PartnerRe Ltd., Q1 2009 Earnings Call Transcript.

PartnerRe Ltd. (PRE)

Q1 2009 Earnings Call

April 28, 2009, 10:00 am ET

Executives

Robin Sidders - IR

Patrick Thiele - President and CEO

Albert Benchimol - EVP and CFO

Analysts

Jay Gelb - Barclays Capital

Josh Shanker - Citi

Matthew Heimermann - J.P. Morgan

Vinay Misquith - Credit Suisse

Mark Dwelle - RBC Capital Markets

Brian Meredith - UBS

Presentation

Operator

Ladies and gentlemen before we begin the call I will remind all participants that they are in a listen-only mode. (Operator Instructions).

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

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

Robin Sidders

Good morning. And welcome to PartnerRe's first quarter 2009 earnings conference call and webcast. As a remainder our first quarter financial supplement can be found on our website at www.partnerre.com, in the Investor Relations section by clicking on 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 then handover 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 normal 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 can 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, equity and other risks associated with the Company's investment portfolio, adequacy of reserves, levels and pricing of new and renewals 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 statements.

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

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

Patrick Thiele

Thanks Robin, and welcome to the first quarter 2009 earnings conference call for us. Despite some modest noise we believe that the first quarter 2009 was the first for ParternRe that reflects a more normal overall environment. While it was some continued volatility in the capital markets both it and the reinsurance market began to stabilize over the last three months. Helping us to report the strong results you saw in our press release. For the quarter we had a 17% operating ROE and 87% combined ratio. And a 2.5% increase in our book value per share after payment of our recently increased dividend.

Our ability to successfully manage our way through the turmoil in the last eighteen months with minimal damage to our capital means that we have the right people, systems and strategy to succeed and whatever comes over the next few years. I'll turn it over to Albert who will give some additional flavor on the results and then I'll come back with some additional commentary.

Albert Benchimol

Thank you Patrick and good day everyone. We're pleased to report a good start to 2009 with a 37% increase in operating income per diluted share to $2.72 this quarter.

Net income increased 10% year-over-year to $2.32 per share leading to an annualized net income ROE of 14.4%. In addition to the items impacting our operating earnings, our net income reflects a change in the market value of our investment portfolio and our successful tender for our hybrid debt.

As we noted in our press release the stronger US dollar had significant impact on our financial results. Between March of '08 and March of '09, the US dollar strengthened 16% against the Euro and 18% against the Canadian dollar. This affected year-over-year comparisons from most income statement items including premiums written and earned and investment income. This also touched the balance sheet with a meaningful portion of our assets and liabilities translated at lower exchange rates.

Our Non-Life segment comprised of the US, Global P&C, Global Specialty and Catastrophe sub-segments, reported lower net premiums written and net premiums earned. However, this decrease was entirely due to FX. Without changes in currency, net premiums would have been flat.

The stable overall production figures belie significant changes in various lines and markets. As we increased writings in those lines of markets with improved conditions, while we made meaningful reductions where terms and conditions did not meet our standards.

Most importantly we reported a 27% increase in our Non-Life technical result, mainly due to a lower frequency and severity of mid-size losses in '09 as compared to the prior year.

Our US operations reported a 5.9% decrease in premiums driven by reductions in casualty and agriculture. The decline in casualty reflects the absence of sufficient improvements in terms and conditions which caused us to reduce our participations in certain treaties. The drop in agriculture relates to a shrinking of the industries premium base for this line. As lower commodity prices this year have reduced the economic value at risk in the harvest as compared to the higher levels in '08. Property was up as was the auto business; volume in other lines remained relatively stable.

The technical result deteriorated year-over-year reflecting our view that pricing was not keeping up with higher loss trends and the current economic environment especially in the casualty and multiline business segments.

Our global P&C unit continues to experience declines in premiums written but not as severe as maybe indicated by the reported figures, which again are effected by currencies. On the constant exchange basis, net premiums written are down 8% compared to the prior year. International standard lines markets remain competitive in large part because they are reasonably profitable as demonstrated by our own results.

We continue to observe clients retaining more business net by either canceling treaties or by shifting from proportional reinsurance to excess of loss covers. There are still pockets of inadequate pricing where we are walking away from business, if we cannot get the terms and conditions, we deem necessary.

