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Executives

Keith J. Lennox – Investor Relations Officer

Scott A. Carmilani – Chairman, President and Chief Executive Officer

John R. Bender – President and Chief Operating Officer-Allied World Reinsurance Company

Thomas A. Bradley – Executive Vice President and Chief Financial Officer

Marshall J. Grossack – Executive Vice President

John J. Gauthier – President, Allied World Financial Services and Executive Vice President and Chief Investment Officer-AWAC Services Company

Analysts

Michael Nannizzi – Goldman Sachs & Co.

Robert Glasspiegel – Langen McAlenney

Dan Farrell – Sterne, Agee & Leach, Inc.

Ray Iardella – Macquarie

Matthew J. Carletti – JMP Securities.

Ian J. Gutterman – Adage Capital Management

Michael Nannizzi – Goldman Sachs & Co.

Allied World Assurance Company Holdings, Ltd. (AWH) Q4 2012 Earnings Call February 14, 2013 9:00 AM ET

Operator

Good day and welcome to the Allied World Fourth Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Keith Lennox, Investor Relations Officer. Mr. Lennox, the floor is yours sir.

Keith J. Lennox

Thank you, Mike. Good morning, everyone. Our press release and financial supplements were issued last night after the market closed. If you’d like copies of either, please visit the Investor Relations site at our website at www.awac.com. Today’s call will also be available through February 28, on our website and as a teleconference replay. The dial-in information for this replay is included in our earnings press release.

Our speakers this morning are Scott Carmilani, Allied World’s President and Chief Executive Officer; Tom Bradley, the company’s Chief Financial Officer; John Gauthier, the company’s Chief Investment Officer; and Marshall Grossack, our Chief Actuary. Also here to assist with questions are several other members of our management team.

Before we begin, I will note that statements made during the call may include forward-looking statements within the meanings of the U.S. federal security subject to a number of uncertainties and risks that could significantly affect the company’s current plans, anticipated actions and its future financial condition and results. These uncertainties and risks include, but are not limited to, those disclosed in the company’s filings with the Securities and Exchange Commission.

Forward-looking statements speak only to the date they are made, and the company assumes no obligation to update or revise any forward-looking statements in light of new information, future events or otherwise.

Additionally, during the call, management will discuss certain non-GAAP measures within the meaning of the U.S. federal security laws. For more information and a reconciliation of these measures to the most directly comparable GAAP financial measures, please refer to our earnings press release, which was issued last night and is available on our website.

With that complete, I can now turn the call over to Scott.

Scott A. Carmilani

Thanks, Keith, and good morning, everyone and thanks for joining in our call. I’m pleased to report that Allied World generated net income of $493 million for full year 2012. Return on equity is 15.3%.

After factoring in dividends, our diluted book value per share grew by 17.5%. These results occurred in a year where we experienced the Northeast Superstorm Sandy, which is maybe the second costliest storm in U.S. history and a mid-year drought across much of the United States and Midwest.

While our accident year results were tempered by these events, we continue to benefit from favorable reserve development, which contributed to a calendar year underwriting profit of $96.6 million and from our diversified investment strategy. We generated a full year total investment return of 5.5% or $456 million for the year.

The company’s top line grew by 20% for the year to $2.3 million of gross premiums. We exceeded the $2 billion mark in writings with the growth of all three of our business operating segments. Underlying this growth was strong retention drawn on existing accounts, new business opportunities and the improving rate environment.

We quantify our rate changes on a policy-by-policy basis factoring in changes for exposures, attachments and policy terms and conditions. On average, rates on our insurance portfolio were up 5.8% in the quarter, 7.5% from the property lines and 5.5% from our casualty businesses. Many of our lines have now experienced sequential, year-over-year rate improvement and we are seeing this trend continue into 2013.

Bringing down the segments more, our U.S. insurance segment gross premiums were up 19% for the year to $994 million. We continue to see new business in the targeted industry classes including the general casualty lines and in property and are gaining momentum in newer lines such as in the marine and mergers and acquisitions services. Overall, our rates were up 7.8% for the quarter in our U.S. segment, was property rates up about 12% and cash inline is averaging 7.5% rate increases. Our retention rate in the U.S. segment was a modest 80%.

