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PartnerRe Ltd. (NYSE:PRE)

Q4 2008 Earnings Call

February 03, 2009 10:00 AM ET

Executives

Robin Sidders - Director of Investor Relations

Patrick Thiele - President and Chief Executive Officer

Albert Benchimol - Executive Vice President and Chief Financial Officer

Analysts

Jay H. Gelb - Barclay Capital

Joshua Shanker - Citigroup

Larry Greenberg - Langen McAlenney

Doug Mewherter - RBC Capital Markets

Matthew Heimermann - JPMorgan

Vinay Misquith - Credit Suisse

Brian Meredith - UBS

Ian Gutterman - Adage Capital

Terry Shu - Pioneer Investments

Operator

Good morning and welcome to today's ParternRe Conference Call. Before we begin the call, I would to remind that all participants are in a listen-only mode. (Operator Instructions).

If you haven't received a copy of the press release, it is posted on our company's website at www.partnerre.com or you can call 212-687-8080 and one will be faxed to you right away. This call is being recorded.

I'd now like to hand the call over Robin Sidders, Manager of Investor Relations at PartnerRe, who will begin the call.

Robin Sidders

Good morning, and welcome to PartnerRe's fourth quarter and full year 2008 earnings conference call webcast. As a reminder our fourth quarter financial supplements can be found on our website at www.partnerre.com, in the Investor Relations section and the supplementary financial data on the Financial Reports page.

On today's call are Patrick Thiele, President and CEO of PartnerRe; and Albert Benchimol, Executive Vice President and CFO of PartnerRe.

Patrick will start with an overview of the quarter and full year and then hand over to Albert who'll provide more details on the results. Patrick will conclude with some additional commentary and then we'll open the call up as usual for a question-and-answer session.

I'll begin with the Safe Harbor Statements. Forward-looking statements contained in this call are based on the Company's assumptions and expectations concerning future events and financial performance, and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation and Reform Act of 1995. Such statements are subject to significant business, economic, and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

PartnerRe's forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments such as exposure to catastrophe or other large property and casualty losses, credit, interest, currency, and other risks associated with the company's investment portfolio, adequacy of reserves, levels and pricing of new and old business achieved, changes in accounting policies, risks associated with implementing business strategies and other factors identified in the company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking information contained herein, listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made. The company disclaims any obligation to publicly update or revise any forward-looking information or statement.

In addition, during the call, management will refer to some non-GAAP measures when talking about the company's performance. You could find a reconciliation of these measures to GAAP measures in the company's financial supplement.

With that, I'll hand the call over to Patrick.

Patrick Thiele

Thanks and welcome to the fourth quarter and full year 2008 earnings conference call for PartnerRe. 2008 was truly an extraordinary year. Given the environment we faced PartnerRe performed well, finishing the year with a 12% operating return beginning shareholders equity, maintaining our strong balance sheet, and generating a positive return on our assets.

And looking at the fourth quarter you can see that we were significantly impacted by 3 external events. First, the dollar appreciated relative to other currencies which hurt our book value per share through our currency translation account. Second, our and the industry's view of losses from Ike increased substantially as more data was gathered from seeding (ph). And third, the ongoing financial crisis intensified in the quarter, impacting our credit and surety book and our life book.

It had impacted our view of D&O and E&O profitability throughout the year. We are not and cannot be immune to these macro events. And we believe we've been transparent on the fact that we're exposed in various parts of our financial statement. But if you filter out the noise there are three overriding themes to the year.

First, our balance sheet, year-over-year, our balance sheet was stable, which is a significant achievement in the year like 2008. Invested assets and cash are up 1.3% to $11.7 billion from $11.6 billion at December 31, 2007.

Non-Life reserves increased 4% to 7.5 billion and our common shareholders' equity was down only 3% to 3.7 billion and that's after including $163 million charge in our currency translation account and $100 million in common dividend. I can honestly say that our balance sheet is as strong as it's ever been.

Second, our book of business; because we're diversified in all levels we will always see losses from a variety of sources. But the impact is usually relatively small and is always well controlled. This is the result of the balance we've achieved across our portfolio; balance between our traditional reinsurance risks and our capital market risks and balance across business lines, geographies and distribution systems. We continue to have a high quality, well priced, stable book of business.

Third, our reputation and creditability in the market. This is the result of the consistently prudent way we approach our business, our institutionalized risk management culture, and the level of transparency we strive for in our disclosures. These are the foundations of our business and I would focus on these and the resulting stability that's created for PartnerRe over the longer term rather than the volatility in any given quarter.

Over the last six years, we've achieved an average operating return on equity of 15% and 11% compounded growth and GAAP book value per share.

I'll now hand the call over to Albert to walk you through the results of the fourth quarter, and our performance for the full year.

Albert Benchimol

Thank you Patrick, and good morning to everyone. As Patrick noted, our fourth quarter results were impacted by a number of unusual factors which I'll address in detail in a moment. Overall, however, our total 2008 performance was the most respectable given the environment we faced. With increased competition, a rise in the frequency of large losses, the third worst catastrophe in recorded history, and the impact of a declining economy, we still managed in underwriting profits, helped the growth of investment income and an operating ROE of 12.3% as compared to our long-term target of 13.

And within the worst year in capital market since the great depression, we achieved a modest positive return for our investment portfolio. We did incur a small reduction in our book value per share, but this was driven by dividends and the impact of FX on the carrying value of our foreign subsidiaries, and not by operating nor investment performance.

At the end of it, PartnerRe sustained its strength, stability and profitability in one of the most difficult years in history and is ideally positioned to support our clients and profit from improvements in reinsurance and capital market conditions.

