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Executives

Neill Currie - President and CEO

Jeffrey Kelly - EVP and CFO

Kevin O'Donnell – President and Global Chief Underwriting Officer

Peter Hill - IR, Kekst and Company

Analysts

Michael Nannizzi – Goldman Sachs

Michael Zaremski – Credit Suisse

Amit Kumar – Macquarie

Gregory Locraft - Morgan Stanley

Jay Cohen – Bank of America/Merrill Lynch

Ryan Barnes – Langen McAlenney

RenaissanceRe Holdings Ltd (RNR) Q1 2013 Earnings Conference Call May 2, 2013 10:00 AM ET

Operator

Good morning. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe First Quarter 2013 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I’d now like to hand the call over to host Mr. Peter Hill, please go ahead sir.

Peter Hill

Good morning and thank you for joining our first quarter 2013 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive a copy, please call me at 212-521-4800, and we'll make sure to provide you with one.

There will be an audio replay of the call available from approximately noon Eastern Time today through midnight on May 23. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The passcode you will need for both numbers is 29548992. Today's call is also available through the Investor Information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on July 11, 2013.

Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings, to which we direct you.

With me to discuss today's results are Neill Currie, Chief Executive Officer; Jeff Kelly, Executive Vice President and Chief Financial Officer, and Kevin O'Donnell, President and Global Chief Underwriting Officer.

I'd now like to turn the call over to Neill. Neill?

Neill Currie

Thank you. Good morning, everyone. RenaissanceRe reported a good first quarter achieving an operating ROE of 22.5% and growth and tangible book value per share plus accumulated dividends of 4.8%. Our results reflected the quality of the book of business we were able at one-one (ph) along with the low catastrophe loss activity and strong investment income.

On our last call we mentioned that we had expected ample capacity and a lack of overall growth in demand for property catastrophe reinsurance in the U.S. to continue through 2013. As a result of these factors, we’re seeing an increasingly competitive landscape so far this year and Kevin will provide more detail on that shortly.

In many ways we have seen similar drivers of pressure on the market before. There is good business to be written and as in this kind of environment that our underwriting discipline experience and long term market presence over the last 20 years really come into play.

With the increase of third-party capital comes opportunity for company like RenRe. For well over a decade we have been uniquely position to sell across the spectrum of products that our clients want to buy. And we can improve the efficiency of our portfolio by purchasing coverage ourselves as well.

Matching the right risk with the right capital is not an easy thing to do. But, it’s an art that we know how to execute. Our clients and partners, a large number of whom have been with us for many years recognize this. Our established presence in the marketplace positions us to access the most attractive business and to construct high quality portfolios, year in and year out.

Our underwriters are currently working on the mid-year renewals an important period for us a key participant in the Florida market. We’re seeing increased capacity including from the capital markets, who are looking for a larger share of this market. While we fully expect the competitive renewal season in Florida, once again, we believe that our long-term presence in this market and the strong relationships we have there will continue to result in our being a first call partner enabling us to maintain an attractive book of business.

I’ll Kevin provide more details around our other businesses later, but I’ll highlight a couple of units. Our specialty unit has taken measures to grow its business to broaden its product offering. We have incorporated a new Bermuda based balance sheet that will expand the reach of our franchise, enabling us to provide a broader range of specialty reinsurance lines including quota share reinsurance to our U.S. based clients.

I will also mention our Lloyd’s unit, which has been making good progress and gaining scale and establishing itself in the London market. The unit had a profitable quarter, and I’m pleased with the team we’ve built there.

In summary then, I like our current position. We’ve a great team that is constantly looking for ways to optimize our portfolio of risk. Our ventures group continues to do a good job sourcing the most efficient capital for the right type of risk and providing capital for our clients in the form that they require it. We have the core capabilities, thecapital strength, and experience to serve our clients and shareholders well going forward.

So, with that I will turn the call over to Kevin. Kevin?

Kevin O'Donnell

Thanks Neill and good morning. Today, I’d like to focus on our businesses in the upcoming U.S. renewal. As Neill said, we had a strong first quarter, due primarily to the low level of cat activity, but also in no small part to the quality of the book of business we were able to build at one-one. This along with our strong position in the market should to service well on the year in which the business environment has become more challenging.

Starting with U.S. property cap, our belief is that there will be flat demand for reinsurance and an increase in the supply of capacity looking for reinsurance risk. As far as demand, we’re seeing a reduction of limit nationally with large U.S. insurance companies retaining more risk, and in some cases accessing coverage through the ILS market.

In Florida, there has been some incremental demand coming from citizens, and we anticipate a small amount of additional purchasing from both new and existing players in the market. In sum, we expect the U.S. property cat limit purchased overall will be relatively flat year-over-year.

