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RenaissanceRe Holdings Ltd. (RNR)

Q2 2011 Earnings Conference Call

July 27, 2011 09:30 ET

Executives

Peter Hill – Director, Investor Relations

Neill Currie – Chief Executive Officer

Jeff Kelly – Executive Vice President and Chief Financial Officer

Kevin O'Donnell – Executive Vice President and Global Chief Underwriting Officer

Analysts

Keith Walsh – Citigroup

Josh Shanker – Deutsche Bank

Doug Mewhirter – RBC Capital Markets

Gregory Locraft – Morgan Stanley

Brian Meredith – UBS

Jay Cohen – Bank of America

Vinay Misquith – Evercore Partners

Ian Gutterman – Adage Capital

Operator

Good morning. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2011 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. Mr. Peter Hill, you may begin your conference.

Peter Hill – Director, Investor Relations

Good morning and thank you for joining our second quarter 2011 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 will 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 August 17th. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The pass code you will need for both numbers is 81548995. Today's call is also be available through the Investor Information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on October 5, 2011.

Before we begin, I am 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, Executive Vice President and Global Chief Underwriting Officer.

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

Neill Currie – President and Chief Executive Officer

Thanks Peter. Good morning everyone. RenaissanceRe reported net income of $25 million and a loss on an operating basis of $10 million for the quarter. Book value per share was up slightly 0.5%. Our results were impacted by severe weather-related losses in the US and what is turning out to be our costliest first six months ever.

However, we were able to find a book of business and new opportunities that we are quite pleased with. Anytime of year when people tend to focus on hurricanes is worth remembering what I said on our last call, that is a leading reinsurer of major catastrophic risk around the world, we have exposure to and expect to have losses from a wide variety of events.

On an aggregate basis, we anticipate and prepare for losses such as we have experienced from the recent historic series of tornadoes in the U.S. Our sympathies go out to the many people living in communities affected by the storms in April and May. We remain focused on being there for our clients, when they need us and promptly paying claims.

On the last call, I mentioned that I expected to see a gradual increase in demand for our product over time. We have started to see a firming of the market at the June 1 and July 1 renewals. And as the implications of continued loss activity and model changes are absorbed, we anticipate this trend will continue.

In the Florida market, discussion seemed to indicate that by and large not enough time had elapsed for the impact of the new vendor models to filter through to portfolios. However, we were able to work with our clients to assess their business risk based upon our own updated model. Our clients find this feedback to be valuable and appreciate the fact that we treat each customer as being unique, frankly because they are.

Once again our ability to take a lead in that market through our investment and technology, our customer and broker relationships and our strong capital position enabled us to assemble a good book of business.

Our leading position in property catastrophe is very helpful in obtaining the signed lines we design own programs in Florida and of course other geographic areas as well. While we are comfortable with our own exposure in Florida, the environment for the Florida homeowners insurance companies remains delicate.

We see signs of improvement in comparison with the year ago in par from the incremental positive changes that have taken place in legislation. We are hopeful that this continues over the coming years, so that both private companies and the Florida Insurance System as a whole will be better equipped to withstand major catastrophic events.

Our international books saw considerable price increases inline with increased perception of risk in those areas that we were affected by the events of late 2010 and early 2011. We expect that the heightened awareness for the potential for large unexpected losses together with the gradual adoption of new vendor cat models will add to the momentum for price firming through the renewals in 2012.

Looking forward, our highly rated balance sheets, flexible capital structure, and substantial capacity position is quite well for opportunities to come. When we take into account our joint ventures, such as Top Layer Re and DaVinci Re, we were able to bring about $8 billion of capital to bear in the catastrophic marketplace.

We decided to raise $100 million from new and existing investors to support the underwriting activities of DaVinci Re and we continue to monitor whether there are additional opportunities to deploy third-party capital. Of course our ventures team remains in constant dialogue with investors about potential ventures.

At our Lloyd's syndicate, we are continuing to build our book of business. We are still small, but growing and have just exceeded $100 million in written premium for the year. As you know, we never push our underwriters to write business. I am proud of team, we are building there and that team is capable of writing considerably more premium, when opportunities arise.

While many people tend to think this as a cat company, I would remind you in addition to a great team in London, we have a gifted specialty team here in Bermuda. This team continues to write good business as opportunities come along and has the capable to write a significant amount of business over the coming years.

In summary then, as we look out towards the months ahead, I want to reiterate that we manage our business for the long-term. Our balance sheet remains strong. Our investment portfolio is well structured in the current environment and we did not have a meaningful exposure to foreign sovereign debt, especially to companies viewed is being high risk of default.

Our capital structure allows us to flexibility to add and withdraw capacity from the marketplace as conditions dictate. We like what we are and we stand ready to be a stable source of capacity for our clients, when they need us.

