Validus Holdings' CEO Discusses Q3 2011 Results - Earnings Call Transcript

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 |  About: Validus Holdings, Ltd. (VR)
by: SA Transcripts

Validus Holdings, Ltd. (NYSE:VR)

Q3 2011 Earnings Conference Call

October 28, 2011 10:00 ET

Executives

Greg Faje – Investor Relations

Ed Noonan – Chairman and Chief Executive Officer

Jeff Consolino – President and Chief Financial Officer

Analysts

Matt Carletti – JMP Securities

Amit Kumar – Macquarie

Josh Shanker – Deutsche Bank

Jay Cohen – Bank of America

Ron Bobman – Capital Returns

Operator

Good day and welcome ladies and gentlemen to the Third Quarter 2011 Validus Holdings Limited Earnings Conference Call. My name is (Arjury) and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. (Greg Faje). Sir you may begin.

Greg Faje – Investor Relations

Thank you and good morning. Good morning and welcome to the Validus Holdings conference call for the quarter ended September 30, 2011.

After the market close yesterday, we issued an earnings press release and financial supplement, which are available on our website located at validusholdings.com. Today’s call is being simultaneously webcast and will be available for replay until November 11, 2011. Details are provided on our website.

Leading today’s call are our Validus’ Chairman and Chief Executive Officer; Ed Noonan and Validus’ President and Chief Financial Officer, Jeff Consolino.

Before we begin I would like to remind you that certain comments made during this call may be deemed forward-looking statements as defined within the U.S. Federal Securities Laws. These statements address matters that involve risks and uncertainties many of which are beyond the company’s control. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and therefore you should not place undue reliance on any such statements.

More details about these risks and uncertainties can be found in the company’s most recent Annual Report on Form 10-K and quarterly report on Form 10-Q both as filed with the U.S. Securities and Exchange Commission. Management will also refer to certain non-GAAP financial measures when describing the company’s performance. These items are reconciled and explained in our earnings release and financial supplements.

In addition, as a reminder to participants, the focus of today’s conference call is a discussion of Validus’ third quarter results not the status of our discussions with Transatlantic or matters relating to Validus’ pending exchange offer and consent solicitation. Therefore, we will not be commenting on the status of discussion between Validus and Transatlantic.

With that, I turn the call over to Ed Noonan.

Ed Noonan – Chairman and Chief Executive Officer

Well, thank you very much, Greg. Good morning and thank you for taking the time to join us today. I will provide an overview of our business. Then Jeff Consolino will give you more detailed look at our results. I will come back and give you some color on the market as we see it and then we’ll be happy to take any questions you may have.

I am pleased to report another quarter of strong financial results for Validus. Despite significant industry catastrophe losses, most notably Hurricane Irene, Validus delivered 13.1% annualized operating return on average equity, $1.09 of operating income per share and quarterly growth and dilutive book value per share of 1.8% inclusive of our common share dividend. Validus Re reported a 68% combined ratio for the quarter and Talbot underwriters 83% combined ratio.

We believe our business continues to emerge as a leader in our four classes. We have been able to outperform the market by generating undersized losses and territories, where we feel we are not being compensated properly for risk. We have also been able to capitalize on the dislocation that has followed these events. Our premium grew by 13.7% in the quarter with Validus Re showing 28% growth year-over-year and Talbot 9%.

We are growing our business in classes that are achieving attractive rate increases and as we look around we have the sense that we are moving forward while a lot of our competitors are either retrenching or rethinking their business models. We are bullish on our core business, both as a result of current rate increase activity and what we believe our longer term structural drivers on catastrophe pricing.

This leading business profile as combined with a rock solid balance sheet. At September 30, Validus had $3.6 billion of shareholders equity and $4.1 billion of capital. These funds are invested extremely conservatively with the goals of maintaining value and providing liquidity. The ability to attract third-party capital is a clear illustration of our market leadership.

Last quarter, we announced the formation of AlphaCat Re 2011 or AC Re 2011. A sidecar designed to provide retrosessional and similar coverage. AC Re 2011 provides nearly $150 million on balance sheet third party capital. It has gotten off to a great start adding another $18.8 million in gross written premium in the quarter for a year-to-date figure of $61.4 million. There have been no losses to this vehicle and so earnings for Validus and our third party investors are quite robust so far. We anticipate the ability to have third party capital available to scale the size of this vehicle for the opportunities that we see for 2012.

