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RenaissanceRe Holdings Ltd. (NYSE:RNR)

Q4 2013 Earnings Call

February 5, 2014 10:00 AM ET

Executives

Peter Hill – IR

Kevin O’Donnell – President and CEO

Jeff Kelly – EVP and CFO

Analysts

Greg Locraft – Morgan Stanley

Michael Zaremski – Credit Suisse

Amit Kumar – Macquarie Capital

Josh Stirling – Bernstein Research

Michael Nannizzi – Goldman Sachs

Michael Nannizzi with Goldman Sachs

Joshua Shanker – Deutsche Bank

Jay Cohen – Bank of America/ Merrill Lynch

Vinay Misquith – Evercore

Brian Meredith – UBS

Sarah DeWitt – Barclays

Operator

Good morning. My name is Ginger and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Holdings’ Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

(Operator Instructions). Thank you. Mr. Peter Hill, you may begin your conference.

Peter Hill

Good morning and thank you for joining our fourth 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 February 19. The replay can be accessed by dialing (855) 859-2056 or (404) 537-3406. The pass code you will need for both numbers is 31065593. Today’s call is also available through the investor information section of www.renari.com and will be archived on RenaissanceRe’s website through midnight on April 16, 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 Jeff Kelly, Executive Vice President and Chief Financial Officer. I would now like to turn the call over to Kevin. Kevin?

Kevin O’Donnell

Thank you Peter and good morning everyone. I’ll start the call today in the same format we have used for the last couple of calls. With me starting off with high level comments then I’ll turn it over to Jeff to discuss the financial results and finally I’ll come back to provide more detail on our book of business and the market. 2013 was a strong year for us and we are pleased to report growth and intangible booked value per share, plus accumulated dividends of 19.7%. We also post a strong result for the fourth quarter.

Our performance benefited from excellent underwriting and solid investment returns. Having had another year lacking in significant credence is a double edge sword for our industry. On one hand results were strong and capital positions were boosted further. But this resulted in abundant capacity. On the other hand for 2013, demand remained roughly flat and aggregate with reduced purchases and some large seasons offset by some increased buying in Florida.

That resulted in pressure and pricing heading January interval. We anticipated rate reductions but the deterioration in pricing at one – one was in fact greater than we expected. And I’ll talk more about that in a few minutes. Consequently we are revising our guidance as Jeff and I will wind in a moment. In light of the increasing competition we focused more than around serving our clients by extending our footprint and growing our product offerings. We were consistent in a way we approached the market and we were able to allocate the most efficient capital to the best risks, structuring products to provide more options to our clients. Our Lloyd’s unit continues to make good progress and building at its business and had a good year in 2013. We strengthened our running capabilities there and deep into our team to better compete in the market. We expect continue to improvement in this business for 2014 as we see greater benefits of scale.

Through 2013 our venture team worked hard to deliver excellent results on an expected basis and a natural basis, for the DaVinci, top layer or various limited life vehicle such as Upsilon. Although we kept DaVinci the same size year-over-year, we brought a new high quality long -term capital partners, we remained focused on bringing capital to market when needed by our clients and withdrawing when it is not. Increasing the size of Upsilon Re and now renewing Tim Re. Compared with 2012, this is relatively light year for share repurchases, nonetheless we bought back over 200 million of our stock, pay down debt and refinance capital perpetual preferred stock at very attractive levels. We remained committed to intelligently managing capital, deploying it in a business when appropriate and returning it when it is efficient to do so.

I’ll discuss the market conditions in more detail but let me turn over call to Jeff to go over our results.

Jeff Kelly

Thanks, Kevin, good morning, everyone. In my prepared remarks I’ll cover our results for the fourth quarter and full year 2013 and also give you an update to our 2014 top line forecast.

We reported solid fourth quarter result which kept a very profitable year for the company. Many of the trends such low cat losses and strong investment performance once that we saw play out through most of the year. Results in the quarter also benefited from reserve releases. For the fourth quarter we reported net income of $269 million or $6.05 per diluted share, and operating income of $207 million or $4.64 per diluted share. The annualized operating ROE was 24.3% for the fourth quarter. For the full year 2013, we reported operating income of $631 million and an operating ROE of 19.4%. For the full year 2013, we reported a combined ratio of 43.8% and underwriting income of $627 million. Our tangible booked value per share including change in accumulated dividends increased 8.1% in the fourth quarter and was up 19.7% for the full year 2013, benefiting from strong underwriting results and favorable investment results.

Before covering the segment results please note that we made slight change to our financial reporting and that we now report Catastrophe Reinsurance and Specialty Reinforces as separate segments. In prior periods, we have reported them separately and then also aggregate them to constitute the consolidated reinsurance segment. The change made here is only in presentation and does not affect any of the figures we have previously reported for Catastrophe or Specialty Reinsurance.

