Thank you. I would now like to turn the call over to our host, Mr. Peter Hill. You may begin your conference.
Good morning, and thank you for joining our third quarter 2011 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800, and we'll make sure to provide you with a copy. There will be an audio replay of the call available approximately noon Eastern Time today through midnight on November 23rd. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The passcode you will need for both numbers is 17212832. Today's call is also available through the investor information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on January 11th, 2012. Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed.
Additional information regarding these factors which may shape the outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With me to discuss today's results are Neill Currie, Chief Executive Officer, Jeff Kelly, Executive Vice President and Chief Financial Officer, and Kevin O'Donnell, Executive Vice President and Global Chief Underwriting Officer. I'd now like to turn the call over to Neill. Neill?
Good. Thank you, Peter, and good morning, everyone. In the third quarter, RenaissanceRe produced an annualized operating return on equity of 4.4%, and book value was up 1% compared with the prior quarter. Our underwriting results were relatively good, although investment performance suffered as interest rates reached historical lows and private equity performance was poor during the quarter. We continue to have a short duration, high quality, liquid portfolio that supports our underwriting activities. Our third quarter losses were modest despite an active hurricane season in terms of storm formations. There was only one U.S. landfalling hurricane, Hurricane Irene. The past nine months have featured a number of large insured losses, but by the same token, they have highlighted the real value of reinsurance. Our business is about being prepared for years like we have had recently. We model potential outcomes and capitalize the company accordingly.
The product that our customers buy is our promise to pay their claims. Meeting this promise is the cornerstone of our business and the driver of the effort we spend understanding the risk that we accept and managing capital appropriately. Not only do we pay claims, but we do so with market leading speed, and this, along with strong relationships and our leadership position in the catastrophe reinsurance space, continues to provide us with access to the most attractive business. On the last two calls, I have referred to our expectation that we would see a gradual firming over time in the property catastrophe market. We continue to believe this will be the case, driven primarily by a deeper understanding among underwriters of the potential for large loss activity and the continuing adoption of the new vendor models.
We also believe the low interest rate environment will focus others on underwriting profit, which is always a good dynamic for improved pricing. Discussions around the model changes continue. As we have mentioned many times before, we commit significant time and resources to having a sophisticated proprietary view of risk. Ultimately, though, models are only one component of our risk evaluation process. We look at each client's risk exposure on a standalone basis and treat each client's circumstances as being unique because it is unique. The other important input into our view of risk, of course, comes from the actual loss events themselves, from which we learn and recalibrate. Risk-based pricing or reflecting exposure to the best of our ability requires underwriting experience and a deep understanding of our clients' risk, as well as good models. That's always been our approach since we started RenaissanceRe.
To summarize, 2011 has seen numerous cat events, and we've been busy doing what we are in business to do. We construct our book of business with a long-term view, allowing us to withstand the kinds of volatility we have seen over the past few months. We are rewarded for the risk we take over time. Our capital position remains very strong and our specialty reinsurance and Lloyd's operations continue to strengthen, broadening the product offering to our clients and positioning us for attractive opportunities when they come. In light of our leading market position and the promising prospects we anticipate for 2012, we are well-positioned to grow our book of business. Now I'd like to turn the call over to Kevin. Kevin?
Good morning, and thanks, Neill. I always look forward to the third quarter investor calls. It not only signifies the end of the U.S. hurricane season, but it also is time when we look towards the future in structuring our book for the upcoming year. Before discussing our view on the market, I'd like to update you on the progress and developments in our various books of business, starting with our other businesses. Moving on to cat, as I want to spend more time on the cat book and the losses of the past year. Starting with our Ventures team. As part of our annual strategy review, we consolidated the reporting of this group to be consistent with all our risk-taking enterprises.
In everything we do, the emphasis should be on the underwriting businesses and ensuring that all of our risk-taking activities are aligned with the chief underwriting officer. I'm excited about this change in reporting for the ventures unit and look forward to working more closely with Aditya and his team. The ventures team is doing well, and our focus over the next 12 months will be on evaluating new opportunities, maintaining and strengthening our joint ventures, and managing our weather and energy business. We're very happy with the success of the ventures team and look forward to continuing to develop our franchises in these areas. Moving to our more insurance and reinsurance-related exposures. I will first touch on Lloyd's. We continue to be pleased with the development of our Lloyd's platform and with our decision to organically build the syndicate in lieu of purchasing an existing franchise.