During the quarter we continue to see favorable development on our lost reserves. With normal IBNR burning off attractively and some redundancy from past major event losses, that’s exactly the pattern that we issued for. Towards that end, rather than have very good prior year news flow to the earnings in the quarter, we’ve increased our IBNR for the current year. It’s been a busy year with lots of events and we continue to believe that prudence is the best approach to reserve it. We prefer to always be above the actuarial and indicative loss reserve number and we think this will continue to serve as well.

With that I’ll turn the call over to Jeff Consolino, then I’ll come back and give you a more granular update on our business.

Jeff Consolino – President and Chief Financial Officer

Thank you Ed. Thank you all for joining the today. I can see we are joined by analysts, many of our long time investors, our Validus colleagues and other interested parties, welcome to our call. I’ll now provide a brief financial overview of the third quarter 2011 results of operations and our financial position.

Net income to Validus common shareholders’ for the quarter was $56.5 million. This was $0.54 per diluted common share. Net operating income to Validus common shareholders’ was $112.6 million or $1.09 per diluted share. Diluted book value per common share at quarter end rose to $32.23. We paid a $0.25 per share dividend in the quarter. After considering the dividend our shareholders’ financial net worth rose at a 1.8% rate during the quarter from the June 30 level of $31.91 per share. This is an annualized rate of 7.1%.

Speaking in more detail of the quarter’s result of operations in the third quarter 2011, gross premiums written increased by 13.7% to $391.1 million. This is an increase of $47.1 million over the prior year’s quarter. This follows on 17.1% growth in the second quarter. Of this $47.1 million increase in the consolidated gross premiums written in the quarter, the Validus Re segment grew by $40.2 million or 28.2% over the prior year’s quarter. It rose to a $182.8 million.

The property lines grew by $42.2 million for Validus Re in the quarter. AC Re 2011 is consolidated in our financial results and as Ed mentioned, it contributed $18.8 million of gross written premium in the quarter. Year-to-date, AC Re 2011 has written $61.4 million in gross premium income.

Turning to the Talbot segment gross premiums written in the Talbot segment increased by $20.2 million or 9.2%, at $238.9 million. Our quarterly combined ratio was 75.6% including a loss ratio of 49.3%.

During the quarter, we incurred two notable loss events as disclosed in our earnings press release, the Danish floods and Hurricane Irene. The total impact, before considering the benefit of reinstatement premiums, was $51.9 million, $19.4 million from the Danish floods and $32.5 million attributable to Hurricane Irene. This $51.9 million reduces to $47.9 million after the benefit of reinstatement premiums. Notable loss events represent 11.3 percentage points of impact on our quarterly loss ratio.

Favorable development in the quarter was $61.1 million, which benefited the loss ratio by 13.3 percentage points. Therefore, our accident year loss ratio excluding cash is 51.3% in the third quarter of 2011. This compared to an equivalent 37.2% for the third quarter of 2010. Our gross IBNR at quarter end stands at $1.16 billion and our net IBNR at $1.05 billion.

While we released $61.1 million from prior accident years in the quarter, we increased our IBNR for 2011 events in the quarter by $58.5 million. Adjusting for this quarterly movement, which is not a prior accident year movement. The underlying loss ratio was 39.3% in the quarter. Our IBNR is 45% of our $2.57 billion of gross loss reserves and 48% of our $2.18 billion of net loss reserves.

Beyond underwriting results, I’ll now comment on quarterly fluctuations in investment results on foreign exchange and also the income statement presentation of non-controlling interest. The non-controlling interest is due to AC Re 2011 is significant on our income statement for the first time this quarter. Our consolidated investment portfolio is $6.20 billion at September 30, 2011.

Net investment income for the quarter was $27.7 million or a quarterly annualized effective yield of 1.80%. This is an increase of four basis points from the Q2 annualized effective yield at 1.76%. Net investment income of $27.7 million is also up sequentially, rising by $1.2 million from the second quarter of 2011. In the quarter, we realized $5.2 million in investment gains, principally coming on the sale of treasury securities.

Our net movement in unrealized investment loss in the quarter was $27.8 million, widening credit spreads in the quarter effected spread assets including our holdings at corporate bonds and bank loans. The duration of our investment portfolio continues to be short at September 30, 2011 instead of 1.56 years effectively unchanged from 1.57 years going into the quarter. Foreign exchange losses in the quarter were $19.9 million. These losses were primarily attributable to movements of currencies other than U.S. dollars and sterling against the U.S. dollar.