Turning to cat net results for the full year 2013, managed cat gross premiums were total $1.2 billion. Managed cat premiums declined 2.1% compared with the year ago when adjusted for $24 million of net negative reinstatement premiums in 2013 and $18 million of net reinstatement premiums in the prior year period. This compares with our guidance for the full year 2013 for decline of 10% in managed cat premiums. As we referenced earlier this year, full year premiums included $66 million related to quarter share transactions. We also had $27 million of premium related to three year transaction for which premiums were booked upfront during the second quarter of the year. Adjusted for these two transactions, managed cap gross premiums were declined approximately 9.5% in 2013 which is obviously a bit closer to our original guidance.

The fourth quarter combined ratio for the cat segment was negative 12.8%; reserves releases totaled $59 million in the quarter. Most of the favorable development related to reset large cat events including storm Sandy of $45 million, the Tohoku Earthquake of $13 million and the second New Zealand Earthquake by $6 million. This was slightly offset by $9 million increase to our loss estimate for the 2010 New Zealand Earthquake.

The fourth accident year loss ratio was a negative 3.7% primarily due to low loss activity and $14 million reduction to our loss estimate for the Central European flooding which we had booked in the second quarter of the 2013 underwriting year. For the full year 2013, a cat segment generated an underwriting profit of $559 million and 22.8% combined ratio again reflecting generally been loss activity and $102 million of favorable reserve development.

Specialty Reinsurance gross premiums were increased 24% for the full year period 2013 to $260 million when compared with the year ago period; this was well above our guidance for the full year 2013 which was for slight growth. As we have caution many times before percentage growth rate for the segment can be uneven on quarterly basis given the relatively small premium basis. The Specialty segment generated a $23 million underwriting profit and 58.3% combined ratio for the fourth quarter as loss activity was generally benign. Favorable reserve development totaled $11 million in the quarter. For the full year Specialty Reinsurance generated an underwriting profit of $74 million on a combined ratio of 65.6% also reflecting low loss experience and $34 million of favorable reserve development.

In our Lloyd segment, gross premiums were increased 42% to $227 million for the full year 2013 as we continue to expand our franchise there in profitable, diversifying classes of business. The Lloyd segment came in an underwriting loss of $3 million and a combined ratio of 106.3% for the fourth quarter. Loss activity for the segment was also generally light and favorable reserve development totaled $5 million. The expense ratio remained relatively elevated at 50.6% and has been consistently declining sequentially as business volume has increased.

For the full year, the segment generated an underwriting loss of $5 million and a combined ratio of 102.9%. Our investment portfolio was a strong contributor to operating and net income during the quarter. We reported net investment income of $79 million in the fourth quarter which was driven by a few factors. Recurring investment income from fixed maturity investments remained under pressure due to low yield on our bond portfolio and totaled $25 million in the fourth quarter. However, our alternative investment portfolio generated a solid gain of $55 million in the fourth quarter driven by a couple of factors. The private equity portfolio continued to perform well with the $15 million gain. Alternative investment also included a $38 million gain related to the upward mark-to-market adjustment for our investment in Essent reflecting the difference between the valuation of the company at the end of the third quarter and at the time of its IPO on October 31.

Finally, while not included in net investment income depreciation in the value of the Essent stock following the IPO resulted in $36 million of unrealized gains on a portfolio through the end of the year. Recall that we had stated on third quarter conference call that following the IPO we would begin to report Essent as a part of our equity trading portfolio. Subsequent changes in the value of the stock were reflected to realize and unrealized gains and losses and are as such are excluding from operating income.

The total investment return on the overall portfolio was a healthy 2.1% for the fourth quarter and 3.6% for the full year. We are pleased with the performance of our investment portfolio and especially given the low interest rate environment and the increased seen in interest rate during the year. We believe our strategy of maintaining a high quality liquid and short duration portfolio is the right one in the current environment.

Our ventures team had an active fourth quarter and earlier this year announced the formation of a third iteration of Upsilon Re targeting primarily structured aggregate reinsurance in retro deals on a worldwide basis. Capital for the vehicle was provided by third party investors and us. On January 1, we also made the decision to return $300 million of capital to the shareholders of DaVinci in the form an annual dividend bringing the capital of that vehicle to roughly the same size as it was the year ago. We will continue to right size the overall capacity that we bring in the market place given current opportunities. Inclusive of other transactions completed over the course of the year, our ownership in DaVinci stood at 26.5% at January 1.

During the fourth quarter, we continued with our share repurchase program buying back 729,000 shares for a total $67 million. For the full year 2013, we repurchased 2.5 million shares for an aggregate cost of $208 million. So far this year, through the end of day yesterday, we’ve repurchased roughly one million shares for an aggregate cost of $93 million. Given the strong growth in our capital base in 2013 and more limited opportunities set to deploy in the business, we remain committed to returning capital to our shareholders over the course of the year and anticipate share repurchases will remain our preferred method of doing so.

We ended 2013 in a very strong capital liquidity position and continue to have industry leading financial strength and enterprise risk management ratings.