Our quarterly operating income is down year-over-year. The difference can be accounted for by looking at only a few items. In the fourth quarter of 2008, pre-tax operating income was $171 million less than 2007 quarter. Of that amount 114 can be attributed to the change in Ike estimates and $65 million is due to lower technical results with the credit and surety line. This reflects our revised expectation of higher loss ratios for business written in 2007, and 2008 given deteriorating economic conditions.

All other changes including the impact of lower pricing, large losses, prior period loss reserves and investment income more or less offset each other with a small net positive contribution. In addition we had an unusual 35% operating tax rate this quarter leading to a tax expense that was some $19 million higher than it would otherwise be on our full year effective tax rate of 15%.

In Non-Life operations, fourth quarter premiums written were up close to 9% notwithstanding the negative impact of a stronger dollar, due to new business and additional reinstatement premiums related to Ike. In the U.S. sub-segment, the Ike rate -- re-estimation amounted to $40 million net of reinstatements. We also looked again at our specialty casualty reserves in light of the sub prime and economic crisis. We continue to believe that this will cause industry D&O losses approaching $10 billion. But we are comfortable that we've been addressing this prudently for quite some time.

We received updated data on the agricultural book and our current view is that it won't be as bad as we had feared earlier in the year. And we will generate a technical profit on that line for the 2008 year.

The sum of all this is a modest technical loss for the quarter and a small technical profit for the full year.

Our Global non-U.S. P&C book had a small decline in net premiums written. But this was entirely due to FX. We reported a strong technical result for the fourth quarter and full year, notwithstanding weaker pricing, given moderate loss activity in our lines of business for the Global P&C book and favorable development of prior year reserves.

Our Global Specialty sub-segment reported a rare technical loss this quarter; given a net $42 million re-estimation of Ike losses, the additional impact of other large losses and our actions to ensure that we were prudently reserved for anticipated increase in claims from our credit and surety book. We look at both prior period reserves as well as the un-earned premiums for contracts currently in force.

The credit insurance industry has an excellent record of taking precautionary actions in times of economic difficulty. And we are also encouraged by recent changes to their underwriting. But we also recognize that we are facing unusual circumstances and so if added to prior period reserves, and taken an additional charge to reflect anticipated higher losses on the un-earned premiums on our book.

These actions led to a $65 million reduction year-over-year in credit and surety quarterly losses as compared to fourth quarter of '07.

Our current book loss ratios are prudently set at very high levels compared to historical pattern. For the full year, our global specialty sub-segment reported a technical profit but again, substantially below last year's exceptional results, given the higher loss activity, lower pricing and our cautious outlook.

Our CAT unit generated a strong technical profit for both the quarter and the full year notwithstanding the impact on Ike on both periods.

I think it's these volumes to the construction and diversification of our CAT portfolio that we can report a technical ratio of 45% in one of the worst CAT years in history.

So overall, for the full year, our Non-Life operations reported a 6.5% growth and a combined ratio of 94.1. While this compared unfavorably against an exceptionally good 2007, we believe they will stand up very well given the conditions we experienced in 2008.

Moving on to the Life operations, we reported a 9% reduction in quarterly net premiums written. But that was substantially the impact of the stronger U.S. dollar which negatively impacted the conversion of predominantly European premiums.

The allocated underwriting results which include investment income was a loss of $4 million as opposed to our gain of $11 million in the prior year quarter. The driver for this reversal in profitability was our GMDB line in Europe. Given the reduction in capital market values in the quarter, we adjusted our reserves by some $15 million.

For the full year, however, the positive allocated result of 17 million was a more modest reduction from the prior year, as improved longevity results offset most of the higher losses on the GMDB business. Please note that this increase in GMDB reserves is more akin to a mark-to-market valuation rather than an increase in reported losses.

For us to incur a loss on this line, there has to be both a mortality event and an unrealized portfolio loss position at that time. As capital markets move, we adjust the potential liability to reflect current values and that will generate some income statement volatility.

Our capital markets activities generated a positive contribution to both operating results and net income for the quarter. Investment income grew by close to 5% over the prior year's fourth quarter to $144 million bringing full year net investment income to $573 million close to a 10% year-over-year growth.

As I've noted in prior calls, our steady growth in investment income is an incremental cash flow directed to straightforward securities that generate consistent and predictable investment revenues. We have no limited partnerships or hedge fund strategies that add volatility to our investment income.

For 2008, we generated operating cash flow of $1.159 billion. We took further de-risking actions in the fourth quarter continuing the trend started ahead of the financial crisis. And this sheltered us from some of the decline in market values of risk assets.

We lowered our equity investment at the start of the quarter and kept corporate credit exposures to less than a third of our overall portfolio. While equity value declined and corporate spreads gapped, risk free rates also declined and this increased the value of our government and agency-backed securities such that we generated a total of $64 million in realized and unrealized gains in the quarter.

Of course we could not avoid the devastation of market values for the full year, and we experienced over $531 million in realized and unrealized losses for the full year and since we adopted FAS 159 on January 1 of 2008, these are fully reflected in our income statement.

We did incur losses and impairments during the year, but a larger portion of the decline in market values of our portfolio relate to increases in spreads that reflect the overall fear and illiquidity in the markets rather than meaningful declines in the quality of our assets.

For example, at December 31st '08, we have approximately $400 million in unrealized losses on various fixed income assets. But close to 95% of this amount relates to investment grade securities that we expect will perform according to there original terms.

All in, we're pleased that in the most difficult year of our lifetime, PartnerRe was able to generate a modest positive total return on its investment portfolio reflecting both our risk management approach to capital markets risk and our sector and security selections.

One final item that -- on our income statement that warrants discussion is our exceptionally high tax rate for the quarter. Our overall tax rate was 39%, the straightforward reason for this is the unusual geographic distribution of gains and losses during the quarter. We have pretax losses in Bermuda but these did not generate any tax benefits. On the other hand we generated pretax gains in taxable jurisdictions and these were fully taxed.