With regard to supply, there has been an increasing appetite for cat risk from both traditional reinsurers and their side cars, and also directly from non-traditional capital providers. This combination has resulted in increased pressure on pricing year-over-year. Even though we anticipated these trends, the impact on price is greater than our initial expectations.

As Jeff will discuss in greater detail, we currently expect that our managed cat premiums will be down a little more than originally forecasted. As always, we remain disciplined and have reduced or eliminated programs that no longer makes sense in our portfolio.

The good news, however, is that we believe the insurance markets both in Florida and the U.S. generally are likely to grow stronger overtime. Our market is constantly changing, and with stronger fundamentals on the insurance side, I expect that reinsurers will see growth over the longer term.

The reinsurance industry has developed multiple vehicles to accept third-party capital in many forms which allows funds to quickly move in and out of the business. We’ve focused on matching appropriate risk efficient capital for many years and have developed a broad range of platforms to meet the needs of both capital and customers.

We all should keep in mind, however, that just because a company can form a vehicle or grow third-party capital that doesn’t necessarily mean that they should. Seeking additional capital should be driven by other considerations such as better serving our customers by providing coverage in the form and at the price they seek, this holds equally true with our investors who trust us to build portfolios that provide adequate returns for their capital.

Our years of experience in managing third-party capital have taught us the value of discipline and patience, and it’s this approach that informed our decision not to create a Florida-focused side car this year. Having said that, we believe there is still ample opportunities to write good business, and we’re well poised to succeed in this environment.

If we divide a market into three buckets, adequate return, low return, and negative return, we’re seeing risk move from the adequate bucket to the low bucket and still relatively limited growth in the negative return bucket. There remains sufficient risk in acceptable bucket of U.S. property cat business and to careful risk selection and portfolio management, we continue to find enough good business to construct an attractive portfolio.

One of the benefits of being around for 20 years is that we’ve seen similar market dynamics before, we’ve experienced operating and a changing market and have more tools than ever to manage our book. And, we feel confident about our ability to build an attractive portfolio.

Moving onto the international cat and retro markets. International market continues to experience pressure from ample capacity although there remain pockets of opportunity in places such as Japan. We expect many of the other markets to be challenging that said, we continue to access business that we find attractive.

The bulk of retro renewals are typically at one-one (ph) and the retro market has not changed significantly since then. These markets are however facing the same dynamics as other markets and those programs that were marketed last quarter were oversubscribed. Despite market conditions, we continue to find good opportunities for Upsilon Re our side car providing structured retro.

The flip side of the retro point is our ceded program probably goes about saying that we find this market to be attractive. We continue to build our toolkit to access this business, issuing our first contrasting (ph) security in a project transaction. This is consistent with our approach of providing risk to the capital markets in the form in which they wish to take it. We anticipate that we will continue to use retro and other capital to optimize our in-force portfolio.

Our specialty business had a strong quarter and continues to access new business. The team is working hard to expand the franchise and we saw new opportunities in both new and existing lines of business. For instance, the U.S. drought created opportunities in the crop space and we’re able to grow this book of business.

Our Lloyd’s Syndicate continues to grow in line with expectations. When we made the decision to start Lloyd’s it was in the belief that it would allow us greater access to specialty and casualty business. I’ve been pleased with the syndicates’ growth in this regard. Going forward, Lloyd became working hard to increase casualty lines in order to take advantage of the gradually hardening market.

Turning to our ventures group now, we continue to see investors in this sector and we believe we’ll enjoy privileged access to efficient capital which we can match against appropriately priced list. We will only deploy this capital when it is helpful to our customers and provides appropriate returns for the risk we take. All forms of capital have a role in the reinsurance business, but it takes discipline, patient and a comprehensive understanding of the entire system to deploy it appropriately for the long term.

To wrap all my comments, we had a great quarter despite some of the market trends I discussed I’m happy with our portfolio and optimistic about our future and our ability to grow our access to both desirable risk and efficient capital.

With that thank you and I’ll turn the call back over to Jeff.

Jeffrey Kelly

Thanks Kevin and good morning everyone. I’ll cover our results for the first quarter and then give you an update to our 2013 top line forecast. First quarter profitability was strong benefitting from solid underwriting, low catastrophe losses and healthy income from our portfolio of other investments.

Our top line decline in the first quarter mostly reflected the more limited growth opportunities we experienced at the January renewals. There were no major catastrophe losses during the quarter and we did not make any material adjustments to our estimates for net losses from the events in 2011 or from storm Sandy in the fourth quarter 2012.

We reported net income of $190 million or $4.23 per diluted share and operating income of $177 million or $3.92 per diluted share in the first quarter. The combined ratio was 36.2% in the quarter and underwriting income totaled a $173 million. The annualized operating ROE was 22.5% for the first quarter and our tangible book value per share including change in accumulated dividends increased by 4.8%.

