RenaissanceRE Holdings Ltd. (NYSE:RNR)
Bank of America Merrill Lynch Insurance Conference Call
February 15, 2011 1:10 pm ET
Unidentified Host – Bank of America Merrill Lynch
Neill A. Currie – President, Chief Executive Officer & Director
Unidentified Host – Bank of America Merrill Lynch
When you come to these conferences, and certainly when I listen to people present, I’m always looking for a company that sounds a little different than the others, that present themselves in a unique way. I frankly think Selective falls into that category and I think the next company does too, RenaissanceRE just sounds and feels different than other reinsurance companies. Neill Currie, the CEO is going to present and you can blame him for this because he was one of the founding members of this company that goes back almost 20 years now.
So to talk about what makes them different and to give us a glimpse into the future, I’ll turn it over to Neill Currie.
Neill A. Currie
I want to look and sound different. I’ve got cowboy boots on so that’s a little different and many people would say that I sound different, a little bit of a southern accent going on there. Here’s our story, a fascinating slide about Safe Harbor. An overview, so as [Jay] mentioned, our company was formed in 1993 in Bermuda as a result frankly, of Hurricane Andrew and the catastrophes that had happened in recent years. There was a huge supply and demand imbalance.
We have become, over the years, a leading global provider of reinsurance, insurance, and related services. Our market cap is about $3.7 billion as of February 10, 2012. It’s a crazy world we live in isn’t it in terms of how market caps can bounce around so much. We had an earnings call the other morning and we popped up to $79.11 for a brief moment, flirting with $80. I look forward to going north of $80 at some future date.
When we started back in 1993, I look at that market cap figure, we started with $141,200,000 of capital. I was the number two guy, the CEO put in $1 million, I put in $200,000 which for me was a fortune to put in and we got the ball rolling. Since that time we’ve been fortunate. Our operating ROE has averaged 22% and tangible book value per common share plus change in accumulated dividends has grown at a compounded annual rate of 20% since we got started.
The next line there says total shareholder return has been good compared to the S&P and the S&P P&C index. We’ve got good financial ratings, we want to keep them that way. We’ve got a AA- from S&P, A+ from A. M. Best, and we’ve had an excellent ERM rating from S&P I think since they started doing those ratings.
So, I look back at this Slide and I think if you fall asleep later, that will be alright but I’ll catch you, I’ll maybe ask you a question if I see you nodding off, but this I think is the most important slide we have. It sort of captures what we do and frankly, I think what any insurance operation should do. If you can execute properly in these three areas: superior customer relations; superior risk selection; and superior capital management you’ve got a really good operation. If you only do well on one or two of these you’re not going to do that well.
We’ve got a young fella that’s been with us for about two or three years now and helps us on strategic planning. He’s an ex consultant with Bain, I think. He’s a smart young man. He’s turned these two three superiors and I like that, it’s got that sort of religious [inaudible] about it and they really are important.
Superior customer relationships, I think when people think of RenRE they think of a bunch of smart guys and ladies, we’ve got a bunch of clients, a bunch of PhDs, we’ve got brains all over the place. So people think of us as good underwriters, thank goodness, but really superior customer relationships is the first thing you need to do. You need to get the business coming in the door, you need to keep the business coming in the door, and I think this is one of the least appreciated advantages that we have at RenRE.
One of the things that we do is we try – well, let’s go back to inception. Here we were after Hurricane Andrew, a huge supply and demand imbalance, if there was a program that came out and it was a four layer program and the first layer was the best layer, you could say, “I want 50% of that layer,” and you’d get it. Customers really were in dire need of help then and from the very beginning we tried to be helpful to our customers and it has evolved to helping them understand their risk but certainly in the early days basically to be there with capacity that would pay.
We would underwrite, we would say, “We really like the first layer but we’ll take some of the second and the third,” because they were great layers as well. We really wanted to be helpful. I think we’ve been seen over the years as being helpful to our clients. When we come in and have a meeting we try to help them understand the risk. You’ve heard about these model changes like RMS11, we have a whole team of people that will go and look at these model changes. We have our own models, and spend thousands of man hours trying to understand these model changes.