As was our goal when we started the platform about two years ago, we have built a strong underwriting team with a good risk culture and are growing in accordance with our expectations. We anticipate that as we grow, our financial ratios will continue to improve, and we believe that we will achieve profitability within the next 18 months, which is consistent with our original plans. We are well-positioned for 2012 with strong teams in our targeted lines and feel confident about our ability to execute in the market. Our business in Bermuda is doing well. The specialty team is successful finding opportunities in what is a very difficult market in most lines. Our strategy in specialty is to build a flexible platform so that we can quickly take advantage and grow in specific lines when the opportunities present themselves.
We remain disciplined and patient, however, with the view that we are more comfortable missing an opportunity in this market than rushing and taking the wrong risk at the wrong times. This strategy has served us well in the past and is consistent with our risk culture, allowing us to realize more than $1 billion of underwriting income from our specialty business over the life of the firm. Finally, let me turn to our cat businesses. Although we've had a relatively active year, or 18 months actually, I am pleased that outside our exposure to Irene and some losses aggregate contracts, the third quarter was a relatively light one for losses. The big stories for the year have been how the losses, loss development, and model changes will influence the future of the market.
With regard to the losses, we're comfortable with our book's construction, both on an inwards and outwards basis. Jeff will discuss the specific movements of the events in more detail, but I would like to comment on our loss estimation process and reinsurance protections. With each of the losses, we do both a top-down and bottom-up analysis to help us estimate the losses of each of our customers and how that rolls up to us. We physically review files, use a proprietary system to generate deterministic events to estimate losses, and then consult with WeatherPredict, which reconstructs the event and provides us a detailed analysis of the physical attributes of the event, further aiding our assessment of the damage. For example, in estimating the Japanese earthquake, did WeatherPredict map our largest exposures against the high-resolution satellite images to assess the impact of tsunami inundation and shake damage?
This allowed us to estimate losses before we had any information from our customers. Simultaneously, we're assessing individual town exposure. This two-pronged top-down and bottoms-up approach ultimately led us to the estimates that we've posted. Now that we have more information, it's not surprising to see our losses are moving around a bit. With the strong preliminary work that we did and the structure of our ceded book have resulted in these changes to the underlying events to be largely offsetting by the time we estimate our net economic impact. Of course, for an event as unprecedented as the Japanese earthquake, further development is difficult to predict. The losses of the last year and a half have consumed a lot of capital in both the reinsurance and insurance markets.
In the large losses associated with the events in Chile and New Zealand, and to a lesser extent, Japan, we saw a significant portion paid by reinsurance companies. A greater percentage, in fact, than for similar-sized U.S. losses. The U.S. losses have been frequent but relatively small, and therefore largely retained, except where aggregate contracts apply. We've reviewed our model for Northern Europe and have found that many of the enhancements appearing in the new vendor model, such as clustering, were features we already developed several years ago. Our view of risk in that region, therefore, remains unchanged, resulting in our continuing to be seen as a differentiated player. With the combination of the losses and the Northern Europe model changes, we feel there is some opportunity for the market to increase price. To date, international rate increases have been limited to areas with losses.
About 16% of our international primary reinsurance book is comprised of private layers, providing good customized protections for our customers and a strong base to build our portfolio regardless of market conditions. In the U.S. market, much of the discussion has been focused around model changes rather than losses, which is ironic given the losses this year are comparable to the large losses of the past, all of which generated considerably more comment. For our own part, we have evaluated the impact of these model changes, in many cases, having previously incorporated the revisions to the release as part of our own robust risk analysis process. This level of sophistication around modeling has allowed us to collaborate effectively with our clients, helping them to solve the challenging transition to the new risk paradigm.
As the latest vendor models are adopted more broadly in the lead up to January 1, I believe the market will continue transitioning to the new risk paradigm, which may be reflected in an ongoing trend towards rate increases in the U.S. Additionally, we are beginning to have more substantial conversations with our customers and brokers about products that will allow U.S. insurers to reduce the burden of aggregate losses to their financials and are hopeful that these discussions will lead to increased opportunities for us. Finally, I'll touch on the retro market, which can be particularly difficult to predict. I think we will have increased opportunities in this market due to the loss experience from the international event. We are well-positioned to execute in this market, but will, as always, remain disciplined.
