RenaissanceRe Holdings Ltd. (RNR) Q2 2014 Earnings Report, Transcript and Summary

Good morning. My name is Jody, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the RenaissanceRe Second Quarter 2014 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I'd now like to turn today's conference over to Mr. Peter Hill. Please go ahead, sir.

Thank you. Good morning, and thank you everyone for joining our second quarter financial results conference call. Yesterday, after the market close, we issued our quarterly release. If you didn't receive a copy, please call me at 212-521-4800, and we'll make sure to provide you with one. There will be an audio replay of the call available from about noon Eastern Time today through midnight on August 21st. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The pass code you'll need for both numbers is 63559814. Today's call is also available through the Investor Information section of www.renari.com, and will be archived on RenaissanceRe's Web site through midnight on October 8, 2014. 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 the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Jeff Kelly, Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Kevin. Kevin?

Thanks, Peter, and good morning everyone. For this morning's call I'll start with some broad themes for the quarter, and I'll turn it over to Jeff to talk about financial results, and then I'll come back on for some more detailed comments on the renewal. Last night we reported an annualized operating return on equity of 11% for the second quarter. Growth in tangible gross book per share plus accumulated dividends was 3.5%. On a year-to-date basis, we have generated net income of $272 million and an annualized operating return on equity of 13.4%, and have grown tangible book value per share plus accumulated dividends by 6.4%. This was a tough renewal for the industry, and we saw the same trends continuing, namely intense competition and ongoing pressure on rates. Against this backdrop the team executed well putting into practice the playbook we've consistently operated in soft market conditions like these. We cut back on business that did not meet our return hurdles. We've positioned our portfolio, and bought ceded retro to reduce risk in line with our consistent strategy to optimize our book of business. Our strategy is based on a long-term view. We've invested in understanding risk, underwriting it and matching it against capital for over 20 years, focused always on managing our portfolio efficiently. Our customers value our experience and trust us to help them with the unexpected. It's been all too easy for the industry to have a short-term memory, given the eight year hiatus without a major landfall and hurricane in Florida, and five years without a meaningful event in the southeast. As we advance through storm season, we're more conscious than ever that good preparation, not good luck should be the basis of sound risk management. The ability to properly assess the risk that one takes on and to differentiate between attractive and non-attractive business remains more important than ever. At this point, I'll turn it over to Jeff for his comments on results.

Thanks, Kevin, and good morning everyone. I'll cover our results for the second quarter and the year-to-date. We had a profitable second quarter again benefiting from solid underwriting, relatively low catastrophe losses and a favorable investment environment. Our managed cat top line decline in the second quarter to a larger extent reflected the competitive market dynamics that we have been highlighting on our recent calls and our decision to pullback on business that did not meet our return criteria. We reported net income of $121 million or $2.95 per diluted share, and operating income of $94 million or $2.28 per diluted share for the second quarter. The annualized operating ROE was 11% for the second quarter and our tangible book value per share, including change in accumulated dividends increased by 3.5% during the period. For the first six months of the year, we reported an annualized operating ROE of 13.4% and growth in tangible book value per share plus dividends of 6.4%. Let me shift to the segment results beginning with our cat segment and followed by specialty reinsurance and Lloyd's. Managed cat gross premiums written declined $180 million or 29% compared with a year ago during the second quarter. Adjusting for prior year reinstatement premiums of $10 million, a $27 million multiyear contract written and booked in the year ago period and $28 million less on a single quota share contract this year relative to the prior year period, managed cat premiums declined approximately 21% in the second quarter and 15% for the first six months of 2014. The top line decline for cat premiums so far this year was driven largely by increased pricing competition, exposure reduction and repositioning of our portfolio as we moved higher up in layers relative to a year ago. The year-to-date decline in…