Then, when our clients come in for a visit we try to help them understand their catastrophe risk, maybe some things they could do to improve their book of business, help them understand the modeling change, and then help them put together a program. If a broker and their client come to RenRE to put a program together, we will give them as many options as they want. We try to be the first one back with a program quoted for them, and they can rest assured if we quote a program for them it’s going to get done in the marketplace. We have historically a very high rate of our programs being filled. In fact, I don’t recall ever having a program not filled out that we led.
So over the years we’ve paid claims extremely quickly. We work very hard at the customer relationship and it pays off. We get a lot of one off covers, covers that are placed with us 100%, people who come to us very early in the placement of their program. Superior risk selection is, we’ve got our own model, we call it the REMs model.
We use all of the publically accessible models but we have our own and we have, I think, a really terrific team of underwriters that have worked together for a long period of time. We have analyst modelers. They work together and some organizations, they’ll put the modeling folks sort of over in a silo where the modelers, and the analysts, and the underwriters won’t interact that often.
But if I were to blind 10 folks up here on the stage and you could ask them all questions, I would defy you to pick which one was the modeler, which one was the underwriter, which one was the analyst, except maybe the underwriter is a little bit older than some of the rest of them. But, they all have the same mindset, they work together. We always have a second pair of eyes rule, we have two underwriters work on a deal together not as a policeman but he’ll actually help make the deal a better deal.
We have a big underwriting trading floor. When we first started the company Jim Standard and I took an old conference room table, cut it in half, he had one half, I had the other half, we sat five feet from each other and we started off in that trading room environment thinking not a lot of offices is a good idea now. Our operation, our headquarter in Bermuda is a pretty big space. We have two offices, we have mine which both doors are open most of the time, and the HR person. Everything else is an open floor environment and a trading environment for the sharing of information.
The third one, superior capital management, that’s not just being able to borrow funds at an inexpensive or a competitive rate but it’s a lot of different things. It’s having multiple channels, multiple levers in terms of access of capital. We view retrocession buying as another form of capital. We have something called CPPs which are quota shares with other insurance or reinsurance companies.
Over the years we’ve had many of our clients say, “You know, we like the way you operate. We wouldn’t mind being on your side of the transaction.” So we invite them to come in with us as reinsurers of ours. We have a stable group of people that have offered us capacity over the years on a proportional basis. We also, I’ve got a slide I’ll show you a little bit later in more detail, of accessing third party capital through joint ventures and what’s known as vernacular side cars. The three superiors.
Strong franchise, reinsurance we’re a pretty innovative company. I mean, we name Top Layer RE, I’ll tell you about, a very innovative name, they write top layers of coverage. Here we’ve got in the reinsurance operation CAT reinsurance and things that are not CAT are called specialty, more information. We have a Lloyds syndicate 1458, we decided to go grow our own syndicate instead of buying another syndicate. We like the idea of having our own folks growing from within where we can do that where possible.
We bought a small Lloyds managing agency and we started off on our own about two and a half years ago. We’ve hired some great people there that have become part of RenRE. Some of them are childhood friends of some of the RenRE folks, so people have known each other for a long time. We took one of our top underwriters from Bermuda and put him in charge of our syndicate at Lloyds.
Then Ventures does three things, it manages our joint ventures on the CAT side, we have some strategic investments, and also we have an energy advisory firm called REAL. Ventures is the company, as we put it, that sells the RenRE soap and there are other organizations that have joint ventures but they don’t have the RenRE soap. So we think the Ventures guys have it made because they get to sell the RenRE soap versus something else.
Okay, we’ve done pretty well over the various market cycles so if you look at this bar chart, down on the left here, was 1993 when we first got started and this is the growth in tangible book value per share over the years. As you can see, it’s grown substantially over the years. We had a couple little blips along the way. 2005 our tangible book value per share and accumulated dividends went down, KRW was in that year.