Kevin is here with us to talk about the second quarter events and midyear renewals so I will turn it over to him.

Kevin O'Donnell – Executive Vice President and Global Chief Underwriting Officer

Thanks Neill and good morning. Let me start with the recent June and July renewals. Overall we saw rate increases in the Florida renewal that we estimate in the range of 10% to 15%, which is at the higher end of our expectations. These price changes were not inform with upper layers receiving a great percentage increase than lower layers, but obviously offer much lower base.

Interestingly, the price spread on the credit worthiness have seen was narrower than in the last few years. This increase is appropriate for the market, when considering all the dynamics that play in Florida. More than any other factor pricing in Florida is being driven by vendor model changes. So, well we are being paid more for the business we are assuming and our expected profit is up so is our view of risk.

An increased perception of risk, all things been equal should result in a commensurate increase in rates. We have worked hard to understand the model changes and develop an independent view of risk. This understanding and the independence it affords us, allows us to better optimize our portfolio as the market changes.

Overall, we are pleased with the portfolio is constructed and believe we are well positioned going forward. Most Florida companies are paying about the same percentage of premium as they did last year. That the premium increases they realized over the year will proportionally shared with reinsurers, which is relatively good outcome for both reinsurers and insurers.

Vendor model changes have been a popular topic lately and the market does not seem to have fully embraced these changes. Due to the increase perception of risk especially in Florida adoption of the revised model would likely substantially increase the demand for reinsurance. Further, brokers and customers faced a much greater disparity among the reinsurance quotes, making it difficult to set market clearing prices. This suggests the reinsurers are at different points in the process of the adopting and updated view of risk.

Looking forward, I expect the new model to become more a part of the dialogue between reinsurers and insurers. The impact of the new models on customers with greater geographic diversification should be muted making their implementation easier to manager.

On the international side, the major renewals included those in Australia, New Zealand and Japan. For the Japanese covers that were extended 7-1, reinsurance pricing was up significantly. Pricing for New Zealand only covers was up great than a 100% in most cases and Australian covers also received healthy price increases. There was substantial support for client from the reinsurance marketplace.

Although we have had the North European wind storm model for only a short period of time, we have begun our analysis of the changes, but as with the U.S. model, the changes are substantial and it will take time to fully evaluate. Similarly findings that the historical footprints were recreated using new techniques, the size and frequency of model storms were adjusted, which has been an area of discrepancy among the north European models and the vulnerability curves were adjusted by class and by region.

Improvements were also made to the storm-clustering methodology. Clustering is the phenomenon, where meteorological conditions are conducive to multiple storm formations and landfall. We developed our own clustered model many years ago and are pleased to see the models adopting this future.

There is more to learn about this model, but based on our preliminary review to revise model will likely increase the expected losses for some of seasons. We will evaluate the new model and incorporate all the appropriate enhancements in time for the European renewal. Unlike the release of the revised U.S. model, we are hopeful that the market will also have time to digest these changes, which have adopted should increase demand as loss curves will be higher.

Looking at retro, we were surprised by the low level of activity in this market and would have expected greater demand, given the substantial level of cat losses and limit eroded by the first and second quarter events. The retro market can change quickly, however, in the event of a meaningful hurricane loss, and we are a market of first call. As far as our seeded program, we think ourselves as portfolio mangers and we will buy or sell in anytime if we see an opportunity to enhance the returns of the portfolio. Over the quarter we did purchase more cover, which improved the efficiency of our portfolios.

As we all know loss experienced during the second quarter remained evaluated particularly in the U.S. and continue to trend a significant large loss activity seen in recent quarters. While the brunt of the tornado losses were borne by the primary reinsurers, exposure for reinsurance companies in many cases are rose from regional covers, which tend to attach lower down and which will add to the reinsurance component of the loss.

The U.S. experienced five distinct convective storm events in April and May each producing substantial industry insured losses. Interestingly, April had over 600 tornadoes, which is the most on record for any month and this included the largest tornado outbreak in history from April 22nd to 28th.

For a many meteorological conditions factor that we believe clear well over this activity and our long-term 28 over continues to involve. However this time its our view that the last 30 years of strong (indiscernible) news in US show no significantly trend.

Finally we believe the most recent news directly into change we are not the meaningful to reinsurance industry overall with measure the loss is being retain by primary (indiscernible).

Moving on to specialty we are seeing a steady (indiscernible) of new business remain discipline and have been slow to aggressive as the many of deals are still offering and sufficient returns (indiscernible) activity of recent quarter just not appear to have impact so far the special because we are targeting once again we enjoyed loss emergency in the book of business.

We remain happy with the progress being made in low end operation where we continue to expand mostly in property casualty and specialty prices as some of our recent initiatives have change increase fractional marketplace top-line growth has picked up our lowest platform represent a long-term strategy to access profitable business written in the London and US market. Thanks and I will turn the call over the Jeff.