We are seeing improvement in some markets. But in many cases we do no believe that increased prices fully compensate for the loss trends, lower interest rates and higher cost of capital prevalent in today's world. The technical ratio is down to 73.9% from 99.3% in last year's first quarter. This reflects improved results in all lines, given less than expected loss activity which led to both reduced reserves of prior periods as well as lower loss picks for the current year. And a much lower level of mid-size losses in the current quarter as compared to the very active first quarter of 2008.

While the Global Specialty unit reported a decline of 1% in net premiums written, without the impact of FX, net premiums written would have grown 8%. On a constant dollar basis, we experienced strong growth in energy, agriculture and marine. We had generally stable production in engineering, aviation, and specialty casualty. While specialty property and credit and surety declined. With regard to credit and surety, the reduction was entirely related to our risk management. But there was strong client demand and much improved terms and conditions. But we felt that even with the acceptable price profitability, the tail risk for this line was in excess of our appetite and a reduction in exposure was appropriate.

The technical result improved year-over-year due to a lower level of mid-sized losses even as we continue to book prudent reserves for lines exposed of the current financial crisis.

Our catastrophe premium production reflects improved pricing in most markets. On a constant exchange basis, net premiums written increased 10%, however, given the impact of the stronger dollar, we reported premiums written growth of 4%.

The absence of large losses contributed to another strong technical result of $60 million. While windstorm Klaus in Europe is likely a $2 billion to $2.5 billion event, it was not a significant claim for us. For those of you who are not familiar with our practices, I want to remind you that we earn our catastrophe premium in line with the risk period. Given the large amount of US wind premium in our book, we tend to earn more catastrophe premium in the second half of the year. So, annualizing our first quarter earned premium would not be a good indicator of our annual earned premium.

The net of the foregoing for all of our Non-Life segments is a very satisfactory consolidated Non-Life result with a combined ratio of 87% and 61% increase in underwriting income. Our Life segment reported modest reductions in premium written and earned, but here again trends are distorted by FX. On a constant exchange basis, premiums written would be up 8% while net premiums earned would be up 11% for the quarter. The Life segment’s allocated underwriting result, which includes allocated investment income and operating expenses was $5 million for the quarter as compared to $4 million in the prior year period.

Our otherwise strong technical result was once again affected by adverse charges for the GMDB book, which experienced $10 million of adverse development, as the French equity index to which it is tied decline by 13% in the quarter. Since there was a mark-to-market character to the reserving of this line changes in the underlying equity index drive volatility in quarterly results. While the recent negative charges for GMDB creates noise. It is worth noting that this is a well structured and well priced line of business. Notwithstanding the recent charges we booked on this line, the treaties remain quite profitable.

Secondly, recall this is a mortality cover. We only have a claim if the insured dies and the investment balance is below the original investments. To the extent that markets recover prior to mortality event, charges maybe reversed in the future. While the volatile capital markets touched only a small portion of our Life business, they were an everyday challenge for our investment activities, but we will well positioned for this.

Consolidated investment income was $133 million for the quarter, down modestly from the $137 million reported in the first quarter of '08. Without the impact of FX, investment income in source currency grew 2% year-over-year as incremental cash flow and reduced allocation to equities in favor of higher yielding assets, offset the impact of generally lower reinvestment rates. As we've discussed in prior calls, ours is a traditional fixed income and equity portfolio with no hedge fund or private partnerships that can cause unwanted volatility in the investment income.

Within the portfolio there was not much change in the quarter. We completed the liquidation of our bank loan portfolio that was initiated towards the end of '08. Although we had wisely avoided CDOs, CLOs, and CMBS securities ahead of and during the financial crisis, we did start to acquire a modest amount of CMBS securities this quarter where we deemed the securities to be attractively priced for the risk.

The composition of our portfolio and various statistics can be found on pages 16 to 21 of our financial supplement. We are very satisfied with the performance of our portfolio. Our total return for the quarter for the entire portfolio was 0.5% positive in local currency. Our investment grade fixed income portfolio, which makes up 90% of our assets reported a positive return of 0.6%, while remaining 10% made up a various risks assets including equities, principle finance, strategic investments in IOS had an aggregate negative return of 0.6%.

