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Validus Holdings, Ltd. (NYSE:VR)

Q4 2011 Earnings Call

February 3, 2012 9:00 AM ET

Executives

Jon Levenson – Executive Vice President

Ed Noonan – Chairman and CEO

Jeff Consolino – President and CFO

Analysts

Amit Kumar – Macquarie

Josh Shanker – Deutsche Bank

Michael Nannizzi – Goldman Sachs

Brian Meredith – UBS

Matt Carletti – JMP Securities

Ian Gutterman – Adage Capital

Mariza Costa – Stifel Nicolaus

Ron Bobman – Capital Returns

Operator

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

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host Mr. Jon Levenson, Executive Vice President. Please proceed, sir.

Jon Levenson

Thank you and good morning. And welcome to the Validus Holdings conference call for the quarter and year ended December 31, 2011. After the market closed 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 February 17, 2012. Details are provided on our website.

Leading today’s call are 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 maybe 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 supplement.

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

Ed Noonan

Thank you, John, and good morning. And thank you all for taking the time to join us today. 2011 was a devastating year with catastrophe loss of roughly $110 billion across the industry, almost on par with 2005 when Katrina, Rita and Wilma occurred.

For Validus, 2011 was in many ways our most fulfilling year. Despite being one of the largest international catastrophe reinsurer, we would deliberately underweight in all of the territories affected by the year’s cat events. For Validus Re and Talbot underwriters generated underwriting income in the year with combined ratios below 100%, despite one of the worst years in history for their respective markets.

We had net operating income of $52.3 million for the year and grow our book value plus dividends by slightly less than 1%. We also finished the year with our balance sheet in great shape. Our reserves are strong, our assets clean, high quality and short duration, and our overall capital adequacy actually improved going into 2012.

The January 1 renewals were extremely successful and we have plenty of capacity available for opportunities for remainder of the year. A year ago, we were restricting our cat business as rates were coming off, since then we’ve had three quarters of strong growth which we expect to continue over the coming months. There is a great deal to cover in the quarter and I’ll provide more commentary on losses, market conditions and our view of the market after Jeff covers our financial results.

So, with that, let me turn the call over to Jeff Consolino.

Jeff Consolino

Thanks, Ed, and thank you all for joining the call today. In particular, I’d like to welcome those of you who became more significant shareholders at Validus in 2011, and also those analysts who resumed coverage on our company after being restricted in 2011, welcome back.

Before I provide an overview of the fourth quarter 2011 results of operations and our financial position, I’d like to talk about the year we had in 2011 from the financial point of view.

As Ed mentioned, 2011 delivered at least $108 billion in catastrophe and man-made disaster losses to the worldwide reinsurance and insurance industries. This is the largest cat bill for the industry since the Katrina, Rita and Wilma year of 2005 which hit $120 billion.

Despite this, in 2011 we recorded a combined ratio of 99.4%, which means despite the repeated and severe worldwide losses in the year, our underwriting was profitable for the year.

We reported net income of $21.3 million for the year and by doing so, we have now produced the full year profit in each of the six years in which we have been in business. We were profitable in 2011 despite booking $633.9 million of notable catastrophe losses and loss expenses for the year, and providing additional $78.0 million as reserve of development on events.

You can look this up yourself, but we believe only four companies in the 19 company Bermuda and reinsurance peer group that we track, have been profitable in each of the six years in this span of time. As with 2006, we’ve been able to focus on growing our business rather than grappling with losses, capital adequacy or potential rating exchanges.

For the fourth quarter of 2011, net income to Validus common shareholders was $27.3 million, this with $0.25 per diluted common share. Net operating income to Validus common shareholders was $23.4 million or $0.21 per diluted share.

Diluted book value per common share at quarter end was $32.28, we paid a $0.25 per share dividend in the quarter and so this is annualized growth of 3.7% in diluted book value per share plus accumulated dividends through the quarter.