Jeff Kelly – Executive Vice President and Chief Financial Officer

Thanks Kevin and Good morning everyone. On today's call I would like to go with second quarter and first half results and update our 2011 top-line forecast. The second quarter was another challenging one for RenaissanceRe as it was for the rest of the industry. Our results were hurt by the high frequency of moderate to large tornado and storm losses across the south and central United States.

The total net negative impact of major tornado and storm losses on the second quarter financial results was $71 million. The net negative impact is the net loss amount after accounting for reinstatement premiums assumed and ceded, loss profit commissions, non-controlling interests and joint ventures.

We have provided the detailed table in the press release relating to the calculation of net negative impact. We do not make any adjustments to our ultimate loss estimates for the first quarter catastrophic events or have any exposure to the June New Zealand earthquake.

Favorable reserve development in our specialty and cat segments was lower than in recent quarters, but was a slight offset to the catastrophe losses. Investment income remained under pressure as a result of the continued low interest rate environment and weaker returns on our other investments than in recent quarters. We reported net income of $25 million, or $0.48 per diluted share and a slight operating loss of $10 million, or $0.21 per diluted share for the second quarter.

Net realized and unrealized gains, which accounts for the difference between the two measures totaled $35 million. Our annualized operating return on equity was negative 1.4% for the second quarter and our tangible book value per share including change in accumulated dividends increased by 1%.

For the first half of the year, we reported a net loss of $223 million or $4.39 per share and an operating loss of $253 million or $4.97 per share. Also for the first six months tangible book value per share plus changes in accumulated dividends declined 6% largely a result of the severe catastrophe losses in the first quarter.

Let me shift to the segment operating results beginning with our reinsurance segment, which includes cat and specialty followed by our Lloyd segment.

In the reinsurance segment, managed cat gross premiums written in the second quarter totaled $619 million compared with $516 million in the year ago period. Managed cat gross premiums written in the current second quarter included $22 million of reinstatement premiums related to the loss activity.

Adjusting for reinstatement premiums, the managed cat growth rate was 16% in the quarter. The top line growth during the quarter was primarily a result of improved market conditions at the mid year renewals and some increased demand for limit.

For the first half of the year managed cat gross premiums written increased 7% from the year ago adjusted for $136 million of reinstatement premiums in the current year and $27 million of reinstatement premiums in the prior year period. This compares with our full year guidance of modest growth provided in the first quarter.

As a reminder, managed cat includes the business written on Renaissance Re Limited's balance sheet as well as cat premium written by DaVinci, Top Layer Re and our Lloyd's unit. The second quarter combined ratio for the cat unit came in at 94.8%. This included net negative underwriting impact of $97 million for the major tornado and storm losses during the quarter. The cat combined ratio benefited from $12 million of favorable reserve development.

For the first half of the year, the cat combined ratio was 187.8% including net negative underwriting impact of $602 million related primarily to the first quarter international catastrophic events. Favorable reserve development for the cat unit came in at $32 million for the first half of the year.

Specialty reinsurance gross premiums written totaled $24 million in the second quarter, which was up compared with $7 million in the prior yar quarter. For the first six months of the year, specialty gross premiums written increased 22% compared with year ago to totaled 99 million these compares with our full year guidance for top line growth of 10% the growth rate for the segment (indiscernible) given the relatively small premium base especially combine ration for the second quarter came in at 87.1% there is no meaningful margin of loss activity during the quarter and combine the ratio included $7 million of favorable reserve development.

For the first half of year the specially combine ratio was 76% and benefited from $60 million at favorable reserve development. And our relates segment we generated $34 million of premiums in the second quarter compared with 35 million in the year ago period specially premium accounted for the most of this amount. For the first six months of the year relate to gross premium return increased 45% to $71 million compared with the year ago period the Loyrd units came in at combine ratio of 119.3% during the second quarter.

Clients related (indiscernible) losses in the US accounted for $3 million of not negative impact to the underwriting results of this segment the expense ratio of the segment was 69.3% although we expected to decline over time from this level as we continue to expand the business volume written on this platform. For the first half of the year the combine ratio for the (indiscernible) was 190% largely a result of savior catastrophic losses form the first quarter.

Moving away from underwriting result other income was loss of $5 million in the second quarter the major driver of other income was $4 million pre-tax loss at real or whether risk management business and $1 million loss related to assume and see the reinsurance contracts that are accounted for fair value equity and earning of other ventures was gain 5 million through been largely by $4 million gain for top layer way.