For our international insurance segment, premiums were up 8.8% for the year to $575 million, driven by some geographic expansion of our international trade credit product and new initiatives for our professional lines businesses. Rates in our international insurance segment were up slightly by about 3%. 5.4% coming from our property business and 2% coming from our casualty lines. Our retention rate in our international segment was also a modest 80%.

Finally, we continue to experience steady growth in our reinsurance segment, where the premiums increased by a one-third to in 2012 to $760 million. This was due to our ramping up of our crop business and the increasing international property cat premiums where rates have improved significantly following catastrophe events in 2011.

But now, let me turn the call over to Tom, to discuss the financial aspects of the quarter in more detail. Tom?

Thomas A. Bradley

Thanks, Scott and good morning everybody. In my first full quarter here at Allied World’s Superstorm Sandy was an apt welcome, but as Scott mentioned we are still reporting strong full year results and are very well positioned as we start 2013.

For the fourth quarter, we are reporting a net loss of $41.1 million or $1.17 per diluted share. From an operating perspective, we had a net loss in the fourth quarter of $55.4 million or $1.58 per diluted share. A $165 million pre-tax Sandy loss that we announced in December has held and was the obvious driver behind the quarterly results. Our net income for full year 2012 was $493 million or $13.30 per diluted share, compared to $274.5 million or $6.92 per diluted share for 2011. In 2011, our results were impacted by $292.2 million in cat losses, but we also recorded other income of $101.7 million associated with the termination fee with Transatlantic.

We generated operating income of $202.7 million or $5.47 per diluted share in 2012, which compares to $183.7 million or $4.63 per diluted share that was reported in 2011. This is an 18.1% in operating EPS. Net investment income for the full year 2012 was $167.1 million and net realized gains were $306.4 million for the year. John, will speak through our investment results in a few minutes.

Underwriting income for the year was $96.6 million and this included $179.6 million in cat losses, which were largely offset by $170.3 million in favorable prior year reserve development. Our international segment continues to be our most profitable business, recording $82.3 million of underwriting profit during the year. The reinsurance segment also recorded an underwriting profit of $36.3 million, while the U.S. insurance segment recorded an underwriting loss of $22 million, largely driven by the storm losses during the year.

Our expense ratio was 29.4% for 2012, a decrease from the 30.1% we reported in 2011 as we have carefully managed the expenses necessary to support our growth.

G&A expenses increased by $35.7 million or 13.1% during the year. This increase was due to higher compensation expenses with increasing our staff by 124 employees during the year. Compensation expense was also impacted by the increase in our stock price during the year, and achieving certain performance base comp targets. These underwriting results drove a strong operating cash flow result of $629.4 million in 2012, compared to $548.1 million last year of 15% increase. We entered the year with diluted book value per share of $92.59, which is up 15.6% for the year. As Scott referenced the growth is 17.5% if you factor in the dividends we accrued during the year.

During the fourth quarter of 2012, we continued our share buyback strategy utilizing a 10b5-1 plan. We purchased 713,874 of our common shares in the open market, during the quarter at an average price of $79.70 per share for a total cost of $56.9 million. This $79.70 average price represents a 14.50% discount to the average diluted book value per share for the quarter.

Our repurchase program had a $0.25 accretive benefit to our per share book value in the quarter. For the full year 2012, we repurchased 3,655,959 of our common shares in the open market at an average price of $72.20 per share for a total cost of $263.9 million. Our repurchase program had a $1.60 accretive per share book value impact for the full-year 2012. Also, as of yesterday, we have repurchased 334,912 shares since the beginning of this year for a total of $27.7 million leaving our remaining authorization at $382.5 million. Notwithstanding Superstorm Sandy and our active share buyback plan, we ended 2012 with shareholders equity increasing $177 million to $3.3 billion as of December 31.

Our year-end capital base totaled $4.1 billion and our debt-to-capital ratio was 19.4%. I will now turn the call over to our Chief Actuary Marshall Grossack to provide some commentary on the loss ratio for the quarter and update us on PMLs.

Marshall J. Grossack

Thanks Tom. Our reported loss ratio for the fourth quarter 2012 was 87.1%. This includes 36.7 midpoints of adverse impact from catastrophes and 6.9 point benefit from reserve releases for the quarter. The current accident year loss ratio, excluding these items was 57.3% for the quarter, and this includes net reduction of about $13 million for a projected 2012 accident year ultimate losses.