Booked value growth was driven by the strong earnings in the quarter although an increase in treasury yields shareholder purchases executed at a premium to booked value were slight offset.

Let me shift to the segment results beginning with our reinsurance segment which includes cat and specialty followed by our Lloyd segment. Managed cat gross premiums written to client $29 million or 5.2% compared with a year ago. There were no reinstatement premium adjustments in either period. This includes $54 million a gross premiums written by our side car venture Upsilon Re II in the current year period compared with $37 million return by its predecessor Upsilon Re in the first quarter of 2012.

Both Upsilon Re vehicles are targeting opportunities primarily in the structured retro marketplace. The top line decline was largely driven by signs of increased competition at January and as a result of more than adequate capacity in the cat marketplace.

As a reminder managed cat includes business written on a wholly owned balance sheet as well as cat premium written by joint ventures DaVinci and Top Layer Re and our side cars, Upsilon Re and Tim Re 3. The first combined ratio for the cat unit of 20.6% unaffiliated from low catastrophe benefited from a low catastrophe loss experience. Net favorable reserve development totaled $18 million for the cat unit in the quarter. This was driven primarily by favorable development on a range of smaller prior events with no material adjustments made to loss estimates for the larger more recent events from 2011 and 2012.

Specialty gross premiums written declined 18% in the first quarter primarily driven by timing issues related to the inception of a few multi-year transactions in the first quarter of last year. Percentage growth rates for this segment can be uneven on a quarterly basis given the relatively small premium base. The specialty combined ratio for the first quarter came in at 57% as loss activity was generally benign.

Favorable reserve development totaled $15 million in the quarter, $10 million of which related to our annual review of our initial expected loss ratios and loss development factors. In our Lloyd segment we generated $74 million of premiums in the first quarter, an increase of 36% compared with the year ago period. The Lloyd gen (ph) came in at a combined ratio of 89% for the first quarter also benefitting from generally low loss activity. The expense ratio remained high at 50.5%, but we expect this to continue to decline sequentially as business volume increases.

Turning to investments, we reported net investment income of $44 million in the first quarter. Our alternative investment portfolio again a $22 million in the first quarter driven by continued solid results in our private equity and bank loan portfolios.

Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio and totaled $24 million in the quarter. The total return on the overall investment portfolio was 0.8% for the first quarter benefitting from strong returns on the alternative investments and some realized and unrealized gains in the values of non-government fixed income securities from a decline and spreads. Raising yields on treasury securities during the quarter resulted in a slight offset to that.

Our investment portfolio remains conservatively positioned primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure. The duration of our investment portfolio remain short at 2.3 years and has remained roughly flat over the course of the year. The yield maturity on fixed income and short term investments remain flat at 1.4%.

Subsequent to quarter end, we instituted a hedge using treasury bond features to lower the overall duration of our fixed income portfolio by a quarter of the year. As a result of that action the current of the portfolio is right around 1.9 years. As we have stated on recent calls, we believe we have capital in excess of our requirements given our current portfolio and our outlook for business growth.

Recall also that we took steps earlier this year to return $150 million of capital in DaVinci third-party investors. Also during the first quarter we repurchased 1.4 shares for an aggregate cost of $111 million. All of the share buybacks were completed in January. Additionally, we repaid $100 million senior note issued that matured in the middle of February.

Inclusive of those actions our balance sheet remains strong with a strong capital position and from a liquidity standpoint over $500 million in cash and securities at our holding company.

Finally, let me turn to update our top line forecast for 2013. For managed cat with some visibility into the trends for the mid-year renewals, we’re changing our guidance from down 5% to down 10% including in 2013, excluding the impact of reinstatement premiums.

In specialty reinsurance we’re changing our top line guidance of down 5% to an expectation that we will see some growth in premiums for 2013. And in our Lloyd’s unit we continue to expect premiums to be up over 30% for the year.

Finally, I would remind everyone that these premium estimates specially this early in the year are subject to considerable uncertainty. We don’t use them as targets or goals or purpose and providing them to you as to give you our best estimates at this point in time.

And with that I’ll turn the call back over to Neill.

Neill Currie

Good, thanks Jeff. Operator, we’re happy to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Thanks. Couple of questions on the capital management. So, $150 million came out of DaVinci, so it sounds like that was financed by the holding company and then you bought back some debt and then the share buybacks. I’m just trying to get an understanding, so should we interpret that as being consistent with your view on managed cat premiums being down, you’re just sort of taking capital that you don’t think you will need this year out of the business and then just one follow up, thanks?