We reported net pretax realized and unrealized losses of $70 million. However, that is essentially all due to the increase in risk free rates. The risk components of our portfolio offset each other as equities decline by some $28 million, while credit spreads, derivatives and other sources improved evaluations by an equal amount. This is the first time since the second quarter of 2008 that we were not penalized for holding risk in our portfolio. We are optimistic that intelligent and prudent risk assumption will be adequately compensated going forward.

Our reported GAAP operating cash flow was $254 million this quarter, a bit lower than the $297 million in the first quarter of '08 reflecting in part higher payouts for losses related to hurricane Ike. Separately, we repaid a $200 million bank loan and used another $94 million to purchase approximately 75% of our outstanding hybrid debts at a 50% discount. That purchase generated $88 million of pretax gains in the quarter. These debt repayments resulted in lower interest expense this quarter and in future quarters. Overall we expect this debt reduction to save some $15 million in annualized interest expense, although that comes at the expense of lower growth in investment income for the first half of this year.

Our overall tax rate was high this quarter. The total tax expense was $60 million comprised of a charge of $25 million against operating income and $35 million on net unrealized not operating income.

The operating tax -- the effective tax rate was 13.1%. While we continue to expect that the net effect of our European restructuring last year will be to reduce our overall average tax rate. The distribution of gains and losses in Europe are such that we believe that the operating tax rate will remain in the 10% to 15% range for the balance of 2009 absent unusual losses or dramatic changes in distribution of income.

To better understand the non-operating tax expense of $35 million on total pretax non-operating income of only $12 million, we must breakdown the non-operating income items. As I noted previously, we generated a gain of $88 million the purchase of hybrid securities, which were issued out of our US subsidiary. This gain was fully taxed of nearly 35%, or a $31 million tax charge. Separately, our non-operating losses of $76 million on portfolio investments than investment in equity companies did not produce a benefit but rather a net tax expense of $4 million. This was primarily due to two reasons. First, approximately half the non-operating losses were generated in Bermuda, and that we received no tax benefits.

Additionally, we recorded a valuation allowance in the US against the benefits related to the capital losses on equities, since under GAAP we can not anticipate the future recovery of the equity markets. We consider this is a timing issue. If and when the unrealized loss position recovers we will reduce the valuation of allowance accordingly.

A comprehensive income of $113 million was $29 million lower than net income of $142 million primarily resulting from the decrease in the currency translation account of $31 million, due to a 6% improvement in the US dollar against the euro in the quarter and the 2% strengthening against the Canadian dollar. Our tactical hedging program had a benefit of mitigating the negative effects of the stronger dollar, which otherwise would have been over a $50 million CTA charge.

As we noted in earlier calls, we expect with CTA movements to even out over the longer term, but recognize that may exhibit large movements when the US dollar moves dramatically. It's important to know the changes in the CTA account do not reflect business profitability nor asset quality. It is purely a reflection of movement in the relative currencies. We will continue to monitor and adjust our hedge with the objective of protecting our capital position until volatility in the capital foreign currency markets return to more normalize levels.

As to our balance sheet, total assets at March 31^st were $16.3 billion consistent with the balance at 12/31 of '08. Total investments in cash stand at $11.4 billion including $572 million in cash and cash equivalents. During the first quarter of 09, the investment portfolio decreased by a $179 million, again primarily due to FX which reduced the portfolio value by $229 million.

The changes in our investment portfolio values due to FX do not fully impact our book value nor our economic value since FX changes affecting the investment portfolio, other assets, reinsurance liabilities and other liabilities generally have offsetting impacts. As I noted earlier, our asset allocation did not change dramatically relative to December 31 of 08. In terms of the rating distribution of the fixed income portfolio, AAA rated securities remained flat at 62% of the portfolio, while the average credit quality of our portfolio remained AA.

We're encouraged that in many classes current valuations represented attractive entry points and reasonable risk-adjusted return opportunities. We will likely increase exposure to credit and equities, if economic trends and valuations continue to move in the right direction. We're now at the low-end of our risk appetites and we have the right professional staff, systems and processes to take advantage of these opportunities as our recent and historical investment results would attest.

Gross Non-Life reserves are $7.4 billion. Net Non-Life reserves are $7.3 billion modestly down from the year-end level but again due to FX. We reported net favorable Non-Life prior year reserve development of $100 million for the quarter, while we continue to experience net favorable development this is a result of new information. We've made no significant changes to our processes nor to the prudence that we exercise in the setting of our reserves. The time value to money in our Non-Life reserves which is discounted at the March 31, risk-free rates for each major reserving currency, increased by $6 million for the quarter to $739 million.

