and Thank you for joining our third quarter 2013 financial results conference call. Yesterday after the market close, 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 one. There will be an audio replay of the call available from about 1:00 p.m. Eastern Time today through midnight on November 27, 2013. The replay can be accessed by dialing (855) 859-2056 or (404) 537-3406. The pass code you will need for both numbers is 78498780. Today's call is also available for the investor information section of www.renari.com and will be archived on RenaissanceRe's website through midnight on January 15, 2014.

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 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 Jeffrey Kelly, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Kevin.

Kevin O’Donnell

Thanks Peter and good morning everyone. I'll start off the call today with making some general comments, then I'll turn it over to Jeff to do the financial results and before taking questions I'll come on to make a few more comments. The third quarter as always is an interesting one for us. It takes place at a time when we transition our focus from the active management of our imposed portfolio to planning for a new portfolio in light of the upcoming renewal. I am pleased to report strong performance for the third quarter. We reported an operating ROE of 19% and growth and tangible booked value per share, plus accumulated dividends of 5%. We achieved this in a low interest rate environment with competitive market conditions.

Our results reflect light CAD activity. They also reflect actions we took earlier in the year to improve the profile of our portfolio. Conditions throughout the Atlantic Basin run favorable to hurricane activity even though the tropical storm count was consistent with historic levels. Our scientists that WeatherPredict do not believe that this season implies any long-term trend. Generally speaking, the underwriting environment and property catastrophe and other reinsurance lines remain competitive with abundant supply of both traditional and non-traditional capacity.

There has been a lot of discussion this year about convergence with a particular focus on new or non-traditional capacity. The participation of non-traditional capital our industry, however, is anything but new. We have been managing many forms of capital including third party for well over a decade. It is our job to find the most efficient capital and deliver it to our clients by matching it with the most attractive risk. Third party capital is just one more tool making our job easier. What is different about the current environment is that capital is coming in when rates are going down. Our capital, because it is primarily from retained earnings can be patient. Much of the third party capital on the other hand needs to be deployed or returned. So now more than ever discipline is important. While the customers benefit from the new competition, ultimately capital must be paid adequately for the risk assumed.

New capital should be deployed carefully and only when it mutually benefits the provider and the end user. Over our history, we have developed a reputation of good stewards of capital and disciplined underwriters. Capital for providers know this and that is why we will continue to be a market of first call for deployment. Strong capital stewardship and underwriting discipline allows us to make the best use of this new capital. For example, we are seeing client needs that are most efficiently fulfilled on collateralized balance sheet. We plan to fill that need by raising capital in a targeted manner using our Epsilon joint venture.

On the other hand, we do not think that increasing the size of DaVinci make sense right now for other investors or for our clients. Clients are still benefiting from the new capital as we have been able to restructure DaVinci's investor base to make it more stable over the long term. If we look at the total capital invested into DaVinci by our top investors that total represents significantly less than 1% under aggregate capital under management. This is patient capital.

Another subject of intense speculation is the amount of capital on the sidelines. I believe that it is this fear of the additional capital as much as anything else that has been driving the weather around convergence. It is instructed to point that the actual amount of convergence capital is relatively minor compared to the size of traditional balance sheets. Retained earnings this quarter will outskirt new capital infusions many times over. In addition, we are beginning to see the first signs that third party capital is cooling to insurance risk as market does continue to soften.

I do not know if that trend will continue. Whatever the future holds for convergence the ability to be responsive to these various market dynamics will be seen in the months and years to come. In that regard, I believe our flexible business model, experience, and proven access to the capital market make RenaissanceRe the best placed company going forward. Let me turn the call over to Jeff and then as I said I will come on for a few more comments after him. Jeff.

Jeffrey Kelly

Thanks Kevin and good morning everyone. As Kevin said, I will cover our third quarter and year to date financial results and also provide you with our initial 204 top line forecast. We reported solid results in the third quarter as loss activity was fairly benign and investment performance was favorable.

From a top line perspective, the third quarter tends to be light for catastrophe reinsurance renewals, however, our Specialty and Lloyd's units did report continued strong premium growth. We reported net income of $180 million or $4 and 1 cent per diluted share and operating income of $151 million or 3 and 36 cents per diluted share for the third quarter. Net realized and unrealized gains on interments total $29 million. The consolidated combined ratio was 48.6% in the third quarter. The annualized operating ROE was 18.7% and our tangible booked value per share including change in accumulated dividends increased by 4.9% during the period.