Jeffrey Kelly

Okay. So, on the senior debt issue that was actually an issue that matured. We didn’t buy it back. But, in terms of the $150 million we returned, that actually left DaVinci pretty much flat in the quarter. So, we were just returning additional, we took in some additional capital, we returned some that had been earned, and the net result was DaVinci was about flat in the quarter. But, it does reflect whether it’s at DaVinci or RenaissanceRe. It does reflect our view of our ability to deploy it in new business opportunities going forward.

Michael Nannizzi - Goldman Sachs

Great, thanks. And then just one question, I’m just curious and maybe this just reflects my lack of understanding about how this market works. But, obviously, there is a lot of interest in third-party capital as you guys mentioned upfront. I’m just curious what was the driver behind the redemptions, I would think that at this point in time there would be frankly more interest in a structure like DaVinci. Is it that investors, you can help us understand, investors in DaVinci wanted more flexibility, is it maybe that structures like Upsilon or other things that you’re doing allowed you to meet those clients’ needs in a different way or any color would be helpful, thanks?

Neill Currie

Sure, this is Neill, Michael. I couple of things, first of all, we’re always looking for good long-term players to add to DaVinci. In my opening comments, I talked about matching the right capital with the right risk, and in DaVinci, it’s very important to get long-term investors into DaVinci. For those long-term investors, one of the attractions to DaVinci is that we accordion the capital up and down based upon the opportunities we have out there. So, it’s a nice way to play in our business without having to take market risk, just a risk of our underwriting. You get in and you get out at book value. So, Kevin would you like to add anything to that.

Kevin O'Donnell

I think that’s exactly right. The one area that we’ve seen ample interest from third-party capital, and we do grow the Upsilon vehicle, but it really is about managing all the different types of capital that we have, and in turn match it against the best risk that we can find to meet those return profiles.

Michael Nannizzi - Goldman Sachs

Great, thank you.

Operator

Your next question comes from the line of Michael Zaremski with Credit Suisse.

Michael Zaremski – Credit Suisse

Hi, great, thanks. I noticed the catastrophe segments ceding levels ran at 36%, which is up from last year, was that driven by Upsilon II or were there other dynamics I should think about on modeling that out for the rest of the year?

Kevin O'Donnell

I think, what you’re seeing there mostly is Upsilon II. One difference that we have to a lot of the other reinsurers is that we don’t go out with the traditional reinsurance program, we will buy at different points in the year depending on how our portfolio is shaped, but the change specifically you are referencing is really Upsilon and dominated by Upsilon.

Michael Zaremski – Credit Suisse

Okay, got it. Okay. And another numbers question, your operating expense ratio ran a couple points higher than previous first quarters, if you can elaborate on the drivers?

Jeffrey Kelly

So, operating expenses were up in the first quarter a bit, and I think, the principal driver of that, especially if you looked at it compared with the first quarter of last year, last year we had a larger, we had a, I think it was about $5 million reversal in a compensation accrual. This year’s first quarter, that reversal was much smaller, so the delta between the first quarter last year and the first quarter of this year was – a vast majority of that was related to that change in the accrual reversal essentially for incentive compensation.

Michael Zaremski – Credit Suisse

Okay, got it. Thank you guys.

Operator

Your next question comes from the line Amit Kumar with Macquarie.

Amit Kumar – Macquarie

And good morning. I guess one follow up and one other question. Going back to the discussion on capital, what do you think about capital management during the hurricane season, and since this is freeing up more capital, what are your updated thoughts on a possible special dividend down the road?

Jeffrey Kelly

Last year, I think we said as we went into wind season that we thought there was some possibility we would refer to shares through our wind season. That was a very -- that was, I think the first time in our history we have done that. And that was a reflection, I think of both the confidence we had and the strength of our capital position, and also the kind of relative valuation of shares at that point.

I think, we still believe we have a very strong capital position and have excess capital. I think at this point, it’s probably a little early for us to decide whether or not we buy shares during wind season, but we’re not opposed to that if circumstances are such that looks attractive. As it relates to special dividend, we always look at, I think, all avenues open to us for returning capital to our shareholders in a way that makes the most sense with our ultimate goal being to increase the growth rate and tangible book value per share going forward. So, I think we had a little bit of discussion on this point last call, I think, the valuation of the shares would probably have to be pretty high to warrant a special dividend.

Our preferred way of increasing the growth rate and tangible book value per share is to do it via share repurchases at attractive levels. So, that’s not to say we wouldn’t consider it, I would say that if we were going to consider a special dividend, it would be very close to the end of the year, certainly not before wind season.

Neill Currie

This is Neill, I would put an exclamation point on the earlier comments that Jeff said in terms of preference for share we purchase and the valuations, it would be at a higher price point then we’ve got now.