Results also included the $10 million loss for discontinued operations this relates to the recognition of the $10 million liability to 2BE for adverse development on reserves that are US insurance operation but we sold there later this year. As part of our agreement with QB the purchase agreement for the insurance operation provided for the top $10 million reverse cover to a plat the potential for favorable or adverse reserve development. Reserve may develop positively or negatively from this point forward but this adjustment exact our maximum liability were negative reserve development under the term of the sale agreement.

Turing to investments we reported net invested income of $33 million with other investment portfolio contributing a $11 million of that amount recurring investment income from fix material investment remain on the pressure to low yield on our bond portfolio price and equity had a reasonably solid quarter of the recurrent were lower here in the recent quarter the total return overall portfolio was 1.1% for the second quarter that realize in unrealized games total 34, $35 million during the quarter our investment portfolio remains conservatively position with the high period degree of liquidity and most credit exposure during the second quarter we reduced continue to reduce senior allocation to US treasuries and increased our allocation to corporate bonds the duration of our investment portfolio increased slightly to 2.7 years the yield from authority on fixed income and short-term investment at a slight uptick to 2.4%.

The correct quality of our fixed income portfolio remain high the 54% of our fix majority security rate AAA. Our capital position remained strong despite the high loss activity of recent quarters and we have ample capital liquidity of holding company to meet market opportunities that we see.

Our ventures team in consider various option to raise third-party capital for new joint ventures. How ever even a strong capitalization of our balance sheet and that of our existing joint ventures we allocated non-trades capital for new join ventures. So, we did however choose to augment DaVinciRe’s balance sheet with $100 million of capital raised from new and existing investors. To some degree, the capital raised at DaVinci was to partially replace approximately $175 million that we have returned to shareholders earlier during the year. We will continue to (indiscernible) the level of capital at DaVinciRe to optimize its portfolio based on market conditions. Our ownership stake in DaVinci is currently 42.8% following the capital raise.

During the second quarter, we did not repurchase any of our shares. Recall that we had stated on the first quarter earnings conference call that we did not expect to buyback shares in the near term as we assessed market opportunities and the upcoming wind season. At this time, I’d say it is unlikely that we would buyback any shares until after wind season.

Finally, given that the majority of our managed care premiums are written in the first half of the year we are not updating our top line guidance at this point. For specialty and Lloyd’s we are maintaining our prior guidance.

And with that, I will turn the call back over to Neil.

Neill Currie – President and Chief Executive Officer

Thanks Jeff. Operator, happy to take any questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first comes from the line of Keith Walsh with Citigroup.

Keith Walsh – Citigroup

Hey, good morning guys. First question for Neil or Kevin, you mentioned premium growth within reinsurance, ex the reinstatement premiums and you talked about rate, but you are also seeing more swings at that for new business with competitors suffering large year-to-date losses?

Kevin O'Donnell

Yeah, I think we are seeing a little bit of movement among some of our competitors in the way they are competing with us. I wouldn’t say that it’s any one company making material changes, but we have seen some companies like take the recent Florida renewal, where few companies that we normally compete with below the hurricane fund, no longer participating there or moving their participations higher. Some companies with very large participations on the small number of accounts were reduced. We also saw an increase in different types of products, where there is a little bit more quota share purchased in for some of the Florida accounts. So it’s a little bit of mixed bag, but it’s not something that I would put out as a theme for the renewal. There was just normal appetite changes among a pretty wide range of our competitors.

Keith Walsh – Citigroup

Okay. And then Kevin, within the model changes you mentioned, do you have an impact on price, but you also if I am interpreting you correctly said the rate of adoption was sort of slow, maybe if you could talk about price and demand impact as the rate of adoption increases as we head into 2012?

Kevin O'Donnell

Yeah. I think what we are seeing right now is a very localized view of the market being concentrated on the Florida renewals. And the Florida renewals were some of the more heavily impacted by the changes to the updated models. So it was little bit of a too big a change to adopt in one sitting, mentality. So from a buyer’s perspective, a lot of the information was presented on the old models and the discussions were trying to be geared on that. And from a competitor standpoint, we saw that there was a much wider dispersion of quotes which to us led that the full view of the change in perceived risk hasn’t fully been adopted and people are making some kind of post model calculations to estimate the change. I think going forward, there is a couple of things that will happen it’s going to be adopted by more geographically dispersed books of business which will mute the impact of the change. So I think it will be little easier for them to move and discuss the business on the new model. I think there is still more to be determined as to how the rating agencies and others will view risk based on the new or old model. And I think our competitors will be in a position with it more holistically adopt to the changes in front of their view on risk.

Keith Walsh – Citigroup

Great. And then just last question for Neill, maybe if you could just talk to the philosophy behind not updating cat losses in the quarter like your peers do? Thanks.