Thanks, Jeff. This is the quarter where much of the focus of course is on the June 1st Florida renewals. While we saw both strong demand with increased purchases and new limit bought in Florida, there is ample capacity to meet this demand and the result was a very competitive renewal. The increased demand in the Florida market and strengthening health of primary companies over the past couple of year are all long-term positives. Many companies are also electing to use cost savings from lower reinsurance rates to purchase more protection. Larger buyers were generally loyal to their existing panels and tended to maintain core relationships. However, as we had anticipated there was greater pricing pressure resulting from non-core participants competing hard for market share. This resulted in price reductions in excess of what we were originally expecting. Nonetheless, we were able to construct a good portfolio of Florida risk. Our longstanding relationships with brokers and clients provided us with access to the business we sought to write. And we continue to draw upon our suite of options to manage inwards and outwards. Retropricing and capacity has followed the general market trend giving us the opportunity to increase our ceded projections. During the quarter we successfully executed a ceded retro transaction specifically for Florida, decreasing our exposure to more frequent return periods. So in our vernacular, we're less half down low than we were last year. Interestingly as market participants have had greater access to models and tools to understand risk, one might have expected a more efficient market. However, instead of greater efficiency the clock seems to have turned back to the 1990s and there is instead then a return to a single view of risk and a resulting decline in risk assessment quality. We believe that the right…

(Operator Instructions) Your first question comes from the line of Josh Stirling from Sanford Bernstein. Josh Stirling – Sanford Bernstein: Hi good morning, and thanks for taking the questions. So I recognize this is a challenging renewal and it's easy for us all to be difficult because we don't actually work in the business but we're trying to frame this and I wonder, Kevin, a really big picture question, if you take -- I don't know, probably the view of your career at RenRe when you started the business and broadly was probably a 20% plus ROE kind of business, and then after hurricane Katrina, higher capital standards came into the rating agencies and maybe it came down 15%. You'll have a better sense of all these numbers, but I'd guess over the past two years pricing must be down something 20% or 30% on some risk adjusted basis. If I can simplify this to say the property cat is really just a 10% ROE business, and if that's not the right high-level math I'm wondering if maybe you can walk me through the way you think about it.

Sure. I've been here for a long time, and I've seen a lot of different markets going back to when I started in '96. Each market I've seen has been different. And when I look at the portfolios that we built in those markets, we build them in a way which matched the right amount of risk to the right amount of capital. In the late 90s our portfolio was very much constructed to be a net portfolio with little third-party capital and then all these years we've built in more third-party capital. I think thinking about the returns in this business, it is one in which rates are certainly down and one is being paid less for the risk they're taking today than they were last year for sure. But it's a business where I believe the portfolios we're constructing still afford attractive returns. The other piece that fed into the returns is really what's going on with investments, and that's really more universally affecting people. But from the risk portfolio, we have seen a decline in the overall returns of the risk portfolio, but it's one in which we're not at the lowest levels that I've seen since I've been here for sure. Josh Stirling – Sanford Bernstein: Okay. That's helpful. I've a different question, but a similar topic on pricing and all, just trying to sort of a second guess how much more longer the pricing pressure might last? You guys both play in the traditional reinsurance market as well as a lot of the collateralized -- you do a lot of different things all throughout the market. One of the markets that I've looked the guidance for is in someway it's a cat bond on market. And I'm wondering when you guys think about cat bond spreads, what investors are paying for risks when you compare them to things like similarly rated [junk] (ph) bonds which are at all time lows. How much more margin is there for new money to be allocated into the space? And how much pricing pressure in the future would -- if you believe that there was ultimately true conversions and similar ratings for similar margins or similar spreads, how much more pressure would that put on this business? Do we still have 10% or 20% pricing declines to come?

Yes. I think cat bond still trade largely at the more remote return periods. So let's just focus on that for a second. We did see some pushback on cat bond pricing earlier this year when the spreads were continuing to contract and the way that market has been trading is really just a multiple of expected loss rather than considering the full uncertainty of the bond being offered. I think if you take our perspective on the cat bond market, we have managed a small portfolio of cat bonds and we're no longer actively looking for cat bonds with where the current pricing is. Josh Stirling – Sanford Bernstein: Okay. Well, thank you guys for the time, and good luck this summer.

Thank you. I appreciate it.

Your next question comes from the line of Vinay Misquith from Evercore. Vinay Misquith – Evercore: Hi, good morning. I just wanted to follow-up on Josh's question. So it seems that the property cat business now is barely a double-digit ROE. Would you say that given the retropurchases that you have done that, yes, it is a double-digit ROE, the risk profile is now lower because of higher retropurchases?