Finally, let me turn to update our top line forecast for 2014. For managed cat we currently expect premiums to be down about 15% in 2014 excluding the impact of reinstatement premiums. This compared with our prior guidance for managed cat premiums to decline 10% during the year. In Specialty reinsurance, we are maintaining our top line guidance above 15% keep in mind the growth in this segment can be uneven due to the relatively small size of premium base.

And in our Lloyd segment, we still expect premiums to be up over 20%, recall here to this growth is offer relatively small premium base and we remained on a building trace of this platform.

Finally, as always I would remind everyone that premium estimate of this nature are subject to considerable risks and uncertainty; our goal in providing them to you is to give our best estimates at this time. And with that I’ll turn the call back over to Kevin.

Kevin O’Donnell

Thanks, Jeff. As I mentioned the renewal at one – one was a challenging one. With rates down more than we expected and placement completed earlier than in the past. I think there are couple of interesting comments to be made here. Although the decline in rates was meaningful, it was largely acceptable. By which we mean that after recognizing each premium dollar has less profit embedded in it, we are able to build an attractive portfolio. We often discuss cat reinsurance business in terms of three buckets. Attractive, low return and negative return. Because of our long standing relationships, established track record and disciplined underwriting, we continue to find opportunities in the attractive bucket, maintaining our share, even growing some instances on line we wanted most, however, here are some context. Our resources are relatively flat year-on-year.

Much of the international market is a levels below our return hurdle, however substantial portion of our international book consist of private deals and transactions which experienced less pricing pressure than the overall market. After all the discussion at the last several months, we did not see business shifting materially between rated and non-rated capital at one-one. The interesting question is whether or not a pricing floor has been reached. I believe the market stabilized because the price reduction tolerance has been reached and not because of an absolute pricing floor has been hit. It is my believe that at the speed at which rates are changing is probably flattening out but that does not mean to say that it will stop altogether. Hence, we have increased our downwards guidance.

At the highest level in the stock market, underwriters can do one of two things. They can protect market share or they can protect margin. I have seen that one-one, we did see a broad brushed approached by many to protect market share. Ultimately, the market will not stop declining until underwriters and capital seek to protect margin over market share. Our pricing for retro was under pressure like most of the rest of the cat reinsurance market, we did see continued increased demand for our worldwide specialized retro product, return to Upsilon Re. In order to provide greater flexibility to investors to invest in the manner that best suits them, we trans the fund to provide different options on the risk forward continue. It has the added benefit of increasingly efficiency of Upsilon Re’s capital and attracting more capital than we required.

One may ask why we are raising additional capital at a time when there is already in abundance of capacity. Upsilon Re represents an interesting confluence of events which allowed us to match efficient capital and desirable risks. Our clients were telling us that they wanted to see to risk an aggregate basis, determining that will be more efficient to assume this risk in a collateralized balance sheet, we would have quickly raised the necessary capacity and serve our customers.

As with many of our vehicles, we are not only the manager but also an investor in each fund, reassuring our partner capital their interest are well earned. This time I like to point I made earlier, we bring capital to market so when needed by our clients and we would draw it when no long needed. And we had a substantial portion of our taking; we did not raise capital solely because it is available and might results fees. Our partner appreciates this approach and as a result we have good access to additional capital.

In terms of ceding opportunities, we will continue to look for ways to optimize our underwriting portfolio. We consistently see opportunities to share risks with others and have tremendous resources to measure the capital import and efficiency of any product on offer. We will remain innovative and willing to match capital in any form against appropriate risk, evaluating all options, both traditional and non-traditional.

Turning to our Specialty business now. We continue to find opportunities in one-one where the market as a whole and more competitive. We are able to do this using several different approaches. With the launch of our U.S. platform earlier this year, we now have access to business we weren’t able to see before and enter markets we hadn’t traditionally participated in. We benefited from strong relationship and a known brand to gain shares on attractive program despite abundant capacity from competitors. In short, participating room for us, and we are seen as a core partner with whom they enjoy trading.

Even in a soft market there is attractive business to be found. We are able to achieve significant growth in the fourth quarter due to some opportunities in mortgage reinsurance where the market as your competitor and favorable fundamental risk characteristics.

Our venture’s team continued to work closely with our underwriting team, establishing capital partnership as a cornerstone of franchise. I think our venture unit is doing two things predominantly. First managing third party capital vehicles and second managing strategic investments we make. Many of these investments are with our reinsurance customers that help them grow their businesses, others a little further from our core, Essent this quarter is a good example that provided us with significant gains over the last few months.

Our capital partners and team appreciate industry leading; real time risking capital announces variables to provide. Intermediate system we operate across underwriting capital management allows us to offer innovative vehicles that support our fundamental principle of matching attractive risks to the efficient capital.