We hold foreign currency assets against liabilities and light currencies in many cases to comply with regulatory requirements or an order to create economically matched position. In the case of underarm premium, non-U.S. dollar underarm premium cannot be revalued through the income statement under GAAP or as the non U.S. dollar asset associated with underarm premium reserve are. We also have a revaluation mismatch in so called minor currencies for reserving. This accounted for $12 million between the two of the $19.9 million of that’s movement in the quarter and that $12 million will be offset overtime through movements in other income statement line items.

With respect to the accounting for AC Re 2011, net income attributable than non controlling interests in the quarter was $13.5 million. AC Re 2011 wrote its initial contract on June 1st for the third quarter of 2011 is the first quarter where AC Re 2011 has significant earned premium. A great majority of policy is written by AC Re 2011 our six month policies, which earn over the term in the policies.

As Ed mentioned AC Re 2011 do not incur any losses during the quarter. As a result applying the 65% non-controlling interest to the results of AC Re 2011 results in non-controlling interest presented on our income statements of $13.5 million. I’ll close by commenting on our capital and capital structure.

Our total stockholders’ equity at September 30, 2011 is $3.59 billion. Total capitalization is $4.13 billion. Debt-to-capital at quarter end was 6.0% and debt and hybrids together as a percent of capital is 13.0%. Our financial leverage remains very low and we have a substantial capital margin above our targeted risk appetites.

Now, back to Ed Noonan.

Ed Noonan – Chairman and Chief Executive Officer

Thank you very much, Jeff. I will start by covering our Talbot business and then speak about Validus rates. Talbot continues to perform at a very high level. Our plan for the year was for about a 1% decrease in overall rates in our portfolio. However, through nine months, we are actually running a 3.4% rate increase, with the rate of change accelerating as the third quarter experienced rate increases of 5.1% across the portfolio.

Rate increases are not uniform in the market and they are disproportionate to the classes we write. In fact, it’s really a tale of two different markets. We are seeing rate increases of 9.4% on our marine and energy offshore account, 7% in the onshore energy account and 9% across our international property book. Each of these are classes in which the market has sustained major losses and we are benefiting from the correction.

More broadly, of the 23 classes that we write in a syndicate, 19 are either flat or showing rate increase. The classes that are declining are in the low single digits. So, in general, the pricing environment in the syndicate continues to be very favorable in our classes. We are the market leader or sole underwriter on about 40% of our business, but we need a much higher percentage of our core classes. We see the ability to continue to push rates in the market, but we don’t believe that we are in the midst of a market turn in Lloyd’s.

The other two areas I would comment on regarding Talbot are terrorism and Asia. Talbot is a clear leader in the global terrorism business at Lloyd’s. Over the last two years, we have seen a number of new entrants to the class, but for what we see they are not gaining much traction. Our fear was that these players will be disruptive in the market, but year-to-date terrorism pricing is essentially flat and our war risk account is showing only a 2% decrease. These are key profit drivers for our business and our leadership position in these classes continues to allow us to write a very profitable account with very strong price discipline.

As for Talbot in Asia, we entered Lloyd’s of Singapore three years ago. We have seen and in fact helped that market develop and we are one of the largest underwriters in the market. Having been underweight the losses in the Asian market, we are seeing very strong rate increases. While not likely to be a significant event for us, the Thailand flooding event is going to be a meaningful loss to the market and one more driver of rate increases going forward. We have a strong team underground that expect to capitalize on the dislocation we are seeing in Asia.

Turning to Validus 1, July 1 was a very good renewal for us. We saw rates up roughly 10% to 12% across the Cat portfolio with loss affected accounts obviously paying higher rate increases. And while there was some market retrenchment, capacity was available if (indiscernible) were willing to pay the proper price. However, the extraordinary global loss activity and the uneven implementation of model change has made price discovery very difficult for brokers. Consequently, we saw larger than usual flow of shortfall covers, where we were able to complete placements at above market pricing levels.

We were also aggressive in cutting our alliance, where (indiscernible) were pushing unacceptable terms and we recycled that capacity into shortfall coverage as well. The significant increase in our catastrophe writing, this was driven by rate increase, reinstatement premiums, and business written to our AlphaCat 2011 sidecar. Through this new third-party capital vehicle, we were able to take advantage of strong pricing in the retrocession market and enhance our overall importance to brokers and buyers. We believe that the ability to solve problems for our clients is one of the things that differentiates Validus Re in the marketplace. And AlphaCat is another example of tools that we bring to the marketplace to help brokers solve problems.