Amit Kumar – Macquarie

Got it, that’s helpful. The only other question I have is, going back on under the discussion on third-party capital and its impact, one other company earlier today sort of opined that probably they expected XOL to be down 5% to 10% and they sort of drew the distinction between XOL and RPP, and they said, RPP might be down 10% to 15% and I was just wondering if you had any thoughts on that or would it be possible, maybe it’s too early, would it be possible to put some sort of a range around those numbers, what you might be seeing, thanks?

Jeffrey Kelly

I think, what we’re talking about is, there is a lot of capital, lot of reinsurance capital and non-traditional capital looking for risk and our expectation is on a nationwide basis, there won’t be growth and demand for reinsurance cat purchase. So, I think that dynamic would indicate that there is going to be some pricing pressure. I think the distinction that you’re drawing between an RPP and the traditional market really has extensive, the difference is really single sharp limit to reinstatable limit. Single sharp limit being more dealing to third-party capital because it lends itself easier to collateralization. I think that there is many ways in which an RPP can be managed within a program in either one free prepaid or whatever. So, I think there could be more competition potentially for RPPs because it is more dealing to a second set of capital. But, at this point it’s a little too earlier to call exactly what those rate changes will look like.

Amit Kumar – Macquarie

Okay, that’s all I have for now, thanks for the answers.

Operator

Your next question comes from the line of Gregory Locraft with Morgan Stanley.

Gregory Locraft - Morgan Stanley

Hi, good morning. Just wanted to delve a little deeper into the Florida market, what I’m really trying to do parse units and price and I know you guys talk in terms of premium dollars. But, just looking at the glide path from last November to today, is it fair to say that units are better than you sought back then and prices worse or can you give us any thoughts with regards to citizens deep hop (ph) and how that’s going to play out at June 1?

Kevin O'Donnell

To help me answer the question, when you say units what are you referring to?

Gregory Locraft - Morgan Stanley

I guess for means demand, just unit demand or the amount of reinsurance that needs to be purchased versus the price per unit or price per exposure?

Kevin O'Donnell

So, starting at a macro level we’re saying is, we think the nationwide demand will be reasonably flat. There we talk a little bit, but we think U.S. national limit purchase is down a bit, which implies there is some growth in Florida. I think, looking at that we’re seeing that the startups and the additional unit purchased is probably the area of disconnect with us and the rest of the market. But, we see that as a smaller contributor to growth and I think what some others are thinking.

With regard to citizens I think, citizens is, we have belief that much of the risk that was taken out of citizens after last wind season will end up migrating towards citizens by this wind season. It’s a pattern we’ve seen before and I think we have pretty good tools to help us understand how those flows will work which could be in other area and which we’re seeing in the market a little bit differently. I think, at the nationwide level we’re probably pretty much in line with what others are saying.

As far as the price per unit of risk, I think that’s something that we’re working on right now, we don’t have a significant portion of our book bound yet. But, our tools are designed that we can move pretty fluidly throughout any structure to accept risk and any structure to seed risk to optimize the spread between the two. So, whatever happens on the frontend price changes per unit of risk, I would hope that we can manage more efficiently because of the tools that we have been build and the experience we have in doing this.

Neill Currie

Greg, its Neill. I might add one comment to Kevin’s comment. We tend to look at things at a point in time, we got the renewals now, so focused on that. But, when you talk about this flow of business and premium between citizens and the other market, we do think there will be some increased demand over the coming year as things evolve there. So, right now, we’re not seeing as much demand, but there may be some more demand coming through the pipe over the next 12 months.

Gregory Locraft - Morgan Stanley

Okay. So, there is a longer tail to that effect. I guess what I’m really trying to get at is back in November you thought the year would be flat, in February you thought the year would down 5 and now it’s down 10 and so something is slipping considerably relative to the view internally five, five plus months ago. And, I guess, it seems to me that the citizen situation is a break to the positive so therefore, what seems to, has to be slipped in the negative then is just, is just, it’s all pricing, is that a fair assessment?

Jeffrey Kelly

Greg, you’re always on the ball. Couple of comments here, there are few things, when you these changes there is all sorts of movements, there is deals coming into the portfolio, there is deals coming out of the portfolio, is it low layer, is it high layer, is it price etcetera. One of the things that changed is there were a couple of large accounts, we had pretty sizeable participations on that renewed in the second quarter and those clients bought less from the traditional reinsurance market. So that started off on a negative flow and yes, there is some pressure on pricing. So, Kevin do you like to add to that.

Kevin O'Donnell

I think, the pricing is always done at the margin so the amount of capacity coming in particularly focused on third-party capital I don’t think is sufficiently large for it in itself to moving the market. It’s really the momentum and the speed in which the market, particularly in the cat fund side has changed that is informing how people are behaving. So, I think there has been a bigger change specifically in that market and the speed in which that change occurred is not something that we saw. I wouldn’t necessarily sit here today and drive our ration out that what we are seeing in our market from last year to this year is something that I would continue from this year to next year.