Yes, I think that's a great question, and I think one of the things we're constantly looking at is getting the right risk mix into the book to match it against the return. We highlighted one retropruchase, which we made which was the Florida specific. That materially reduced our exposure to more frequent type events particularly in Florida. I think the other thing to focus on is we share a lot more risk today than we have in the past across all the different mechanisms that we have from third-party capital to traditional ceded to other vehicles that we have in place. So I think thinking about our book from a gross to net perspective, there is certainly a big spread between the two and it's one in which there is significantly less risk in the net than there is in the gross particularly comparing to last year highlighting the biggest changes that when Florida purchased, which materially changes the exposure to more frequent events. Vinay Misquith – Evercore: Okay, that's helpful. The second thing is on pricing. We've heard that some deals have been returned because the price were too low. So just trying to see if we're heading towards the bottom, close to the bottom, I think trying to do something about a couple of quarters ago and then last quarter things got worse, the risk of beig wrong again. Just curious from your perspective as to where do we think we're pinned down with the pricing on property cat.

The 6/1 renewal is a very different comp position than other renewals around over the course of the year. So I think it's a straight, difficult to extrapolate what we saw in the Florida renewal to what's going to happen to a much more diversified renewal at 1/1. I'll say that have seen some surprise or some catalyst, I think it's difficult to see the direction of pricing change. I think it's more to think about what is the magnitude of the price change and at this point we are being to into when sees a lot of change between now and then, but that's the way we would position ourselves. We'll build our pro-forma for the 2015 year in the October-November timeframe, which is when we really get down to making estimates as to what's going to happen with pricing going forward. Vinay Misquith – Evercore: Okay. So it seems that you're not really optimistic that pricing has reached the bottom yet.

I think there are -- there was resistance particularly as we got closer to the June 1 renewals, but I think whenever there is -- I think markets often don't change without some catalyst. So whether the market flattens out or continues to decline, it's something that remains to be same. Vinay Misquith – Evercore: Okay, that's helpful. And then one last point, on the retro, I mean you bought a lot of retrocessional reinsurance, you've not bought back any stock. Just curious about the capital, the excess capital position right now. And does the purchase of retro give you additional room to manage capital? And also your views on given where the stock price was trading, it seems that you should have held back in share repurchases, would you be open to a special dividend too?

Let me start and I'll turn it over to Jeff. One of the things that I think is unique about RenaissanceRe is the way we integrate our thinking about risk and capital. So every time we make a decision to write a piece of business, every time we make a decision to purchase ceded, we understand how much capital that's using, and how much capital it's releasing. So to think that -- when we purchased the retro we do recognize we are taking risk off and we fully understand how that flows through into the excess capital position that we have. Jeff?

Yes. I think just adding to Kevin's point on the Florida ceded purchase and what it did to the capital position. I think you have to look at the overall book itself, so with premium being down as well as the Florida ceded purchase while the Florida ceded purchase and the reduction and exposure have the effect of increasing excess capital if you will. The reduced expected profit in the book has the opposite effect to some degree. But on balance we do see the excess capital in the portfolio having gone up in the quarter largely as a result of the ceded purchase been offset a bit by the reduction in the expected profit of the book. I'd say just on the amount of excess capital, as I mentioned in my prepared remarks, we think we have a fair amount of excess capital and we stand ready to but shares at what we think are attractive prices. As it relates to a special dividend, I think whenever we get asked this question, I think our response has always been that we look at every option available to us to manage excess capital and that would certainly include that. And historically while we repurchased, done most of our share -- capital management via share repurchases, we have altered the capital structure as well by paying down debt and calling preferred stock. So we do look at every available option to us and that would include a special dividend. Vinay Misquith – Evercore: That's helpful. In the past you mentioned that $300 million of excess capital number, would you care to update that number?

No. I don't recall having mentioned 300 million. It would be denominated in several hundred million dollars and actually somewhat more than that amount. Vinay Misquith – Evercore: Okay, thank you.

Your next question comes from the line of Kai Pan from Morgan Stanley.

Good morning. Thank you for taking my call. And the first question is just if you just look at -- have you quantified what exactly were the cat losses for the quarter?