By getting out of 2011, without reducing our shareholders financial net worth, our track record since formation is at 13.3% compounded annual growth and diluted book value per share plus accumulated dividends, since our IPO this is 12.7%.

Speaking in more detail to the quarter’s results of operations, in the fourth quarter of 2011 gross premiums written on a consolidated basis increased by 7.6% to $278.3 million, this is an increase of $19.5 million over the prior year’s quarter in dollar terms.

This follows on 13.7% and 17.1% growth in the third and second quarters of 2011, respectively. Of the $19.5 million increase in consolidated gross premiums written, the Validus Re segment contributed $20.5 million or more than 100%. This is growth of 60.4% over the prior year’s quarter to $54.5 million.

The fourth quarter is a light premium quarter for the reinsurance business, but the last three sequential quarters for Validus Re have seen growth in gross premiums written of 60.4%, 28.2% and 20.2%, reversing the 4.5% decline in gross premiums written in the first quarter as we took a cautious approach to the January 1, 2011 renewal season. That was before the significant market losses in 2011 and seems like a long time ago.

At January 1, 2012, we grew our managed reinsurance premiums for Validus Re by 10.7%, while reduced our peak zone aggregate for Validus Re by $312 million. This is a 16% decrease. In contrast, we are now deploying over $340 million of aggregate in AlphaCat Re 2011. Ed is going to cover the January 1st in more detail in his further comments.

Our quarterly combined ratio was 97.4% including a loss ratio of 68.6%. As we announced on January 11th, during the quarter we incurred one notable loss event the Thailand flood.

Total net loss and loss expense before considering the effect of reinstatement premiums with the Thai flood was $54.1 million. This represents 11.1 percentage points of impact on the loss ratio. After the effected inward and outward reinstatement premiums, the total economic effect of the Thai flood in the quarter was $55.5 million.

Favorable prior year loss development in the quarter was $42.8 million. This benefitted the loss ratio by 8.8 percentage points. This quarter brings total favorable prior accident year development in 2011 to $156.1 million. This compares to $156.6 million of favorable prior accident year development in calendar 2010.

Our growth in IBNR at quarter end stands at $1.22 billion and our net IBNR at $1.09 billion, while we released $42.8 million from prior accident years in the quarter, we increased our IBNR for 2011 events in the quarter by $38.6 million. This is in addition for events occurring in 2011 rather than prior calendar years, so that will not up show in the prior accident year development.

We also added $78.0 million to the reserve for development on events in the quarter. Our IBNR now stands at 48% of our $2.26 billion in net loss reserves. Our underlying loss ratio excluding these items in the quarter was 42.4%.

Before closing, let me briefly address AC Re 2011 and quarterly investment results. AC Re 2011 was previously consolidated in calendar 2011 in our financial results, as we initially held its 57.5% majority of the outstanding voting rights after the May 2011 formation.

On December 23, 2011 certain investors subscribed for $71.0 million of additional shares in AC Re 2011 after which the company no longer holds majority of the outstanding voting rights. Consequently, Validus now holds AC Re 2011 as an equity method investment this year in balance sheet. This is $53.0 million on the balance sheet as of December 31, 2011. Going forward into calendar 2012, we will no longer consolidate AC Re 2011 results of operations. Our economic interest in AC Re 2011 now stands at 22.3%, down from 36.0% in calendar 2011.

Our consolidated investment portfolio, December 31, 2011 is $6.0 billion. Net investment income for the quarter was $28.0 million. This is a quarterly annualized effective yield of 1.84%, an increase of 4 basis points from the Q3’s 2011 annualized effective yield of 1.80%.

Net investment income of $28.0 million was also up sequentially, rising $0.3 million from the third quarter. In the quarter, we realized $5.4 million in investment gains. This is principally from the sale of treasury securities and selected corporate bonds, and our net unrealized investment gain in the quarter increased by $2.2 million. As of December 31, 2011, the duration of our investment portfolio continues to be short at 1.63 years.