Gregory Locraft - Morgan Stanley

Okay that’s great color. And then last, just a small in for Jeff is, you mentioned in your commentary that you took out a hedge to lower portfolio duration, can you talk a bit about this thinking and the logic behind that?

Jeffrey Kelly

Sure, Greg. We’re actually making and I don’t mean to over dramatize, this is only a quarter of the year, but we’re making actually two relatively small tactical changes in the positioning a portfolio. The first is that we’re making this reduction in the duration of the portfolio, the second is that we’re actually a small increase in our allocation to equities via a passive allocation to the broader equity market. So, those two are both born of the same view of the, I would say the macroeconomic tractors that are affecting the capital markets today and we continue to believe will affect them going forward.

And the duration ones principally I view that sometime in the next 12 months or so the feds is going to begin to remove it’s stimulus via the significant asset purchases in the very long end of the market and our belief is when that occurs or probably better set, when the market concludes it about to occur, we expect there is a reasonably good chance of a material increase in long-term interest rates. So, we want to begin to position a portfolio to be less impacted by that. So that’s really the duration has.

The increase in the equity allocations really just a point of view that the economy is gaining a little bit of self sustaining putting and consistent with the view that at some point the fed takes out its stimulus and equities are probably marginally, not marginally, somewhat better placed to put money. I don’t want to overemphasize that I think, we emphasize or we anticipate a total commitment in the near term to the equity market of about $100 million. So, it’s not huge, but it is bigger than we have been there before.

Gregory Locraft - Morgan Stanley

Okay, great. And then, I guess, just its been a long time since I’ve done the sensitivity, but if interest rates go up, what is the sensitivity in the year, in the year earnings and your ROE and that’s my last one, thanks again?

Jeffrey Kelly

It’s probably worth a longer discussion, the answer is it depends, it depends on how much and where on the yield curve. Most of our investment securities are actually very short term and inside of five years. So, we think that the increase that’s likely to take place is actually at the very long end of the curve at least initially. And that’s we set our hedge in 30-year treasury bond features. But, I think the shortness of our duration inside now of two years really makes for a very limited impact on the earnings and equity of the company from a raising interest rates.

Neill Currie

Yeah, Greg, it’s Neill. Just maybe for the benefit of some other folks on the call or that who read the transcript that are not as up to speed in our company as you are is, on a comparative basis compared to some other folks there is less risk there for us then some of our competitors because we don’t have as much leverage on the balance sheet in terms of assets to equity and of course, we have a pretty duration of high quality, back over to Jeff.

Jeffrey Kelly

Yeah, just not to kill the question with answers Greg, but in the, as of the end of the year we do have a table in our annual report which show that the sensitivity of the portfolio at the end of the year that sensitivity to just a shift in the level of rates was about $146 million for a 100 basis rate, immediate increase in rates. So, we do anticipate it would be somewhat less than that today.

Gregory Locraft - Morgan Stanley

Okay, great, thank you so much.

Operator

Your next question comes from the line of Vinay Misquith (ph) with Evercore Partners.

Unidentified Speaker

Hi, good morning. The decline is certainly a little bit disappointing though what ROE do you think that you’re riding the business ride now, both from our property cat perspective as well as from a companywide perspective?

Kevin O'Donnell

Can you repeat the last part of the questions I didn’t hear it?

Unidentified Speaker

What ROE do you think are getting on the business that you’re riding both for the property cat business as well as for the company as a whole?

Kevin O'Donnell

I think, we look at the business in multiple different ways and they talk about specifically about one measure against it, isn’t the way we’re most comfortable thinking about it? We’re constantly comparing the portfolio that we have against the portfolio that we intend to write, so we’re creating performance as to where we think the market is going. In each of the performance we create then we try to optimize what we can do with the pricing environment that were being presented. And I believe we’re going to end up is in a portfolio that is significantly better than the market, similar to what we had last year. So, whatever we’re going to see in the market I would expect that our portfolio will continue outperform by a wide portion. But, as far as giving a specific number on that I don’t think that’s the best way for us to talk about our book of business.

Unidentified Speaker

The second question is on the Florida market. My sense says there is more demand, now did I understand you correctly that your view is that that will take a longer to play out and that’s why softer guidance in the past?