These reductions include global property business where we experienced much more benign loss activity than in 2011. Also, with the late improvement in weather and initial reporting to losses from companies who reinsure, we reduced our expected crop losses for 2012 by $4 million. Our full-year 2012 reported loss and loss expense ratio was 65.1%, benefiting from net positive reserve development of $170.3 million or 9.7 points.

The bulk of our reserve releases were from casualty lines for 2009 and prior loss years. As of the end of the year, our reserve position sits at 4.5% over the mid-point of our actual range. This is largely unchanged from year-ago were we estimated, we were 4.6% over the mid-point of our actual range. The Favorable Loss Reserve Development during the quarter continues to be a function of actual losses, emerging better than expected.

Regarding Superstorm Sandy, we booked a $175.7 million in loss and loss expenses during the fourth quarter comprised as follows: $81 million from our reinsurance segment before consideration of $9.6 million and estimated reinstatement premiums, $73.7 million from our international insurance segment, and $21 million from our U.S. insurance segment. These amounts are within our expectations for an event of this magnitude, which we believe will ultimately be a $25 billion insurable event for the industry.

Finally, let me provide the quarterly updates on our PMLs. As of January 1, our 1-in-250 and 1-in-100 hurricane PMLs are $740 million and $569 million, respectively. U.S. Southeast wind continues to drive our Hurricane PMLs with the Gulf Coast being the second largest contributor. Our 1-in-250 and 1-in-100 earthquake PMLs are $545 million and $381 million respectively, with California still being the largest contributor.

Let me now turn the call over to John Gauthier, our Chief Investment Officer, who will discuss our investment highlights for the quarter. John?

John J. Gauthier

Thank you, Marshall. Good morning everyone. Allied’s investment portfolio returned 60 basis points for the quarter, bringing the year-to-date return to 5.5%. In dollar terms, that equates to $50.6 million investment return for the quarter. For the full-year, we were up $456 million investment return, including $289 million of realized and unrealized gains and losses. As in a side, we have now eliminated any future unrealized gain or loss from our balance sheet as we have completely transitioned our portfolio to a trading portfolio. Breaking down the 60 basis points for the quarter approximately half the return was generated from our core fixed income portfolio, which represents just over 75% of our invested assets, while the other half was generated from our diversified portfolio of equities, bank loans, distressed residential mortgage-backed securities, hedge funds, and private equities.

For the full-year, the core fixed income portfolio generated a 4% return, while the remainder of the portfolio drove the return on the entire portfolio up to 5.5%. We continue to believe that a short duration diversified portfolio makes sense in this economic environment.

Within Allied World Financial Services, we announced and closed four deals in the fourth quarter. They include the purchase of minority stake of and broader partnerships with the global third-party claims administration company Cunningham Lindsey, MatlinPatterson Asset Management, the collateralized reinsured U.S. Capital Management, and lastly Crescent Capital Group. Although Crescent, MatlinPatterson managed assets in the debt space there was actually very little overlap between the strategies they will be managing of Allied World.

While we don't provide specific dollar amounts or corresponding ownership equity percentages of any of the individual equity investments we made, we have broken out the total of those minority investments on the balance sheet and in the supplement. As of 12/31/12 those investments totaled just over $127 million or a little below 1.5% of invested assets.

As outlined when we started Allied World Financial Services, our goals are fairly simple. To get the best value for the fees we pay, to increase our knowledge and expertise by partnering with experts and to participate in the economic returns of those partnerships. Today, we feel we’ve found four great partners that we hope to grow with over time. And with that I’ll hand it back to Scott.

Scott A. Carmilani

Thanks, John. And let me end our remarks by saying again that I am very pleased with Allied’s 2012 results and our ability to withstand the Superstorm Sandy and crop losses. Also, by well being dislocated from our New York offices during the last two months of the year because of the event, we managed to weather through. We continue to print these results against the upper tier of our peers, and a number of key financial metrics, including the ROE, the book value growth and resulting in our stock price appreciation.

At the same time, the many initiatives, we’ve undertaken in recent years on the underwriting and investment fronts are beginning to pay dividends and our helping us drive value and value creation for our shareholders and our customers. We are very excited about the Company’s prospects moving forward and with that, I’ll open it up for questions. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. And the first question we have comes from Michael Nannizzi of Goldman Sachs, please go ahead.

Michael Nannizzi – Goldman Sachs & Co.

