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Text: Yesterday, after the market closed, we issued our quarterly release.
The passcode you will need for both numbers is 2968847.
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 November 28, 2020.
Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you.
With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.
Once again, we find ourselves at the end of a very active third quarter, which saw numerous name storms making landfall in the U.S., record-breaking wildfires across the West Coast and multiple typhoons in Asia.
We extend our sympathies to all those impacted by these catastrophes.
An important part of our purpose is to support rebuilding and recovery efforts after disaster strike, which we do by providing solutions and protection, sharing our expertise and paying valid claims promptly.
So while our results for the third quarter reflect an elevated level of activity, these are risks that we fully understand and are paid to take.
And I am proud of the role we play helping people when they need it most.
The Q3 2020 large loss events were driven in particular by hurricanes Laura and Sally in the Gulf of Mexico and the wildfires in California, Oregon and Washington.
The fourth quarter has also been active so far with Hurricane Delta making landfall as a category two in nearly the same location as Hurricane Laura and continued wildfire activity.
Last year, during our third quarter call, I discussed our belief that climate change contributes to making extreme events more frequent and more severe.
This year, it is already clear that we are experiencing an especially active season for both wildfire and wind.
On the West Coast, California wildfires have already consumed more than four million acres in 2020, which is more than double either 2017 or 2018, and has resulted in over 90 million metric tons of carbon dioxide being released into the atmosphere.
For perspective, this is 1.5 times more carbon dioxide than is released in powering the entire state for a year.
We continue to believe that there is strong evidence that climate change is increasing wildfire risk in California for two primary reasons.
First, California's climate is hotter and drier now than at any time in the past 120 years.
Higher temperatures and longer dry seasons accelerate the desiccation and death of vegetation creating fuel for larger, more intense wildfires.
Second, climate change extends the length of the dry season into the late autumn, causing it to overlap with the Diablo and Santa Ana winds.
This combination of high and strong winds results in the dramatic spread of damaging fires as we have experienced in 2017 and '18.
Climate change is also influencing hurricane risk.
Due to a globally warmed world, we anticipate a future, where a greater proportion of tropical cyclones reach category four or category five status.
Climate change also drives sea-level rise, which increases the impacts from storm search.
While there have always been natural cycles of variability in sea surface temperatures, we believe recent increases are primarily a product of climate change.
Consequently, sea surface temperatures and associated hurricane activity will not revert to lower levels of prior periods, rather the heightened activity levels of the last two decades are likely the new normal for Atlantic hurricane.
Vendor cat models, however, rely on the long-term historical record to estimate risk.
Unfortunately, due to climate change, this long-term record of past experience may no longer be a reliable guide for what we can expect in the future.
Making the problem worse, human behavior can interact in complex ways with climate change to amplify risk of loss.
For example, we have seen a long-term trend to build on coastlines or in the wildland-urban interface, often with building codes and materials that fail to provide resilience in the face of natural perils.
Recognizing the fact that climate change is increasing the risk of natural disasters is only the first step, however.
To gain a true competitive advantage, this insight must be accurately reflected in the cat models used to price risk.
Our scientists, meteorologists and engineers at RenaissanceRe Sciences have been studying the impact of climate change on natural hazards for decades.
They believe that a physical model, informed by historical observations but calibrated to our best understanding of how the climate has and will continue to change, creates the best basis for categorizing the full distribution of outcomes that should be a new written against.
Applying these insights, RenaissanceRe Risk Sciences works closely with our underwriters and risk managers to build proprietary cat models that capture the physics and future impact of climate change.
Our approach sets us apart from many other underwriters or ILS managers, who often rely on a single vendor model that fails to capture the true impact of a changed climate.
This has obvious implications for ILS investors.
But building proprietary climate change-informed cat models goes beyond investments in cat risk and benefits all of our stakeholders.
Our ILS partners rely on us to accurately model the risks inherent to their investment.
Our clients appreciate the superior customer service that we can provide through deeper insight into the full distribution of their risk profile, which often leads to increased demand for our products.
And our shareholders benefit from the more efficient portfolios of risk we can construct as well as our enhanced sustainability.