Neill Currie

Yeah, that’s a tough one. One of the things when we look at that key is setting President, when will people take a view of like when is our signal when we do or when we don’t. And so we run the company for shareholders to give them information to help them decide whether they want to hold the stock over long period of time. And our view is more long-term versus quarterly focused. We focused – it makes your all’s job you are trying to come up with the quarterly numbers, but we want the focus to be on the long-term. And if we are going to prerelease, we wanted to be of a material nature, something that’s meaningful because of the same token I would say that our increased premium volume is material and helpful. It’s a trend towards the future, we don't preannounce that. So, a large part of it is just trying to be consistent with our approach over long period of time. You asked me, so I want to give you my view, but Jeff do you have further views on that.

Jeff Kelly

Nothing materially different. I think it’s a good question. It’s a one that we discuss frequently around here. And I think we’re always looking at our disclosures and our disclosure policies and this one we’ll continue to evaluate.

Operator

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

Josh Shanker – Deutsche Bank

Good morning everyone. I was wondering if you could maybe give some color on the managed care premium by geography. To the extent we know that the rate environment for June 1 quarter was up 10% to 15%. Is that equivalent with what your experience was in the remainder increases from New Zealand whatnot?

Neill Currie

Yeah, I think let me first talk about the rate increase that I mentioned and then I’ll talk a little bit about how it’s written in our book. The 10% to 15% I think is our best estimate of where the bulk of the changes are. We saw accounts that had much higher increases than layers that have much smaller increases, but I think in kind of generalizing the market 10% to 15%, secured generalization. Outside of that losses with, accounts with losses had very substantial, sometimes over 100% rate increases, but a lot of those were single territory of low rated deals to being with. So, when you look at it against the book of business that we have, it will be a little different than the numbers because I’ll think about this on a fore stasis, but about two thirds of our premium change comes from the Florida renewal and about a third of it ballpark comes from really the stuff outside of Florida. The bulk of which of that is a little bit of new cover in the US, but also Australia and New Zealand renewals and including the 711 extensions for Japan.

Josh Shanker – Deutsche Bank

Do you think you risk for print looks dramatically different right now than it did 12 months ago?

Neill Currie

No, I don’t. I think there is a couple of things that have changed, but the footprint I think of is relative across the regions. We changed our model, so we have increased the expected losses against the book. But, in looking at it in relative to the overall balance of the portfolio it’s pretty similar to what we had on the books last year. A few changes here and there where its; balance, but it’s not materially different.

Josh Shanker – Deutsche Bank

On the QBE, have you preemptively taken that charge or maybe not actually go through, or you have received claims from QBE?

Neill Currie

We have not received claims notification from them. But as I said Josh, claims could develop positive or negative from this point forward and when that reserve caller is trued up and paid out will be the first u of next year.

Jeff Kelly

Right, just so to be clear, we put up the maximum amount of liability of $10 billion on that. We’ll see how it evolves over the coming months.

Josh Shanker – Deutsche Bank

Are you just putting up, as a preparation, but you may or may not be that amount is actually, it actually happened.

Neill Currie

That’s right. It’s our best guess now for account purposes, but it is the maximum.

Operator

Your next comes from Doug Mewhirter with RBC Capital Markets.

Doug Mewhirter – RBC Capital Markets

Hi, good morning. I just have two questions. The first maybe for Jeff, I noticed you had a increase in the proportion of bank loan funds in your other investments. Does that represent some new investment? I’m assuming that market to market it doesn’t account for all of that. And if you did make new investment, I guess what are the appeals of those funds right now?

Neill Currie

We did make a few investments. The appeal of those is just a way to essentially take an exposure to the high yield market. We are in a very diversified and granular way and further up the subordinated structure and loss or capital structure in most consensus. It’s kind of our preferred way of taking high yield res.

Doug Mewhirter – RBC Capital Markets

Okay, thanks for that. And my second question for Kevin, I know for a long time you and your colleagues have said the rates in the Far East were not generally adequate. Now obviously there's some increases, but obviously there is also some increase in actual losses. So judging by the fact that you haven't appreciably changed your risk footprint based on the earlier question, I'm assuming that rates are catching up, but because there maybe the expected risk is going up, that they maybe approaching overall adequacy, but still aren’t quite there, to oversimplify a very complicated subject.

Kevin O'Donnell

I think it’s a good question. I think it’s probably good to talk a little bit more granularly about the places with losses near the Far East generally. I think if you are looking at the New Zealand we liked the construct the way the New Zealand market, and particularly the large there bought cover. So, we’ve been a long time participant in that market. It’s a good way for us to build up our risk there. In some of these regions, it tends to be a very large program with a significant drop of capacity that might be like good place for us to allocate and we’ve seen that in New Zealand and Japan. I think the Japan I would also split between wind and quake. Generally going back many, many years we wrote some fire insurance, earthquake related expense covers which we always liked. We liked second beneath we liked the quake and thirdly we’ve always thought the wind was the very difficult write, so we hadn’t participated in the open market, but have been able to get the risk in other ways there.

