All right. Good morning. Welcome to day two of Morgan Stanley Financials Conference. My name is Kai Pan. I cover property and casualty insurance here. It is my pleasure to introduce our next speakers, the management from RenaissanceRe. With us today, we have Jeff Kelly, CFO and COO. Jeff has been with the company since 2009. We also have Aditya Dutt, President of Ventures. Aditya is Morgan Stanley alum. Welcome back. We also in the audience have Rohan Pai of Investor Relations. The format of today's presentation is fireside chat. I will kick off with a few questions. If you have any questions, feel free to raise your hand. We have microphone round. Let me start with this. Jeff and Aditya, we have seen recent waves of industry consolidation. This morning, another announcement. The competitors are leapfrogging each other through merger acquisitions.
How do you view your market position in such environment?
I will start off and then let Aditya add. Right now, we like our position quite a bit. I think we view our strength as one of helping clients solve complex risk management solutions. We tend to focus, obviously, on reinsurance. I think we have a number of different platforms now across both the U.S., Bermuda, and with Lloyd's. We are able through those platforms as well as some of our joint ventures enough to bring somewhere north of $10 billion in capacity to the reinsurance market. We think we are in a great position with a lot of flexibility to take advantage of whatever market opportunities arise.
I would agree with Jeff. Jeff said it exactly right. I think we tend to focus on two things when it comes to relevance in the market. One is providing underwriting expertise, as Jeff referred to our customers. Two, having enough capital in the forms that are most efficient to service our client base. We feel very comfortable that we have got both of those. I think some of the M&A you are referring to, size is often confused as a proxy for relevance. I think we tend to be a little more careful about how we view relevance to clients. It is a range of characteristics, including size. We feel very comfortable as Jeff enumerated several of the characteristics we feel that make us comfortable with our size and market position.
Do you feel a broad product offering like a specialty casualty line help you to raise your property cat business?
Yeah. To an extent, I think larger clients, global clients are moving towards a smaller panel of reinsurers. They're seeking to buy more products from a smaller group of reinsurers. I think there is a trend towards that. There's some truth to that, although we're very careful about underwriting products where we have expertise, where we're actually solving a client problem rather than being a source of capacity. We focus on being specialists rather than being generalists, but we do note that there is a trend towards multiple products with a smaller panel of reinsurers. Jeff?
Yeah. I'd just add that we first actually started talking about that trend internally probably three or four years ago and really organizing our marketing efforts around that because we do see increasingly that some of the larger cedents around the world want a company to deal with that has multiple balance sheets, strong ratings, and can offer a broad range of coverages across classes of business. We see them really as reinforcing one another, not one in particular supporting the other. We think they're synergistic to have both capabilities.
Okay. On the other side, some reinsurers have argued that they need to get into primary insurance business to get closer to the end customers. Do you agree with that, and would RenaissanceRe be interested in acquiring primary insurers?
I think just to start on that, I think it's possible that you get closer to the clients, but it depends on how you source risk in the primary market. I think if you're sourcing risk through a broker or as an agent, I'm not sure how that you're terribly close to the client anyhow. I think that you get closer to the client by offering the client value, and we feel we can do that on the reinsurance side. It's where our skill set lies. That's not to say that we wouldn't consider a primary insurance company or linking up with a primary insurance company in some way, but there's a whole host of filters that we go through in analyzing any acquisition. First and foremost, one and one have to add up to at least two.
The strategic rationale for it would have to be strong enough that we could see how the combination of the company benefits our clients and our shareholders. I think, more specifically as relates to a primary company, it's not our skill set, our core skill set at RenaissanceRe. Either it would have to come with what we consider to be very good management, or we'd have to be confident that we could assemble that management very quickly.
That's good. Let's touch upon the acquisition you just closed with Platinum. How's the integration going, and are you still on track in term of integration costs and target cost savings?
I think actually today is 100 days into the integration post-close. I think the integration is going probably a little bit better than we had planned on virtually every aspect of the integration. On the cost saves, those are running a little bit higher than we anticipated, and that's because we are retaining fewer employees than we had anticipated in due diligence, at least at the level of diligence that we could do when we did it. The one-time costs, or at least how we categorize one-time costs, are higher. Part of that's related to the fact that we're retaining fewer employees, and there are some other decisions that we made along the way that have increased one-time costs a little bit higher than we anticipated. We're very happy with how the integration's proceeding, both in financial terms as well as qualitative terms.
My next question probably for Aditya. The alternative market you have, including cat bonds, has led the market to go into a decline for about two years now. We recently have seen some stabilization in the market from the alternative capital. Do you think you've seen that in your business, as well as would that be a leading indicator into a broader stabilization in the property casualty insurance market?