The last five years we have launched five limited life vehicles launched a new cap on fund, we’ve risen over $900 million of new capital from a wide variety of institutional investors, and at the same time we have returned an excess of billion dollar of capital.

As a reflect on a market and the increased the competition that we are seeing, I am more grateful than ever I am at RenRe, I firmly believe that our structure of having both highly rated balance sheets and strong access to other forms of capital is the best formula to serve our customers by having efficient capital to match against their risks.

We are core insured to our clients and its trusted steward to all of the capital we bring to the market. And my believe is no matter what we are doing today we can still build an attractive portfolio going forward and continue to extend our 20 year track record of our performance.

And with that I’ll turn it over to questions.

Question-and-Answer Session

Operator

We do have a question from Greg Locraft from Morgan Stanley.

Greg Locraft – Morgan Stanley

Hi, good morning guys, congrats on the quarter and a great year. Wonder actually isolate on the guidance and specifically the downward trend from down 10 to down 15, can you talk a bit about what changed November versus February?

Kevin O’Donnell

Sure, thanks. The fundamental change really was just really resulted from competition. There is no new capital; there is no initiative that I can point to that is significantly changed to the fundamentals of the business. There was just – there was much more proactive reaching out by some markets to protect market share, that would sense by both buyers and brokers and with that there was increased pricing pressure but it is nothing fundamental in the market that’s changed.

Greg Locraft – Morgan Stanley

But I guess again you guys are in the market, you are sitting in November, you are having conversations, you put down 10 and then all of a sudden to down 15, in your comment you suggested that the actual rate of Essent is flattening out but the movement in guidance which is just otherwise so I am wondering what would prevent the down 15 from becoming down 20 let say in July or something like that once you get to the June.

Kevin O’Donnell

Sure, so we are giving updated guidance today but obviously earlier in the renewal process, I think earlier than most we recognized that rates were sliding further and we readjust our strategy for the renewal. I think for 2014, the June renewals in 2013 had a more significant reduction than the January renewals in 2013. So I think we are going into mid-year renewals with already some of the reduction built in, I believe there will be further reduction but I also feel that our process which is both the ground up and top down process by account and looking at where we think rates are going what we think buyers will do from increasing purchases and reduce purchases, I feel comfortable that the down 15 at this point in time is our best estimate. Obviously the futures are unknown so there is thing that can dislocate that but I feel at this point with what we know and what we done that it is our best estimate where we think our markets going.

Greg Locraft – Morgan Stanley

Okay, great and then second I think just on capital deployment. I am trying to – -it sounds like DaVinci gave back everything that is earned on the year so call it a 100% payout ratio for DaVinci owners. Why didn’t RenRe on that the public equity owners receive the same kind of payout ratio in 2013 was significantly lower when you look at dividends and buyback as a percentage of total earned.

Jeff Kelly

Yeah, so Greg I think the only difference there is our dividend of DaVinci shareholders go in and out at book value and what we are trying to do in our share repurchase activities is to repatriate capital at levels that we think are very attractive for the shareholders RenRe who do not get it an added booked value and so we are just trying to capture the best share repurchase opportunities we can.

Kevin O’Donnell

Let me add one other point to that. So as we keep financial flexibility at RenRe Holdings as well for opportunities that may emerge and some of those opportunities could be emerging at DaVinci so we could increase our share in DaVinci at given point in time if there is an opportunity booked to that were to grow so the more financial flexibility is kept in the holding company than we will keep at DaVinci or any other operating levels.

Jeff Kelly

Yeah, that’s good point. We do manage DaVinci closure to – a little closer to our exposures than we do at the holding company just for the reasons Kevin sited.

Greg Locraft – Morgan Stanley

Okay, great and then last topic is actually away from the core of property cat business. Kevin, could you talk a bit about I mean how – what are your ambitions in the Lloyd and Specialty segments? Obviously the growth there is significant, can you talk a bit about the historical profitability those businesses and where you see this thing going as perhaps another leg that still emerges?

Kevin O’Donnell

Sure. Let me start with Lloyd, Lloyd is a business in which we and entering Lloyd we made the decision to build versus buy. The cost of that decision is really an expense ratio that will take time for us to grow into. We had slower growth in top line and the way it has been in our original estimate and that’s really resulted market conditions that we are comfortable that’s consistent, we manage any of our underwriting businesses. I believe we built the right team there, we built the right infrastructure so as we look back in 10 years’ time I feel very comfortable about the investment we are making in Lloyd that will provide long -term profitability to the growth, to the group knowing that it starts going to little slower because the participant and –I think in Specialty we have a much longer track record. And if you look back over inception today for the Specialty line that we are in, we made an excess of a $ 1 billion profit by being in that business. So although it’s not as large as our cat business we do see it as core, we think it is a very efficient use of capital on a marginal basis to bring on to our portfolio and by expanding our footprint into the U.S. we have gained access to new lines of business. A lot of business that we have written in Specialty is really from core lines we have on the cat side and we have been very fortunate to have a good reception from those buyers, making room for us and some of their best programs. So it’s a kind of little different story for each one but I believe it will be long term contributors.