Our specialty reinsurance book renewed essentially as it is at July 1. This is the market where we see new entrants and existing players looking to increase their writings. Reinsurers are generally disciplined, but we have to remind to let our portfolio sit as there is not increased our presence in light of market conditions unless unique opportunities arise.

As we look ahead, we see a very attractive business environment in our core products. The market’s in an interesting position. The changes to the RMS model disproportionately affect the layers of risk typically reinsured. Our research team has spent a tremendous amount of time in disaggregating the model as I’ve described before and also working with RMS, the scientific community, clients and brokers. We believe the model has directionally got it right but there are some areas where there is science difference from what we believe to be state-of-the-art. The model change, however, will increase the amount of capital required to support risk. We believe that our work has given us competitive advantage in risk selection and in the ability to deliver unique analytical insight to our clients.

Our research team has also spent the last few weeks in Europe meeting with clients and brokers to review the changes to the European version of the RMS model, which are also significant. It’s clear to us that the European market has not even begun to contemplate the impact of the model change. Being able to look ahead and see where the rest of the reinsurance market is going to move over the next 18 to 24 months gives us a clear advantage in reshaping our portfolio today. This is the type of market and efficiency that we spent all of our time trying to find and exploit.

For January 1, we are expecting the U.S. market to see rate increases in the 10% to 12% range simply to come in line with the July 1 price levels. Model change will continue to exert upward pressure on pricing through 2012. In the U.S. market, we know that demand is increasing in the low layers of risk that have hurt regional carriers so badly. I don’t believe the reinsurance market can address the impact of losses on client retentions.

It’s a pricing issue as the insurance product itself needs to be reprised to factor in the risk of recurring localized weather events. The price of reinsurers will charge for this risk will generally not be attractive to buyers. And as a result, we don’t see this as an area of significant interest or opportunity. Our view of Europe is always, I am sorry, our view of Europe is always predicated on the behavior of the big European reinsurance. Our expectation today is to see up to 5% rate increases at January 1 presuming that the big Europeans follow through on their public pronouncements. In any event, we expect to be in a position to enhance our European portfolio as a result of better insight into the model changes ahead of the rest of the market. The areas, where we expect to see the greatest rate increases or retrocession and in our marine and energy accounts. They have obviously been significant losses in the global market and both of these areas and we expect rates to reflect that at January 1.

We already have a very good pipeline of retro accounts lining up for our AlphaCat sidecar and our position in the marine and energy market will allow us to benefit disproportionately. In terms of loss activity, Hurricane Irene I think was more a good reminder than a significant loss. And the New Zealand and Japanese earthquakes continued to reinforce our belief that assessing our earthquake losses is one of the most challenging tasks for primary insurers. And therefore, the reporting pattern is very different than for other catastrophe events. Our approach is to reserve very prudently and in fact the difference between our carried reserves and our actuaries’ indications more than covers our full remaining exposure to Japan.

So, I’ll stop here and we will be happy to take any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from the line of Matt Carletti representing JMP Securities. Please proceed.

Matt Carletti – JMP Securities

Hey good morning. Thanks for taking my call.

Ed Noonan

Good morning Matt.

Jeff Consolino

Good morning Matt.

Matt Carletti – JMP Securities

Really just some numbers questions, I wanted to start with the kind of the attritional loss ratio math. Jeff, I think you gave us I think, I caught $58.5 million of increase in the current year IBNR for caps, would that all fall into the RDE?

Jeff Consolino

It followed into IBNR in total not the RDE.

Matt Carletti – JMP Securities

Okay. And Ed, you mentioned some redundancy from past cat events, can you quantify that?

Ed Noonan

I think Jeff can probably give you the exact number. The biggest driver for that is our Chilean earthquake loss continues to be showing favorable downward movement. Jeff, do you have the development number also top of your head?

Jeff Consolino

I do. We had favorable developments including net of reinstatement premiums and retro of $17 million for the 2010 event year.

Matt Carletti – JMP Securities

Okay.

Jeff Consolino

And $1.6 million for 2009 and prior event years.

Matt Carletti – JMP Securities

Okay. And when thinking about the RDE if I did the math right, it looks like maybe there was I want to say a little over $4 million remaining for 2010 at June 30, would that be included in that 17?