I think the biggest competition will not come from other players, but from increasing amounts of retained risk by our customers in lieu of paying higher prices. Thanks, I'll turn the call over to Jeff.
Thanks, Kevin, good morning, everyone. On today's call, I'd like to go over our results for the third quarter and first nine months of 2011, also provide our top-line estimates for 2012. The third quarter was a mixed one for RenaissanceRe as it was for the rest of the reinsurance industry. Third quarter catastrophe losses were relatively moderate. The net negative impact on our financial results from Hurricane Irene totaled $18 million, the combined impact of losses on aggregate loss contracts totaled $26 million. The third quarter results also included reserve adjustments for recent large loss events with increased estimates for the 2010 and 2011 New Zealand earthquakes, offset by reduced net loss estimates for other events, including the Japanese earthquake. The net impact on the financial results from the various reserve adjustments for large recent prior period events was $20 million favorable.
The net negative or positive impact is the net loss or profit amount after accounting for reinstatement premiums assumed and ceded, lost profit commissions, and non-controlling interest in joint ventures. We have provided a detailed table in the press release relating to the calculation of net impact of the catastrophe losses. Investment performance in the quarter was hurt by extremely low interest rates, widening credit spreads on fixed maturity securities, and a challenging environment for alternative assets. We reported net income of $49 million, or $0.95 per diluted share. Operating income of $33 million, or $0.62 per diluted share for the third quarter. Net realized and unrealized gains, which accounts for the difference between the two measures, totaled $17 million. Our annualized operating ROE was 4.4% for the third quarter. Our tangible book value per share, including change in accumulated dividends, increased by 1.5%.
For the first nine months of the year, we reported net loss of $174 million, or negative $3.44 per share. Operating loss of $220 million, or negative $4.35 per share. For the first nine months, tangible book value per share plus change in accumulated dividends declined 4.7%, largely a result of the severe catastrophe losses in the first quarter. Let me shift to the segment operating results, beginning with our reinsurance segment, which includes cat and specialty, followed by our Lloyd's segment. In the reinsurance segment, managed cat gross premiums written in the third quarter totaled $112 million, an increase of $33 million compared with the year ago period. Managed cat gross premiums written in the current third quarter included $21 million of reinstatement premiums related to the loss activity.
Excluding the impact of reinstatement premiums in the quarter and prior year periods, the managed cat growth rate was 24% in the quarter. The top-line growth during the quarter was primarily a result of improved market conditions at mid-year renewals and a timing difference resulting from the shifting of certain Japanese renewals to the third quarter from the second quarter. For the first nine months of the year, managed cat gross premiums written increased 9% from a year ago, adjusted for $155 million of reinstatement premiums in the current year and $35 million of reinstatement premiums in prior year periods. This compares with our full-year guidance of modest growth. As a reminder, managed cat includes the business written on RenaissanceRe Limited's balance sheet, as well as cat premium written by DaVinci Reinsurance, Top Layer Reinsurance, and our Lloyd's unit.
The third quarter combined ratio for the cat unit came in at 56.1%. This included underwriting losses of $22 million for Hurricane Irene and $30 million for aggregate loss contracts. In addition, there were a number of adjustments made to the loss estimates for several large recent catastrophic events. Increases to our loss estimates for the September 2010 and February 2011 New Zealand earthquakes had a $38 million negative impact on our underwriting results. This was more than offset by reductions to our loss estimates of $11 million for Cyclone Tasha and $19 million for the Australian flooding and $20 million for the Japanese earthquake. In the case of the Japanese earthquake, an increase to our gross loss estimate was more than offset by anticipated recoveries on retro programs we have in place that were triggered in part by the size of the industry loss estimate.
The cat combined ratio benefited from $1 million of prior year net favorable reserve development. For the first nine months of the year, the cat combined ratio was 149.2%, primarily as a result of the loss related to the first quarter international catastrophic events. Favorable reserve development for the cat unit came in at $33 million for the first nine months of the year. Specialty reinsurance gross premiums written totaled $26 million in the third quarter, which was up compared with $22 million in the prior year quarter. For the first nine months of the year, specialty gross premiums written increased 20% compared with a year ago to a total of $125 million. This compares with our full year forecast for top-line growth of 10%. The growth rate for this segment can be uneven given the relatively small premium base.