As a result we had an effective tax rate of 35% on operating income and 44% on non-operating income. We consider this an anomaly and not predictive of future trends. Our full year effective tax rates are more consistent with our long term perspective. For the full year, our effective operating tax rate was 15% consistent with the guidance we provided earlier this year. Some of you will recall that we had an unusual tax expenses in the first quarter associated with our European reorganization. We noted then that this reorganization would lead to lower long-term effective rates and this has proven true. Excluding the one-time charges of the first quarter our operating tax rate for the full year was below 10%.

Going forward, we expect that our effective operating tax rate would be in the range of 8 to 12% and this compares to the historical range we communicated of 10 to 15% in the past. This range of course, barring the large CAT losses for unusual FX volatility for geographic distribution of earnings.

The net of all this is operating income of $469 million or $8.43 per fully diluted share for the full year equal to a 12.3% ROE on beginning common shareholders equity, and net income of $47 million or $0.22 per share. Our comprehensive income was negative for the quarter and the full year. Since we adopted FAS 159, this is driven by a -- this is not driven by unrealized investment losses. This primarily reflects the change in the carrying value of our foreign subsidiaries created by fluctuations in currencies.

Historically, we have not hedged the net investments supporting our European and Canadian operation as we believe it is appropriate that the capital supporting non-dollar business should be aligned with that business on a currency basis. While this has contributed to ups and downs in our CTA account, these were generally immaterial and their cumulative effect even after including 2008 has been positive.

However, the second half of the year and the fourth quarter in particular witnessed a dramatic rise in the value of the U.S. dollar and this has caused a negative impact on our CTA account.

While we continue to believe that over the long-term it is not necessary to hedge the equity of our foreign operations, we have initiated a partial hedging program that we will likely maintain while currency volatilities remain abnormally high.

Let's move on to the balance sheet which has remained remarkably stable in a turbulent year. Total invested assets and cash are $11.7 billion, are modestly higher than balances at the end of the third quarter. Positive contributors to the increase were investment income, new cash and a net improvement in the value of our fixed income assets, offset by lower equity values and the negative impact of FX.

The biggest change in the composition of our portfolio for the quarter and year-to-date are lower allocations to equities and high yield securities, and increases to governments backed mortgage securities. Overall quality remains high with an average fixed income rating of AA. We did lower the duration of our portfolio towards the end of the quarter. With interest rates at historical lows, we thought it prudent to reduce interest rate risk.

It seems that every quarter we get new questions about suspicious assets classes, so I'm pleased to confirm that we had no direct exposures to sub-prime, Alt-A, RMBS, CMBS, nor CDOs in our fixed income portfolios nor do we invest in MUNIs. We have less than $30 million of exposures to prefer high rate securities of financial institutions and asset class that has been a subject of recent controversy.

About half our holdings are U.S. based and the other half are European banks and insurers. We do have a very small allocation to sub-prime mortgages and a distressed asset vehicle, but this is an opportunistic trade and the entry points appear attractive to us.

We do invest in asset-backed securities in our fixed income and principle finance portfolio but these relates to well-structured securities with comfortable levels of subordination supporting our holdings. Most of these have unrealized loss positions given market conditions and these are fully reflected on the financials but we are very comfortable with their underlying asset quality and their ultimate performance.

It is likely that we will see substantial volatility in capital markets in 2009. And activity in the new year-to-date have provided no respite from the difficulties of 2008. Nevertheless, we're confident that our portfolio is prudently positioned and highly liquid. Downside risk, while still present, is very manageable.

Our Non-Life reserves are up for the quarter and full year, reflecting ongoing underwriting activities. Page 24 of our financial supplement provides all relevant data on the various movement of our reserve balances.

Favorable prior period research development was $68 million quarter -- for the quarter, while for the full year, reserve releases were essentially flat with 2007 at $480 million.

The time value of money in our Non-Life reserves which is discounted at the December 31st risk-free rates for each major reserving currency, decreased by $314 million for the quarter, given the decline in risk-free rates, and now stands at 733 million.

The calculation of the time value of money in our reserves and the sensitivity to rates would be loaded on to our website shortly.

Gross reserves for policy benefits for Life annuity contracts were down for the quarter and full year and total 1.4 billion at December 31st.

The decrease for the quarter was almost entirely due to the impact of foreign exchange while the decrease for the full year is due to loss payments and foreign exchange offset by the growth of the Life business. As I noted earlier, Life reserves had adverse development of $14 million, mainly due to GMDB lines.

There was a same amount of movement in our capital during the quarter. Total capital is down from 86 million in the quarter. But this reflects a reduction of $200 million of long-term debt that was incurred in 2005 and that we repaid in January of 2009.

Our common shareholders equity increased $114 million to 3.7 billion. We completed the delivery of shares under the expiring portion of our arranged forward agreement. All in, we delivered 3.4 million shares and we received $212 million of which 195 million were received in the fourth quarter.

The positive net income of $95 million was more than offset by the reduction in the CTA account I discussed previously and dividend, such that our book value per share declined 2% in the quarter to 63.95. After everything that happened in 2008, our diluted book value per share declined 5.9% or $4.01 after the payment of $1.84 in common dividends.

While we're never pleased to report a reduction in our book value, a 3% reduction in payment of dividend speaks of the stability of our organization in trouble times.

Given all the noise in the quarter and full year, it maybe useful to put things in perspective. Ours is not an industry where one can draw conclusion from any one quarter or even year. Our core business is the assumption of volatility from our clients. We achieve our returns by diversifying across lines, geographies and time.