Jeff Consolino

Yeah, Matt I hate to correct numbers but…

Matt Carletti – JMP Securities

No, that’s all right.

Jeff Consolino

You have $25 million of RDE remaining as of the end of the third quarter in addition to the quarterly movement we discussed in 2011 and then we also allocated $9.7 million of RDE to specific 2011 events.

Matt Carletti – JMP Securities

Got you.

Jeff Consolino

It will remain with $25 million as on balance sheet at the end of the third quarter.

Ed Noonan

And maybe I’ll give a little bit of color on the IBNR that we put up, we had significant favorable development in the quarter. As I mentioned rather than having a flow through the earnings we looked at adding that IBNR and in fact also we did. I think there is probably a general desire to see us allocate that between specific events be it New Zealand 1, 2 or 3 or Japan. And we spent a lot of time looking at it. It’s an interesting process. If you look at the way these events have developed, Japan is an event unlike any we’ve seen before. I can’t even compare to prior earthquakes, the termination of the impact with Tsunami and radioactivity, which has kept just as from getting to some parts of the country.

It means that there is no good historic benchmarks to go by sure to be adding up all your limits and making sure that you’ve got the reserved and that’s a conservative approach and in fact, as I mention IBNR more than governs are remaining exposure in Japan, but even in New Zealand if you look at the way that looses jumped from report to report both of the government program, which were not on, but also from the other big Australian ensures who are participating. We’ve cleared to us it just going to take significant amount of time for these losses to settle down and to some pattern where we think we can reasonably predict the ultimate as the reinsurer.

So, our view is that the clients haven’t got their right yet the government is involved to having it count it right yeah there have been big jumps. Some areas of the countries are off limits and so I just kind of felt that there is first level of precision in allocating the IBNR to different events. Our job is to get it right in aggregate and I’m very comfortable that that’s what we’re doing getting it right in the aggregates and to allocate it to a particular events I’ll probably bet you a dollar that I talked to you two quarters from now I would have moved $0.50 from one event over to the other because that’s how they mature.

So, I just felt like we’ll be giving a forced level of precision until we really are in a position to give good precision there is no reason to go down that path and it’s not actually helpful to investors. So our remaining exposed limits to Japan and New Zealand are less than the difference between our carried and actuarial indicative loss reserves. We feel like we’re quite confident in where we are but rather than split them out and just assume that all the limits are exhausted in each case or one case and not the other. We’re just putting up as an IBNR as it starts to clarify then we’ll allocate it as the individual events.

Matt Carletti – JMP Securities

Yeah, I can’t disagree and I think that particularly in a period of increased frequency of cat events, particularly earthquakes that are a lot harder to estimate than say windstorms that makes a lot of sense. I guess my kind of where I’m coming out from I think may be some others would feel the same it used to be a lot easier to try to project these kind of attritional loss rate for the accident U.S. cap loss rate kind of before the introduction of the RDE and I think the disclosure on the queue is very good. If you guys could put that into the supplement at some point, I think that will be helpful just to get that color to for us to be able to know what some of the moving pieces are and getting to that kind of attritional rate because I think two of the past three quarters it’s been a bit higher than anybody has expected and with the other the balance of the second quarter being a lot lower than was expected. So, just trying to get more granularity in being able to see through the results.

Ed Noonan

Hey, Matt, I’ll take that advice. That’s a very good suggestion. My only problem is that Consolino is a little flat to ask about the supplement of these. I’m not sure if I’ll be able to convince him to add more numbers to it.

Matt Carletti – JMP Securities

Okay. We’ll try to get a quorum to convince him.

Jeff Consolino

And actually, Matt, I hope you can get the supplement to be 50 pages or longer. This will be, it’s quite an improvement over the 39 pages.

Matt Carletti – JMP Securities

I hope that works. I have just two quick ones and I’ll get out of the way. Why were G&A expenses, they look to be quite low in the quarter, was there something kind of one-time or atypical going on there?

Jeff Consolino

No, it’s not atypical, but when we go through it, it will be pretty clear to you. We accrue our performance bonus pro rata at the time in the first half of the year and then true it up in the last two quarters of the year. We’re proud of our record on a relative basis this year but we’re not on track to achieve the financial targets that we set for ourselves that result in performance compensation being paid out at target levels or anywhere near target levels. So, we didn’t have any accrual for performance incentives in the quarter. I think if you went back to 2008, you’d see a similar trend.