Thank you. I just had a question on the underlying results in reinsurance in particular. So, it looks the underlying loss ratio was pretty far below what we have seen recently, how much of that is due to mix of the business, you are writing more property cat now than you have been in the past. How much of that is low non- cat, where there any Marshall? I didn’t know if the $13 million you referenced was company wide or just in the insurance segment. If I can just get a little more color on that and just one followup, thank you so much.

Marshall J. Grossack

Yeah. I mean the $13 million was across all our segments, but I think the majority of it was in the reinsurance segment. So, I do think part of the improvement in reinsurance this quarter was that we had Sandy, we really didn’t have any other events across the rest of the world, we are a global company, so we actually were able to kind of recognize some of that into income. And then crop also, as we mentioned we did take $4 million down there, and then kind of on the denominator of the loss ratio we did add about $10 million in reinstatement premiums in reinsurance, which would also improve the loss ratio.

Scott A. Carmilani

Yeah. Some of the growth came from the crop business, but as Marshall said the international reinsurance cat business, mainly Asia and the Eastern part of the world where it was lots of cats in 2011. There is virtually no cat in 2012 and there is a bit of pay back in terms of the rein and rein environment there, so lot of growth came from there in form of pay back from those losses in 2011.

Michael Nannizzi – Goldman Sachs & Co.

Yeah. If I look at those, I mean both of have changed a little bit, you experienced some growth particularly in reinsurance, I mean how should we think about, I mean is it, is 4Q more kind of indicative of what you expected at the full year or if some of that give back is maybe somewhere in the middle just in terms of – kind of how you’re thinking about those businesses themselves.

Marshall J. Grossack

Yeah. I don’t know that I would take the reinsurance business of the fourth quarter, if you look in the reinsurance we have to look at the whole year.

Michael Nannizzi – Goldman Sachs & Co.

Right.

Marshall J. Grossack

Lot of that business trends act in the first half of the year as you know, so think if you looking comparative for, as you build on your model for future you want to look at the whole year performance for 2013 for the reinsurance segment as a total.

Michael Nannizzi – Goldman Sachs & Co.

Great, okay thank you. And then in insurance you had some adverse, I guess, I mean I am guessing that Darwin, the medical professional liability be priced or developing somewhat favorably. Could you just give us an update of kind of what you saw there maybe you know that if you could the Darwin and then maybe ex-Darwin and kind of where you are seeing the opportunities and where you are seeing rate in excess of loss trend?

Marshall J. Grossack

We don’t break it up by Darwin or non-Darwin. There is professional liability, healthcare and casualty property in the U.S., there is no Darwin per say in the segment results, so you must have to retool that question to professional liability versus medical, versus property, versus casualty.

Michael Nannizzi – Goldman Sachs & Co.

Right, okay.

Marshall J. Grossack

And I think it was a little bit tighter in professional liability this year although we grew somewhat in the larger cat professional liability, the med, mal book continues to be under rate to rest, but continues to be profitable and there is considerable margin in that portfolio for us, both in Medical professional and the med mal side of things. And property as you know, in the Northeast we experienced the Superstorm Sandy event and there were a bunch of what I would call subtropical tornados and what not in the south earlier in the year too, so that affected the property results for the year. And casualty has been building well and doing well quite frankly, both on the exits and the primary side.

Michael Nannizzi – Goldman Sachs & Co.

Great, thank you very much.

Operator

Next we have Bob Glasspiegel of Langen McAlenney.

Robert Glasspiegel – Langen McAlenney

Good morning everyone. I was wondering if you are taking a $1 billion and putting in the structures, what sort of yield pickup over time should we think that should add to the portfolio?

Marshall Grossack

We hope a lot.

Scott A. Carmilani

Should point about Bob, that it’s not all today right these are commitments over multiple year adding to a billion dollars, so I don’t want you to think that we are giving up a lot of liquidity and a lot of flexibility all on the outset. We think that there is obviously some upside, I don’t think we want to give guidance as the earnings increases coming from this to be honest. But you can look at returns from where in the various places we have been invested historically as you got, and they have been kind of low double-digits versus the return that we received on our core portfolio, unclear whether that’s sustainable in a tightening spread low growth environment.

Robert Glasspiegel – Langen McAlenney

Okay, but the decline this quarter was there anything in it, is that just yields going down or just something on the partnership side?