For the first nine months of 2013, the annualized operating ROE was 17.7% and tangible booked value per share plus change in accumulated dividends was up sharply at 10.9%. Let me shift to the segment results beginning with our reinsurance segment, which includes catastrophe and Specialty followed our Lloyd's segment. Beginning with catastrophe reinsurance, managed catastrophe gross premiums written increased $10.6 million or 13.5% compared with a year ago period during the third quarter. Net of reinstatement premiums managed catastrophe gross premiums written increased 25.7% from a year ago in the third quarter. Ceded premiums total $50 million in the third quarter reflecting increased reinsurance purchases including the issuance of our 144A catastrophe bond through the Monalisa Facility early in the quarter.

For the first nine months of the year, managed catastrophe gross premiums written declined $29 million or 2.2% relative to the year ago. Adjustment for reinstatement premiums in the current and year ago periods managed catastrophe gross premiums written would have declined 4.8% for the first nine months of year. This compares with our full year 2013 guidance for the segment of a decline of 10%. Our largely flat underlying premium volume in a very competitive marketplace speaks to the strength of our underwriting franchise and market position. Ceded premiums for the first nine months of the year totaled $364 million compared to $411 million in the comparative. The decline in ceded premiums relative to a year ago reflects both lower cost retro-protection as well as reshaping of our portfolio early in the year which led us to retain slightly more risk in lower layers.

The third quarter combined ratio for the catastrophe unit of 30.1% benefited from a low level of catastrophe loss experience. We did not have material losses related to notable industry loss events such as the German hail storms or flooding in Colorado. Net favorable reserve development totaled a modest $6 million for the catastrophe unit in the quarter relating primarily to a $5 million reduction to our loss estimate for hurricane Ike. We did not make any meaningful reserve adjustments during the quarter to our ultimate loss estimates for storm Sandy or for the major loss events of 2010 and 2011.

For the first nine months of the year the catastrophe unit combined ratio came in at 32.3% with favorable reserve development totaling $43 million. Specialty reinsurance gross premiums written increased 58% in the third quarter to $60 million primarily driven by additional quarter share premium. Percentage growth rates for this segment can be uneven on a quarterly basis giving timing differences in a relatively small premium base. For the first nine months of the year, gross premiums written increased 14% compared to the year ago period. This was above our prior guidance for slight growth in a year. The specialty combined ratio for the third quarter came in at 62.7% with favorable reserve development totaling $3.0 million. For the nine month of the year, the combined ratio for the specialty segment was 68.1% with reserve releases of $23.0 million resulting in a 14.6 percentage point benefit to the underwriting margin.

In our Lloyd segment, we generated $40.0 million of premiums in the third quarter, an increase of 39% compared with a year ago. For the first nine months of the year, Lloyd gross premiums written increased 37% to $183.0 million. This compares with our annual growth rate guidance of above 30% for the full year 2013. The Lloyd’s unit incurred a $2.5 million underwriting loss in the third quarter driven in part by a $3.0 million net unfavorable reserve development principally relating to single late reported claim. The expense ratio remained high at 45.5% but has been declining sequentially as business volume increases. For the first nine months of the year, the Lloyd’s combined ratio came in at 1% or 1.5%.

Turning to investments, we reported net investment income of $60 million in the third quarter. Recurring investment income from fixed maturity investments remained under pressure due to a level of yields on our bond portfolio and total $24 million in the quarter. Our other investments portfolio generated again a $37 million in the third quarter. Private equity and hedge funds had positive performance and generated gains of $14.0 million.

During the quarter, we reallocated our portfolio of bank loans from other investments to our fixed maturity investments to reflect the change in their holding structure from investment funds to separate accounts. Thus, in future quarters, we will not be reflecting marked market gains and losses on these securities as a part of investment income. Instead value adjustments and the valuation of these bonds will show up below the operating income line within realized and unrealized gains and losses.

Our other investments performance also included an $18.0 million gain related to an upward marked market adjustment for investment in Ascent. This is a startup mortgage insurance company that we have a strategic investment in during 2009 and which we account for at fair value. The increase in the value our stake in Ascent reflects our estimate of fair value at the end of September. Following the IPO last week, we intend to shift this investment to be reflected as equity investments trading on our balance sheet and its value will then be based on its public share price.

So, on a go forward basis valuation adjustments post the IPO valuation will be reflected in realized and unrealized gains and losses on investments which are not included in our operating income.

The total return on the overall investment portfolio was 1.4% for the third quarter. The duration of our investment portfolio remained short at 2.1 years and has remained roughly flat over the course of the year. The yield of maturity on fixed income and short-term investments was roughly flat as well relative to that at the second quarter at 1.7%.

On a year-to-date basis, our investment portfolio has generated a 1.5% total return. As we have stated on recent calls, we believe we have capital in excess of our requirements given our current portfolio and our current outlook for business growth. Share purchases during the quarter were again relatively modest totaling 224,000 shares for an aggregate cost of $19.0 million. For the first nine months of the year, we were purchased 1.8 million shares for a total of $141.0 million with the vast majority of those shares bought back in the first quarter.