I think, Kai, your observation is correct. I think we would hesitate to call it a leading indicator. I think your observation is fair that the alternative market, the cat bond market, for example, yields and prices have the price of the risk has stayed put year on year. That's a fair comment, which would indicate there's some stabilization. The fact that it's a leading indicator, we don't necessarily link the two primarily because the capital base that finances the alternative capital, as you say, is a very different form of capital than who finances the traditional reinsurance market. The traditional reinsurance market, as you know, is rated, has some leverage, operating leverage, and financial leverage in the business model. The alternative capital does not. The alternative capital also tends to target peak zones, which is the U.S. The traditional market tends to be diversified.
It's hard to draw a line from one to the other, given the relative size of the two markets. I think in certain parts of the reinsurance market, in peak zones, and in certain bands of risk, I think your observation is fair that both the traditional markets and the alternative markets are showing signs of pricing stability. I think that would be a fair comment.
Just on that topic, how's your June 1 Florida renewals?
We were very happy with the June 1 renewals. Again, I think the overall theme, without getting into specifics, is one of there's some stability returning to the market in terms of pricing. I think overall you could say there is ample capacity in the reinsurance market. There was ample capacity at June 1, but there also was an increase in demand both from the Florida Hurricane Catastrophe Fund purchasing reinsurance for the first time, but also Florida-only companies purchasing more cover from the private market. We were encouraged by an increase in demand. We think there's ample capacity in the market, but we do believe the market is showing some signs of pricing stability at this particular renewal for this particular class of risk.
On the demand side, do you see a structural change in the Florida market in term of privatization and potentially large national carrier reentering into the market?
I think the first part of your question, absolutely. We do believe that in the last five years, when you look at what Citizens, which is the state-owned homeowners insurance provider, and what the Florida Hurricane Cat Fund have done in the last five years alone have transferred $billions of homeowners' catastrophe risk into the private reinsurance market. We think that is a structural change that's positive for the industry. We think it's positive for the public entities that have held this risk, and we think that will continue. The privatization has also spawned many new startups in Florida that have absorbed that risk. We think that's a positive. Whether that leads to the nationwide companies coming back into the market, I think the jury is probably still out on that.
One of the major considerations that led the nationwide companies to exit the market was the magnitude and the concentration of cat risk in the state of Florida. That has not changed. The lack of pricing freedom in the admitted homeowners market, that has not changed. That's not a Florida comment. That's a nationwide comment. I think if you're a large nationwide carrier and you're looking to control volatility, the state of Florida is not exactly at the top of your list. We wouldn't necessarily make the second correlation. Certainly, your comment on structural change in demand occurring because public entities are transferring risk to the private market, absolutely. We agree with that, we support it.
Okay. Given the acquisition of the combined company between Renaissance and Platinum, how do you approach the June 1 renewal? Are you going to prune some of the property cat book that they have?
I think their property portfolio was pretty small, to be honest. We've, for the most part, renewed expiring lines. Relative to the size of our portfolio at June 1, it's pretty small. I think the general comment we'd make is we've renewed the old Platinum's expiring lines into Renaissance and DaVinci where appropriate. We have also reduced or declined certain risks that Platinum wrote. All that being said, I think it's fair to say the portfolio is pretty small relative to ours on the property side at June 1. Jeff, would you?
Yeah, I'd just add that in percentages, it was roughly 10% of our overall property cat book. As Aditya said, it was pretty small. When we did diligence on the portfolio, we liked their property book. Our intention was not to prune any part of it unless through the normal course of re-underwriting the book this June renewal, we felt we should be off any particular lines or any type of risk or any geographical risk. We like the portfolio virtually across the board. I just remind folks that when Platinum at the peak had written like $1.5 billion in premium, they pruned that down themselves down to about $500 million when we bought them. We thought that they had pruned it down to a very core portfolio of long-term relationships and risk that we liked a lot.
We didn't go in with the presumption to prune very much, if any, almost anywhere in the portfolio.
Okay. How about terms and conditions?
Held flat, I would say. In general, again, we can speak to our portfolio rather than the market in general, our belief is that terms and conditions were reasonably flat year-on-year. I'll give you an example. Hours clauses get a lot of attention in the reinsurance market. For a single state, hours clauses don't mean as much as they would for a nationwide cover, for example, because a hurricane moving through four states if you've extended the hours clause in a reinsurance contract means more than if it moves through one state. We can have a four-day hours clause or a one-day, the storm will do what it does in one state. That being said, we do believe terms and conditions held reasonably flat. The market showed a reasonable amount of discipline at this renewal with respect to both price and terms.