There will variably be quarters and years with some noise or even higher than usual volatility. What we can do is to ensure that our company can absorb that volatility, be prepared to handle shock events and stand ready to serve our clients and generate value for our shareholders. I believe we did that in 2008. We protected our capital and are prepared to assume well priced risk and a generally improving reinsurance market. Our confidence and optimism are reflected in the growth of our premiums, the capacity we're marking available to our clients and the recent increase in our common share dividend.

And with that, I'll return the call to Patrick.

Patrick Thiele

Thanks Albert. Now I'll do the forward-looking part of the call. In the short-term we will continue to have unsettled conditions. We saw our January 1st renewal press release, our CAT exposed premiums, CAT, marine, energy, ENS property were up 15% or more while our standard Non-Life premium in Europe was down 15%.

Overall we saw a flat renewal in terms of currency adjusted premium with priced technical ratios, marginally improved year-over-year. However our priced ROEs were down modestly because of the collapse in risk free rates around the world. It was a late but generally orderly renewal that was notable in two respects; first, despite all the drama around several of our competitors, it was difficult to get the clients to reshuffle their panels, and business generally remained stable this year both for ourselves and our competitors.

Second, there was no material movement in terms of pricing for the U.S. specialty casualty despite the likely impact of the credit crises on loss trends. Accordingly we remained cautious on adding exposure in this area. Based on this renewal and the rapidly deteriorating economy in the U.S. and Europe which will negatively impact exposure growth in many treaties, we expect a subdued year for the industry in regards Non-Life written premiums. However, pricing remains by and large adequate and we feel we can participate in any opportunities that may present themselves as primary companies seek to shed risk.

As you would expect, the opportunities first emerged in those areas that had losses in 2008; CAT, offshore energy, credit and then hopefully spread to the more stable lines. The greatest uncertainty as to underlying profitability remains the U.S. casualty business. Obviously in the capital markets things are even more uncertain.

I'm very proud of the performance of Albert and his investment team in 2008. They de-risked our $11 billion portfolio quickly and efficiently and avoided most of the land mines in the market. The issue now is when and how to intelligently put some risk back into the portfolio in what will continue to be a very volatile market.

We expect to do that in the first half by entering back into the spread credit markets and hopefully later in the year back into equities and the higher risk asset classes. Again we will only do that, if we judge returns to be risk adequate and only within the limits of our stated risk appetite.

As I said upfront, the short term outlook for the reinsurance industry is uncertain with continued volatility and reported results from both reinsurance and capital market exposures. The intermediate term outlook is also somewhat uncertain. I don't think we can count on the normal reinsurance pricing cycle and profit cycle this time around; too much has changed in the world. It's also my belief that capital markets have entered a new era where the investment tactics and strategies in the last 25 year have been discredited.

Having said that, I believe the reinsurance industry will generate attractive returns for its shareholders over the new few years certainly relative to the banking industry and to economically sensitive businesses. I also believe that there will be a large dispersion of company results around the mean given the inefficient nature of the reinsurance business and the continuing volatility of our markets.

I will leave you with one final point. We closed out 2008 possibly the most challenging year yet in PartnerRe's history in a very strong position. We have taken care of those lines of business, the unknown credit that we believe are being and will continue to be impacted by deteriorating global financial conditions. And as Albert said, we have de-risked our investment portfolio such that it presents more of an opportunity today than a concern. Our reserve position to day is the strong as it's ever been and possibly one of the strongest in the industry.

We have the financial resources, the risk pricing and management framework, the diversification, and the distribution to optimize our risk return profile as well as anyone in the business. And we see no reason to change our long-term goals of 10% growth and GAAP book value per share and continued growth in our annual common share dividend.

With that, I'll open the call up to questions. Operator, we're ready for the first question.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). We'll take our first question from Jay Gelb with Barclays Capital.

Jay Gelb - Barclay Capital

Thanks very much. Patrick, can you talk about the ability for PartnerRe to assume more CAT risk in 2009. I think you usually outlined the ability to take more exposure relative to internal caps?

Patrick Thiele

As of January 1st, for those risk zones that historically have driven the results, i.e., Southeast United States, Northeast United States, earthquake in California, we're pretty much full up based upon our aggregate limits for each one of our risk zones.

So to move forward, we're still within our overall risk appetite as measured by a risk dashboards as measured by 1 in 15 and 1 in 75 year but we are bumping up against our self imposed aggregate limits.

Jay Gelb - Barclay Capital

So the growth in 2009 that you de-outlined a couple of weeks ago, that'll be where?

Patrick Thiele

Primarily price.

Jay Gelb - Barclay Capital

I see. Okay. And then could you give us a sense of what you think clouds (ph) will be in -- on the European storm in terms of industry losses as well as Partner's exposure?

Patrick Thiele

We don't have an industry estimate that'd be materially different than any of the modeling agencies and we don't comment on losses that we don't think will reach our self imposed disclosure level.

Jay Gelb - Barclay Capital

Can you remind us what that is?

Patrick Thiele

20 to 25 million.

Jay Gelb - Barclay Capital

Great. Thanks very much.

Patrick Thiele

Sure.

Operator

We'll take our next question from Josh Shanker with Citi.

Joshua Shanker - Citigroup

Good morning everybody. First thing -- two questions. In the process of bringing down your matured -- your average duration from 4.1 to 3.1 years, I was wondering if you can describe a bit the moving parts of selling assets and buying assets and how you do that in a three month period. And second, with the $65 million increase for credit and surety, I think you said this but I just want to confirm that you haven't seen additional losses coming from your customers, but rather this is purely anticipatory?

Patrick Thiele

Yes, let me address those. The 4.1 to 3.1 duration change is actually done utilizing futures. It would be inefficient in this market you can imagine --

Joshua Shanker - Citigroup

That's right, thanks --

Patrick Thiele

To buy and sell security. So, we do it very quickly with futures, it's very liquid and we achieve the economic protection. As you might imagine, over a -- any kind of period of time, we think there's more risk that rates go up than down, and we think this actually reduces the overall risk of the company.