Contrary to some perspectives, accurately pricing for climate risk does not put us at a competitive disadvantage to our peers, rather an industry-leading understanding of the influence of climate on risk is a key component of superior risk selection allowing us to shape our portfolios but growing on the best business and shrinking on the worst.
Moving on from climate change.
I want to take a minute to discuss capital deployment opportunities.
As we enter the important January one renewal period, I believe we will have one of the best opportunities in many years to profitably deploy material additional capital.
Our focus on superior risk selection should prove increasingly valuable as the combination of historically low interest rates, the Q3 2020 large loss events and material trapped capital put additional upward pressure on reinsurance rates.
We have legacy positions on the best programs, first call status to capture opportunistic and off-cycle business and significant capital to support growth on new and existing profitable opportunities.
I'll provide more detailed update on the renewal in our segments at the end of the call.
As Kevin discussed, and as you saw in our pre release, our third quarter results were impacted by active wind and wildfire season.
Despite this elevated activity, we reported positive net income and remain in a very strong capital position going into renewals.
Today, I will discuss our consolidated performance and then provide more detail on our three drivers of profit: underwriting income, fee income and investment income.
Starting with our consolidated results, where we reported an annualized return on average common equity of 2.8%, benefiting from mark-to-market gains in our strategic investment portfolio.
Annualized operating return on average common equity was negative 7.7%, with the loss primarily driven by the Q3 2020 large loss events.
We grew our book value per common share by $0.86 or 0.6% and our tangible book value per common share plus accumulated dividends by $1.24 or 1%.
Year-to-date, we have grown tangible book value per common share plus change in accumulated dividends by 14.6%.
Net income for the quarter was $48 million or $0.94 per diluted common share.
We reported an operating loss of $132 million or $2.64 per diluted common share.
This excludes net realized and unrealized gains on investments, the sale of RenaissanceRe (U.K.) Limited, net foreign exchange gains and expenses related to the integration of TMR. Included in this operating loss is $322 million of net negative impact resulting from Q3 2020 large loss events.
Now to clarify, net negative impact is the bottom line impact of events to us after taking into account our best estimate of net incurred losses along with related adjustments for earned and ceded reinstatement premiums, lost profit commissions and redeemable noncontrolling interest.
I will now discuss our three drivers of profit, starting with underwriting income.
On a consolidated basis, we reported underwriting loss of $206 million for the quarter and a combined ratio of 121%.
Our results were driven predominantly by natural catastrophe losses with little impact from COVID-19 losses in the quarter.
Gross premiums written for the quarter were $1.1 billion, up $282 million or 33% from the comparable quarter of last year.
Approximately 60% of this growth came from our Casualty segment and 40% came from Property.
We are pleased with our growth so far this year.
As I've mentioned last year, we anticipate that we will have many opportunities to deploy additional capital in 2021 and beyond.
Moving now to our Property segment, where gross written premiums increased by $113 million or 36% from the comparable quarter.
This was driven by an increase in reinstatement premiums related to the Q3 2020 large loss events, a negative premium adjustment in 2019 and continued expansion of our Lloyd delegated authority insurance book.
The overall combined ratio for the Property segment was 140%, with property catastrophe and other property reporting combined ratios of 159% and 113%, respectively.
We reported a current accident year loss ratio for the Property segment of 122%.
And as we've indicated in the past, our other property class of business is exposed to catastrophe risks with the Q3 2020 large loss events, adding 30 percentage points to its loss ratio.
Favorable development for the Property segment during the quarter was 8%, with property catastrophe experiencing favorable development of 11% and other property experiencing favorable development, up 3%.
The underwriting expense ratio for Property was 26%, which is flat to the comparable quarter.
However, within the underwriting expense ratio, the acquisition expense ratio was up approximately one percentage point due to the unwinding and previously earned profit commissions given the large cat events for the quarter.
This was offset by a one percentage point decline in the operating expense ratio due to improved leverage and slightly lower operating expenses.
Now moving on to our casualty segment, where our gross premiums grew $169 million or 31%.
This growth was a combination of expansion of existing deal share and premium as well as new business opportunities.
Overall, our casualty combined ratio was 99.9%.