Oddly enough, look back at 2001, so when we had 9/11 a horrible event, I think people were a little surprised that a company like RenaissanceRE didn’t have a really bad year like everybody else. Well, this gives you a little bit of insight into our company. The reason we did so well compared to some other folks back as a result of 9/11 is our underwriters, we were concerned of an accumulation of earthquake risk in New York City. We said, “We don’t want to write any more business than this in New York in case there’s an earthquake.”
Now, most of you in this room, I’m sure quite a few of you live in the New York environment. I don’t think you wake up every morning worried about the earthquake risk in New York. Maybe you worried last year about the hurricane risk in the New York area but you weren’t worried about earthquake. We really pay attention to tail events so even though we’re in a risky volatile business, we want to make sure that when really bad stuff happens that we’re one of the companies still standing to be able to continue to trade.
In fact, this year, I feel good. It’s been the first or second largest year in CAT that people can think of and it’s according to who you ask if it was the worst or the second worst. But for the year, our tangible book value per share plus accumulated dividends was down less than 2%. I think that’s pretty good for a property CAT specialist when you have all this bad stuff happening around the world. Then again, our tangible book value per share went down in 2008 as a result of some of the hurricane activity and the financial crisis. We were down just a little bit for 2011 for reasons just mentioned.
This takes a minute, this is kind of a busy chart. This is a track record of our financial performance or outperformance if you will. The green bars show the ROEs that we had in a given year. So for example, it looks like 1996 we had a little bit over a 30% ROE for that year. If you look at the blue line with the diamonds on it, that’s the peer group results. So our peer group returned it looks like about 14% to 15%.
If you look year-by-year across this timeframe from ’96 to 2011 we go along and it looks like in virtually all the good years we outperformed. We did, as I said, pretty well in the World Trade Center year compared to the industry. ’04 was a tough year for us. We had all the hurricanes that hit Florida, we are pretty large in Florida, had been for many years and to add insult to injury that year, we have bought a fair amount of retrocession cover. But, we bought it at a level where none of these losses triggered our retro.
We paid the money out for the retro and then we’re not able to recover. But, we still made money for the year, it just wasn’t a terrific year. Of course in ’05, KRW, the peer group did a little bit better than we did in 2005. I took over in 2005, it’s an interesting time period, “Welcome to the club. Here comes KRW and some other things coming your way.” But we had done a lot of work on models and understanding risk.
We had come to the view in 2004 that we thought we were entering a period, due to the warmer waters in the Atlantic, that we were entering a period of where there was going to be more frequency of severe events but we didn’t know we could charge as much as we thought we would like to have in that market environment. But as a result of the losses in ’04 and ’05, a lot of people said, “Wait a minute,” this was almost somewhere going back to Hurricane Andrew, “We don’t understand this game. Where did all these losses come from?”
Well, to us, the loss activity in ’04 and ’05, those losses were pretty much what we had expected to us from losses of that size. But it really hardened the market and a lot of our competitors either put the brakes on or went looking for the exit door. We said, “No, we understand the risk. We’re not surprised by this loss activity. We understand, we have our own model.” So we wrote quite a bit of premium in ’06 and also we were fortunate to have a good return in ’06.
Going back to the strong customer relationships, we typically are the go to market after bad stuff happens. We don’t get surprised, we’ve been fortunate not to be surprised, and we’re really ready to stand up. Sometimes stand up and renew a [inaudible] contract. Sometimes the market gets soft, if the market is soft, if it goes below our pricing then we reduce and sometimes get off of accounts. But by definition, when that happens, our clients have someone else willing to take the coverage. So we’re not leaving them when they need us but we’re there in the harder markets when they need us and in our view, there’s pricing adequacy.