Finally, at December 31, 2011, our total stockholders equity is $3.45 billion and total capitalization is $4.0 billion. Debt-to-capital at quarter end was 6.2% and taking debt and hybrids together, those instruments were 13.5% of capital. Our financial leverage remains very low and we have a substantial capital margin above our targeted risk appetites and rating agency targets.

Now, back to Ed.

Ed Noonan

Thanks, Jeff. Let me start by talking about the loss activity we saw in the fourth quarter and during 2011. The Thai flood losses are yet another very unique event. While we’ve seen broad inundation of a developed area in New Orleans as a result of Hurricane Katrina, we’ve never experienced such widespread flooding in an important and specialized manufacturing region. The Thai flood will take months to start to crystallize in terms of the industry loss, as business interruptions and contingent business interruption will be key driver of the event.

Additionally, the fact that in many cases Thai manufacturing was the disaster recovery plan for Japanese companies affected by the Tohoku earthquake, means there is little spare capacity to be brought online to mitigate the business interruption, particularly for sophisticated disc drives and some automotive parts.

While we’re currently estimating the industry loss of $12 billion, our reserve is not predicated on a particular industry loss. We think it’s important to look at the key sources of loss in this event to understanding exposure and I break them down as follows.

First, there will be significant losses from indigenous companies in the territory, both from catastrophe covers and quota shares. We’re not a writer of this business in any meaningful way as the risk return profile has not met our standards. We believe this portion of the loss will affect the local reinsurers, the European players and the Singapore market.

The second area of loss arises from the Japanese interests abroad treaties, in which Japanese insurers provide coverage for their clients’ risks outside of Japan. The Japanese markets by its quota-share, risk excess and cat excess for this exposure. We also write very, very, little of this business as we’ve not been satisfied with the pricing and terms. Some of these programs are going to be an absolute disaster from reinsurers.

The third area involved is the direct and facultative portfolio of many players, particularly Lloyd’s Syndicate. We’ll pick up a few losses that we’re aware of, primarily from our onshore energy account. But in this area as well we have not written any meaningful exposures even though we’re one of the largest players in Lloyd’s of Singapore. We felt that rates were not adequate in the territory. But we do expect this to be an area of surprises for the market as supply chain interruption will cause losses for companies all over the world.

Our exposures in Talbot is small and well reinsured, and so we don’t expect many net surprises. This is an area that will affect the major global account insurers, many Lloyd’s underwriters, some quite disproportionately and again the Singapore market will be badly affected.

The fourth area of risk and one that concerns us most comes from the catastrophe programs and the major global writers in the retrocession market. However because the loss is broken down into multiple events under the hours clause in most treaties, cedants must keep multiple retentions.

As a result, we’re not seeing significant losses from the major global accounts at this point. The retrocession market would normally be large source of law -- source of loss, but most retro programs have used up to bulk of their coverage in the New Zeeland and Japanese quake.

So, in total, while this event will take time to develop, we’re very comfortable with our exposure. We think they will pick up some marine cargo losses in addition to the few claims that have been reported to date. But our chief exposure would require the major global carriers that -- to get into the cat programs as a result of one or more of the events. Several of the global have local subsidiaries that purchase their own reinsurance which we have largely avoided.

Turning to the New Zealand and Japanese earthquakes, we continue to see companies increasing their loss reports. We carry significant IBNR for each of these events individually. The situation in New Zealand grew increasingly complex with large portions of Christchurch being deemed unhabitable going forward. This loss will therefore remain somewhat unpredictable for a while.

The Tohoku earthquake industry loss grew as a result of Zenkyoren announcement which I can’t believe was a surprise to anyone in the market. We are watching to see the effect on other insurers with major exposures in the affected region particularly some of the mutual.