With regards to the -- to the credit and surety, first of all, the 65 is the difference between last year and this year. So last year there was a modest gain, a technical gain on credit and surety; this year obviously there is a loss on that.

I would say that primarily this is anticipatory, we have received some small claims here and there but that is not the driver. If we were reacting only to reported claims, our adjustments would significantly smaller than they were. This is more anticipatory in nature.

Joshua Shanker - Citigroup

And -- very good. And is the geography of those reserves, are they global, European based, U.S. based?

Albert Benchimol

Substantially global European.

Patrick Thiele

The credit obviously is somewhat unique market. There isn't a lot of other exposures like that and obviously given our international nature, we tend to probably be a little bit more exposed here, perhaps than some others.

I think a couple points on that. One is, we do have 40 years worth of history and we have modeled the current event relative to the -- to both our history and we're currently booking an under-writing year that is the second worst in our 40 years. And we've also modeled it again to a stress test scenario that reflects our best thinking as to the current state of the credit market. And we are quite confident that the current level of reserving and the loss stakes that we have in 2008 reflect a prudent level of reserves.

On the going forward basis, obviously the markets been impacted. January 1st is a large renewal date for the credit book in Europe. We saw significant price increases on the excessive loss portion of the coverage. We saw and drove significant commission reductions on the quarter share we put in, we and other re-insurers put in some loss mitigation features which improve the risk profile of the overall book. And in addition, we cancelled one or two treaties, clients who weren't confident would be able to adjust to this new more dangerous world.

And then on top of that, obviously you may have been reading in the paper that in fact the primary companies are adjusting their rates and are adjusting their underwriting philosophies to mitigate their risk before it gets into the reinsurance treaties. So, we are as confident as you can be in a unsettled credit environment, that in fact we've taken the right actions both in terms of the booking of the 2008 and prior years as well as the renewal for the 2009 year.

Joshua Shanker - Citigroup

And on that book I mean actually well parts, are you anywhere near your caps or limits we're talking about at this point?

Patrick Thiele

No.

Joshua Shanker - Citigroup

Okay. Thank you.

Operator

And we'll take our next question from Larry Greenberg with Langen McAlenney.

Larry Greenberg - Langen McAlenney

Good morning and thank you. I was just wondering if you can give us some idea of the breakdown on the credit losses between the fourth quarter period and re-estimation of prior periods.

Patrick Thiele

It was approximately $31 million in the fourth quarter. That was a combination of prior year and prior quarter effects.

Albert Benchimol

Yes, I think, if you look at our numbers by the way, you'll notice its specialty, global specialty actually had adverse developments; $4million. That was driven by the credit book, there was $15 million of prior year. And that's really what drove the adverse development for the specialty.

The rest was prior quarter and or anticipatory. And basically, on a year-to-date basis, we had booked the credit maturity at approximately a mid 90s technical ratio. With our actions in the fourth quarter, we've brought it to a full year level in the low 120s. So you can imagine there was a significant charge taken on the fourth quarter and that deals with prior year, prior quarter and also a charge against the unearned premium to anticipate claims in the future. So we addressed all periods at once.

Larry Greenberg - Langen McAlenney

Okay, great. That's helpful. And just with the development on Ike, I gather from your comments that it was really just a function of you guys as re-insurers being one step removed from the action as opposed to any deficiencies with models?

Patrick Thiele

I think that's right. Obviously, the storm was larger than most people anticipated in terms of its footprint. I think the one distinctive thing here was the subsea damage that occurred offshore and the Gulf of Mexico to the rigs. I'm not sure if we or the industry model that effectively. So yeah, I think there was some distinction there. I don't view it as a failure in our writing guidelines. I don't view it as a failure frankly as the models overall.

I would also make the point that again, while we've reflected the new view of the Ike loss in the fourth quarter that January 1st is a big renewal for the offshore energy business. And in fact rates exploded and they exploded upwards in the marine offshore, marine market price. And in fact we'll... well without a significant increase in exposure we'll show a dramatic increase in written premium for 2009.

Albert Benchimol

If I may add, I think part of this Larry is the fact that we report early. And therefore we give you the data that's available to us at the time that we report.

Larry Greenberg - Langen McAlenney

Right.

Albert Benchimol

Obviously, clients give us information, we do it. But I think the one thing that we should also note is that as soon as we found out that there was an increase, we let you know on December 1st. We didn't wait to let you know that we had re-estimated our losses.

Larry Greenberg - Langen McAlenney

Great, thanks. I appreciate that.

Operator

Thank you. We'll take our next question from Doug Mewherter with RBC Capital.

Doug Mewherter - RBC Capital Markets

Hi, good morning. Investment question and an underwriting question. First, Albert, it seems like, if you look... take your ordinary investment income and you look at your asset base, the yield has held up surprisingly well, considering where longer term interest rates have gone, that trend. Do you anticipate being able to maintain those kinds of yields or are you basically making it up by reinvesting it into maybe higher spread products as you talked about where you're getting paid to take more credit risk?

Albert Benchimol

Good question. I think those, the first thing to look at is that this tends not be that much turnover in the portfolio. So, no matter what happens in the public markets, we still get the coupons that are tied to our existing assets. So it takes a long time for changes in markets rates to actually impact the growth of our investment income. Now that does happen, but it takes a longer time.

That said, our current yield at market is about equal to what it was in the middle of the year. So overall, we think that is not yet a negative. I think going forward, as Patrick noted, we may look at some opportunities to invest in spread products. And I think currently, we believe that this may well be very well priced return for assuming some incremental risk and that will a bit of a positive.