We generally take a pause in share buyback activity during one season, although we did buyback some shares through our 10b5-1 plan early in the quarter. We remain committed to returning capital of the shareholders in a disciplined manner and share repurchases will remain our primary method of doing so. We have, however remained active in terms of managing our overall capital structure and recalling that in the second quarter we refinanced our preference shares at more attractive rates.

Also, earlier this year, we returned a $150.0 million capital of third party investors in DaVinci as well as repaying a $100.0 million senior note issue that matured in the middle of February.

Our balance sheet remains strong with considerable access capital and from a liquidity standpoint over $750.0 million in cash and securities that are holding company.

Our line item relating to discontinued operations reflects a loss of $9.8 million. This relates primarily to an $8.8 million loss on our sale of our weather and energy risk management unit [indiscernible] at a discount to carry value during the quarter. As noted in our release, all prior periods presented have been reclassified to reflect the results of real and discontinued operations.

Finally, let me give you our initial top line forecast for 2014. For managed catastrophe, we estimate premiums will be down about 10% in 2014 excluding the impact of the reinstatement premiums. This reflects our expectation for continued price competition as well as fewer business opportunities that beat our return hurdles.

In specialty reinsurance, we are forecasting the top line to be up 15% reflecting some new business opportunities. Keep in mind that the growth in this segment can be lumpy due to the relatively small size of the premium base.

In our Lloyd’s unit, we expect premiums to be up over 20% for the year. Recall too that this growth is of a relatively small premium base and we continue to be in the building and growth phase for this platform.

Finally, I would remind everyone that premium estimates of this nature are subject to considerable risk and uncertainty and our goal in providing them to you is to give you our best estimate at this time.

Thanks. Now, I will turn the call back over to Kevin.

Kevin O’Donnell

Thanks Jeff. As you can see from our guidance, we are expecting a challenging renewal for property catastrophe. Over our 20 years, we have experience many softening markets. In my view, we are better positioned today from the perspective of tools, people and capital than we have ever been.

With the risk management frameworks we have in place, our insight into the risk, we are assuming, is improving all the time. That obsess arrive with conviction and we believe we will be able to build an attractive portfolio for 2014. At the same time, we will manage our exposure using multiple channels including sitting reinsurance and trading with third party catastrophe. We expect to see continued demand at attractive terms with the aggregate retro-product we offer to our [indiscernible].

One of the changes we will be focusing on in the market is the expiration of TREA at the end of 2014. We have historically been a large provider of both international and U.S. terrorism coverage. We have the people, technology and capital to write this risk and believe that if demand for this product increases, capacity will be there to meet it.

Outside of property reinsurance, the environment for casualty and specialty reinsurance that we write is also competitive. However, as primary insurance pricing in some specialty classes continues to improve, we have seen increased [indiscernible] opportunities. We have strong capabilities in the specialty line. Since this risk is diversifying to our property catastrophe exposure, our cost of capital for most of these lines is very efficient. The challenge to growing this book is that many classes are simply not profitable enough with the risk being seated.

Specialty [indiscernible] building out the new U.S. platform in a disciplined manner leveraging expertise and relationship we have developed and our other decisions. Our Lloyd’s unit is on plan, meeting expected targets. Over the past few years, we have developed our syndicates, underwriting capabilities and infrastructure to allow it to compete effectively in the market. As this operation continues to gain scale, we expect profitability to improve.

Looking at our strong market presence and client and broker relationships, position us well to construct a high quality book of business. We will optimize our portfolio using our joint venture relationships and the opportunities offered by the retro and security margins. Our strong traditional balance sheet and other vehicles can be ramped up quickly if the need arises. This level of versatility has served us well over the years and we believe it will continue to serve us well as we look to maximize shareholder value over the long term.

And now operator, we are ready to take the questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Sarah DeWitt with Barclays.

Sarah DeWitt – Barclays

Hi, Good Morning.

Kevin O’Donnell

Good Morning.

Sarah DeWitt – Barclays

Given the growth that we are seeing in alternative capital, could you talk about what opportunities you are seeing to manage more sidecars or ventures and I know you mentioned increasing Upsilon Re but not DaVinci and how much could that be the increase in capital of Upsilon Re?