Cat losses for the quarter; well, yes, we haven't. I don't think we disclosed it. I would say at a very high level, Kai, we had about -- there weren't any major cats during the quarter was really a series of smaller PCS events that I think were a total of six. On a gross basis it was probably around $50 million in losses on a net basis about $38 million for the cat unit.

Okay, that's great. So if you look back for the quarter, it's really the low cats quarter and you got 11% or certainly below your long-term average, I just wonder is that because the business you write inherently have the lower ROE than your hurdle rates or you just simply couldn't find enough that this is right that you have abundant of excess capital out there.

So firstly, many of you just will hear that the portfolio we build was based on decisions we've made. It wasn't due to access to business. It was based on what we saw from a pricing environment and how we want to construct the portfolio. The first piece of the pricing environment is gross rates are down. That's been part of the conversation throughout 2014. So with that, risk has less premium associated with it. The portfolio that we're building is really one in which how much capital are we putting against the risk that we are taking, and it's something that when we design that it is based on providing an optimal return. One of the return on equity components, which Jeff touched on is that we're carrying a lot of excess capital. The other piece is that we have increased the sessions we have both to third-party capital and to through ceded relationships. So it's a matter of the portfolio construction rather than just what the prices and how that flowing through the return on equity.

Okay. And then following up on that, if you like these all the pricing and surging out there. So I just wonder how long do you think you need to hold on to this so called excess capital and just sitting there and waiting for the pricing to return or being probably more proactive in terms of the capital management, because if you think the pricing going to stay where it is now, apparently you have last available high return business to write. Then you don't need these much of capital that probably should think about buying back the stocks or somehow return, reduce your capital base.

So, if you look back over our historic record, we've been good stewards of managing capital and it's one of the primary levers in which we believe we need to manage to achieve our long-term return objectives and something that as Jeff had mentioned, we will continue to work on through the course of 2014. Measuring capital returns or share buybacks in any one quarter is not the way we think about it. We think about it over the long-term, and there will be periods in which we are carrying more excess capital. Having gone through the renewal and adjusting the way in which we built the portfolio, added excess capital to our portfolio and we'll continue to manage that in the quarters to come.

Thank you so much.

Your next question comes from the line of Michael Nannizzi from Goldman Sachs.

Thanks. I just had a couple of questions. One of the expense side, I guess. Are you able to scale down notional operating expenses on the cat reinsurance side as earned premiums declined at least for the next six months or so? I was just trying to get an understanding of the sensitivity there. Thanks.

Sure. Well, one of the big expenses we have is acquisition cost. So that's a variable expense that comes in. So obviously that was scaled with the amount of premium that we are writing. Additionally, I think we run an organization that is -- maintains the ability to scale up when opportunity is there and I think that's important, but it is something that when you look at the primary levers that you have to control return its investment income, underwriting income expenses and then moving to equity. So it's something that we are constantly looking at and trying to optimize against the environment that we see both in the short-term and the long-term.

Right, but specifically the operating expense, these are the non-variable. I would imagine that's mostly fixed cost. I am curious, I mean if you scale back to like if this is kind of the run rate of premiums just for the near-term, should we expect a notional number of operating expenses to stay the same or should we expect the ratio of operating expenses to sort of stay the same?

So I think the way we would look at it is more on a notional basis rather than on the -- to make sure that we are maintaining the capabilities within the organization. I think the other thing to look at is how much risk we are retaining and how much we are ceding, so not only looking at in on a gross premium but on a net premium.

Got it. Okay. And then I guess on the top line, is it possible via the specialty or Lloyd's businesses to recapture the decline in premiums that we are seeing on the cat side, sort of one-for-one or other potential growth initiatives. Is that something that's plausible in the near-term or is that more of a headwind? Is that more headwind?

Sure. I think -- let me start with specialty; a lot of what we are writing in specialty is quota share business and we saw increased -- we did see increased opportunity, but we saw pressure on particularly ceding commissions within that business. And the return profile for writing that business is different than the return profile of revenue cats. This is due to the volatility embedded in it. So I think we can from a top line perspective we still have room to continue to grow the specialty, but it does have a different risk profile and a return profile than cat premium. Within Lloyd's I think it's a similar -- we have more of a mix between insurance, really insurance and then within reinsurance between quota share and XOL. I think we still have opportunities there, but there is some headwind on pricing for the business coming into Lloyd's as well. That's one of the reasons we're more cautious about the growth forecast for that business unit.