I do want to caution you that a third of our portfolio is in foreign currencies. And if the U.S. dollar strengthens, obviously that will be a bit of the head winds. But again, I think what matters is the quality of the investment income that is very steady quarter-over-quarter.

Doug Mewherter - RBC Capital Markets

Okay, that's very helpful. And if Patrick or Albert, if you could I guess offer an update, if any, on the January renewals you had a pretty significant line item in your original renewal report which had, I guess pending renewals and I didn't know if any of those had made it's way to the pipeline. Is there any adjustments that meet your expectations as to what you thought you would renew?

Patrick Thiele

90% of that pending was the U.S. ag book. We still don't have final sign lines on there. But I see no reason why the bulk of the shouldn't be bound to the next couple of weeks and show open in our first quarter in our written premium.

Doug Mewherter - RBC Capital Markets

Okay. Well thanks. And that's all my questions.

Patrick Thiele

Sure.

Operator

We'll take our next question from Matthew Heimermann with JPMorgan.

Matthew Heimermann - JPMorgan

Hi. Good morning everybody. Couple of quick numbers questions. First, just with the forward sale, the debt if I recall correctly matures in the fourth quarter. I was just curious whether or not there was going to be anything, replacement debt and what, assuming not what the interest rate is going to be and what's left?

Albert Benchimol

Okay. Now I'm going to take a step back here because I'm not sure that I follow all of the points. When we did this in 2005, the entire $400 million of the range forward was due to the exercise around October of 2008 and all those of the debt was actually due to the repaid in April of 2009.

In the summer of this year, we split that original transaction in half with $200 million of range forward and $200 million of debt staying with their original maturities, which is September '08 and April '09. And then the other 200 pushed over to the spring of 2010.

With regards to the extended debts which will paid in 2010, it will continue to have its original LIBOR rates of LIBOR plus 50 through April and that's amount will be LIBOR plus 85.

With regards to the first $200 million, we paid that in the 14th of January, I believe. So there will be a reduction of LIBOR plus 50 times $200 million in our 2009 financials.

We don't see a need to replenish that because after all, we paid the debt but we've got $200 million of equity. So that change net-net is actually a modest increase in the quality of the overall capitalization.

Matthew Heimermann - JPMorgan

Okay. And then just with, that's very clear. That hit everything even if it was a poorly worded question. And then that would I think put your debt to cap next year sub 15%. So is it fair to say that if something happened and you potentially wanted to expand your exposure appetite that -- is it fair to think of debt as something not on the margin potentially could be used to expand that?

Albert Benchimol

Two things. One is that our capital table and our schedule already reflects the $200 million moving away. But I think its fair say that we finished 2008 with lower leverage than we did in 2007. And obviously what we will always do is target an appropriate mix of common stock, hybrids and debt.

With regard to what happens in the future, obviously starting with a lower leverage ratio, increases your financial flexibility with regards to debt but at all times, we need to differ to the actual time when we have to make that decision and respond at that moment in time to market conditions and opportunities. So if you don't mind and whether or not prognosticate how we would increase our capital in the future.

Matthew Heimermann - JPMorgan

Right (ph).

Patrick Thiele

I think to the second part of the question, Mat, when you are asking whether in fact we would use debt to increase our exposures or exposure appetite, I assume on the -- I mean on the underwriting side. When we calculate our appetite, we use economic capital which does not include debt.

Matthew Heimermann - JPMorgan

Okay. Well, that's helpful.

Patrick Thiele

It wouldn't have an impact on our risk appetite.

Matthew Heimermann - JPMorgan

Okay, fair enough. That's very clear. Thank you.

Operator

We'll take our next question from Vinay Misquith with Credit Suisse.

Vinay Misquith - Credit Suisse

Hi, good morning. Do you have exposure to perpetual preferreds in Europe?

Albert Benchimol

I did mention that during my prepared remarks, we have about $15 million; 15 of these hybrid preferreds in Europe, couple of banks, couple of insurance companies.

Vinay Misquith - Credit Suisse

Okay that's a small number --

Albert Benchimol

All in we have about 30 million but the other 15 million is in the U.S.

Vinay Misquith - Credit Suisse

Sure, that's great. Sorry I missed that. The second item, I think, would be for CAT -- do you expect your accident year combined ratio in 2009 to be roughly level with that of '08, given the fact that pricing is rising in some areas?

Patrick Thiele

The January 1st renewals, the technical ratio was improved in virtually every one of our business segments; in fact I think in every business segment.

If in fact the CAT and the credit affected lines maintain their current price levels, I see no reason why they shouldn't, and in fact it spreads to other lines of business, some of the more stable lines of business as losses begin to emerge in several other lines, my expectation is our price profitability could improve further.

Vinay Misquith - Credit Suisse

Okay, that's great. And finally on the Ag book, would it be realistic to assume that the top line will be slightly lower this year versus last year given that agricultural prices have come down this year?

Patrick Thiele

You're talking in terms of premium?

Vinay Misquith - Credit Suisse

Yes.

Patrick Thiele

We originally thought that there's been stability in prices and there's been a greater potential uptake in terms of the farmers. So, I don't think you can draw a significant conclusion at the moment about what the likely premium level is going to be. I think you can tell from the pending and the renewal press release that we had that we expecting by and large that kind of flat premium year-over-year.

Vinay Misquith - Credit Suisse

Well, that's great. Thank you.

Operator

We'll take our next question from Brian Meredith with UBS.

Brian Meredith - UBS

Hey good morning. A couple of quick numbers questions here. For Albert, the GMDB reserves, would you happen to have that so we can kind of get a sense of kind of what the volatility is there?

Albert Benchimol

Let me get -- let me through my papers, and I'll get back to you on that one. What's your second question?