Kevin O'Donnell

I think there is two interest to that one is we believe there will be some increase in demand in Florida for this year, but that’s being offset so at the U.S. limit purchase level it’s about flat. I think Neill’s comment which were reflecting more of the long-term growth prospects in Florida really in tune to the fact that the insurance market in Florida is actually looking pretty good and pretty healthy and I think as markets become healthy they particularly in Florida they will see more risk to reinsurance business, I think there is multiple ways in which we can see growth in Florida, one is just by traditional sums insured, but other by risk being transferred from the state to the private market and it’s our belief that the market, every dollar of insurance premium associated with the private market, more reinsurance dollars associated with it, which will enhance the gross prospects for the reinsurance business there.

Unidentified Speaker

Okay that’s helpful. And on the capital, you bought back $100 million debt this quarter, more than $100 million of stock, should we expect you guys to buy back more than a 100% of earnings given that the opportunity is less versus the past?

Jeffrey Kelly

Well, I wouldn’t focus on specific amounts like that Vinay, I think the way I characterize it is, we have always and are committed to return capital to shareholders that we don’t feel weak and deploy effectively. And it would be our intention over some period of time to do that. But, the precise method with which that’s done and the exact timing is, I wouldn’t bucket into any calendar quarter or calendar month.

Unidentified Speaker

Sure. But, it’s fair to assume that you’re sitting on more capital that you need right now, correct?

Jeffrey Kelly

It is indeed.

Unidentified Speaker

Great. One last, just a numbers question if I may. The fixed maturity income decline about $4.6 million this quarter versus the prior quarter, were there some derivative losses in that?

Jeffrey Kelly

Vinay there were actually three things that account for that decline. The first is that the average invested assets were down about $400 million in the fixed maturity portfolio that accounted for about a million and a half of the decline. We also had change in derivative income and that was $0.1 million so that’s about 2.67. And I’d say the remainder of it was the conversion of higher yielding assets being sold at gain. So, you saw that in the realized gains line and investment income that was somewhat elevated from previous quarter. So, we converted a lot of assets that were on the books at high yields realize some significant gains in that and then invest them at current market yields. The overall market yield of the investment portfolio was about the same.

Unidentified Speaker

That’s great, alright, thank you.

Operator

Your next question comes from the line of Jay Cohen with Bank of America/Merrill Lynch.

Jay Cohen – Bank of America/Merrill Lynch

Thank you. I guess the one area where there seem to be growth that you had mentioned was the crop, so I’m wondering if you could talk about what you’re doing there, what you’re seeing in that market?

Kevin O'Donnell

Our crop business is really focused on excessive loss more than quota share. So, although our premium number for that isn’t particularly large, we want to mention it simply because it’s a change in the risk profile. If you look back, it will create about 4 million of premium there, we’re going to be probably between $15 million and $20 million right now on an XOL basis. So, it’s a significant position we’re building there, it’s one we feel comfortable with. Just also split between our Lloyd’s operation and Bermuda, one of the lines that we write in both venues.

Jay Cohen – Bank of America/Merrill Lynch

Right, thank you.

Operator

Your next question comes from the line of Ron Bobman, a private investor.

Unidentified Analyst

Hi, the question for, I think for Neill. Unlike your competitors who sort undergo never ending revolving set of chairs as far as people moving from company A to company B to company C etcetera. You got tremendous employee retention which is obviously a testament to everything you built and cultivated etcetera. But, I’m wondering now with the cat market, the property market under so much growing pressure from convergence and capital market players, if the employee retention or the key employee retention is a greater challenge now then it’s been in the past, given you’re a industry leader and obviously have priced staff that any startup or competitor would probably love to attract?

Neill Currie

Ron that sounds like a great question from an investor, sometimes it’s a little bit of difference between the question the analysts ask and the investor. It is a good long range question. First of all, thank you for not asking the question during salary review time. All the guys around the table are grinning chaser cats, but it’s interesting. The phone rings off the hook around here and so, first of all we try to have an environment here where people enjoy working with each other, we actually have instituted, we have done it for years and have actually named it. We have a no jerk rule, we try to hire people that get along with the team and we don’t hire people just because they’re smart, have to get along with each other, the client. So, we got a team here that really works together well, also if people were to leave and go somewhere there is a risk of failure there, they don’t have the same support system, same tools or same flow of business. So, it’s pretty risky for them to put their reputation on land to go somewhere else. And you know, last but not least, we pay them oil, so people can do quite well stand here, but its holistic together, we have been very fortunate and frankly my guess is we will continue to be fortunate in that area. We may lose one or two over the years, but we have been fortunate and we want to keep that way.

Unidentified Analyst

Thanks.

Operator

Next you have a follow up question from the line of Amit Kumar with Macquarie.

Amit Kumar – Macquarie

Just one quick follow up. I wanted to go back to the discussion on citizens declaring house concept and hence SB1770 which has been meaningfully diluted, it doesn’t seem to be a game change here from what I am hearing. Even if the clearing house proposal gets done, when do you think is the earliest it can impact demand, are we already talking about 2014 renewals just based on the time it will take for the clearing house to be sort of set up?