That was our observation for the market. Again, we can only speak to our portfolio.
Okay. We kind of take a pause to see if any questions from the audience. Okay. Let's switch to your specialty and Lloyd's business. They account for more than half your overall book and are growing fast. RenRe is well known for its data analytics and risk management property cats. What are your competitive advantages in specialty and Lloyd's?
Let me start off, then I'll let Aditya chime in. I think as context, you have to go back several years in the strategy of those businesses. We had actually been a large specialty writer right after 9/11. We've made in the specialty casualty business north of $1 billion since we've been in it. We viewed that up until 2008 as kind of an opportunistic business in which we got in when the market was very hard, then we began to exit when the market softened a bit. I think by our own admission there, to some extent, we probably exited some of those lines after 9/11 a little too soon. In 2008, we decided that we wanted those businesses, the specialty casualty business, to be a core part of our franchise.
We began to build that balance sheet in Bermuda, then following on that, bought a Lloyd's syndicate and began building that. I think when we bought our Lloyd's syndicate, there were maybe a dozen folks there, and today we probably have 70 people in London. It's a significant operation. I think the most recent component of the specialty casualty strategy was starting a U.S. platform, and that was done about a year and a half, actually almost two years ago now. The Platinum acquisition was really one of the parts of our deal thesis, and the Platinum acquisition was accelerating growth of the U.S. platform. I think what we bring are a disciplined set of modeling and analytics to it.
I think although we're known as a property catastrophe specialist and in analyzing that, I think one of the things that is perhaps underappreciated in the risk selection component of what we call the three superiors is the part about building efficient portfolios. The specialty casualty business meshed with our property catastrophe business allows us to build, we think, very capital efficient portfolios of risk. I think that's an element of it. The other thing that I think we are bringing to the specialty casualty business is our ceded strategy that we deploy into the property catastrophe business. Recently, we've begun to do some ceded strategies related to our specialty casualty business to not only manage our own exposure, but just basically to improve the overall efficiency of the portfolio. It's something that we're working on.
We think there's a future in ceding off specialty casualty business, that, I think, plays to our capital management skills in that area.
You mean retrocession coverage?
Yes.
for the casualty line?
Yes.
Okay. Is there a market for that?
I wouldn't say it's a huge market, but yeah, we've begun to transact in that market. Yes.
The potential sellers are from the sort of alternative capital markets?
Both traditional and alternative. It's not the same alternative as the property cat market, but yeah, you find both traditional and non-traditional markets in the retrocession world.
Okay. Just on that, Renaissance have been pioneer in the alternative capital market solutions, especially in the property cat space. Do you think the market as well as itself expanding a joint venture into specialty and casualty lines?
I think we're always open to considering an expansion of our joint ventures. There are a couple of principles we try to follow when we do these things. Number one, I think it's probably the overarching principle of our franchise is, if we bring alternative capital or joint venture to market, does it add value to our client? Is this capacity they need? Is this underwriting skill they need? Is it a product they need? Often that's where we either dismiss or pursue an idea. The client doesn't need it, we don't pursue it. That being said, when you look at our capital structure and the balance of our portfolio between property and non-property risk, our balance sheet is an especially good home for non-property risk because the diversification allows us to leverage our capital base very efficiently.
When you just look at the economics and the math of bringing in new capital alongside us, it's not as obvious as it is in the property business. Again, that being said, if there was an opportunity down the road for us to bring our capital partners into a joint venture that afforded us new products or entering into new lines of business or bolstering what we offer to our specialty clients today, absolutely. Five years ago, we may not have had the tools and the risk to do that. I think we've gone down the road, especially with the Platinum acquisition. Now we feel at least we have the expertise, the risk, and the capital partners. We have all the ingredients to prepare the joint venture. We're looking for a market opportunity. It's not obvious today, but we would certainly consider it down the road.
One of your philosophy has been taking risk alongside with clients. Would you consider being just pure third party asset manager, earning fee income from managing capital on behalf of third party?
I don't think so, Kai. Jeff will certainly have an opinion on this and a view on this, I don't think so. We believe the hybrid form that we exist in, which is providing a rated leveraged form of capital and a non-traditional capital that we manage in multiple balance sheets, actually gives our customer the very best interface for risk transfer in the market, period, end of story. We don't believe moving to one end of the spectrum or another actually serves our clients well. I don't think so, let me pause and give Jeff a chance to respond.