Thomas A. Bradley

Nothing on the partnership side, it’s really the decline, the low return in the quarter was due to fact that rates were a little bit higher, we didn’t have as much investment income as this quarter last year, and the fact that we had kind of modest of returns from our diversified portfolio, obviously for the whole year, we had a lot of returns in those diversified assets.

Robert Glasspiegel – Langen McAlenney

Okay, And just a follow-up on the last answer, Scott your last answer on the adverse in U.S. insurance, I think you were saying that was more likely to be in the medical lines, what actually?

Scott A. Carmilani

No, no, no.

Robert Glasspiegel – Langen McAlenney

Well, I misunderstood your answer?

Scott A. Carmilani

Yeah, the adverse really more in the professional liability side specifically not for profit, as a small company D&O, where we had a couple of minor, but little frequency and then a new business in the environment front, where we had some, it’s a new portfolio for us, not that big and we had a couple of quick losses that we took down right away.

Robert Glasspiegel – Langen McAlenney

Were you’re on the professional liability more recent or going back at that?

Scott A. Carmilani

Yeah, the current year 2011 really versus last year.

Robert Glasspiegel – Langen McAlenney

Last year. Thank you.

Scott A. Carmilani

Yeah.

Operator

And the next question we have comes from Dan Farrell of Sterne Agee.

Dan Farrell – Sterne, Agee & Leach, Inc.

Hi, good morning and just a couple of questions. The insurance segment had a little bit of an uptick year-over-year in the core loss ratio and does that reflect any adjustments to your go forward fix in professional liability given some of the trend that you saw in the more recent action here?

Scott A. Carmilani

No, I haven’t. Really, the uptick that we saw, it’s not kind of referenced. We did have a large limits loss in our environmental book. That’s really would give us kind of a one-time event. So it wouldn’t change our view going forward.

Dan Farrell – Sterne, Agee & Leach, Inc.

So nothing on a go-forward basis? Great and then I was wondering if you could since it’s still a relatively new initiative, talk a little more about the financial services segment and in particular as this financial services platform gets ramped up, how do you think about the cost savings that you might be able to realize from fees?

Scott A. Carmilani

Yeah. Well, a couple of things. We are pretty explicit in the investment expenses that we report. But it’s important to point out that those are expenses we pay directly to managers. So you won’t necessarily see all of the expense saving coming to that line because some of the products are going to be in the terms of the net return we get which will be a net of lower fees. We have – if you think about that $1 billion that will ultimately be deployed, their savings anywhere from 20% to 30% across existing kind of products that are being managed.

Dan Farrell – Sterne, Agee & Leach, Inc.

Okay.. All right, great, thank you very much guys.

Operator

(Operator instructions) Next we have Ray Iardella of Macquarie. Please go ahead.

Ray Iardella – Macquarie

Thanks and good morning. Yeah, Scott maybe I just wanted to touch on the reinsurance business a little bit more. I know, in the past you guys have targeted around 30%, it’s hovering a little bit above that and maybe just talk about the growth there and whether or not you think that 30% is still the right way to think about it longer term.

Scott A. Carmilani

Yeah, I did, I will answer that backwards. I do think that neighborhood is the right way to think about in long-term. As I have always said, the ebbs and flows where we see opportunity in the marketplace. This year, it’s up slightly and we saw a bunch of opportunity in the international cat space, and that business grew mostly because the rate environment had switched so much from 2011. It also grew a bit because we grew the crop and specialty business, now that’s one where we kind of grew in the year, we had the worst drought in 40 years. So, it also punches in the back a little bit, but we do feel long-term that that’s a great – it’s going to be a great business for us and a long-term profitable franchise for us. So, we took a little bit of a lump in its first year, I think there will be upside in that in 2013 and onward.

Ray Iardella – Macquarie

And any sort of thought process on where the crop and marine book could go on the reinsurance side on 2013. I know that, like you said, that was a pretty big growth engine for you guys, but any change in kind of thought process in terms of quote of share versus excess of loss on the crop side?

Scott A. Carmilani

Yeah, that’s largely up to the scene to who operate those underlying businesses today. Both marine and crop underlying companies had decent loss activity this year. Marine book because of Concordia and Superstorm Sandy by the way had a fair amount of marine loss was caused from that event. So the crop business is likely you can yields likely go up next year, and pricing will probably go up next year, and that business, I would suspect that although I don’t know this yet that these marine businesses will experience some decent amount of rate increase this year as well, the amount I can pin down for you right away, but even obviously in growing that business significantly the rate should move that book slightly higher.