Kevin O’Donnell

Sure. We – in order to think about third-party capital we tend to look to our clients first and the reason we had decided to increase the size of Upsilon is because we think there is significant demand for the retro product that we offer which is a – tends to be more of a worldwide product which is efficient on a collateralized structure, more efficient than on our rated balance sheet. DaVinci actually is one in which the market for U.S. catastrophe has been relatively flat over the last 12 months so when look to our client, they don’t need additional capital to be introduced into the more traditional layers being placed. However, we did change the profile of some of our investors within DaVinci, which we think will be long-term beneficial to us and so although we are not changing -- increasing the size of DaVinci, we are constantly changing the capital structure supporting it, adding efficiency and longevity to the vehicle.

Sarah DeWitt – Barclays

Okay great and then just looking at your operating ROE of 19% for the quarter usually in a low catastrophe quarter you are north of 20. So does it reflects more business makeshift or is it because of rate reductions and the extent is because of rate reduction. How much further would rates need to fall and property catastrophized for heading your minimum return hurdles.?

Jeffrey Kelly

Sarah this is Jeff. So taking the first part of your question, I think that the kind of light cat quarter comparison with years ago returns in similar environments are fundamentally a function of the declining interest rate and investment return environment as well as I think depending on where you are starting period is, just pricing in the business overall. So, we would like the pricing in the business. We like our portfolio but pricing is down obviously from some previous period. So I think for a number of reasons even in a light – a very light catastrophe quarter returns are a bit lower than they would have otherwise been in previous years.

With regard to your rate question as to how much rates would need to fall, the first point I would like to make is softening but there is still plenty of adequate risk. If we go back to where we traditionally talked about the market is between adequate return buckets, low return buckets and negative return buckets, we believe that over the near term there is ample risk residing in the adequate bucket even though rates are moving down for us to continue produce superior returns. I think to think about it as a binary point which we are in or out of the market, isn’t the way that we think about it. We are constantly looking forward in performing our book. When we perform our book, we are looking at notches rate changes but how we are going to structure our capital, how much third-party capital we are going to have and how much retro we are going to have, so I when I look forward, I see ample opportunity for us to continue to provide capacity. I also see that we are better positioned to sustain market changes because of the flexibility of our platform.

Sarah Dewitt – Barclays

Very thanks for the answers.

Jeffrey Kelly

Sure.

Operator

Our next question comes from the line of the Vinay Misquith with Evercore. Please go ahead.

Vinay Misquith – Evercore

Hi Good morning. The first question is on top-line guidance. The down 10% seems actually pretty good considering that we’ve had pricing in the prop-cat is done more than 10%. Could you help me understand some of the guidance because my thoughts would be that you would write less business because less of the business would meet your return criteria. Thanks.

Jeffrey Kelly

Sure, thanks Vinay. The top-line guidance you know right now there is a lot of discussion as to how rates are changing in the market, but it is still pretty early in the one-one renewal cycles but there is not a turn of actual price discovery out there. Again, I would point to the flexibility of the way we build our book of business. So what we provided is what the top-line is but we will significantly look to manage our book through other mechanisms whether it be third party capital, the Upsilon has additional opportunities and also with the way in which we structure our retro programs. So the focus only on one component being the change in our top-line doesn’t really necessarily reflect the way in which we are going to build the book over the course of the renewal. There is still a lot of uncertainty as to what one will look like at this point and we will continue to modify our strategy as we get closer to the renewal date.

Vinay Misquith – Evercore

Okay, okay. The second question is you mentioned that rates still meet your return thresholds. What are those return thresholds right now?

Jeffrey Kelly

The – that’s the way we think about our business is looking at what is our portfolio returning and what’s the marginal difference of each deal that we add, so the – the portfolio really reflects where we think the market is going. So I don’t think it would be the most informal way to think about it that this is a specific hurdle where deals are good or bad. It depends on the way in which we are going to structure the risk and the way we are going to bring it on to our portfolio on a net basis.

Vinay Misquith – Evercore

Sure, I mean my question was more in terms of you know, what are we do you think is an adequate return, if you want to share that with us?

Jeffrey Kelly

Yeah. I would think that you know, that’s again looking at our business. We are dealing on an expected basis and what is ultimately produced is you know, how we have done against that expected basis but we have been doing it for 20 years so I would point it to our long-term returns as an adequate place to start.

Vinay Misquith – Evercore

Okay great, and then one last question on share repurchases. Would it be fair to assume that 100% of your earnings are available either for dividends or share repurchases this year or next year?

Jeffrey Kelly

Yeah. So I think it would be fair to assume that. We have, as I said, a fair amount of excess capital, or we believe there is excess capital and it would be available to the – if there aren’t other business opportunities that develop for it, and as Kevin noted, there are lot of laborers that we can pour in that potential deployment but it is possible that we can return up to that much.

Vinay Misquith – Evercore

Sure, and just looking at next year the top line guidance is down 10 but is that mostly due to rate and so therefore I mean no capital frees up or do you actually free up some capital from your top-line being down on the catastrophe side?