Greg Locraft – Morgan Stanley

Okay, great, thanks for the answers guys and congrats again on an excellent quarter and another great year, even as the macro is getting more difficult.

Operator

Your next question is from Michael Zaremski with Credit Suisse.

Michael Zaremski – Credit Suisse

Hey, thanks. I guess first on capital. Is there element – can you tell us how much money is at the holding company or if that’s an element you think that’s material?

Jeff Kelly

I believe that the end of the year we have about nearly $700 million in cash and securities of the holding company which is a little higher than normal. And that – I wouldn’t say that is a – that’s not proxy for what we view necessarily is excess capital but it does represent the kind of the raw material with which we can execute capital deployments among the various balance sheets of the company or through share repurchase. And then in addition to that we have a revolving credit facility of $250 million that we can draw if need be.

Michael Zaremski – Credit Suisse

Got it and to follow up to one of Greg’s questions on capital as well. So the $300 million redemption at DaVinci, is that a use of capital is how we should think about it?

Jeff Kelly

No, it is actually so we give an infusion of that to the holding company from the standpoint that it’s – it comes out of DaVinci and goes to the parent but given that we only own 26.5% of the vast majority of that is a dividend to the third party shareholders.

Michael Zaremski – Credit Suisse

So I guess this is a further complication, if I am looking at net income for the year subtracting out share repurchases as a use of capital, subtracting the dividend, I shouldn’t be subtracting out that $300 million.

Jeff Kelly

No.

Michael Zaremski – Credit Suisse

Okay, thank you. And I guess lastly on the top line guidance for cat. I believe in 2013 your guys increased your core share transactions, is that – what do you guy think about that for in 2014, could that potentially be a wildcard? Thanks.

Kevin O’Donnell

Sure. We did increase some core underwriting, one of the things that we looked at is when we write our property for share it is often is line kind of exposure that’s embedded within the closure and hence our interest. I look at the Florida market and I see the Florida market from a primary standpoint in pretty good shape, so there could be additional opportunities for us to write and some property for the share but it’s very early and discussion with our partners even to determine whether that’s going to be an appropriate product for them, but we certainly have capacity to write, we have the tools to understand the risks that we are taking. But it is too early to be definitive to whether there will be opportunities or not.

Michael Zaremski – Credit Suisse

Thank you.

Operator

Your next question is from Amit Kumar from Macquarie Capital.

Amit Kumar – Macquarie Capital

Two quick I guess follow up questions. First of all on the discussion on pricing. If I sort of excel the reserve release in Essent gain you are sort of looking at mid-teen ROE and I am sort of wondering at what point do the returns on the catastrophe business become unattractive versus the cost of capital?

Kevin O’Donnell

So I think you are focusing only on what’s going on with the gross rates isn’t necessarily the way that we think about it. What we are trying to do is a build the most attractive portfolio we can by bringing in the best deals in the market. But we are also constantly looking at how to match the right capital against that and obviously between the capital and risk there is a margin for us. So I don’t see that there is a point a black line or red line on which rates cross and you are either in or out the market. I see that is a migration between right balance sheets are permanent third party capitals or temporary vehicles as to how we structure them traditional retro as well, so tomorrow we continue on but I don’t see a red line I would rather in or out of the market.

Amit Kumar – Macquarie Capital

I just sort of want to ask was you mentioned that it was still meeting your hurdle rate and it was sort of find to put range on what that sort of earned hurdle return a rate might be.

Kevin O’Donnell

Yeah, again I think it is one that the highest level what we are trying to do is find desirable risks and find efficient capital. I think the rate in which where the returns we are looking for is different between the capital on risk, risk capital but I wouldn’t think it is something that I would focusing on has been a binary point or a single point by having interest or interest in a market.

Amit Kumar – Macquarie Capital

Okay and then I just relates to that is as more business moves to your third party insurers including Upsilon etcetera, how should we think about how much incremental capital it frees up and thus makes it available for other uses including increased buybacks?

Kevin O’Donnell

I think in a very simple level when we look at bringing unrated capital to the market we look at whether it is kind of ballistic to our existing business or its accretive. The Upsilon specifically is something that is accretive to what we are already doing, so I don’t think if it is a trade against the risk capital that we deployed, it is augmenting the footprint that we have in the market by adding a product that we wouldn’t otherwise so.

Amit Kumar – Macquarie Capital

Okay and I guess the finally did you mentioned the holding company capital I think Mike was asking that question, the number you gave is that the holding company number?

Jeff Kelly

Mike asked the question of how much cash we have available at the holding company. And I said approximately $700 million with an additional $250 million that’s accessible via a revolving credit facility. That’s not necessarily the same as an access capital figure.

Amit Kumar – Macquarie Capital

Right. And the $700 million sort of on encumbered number?