Brian Meredith - UBS

Okay. Second question, a quick numbers question, I noticed that in your corporate portfolio, you're increasing the exposure to the investment banking and brokerage area. I wonder that's just a view of -- do you think that business is improving?

Albert Benchimol

I wish for you it does. Is it hopeful -- is that a hopeful question? No, a couple of things that happened there. Obviously, we did have a couple of additional pieces there, not surprisingly to institutions that we believe have been savored by the U.S. government. And there's also a modest re-definition as some of the brokers have become banks. And so there is a re-allocation of assets between the brokers and bank. But that you properly catch a modest increase and we believe that the government actions are such that it made the investments prudent.

Brian Meredith - UBS

Okay great. And then Patrick I wondered if you could comment on your view of what's going to happen here going forward with respect to retentions and market share and pricing a lot of people expecting a hard market in the second half of 2009, and I think obviously some people were a little disappointed with one-one renewals that their retentions actually didn't get better; I am curious what your thoughts are?

Patrick Thiele

Well there is certainly wasn't a significant buying down of retentions of moving down by the clients. In fact the -- I think that January 1st signaled the end of the assembly increasing retentions. And you saw that and the kind of the rapid diminution -- and the kind of the rapid diminution in the non-renewed numbers, percentage for us on January 1st. Typically we non-renew which includes the impact of retentions. Approximately 18 to 20% of renewal; this time it was 12% and only 6% of that was on -- due to the client action. So I think there has been a stabilization in terms of retentions on the part of the client.

The -- in some lines, CAT especially, there is continued buying at the top end as well which translates into some increase in overall demand. I think the other impact from the January 1st which was notable was the fact that besides of the two things I also mentioned was the fact that some of our client base has been impacted by the ongoing financial crisis and credit crisis and their shareholders equity has declined somewhat significantly. And there was a number of enquiries about the possibility of doing large quota shares. Some of them got done, some of them didn't get done. I would expect that to continue through the year especially as the impact of the fourth quarter is turmoil and the capital markets rose through into statutory statement both in Europe and the United States.

Brian Meredith - UBS

And market share situation?

Patrick Thiele

Our market share?

Brian Meredith - UBS

Yeah. And I think you said -- I mean you made a comment early on that programs you didn't see a lot of shifting of shares and programs.

Patrick Thiele

Yeah, I think that's fair. I think it was -- in that sense it was quite a stable renewal. And given all the discussion at Greenbriar and Boton Boton (ph) at Monte Carlo in terms of re-insurers and some of their ownership issues and reserving issues and invested asset exposures that was a little surprising to me. It perhaps reflects comfort on the part of the clients with there understanding of the financial strength of the underlying re-insurer. I think perhaps it also shows further declining impact of rating agencies and their views despite the fact that there were rating actions taken in the fourth quarter. It really didn't have much of an impact in client behavior.

Brian Meredith - UBS

Thank you.

Albert Benchimol

Brian just to add to your first question. The $1.4 billion that we have in life reserves, $65 million are GMDB reserves, that's 65 out of 1.4 billion.

Brian Meredith - UBS

Excellent. Thank you.

Operator

We'll take our next question from Ian Gutterman with Adage Capital.

Ian Gutterman - Adage Capital

Hi guys. I guess first on Ike, just -- Albert do you have how much reinstatement there was in the quarter out of that 114?

Albert Benchimol

Yes I do. I had that number in a piece of paper because I knew you'd ask. Find that paper, so bear with me while I find that paper.

Ian Gutterman - Adage Capital

I will have to ask Patrick while you are doing that.

Albert Benchimol

I've told -- Ian I'm told it's 14 -- 14 million all in.

Ian Gutterman - Adage Capital

Right. Okay, the development -- I understand the energy part that makes sense but I guess while I am a little confused on the late development sort of across the re-insurance market is, the primary reports we have seen, Allstate, Travelers, I believe, all lowered their estimates. So where is all this late reporting coming from outside of energy just leading everyone in the reinsurance market to take up estimates?

Patrick Thiele

Well I get -- I would echo what Albert said. We did get informed from our clients in November; that in fact -- so their estimates were increasing and that's what we reflected in our estimate increased in the first week of December. Yeah you're right, there has been some movement I think the other direction now in January. But when we made our announcement it was made based upon the information that was given to us by our scenes (ph) in November.

Ian Gutterman - Adage Capital

Just couple of other ones -- one of the big ones that I think I've been hearing myself is that a number of the reductions are coming through based on expectations of TOI (ph) charges. The difference is that the TOI lines still blows through the reinsurance cover. So although the primaries are expecting less charges from TOI that won't affect the reinsurance result.

Ian Gutterman - Adage Capital

That's fair, good point. On the credit and surety you said that part of the reserve charges on unearned premium and I guess I'm trying to think through how that works and why won't you just wait and put that as that earns out in '09, why wouldn't that just go into the '09 accident year? Have -- mechanically, how do you take it now?

Albert Benchimol

We took a $15 million charge against debt, we wrote off 15 million of debt.

Ian Gutterman - Adage Capital

Got it, okay. And then just lastly Patrick can you clarify in your comments towards the end you said that this won't be a normal pricing cycle. I guess I just to be -- I wasn't sure if you meant normal and that it won't harden even though there are signs that it should or normal that it will harden even though maybe there are signs that it shouldn't. So which way we're trying to --?

Patrick Thiele

I was trying to say that it seems to me that a number of participants in the market and a number of the observers of the market are doing nothing more than postulating the last two renewal cycles, either the 2001, 2002, 2003 or the 2005, 2006 and it's difficult for me to imagine that given the change that it is occurring in the financial world and the regulatory world and the insurance and the reinsurance world, that everything will play out so neatly as to be just a carbon copy of either one of those two.