Matt Carletti – JMP Securities

Okay, perfect. And then lastly, just, could you comment on kind of appetite and timing for getting back to share repurchases?

Jeff Consolino

We’re precluded from repurchasing shares during dependency of our exchange offer. So, we will be back in the market once our exchange offer is consummated or terminated.

Matt Carletti – JMP Securities

Great, thanks very much.

Jeff Consolino

Thanks Matt.

Operator

And our next question will come from the line of Amit Kumar representing Macquarie. Please proceed.

Amit Kumar – Macquarie

Thanks and good morning.

Jeff Consolino

Hi, Amit.

Amit Kumar – Macquarie

Just going back to the previous question, I appreciate your comments that, you don’t want to get into the numbers at this point and the numbers could evolve differently going forward. But I think, to us and the analyst community it would be helpful if you could at least give an approximation as to the buckets of the $58.5 million number?

Jeff Consolino

I guess, I understand, why that’s helpful to you. And our desire is to help you feel to do your job as well as you can. This is a kind of a mirror of the conversations that we had internally. Putting in either bucket there is an arbitrary next to it at this point. And so it really gets to the essence of why we didn’t put it in bucket. It’s just we’d be giving you false precision and as I say, I would bet that those numbers will move around and if we put $2 in one bucket and the $1 and the other, six months from now it would be a buck and a half in each bucket and we won’t give any false precision to the investing community.

As the events clarify themselves, obviously we will. But as I said, the important thing for us was to make sure the overall reserves reflected in our total remaining exposure to both event and in fact our overall reserves reflect more than that. And so, anything beyond that is really as I said just kind of there’s an arbitrary next to it given the clients and the governments involved are enabled to start to bring this down to realistic ranges, and so I don’t feel like we have the ability to either.

Amit Kumar – Macquarie

Okay. But all as being equal at this point looking at events today, you would agree that a majority of that is related to Japan and not New Zealand?

Jeff Consolino

Yeah, I think that’s right Amit.

Amit Kumar – Macquarie

Okay, that’s helpful. Just moving on to AlphaCat Re or AC Re 2011, $150 million of capital, $60 million or so on premiums, how should we think about that going forward? I mean how much more can you write through that and you said that there was capital available going forward if market conditions are good. I mean could there be another sidecar like an AC Re or what are your thoughts on that?

Jeff Consolino

Sure, Amit. The vehicle AC Re 2011 is a fully collateralized vehicle and therefore it’s tackling right premium is based on its unencumbered capital plus the premium and sales because the client expect their full image to be collateralized. So, if you give us sort of making assumption as to what rate online might exist in the market, you can gross up the capital for the premium and reach a conclusion.

As I said, on the prepared comment that’s been written more than $60 million of premium in turn, almost all of that is six-month deal. So since that business is done a loss Re and that capital will be available to write in like amount of business going forward in 2012. The comment Ed made about the ability to expand it is exactly as designed much have been of the so called just time capital approach or Accordion sidecar and the sidecar is designed to facilitate additional entry of capital and for our investors sees the kind of opportunities that they like we have the underwriting mention can recommend to them that they were on a good return at their capital as we’re getting closer to generate for our underwriters are having a look at that and while the in-conversations that the capital is very definitely valid to us.

Beyond AC Re 2011, we are looking at other opportunities to put our underwriting acumen into work with other people capital, we are always in those kinds of discussions, people seem to value your underwriting and our risk management. And so we’ll have opportunities to do that subject to again what the pricing is, will feel and talk more concretely about this after the 11 renewals on our next quarterly conference call that access to underwriting capital is something that we have free and variability to reach out in GAAP which is a good position to be in.

Amit Kumar – Macquarie

Got it. And then just one final question, this is for Ed, you talked about the European RMS 11 model changes and then you said it still hasn’t even contemplated that demand. Are we talking about tens of billions of dollars and you demand out of that or what sort of impact do you think this would have for 2012? Thanks.

Ed Noonan

Is not tens of billions of dollars by any means I mean it’s actually more that the model changes has some interesting effects we’re effectively the pan European companies are less effected than localized companies, which is in kind of a counter intuitive assessment and I finally going to in too much more detail because we feel like we’ve got some proprietary advantage, but I think my point here is that I’m not expecting to see demand kick off at 11, I don’t think the European market has gotten even got as fair bit of understanding the model changes. And so I don’t think it will be an influence on their buying decision.