The current accident loss year ratio was 76%, which is seven percentage points higher than the comparable quarter.
This increase is driven by three factors, each of which contributed about two percentage points to the loss ratio.
First, $10 million of IBNR related to Hurricane Laura in our marine and energy book; second, increased reserves from our private mortgage insurer book, which did not impact the combined ratio; and third, $15 million in ceded premium for our new Lloyd's adverse development cover.
Now let me walk you through the last two items in more detail.
Starting with our private mortgage insurance book, where we increased our reserves to reflect delinquency notifications.
The primary mortgage insurers are required to report loans as delinquent net 60 days without payment even if the loans are in forbearance or payment holiday and otherwise expected to perform long term.
We reserve for these delinquencies as they are reported to us.
That said, we do not anticipate that all of the notifications will crystallize as paid losses.
While these mortgage delinquencies increased our casualty loss ratio by two points.
Due to the structure of the transaction, these losses were offset by a decrease in profit commissions paid to our cedents.
As a result, there's no impact to the combined ratio.
Now moving to the Lloyd's adverse development cover.
We closed this transaction in August to reinsure the casualty reserves for our Lloyd's syndicate for the 2009 through 2017 underwriting years.
The premium cost of this cover is reflected in the current accident year loss ratio for our casualty segment, contributing about two points.
This transaction is an innovative example of our gross-to-net strategy in action.
It provides capital relief to our syndicate, over time, creating additional capacity to underwrite into an improving market.
This protection is a retroactive reinsurance transaction.
This means that we are protected economically, but given the accounting treatment, you may continue to see reserve volatility in the short to medium-term from an accounting standpoint.
During the third quarter, the casualty segment also experienced favorable development of 3%, driven by a variety of specialty lines.
Now moving to our second driver of profit fee income, where total fee income for the third quarter was $18 million.
Management fees were $30 million, up 23% from the comparable quarter, driven by increases in assets under management at DaVinci, premier and Upsilon.
This was offset by negative $12 million in performance fees due to the impact of catastrophe events on DaVinci and Upsilon.
Year-over-year, total fees are up 8%.
The net noncontrolling interest charge attributable to DaVinci, Medici and Vermeer for the quarter was $19 million.
This reflected an overall loss for DaVinci that was more than offset by income in Medici and Vermeer.
The $19 million is passed on to our partner capital, reducing our operating earnings accordingly.
Now turning to our third driver of profit, investment income.
We reported total investment results for the third quarter of $308 million with realized and unrealized gains of $224 million.
These mark-to-market gains were predominantly in our fixed maturity and equity investment portfolio with equity gains driven by our strategic investment portfolio.
We take a prudent and reasonably conservative approach to our investment portfolio and have not materially increased our allocation to high yield or equities in attempt to stretch for yield.
As I discussed on our previous call, we increased our allocation to investment-grade corporate credit in the second quarter.
In the third quarter, we made more marginal allocations, increasing in higher quality credit sectors such as AAA-rated collateralized loan obligations and commercial mortgage-backed securities.
Our fixed maturity and short-term investment income for the quarter was $70 million, and overall net investment income for the quarter was $84 million, of which we retained $65 million and shared the remainder with partner capital.
Our managed investment portfolio reported yield to maturity of 1% and duration of 2.9 years on assets of $18.6 billion while our retained investment portfolio reported yield to maturity of 1.3% and duration of 3.7 years on assets of $13 billion.
Now before handing over to Kevin, I'd like to provide more information on our expenses and foreign exchange gains for the quarter.
Direct expenses, which are the sum of our operational and corporate expenses, totaled $97 million for the quarter, which is an increase of $30 million from the third quarter of 2019.
This increase is predominantly driven by the sale of RenRe (U.K.) Limited, which I'll discuss momentarily.
The ratio of direct expense to net premiums earned was 10%, an increase of more than two percentage points from the comparable period last year.
This increase was driven by corporate expenses, which increased by $34 million or three percentage points on the corporate expense ratio.
Included in corporate expenses were $32 million related to the loss on sale of RenaissanceRe (U.K.) Limited and associated transaction-related expenses and $5 million of one-off items, including expense related to senior management departures.