Ray Iardella – Macquarie

That was going to be sort of the next question in terms of property you gave sort of rate increases on the insurance in U.S. and international, any sort of thought process or numbers you can give us in terms of rate increases on the reinsurance side?

Scott A. Carmilani

Yeah, again that’s much more forensic and the user knowledge base has dramatically over the last few years or decade, so it’s much more laser to where there has been significant loss activity, so I don’t expect to see much will rate increase compounded in 2013, from 2012, and so the international in Asian space, but I do expect to see significant rate increase in the Northeast, where we did have a fair amount of concentration, but Florida in the South, where there hasn’t been a big storm in a while, you’ve seen a much more tempered attitude towards rate increases.

Ray Iardella – Macquarie

Okay, that’s helpful. And last one and I’ll re-queue and may be this is another one for you Scott, in terms of thinking about book value growth in 2013, obviously the underwriting result I would kind of expect just base on the rate commentary to improve a little bit, but with that investing income probably so a little bit under pressure, know how do you think about the total return on I guess, that component relative to book value growth? Obviously, buybacks are included in there. But should the portfolio, sort of the change in the portfolio structure add to book value growth, that’s not necessarily captured in sort of operating income?

Scott A. Carmilani

Well, let me try to answer that question. I mean there’s a lot of stuff in that question. Our operating ROE this year was mid single-digits and that’s below our long-term averages and what we strive for. So the underwriter’s goal is to beat those loss stakes, hunker down the businesses that are less than stellar and push forward on the businesses that are producing higher in the double-digits.

So, we’ll be working as best we can to get that operating ROE up to the double-digit and moving towards at that. The modest rate environment whether it’s 5% or 15% depending on the product line you’re talking about, we’ll go a long way towards helping that. We helped the loss cost trend stay flat the last year and if we get some uptick in the investment portfolio, you know that will get us there.

Ray Iardella – Macquarie

Great, thanks. I’ll re-queue.

Operator

Next, we have a Matt Carletti of JMP Securities.

Matthew J. Carletti JMP Securities.

Yeah, thanks good morning. Most of my questions have been asked and answered. But the one I just wanted to ask was on capital management. Just if you could update us on how we should think about – there has been nice, strong growth from new initiatives. So how we should think about your buyback going forward versus capital needed or wanted to be held back for future growth opportunities and maybe in reference to kind of earnings as a base, should we expect you to see you to buyback earnings, a little more or little less? Thanks.

Scott A. Carmilani

Yeah, I think with the pace of earnings that we’ve been generating for the last number of quarter, it supports the buyback we’ve had in place and supports our growth. I think this is manageable organically given the business we have and the pace that we’ve been buying back shares in the recent quarters.

Matthew J. Carletti JMP Securities.

All right, great. Thanks, congrats on a very successful quarter and year.

Scott A. Carmilani

Thanks, Matt.

Operator

Next we have Ian Gutterman of Adage Capital.

Ian J. Gutterman – Adage Capital Management

Hi, good morning. Scott, first can you clarify when you were talking about the rates, any other on to get some insurance of 5.8%, was that for the quarter or for the full year?

Scott A. Carmilani

For the quarter.

Ian J. Gutterman – Adage Capital Management

For the quarter, okay, great. And what is that – if you can sustain that pace can you give us a sense of where loss trends are, I mean I think others have talked about maybe 4%, that would imply a couple of points of margin improvement by the end of this year, is that a reasonable way to think about it?

Scott A. Carmilani

It is, I guess that’s better to go late in the process, you’ve already got that information from other carriers, so, yeah it’s pretty consistent.

Ian J. Gutterman – Adage Capital Management

Okay, great. And then, the – I lost it out there for a second. Can you talk a little bit about growth at 11 on your renewals?

Scott A. Carmilani

Well, Jon is in the room. He has got a sledge hammer in his hand, if I go through far over the mark here, but let’s say that January 1 was a vibrant market and we are pleased with the pace we have started with this year.

Ian J. Gutterman – Adage Capital Management

Any lines where you appetite changed I guess on getting at either in U.S. or international.