Jeff Kelly

Yes, that’s cash and securities, short-term securities all that holdings.

Amit Kumar – Macquarie Capital

Perfect, okay, that’s all I have. Thanks for the answers.

Operator

The next question is from Josh Stirling from Bernstein Research.

Josh Stirling – Bernstein Research

Yeah, thanks for taking the call and congratulation on a fantastic year. I wanted to ask you sort of like longer term question. You guys do presumably some long-term planning, I know you are sort of practical and opportunistic firm and you know whether deals with deals but wondered if you could just give us a little more color on sort of what division for RenRe really is in five years and you sort of may be put some finer point around to – if you could think in terms of the market you think are attractive as well as in the relative size your own balance sheet persist third party and perhaps as we think about the growth initiatives in Lloyd and Specialty and sort of stabilizing and shrinking cat volumes whether what your core business will be in on real on party time. Thanks.

Kevin O’Donnell

Thank you. When we look forward there is a spectrum – let me take the cat market to start with. There is spectrum from – in some people’s view is going back to 100% weighted balance sheet to another view where it becomes an asset management business and it’s 100% unrated capital deployed into this space. We believe that unrated capital is going to be in the business permanently. We wouldn’t have built the structures that we built if we didn’t think that. We also think having the flexibility of providing risk solutions through rated balance sheet and unrated capital is going to be the winning formula over time. So the future on certain is to which direction the market can continuous to move but in any direction we feel like we have the structure that is as the highest probably of being successful. I believe the cat business will be the driver of our results, and even though we will continue to emphasis the growth in Specialty and Lloyds, I believe that Lloyds’ platform that we are building is one in which we are happy with the investments we have made there and we built something that’s highly integrated and highly culturally aligned, so I have tremendous confidence that will be a big contributor over time. And our Specialty business is one that has over time contributed meaningfully to our results, and I believe the moves that we are making now will continue to allow it to make good contribution over time. The final thing which we didn’t really touch on the call is our Singapore office. So I believe our Singapore office will not be a meaningful contributor in the near term but over the long term it’s imperative that we are in the region and we will continue to find opportunities and build the relationships there.

Josh Stirling – Bernstein Research

That’s helpful color, Kevin, thank you. I wondered if I could just talk a little bit in shorter term perhaps coming years so the renewal at one-one was bad, how should we be thinking about how this goes through renewals as we work through the year and I guess if you guys has given us guidance so now the centralized effort, I am wondering what should be– you think we should be watching to figure out whether it’s going to get better or worse and if is anything you can think on the horizon like process or just going and changes in Florida, positioning from the rating agencies or may be just some rational behavior by competitors, I think at the end of the day we are all kind of looking at just try to figure out whether there is a near term story or whether we have to first wait for new capital and sort of more aggressive players to drop themselves. Thank you.

Kevin O’Donnell

I think you are looking at the first six months of the year from the property cat perspective is really two renewals. One is the April which is dominated by Japan and the other is the June – July which is dominated by Florida. The far more meaningful of the two is the Florida renewal for us, as I mentioned earlier I think the Florida market is in great shape. There have been significant migration risks from the state facilities to the private market and every premium dollar that moves from state facility to a private company has more of insurance dollar associated with it. We’ve also seen in the press that AFAC [ph] office considering purchasing additional limits which again I believe is positive for the markets; there have been some new startup companies down there so there is a lot of momentum in Florida that gives me some optimism that will be increased demand. All that and done there is a lot of capital is prepared to be deployed at the right margin in the business which will temper the enthusiasm for the new demand. But I think there is some reasons to be optimistic about that, but again our change in guidance reflects that, so I think there is uncertainty as to what it is but I look forward but leasing a healthy market that we are going into in Florida.

Josh Stirling – Bernstein Research

Okay, great, thanks, Kevin. Good luck, guys.

Operator

Your next question is from Mike Nannizzi from Goldman Sachs.

Michael Nannizzi – Goldman Sachs

Hi, thanks. Question in terms of the Specialty, Lloyd’s business. How should we think about the margins that you are going to target there and how does a mix change towards those areas potentially the way for property cat impact your target ROEs and what do you think you can sustain and should we think overall ROEs if this mix change continuous will be lower but there will be less volatility or and how should we think about that? Thanks.

Kevin O’Donnell

Let me explain the way we think it and then we will talk about how it over represent itself on the financials. So firstly I think these businesses, we here right some property at Lloyd but perhaps that component of the book most of the risks that we are taking in is from a marginal standpoint requires limited additional capital and in our economic models. So with that we believe on a standalone basis there is sufficient profit to one of the embedded risks within the transaction and on a marginal basically economic returns are substantially higher because it adds degree of diversification to our portfolio. Looking back to our kind of gap representation I would anticipate that on a net basis it will increase ROE and with the diversification we hope that it has a different loss profile than our cat book so there should be some diversification there as well but that’s not the reason we are doing it. We are doing it based on our economic models and we see that economically it has high marginal returns which allow building more attractive proposals.