And I think I'll just add although. So I think the answer to your question, Mike, is I think there is flexibility in both the business and even in the expense line. But those -- that flexibility comes in different timeframes. In the very short-term there is not a lot of flexibility in either of those, but over the longer term there, there is.

Great, thanks. And I just guess thinking about where competition is coming from. Is it still sort of primarily coming from alternative vehicles? Are you seeing some of that competition coming from other more traditional reinsurers that are maybe looking to redeploy capital in different placements or in sort of different geography in the stack? Just trying to understand what are the sources of that competition at this point that you see?

The competition is broad, so we are saying it both traditional and non-traditional players. I think one of the big concerns the market has is to how much new capital is truly interested in entering the space which is feeding a feeling among traditional reinsurers that they need to project market share over margin. I think within the alternative space, I think there is pressure to deploy capital. So I wouldn't point specifically to one area of the market or the other, but I think they are highly connected and we are seeing competition from a reasonably broad spectrum of competitors.

Got it, great. Thank you so much.

Your next question comes from the line of Jay Cohen from Bank of America/Merrill Lynch. Jay Cohen - Bank of America/Merrill Lynch: Yes, thank you. First question, I think a lot of us are struggling when it comes to reinsurance and specifically the cat market. What's potential margin or specifically the loss ratio impact is at lower prices. Obviously you see these big declines, you are doing things to offset those declines whether it's to buy more retro, manage your capital. Can you say at all given the changes in the pricing environment, given the changes in your portfolio, what does your loss ratio look -- on an expected basis loss ratio look like now versus, say, a year ago?

So, I think that's one measure to think about. Really what we're trying to think about is across the full distribution how much capital we'll be using at a given point, how much -- what's the likely of loss associated with that capital at a given point? So, thinking about it as simply a loss ratio, it's -- you can talk about it in a specific region or specific line, but we think about it much more broadly across the portfolio. I think rates are under pressure. So loss ratios are going up, but we're doing -- we're building portfolios that I think have greater diversification from some of the specialty that we're brining in, and then changing the profile of the risk we're taking both by what we're accepting on the inwards basis and then how we're thinking about it from a ceded perspective. So I don't think it's as simple as just thinking about loss ratio A loss ratio B. Jay Cohen - Bank of America/Merrill Lynch: I understand that. Second question; the Lloyd's business, with the growth slowing there, presumably it would continue to slow given the direction of market conditions. I guess one of the issues with that business is the expense ratio is relatively high because you haven't scaled up yet. I mean slowing down the growth in that business, does that push out the eventual -- your decent returns you'd expect to earn in that business?

Yes. I think it's -- I'd rather trade it a higher expense ratio than taking greater risk, greater uncertainty for writing than thinly or underpriced business. So it's something that -- yes, we're prepared to be patient to continue to build that franchise spread over the long-term. It's an industry-leading franchise within Lloyd's. Jay Cohen - Bank of America/Merrill Lynch: Got it. Thanks, Kevin.

Sure.

Your next question comes from the line of Ryan Byrnes from Janney Capital.

Hi, great. Thanks for taking my questions guys. Firstly, I just wanted to talk about your appetite for financial -- I guess your mortgage insurance or reinsuring that product, I know you guys did a lot in the first quarter this year, but just want to see your appetite going forward now that there maybe some new capital requirements on the primary guys?

Let me start; one of the things when we look at lines that are written, more financial-based lines, we're very careful to make sure that there is some value that we're bringing from the structure that we're offering. And to the extent that we get over that hurdle we become interested in the line such as mortgage. I think our appetite continues to be strong for that business assuming that we can determine that we're bringing a unique solution compared to a straight capital market solution for the products that we're offering.

And would you expect the returns from that business be similar to the cat business for you guys right now?

I think there are two questions, one is on a standalone basis and one is on a marginal basis. Marginally, we look at risks in conjunction of the overall risk of the organization, including our investment portfolio. And on a marginal or on a diversified basis, the returns on that business are very attractive.