Scott A. Carmilani

Sure. I would point to the areas that we are under stress in 2012 or areas that we put more focus and attention on is in improving terms, changes in deductibles or tightening down the need for rate increase, meaning the ability to walk away from business and some that’s taken place in some of the small professional liability business, for the environmental business, some of the marine business and where we saw significant loss activity we made corrective actions, it sort of like sitting in a football game during half time and making (inaudible) to come out and play the second half.

Ian J. Gutterman – Adage Capital Management

Got it. And then on the reinsurance, the reserve releases I mean they are still favorable but they have been slowing a lot, it is, I think $30 million for the full year was over $100 million last year, over [$62000 tangibles], sort of – are there certain lines where you are seeing less favorable development then you had in the recent past.

Scott A. Carmilani

Yeah. I think that’s fair to say, I mean, I don’t think it’s any big secret that especially in the U.S. the professional lines and general casualty or the broader market that we reinsure has been in pretty competitive out there for the last three or four years with the rate environment. So, we’re not kind of seeing the decreases in those lines that maybe we have seen from the 2004, 2005 kind of through the years.

Ian J. Gutterman – Adage Capital Management

And then, perhaps finish up with some investment questions. For the quarter John I am surprised the realized gain was small given it was very strong market quarter for the non-fixed income, can you help me understand that?

Scott A. Carmilani

Yeah part it is, the fixed income actually had some losses there, right, because rates actually backed up at the end of the quarter in December at the yield curve steepen, so that moderated what the fixed income return would have been and then you had – that was offset by the positive, but not stellar returns of the other asset classes. So the fixed income return for the quarter was only 30 basis points. And so that’s lower than – if total return is lower than the investment income portion. So, we actually had a decrease in the capital position of that portfolio. And then, you had positive return, sorry.

Ian J. Gutterman – Adage Capital Management

All right. Go ahead please.

Scott A. Carmilani

And then you had positive returns from our distressed mortgage portfolio, 5% equities were up 1%, bank loans were up almost 2% and our hedge portfolio is up about 76 basis points. So, negative returns in fixed income, net of the investment income but offset by positive returns in the non-fixed income.

Ian J. Gutterman – Adage Capital Management

Got it. Did you actually have worth of breakdown as each – can I ask going forward, as think is becoming a more important part of your strategy, that will be nice to know sort of what realized gains or losses are in the quarter from fixed income versus, non-fixed income.

Scott A. Carmilani

Yeah. We can look at that as a supplemental disclosure.

Ian J. Gutterman – Adage Capital Management

That’s not a bad idea. Thanks.

Scott A. Carmilani

And just a finished point to the earlier question, I think which from Bob, that guidance on that, I understand we’d like to give specific guidance, but if you have $1 billion that’s going to earn 8% to 10% a year, that’s two or three points of ROE that you get no credit for, because we can’t really evaluate it. And, it’s hardly part of the reason (inaudible) does, because you getting no credit for that income for other people, but in operating.

Ian J. Gutterman – Adage Capital Management

Yeah.

Scott A. Carmilani

So just because of the way you do the fixed maturities going through net income were most companies down it’s just hard to pick it out, so any help that you can give us in the sheets, tell us more about that, that this is the strategy in general the investors are making that will be helpful for this time.

Unidentified Company Representative

Yeah. Fair point Ian, I would say remember the $1 billion is not all new assets some of that will be replacement of assets that existing manager, so it’s not a that will all be accretive but I think we certainly hope it will be value added and we will provide some additional transparency.

Ian J. Gutterman – Adage Capital Management

Great, thanks guys.

Scott A. Carmilani

After all, that is why we’re doing.

Ian J. Gutterman – Adage Capital Management

Right.

Operator

(Operator Instructions) Next we have Michael Nannizzi of Goldman Sachs.

Michael Nannizzi – Goldman Sachs & Co.

Yes. Just a quick follow-up. So maybe John, when we’re thinking about, I mean most companies we think about operating income versus making that the base for deployable capital, but clearly, you guys have started I mean one of the early companies to really look at total return of portfolio side, realizing gains at a much higher clip, and obviously you’ve deployed more capital in ‘12 than you’ve generated on an operating basis, but less than you did overall, how should we think about that going forward. Is that harvesting likely to continue to support cash flows and maybe allow you to continue to deploy more than earning on an operating basis? and just one quick follow-up, thanks.