Michael Nannizzi with Goldman Sachs

So what kind of profitability do you need to see in Specialty line for that to be – I mean it make sense but not make sense – is that market allowing you to see kind of increasingly positive opportunities to invest or just on standalone basis or is it more because of the integration with the current structure of your book that allows you to just kind of arbitrage some excess returns.

Kevin O’Donnell

So most of the decisions that we make on cat business are based on a marginal basis against our portfolio because that’s the more important measure as cat’s diversification. With the diversification being as high as it is on many of Specialty line of our writing, most of decisions are based on the standalone returns of the individual transactions. So the standalone returns it can be significantly lower than what we require on our cat book because the marginal capital allocates it is significantly lower as well. My concern is if the market only looks at the marginal return of these transactions, they can quickly become unacceptable from the standalone return basis and we would not write them. So we continue to be very focused on standalone within the marginal. We will start within the Specialty line.

Michael Nannizzi with Goldman Sachs

Got it. And I mean do you expect others – I know you can’t speak for others but we have seen that this sort of math of diversification into Specialty could make sense for others they are looking to deploy capital away from property cat, I mean do you expect that some of that competitiveness that you are seeing on the property cat size for diversify rider could you know may have tested another doing sort of the same thing, are you using some of that now? Thank you.

Kevin O’Donnell

Sure. So on most of the Specialty stuff that we look which kind of saw two trends. One is a reduction in economic offered to reinsures largely through increasing ceding commission, offsetting that was in many of the businesses that we are looking at anyway is slightly better fundamental from a pricing perspective for the original business. We haven’t seen or certainly the deals that were on, we haven’t seen negative standalone returns but in other markets that we have certainly seen that within Specialty lines. But I feel like even though ceding commission are going after it is a bit of an offset by primary fundamental, so the business is still good but we need to watch it closely. If it does move to negative standalone returns we would come off business in that area.

Michael Nannizzi with Goldman Sachs

Thanks for your answers, Kevin. Appreciate it.

Operator

Your next question is from Joshua Shanker from Deutsche Bank.

Joshua Shanker – Deutsche Bank

All my questions have been answered. Thank you.

Operator

Your next question is from Jay Cohen, from Bank of America/ Merrill Lynch.

Jay Cohen – Bank of America/ Merrill Lynch

Yes, thanks. A couple of questions. First is on the cat guidance and that is obviously a gross number given your feeding of business in 2014 or expected session of business, is it fair to expect the net premiums return to be down more than 15%?

Kevin O’Donnell

Yeah I think we don’t provide net guidance but in talking about how we approach the market, we have multiple ways in which we share risk; we have ownership and our third party capital vehicles. We have long standing sharing agreement that tend to be must more stable over time. And then we have more of a trading account for retro. I would say that the area of uncertainty is the trading account proceeds at retro where I believe we have great access to see what’s available in the market and we have great tools to determine whether it is accretive to the portfolio. And I would think that is the biggest area of uncertainty within our net writing year-over-year.

Jay Cohen – Bank of America/ Merrill Lynch

so just have to say at this point then

Kevin O’Donnell

Yes.

Jay Cohen – Bank of America/ Merrill Lynch

Okay and second question was related to the operational expenses which were higher than have been lending I am assuming that was bonus accruals because you got lot of money this quarter and this year.

Jeff Kelly

That’s part of the Jay I think it’s – you have to really compare fourth quarter over fourth quarter and typically the fourth quarter expense number a bit higher than during the course of the year that jumped from first quarter of last year to fourth quarter of this year is largely reflective of an increase in compensation accruals and is also reflects a donation we made to a local charity to commemorate the 20th anniversary of the company. Those two things accounts for the – almost all the difference.

Jay Cohen – Bank of America/ Merrill Lynch

Got it, thank you.

Operator

Your next question is from Vinay Misquith from Evercore:

Vinay Misquith – Evercore

Hi, good morning. The first question is on the Specialty Re, I just want to dig further, what are the targeted combined ratios in that land, are they Mid Re [ph]?

Kevin O’Donnell

In the Specialty I think that’s not something we post exclusively but let me make the comment and much of overwriting is our quarter share or at least a lot of the new premium is quarter share, so he might want to look to what your estimates are for primary Specialty layers and I think that is the risks that we are taking and like carry through.

Vinay Misquith – Evercore

Okay, helpful. Second question is on access capital. Sort of looking at that you fought back just 40% of earnings plus dividends this year, curious as to what held you back, number one. Number two is I think you mentioned $700 million of capital of holding company, how much of cash do you normally keep there, so how much of it running in excess of normal that you could use to buy back stock?