The specialty combined ratio for the third quarter came in at 44.5%. There was no meaningful large loss activity during the quarter, and the combined ratio included $13 million of favorable reserve development. For the first nine months of the year, the specialty combined ratio was 65.6% and benefited from $72 million of favorable reserve development. In our Lloyd's segment, we generated $17 million of premiums in the third quarter, compared with $9 million in the year ago period. Specialty premiums accounted for most of this amount. For the first nine months of the year, Lloyd's gross premiums written increased 53% to $88 million compared with the year ago period. This compares with our guidance of growth in excess of 50% for the year. The Lloyd's unit came in at a combined ratio of 133.3% for the third quarter, primarily driven by a 65.3% expense ratio.
We expect the expense ratio to decline over time from this level as we continue to expand business volume written on this platform. Claims related to Hurricane Irene in the U.S. accounted for $3 million in net negative impact to underwriting results for this segment. For the first nine months of the year, the combined ratio for the Lloyd's unit was 168%, largely a result of the severe catastrophe losses from the first quarter. Moving away from our underwriting results, other income was a loss of $2 million in the third quarter. There were a few moving parts here, and the breakdown is provided in our financial supplement. Equity and earnings of other ventures was a gain of $5 million, driven by gains in Top Layer Re and Tower Hill Companies. Turning to investments, we reported a net investment loss of $19 million, which was driven by a few factors.
Our alternative investments portfolio generated a $37 million loss for the quarter. Performance was negative across our private equity, hedge fund, and bank loan and high yield funds as investors fled risky asset classes during the quarter. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio and totaled $11 million for the third quarter. Net investment income from fixed maturity investments includes approximately $19 million in derivative-related losses in the quarter, resulting from hedging strategies employed by our external managers. The total return on the overall portfolio was negative 0.3% for the third quarter. Net realized and unrealized gains included in income totaled $17 million during the quarter. Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure.
During the third quarter, we reduced risk in our fixed maturity portfolio to some degree by reducing our allocation to corporate bonds and to non-U.S. fixed income funds. At the same time, we increased our allocation to short-term investments. We believe our current allocation more accurately reflects our outlook to the investment risk and reward in a potentially more uncertain economic environment. We do not have exposure to sovereign debt issued by distressed European countries. Our exposure to securities issued by financial institutions in these peripheral European countries is approximately $18 million. The duration of our investment portfolio decreased slightly to 2.5 years. The yield to maturity on fixed income and short-term investments declined slightly to 2%. The sharp decline in the percentage of AAA-rated credits reflects the impact of the ratings downgrade of U.S. debt that we hold by S&P earlier in the quarter.
One thing I would point out on our alternative investments is that these are accounted for at and incorporate estimates of current market values. They are not lagged. All of our hedge fund managers give us estimated market values, and the vast majority of our private equity fund managers do as well. Where we do not get estimates from the sponsor, we make estimates ourselves. Those estimates are trued up in the following quarter when managers have final values for the quarter. Those true-ups have typically been relatively small. Our capital position remains strong despite the high loss activity of recent quarters, and we have ample capital and liquidity at the holding company to meet market opportunities we see. During the third quarter, we did not repurchase any of our shares.
Recall that we had stated in recent quarters that we did not expect to buy back shares until after hurricane season. Depending on our view of market opportunities and capital utilization as we approach the January renewals, we may reenter the market for buying back our shares. We remain committed to returning excess capital to our shareholders and continue to believe that buying back stock is an attractive means of achieving this goal given the valuation of our shares. Finally, let me give you an initial top-line estimate for our units for 2012. For Managed Cat, we estimate premiums will increase 10% in 2012, excluding the impact of reinstatement premiums. We expect this increase to be driven by a combination of price increases and exposure changes. In specialty reinsurance, we estimate the top line to be up over 20%.
Keep in mind that growth in this segment can be somewhat uneven due to the relatively small size of the premium base. In our Lloyd's unit, we estimate premiums will be up 50%. Recall that growth is also off a small premium base here, and we are in the building and growth phase for this platform. Finally, I'd remind everyone that premium estimates of this nature are subject to considerable risk and uncertainty. Our goal in providing them to you is to give you our best estimates at this time. With that, I'll turn the call back over to Neill.