Jeffrey Kelly

I think there is a lot of moving creases where we do this, but I think to keep it simple I would assume that most of that is rate change in the proforma portfolio is a remote – similar risk profile. One thing if we go back to what we said on the last quarter, they were constantly shifting whether we have risk lower in the you know, at more exposed return periods or less exposed return periods. Those sorts of shifts will occur but then in general if you think of the guidance as mostly rate it is probably [indiscernible].

Vinay Misquith – Evercore

Sure and just to clarify, has the growth in the specialty in the Lloyd’s will not require any more capital, correct?

Jeffrey Kelly

When we look at our economic balance sheet, that’s true. We – we have to put some collateral at Lloyd’s but it’s – the driver in our decision is the economic and we are still going to be dominated by our catastrophe exposure so the marginal capital allocations is very small.

Vinay Misquith – Evercore

Okay Thank you.

Operator

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

Michael Nannizzi – Goldman Sachs

Thanks. So, just one question, on the third-party capital vehicles, what sort of hurdle rate for returns do you have in those vehicles versus your own balance sheet and I am assuming DaVinci is similar but maybe for like Upsilon or some of the other structures, I am just curious kind of how to think about where you know, what is the return profile you need to kind of put business into those structures? Thanks.

Jeffrey Kelly

Sure. I think it fully depends on the structure so if you look at our catastrophe bond it really is based, you know, on the multiple to excepted losses is to what we were paying. If you look at – you know, which is the single digit return. If you look at things we have did in Tim Re which were kind of concentrated risks mostly in Florida, the expectation for returns actually is quite high. So we try to match the investors that we speak to the written profile of the deal that we have. I think you are right in thinking DaVinci as being in a similar profile to the RenRe cat book but that is a permanent vehicle where something like Tim Re we are going out based on an opportunity. And that is just a risk that we are putting into it to the type of investor we are attracting.

Michael Nannizzi – Goldman Sachs

Got it. Thanks, and any movements that you kind of insinuated a change to the profile inductors in DaVinci. Can you elaborate on that a bit more?

Jeffrey Kelly

Sure. If you go back, you know, when DaVinci or even just going way back when DaVinci was first started and then when we changed the size in old thought, we came in with you know old thoughts certainly with more hedge funds and now we have much more of a pension fund in down type investment profile within DaVinci, so you know that's why I thought of making the comment about this besides the overall assets under management of our investors, you know, compared to what they have allocated into DaVinci, I think is an important point.

Michael Nannizzi – Goldman Sachs

Got it, and then just one other question on the ceded premiums, clearly those were higher this quarter. I would have thought though that maybe expense ratio would have benefited a bit more just given how I would imagine the ceding commissions would run through there, I am just curious – is that right or is that not right?

Jeffrey Kelly

I am not sure I understand your question. Can you explain?

Michael Nannizzi – Goldman Sachs

Higher ceded premiums help to reduce the expense ratio because of the ceded commissions that you receive from the counterparties you are ceding the business to?

Jeffrey Kelly

Yes, a big part of the increase in the ceded premium in the third quarter was the catastrophe bond we issued and there is no ceded premium.

Michael Nannizzi – Goldman Sachs

Got it, okay, that makes sense, okay.

Jeffrey Kelly

Okay.

Michael Nannizzi – Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Michael Zaremski with Credit Suisse

Crystal Liu – Credit Suisse

This is Crystal Liu filling in for mike. My first question is can you help us think about the potential for new reinsurance demand coming in online in Florida as a result of number 1, Citizens drive to depopulate and number 2 Citizens clearinghouse.

Jeffrey Kelly

Sure. Looking up to this it seems the takeouts are – there are more takeouts going on and citizens rates are going up. The other thing I consider is citizens are also buying reinsurance, so we have got a lot of components of the Florida market that good tailwinds. Additionally, when I mentioned that U.S. catastrophe market has been relatively flat, we did see the Florida market grow modestly in part of it is because of the takeouts. The clearinghouse will come online of the operational next year. So I think we will have better senses to what opportunities really come out of the clearinghouse. You are optimistic that it can serve to reduce the size of some of the state funded reinsurance [indiscernible] but we think it is a good thing long term. Finally we have seen a lot of new startups in Florida and I think again that is again pointing to competence that there will be more migration of risk from the state facilities to the private facilities. It is all that leads up for us to be optimistic but a lot can unfold between now and the June and July renewals.

Crystal Liu – Credit Suisse

Hay, great. And I know you currently do not plan on increasing the size of DaVinci but given current insurance linked securities market dynamics, if there are very large catastrophes would it be more likely when we raise more capital within the DaVinci versus from equity investors?