We will be posting on our website the details of this calculation over the next few days. Gross reserves for policy benefits life and annuity contracts were flatter $1.4 billion compared to the fourth quarter of '08 notwithstanding the impact of currency. Life reserves had aggregate development of $7 million in the quarter mainly due to the GMDB contracts that I discussed earlier.

Total capital was down 2.1% for the quarter but this was due to the repurchase of our hybrids at very attractive financial terms. This modest decrease had not significant impact on our financial strength.

Our common shareholders equity increased both on absolute basis and as a percentage of our total capital. Book value for share increased 2.5% in the quarter. We remain confident that ours is one of the most robust balance sheet in the industry, with a capital base that will both allow us to honor our obligations under any and all circumstances and also take advantage of the various opportunities that will invariably come our way. And with that I will return the call to Patrick

Patrick Thiele

Thanks Albert, and now to the forward looking part of the call. As I said at the beginning of the call I believe we are emerging from the financial crises era that we been dealing with recently and are now having to deal with the number of factors which are impacting growth and profitability for ParterRe.

First the economic crisis in Europe and the US means that our clients are facing declines in exposures, putting pressure on their written premium levels. That will have a knock-on effect on our quota share business. In addition the larger European insurers continues to consolidate their reinsurance programs bringing less premium to the market, while medium-sized reinsures continue to move from proportional to non-proportional treaties.

Second issue, massive governmental intervention has led to a new lower level for risk-free rates and government securities which make up a meaningful amount of the industry's investments. This will put pressure on investment income growth going forward.

Third, there is a great deal of uncertainty about loss trends in this new environment. While we expect reasonable stability in loss trends for the short and medium-tail lines, we do expect trends to increase for long-tail lines like Specialty Casualty, putting upward pressure on loss picks. On the positive side, we've seen price improvement in our CAT-exposed lines and a diminution in the pace of price declines and other lines. Also, we continue to see actual losses in casualty lines that are less than expected, albeit, at a diminishing rate.

Finally, we are encouraged the stability that's returned into the credit markets. Overall, we were satisfied with our April 1st, renewals as we registered a modest increase in premium primarily from the improved Japanese renewals. While price underwriting year return on capital remains under pressure, because low risk-free rates our priced technical ratios actually improved slightly from expiring levels.

As I said before, we think that by continuing to push price increases, an improved terms and conditions were needed. And by reintroducing more risk and therefore potentially higher return into our investment portfolio, we can continue to achieve our long-term goal of minimum 10% compound growth in our GAAP and our economic book values per share. And we will do that without sacrificing the diversification and the balance of our risk portfolio and without reaching any of our risk limits.

In summary, while we face some short-term challenges, I am more convinced than ever that a professional risk-taking organization like PartnerRe has a bright long-term future.

And with that, I will open up the call to questions. Operator, we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Jay Gelb with Barclays Capital. Mr. Gelb, please go ahead with your question.

Jay Gelb - Barclays Capital

Thank you. Could you talk about your positioning ahead of the mid year property CAT reinsurance renewals for Florida in particular?

Patrick Thiele

We really haven't changed our positioning at all. I think as you know we are primarily a writer of national programs that have exposure in Florida. We do not have a significant exposure to the Florida only homeowners only marketplace and I really don't expect that to change on the June 1st to July 1st renewals.

Jay Gelb - Barclays Capital

Okay. And then for a there has been some press recently about potential changes to crop insurance programs. Can you talk about how that might impact Partner?

Patrick Thiele

Yes, I mean there was a great deal of discussion of that in the press over the last few weeks. The most recent bill that we're aware of in fact has done away with most of the reforms and we are pretty much back to where we were in the first place. I think the profitability trends in the ag business in the United States will be primarily driven around obviously again weather and crop prices, not so much around any significant changes in the governmental program that impact that line.

Jay Gelb - Barclays Capital

So for the private reinsurance market, essentially no change versus a year-ago, should be the end result?

Patrick Thiele

That is what it seems to be shaping up as. Obviously, it's very difficult to project what's going to happen in Congress, but at the moment we are relatively optimistic, that there are not going to be significant changes.