Good. Thank you, Jeff. Operator, we're available for questions.
At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Sarah DeWitt with Barclays Capital.
Hi, good morning.
Morning.
I was wondering if you could expand upon your guidance for the Managed Cat premium growth and embedded in that, what's your assumption in terms of rate increases versus writing more business?
Sarah, thanks for asking, we're not going to answer that one. One of the things, we try to do our best job to give you estimates so that you have a fighting chance of guessing where the market's going. It's a combination of rate increases and opportunities to write new programs.
Okay. Are you willing at all to speculate on what property catastrophe reinsurance rate increases could be in the U.S. at one one?
No, ma'am.
Okay, fair enough. Turning to your excess capital position, could you elaborate a little bit more on that in terms of what you're thinking about in terms of the size and your appetite for buying back stock?
I'll start off and then turn it over to Jeff. Stock buybacks at appropriate prices have been part of our corporate strategy since we started the company. We do have excess capital and as Jeff said, I think there's the possibility of buying shares back. Jeff, would you like to elaborate?
The only thing I would add to that is as I mentioned in my comments, we do want to look closely at what we think will be the opportunity to deploy capital in the underwriting business at the January one renewals. I think we're beginning to get a pretty clear picture of that. As soon as we make a determination of what capital we can deploy there, we'll move as aggressively as we can to return that to shareholders.
Okay. Should we not be expecting any buybacks in 4Q then?
No, I wouldn't necessarily say that at all.
Okay. All right, great. Thanks for the answers.
Thank you.
Your next question comes from the line of Joshua Shanker with Deutsche Bank.
Yeah, thank you for taking my question. I just wanted a little clarification on the aggregate loss contracts and whether there's a risk that those losses increase if there's another event in the fourth quarter.
Okay. A couple of things. The aggregates that we have, it's kind of split between, we have some retrocession and some primary aggregate covers. I think there's always room for aggregate covers to be impaired depending on where the event is. For additional development for the ones that are already impaired is not the concern that I have being a material driver going forward, though. It'd be really whether something new happens and triggers some additional aggregate covers that we have.
Yeah.
It's not a big component of our book generally, though.
How do they work precisely? You'll correct me if I guess something wrong here, that someone bought some cover at the beginning of the year of an accumulation of events occurred, and that was triggered. If there's additional events, are we through the layer that RenaissanceRe pays and not the cedent?
Yeah. Your assessment as to how they work is largely correct. On the retrocession side, they tend to be a little bit more bespoke with defined contributions. The retrocession exposure that we have specifically that has been triggered will not develop.
Aggregates that we have in the U.S., there can be room for them to develop with additional events. I do want to stress they're not a big component of our existing book.
Right. Josh, this is Neill. Maybe I'll give a little color, too. These aggregate contracts have been around for a long time. I used to sell them as a broker back in the late 1970s, and they're wonderful things to buy. They're tough to sell, and we tend to be a little expensive on aggregate covers. I would guess we probably have fewer aggregate covers out there than some other folks. It's not a particularly large part of our book of business.
I appreciate those answers. Thank you very much.
Your next question comes from the line of Vinay Misquith with Evercore Partners.
Hi, good morning. The first question, just a clarification on your capital position. Given your 10% growth for managed catastrophe, do you still think that you can buy back stock next year, sort of equivalent to earnings next year?
Vinay, we don't generally forecast how much we'll buy just because circumstances can change. I wouldn't say what percent of next year's earnings we'd buy. I don't see any reason why, given our current capital position and what we know at present, that we couldn't repurchase shares next year. I wouldn't speculate on the exact dollar amount.
Fair enough. The second question is that there's been some news about the Thai losses. If you could give us your exposure to that'd be great.
Sure. As you know, the Thai situation is still developing. I think the exposure that we'll potentially have will come from our retrocession book. We write no indigenous local Thai business, so the only thing we can have is on worldwide or worldwide ex-U.S., Asia-specific retros that we're writing. I think there's some discussion in the market as to how this is ultimately going to flow through with the Japanese interest or broad covers potentially playing a reasonably large role, particularly with some of the auto and potentially hotel losses. It's really very early to tell how this will flow through, particularly into the retrocession market, if at all. Again, we have no local covers there.