Kevin O’Donnell

I think that is the hard thing to forecast. I certainly believe that we will have ample opportunities to raise capital in both but will really depend on kind of what the event is and what the market dynamics are at the time of the loss. I think having the flexibility to access capital from such a wide variety of sources, no matter what the outcome is, it would position us best compared to the other participants in the market.

Jeffrey Kelly

And, I would just add to Kevin's answer that we feel that we have – we do feel we have a lot of flexibility to raise capital in both balance sheets.

Crystal Liu – Credit Suisse

Hay, thank you.

Operator

Our next question comes from the line of Josh Stirling with Sanford Bernstein.

Josh Stirling – Sanford Bernstein

Hi, good morning, thank you for taking the call. I am wondering if you could just talk through a little bit more of some of what's your growth in Specialty and in Lloyd's, obviously you are coming on small basis but you know generally the market is getting a bit more competitive and would love to get a sense of sort of what to go to market strategy is here and sort of what opportunities you guys think of taking advantage of"? Thank you.

Kevin O’Donnell

I think you hit the nail on the head just in your comment there that it is of the small base but let me talk a little bit more specifically about each of platforms. In the Lloyd's platform we build out and built more into each of the underwriting teams, so we are really just accessing business that we have been accessing for the last couple of years with ample opportunity to grow. It is a very large market and we are still small participant.

On the Specialty side, we have opened a new office in the U.S. which will allow us a little bit more flexibility to raise some of additional vote of share type business that we wanted to have higher degree of touch and what we are comfortable with from the premier to base balance sheets. So we feel that will create some opportunity. We think there is some positive movement in certain classes on the primary side, so we will look to leverage into that.

The final piece is just regarding your economic capital model which I touched on earlier. This is very efficient growth for us because it really does not require any additional hard capital. We are simply leveraging the efficiency within our balance sheets and structures. So it is not that we are chasing a market where we see strong headwinds. It is really picking your spots and being opportunistic and growing if we consider efficient capital base.

Josh Stirling – Sanford Bernstein

And I get some curious on you Specialty business. Actually, I guess I lost two follow-ups, when you sort of think make the point that you are leveraging your capital and you [indiscernible] sort of between economic capital and sort of hard dollars and I guess that you know the first follow-up is you know, would you expect these guys to sort of return, sort of appropriate, you know mid-teens targets on an absolute allocated hard, you know, capital base or if it is just truly sort of a marginal benefit in you economic analysis?

And then the second question is when you think about specialty lines you know you are the most famous doing sort of more exact things like worker's comp, you know catastrophe and terrorism and so on and so forth. But I guess the question is what actually are these primary you know, lines you are doing for your customers and sort of what you know you said there are some primary lines benefiting and obviously that is happening in the primary side, I' m curious sort of which of these lines you guys targeting and if there is sort of you have this or with this to with RenRe focus on cat and very focused on sort of well modeled risks? Thanks.

Jeffrey Kelly

Let me take your first question which is regarding economic and hard capital returns. I think it is a great question and one of the things we do on each deal is we look at absolute standalone returns for a deal and then we look at the marginal returns and the gating issue we have had on this specialty business is the standalone returns for the deals. So is there enough profit in the deal for us to accept that level of risk because we know once we had even a small degree of profit against the overall portfolio that we have the marginal return will be higher. So we are very, very focused on that and careful to make sure that the standalone return is understood and appropriate for the risk overtaking.

Kevin O’Donnell

Regarding what types of specialty lines, I think it does change a bit over time. If you look at where we have been more successful, you know, we talk about specialty and casualties together, we have been more successful on the Specialty lines and then I would say more in some of the professional lines within specialty. That is really where we have seen some of the better rate change. As far as the worker's comp, you have mentioned that that's not focus where we are trying to grow up the business.

Josh Stirling – Sanford Bernstein

Great, thanks, Good luck one-one. Thank you.

Operator

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

Joshua Shanker – Deutsche Bank

Following [indiscernible] questions and quota share cede at what point in this market does it become for a better market to be a buyer of reinsurance than a seller? Are we at the inflection point, you know, how are you thinking about things here? What is the average gross opportunity?

Kevin O’Donnell

So, I think that is really a straight question. So if you go back over history, we are more kind of, what I would consider to be a nontraditional buyer retro in that we when we are looking our portfolio, we are looking at inwards business, outwards business, or sessions to see which and how to optimize the portfolio. We have ceded in, in what I would consider to be the hardest markets and we have ceded more what I would consider to be the softest markets, so it is not the specific point where we are going to be on one side of the fence or the other, it is really how are shaping our portfolio and how we are able to capture the best economics we can on a net portfolio basis.