Jay Gelb - Barclays Capital

Okay, and then just a quick number's question, there were no notable catastrophe losses in the first quarter. Is that right?

Patrick Thiele

That's correct.

Jay Gelb - Barclays Capital

Thanks again.

Operator

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

Josh Shanker - Citi

Good morning everyone. In terms of thinking about maybe there is two ,maybe three, maybe four of your reinsurance competitors, who could arguably be injured at this point in time, how has that changed the competitive landscape for you right now ?

Patrick Thiele

The competitive landscape is generally pretty stable, the behavior of the reinsurance competitors across the board, all of our competitors has been certainly not very aggressive, and I think the terms and conditions certainly have been holding up better in the reinsurance marketplace then they have been in the primary marketplace. I don't think that there is been any real change in terms of aggressiveness given the “damaged nature” of some of our competitors, I think the market its in good shape, its in reasonably good shape.

Josh Shanker - Citi

And the given the success you had in buying back those hybrids into your balance sheet, do you have any thoughts on future and capital needs and whether you would take further action?

Albert Benchimol

Well, the repurchases in a sense was obviously opportunistic. Right now we are not looking, we did not have a plan to either issue or buyback anything, we will continue to monitor markets, we think we've got good balance as I mentioned in my prepared remarks in terms of capital to support all of our obligations and to take advantage of opportunities when we see them. There is no significant action that is planned and either direction either reduction or increase.

Josh Shanker - Citi

Obviously depending on market conditions, that would obviously inform things greatly.

Albert Benchimol

That's right.

Josh Shanker - Citi

I appreciate thank you guys.

Operator

(Operator instructions) We will take our next question from Matthew Heimermann with J.P. Morgan.

Matthew Heimermann - J.P. Morgan

Hi good morning everybody. Two questions first Pat and you can tell me if I am hearing you incorrectly, but are you feeling a bit more optimistic now then you were three months ago, as you were just going through the January renewals.

Patrick Thiele

Optimistic, I don't see…

Matthew Heimermann - J.P. Morgan

You can use comfortable, if that's easier.

Patrick Thiele

I think, I don't see an awful lot of difference on the reinsurance market place I think the trends that were in place on January 1st are generally the trends that were continued in on April 1st. And I don't know that I have changed my view as to the second half of the year I think it's a little early to call a major across the board, across all lines, turn in the marketplace. So I don't think there's been a significant change in my view of the reinsurance market place. I think I have become, obviously with Albert's help a little more optimistic about the capital markets and the credit market where I think we do have as Albert said an opportunity to capture some attractive rates of return with relatively modest amounts of risks.

Matthew Heimermann - J.P. Morgan

Okay. And then just there seem to be some signs that at least, well some signs and some leading indicators that there is more, there could be more price stability on the primary side. I guess how much would primary rates need to increase before some of the proportional business started to look more attractive to you assuming that the relative price that the reinsurers are charging doesn't change?

Patrick Thiele

That's obviously a difficult question to answer. A lot of the proportional business that we're seeing from say, midsize, regional insures in United States and midsize companies in Europe is priced in the high single digit return on equity underneath our methodology which does include risk free rates in the pricing. So it's not wildly out of line with what we would think to be attractive levels. So I don't think it's massive amounts of price increase that would be necessary and frankly I am not sure that massive amounts of price increases on the primary side are likely to happen. Given the current economic environment it's difficult to see really major movements in pricing for the primary guys but I am probably not the best person to answer that question. Obviously we see stuff with a little bit over lag as a reinsurer as opposed to primary. So I would rely more on the primary companies in terms of their view of their market. Albert?

Albert Benchimol

I think if I had to add one comment to that as we think about changes and increases and so on so forth. Just to put in context where we are versus where we've been is not the depths of a down market. I mean most of the lines of business had reasonable profitability. You look at the industry the last few years obviously it got clocked on Katrina, Rita, Wilma. But by and large the profitability has not been so bad that we need significant successive double-digit renewals. So Patrick’s comments about we just need a little bit here and there needs to be taken in the context of where we've been, which hasn’t been that bad.

Matthew Heimermann - J.P. Morgan

I think that's a real fair comment. Thank you.