I think looking at Australia is an interesting one because Australia had losses. Wind really changed our view on Australia because of the losses that occurred, but rates did move. Unfortunately, rates are still probably about 10% to 15% lower than where we would need them to be, but we are getting much closer. So, looking at the different regions, I think it is a different story by location, but it’s one in which certainly loss affected areas, we like the business more, but not always up to the level in which we want to participate to a greater degree.

Operator

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

Gregory Locraft – Morgan Stanley

I wanted to followup on – or not followup, but actually understand more on the reserving side of things. Obviously the corporations had a great track record in the IVNR and additional case. It’s at near all time highs. Has there been a change in philosophy with regard to reserving methodology and can you comment on the go forward there at all?

Neill Currie

Sure, I will Greg I will start off and then turn it over to Jeff. There has not been a change in philosophy. Our philosophy is always to get it right. We are prudent reservers. It’s difficult in our business to reserve exactly right each time, but we had the same methodology and we try to get it right and I wouldn’t if I were you guys try to build in reserve releases. It is what it is. We try to, once again be correct. So, Jeff?

Jeff Kelly

Thanks, Neill. I guess, what I’d add to that, Greg is that apart from the periodic deep dives we view, or we review, or deep dive reviews we go into on specific areas of the portfolio, as Neill said our reserving methodology hasn’t really changed. I think in terms of the pace of releases because I have seen some written comments on that and various analysts review, I think as a general statement what’s been occurring is, if you went back a couple of years ago, our reserves in particularly the case reserves in IVNR were dominated by the ’04 and ’05 hurricanes. Over the last 2.5 years as those storms or those losses have matured, there are uncertainty around the ultimate loss of those storms diminishes into the extent that we have excess reserves that held against those. We tend to release those.

So, what’s been transpiring at least over the last couple of years is the nature of the reserve results has changed and now to the point where over $900 million of our ACRs and IBNR hold against the cat for the last five quarters. So, it’s still very early on in those in the maturity of those events to come to a conclusion that our losses are materially different than what we initially reserved at. And as I said earlier, we did not make a change in our view the ultimate loss associated with any of those events in the last five quarters.

Gregory Locraft – Morgan Stanley

Okay, that’s helpful. As a follow-on, however, to that, is there anything in these particular events, of let’s say the last two quarters, because, again, additional case plus IBNR sits actually well above Ike and Gustav, as well as Katrina. If there has been no change in philosophy that bucket has filled up considerably given the year-to-date events. So why would we be booking more additional case and more IBNR with these events, given – is there something endemic to them in particular that makes them different than Ike, Gustav, and Katrina?

Jeff Kelly

Yeah. Some of that, Greg it’s just the timing of when cedants report losses to us.

Gregory Locraft – Morgan Stanley

Okay. So, you are saying that your clients in the foreign markets don’t report as rapidly as perhaps the clients in the U.S. markets?

Kevin O'Donnell

Yes, if I could add a little bit to that, I think one of the things is also e start to little bit adding the loss that happen at the last couple of quarters the big pieces it is from our record session book and book tend to report little bit more slowly the other pieces the on the primary side at least on the for Japan and New Zealand are very the position is primary big percent comes (indiscernible) so if you look back over the other events we have had seems where as built out a view based on information from lot of different points on the primary side we reline in very real that one very large in Japan, two large covers so kind snow balls little bit and then kind of that take a biggest difference between predominantly US events what we seeing on the international side.

Gregory Locraft – Morgan Stanley

Okay, that’s great. Just shifting gears to next year, Neill actually mentioned that the trend should be continuing, you know, the recent trend and the top line into 2012. Neill, were you comments specific to the June I’m sorry, to the January 1, 2012 renewals, or were you actually thinking this thing goes through all of next year? So in other words, we’re lapping June and July next year, as well, and things are looking okay?

Neill Currie

Sure. Well, Greg, you know I have probably crystal wall on the business so I think some one is benefit what going to happen in the future slightly if you had various ventures and what work in change things and all I see pressure towards continue harming after the wall activity Greg running from wall activity and model changes I see those things that bring in so that it should not (indiscernible) for one unless our (indiscernible) process one lectures a lot of hurricane activity with backup purchases January 1 is going to be the first will test but it should continue into the other remove periods during that year and perhaps.

Gregory Locraft – Morgan Stanley

Okay, thanks.

Neill Currie

Sure.

Operator

So, our next question comes from the line of Brian Meredith with UBS.