Another bar chart, this shows you the various businesses that we are in and have been in. So the blue color squares are our CAT business, the green is specialty, black is Lloyds, the yellow is joint venture business, and the red is the US insurance business. You’ll note that in 2011 and 2012 were are not in the insurance business in the US anymore. We are in the insurance business in Lloyds on an excess and surplus lines basis.
But we decided after the years of being in that business that it was best to focus on some different lines of business, our core property CAT business and we like to solve complex problems. We like to go after business that has got some volatility but we have rate freedom. A lot of the business we were writing in the US insurance business was written on an admitted basis where there wasn’t rate flexibility.
Also, we wrote of a lot of crop hail business in the US and we thought that over time the profit margins on that would be diminished and that the people who would do the best in that business would be the people who had become large and were very good at managing their expenses and operations. So more of an operational skill versus and underwriting skill so we sold that business in 2010 and I think that was a really good move for us.
For everybody in the room here, you don’t have to go out – we don’t pretend to be Berkshire Hathaway, to be the one stock. You can’t just say, “Okay, we’ll buy Berkshire Hathaway and forget about it all they’re diversified enough.” We know that most of you are trying to put together a portfolio of business so if you’re going to look into our business you might say, “Well, I want to find somebody that’s in the property CAT space, or takes low frequency high severity business. I might want to invest in an auto carrier, maybe I’ll buy Progressive or 21st Century.” But you get to put your own portfolio together.
We found that by selling the US insurance operations it helped you understand better where we could fit into your portfolio and I think it’s one of the reasons that we enjoy one of the higher multiples in our industry of market value to book. We’re understandable and some people think we’re best in class. I’m certainly very bias I think we do a good job.
Now, looking at the green portions of those bars, you’ll see that back in ’04 and ’05 the green part got pretty big. That was a specialty reinsurance operations and we had a good team then and I think we’ve got an even better broader based team. In fact, I think that’s another – if I were to say, “What are some of the things that people may not understand about RenRE?” They may not understand the value of the customer relationships, they may not understand how good a specialty team and Lloyds team that we have. They are really bright, smart folks and at the right time they will contribute significantly to the bottom line of RenRE.
We tend to be a little bit more opportunistic in that area. You have to wait until the prices get up to where you need to be. But if you look back at ’05 for example, we wrote about $120 million of workers’ comp catastrophe business. Some people would say, “Okay, you do workers’ comp that’s casualty.” But it was driven by a catastrophe event so the prices when way up after 9/11 and so we have a very large book.
Some people got involved and found that business to be attractive. Some people oddly enough thought they were diversifying because it was workers’ comp but the proximate cause would have been earthquake, or hurricane, or something like that most times. We reduced that business. We’re very good at putting the accelerator down in good times and putting the brakes on in bad times so we reduced the book of business, a $120 million book of business, I think had a zero loss ratio. I think we have about $5 million of that particular line of business now. We will remain disciplined based upon the pricing dynamics of the business out there.
I think we have another slide where we can talk about Ventures a little bit better than this one. This is a slide that over the years we’ve found people are interested in. If you look on the left, we get to see virtually every property CAT deal in the world. We bucket them and we keep up with all the information whether we’re on the business or not. Roughly half of the property CAT business out there you’ll see, on the left with the various bars, roughly half is an acceptable return, about 35% to 40% is a lower return, and 10% to 15% is a negative return.
So guess what we encourage our underwriters to do? The good news is because we’ve been around, we’re a lead, we’ve got these good relationships, we get to play ball in that left hand part of this graph. That’s where we play. I think that’s the thought I want to leave you with.
You can see recently in ’11 the acceptable return went down. It was a little bit softer market so acceptable went down, low return went up, negative return about the same. You can see in 2012 acceptable is up a little bit and low return is down a little bit due to pricing changes and terms and conditions.
Specialty reinsurance, I think I’ve already bragged about specialty enough earlier. This is just a graph that focuses a little bit more. It gives you an idea of how much premium volume we did have back in ’04 and ’05, a disciplined approach and now we’re starting to slowly grow that book again. We think we’re starting to see some good opportunities. Nothing to write home about yet but making some good inroads there and we think the next couple of years could be interesting for us.