I think the -- I think it's difficult to figure out exactly how it's going to evolve in the next year, year and a half, I think one thing we do know in terms of difference is the fact that exposure growth is going to be negative for many aspects of the industry and so you're going to have this interesting situation where real growth goes down, pricing can go up in that environment, but you get a net written premium environment which is unlike either one of the two prior.

So it depends on what metric you are using to kind of gauge -- I was thinking primarily there in terms of risk and premium. The other issue is that we are in the re-insurance and insurance world linked into the overall financial world around the cost of risk transfer and obviously there is a new sense of risk in the world in my expectation as is that we will be priced in and that is different again then where we were in 2005 and 2006 where the environment in both of those in 2001-2002 and 2005-2006 was there was a disdain for risk and no real call to adequately price risk. And I think again that's changed. I'm not sure exactly how that plays though in terms of the environment over the next few years I think that's generally positive for our risk assumer, but I do think the market will be different.

Ian Gutterman - Adage Capital

And all that makes sense. Have you thought though -- I realized that there a lot of people in the industry today list 373, 74 but that market on the surface seems to have a lot of the same characteristics as yesterday, bad investments, loss of capital during the recession. Is there any reason that we shouldn't be following more of that, Pat, and just maybe the underwriters haven't lived through it so they don't know how to respond to it yet?

Patrick Thiele

Are you calling me old Ian?

Ian Gutterman - Adage Capital

I'm not calling you but I was just saying that a lot of people are under it -- a lot of people who are underwriting the business run around.

Patrick Thiele

I think it was -- yeah, I think what's different is that, that wasn't a credit crisis in the sense of default. It was a -- originally it was a crisis stock market collapse and then we got a spike of inflation and bond values decreased. I think the difference in this case is we have mark-to-market accounting. We're generally -- we didn't have mark-to-market accountings '74, '75, so whereas in '75, '76 and again in '84 many companies were basically bankrupt on a market value basis. We were able to trade through as an industry because we didn't have to mark our AA and AAA bonds to market like we currently do.

Ian Gutterman - Adage Capital

Okay. I appreciate that, thank you.

Operator

We will take our final question from Terry Shu with Pioneer Investments.

Terry Shu - Pioneer Investments

I have two quick questions. First when you talked about your new market yield, you said that it was very similar to mid last year, can you quantify that number please how that compares with your current portfolio yield which is, I think, the supplement is like 4.9 or 4.8?

Albert Benchimol

That's right. Our -- if you look at our yield at markets --

Terry Shu - Pioneer Investments

Right.

Albert Benchimol

It's approximately 4.7 and our current portfolio yield on our actual portfolio's close to 5.

Terry Shu - Pioneer Investments

Close to 5. So your new investments now are in the high 4s right now?

Albert Benchimol

That's right, but what I'm saying is that during the year --

Terry Shu - Pioneer Investments

Yeah.

Albert Benchimol

We were on average between 4.5 and 4.8.

Terry Shu - Pioneer Investments

Okay.

Albert Benchimol

So basically, what I'm saying is that at this one point in time --

Terry Shu - Pioneer Investments

Yeah.

Patrick Thiele

It's a little bit lower. I don't believe that that will be a significant driver.

Terry Shu - Pioneer Investments

Okay. Second question is, if you look at your life insurance - re-insurance and you gave the number on the GMDB reserves and which -- it's a tiny number relative to your total reserves. And looking at your supplement of distribution of premiums written that the longevity risk is just 15% of the total and I gather that those are annuities. Can you comment about insuring these benefits whether it's GMDB or GMIB, what's the pricing in the industry? Is it still being written by any of the life re-insurers because of what is now obvious risk with the collapse of the equity market? Just broadly comment on that.

Albert Benchimol

Let me start first of all with some of the factual issues. The GMDB is not a longevity line, it's a mortality line. Because --

Terry Shu - Pioneer Investments

Okay.

Albert Benchimol

-- there's only a claim of somebody -- if somebody passes on while the performance is under water. The longevity tends to be match funded at the pricing and as you know we have not been growing our longevity business for the last couple of years.

Terry Shu - Pioneer Investments

Right.

Albert Benchimol

With regard to the pricing, the reality is that, we haven't been doing much GMDB business in the last couple of years.

Terry Shu - Pioneer Investments

Right.

Albert Benchimol

I think that, obviously one of the way that you look at these things is to incorporate or to reflect some sort of options pricing. So because we have not been active in that market in the last few years, I am not prepared to respond appropriately to your question about how the industry is doing it.

Terry Shu - Pioneer Investments

Okay. Thanks so much.

Patrick Thiele

Obviously there's been a fair demand for the product.

Terry Shu - Pioneer Investments

Right.

Patrick Thiele

Because the insurers see the risk and I think I'm more tuned to the risk, perhaps when they were five to ten years ago but the fact that we haven't written does tell you something.

Terry Shu - Pioneer Investments

Right.

Patrick Thiele

Much rightly it does tell you something about our perceived --

Terry Shu - Pioneer Investments

Right.

Patrick Thiele

-- our view of the perceived personnel (ph).

Terry Shu - Pioneer Investments

I was just wondering whether anyone is writing it in this market now.

Patrick Thiele

I can't tell you.

Terry Shu - Pioneer Investments

Okay. Thanks so much.

Operator

That concludes the question-and-answer session today. At this time, I'd like to turn the conference back over to today's presenters for any additional or closing remarks.

Patrick Thiele

Really no closing remarks. As always thank you for your attention. It was a little longer than normal. I think there was probably few more moving parts in this quarter, in the fourth quarter and as always we'd like to give a longer term perspective for the results at the end of the year.

But again, I thank you for your attention and I actually look forward to having this discussion in -- after the next few quarters in 2009. So we're adjourned.

Operator

Thank you, ladies and gentlemen. Once again, that does conclude today's conference. We thank you for your participation.

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