I’d like turn now to our reserve for development on events. This is a reserve we carry in recognition that in periods of multiple significant events, there is additional volatility around reserves in total. By way of example, in 2010, we established the reserve for development on events in recognition of the volatility arising from the Chilean Earthquake, the Melbourne floods and the Deepwater Horizon explosion.

We subsequently allocated part of this reserve to the Chilean Earthquake, while it turns out our reserve for Chile has proven to be more than adequate and the reserve wasn’t required. But at that point in time, we believe that the loss had greater potential. By having established RDE, we were able to maintain reserves at a very high confidence level which is always our goal.

As part of our year end reserving review, we evaluated the each individual event and established what we believe to be a prudent reserve including IBNR for each catastrophe. However, in light of all the loss activity in the market this year, we felt it’s prudent to increase our reserve for development on events to $78 million at year end.

This reserve does not apply to any particular event and if you asked me to guess where it maybe needed I would tell you, frankly, I don’t know. What I do know is that from my experience, loss reserve movements from complicated events tend to have asymmetrical outcomes with an upward bias.

Our job is to make sure that our balance sheet remains rock solid and giving the ongoing uncertainty around all of these events, we would prefer to be prudent and I have to come back and talk about these losses in the future. The favorable development that we have experienced quarter-after-quarter is the reflection of the conservatism.

We set our reserves well above the actuarial central estimate and that gap grew at year end. We’re perfectly comfortable with this level of prudence, particularly in light of the complexity associated with the type of mega disaster that occurred during 2011.

Turning to market conditions, we undertook some material changes to our portfolio and Validus Re at year end. Our view is that rates had to move sharply to reflect loss activity and the change in expected losses arising from the commercial models. We used all of the commercial models, as well as our own and we felt that the revisions made by RMS did suggest higher loss cost.

We don’t agree with all the changes made by RMS, but as we’ve been saying, we think that directionally they are right and we’ve incorporated a significant amount of the underlying science into our own model PML.

Consequently, we held the line on pricing very firmly. It was a difficult market for brokers in terms of price discovery as there was wider than usual range of the reinsurer closing most programs. This was a type of environment that we thrive in, as we have strong confidence in our analytical abilities. While the market ultimately settled in an orderly fashion, there were wide disparities and rate adequacy between programs and layers which we took advantage of.

The upshot is that we achieved the risk adjusted 15.7% rate increase on U.S. business, several points higher than the market consensus. To accomplish this, we had to be prepared to walk away from business and we didn’t hesitate to reduce our lines on programs that didn’t meet our rate requirements. This is what led to our outperformance on rate increase.

Some total of our underlying activity was a $300 million reduction in our zonal aggregates in our core Validus Re book. Our general sense is that we have adopted model change more rapidly than the general market.

As you know, PML disclosure is spotty among our competitors and we are highly suspect of some of the disclosure we do see based on actual outcome. We don’t believe that all of our competitors are adequately capitalized in light of model change and the net losses they incurred in 2011. Our portfolio is extremely well-positioned and we expect to be able to capture more opportunities as clients and competitors start to come to grips with the full impact of model change.

Our goal is to provide the best transparency possible to you and you can see that while we shrunk our zonal aggregates by 16%, our PMLs actually moved up by 21%. We accomplished this while maintaining and actually modestly improving our overall capital adequacy, leaving us in a great position for the balance of 2012. We’ve already seen and bound attractively priced business as companies are trying to lockup capacity ahead of April 1 renewals.

Rates in the retrocession market were particularly attractive 1/1, with rate increases in the 20% to 25% range. We don’t like to overweight our Validus Re portfolio with retro business and so we used our AlphaCat 2011 sidecar to write $288 million in limit at January 1st, essentially offsetting the reduction in our core book. The sum total was a 10.7% growth in managed premium. This is the first quarter we’ve spoken about managed premium, but we expect this to be an important metric going forward.