Operator

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

Vinay Misquith - Credit Suisse

Hi, good morning. During the Jan 1 renewals, I believe the guidance was for the US reinsurance segment to be up 15%, and it was down 6% this quarter. Just wondering what happened between that guidance and your results? Did you see less of an opportunity in the ag space?

Patrick Thiele

We saw a less premium in the ag space, but that was primarily a function that we estimated what we thought our premiums were going to be on January 1. For the January 1^st renewals we didn’t have the complete information in January. Agriculture, as you might know even though it’s supposedly January 1^st renewal, it never actually renews until mid-March. So we put an estimate in that press release which turned out to be about $20 million to $30 million higher, frankly partly because of the continuing decline in the price of the commodity. There is also one small timing difference on one renewal which was actually a 12/30 renewal that we included in the January 1^st estimate but doesn’t earn out at the same or doesn’t write at the, doesn’t come in at the same level in terms of the first quarter. So adjusted for those two there was really no significant difference between what we thought we saw at the January 1^st renewals and what we reported.

Vinay Misquith - Credit Suisse

Okay. In terms of demand for reinsurance, I believe we thought that maybe the mutual insurer would buy more reinsurance. Have you seen that all? Or do you expect that in the future?

Patrick Thiele

It's a little bit of a tale of two markets. We've seen decent numbers of opportunities in the US in the regional marketplace. And we actually saw a little bit growth in the first quarter because of that marketplace. Those are tough buyers of reinsure though. In fact, the pricing is still a little bit thin. The big quota shares that I think people were hopeful of developing from a number of the mutuals who had significant exposure to the investment market has by and large really not come about.

In Europe, it’s a little bit different there, two trends are going on as I mentioned in my comments. One is the big guys continue to consolidate, but there are reinsurance programs especially after making purchases of other insurance companies which is decreasing demand of somewhat. But also there is still is, primarily in Southern Europe and a little bit in Eastern Europe continuing trend away from proportional treaties or non-proportional treaties. We lost a significant amount of business in the first quarter in our global P&C segment to those two factors.

Vinay Misquith - Credit Suisse

One last question, on in the US and global reinsurance segments, the accident year technical ratio was more than a 100%. Could you comment on your willingness to write business at these levels?

Patrick Thiele

We don’t really use technical ratios. Technical ratios are nice shorthand in terms of thinking about profitability. But we write to underwriting year return on attributed capital. We still believe that over our total portfolio, including CAT and non-CAT, we are still pricing to a adequate rate of return, given where we are in the cycle.

Vinay Misquith - Credit Suisse

Thank you.

Operator

We will hear next from Mark Dwelle with RBC Capital Markets.

Mark Dwelle - RBC Capital Markets

Yeah, couple of questions. In your opening comments, you kind of characterized global specialty, CAT, and Life businesses as being ones where based on constant exchange rate, where you saw some positive growth. Can you characterize between what portion of those increases were sort of demand driven? And what portion were price driven?

Albert Benchimol

Well, I think on the CAT side, if you look at where we are with regard to exposure as we, bottom-line haven't really increased our peak exposures. We may have made a couple more, used more of our exposure in some of the secondary markets where there were some opportunities. But by and large, I would say that is on pricing basis. The other line of, so the real CAT exposures were up approximately 10% through April 1. That is not a reflection of increased exposure, significant amount of increased exposure in the major peak zones in the US that’s more of a reflection of the growth that we saw in Japan and Asia on April 1 and some continued filling out of CAT lines in Europe. I think, in terms of the energy, it's a combination of the two. There was some very good pricing movement and obviously we responded with taking on more volume there.

Mark Dwelle - RBC Capital Markets

Okay. That’s hopeful. In terms of the, you commented related to the ag business. Could you comment in dollar terms how much of reduction that was kind of on a year-over-year basis?

Albert Benchimol

Sure. Just to give you some background, we think that because of some of the changes in pricing of things like corn, soya, wheat so on and so forth, we believe that the total ag market in the US this year is probably going to be down some 25% from close to $10 billion to close to $7.5 billion. In our case, we see our ag premiums going down approximately 10%. So, there has been some market share gains if you would. But that should give you a sense of the various changes in market and ourselves.

Mark Dwelle - RBC Capital Markets

That's helpful. The last question I had in terms of, it seems like for the most part there haven’t been a lot of changes apart from mix in terms of the major lines of classes of business that you have been writing. Are there any new business areas or new lines or specialties that you considering or maybe that you’ve moved into that or maybe we are not aware of?