Brian Meredith – UBS

Yeah, good morning. Couple questions here for you. First, Kevin, I’m curious, on the RMS 11 hurricane model, what pieces of the model had the most impact on your pricing and capital models? Was it the increased frequency of hurricanes? Was it storm-surge? Can you give us perspective, on kind of what areas you thought were the most meaningful.

Kevin O'Donnell

Yeah, let me split my comment to little bit between what’s effecting the market was effecting us I think the biggest component effecting the market is as soon, I think more to do with the when the fall since the England so changed from the cholesterol maybe if one of our (indiscernible) great percentage increase few more color we have biggest components to the market for us I think we had several things that were already that were adopted into the new model. We are already in our model. So it’s difficult for me to kind of extrapolate what the component pieces are for us in the changing – in pricing the risk.

The one I would say in percent change in what we did to our model from our – I’ll call it version A to version B, version B had the benefit of the learnings from the RMS model and some other learnings. The percentage increase between our two models is significantly less than the percentage increase that RMS version 10 to 11 would require. And a component of that is the way we have historically evaluated the risk and then also some of the features that are mass adopted were things that we already had and some of it are things that we don’t think are necessarily appropriate to adopt in the model. So it’s more clear on ours, but I think the important thing is we didn’t need to change our model nearly as much on our updated view of risk as compared to what the needed to change their view if they were strictly an RMS user.

Brian Meredith – UBS

Got you. And your comments on the degradation, I assume that’s more for the Florida renewals, not so much countrywide, because I’ve seen some presentation stuff that show that the actual increase and then frequency of hurricanes is actually the biggest component of the kind of overall P&L increases of the RMS ‘11?

Kevin O'Donnell

I think that’s true. I think there are some big changes along the East Coast as well. And particularly one thing that just makes to mind is the way the storms – transitioning storms move into the Northeast. So depending on the construct of the book, you’ll have very different bi-cedant changes, but the biggest single cedant changes we expect to see over the course of the next 12 months specifically for the Florida ones.

Brian Meredith – UBS

Okay, great. And then, one other just quick question, on the Florida renewals, were there any changes – or material changes in terms and conditions, i.e., maybe payment terms and stuff that happened with this last renewal?

Kevin O'Donnell

No, not really. I think it was much of that was already – that much of the things that needed to be addressed on that or could be addressed on that were addressed last year. So a lot of what came through was much more consistent with prior year than what it was 10 to ‘09, 2010 to 2009.

Brian Meredith – UBS

Great, thank you.

Operator

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

Jay Cohen – Bank of America

Yes, thank you. Two questions. The first is, on the investment income, the fixed income side specifically was quite a bit of a drop-off from the last quarter. I know in the past, you have had some hedges flowing through there, and it did distort the numbers. Did that affect the numbers or was this simply just rates that continue to pressure the fixed income investments?

Jeff Kelly

No, Jay, you have it exactly right. Some of our managers do employ interest rate and foreign exchange derivatives. And I think we have not had the mark-to-market losses on those derivative positions are. Our accrual income would have been roughly the same as it was last quarter.

Jay Cohen – Bank of America

So, there was a negative impact?

Jeff Kelly

Yes. Roughly $7 million I think.

Jay Cohen – Bank of America

Okay, that’s helpful. And then secondly, did any of the growth in the cat book come from you simply changing which layers you plan? In other words, going down to lower layers, where the rate on large just happens to be bigger or was your mix of business relative to these layers roughly the same as last year?

Neill Currie

Let me start, just you need to bear in mind that our book constantly evolves and you have programs – some programs we come off of the programs we go on to, but we got overview Kevin.

Kevin O'Donnell

Yeah, I think, it was absolutely right, we are constantly looking at finding the best inwards and outwards that improves the portfolio. One comment we have made historically we are hot down low and what that means is we have a greater percent market share before the hurricane cat fund been above that remains true. I think the biggest changes in our portfolios this quarter from just a business mix is really what we did on the cedant side, but overall, I think it’s fair to say our portfolios we haven’t biased the book lower or higher it’s roughly in connection with Neill, things are always moving around, but there is nothing that I would put out as saying that it’s a materially different book than what we had previously.

Jay Cohen – Bank of America

That’s helpful. Thank you.

Operator

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

Vinay Misquith – Evercore Partners

Hi, good morning. What portion of your 16% growth in the managed cat premium was from rate versus just organic growth?

Jeff Kelly

I’ll reflect back on Neill’s comments. Sometimes harder for us to talk about because we get off a program or get off a layer and write a new one. So, it’s hard to give exact numbers on that. But, it’s fair to say that being at our construct of our book is largely similar and looking kind of at all the ways we measure risks, it’s fair to say that most of the change is really coming from increased premium and again the increased premium is coming from the mostly the international accounts that have been loss exposed and from the present change in perceived risk in the Florida renewals. There has been a coupe of new purchases, but among all that mix, some deals coming out, some going in. I think that’s a reasonable summary.