Scott A. Carmilani

Yeah. We certainly hope so, right. I mean that’s why we’re diversifying the portfolio, because we’d expect to be able to generate returns from our non-fixed income portfolio that are greater than the core fixed income portfolio given where rates and spreads are.

I want to point out though that, we don’t actually have to harvest it in the terms of realizing it from a sales standpoint, because of the accounting methodology the fact that’s all trading, we get the benefit of the detriment regardless of whether we actually sell a security. So just want to make sure that everyone is understanding that.

Michael Nannizzi – Goldman Sachs & Co.

All right. But how much of the realized gains for example in the fourth quarter were cash in the door, sales, gains versus accounting gains, because of trading categorization?

Scott A. Carmilani

I don’t have that handy, but I guess, I’m not sure that we think about it that way, there Mike.

Michael Nannizzi – Goldman Sachs & Co.

Okay. So we should continue to think about operating income as a base for deployable capital or not potential realized gains, okay.

And then just one follow-up on, I think Marshall had mentioned the new the environmental loss in insurance. I couldn’t figure out if Scott mentioned that is current year development and then Marshall might have thought prior year development and then I thought Marshall kind of referenced in the current action year, or loss pick where they are more than one or just got a little bit of clarification on the current underlying exiting your loss ratio.

Scott A. Carmilani

Yeah, I will let Marshall give you the detail, but we have only be in the environmental business for one year, so it’s current.

Marshall J. Grossack

Well, there is the 2011 loss and 2012 loss, but 2012 loss is the full limits losses. As I mentioned before the 2011 loss was emergence on a claim that we were already aware of, but since it’s a small line of business and it’s just kind of in start-up mode, it hasn’t really created a whole lot of IBNR, we are in kind of add to our reserve position or loss pick for 2011 as well.

Michael Nannizzi – Goldman Sachs & Co.

Got it, great. Thank you.

Scott A. Carmilani

Hey Mike?

Michael Nannizzi – Goldman Sachs & Co.

Yes.

Scott A. Carmilani

I do have, your question about the breaking up the realized gains for the quarter.

Michael Nannizzi – Goldman Sachs & Co.

Yeah.

Scott A. Carmilani

We posted a net realized gain of $14.4 million for the quarter, that was comprised of traditional realized gains of $57.5 million and mark-to-market adjustments of a negative $43.1 million.

Michael Nannizzi – Goldman Sachs & Co.

Got it. Great, that’s helpful a lot. Thank you so much, John, I really appreciate it.

Operator

And next we have Ray Iardella of Macquarie.

Ray Iardella – Macquarie

Thanks for taking the follow-up. Two questions, I guess first Scott, could you maybe talk about the expense ratio obviously it was down year-over-year below the 30% target, but given the growth I mean, can you talk about what we should think about the expenses going forward, given that you’re growing the platform, at the same time growing the top line?

Scott A. Carmilani

We’ve long said we see the expense ratio as something we can manage and we strive to be certainly at the low at the low end of what peers and others in the industry operate under. We’ve always – we’ve said for many quarters and many years now that our goal is to get it under 30%.

We added 120 somewhat people and built out the infrastructure quite substantially within 2012 and managed to reduce our expense ratio by a little more than half a point. So it’s well within what we’ve planned to do and what we desired to do and where we wanted to keep it.

Ray Iardella – Macquarie

Got it. And then may be just update your thoughts on M&A. There has been some activity in the space more recently, so just any thoughts and kind of what’s out there in the horizon or your appetite going forward?

Scott A. Carmilani

Well, we made four minority acquisitions in the last quarter. So we’re pretty active in the space. We seem to be in a lot of people’s list to have discussions with. But we haven’t found anything that – or seen anything or been offered anything that looks more attractive than to build out organically.

So we’re capable of doing either and I think we’ve got a bunch of experience under our belt from looking in transactions, doing the transactions and working with transactions that don’t work. So we never close the door to an opportunity. But right now, we are focused on executing our 2013 plans.

Ray Iardella – Macquarie

The great and thanks for taking the follow-ups.

Scott A. Carmilani

No problem.

John J. Gauthier

Thank you, Ray.

Operator

Well, it appears that we have no further questions at this time. We’re going to conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Scott Carmilani for any closing remarks. Sir?

Scott A. Carmilani

Thanks all for joining us for the call this morning. and have a great weekend. Thank you very much. Good bye.

Operator

And we thank you sir and also have a great weekend. And we thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thanks again, and take care.

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