RenaissanceRe (U.K.) Limited was acquired as part of the TMR transaction and primarily wrote long-tail commercial auto business.
It was placed into run-up by Tokio Millennium Re in 2015, and our stated intent has always been to divest this entity.
This allows us to focus on our core strategy, simplify our operations and decreased underwriting and foreign exchange volatility.
As a reminder, the loss on sale of RenaissanceRe (U.K.) Limited and associated transaction costs are excluded from the operating loss in the quarter.
Excluding the impact of RenaissanceRe (U.K.) Limited and the one-off items I just described, the ratio of direct expense to net premium earned was 6%.
This is a decrease of one percentage point from the comparable period last year, demonstrating the operating leverage embedded in our business model.
And the operational expense ratio also declined by 1% point due to the reduction in office travel expense related to COVID-19 restrictions.
Finally, we reported a $17 million foreign exchange gain.
Approximately half of this gain is an accounting adjustment for the prior quarter related to the Tokio Millennium Re integration.
The majority of the remaining gain relates to Medici and has no impact on our bottom line as it's backed out through noncontrolling interest.
As usual, I will divide my comments between our Property and Casualty segments.
Overall, I am very optimistic regarding opportunities across our business as we head into the January one renewal.
We anticipate that there will be a supply/demand imbalance in certain areas of our portfolio, particularly for capital-intensive risks driven by continued uncertainty related to COVID-19 and further accelerated by another active year for natural catastrophes.
RenRe is positioned to deploy additional capital and grow, given our market leadership and long-term relationships with brokers and customers.
Beginning with Property cat.
The third quarter was very active for natural catastrophes in the U.S. So it categorize as high-frequency and low-to-medium severity.
The largest and most impactful events for us for Hurricanes Laura and Sally in the Gulf of Mexico, Hurricane Isaias in the Northeast and wildfires on the West Coast.
Because the U.S. had already experienced above-average frequency of events prior to the third quarter, aggregate covers also increasingly came into play.
These events will add additional pressure to the already hardening rate environment from Property cat and should lead to increased demand for Property cat reinsurance throughout 2021.
At the same time, ILS capital is becoming fatigued as investors contemplate a fourth consecutive year of elevated cat losses and additional trapped collateral caused by COVID-19 BI claim uncertainty.
While we are encouraged by the market, we must remember that we are still in a pandemic that is likely to result in losses across the insurance industry.
In the U.S., so far, we have received generally favorable news regarding the court's interpretations of the availability of business interruption protections from the COVID-19-related shutdown.
It's important to recognize, however, that for the most part, these processes remain at an early stage.
I remain concerned that the plaintiffs bar will continue to test new theories for recovery in multiple venues in the hopes of obtaining judgments more favorable to insurers.
Such challenges will result in continued uncertainty regarding BI coverage that could extend for years.
And it's irrational to believe that these processes will not result in material liabilities to the insurance industry.
As with any time there is uncertainty with coverage, insurers will submit claims to protect their rights under their insurance policies.
Ultimately, some of those claims may be presented to reinsurers.
I think we are a long way from understanding the impact of the virus and the shutdowns.
But I expect that we will see an increase in submitted claims, particularly as information is shared during the renewal process.
Internationally, business interruption is a more fluid issue as more affirmative coverage was sold outside the U.S. Additionally, various jurisdictions are approaching the issue of coverage differently, so we are watching this space carefully.
In the fourth quarter, we expect that our renewal conversations will provide us with greater clarity regarding potential customer claims for business interruption-related losses, and we will react appropriately as we assess the validity of such claims.
Turning to other property.
It was also an active quarter.
As I explained to you earlier this year, we have increased the other property books catastrophe exposure as we believe we are being paid sufficiently for it.
Consequently, other property experienced losses from the Q3 2020 large loss events, primarily from hurricanes Laura and Sally and the Midwest derecho.
That said, attritional losses were within our expectations.
Prior year development was favorable this quarter.
And overall, I am satisfied with the performance of the other property book.
Similar to Property cat, we are seeing increased opportunities to profitably deploy material capital in other property.