Kevin O'Donnell

I think the clearing house if it does what I think it’s going to do which is allows risk or allows citizens to continue to shrink. So, it will hopefully provide a structure in which private companies can pull policies before they go into citizens. I think that’s a good thing and something that we should look to be helpful and picking up all the details that are required to allow that to happen.

I think, as far as implementation of it, practically it will have really a meaningful, the first meaningful impact it could potentially have will be 2014. I think with regard to deep hops there might more flexibilities to how deep hops are happening as well, so again, that’s probably opposed 2013 issue but I think specifically for the clearing house it more likely to be 2014, we just see any help from it from 2014 and 2013.

Amit Kumar – Macquarie

Got it. And do you have any view on legislation which has taken out the actuarial sound discussion altogether. It does not limit the upside what we would have previously thought?

Kevin O'Donnell

For U.S. now having the thought of legislative process there is lots of things that we get excited about seeing in there and we’re hopeful that they go through to completion. I think the actuarial rates would have been a good thing, but it’s one that we will continue to work on there. I think the trend in Florida is one that we see as very positive; we’re taking a lot of proactive steps to look at options to reduce the state involvement in the insurance market and allow the private market to grow. If we can be helpful with that we will continue to do so. Actuarial rate is always a good way to do it, but it’s one that it will live another day and see if it can go through into that support team.

Amit Kumar – Macquarie

Got it, thanks for the answers.

Operator

Your next question comes from the line of Sarah Dewit (ph) with Barclays.

Unidentified Speaker

Hi, good morning. I just wanted to follow up on your comments that you still believe you construct an attractive book of business at mid-year, I know you won’t quantify the models ROE the year you inspect to achieve, but could you help us understand at least directionally how the return, you’re achieving either, historical levels or historical cycles?

Kevin O'Donnell

What we have said before is coming off 2006 we thought was, sort of is the best market I have ever seen, I think we have traded back in (inaudible) since 2006. Looking at our book and the way I anticipate constructing it from a historic perspective I think it’s going to be a very strong book based on our 20 year history. One of the components of that is the flexibility we currently have with, not only with our ability to access business but our ability to manage our net position through seeded and through the partners that we have in DaVinci and in other vehicles that we have supporting us.

So, when we talk about our book in this context, we’re really talking about the net position that we’re able to build and that’s coming in from all the components being in rich business and shared business and seeded business.

Unidentified Speaker

Okay, great. And then, just on the specialty reinsurance premiums that were down a lot in the quarter, but you’re expecting some growth for the full year, what drove the decline and why do you expect that to rebound for the rest of the year?

Neill Currie

Well, the decline mostly Sarah related to the fact that in the first quarter of last year, we booked some multi-year deals in the first quarter and all of the multi-year premium came in the written premium. So, I think that kind of overstate somewhat the decline in premium weeks backed over the course of the year. We do expect good growth over the course of the year that leads us to the conclusion or the expectation that we will see some net positive growth.

Kevin O'Donnell

One of these, I think Neill touched on in, specifically also for Lloyd’s is we see some hardening in certain casualty and specialty lines so we’re going to continue to look for opportunities on either an XOL basis or quota share basis to continue to expand into those.

Unidentified Speaker

Okay, great, thanks for the answer.

Operator

Your next question from the line of Ryan Barnes with Langen McAlenney.

Ryan Barnes – Langen McAlenney

Hi, good morning everybody. Just had one question, I realize that the three year renewal still await the wait, but it seems like the early consensus is that kind of there will be more risk put back in the private market and just want to see what kind of, I guess, opportunities that will create for you and guess how you go about that?

Kevin O'Donnell

I think that three renewals is at the end of the year, so it’s got quite a bit of time before we have any certainty as to when that’s going to happen or what’s going to happen there. I think, it’s as far as, I believe there is a lot of appetite at least for us, and I think with other insurers to take conventional terror, and I believe there is a lot of capacity for it. I think the area of greater concern is really NBC and figuring out what that can look like. So, if you would ask me, here what I think like happen, but what I would hope happens is there is more transfer of conventional terror to the private market and if there is a federal back stop it really will focus on where its most needed which is NBC.

Neill Currie

One Kevin, I will take as usual there, but he might have mis-interpretationally said that it renews at the end of 2014 not 2013. Other than that all is usual.

Any other questions, operator?

Operator

And so, we have no further questions in queue.

Neill Currie

Well, terrific. Well, enjoy the day, tune-in in a quarter to see how we did in the mid-year renewals, thank you very much.

Operator

Thank you. This concludes today's presentation, you may now disconnect.

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