Okay, great. And then just my last one, it looks like you guys were potentially an investor with Trupanion which had an IPO a couple of weeks ago. I just wanted to think about how we should think about that mark running through earnings going forward? Will that be running through operating in the third quarter or would that be run through realized gains going forward?

Thanks. The way we handle that is when an investment prior to going to IPO, we generally mark that through operating earnings. Once it gets to IPO and becomes an equity security in our portfolio, it's in what we classify as equity trading against mark-to-market.

Okay, great. Thanks guys.

Thanks.

Your next question comes from the line of Josh Shanker from Deutsche Bank.

Thank you. Mr. Cohen asked my question more eloquently than I possibly could, but I just want to go one step further. With your concern, Kevin, that we might not have seen a bottom or directionally or whatnot, to what extent do you have an appetite for taking on same portfolio of risk you have right now with a lower expected return?

The way we'd think about it is -- I think it's difficult to say this portfolio is cheaper, is that still acceptable, because it would need to think about what is the cost of the capital we're putting against it, is it likewise experiencing a reduction in cost? I think going forward -- a different way to ask the question is do we feel like we're going to be positioned at 1/1 to write a portfolio in which we'll provide adequate returns for the capital we're putting to work? The answer to that is absolutely yes. I think the flexibility of that we have is to how much we're retaining and then all the different vehicles in which we're sharing risk is extremely important to focus on and how we're thinking about constructing, not only this portfolio, but portfolios that will agree with (indiscernible) 1/1 and beyond.

Fair answer, and good luck in the turbulence.

I appreciate it. Thanks.

Your next question comes from the line of Ian Gutterman from Balyasny.

Hi, thank you. I want to clarify some numbers first, and then I had a question on competition. The 38 million of small PCS events in cat, can you just give us a sense -- there is always some, right? It's pretty rather there is zero. I mean you obviously don't show attrition loss ratio to zero at any time. So, is 38 sort of a normal? Is that a little high? Is it a lot high? Just sort of a sense of how that fares versus expectations?

I characterized it as I think relatively low. And I'd say it's relatively low to -- it's relatively low I think compared with other quarters. I think compared with second quarters in the past, we've certainly had second quarters where it's been higher than that, but it's actually marginally above average.

Got it, got it. And then, on the retro, you said 180 million of cover, you didn't say where it attached, can you give us that?

Yes, I think rather than getting into the specifics of a single transaction, I think what we're -- the guidance we're giving on that is it's at the more frequent return periods for Florida-specific events.

Got it, got it. Okay. And then just on the market, I guess I'm curious on your perceptions of the following, I guess, a lot of companies talk about how they bought in "cheap retro," to make up for the softening market. And yes, I think you're one of the only ones who have actually not just done that, but also shrunk your top line and gotten off accounts. It seems a lot of others have been either flat or even grown their top line, said, "Oh, boy, I bought this cheap retro, so it's okay." I'm just wondering how you view, (a) is that making the market softer? Do we need people to actually get of gross accounts to find a bottom? And (b) what is the risk, and you guys obviously (indiscernible) maybe bought more retro to keep relationships. What sort of the risks do you think, what keep the account for distribution and retro it out?

Firstly, if everyone is trying to renew what they have or more; obviously that's going to add to supply side and pricing pressure. With regard to retro and purchasing retro, if rates are down in order to hold your top line in the same, you need to write more and then match that up against the retro. So they're growing and then buying retro against it. I think it is potentially a strategy to think about doing that, but there is never a perfect match between a retro and inwards book, so one need to think about what's the risk that resonate around the purchase that you're making. I think from -- thinking about different capital levers that one can pull we have more access to (technical difficulty) retro. So I feel comfortable with decisions that we're making on how we're (technical difficulty) renewal or others will be something that will either additionally provide an opportunity.

Got it. And then just lastly; this one might be a little bit more cynical, but there has been a lot of commentaries about companies rebalancing their portfolio to -- this goes back to Jay's question about the impact of lower price on margins, and again, for the starts that you guys have been taking, I can understand it, but it seems there is a little bit of like we'll begin where everyone seems to suggest that they rebalance their portfolio, so they're not taking that much of a margin hit versus the headline rate cuts. Does that make sense that the traditional market has been able to do that and sort of the worst businesses gone to alternative markets or should I be much skeptical there, most of the traditional market that may put a rebalance favorably and what seems like a hard market to do that?