Rates are up, particularly in the U.S. E&S business.
And the Q3 2020 large loss events will only accelerate the velocity and persistence of these rate increases.
Of course excessive losses and increasing uncertainties aggravating an already dislocated retro market, we are experienced and comfortable managing the level of uncertainty in this market, both as a buyer and seller of retrocessional coverage.
Focusing on selling more in 2021 is yet another opportunity to profitably deploy significant amounts of capital.
Moving now to our Casualty and Specialty business.
As Bob explained, this segment largely performed within our expectations during the third quarter.
We experienced rate increases across all major risk classes, along with acquisition and profit commission ratio improvements, and executed on several key transactions at economics that exemplify both our strategic position with core clients and a continuing hardening of casualty markets.
Our ability to increase lines on targeted deals that were oversubscribed substantiates our strategy to build options with core trading partners.
We have been closely monitoring economic impact of COVID-19-related shutdowns and the development of forbearance measures on our mortgage book.
While the homeowners market has seen significant price appreciation in recent months, it comes on the back of a challenging unemployment picture that could put pressure on homeowners' ability to repay their outstanding mortgages.
Despite this challenging economic backdrop, we believe that the portfolio we have constructed will remain resilient.
The fundamentals of the U.S. housing market were strong heading into the pandemic, supported by tight underwriting standards and banking regulations, high loan quality and growth of homeowner equity.
And although we did not expect it to be pandemic-driven, we have been underwriting and constructing the portfolio in anticipation of an economic downturn and have actively avoided risk from lower credit borrowers for several years.
Forbearance trends are showing improvement as well.
With GCE forbearance speaking at around 6.4% in May, and have been consistently reduced since that time.
Looking forward to the January renewal, we expect ample opportunities to deploy significant additional capital in both of our segments and across our platforms.
Many markets are exhibiting supply/demand imbalances.
And overall, we are seeing strong rate momentum across all lines with stable or improving terms and conditions.
We have focused for many years building strong positions on high-quality programs.
As the market hardens, we believe we are preferentially poised to expand our share on existing programs while being the first call for new opportunities, both at improved economics.
I'm pleased to report debentures team continues to operate effectively.
And overall, our joint venture balance sheets continue to perform well.
With the level of catastrophe losses in the quarter, DaVinci also experienced losses, but year-to-date remains profitable.
Top Layer Re, Upsilon and Vermeer, all had positive quarters.
And Medici, our cat bond fund, had one of its best performances in its history, and we expect it to continue to benefit from the flight to simplicity that cap on market is currently experiencing.
The ILS industry will likely suffer significant amounts of trapped capital yet again in 2020 due to the impact of COVID-19, catastrophe loss events to date and an already-active fourth quarter.
The potential for trapped collateral highlights an important difference between collateralized coverage and traditional reinsurance in a collateralized deal, as cedents enjoy protection for as long as collateral is available.
Consequently, in a year like 2020, cedents would prefer to maintain protection against the heightened uncertainty of losses while providers will want to roll their capital into new deals and new premium.
Business interruption-related COVID-19 claims only intensify this inherent tension.
The industry remains in the early stages of assessing the myriad of factors affecting potential BI losses of process that will play out over years.
Given this, going into 2021, we expect that cedents will increasingly prefer the certainty of rated balance sheets, provide over collateralized vehicles.
If this occurs, we have the flexibility to transact with our customers through their preferred means of risk transfer.
This is likely to result in us deploying more rated paper and shrinking Upsilon.
In conclusion, we find ourselves in a very enviable position heading into the January one renewal cycle.
Market conditions continued to improve as the natural catastrophe activity of the quarter further restricts supply in an already unbalanced market.
As the industry grapples with the uncertainties from climate change and COVID-19, our independent view of risk provides us with an enduring competitive advantage.
I am confident that we can profitably deploy material amounts of capital in this environment and continue creating long-term shareholder value in 2021 and beyond.

user
compname reports third quarter 2020 net income available to common shareholders of $47.8 million, or $0.94 per diluted common share.
operating loss attributable to common shareholders of $131.7 million, or $2.64 per diluted common share.
q3 operating loss per share $2.64.

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