Joshua Shanker – Deutsche Bank

In negotiations do you need to make clear your appetite to buy retro early on, or is it widely available for you after one-one?

Kevin O’Donnell

So, I am not sure if you are asking do we disclose to our clients how are managing our risks?

Joshua Shanker – Deutsche Bank

No, no, no. More or less if you find someone who would like to see the business to, I mean, are you able to see where your book stands and then make the decision or do you have to have a view going in about how much risk you are taking on and buy your retro as part of your renewal season package?

Kevin O’Donnell

Okay. So, I think it is – it is a little bit of both actually. Since we are performing our book of business, we have an ability to have a much more detailed conversation with some of our capital, about what the book is likely to look like. The examples of that we were putting together a third-party capital vehicle like Tim, Star Bond, Upsilon. We can be very precise as to what business we are likely to see to it. On the other side, if we are trading on ILW or something where it really is not important by the way we construct our book, we really don’t have to have any disclosures as to the way we construct our portfolio or what we are likely to do.

Joshua Shanker – Deutsche Bank

And in terms of the market right now, is there plenty of capacity in the market for that type of business or if your view will be one to one vulnerability?

Kevin O’Donnell

You mean for us to see it?

Joshua Shanker – Deutsche Bank

Yeah.

Kevin O’Donnell

I think it's one that again, since we don’t collaborate the program, we can be flexible and purchase on retro now, in February or June, it doesn’t matter and it is about optimizing our portfolio not building required capital. So I think whether it is available for one-one we are somewhat agnostic about, but we are not agnostic about as being in the discussion and being able to see what is available early and be able to respond to those offerings quickly.

Joshua Shanker – Deutsche Bank

Understood. Well. Thank you for all the answers and Good luck.

Kevin O’Donnell

Sure Thanks.

Operator

The next question comes from the line of Jay Cohen with Bank of America.

Jay Cohen – Bank of America

Thank you. I guess the question is on the specialty business. The [indiscernible] your last ratio is quite a bit lower than it had been running, if my numbers are correct and I am wondering what is behind that. At the same time the acquisition expense ratio is quite a bit above what it had been running. So I guess maybe a shift in business mix, but I am wondering if you can explain why these numbers look a bit different in the previous quarters?

Kevin O’Donnell

Let me talk of just the acquisition. The acquisition one is the mix is shifting a little bit from XOL to little bit more quarter share. Part of that is you know, just the way we are repositioning some of our balance sheets and the U.S. platform and as far as the acquisition loss ratio, just looking to numbers here.

Jeffrey Kelly

Yeah. I think it is just a relatively light loss period Jay. I don’t think there is anything special going on.

Jay Cohen – Bank of America

Great, Thank you.

Operator

The next question comes from the line of Brian Meredith with UBS.

Brian Meredith – UBS

Yes Thanks. Jeff, just one quick numbers question. The yield on your fixed income portfolio for the quarter, does that incorporate the bank loan facilities in there for the full quarter or will we receive change, you know, in the fourth quarter result of the switch?

Jeffrey Kelly

That’s a great question. I – I think it will probably change it slightly. I mean in the context of the overall portfolio it is, you know, it is a relatively small number but it will be included now as part of the fixed income securities portfolio as opposed to private investments or private – privately held other investments, so it should take it up.

Brian Meredith – UBS

Take it up a little bit. Okay great.

Jeffrey Kelly

It will be very minimal based on the size though.

Brian Meredith – UBS

Got it, and Kevin, two questions, first I was wondering if you could just expand your comment about the slowdown and demand which has been seen from alternative capital providers?

Kevin O’Donnell

Sure. What I was saying is this seems the first time of that and what that is, is really a shifting dialogue at this point where we have seen a lot of conversations with different types of capital either that walk in the front door and then go out and solicit and you know we are hearing a lot discussion on market and rates for changing and they are trying to understand how that is going to impact the returns on the capital that they are putting forth. So I think it is one that it is that if you go back you know, seven months ago, that dialogue wasn’t there and there was just an eagerness to have discussions without catastrophe returns. I think right now that discussions are more yielded because of the discussions for price change.

Brian Meredith – UBS

Got you, and my second question Kevin, I’m just curious. As we look at your current portfolio going forward in the catastrophe book in which you retained in your balance sheet versus what you seated out to third parties in retro, do you expect that because of what is going on with alternative capital it may be which you retained on your own balance sheet will be kind of lower peak exposure and more the peak exposed, or there is going to be seated off. So we see a kind of a shift going on here?, confess with the collateral as market typically is more competitive?