The Lloyds opportunity, about 75% of our Lloyds operation is specialty insurance and reinsurance and about 25% catastrophe. I said culturally it’s the same type folks. We have people going back and forth between the Lloyds operation and Bermuda and a lot of cross pollination there.
Okay, risk management tools and cultures. On the left we see our REM system. Every time we get a piece of business we get the business in and we say, “Do we like it or not.” Then we put it into our portfolio and our underwriters in real time can see has this piece of business made our portfolio better, more efficient, or worse. It is a very robust operation. We have all the external models that we look at as well but then we have our own models.
We have the cultures, we’ve got the people in our organization understand how to use the models. Frankly, I would rather have one of our experienced underwriters with a napkin and a pencil and not even a calculator than having an inexperienced underwriter with the fancy models. Experience and knowledge just goes such a long way and is so important. I think the other parts of this slide I have touched on already.
What this combination of the culture, capabilities, with the modeling enables you to be pro active and move very quickly. In fact, this renewal period this last year was one of the most interesting ones I’ve been through and I’ve been through renewals. I was a broker for 17 years before helping to start Renaissance in ’93. But this particular renewal cycle was one of the most interesting ones and it was just all over the place. But once we had all the information in our system, we could respond very quickly.
It turned out on the retrocessional side, for example, we had a lot of good opportunities come along just in the last week and we also saw shortfalls. It’s tough, as you’re an underwriter you put out a price and a customer says, “Well, okay we’ll think about it.” It’s very easy for that underwriter to say, “Maybe I ought to cut my price by 5% or 10% even though it’s the wrong thing to do.” Our guys don’t do that. They put out the price, we don’t change the price. If we get new information we would look at that. The price is the price and then you’re sitting there and you’re waiting.
A day goes by and you haven’t heard back, a day goes by and you have heard back. Then things started hopping. People started coming back to us because we were in the market that we’d hope we’d be in. Then the last couple of days of renewal season we did quite a few what we call short falls where people thought they could get coverage placed and they couldn’t. We already had the data in the machine and our underwriters could move very quickly to fill out programs for folks at the right price for us.
This is a slide that I wanted to talk about Ventures and soap. On the left there RenaissanceRE presently has $1.6 billion of capital. We can ratchet that up as need be for future opportunities, we’ve got plenty of extra capital up in the holding company. We have DaVinci RE, when we posted this at the end of the year 12/31 we owned 43% of DaVinci RE. We had three top quality investors come along so we let three new investors come into DaVinci RE and it took our share down to 35% in the first quarter of this year.
Our Ventures group spends a lot time trying to cultivate third party capital and what we like to do is get long term investors into DaVinci. This is a long term vehicle it’s been around 10 or 11 years and we don’t want sort of hot money come in. We’re willing to take money that will move quickly but we want that – if we set up a true sidecar where we see a one year opportunity and somebody thinks they only want to be involved for one year, we’ll bring that type of capital in to a specific rifle shot approach versus DaVinci is a longer term vehicle. I’m very proud and pleased with the shareholder group we’ve got there.
I mentioned earlier the CPPs. Sidecars are truly one shot, maybe they could be a second year. We started another sidecar this year called Upsilon RE to underwrite property catastrophe retrocession and we’ll see how that goes. It’s good so far, whether it will be there for one, two, or three years we’ll see. Top Layer RE I love this operation, I love State Farm.
They’re a partner of ours both in DaVinci and in Top Layer RE. They’re our sole partner in Top Layer RE and they provide aggregate stop loss protection to Top Layer of $3.9 billion. We do all the underwriting and that is to write Top Layer’s high level of coverage internationally. State Farm doesn’t have any international exposure so it’s a great partnership, a great marriage, and we’ve been at it for over 10 years now.