Okay, thank you.
Your next question comes from the line of Doug Merriwether with RBC Capital.
Hi, good morning. You've been talking about, and actually all of your peers have been talking about rate increases in the reinsurance market, particularly with property and/or catastrophe exposure. I understand that, Neill, you had demurred trying to give a breakdown between unit growth and pricing, and I understand that. If I could, I guess, ask the question in a different way. When you talk about rate increases, especially with regard to model changes, how much of that is a true risk-adjusted rate increase, and how much is the rate increase accompanied by a proportional amount of extra modeled exposure, for lack of a better term?
Right. Douglas, it's a little hard to hear you, I think I get the gist of your question, I could answer your question differently and say no, sir, versus no, ma'am. We'll try to help you out a little bit there. I think there'll be new opportunities out there for us because people, as they analyze their exposures, they will feel the need to either buy more cover, maybe buy some more cover underneath, et cetera. I think there will be some rate increases that will be justified by new learnings from the losses that we've had and from the model changes. Kevin, do you want to elaborate?
I think it's also helpful sometimes to think about it by book. You express whether the model change is commensurate with exposure change. I'll highlight the European model changes where our view of risk doesn't change. If there is a market movement, that is all benefit to us, potentially not benefit to those who are moving from one model to the other. In the U.S., we've talked about rates increasing over some period of time, I think that's a reflection of the gradual incorporation of the new risk paradigm represented within the new models. As rates increase, it really depends on where people are on the curve of adoption to the new models. Retrocession is always a little bit more complicated because retrocession, there's a lot more flexibility in restructuring a program.
It's harder to compare one year to the next with regard to rate changes because the structures and the underlying exposure can change pretty dramatically.
Okay. Thanks for that. If I could just ask you a follow-up on the retrocession side. Kevin, you mentioned there's been some dislocation in retrocession and some of it, that benefit could accrue to you on the inwards basis. Does that cut your flexibility on the outwards retrocession basis? Is there still opportunities to manage your book that way?
Yeah, we have several different types of products that we purchase on a retrocession basis. Some of our core retrocession is what I would consider much more stable long term. I think that will be a core component of our book this year, next year, and hopefully many years into the future. I think we also have a little bit more of a trading account that we also participate in the market where we see specific opportunities. That does change depending on where we are in the pricing cycle. In every year I've been here, we've always found some opportunities, and I'm optimistic we'll continue to find some in 2012.
Great. Thanks. That's all my questions.
Your next question comes from the line of Jay Cohen with Bank of America Merrill Lynch.
Thank you. Just a couple of questions. First is on the outlook on the catastrophe side, you mentioned 10% ex-reinstatement premiums. Do you happen to have the reinstatement premiums by quarter handy for us? We can just make sure we have that right in our models.
We'll get back to you on that, Jay.
Okay, that's fine.
I don't have it in front of us right now.
On the investment income, obviously on the fixed income portion, the hedges took away from some of that income. Are those hedges still in place as you go into the fourth quarter?
I believe they are, Jay. The one thing I'd just clarify on that is when we give an investment manager an investment mandate, we give them as a part of that a target duration. They may buy securities in their portfolio. They have the flexibility to own securities that are longer than the duration that we're targeting for the overall portfolio. If they own longer duration securities, they hedge those back perhaps to the target duration. What the investment income loss from derivatives is largely a geography issue where the derivative loss flows through investment income, and the offsetting, in large part, gain is in unrealized gains in the portfolio in an instance like this where interest rates decline sharply.
Got it. From a book value standpoint, there was an offset, obviously.
For the most part, there was an offset. We did have one manager that was short their duration benchmark and had a reasonably bad quarter kind of all around. For the most part, the duration that's lost in these hedges is incorporated in unrealized gains in the securities that they do own.
Great. Thank you.
Your next question comes from the line of Seth Feinstock with TimesSquare Capital Management.
Hey, good morning.
Seth.
I find it interesting that many of the primaries have been disproportionately stung by some of the U.S. catastrophe events this year, that you've even seen some of the smaller regional companies report losses that in some cases are multiples of what the reinsurers have announced. My question is, given that dynamic, do you expect to see some of the primary insurers also reassess the retention levels?
The short answer to that is yes. Why don't you follow there, Kevin?