I think the only thing I'd add to that, Kai, is we've built a reputation in managing third party capital vehicles based on having what I would consider almost a complete alignment of interests with our third party investors. I think that reputation, that business model, has served us well. Aditya and his team get a lot of inquiry from folks that want to be a part of the market and invest in the market. I think approach us because of the aligned model that we have. I think going to a model where we were just a manager, we were just sourcing risk for somebody, I think that's unlikely. I think it would be kind of confusing for the market, frankly. We consider ourselves an underwriting firm, not an asset manager.
We spend a lot of time investing in the capabilities of the company to facilitate, as we say, being the best underwriter of the risks that we underwrite. We think being the best underwriter is the key to our success. I think if you divorce underwriting just becomes sourcing risk for somebody and passing it along to them, that seems more like a brokerage than an origination function, and it's probably not one that we would get into.
Switching to capital management, what's your parent holding company cash position post the acquisition, and how long it would take to basically properly capital bond your subsidiaries and parent holding companies, and to what extent that will be impacting your share buyback activities?
Well, just as context, I'll get to the answer. As context, I would remind folks that in the Platinum acquisition, we did a $1.9 billion, almost a $2 billion deal, having issued $700 million in equity. We deployed a lot of capital and cash into the transaction, both from Platinum's balance sheet as well as our own. Having said that, I think when we announced the deal back in November of last year, we said that post-close, it would take us a few months to get the individual balance sheets that we wanted to have in place as market-facing balance sheets capitalized in the manner that we felt appropriate. We're 100 days in, and I think we're largely complete with that. At this point, we have, without being too specific, somewhere north of $500 million in cash at the holding company.
I wouldn't necessarily equate that with how much we'd be willing to buy back at any point in time. As I think we said on the first quarter earnings conference call, we did purchase a very small amount of shares right after the first quarter ended, after the close. We would likely be in the market for some amount, I think, in the near future. We're traditionally not a big buyer of our shares during wind season, and I don't see any reason for that, at least at this point. Other things being equal, I don't see any reason why that would be different this year. I would just say that we would expect to be in the market this year, although we'll probably likely to be a much more significant factor after the wind season's largely passed than just headed into it.
With your excess capital, how do you prioritize the capital management in terms of growth, acquisition, and shareholder returns?
Well, first and foremost, we always try and deploy it in the business. Whether that's in the form of an investment through Aditya's area or an acquisition that would further our strategy, that would make sense, or deploying on the underwriting side. If we can't see a path to that in a reasonable period of time, we look to return it to shareholders. The only thing then governing it is our outlook for the business, the price of the shares, and the interplay between those. We view our stock as an attractive investment, certainly at this level. We'll just have to see how the wind season plays out.
Okay. Any question from the audience? All right. On the investment side, Fed could raise rates for the first time in nine years. How do you position your investment portfolio in anticipation of a rate hike? Given the shorter duration of your portfolio, how quickly do you think you can basically turn around the overall portfolio yield?
I think you just identified the way that we think we respond to that, and that's by having a short duration portfolio. The duration of the portfolio is about two years. It's been there for a long time. We've been, I would confess, seemingly perennially wrong in thinking that interest rates would rise over at least the last two or three years. We don't see any reason at this point to lengthen the duration of the portfolio until things play out. We still don't think that even though the Fed probably begins raising interest rates, that that path upward is rapid or significant. Market yields are clearly adjusting. I think that's good for us generally. We have a short duration. I think half the portfolio effectively turns over on average every year.
I think you could sort of track the increase in the market yield of the portfolio based on that duration and turnover.
My last question actually on the culture perspective of RenaissanceRe. How have you seen that evolve over time, and especially in light of changing market condition, some underwriters probably had to scale back in term of their underwriting activities. How does that impact their interest in the work, and do you see heightened turnover in your workforce?
Well, I can't answer the culture question in any depth in nine seconds.
Okay.
I would say that the one thing that I think has been unique about our culture, and continues to be unique about it, is the level and degree of collaboration across all areas of the company. It doesn't matter whether it's underwriting, ventures, finance, treasury. There's just an immense amount of collaboration to affect the right outcomes for our clients. That's an important thing for us to carry forward, and I think it will. I think as it relates to the new Platinum folks, we're encouraging them to expand their view of their client base and increase our book. I think we're offering them pretty much a 180-degree trajectory that they had been on. I think generally speaking, that they see that as an opportunity to grow and develop as a team.
We sense a lot of excitement on the underwriting side to collaborate and act as one team going forward. Effectively at this point in the integration, our folks are really operating seamlessly across all the platforms.
That's great. With that, I'm afraid we're running out of time. Please join me. Thank you, the management from RenaissanceRe. Thank you.
Thanks, Kai.
Thanks a lot. Thank you.