But I think it will, by mid-year by next January 1 or I think it will have a significant impact. And even if it doesn’t lead to more demand in the aggregate although we think it will. It will lead to shift some demand and there’ll be some companies clearly we need to buy more and so we feel like we’re in a position today to reshape our portfolio in anticipation of changes that we see coming down the line.

At a point in time, when our camp research team in Europe as we seem to be the first one talking to plans about this and certainly have seem to have a lot more insight to it. So, the feedback we’ve got from the European clients was outstanding that someone was sharing our insights with them. And as I say I think the opportunity for us is less about a big weight movement, it’s less about big demand uptick and more about being ahead of the market in positioning our portfolio for the changes that will come as a result of the model change.

Amit Kumar – Macquarie

Got it. Thanks, thanks for the answers.

Ed Noonan

You’re welcome.

Operator

And our next question now will come from the line of Josh Shanker representing Deutsche Bank. Please proceed.

Josh Shanker – Deutsche Bank

Yeah, good morning following up a little bit on the last question. Going into the end of the year thinking about your appetite also thinking access capital and whatnot I can be sort of go through the calculation little bit there in terms of how much money you think you have to deploy and if you don’t get the opportunity you might use for a capital return?

Jeff Consolino

Josh, we haven’t ever really provided a precise calculation of our excess capital because the very notion of excess capital is subjective and different entities or organizations deal with it different ways. We do have our stated risk appetites of not wanting our one in 100 year windstorms exposures with the 25% of consolidated capital. You do that math you’ll see that we have significant margin over that level.

We don’t rely on models. We don’t want to deploy reinsurance aggregate more than 65% of our reinsurance company capital on any one zone. That has tended to be more restrictive than any other major capital adequacy or risk appetite so you can do that math and see that we still have a several hundred million dollars margin there. Beyond that we keep a careful watch on the standard imports and add that capital models because it’s our desire to continue our upward arcs and the readings. Certainly think our balance sheet and our franchise position leads us in that direction.

We also have the advent of built out in Bermuda to replace some insolvency margins and also solvency too in Europe. So there are a lot of different ways to look at capital. We feel like we have got a very, very comfortable excess capital margin over the level we need to keep to have a margin of safety amount all those measures over the minimums and what that turns out to be in practice will be one we back out in the market buying shares. We have nearly $400 million remaining under our authorization and when we reactivate that we see no reason why we can’t use it.

Josh Shanker – Deutsche Bank

Would it take a market hardness of the level of 2006 post Katrina to want you to go fully back up to your maximum tolerance?

Jeff Consolino

Yeah, I mean the theory that we try and work to is that you take on your max from tolerance when prices are best, prices are pretty good today, to be honest with you. It wouldn’t cause us to use our max aggregates but prices are pretty good. It wouldn’t take a whole lot more to start to feel like today the margins and the business are so attractive that we should commit more aggregate to it. But, as part of it is the broader issue of where is pricing and what are the margins, part of it is very granular, what opportunities are available to us in the market today.

As I mentioned earlier, in the U.S. its 7/01, we didn’t hesitate to cut lines on programs where we fell like we weren’t getting paid, despite the fact that the broader market in general is well priced and so in those cases, we redeployed the capital. So until we get out until, kind of somewhere around December 1, December 15 we will have enough of a feel for, the market will be at January 1 start to make hard calls on, capital and excess capital and where we want to be. But, if we do think that we’re in a pretty attractive pricing environment, the cap risk. And so, I wouldn’t anticipate increasing our areas materially unless there is unique opportunity that causes to want to do it.

Ed Noonan

Hey Josh, I’m assuming your question was surrounding your balance re-segment. We’re obviously in good growth in Talbot that’s well in the last quarter and in underlying rate and that it validates Re. We’ve got an excellent team there as well just like the Talbot, great underwriters, great risk management, great relationships with distribution. We’ve had very good growth and gross premium income and that’s the real measure of the expansion of our franchise whether we’re standing that franchise using our capital and our aggregate or whether we’re doing that in vehicles like ACE Re 2011, our mission undertake full advantage of the good things we have going forward Bermuda with Validus Re.

Josh Shanker – Deutsche Bank

Well I understood. Well good luck and navigating next couple of months should be interesting.

Ed Noonan

Thanks very much Josh.

Operator

Our next question will come from the line of Jay Cohen representing Bank of America. Please proceed.