Sure. I think there's a couple different things in your question. For the small regionals, a lot of these storms have been small and somewhat localized. If you are a regional in the play or your retention was at a level where on an occurrence basis you did get some recoveries, I think it'll be difficult from a pricing perspective for them to reduce their retention materially. They may look to do it or find alternative structures. I think on the large, the nationwide accounts, their retentions are set at a level where a lot of the regional or smaller losses have been retained.
I think, again, it's going to be a price to risk question for them as to I'm sure they'll have the desire to reduce retentions, but I think they're going to need to look at a more creative structure in order to materially share some of the aggregate losses that they experienced over the course of this year, rather than just taking their retention down. I think whenever there's a dynamic where reinsurers in the U.S. and insurers are having a different experience with losses, there's always an opportunity for new products, we're actively talking to brokers and customers about filling the need there. I'm not as convinced it'll be simply just a dropping of retentions.
Seth, I might add this in as well. I think we don't know what all of our competitors do, obviously, but we've done a good job here at RenRe trying to analyze exposures like tornado, hail, fire, wildfires, things like that. We probably have some insights that some others don't. If we can share those insights with our clients and they're willing to pay for the products bearing those insights into account, we have some opportunities.
Great. Thanks much. Good luck with the upcoming renewals.
Thanks.
Thanks, sir.
Your next question comes from the line of Kevin Kraft with Morgan Stanley.
Hi, guys. This is Gregory Locraft.
Good. I thought it might've been your brother.
The firm's correct. Well, good morning. I wanted to just follow up on the managed catastrophe guidance. Up 10 versus, I guess this year you're kind of trending up nine. Neill, I missed your comments at the beginning, but I wanted to confirm that the multi-year growth trajectory you outlined at mid-year was in place, and then try to tie that comment to the sequential of, let's say, at an up nine going to an up 10, which really it certainly is growth, but it's not much of an acceleration.
That's right. It's very difficult for us to project growth. We do the best that we can to help give you guys some guidance. Yes, it is in keeping with the comments that we've made in the past so that we are looking for some increases both at one-one and for contracts that renew later in the year. Kevin, do you want to expand on that?
I think it depends on there's different dynamics in different books of business. Within the U.S., we've really focused the comments about the rate changes as
In conjunction with the adaptation of the new modeling, the new vendor models. I think this is the first 1/1 where that vendor model is going to be incorporated at all. We expect to see some increased demand because of it. I think we'll go through the rest of 2012 with more certainty as to how the rating agencies are going to be looking at companies using different models, Lloyd's and different companies on their own risk assessment parameters. I think there'll be increased demand based on that throughout the rest of the year.
Okay. If I look at Guy Carpenter's Rate-on-Line Index, I take the mid-year renewal and just flatline it into Jan 1.
Yeah
It looks like rates should be up solidly in the double digits, 10%+. I guess said differently, the comp for the Jan 1 renewals is easier than the comp for the June 1 renewals that you just lapped. The numbers are pretty good so far this year. Given the easier comp at Jan 1, given the amount of the book that renews at Jan 1, unless rates are going down, I'm not sure why up 10% in managed cat as guidance isn't uber conservative? Is there a disconnect? Am I analyzing the marketplace incorrectly in terms of what's occurring?
Greg, I think one of the things as we look at this is we do not try to predicate rate increases. We don't feel like that's appropriate in our stance to predict rates. We look at it, as we said in my opening comments, we look at it on a client-by-client basis. There's always a wide swing. If you look back over the history of the company in terms of trying to predict rate increases, we try to give you an area to look at. I wouldn't get too finite on these numbers. They're estimates.
Okay. Great. Actually, totally different topic, just on ROE. Again, in a year like this, I just wanted to sort of baseline the business. What sort of an ROE profile is RenaissanceRe shooting for given where current interest rates are at? Has it changed? What should we be thinking about in 2012 and beyond?
Greg, that's not something that we've ever disclosed publicly. Obviously, if you look at the type of returns that we'll have in a very low interest rate environment, they'll be lower than in a higher interest rate environment. That's not something that we've disclosed historically.
Okay, great. Thanks. I'll jump back in the queue.
Thanks. Operator, if we could right now, there was a question earlier that Jay Cohen answered. We've got the answer to that question. Jeff, if you could respond to that.