Jeff Kelly

Yes so the $700 million number that I discussed is probably a couple hundred million dollar, $100 million to $200 million higher than normal. And is I think reflective of really the strength we’ve had in earnings in a last several months of the year. And going to your former or your first part of your question, well first of all as I said in a response to an earlier question, we necessarily think of the cash as a proxy for excess capital but we don’t disclose how much excess capital we have but we believe we have but I would say is the principle thing that have been holding us back or did hold us back in 2013 from share repurchase was just a price being bit higher than we would have normally targeted given our outlook for the business and our ability to deploy, obviously the fourth quarter was a stronger quarter than we anticipated and that made a very strong capital position even stronger so I would say our expectations at this point is that with the current outlook on our ability to deploy capital on the business is – capital position that we have today and roughly we are at the price of the stock is we think it is an attractive level to buy shares. We have been buying shares pretty aggressively, and I would expect that that would be – that all those things continue to hold that would be our intent going forward.

Vinay Misquith – Evercore

Okay, that’s helpful. And just one clarification on margins some of the peer rating next year versus this year, would it be fair to assume that your purchase of retro would have reduced the negative margin, did the iteration impact on an assumption?

Kevin O’Donnell

So I think we are asking are we going to get positive spread on our ceded to our inward business.

Vinay Misquith – Evercore

Yes.

Kevin O’Donnell

The answer – well we are obviously looking in the proxy for that is to the cost of capital for retro two compared to our own cost to capital and obviously we have more capacity than we are willing to deploy into the market so that we are purchasing from – on a trading basis we are certainly looking to have a cheaper cost to capital brought to our balance sheet and therefore improve the overall attractiveness of our portfolio.

Vinay Misquith – Evercore

Okay, thank you.

Operator

The next question is from Brian Meredith from UBS.

Brian Meredith – UBS

Yeah one quick one and one follow up to your trade question. Tower Hill, I noticed that pretty good income in the fourth quarter, generally lose money or is there some profit that’s something unusual happened there?

Kevin O’Donnell

No, I think Tower Hill has been an investment we had through several years and it has performed pretty well. I am not sure what exactly the numbers that we are looking at there.

Brian Meredith – UBS

Just looking at your equity earnings and other ventures and can you give specifically Tower Hill and I could follow up on this one, it is not important.

Jeff Kelly

The only other factor that would increase our increasing Brian is the amortization of the goodwill there is going is reasonably rapid in that so you can have static earnings environment and our earnings and that should go up over time.

Brian Meredith – UBS

That’s great. And then my second question, Kevin, just to follow Jay’s question on the ceded side when do you make your purchasing decision on that, is it later and that’s why you don’t know necessarily whether you got any attractive retro opportunities at one-one.

Kevin O’Donnell

I think we approached the world a little differently than many were, they put out their retro program and built into their capital structure and then go execute against that. We are in the market everyday looking for ceded opportunities and we don’t go out with a formal program looking for and to build into our capital structure. We have other mechanisms to do that. So the type of retro that we are talking about here is something that we opportunistically look for in the market and add to the portfolio only when it is accretive.

Brian Meredith – UBS

Great, thank you.

Operator

Your final question comes from Sarah DeWitt from Barclays.

Sarah DeWitt – Barclays

Hi, good morning. You mentioned that the piece of price decline is slowing but it hasn’t reached a floor yet, how much lower do you see the floor versus current level?

Kevin O’Donnell

So again I think it’s different by market. One of the things we mentioned is that the international markets decline as well. I think we are closer to a point of moving from the lower return bucket to the negative return bucket, and I think I have to admit that’s the context to have the discussion within the U.S. would be – we did see an increase in negative return business in the U.S. although a very small proportion of the overall book is in that bucket. And that’s something we look for. There tends to be non-peak risk but it is not an area that I would say that there is going to be a red line as to when market should stop participating in a market. I think we have a greater flexibility to structure our capital so we have a longer runway to participate in a market. So not particularly concerned that we are going to hit a pricing point again that we are going to need to exit, and we don’t have this specific forecast as to what impact could be for others.

Sarah DeWitt – Barclays

Okay, great, thanks and then just another question on excess capital and potential share buyback. I look backed at a store please and what you got share buyback of $500 million a year and given that you have a significant excess capital position right now and your price your premiums are going to be down for this year, any reasons why shouldn’t expect a similar amount in 2014?

Jeff Kelly

We don’t like to forecast, what we might do over the course of an entire year but by my description of the liquidity position we have at holdings and – I certainly don’t see that we are bounded by that number or any other number for that matter. We’ve already bought back almost a $100 million in essentially at first 35 days of the year so it doesn’t seem like an outsize amount. But we don’t – we aren’t making – going to make a forecast about what we will do for sure.

Sarah DeWitt – Barclays

Okay, great, thanks for the answers.

Operator

This is all time we have for Q&A. Kevin, do you have any closing remarks?

Kevin O’Donnell

Just wanted to say thank you everybody and look forward to working with you all over the course of 2014.

Operator

Ladies and gentlemen, that does conclude today’s conference call. Thank you for participating. At this time, you may now disconnect.

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