Kevin O’Donnell

Yeah. I think that if we could point – that is a hard one to answer. If you go back to our previous call, we talked about that. We were harder down low specifically with the six-one, seven-one renewals that really [indiscernible] hurricane. I think we are, because of the relationships that we have, we have a lot of flexibility to change the profile of our book. I would not want to go out and say that you were going to have more or less of one type of risk than the other but we will leverage whatever is available on the market on both an inwards and outwards basis to structure into making sure we go for most desirable risks and the most efficient capital that sometimes may be reducing risks in certain areas or increasing risk in others or might be just where we are playing, either very low in the sack of capital or more of exposed return periods or less exposed return periods. But I think your point about the collateralized capital being most efficient in peak stones is an important one because as they move outside of peak stones, the rated balance sheet is at least as efficient as the new capital coming in, so I think it is something that for the time being we should focus on to the [indiscernible].

Brian Meredith – UBS

On that point, do you anticipate going to looking forward that perhaps the tract invest of [indiscernible] Europe versus the U.S. may increase a little bit?

Kevin O’Donnell

On a relative basis I think that this is occurring you know looking forward in our proforma we have an anticipation of more rate competition in the U.S. than we do in Europe. All that being said, the absolute return from U.S. business is still higher than the absolute return from European business.

Brian Meredith – UBS

Great. Thank you.

Operator

The next question comes from the line of Ian Gutterman from BAM.

Ian Gutterman – BAM

Kevin, I guess my first question is in the press release you mentioned that results were helped by decision early in the year to adjust your portfolio. Can you just give a little more color on that or are trying to say that you got off some risks that caused losses for the market this year or are you trying to say something else?

Kevin O’Donnell

No it wasn’t that, it was more how we structured on an expected basis, so if we go back, you know we bought a catastrophe bond, we changed the size of Upsilon, we didn’t renew Tim Re, you know we changed the profile of the book as I just mentioned as to how we [indiscernible] hurricanes. It is all those things combined.

Ian Gutterman – BAM

Yeah I got it. That makes sense. On Upsilon, I just wanted to refresh my memory a bit, the retro that vehicle writes, how much is that for you know external parties reinsurance or is that for your own reinsurance book buying retro or [indiscernible] on that?

Kevin O’Donnell

You know it is – we said it is protection of third parties, so it is not – Upsilon is not writing a retro on what we are going to achieve.

Ian Gutterman – BAM

Okay I certainly make sure, and then is there any appetite to expand from just being collateralized retro to doing collateralized reinsurance given it seems the primary insurers are looking into allocate portions of the program to collateralize?

Kevin O’Donnell

I think we – when we talk about, I mean, generally the ponderance of risk that is currently under this retro will be doing flexibility [indiscernible] insurance as well.

Ian Gutterman – BAM

Okay, is that a plan to increase that this year. Obviously, I mean I think historically Epsilon has been one-one vehicle but [indiscernible] Florida guys having been collaterals [indiscernible] on their programs may reach the Epsilon rates in mid-year too?

Jeffrey Kelly

We did write some risk later in the year last year as well. So I think we could. Epsilon is targeted as specific opportunity. I think if there are different opportunities in Florida we could always change the profile of some of the risk or some of the criteria that we have in Epsilon or we could just start a new vehicle.

Ian Gutterman – BAM

Okay. Got it. Got it. And then I guess [indiscernible] come up with the reserve releases were the lowest in several years. Was there any pockets of adverse that offsets the normal level or releases or were they just favorable less than usual?

Kevin O’Donnell

Yes. It is just favorable less than usual.

Ian Gutterman – BAM

Okay. And, any specific lines that came from or types of risk that came from [indiscernible] expected versus actual events or anything like that?

Jeffrey Kelly

No. Favorable development in all segments of the business were very light this quarter.

Ian Gutterman – BAM

Okay. Got it.

Jeffrey Kelly

Favorable and unfavorable were very light this quarter.

Ian Gutterman – BAM

Got it. Great. I think that is all I have for you now.

Jeffrey Kelly

Thanks.

Operator

The next question comes from the line of Matt Carletti with JMP Securities.

Matt Carletti – JMP Securities

Thanks, Good Morning. Just a quick question for Jeff that late reported claim at Lloyd had a little bit of adverse prior period. Can you quantify that so we can see what the underlying trend was there?

Jeffrey Kelly

It was about $3.0 million.

Matt Carletti – JMP Securities

$3 million. Alright, great. Thanks a lot.

Operator

And there are no further questions at this time. I would like to pass the call back to your presenter for any closing remarks.

Jeffrey Kelly

I would just like to thank you all for your time and I look forward to speaking to you in next quarter.

Operator

And ladies and gentlemen, with this we conclude today’s presentation. We thank you for joining. You may now disconnect.

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