Yeah, there was a question earlier about the reinstatement premiums by quarter. I think in my prepared remarks, I said that they were $155 million year to date, and the third quarter ones were $21 million. The second quarter reinstatement premiums were $22 million, and first quarter reinstatement premiums were $112 million.
Thank you. Operator, back over to the queue.
Your final question comes from the line of Ian Gutterman with Adage Capital Management.
Hi, guys. I had two numbers questions for you. First, can you explain the DaVinci minority interest was only $5 million this quarter, and normally when you have this kind of operating income would've been $20 million or more. Why was it so low?
Bear with us just a second, Ian.
Sure. I should have said underwriting income. When your underwriting income is at this level, usually it would've been $20 something million.
No. Well, it was related to the losses in the quarter that affected DaVinci and also just the investment income in the quarter.
How does investment income affect DaVinci? I thought it was a share on the operating. Do you actually allocate investments to DaVinci versus Ren?
Investment income. Yes. DaVinci has its own investment portfolio.
Okay. They had more losses on the investment side than the Renaissance balance sheet?
I wouldn't say they had more losses. It just wasn't as strong as it's been in recent quarters.
Okay, got it. If given the market's rebounded, if those marks unwind in the fourth quarter, maybe minority interests would be higher than we normally expect for Q4?
I think that's possible. Sure. I think there's a pretty detailed breakdown of the income statement for DaVinci on page 10 of our supplement.
Right.
That I think will help you with that.
Okay. Thank you. I'll take a closer look at that. The other question is, I probably asked before, but I'm amazed at it every quarter. The paid losses year to date are actually down from last year, and last year was actually a very low paid loss year historically. You've had two years of very low paid losses with two years of very high CATs. What's going on with the paid, sort of the payout trends on these CATs versus normal? Are they a lot slower? Because everything I've read about Japan says the Japanese pay out very fast.
Yeah, I think there's one thing we've talked about before is half of our loss in Japan comes from retrocession, and the retrocession component tends to be a little slower. Quakes tend to be slower than wind. A lot of the reserves that we've posted over the last year or so have been quake related. In Japan, the high percentage of That is being discussed is really around probably one or two accounts, and that's one that is emerging in the market as a paid number. It's just one component of the overall loss. In general, you should expect to see quake payouts to be significantly slower than wind payouts and then retrocession to be slower than primary.
Okay. It's obviously hard for us to model on the outside. The way I try to do is I look at the big historical events like 2004 and 2005 and years like that.
Yeah
Sort of what the lag is in paid. Is it just that it's slower this time, or is there something about the pattern that maybe as many pays have already happened and just everything else, there's something offsetting it elsewhere?
One thing, that's Japan. The other one, it depends on the retention level of the contracts that we're writing as well.
Okay.
If you go back to the losses that affected Florida in 2004, in particular, the retentions on many of those deals are actually quite small, so the reinsurer participation comes in very early in the loss tower.
Okay.
Something like New Zealand, a lot of the exposure on the primary side is concentrated with very high retention deals, which will slow down the primary and also slow down the retrocession.
Got it. Okay. It sounds like pay losses, maybe by next year, maybe in 2013, are going to be higher than trend, and maybe that puts a little bit of pressure on cash flow. Is that fair?
I can't comment for others on this. The way we look at it is, we're eager to pay, and the other thing in 2004 and 2005, we prepaid a lot of our losses.
Okay.
We offered in some instances here to prepay some of our losses, it hasn't been as quite profound as it was in 2004 and 2005. Whether it moves into cash flow now or in the future, it won't affect our view of risk or our assessment of how we're going to take risk. I can't really comment on how the rest of the industry will look at it.
No, that's fair. Yeah. I wasn't thinking about it as far as a development issue, more about just trying to get my model right on cash flow and invested assets to-
You're just trying to calculate those huge investment returns.
Exactly. All right. Thank you, guys.
Good. Thank you very much.
This concludes-
Operator, is that it for us today?
Yes, this concludes the Q&A portion. I would now like to turn the call back over to Mr. Neill Currie for closing remarks.
Well, good. Sounds like we had a Southern operator today. Always makes me feel good. Thanks, everyone, for joining in, and look forward to discussing the renewal season with you next quarter. Thank you.
This concludes today's conference call. You may now disconnect.