Vinay Misquith – Evercore Partners

Okay, so just rolling forward to next year, just give out proactively, slightly that you will have more demand also kicking in, correct. But the rate of increase will be lower because you will have less international covers that have high rate increases sort of coming to. Should that be the right way to think about it?

Neill Currie

Let’s break into – you have demand, I think with the changes that we are seeing and the people are adopting the changes just as presented by the vendor models. We should see an increased demand. On the other side of it you would have a reduced supply because reinsurers put out the same and you need to apply more capital to it. I think going forward we talked about the effect of that being less on renewals outside of Florida. So, your comment about the percent increase is lower against, then Florida is true. The one exception to that is I think and a large portion of our international book comes from our non US retro writings an a lot of the retro stuff really has been impaired this year, but has not been renewed or backed up. So, I think we’ll hopefully have pretty good opportunities there as well. So, I think largely you are correct. But I think adding the retro component is important.

Vinay Misquith – Evercore Partners

That’s great. The second question was on capital. Now, I understand that’s increased slightly because your perception of risk has increased. Could you give us a sense for how much and has that negatively impacted your ability to repurchase stock?

Neill Currie

Good question, Vinay. This question came up on last quarter’s call. There are two key component shifts with us. One is going back to Kevin’s comment about there was less impact on us than perhaps some market as a whole or in particular primary companies. There wasn’t as much change in our end model. And secondly being primarily an excessive loss writer that takes away some of the impact versus unlimited, if you will, primary writer. So, a little bit more capital frankly not as much as I thought and we have plenty of capital to address new capital. Jeff do you want to add anything into that?

Jeff Kelly

I think to be perhaps a little bit more specific on where we stand at the end of the second quarter, at the end of the second quarter at the holding company we had just over $600 million in cash and liquid securities and $400 million in undrawn revolvers, including the $250 million synthetic revolver which is on our balance sheet. So, I think, to Neill’s point, I think we will have a lot of capital to address to the opportunities we need and we feel we’re really well positioned from a liquidity standpoint as well to take advantage of those opportunities.

Operator

Your next question comes from the line of Ian Gutterman with Adage Capital.

Ian Gutterman – Adage Capital

Hi, I have a question on the specialty book. If I pull out the reserve development, it looks like the combined ratio is about a 110 and similarly, last quarter ex the cats, the action here was over 100. Why is that book running over 100 on an acts near ex cat basis?

Kevin O’Donnell

I think breaking it down, there is a lot of the things that we do. We don’t have an internal, historical record so we lose more industry data to develop our reserve methodologies and curves. I think that’s a component of it. I think also the way we allocate expenses to that book as another component of it. It’s odd believe that if you look at it from the underwriters view, we would expect that book is profitable, but the underwrites do is one and which doesn’t know this accounts but the other elements that are attributed to a book of business and how it ultimately play out over time.

Ian Gutterman – Adage Capital

Is the reasons getting worse because it seems it running higher than it used to as well?

Peter Hill

The one thing I would say is, we had two lines that were pretty dominate within the portfolio going several years back, where terrorism and workers comp cat both of which had significantly lower reserve loss ratios than what it makes currently.

Ian Gutterman – Adage Capital

That makes a lot of sense. My second question is can you help me on pay losses, it keep expecting there to be spike up due to other events over the last year and half and that thing. Can you give me some sort of sense of I guess starting over the last year vents in the first half of this year looks like its about a $1 billion in cat claims. How much of that is paid out or what would do you expect to pay out over the next year or you want to address it. But I guess it surprising it seems I had countries so far.

Peter Hill

I think the answer is that the nature of the events that we have seen over the last 15 months or so is such that we would expect them to take longer to develop in to actual and paid claims. The distinct difference is the U.S. tornados in the second quarter in which we have already paid a significant amount in the second quarter. Quake generally due tend to pay off much more slowly than hurricanes or the types of storms.

Ian Gutterman – Adage Capital

Okay, I understood. Can you give me some sense of maybe what a normal attritional of whatever you think about. I guess sort of the specially cat plus and attritional academy. If there are no cats in the year and there are no cats in the inventory like what’s the base pay loss number for the company.

Neill Currie

Jeff will get back to that one. I don’t have that in front us.

Ian Gutterman – Adage Capital

Okay, great. Okay, fair enough. Thanks guys.

Neill Currie

Thanks. Operator, we are just if we have any more, we can take one more question if there is one.

Operator

At this time, there are no further questions, sir.

Neill Currie – President and Chief Executive Officer

Well, that’s perfect timing, various to analyst and investor group to hold it to exactly one hour. Good questions today, everyone. Thanks for joining us and speak with you again in three months.

Operator

This concludes today’s conference call. You may now disconnect.

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