Albert Benchimol

We are 150 year old industry, so it's hard to find and we are well diversified reinsurance. So, it's hard to find new and undiscovered specialties and geographies. We continue to expand nicely in Brazil, where we have a relationship with the ex-national reinsurer there. We have found a few more opportunities in Asia as that market begins to stabilize here in the last few months. But we have not, we continue to try to expand in the regional segment in the United States. But if you are looking for brand new classes of business or brand new geographies, what you see here, what we currently have is what you are going to get. There just isn’t that many undiscovered pockets of loss free premium existing in the reinsurance world.

Mark Dwelle - RBC Capital Markets

Not boldly going where no one has gone before?

Patrick Thiele

We are not usually very good at that. I think we are relatively cautious organization and we like to move into new areas at a pace which allows us to learn what the pitfalls are going to be, unlike some of our banking brethren who seem to be able to expand very rapidly with products they don't understand.

Mark Dwelle - RBC Capital Markets

Okay. Thanks very much.

Operator

We will take our next question from Brian Meredith with UBS.

Brian Meredith - UBS

Yeah, a couple questions for you. First one, Pat, a little off the wall here. What exposures would there be in your business to some kind of a pandemic risk?

Patrick Thiele

That actually is a pretty good question. We model that out as best we can. It’s a very difficult thing to do obviously, but we are exposed to mortality risk and the biggest mortality risk that we have is pandemic. We typically use, as the industry uses, the 1918 flu epidemic as kind of the 1 in 100 year event. We would certainly have some exposure at that kind of level, if difficult to quantify but we certainly believe that 1 in 75 to 1 in 100 year pandemic would be less than $100 million to us.

Brian Meredith - UBS

Is there exposure in the P&C business as well as Life business?

Patrick Thiele

You could think of, yes, continued exposure, Property exposure, liability exposures but that really is a question mark, I don’t think anybody is ever come up with an answer yet to. I couldn’t hazard an estimate on that one.

Brian Meredith - UBS

Okay. The next question would be, any impact in the quarter from premium accruals basically heading downwards just because some of the cedents are just not producing as much business. Do you expect that might be a potential issue here during 2009?

Patrick Thiele

Yes, that's what I said, that was what I was trying to say in the first part of my remarks was in fact you are going to see that in our quota share treaties. As the premiums are under pressure in the primary market and it seems everybody is reporting down 7% in terms of net written premiums in the United States and I expect about the same in Europe. My expectation is that the premium projections in number of our clients have given us, may turn out to be too high, Albert?

Albert Benchimol

Two comments, obviously there is component of that in every year and every quarter as we receive adjustments. The adjustments this quarter were in fact a little bit better and so then they were in the first quarter of 2008. But reflecting some of Patrick's comments in a number of lines where there's been a pattern like that when we write our business we make sure that we take a reserve against the estimate. So, we in fact will report net premiums written that are generally a few percentage points lower than have been advised to us by clients. And we will only in future periods determine whether the reserve that we took was too little or too high, but we do try to build a little bit of prudence in our reported net written premiums. But that is very much depended on the quality of the information and the timeliness of the information we get from our clients.

Brian Meredith - UBS

Great, and last question, Pat. Any changes in your view on special liability exposures? Any credit crises?

Patrick Thiele

No, we saw a continued development in terms of the number of lawsuits. By our count, the lawsuits are up to, this is for specially casualty D&O. Financial institution D&O is up to about 225 up from about 190 at the end of the year. I am talking US only. Subprime is up from 140 to 180. Our market share is beginning to diminish, if you will over the number of lawsuits that we’re exposed to. Our incurred continues to go up but it still to be frank has not reach the level I originally had thought it would reach. But I still believe in fact the losses will occur.

Now we obviously are tracking the Madoff issue as well. Lawsuits are beginning to be filed around the Madoff disaster. And we are just starting to look into the Stanford potential as well. So I think as this general financial crisis, even though the financial crisis itself maybe peaking and stabilizing in fact the specialty casualty, the liability losses that will occur because of it are probably still growing.

Brian Meredith - UBS

Thanks.

Operator

And we have no further questions at this time. So we will conclude today's conference. We would like to thank you all for your participation.

Patrick Thiele

Thank you very much.

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