I think from our perspective, the thinking about how to build a portfolio is you need to recognize and be honest with what's going on with the market around you, and if rates are down there is less premium associated with risk. I haven't seen a tremendous -- I haven't seen areas in which we've seen increasing pricing in specialty or in cat. So I think thinking about adding more risk and rebalancing the portfolio without taking more net risk is a difficult proposition in today's market. I think if you're going to use ceded to make up the difference, you have two options. One is you need to scale, because if (indiscernible) is not big, so you need to write a lot more and then cede a lot more hoping the spread between the two makes -- captures the lost income or you need a very large spread in pricing between primary reinsurance and retro. And at this point, we haven't seen a complete dislocation between retro and primary.

Got it. On the gross side specifically, shall I assume that there is better business to change your gross mix through that everyone would realize that and most people would gravitate there and that's probably more competitive business or are they really pocket? I'm simply more concerned, but within cat, are there pockets where maybe you can -- there is unrecognized value that not everyone can get access to?

I think if you take what we did, we at 1/1, we put our guidance out and then we wrote -- the reduction that we had was less than the guidance that we put forth, because we had an expectation that 6/1 was going to be more competitive than 1/1. And so frankly a little bit more than we thought, but directionally it was pretty close. So, being thoughtful as to how you're going to position your book before the renewal is important, and I think we did that well going into this year as our guidance were down, 15 is not far off where we ultimately were, but we wrote it very differently declining less at 1/1 and more in 6/1.

Got it, got it. Okay, thank you.

Your next question comes from the line of Brian Meredith from UBS.

Hey, Kevin, I'm just curious, so it looks like the industry was pretty good at holding off changes in terms and condition. I'm curious if that's your view. And then, looking forward do you think there will be continued pressure on terms and conditions in cat reinsurance contracts?

Yes. If you look at what was going on 6/1 result, even over the course of all the 2014 there has been different attempts to substantially increase the amount of additional exposure put into cat contracts. Our view is additional exposure into contract is just a different way to achieve a price reduction. I think in general, we're reasonably pleased with how the market held up from a terms and conditions standpoint, but I think the pressure will continue going into the 1/1 renewal.

Do you think there is a possibility that maybe the actual level of rate decreases, pricing actually subside, but there is more push or more loosening of terms and conditions?

I think that's always a risk. The way we think about it, we'll price in any change in exposure. I think it is an easy way if someone is looking to have a different headline number just to expand coverage and keep price the same, I don't know whether that will be a strategy. It certainly will not be our strategy. We'll reflect the risk we're taking for the price we're getting.

Got you. And the last question is -- I'm just curious, you reduced your investment and DaVinci had a new investor coming on board, what are your conversations like with third-party capital that wants to invest RenRe right now? Are you saying, "Yes, go ahead, let's get into the business right now, "or are you telling to be cautious, and what demand look like from that perspective?

So, we have a lot of capital that as expressed interest in coming into our vehicles, and one of the reasons they're particularly interested in our vehicles is the alignment that we offer between the capital, our capital and their capital. So, we're constantly making an assessment as to whether we're giving them good risk or not. And that's extremely valuable to third-party investors. We, at this point, have not actively been looking for new investors to come in, but when we see long-term partners that we want we'll in many instances make room for them. From a return perspective, they look at the alignment and then the ability for us to provide a home for their capital and risk adjusted rewards that are acceptable to them over the long-term, and we continue to have good interest in the vehicles that we offer.

Great, thank you.

Yes.

At this time, there are no further questions. I'll now turn it back over to management for closing remarks.

Well, thank you everybody for your attention and your questions. There is a lot changing in the market, and I believe the results that you're seeing are based on conscious decisions that we've made, which are soundly based on providing the best risk adjusted returns that the market can afford. So, we're comfortable with the portfolios that were built, and we look forward to continuing to work for you and communicate with you at the next earnings call. Thanks again.

Thank you. That concludes today's conference call. You may now disconnect.