I’m looking at the clock and I’m going to have to speed up here, you want to have a little bit of Q&A time. Touching briefly on REAL, this is our Houston based award winning, they’re considered to be tops in the field and what they do is they help out clients. They’re not just a trading operation trying to do commodities trading, they try to solve complex problems for people in the energy business such as public utilities or heating oil distributors and to help take the risk away from them in terms of extreme weather events.
They will often have dual trigger policies where if the weather is particularly warm or particularly cold in the summer, and there are fluctuations in commodity prices they help out. They hedge out the commodity aspect and then we keep the risk on the weather side. This year, we grew that operation some and as you might have heard earlier in the earnings call, we loss $41 million pre-tax, $31 after tax, in REAL this year and it is just due to the extreme warm weather that we’ve had.
You’ve seen it in the northern part of the US. In the UK where we had a lot of exposure it was the warmest winter in 52 years in the UK. So they had a big loss but we’re happy with that. It came in the distribution where we thought it would and we look forward to having a little better luck this next year.
Capital investments, I can go through this pretty quickly. On the left, what you see is what you see, common equity, preferred debt, undrawn revolver, and then this is just the non-controlling interest that we have in DaVinci to show you the additional capital we bring to bear there. On the right, a year ago this wouldn’t have looked quite the same it was smaller. We had smaller reserves, case reserves, and IBNR and additional case reserves.
I think this is kind of interesting to spend a minute on. Now, as a result of all the events that we’ve had in the past year plus some historical events, we’ve got case reserves of $853 million but on top of that we have IBNR and additional ACR, or additional case reserves of $1.1 billion. So case reserves, that’s what our clients have told us. We love you clients but we don’t think you’re always right so we put some on additional because we go in ground up and we look at the losses ourselves irrespective of the information they give us to try to estimate what the total loss will be.
The punch line on this is we like to buy our shares back. Since I’ve been back as CEO we’ve bought back 25% of our shares so other shareholders and I now own 25% more of the company and I think that’s a good plan. We like to buy our shares back. We haven’t bought many shares back of late because we think there are good opportunities out there and we’ll try and deploy our capital first and then if we have excess excess capital, we like to have a little cushion in there for future opportunities, then we’ll buy shares back.
We have a very conservative asset portfolio. It needs to be short and liquid for the most part and it’s mainly in highly rated securities, it’s short duration. We don’t rely on investment income quite as much as some other folks because of the nature of our business. Our leverage of our assets to our equities is about 2:1 so investment income is not as important to us as some other folks. We focus on underwriting.
So we might have a minute and 11 seconds for questions here. I think I’ve told you all this so I’m not going to go into it anymore. We think we’re well positioned in a good market with good pricing. Does anybody have any questions?
Could you please explain why you have $4 billion of capital in Top Layer RE and $55 million in written premiums?
Neill A. Currie
Leverage. No, I’m sorry, I was being flippant there. What happens is top layers by definitions generally go at a relatively low rate online. They’re usually in the 3% to 4% range because they are usually very high up in the program so the true capitalization of Top Layer RE is $50 million and so when you get on top, State Farm provides an aggregate stop loss of $3.9 billion excess of 100 and we take part of the premium we get and pay State Farm for the risk that they take by providing the stop loss. It’s a little counterintuitive.
On the same subject, is the rate that State Farm is charging for ’12 any different than the rate they’re charging for ’11 on that tall tower of excess coverage or is it sort of in the same ballpark?
Neill A. Currie
What we do is we help them in that endeavor and we pay them what we think is the appropriate amount. I don’t want to get ahead of the game too much, but the rate environment on the front end is different in 2011 than it is in 2012 and there are some good opportunities out there internationally as a result of all the loss activity. But what we do is we pay them the appropriate share of whatever market that we’re in for that coverage. It’s a partnership and we both feel comfortable with the amount of premium that’s paid for that. They own 50% of Top Layer and we own 50%.
Thank you it was a pleasure.
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