Jay Cohen – Bank of America

Yeah thank you. A couple of questions, I forget…

Ed Noonan

Hey Jay no good morning or anything just a thank you and right away you’re counting us for questions? Come on.

Jay Cohen – Bank of America

I got a lot of questions. So, I wanted to get right to it. No, I don’t know anything, In AlphaCat, I might be confused what is your ownership of AlphaCat now?

Ed Noonan

Jay, our ownership of the common equity interest is 35%.

Jay Cohen – Bank of America

Okay, did that change and a slightly lower number?

Ed Noonan

Well, your lower number might have included the preferred equity interest, which doesn’t participate in the per rata share earnings you get to up tick preferred dividend. There is a vehicle 45 million of preferred which doesn’t get equity method in earnings and (indiscernible) it’s preferred dividend.

Jay Cohen – Bank of America

Got it. And then I guess sticking with AlphaCat, is this a vehicle that you see existing as you go into the win season of 2012?

Ed Noonan

Yes. It intends the right business for the 2012 underwriting year and buy at terms unless otherwise extended we’ll return its capital to its investors at the end of 2012.

Jay Cohen – Bank of America

At the end of ’12, okay. Bigger picture question I guess for the U.S., are you surprised and this is for I guess Ed or Jeff at the relatively slow adoption of RMS 11 by U. S. Company it feels like companies are still talking about we’re still getting our hands around. This was introduced in February I’m little surprised myself I don’t how you guys feel about it.

Jeff Consolino

Jay, it’s hard not to be a little but cynical when you look at the increases and expected losses coming out of the model very clearly one reason for slow adoption, I’m sure among some percentage of the population is that it would require a significantly more capital and they will be visiting the rating agencies until sometime next spring and so there no reason to adopt it until the ready agency says actually we’re not using it into model work. I think people – I think the reinsurers talk about the change in their portfolio as a result of RMS ‘11 and it’s interesting it wouldn’t track with what we think the changes are likely to be. So I think that the slow adoption is less about understanding the model although there is legitimacy to that. But that there is a significant part of it that is just if we adopt the model then we’re going to have to buy more reinsurance where we’re going to have to have a higher capital charge when we go to the rating agency. Let’s wait and see how it plays up.

Jay Cohen – Bank of America

Got it. That makes sense I guess the last topic trans Atlanta, which I’m not sure what you can say about it these days anyway but if you could talk about timing you wouldn’t want and no one would want too much uncertainty in that vehicle as we head towards the renewal season and obviously you are contemplating buying this company. Can you give us a sense of when you would expect this all to be resolved one way or another if you had your way?

Jeff Consolino

My apology Jay not to be evasive in terms of our confidentiality agreement with Transatlantic precludes us from commenting on the status of negotiations and we ought to comply with our agreement there.

Jay Cohen – Bank of America

That’s good Jeff. Okay that’s all I have for now. Thanks a lot.

Jeff Consolino

Thanks, Jay, good morning.

Operator

(Operator Instructions) Our next question will come from Ron Bobman representing Capital Returns. Please proceed.

Ron Bobman – Capital Returns

Good morning.

Jeff Consolino

Hey Ron.

Ed Noonan

Hey Ron, how are you?

Ron Bobman – Capital Returns

Great thanks. I don’t think Jeff would have gone and answer even if you had said good morning. So I had a simple question, I believe you bought a meaningful amount of retro at about mid-summer and I was if I’m right, is the bulk of that or is all that sort of six months life retro or should I think of it as a 12 months life retro?

Jeff Consolino

Its 12 months retro.

Ron Bobman – Capital Returns

Okay, thanks a lot.

Jeff Consolino

Yeah, it covers not only win payroll but quiet payroll and so it will give us real protection for 12 months and Ron is going through our financial statements, 10 to 12 month basis.

Ron Bobman – Capital Returns

Great. Thanks and best of luck with all.

Jeff Consolino

Thanks Ron.

Ed Noonan

Thank you.

Operator

And at this time there are no further questions inside the queue. I’d now like to turn it over to management for closing remarks.

Ed Noonan – Chairman and Chief Executive Officer

Well thank you very much. So often considered we’re feeling rather bullish about the business. So our model is performing very well, our balance sheet continues to look great and we have leadership positions in the most attractively priced classes in the global market. So I’m looking forward to coming back and tell you how long in our next earnings call. Thanks you all for taking the time to join us.

Operator

Ladies and gentlemen this does conclude your presentation. At this time you may all disconnect and enjoy the rest of your day.

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