AlphaCat Re 2011’s results was sterling for 2011 and we paid as both the participant in the risk, as well as the share of the profits generated. Our international cat portfolio was a mixed result at January 1. We were disappointed in the European market as rates were essentially flat with the exception of loss affected covers.

There is too much capacity in this sector with the European reinsurers particularly those whose capital has recovered being market share driven. We also saw the Zurich market, which is populated by subs of Bermuda and London companies has been very aggressive to market share at 1/1. Consequently, we shrunk our European book slightly to reflect rate levels. With regard to Zurich market, we observed that secondary center seem to feel they need to write business to justify their overheads.

In Asia, cat rates were up sharply. The Australian market paid increases of 80% to 90% on average. The Japanese market doesn’t have any major 1/1 renewals, but we expect rates to move sharp with April 1 and we believe this market may reach price levels consistent with our view of risks and become attractive. Having been underweight, we have ample capacity should prices become interesting.

The marine reinsurance market was essentially flat for hull and cargo business. Marine energy however continues to see stronger rate increases as a result of the losses over the last two years. Our book saw 20% rate increases at January 1. We expect rates in the hull market to begin to move up what has a result of the Costa Concordia event.

Turning to Talbot, rates were up 3.1% for the full year. We saw rates as flat or increasing in 17 of 23 classes. The biggest gainers were the energy and property markets with rates up around 10%. The weakest class was aviation with rates down 2% to 4%.

Talbot has an outstanding track record that will continue in 2012. We expect the results from the Lloyd’s market to be ugly with some of the bigger syndicates posting the worst results. Talbot was again profitable and we expect their performance to again be top quartile. The management team and underwriters at Talbot are extremely disciplined and their conservative approach to reserving continues to be a source of ongoing favorable reserve development.

We are beginning to see the London market come to grips of that result in the January renewals. The picture is improving rapidly in the onshore energy market with the rate increases growing now more than 20%.

Property rates are up 3% to 5%, but given Lloyd’s losses in this class and the fact that the market is significantly dependent on both reinsurance and the RMS model, we expect rates to move sharply upward for property business as well

Our Costa Concordia losses in keeping with our market share in marine direct and reinsurance line which is averaged around 4% to 5% to major losses. We are working off a range of $845 million to $950 million for the loss. But the nature of the protections that we’ve purchased causes our loss to stabilize at this level even if the event were to grow to be at $1.5 billion loss.

Going into January 1st renewals, our goal is to position the company for continued market leadership in the future. This was the complex test that I feel we accomplished beautifully. We finish 2011 underweight all of the industry losses. Our reserves were in excellent position. Our portfolio fully adjusted for model change and our capital fully intact and position for further opportunity.

When we acquired IPC Re, there was a fear that we were overly concentrated in cat risk. Our view was that with our underwriting and risk analytics, we would easily digest the business. The IPC international book is book we mostly kept, but restructured.

Our performance in 2011 was not good fortune, but rather than result of delivered underwriting decisions and formed by our analytical team. That’s the model that we hope to build and that’s the model which allowing us to attract increasing amounts of third-party capital to continue to grow our business. We feel like our position has never been better.

So, with that, I’ll stop there, we’ll be happy to take any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Amit Kumar with Macquarie. Please proceed.

Amit Kumar – Macquarie

Yeah. Thanks and good morning. Just going back to the RDE discussion, I’m curious why this was not part of the pre-announcement?

Ed Noonan

Amit, actually, if you think about the pre-announcement was based on a single event. The RDE is part of our normal reserve closing process where we evaluate all of our events and look at the IBNR. We have associated with each and then determine whether in fact we think an additional IBNR in the form of an RDE is necessary. So that process took place completely independent of our assessment for the Thai flood loss and frankly, didn’t conclude until we were closing our books well into January.

Amit Kumar – Macquarie

And is there some sort of a reporting threshold where you issue a pre-announcement just based on the level of reserve adjustment?

Ed Noonan

If it were a single event, Amit, I think, we have a pretty good track record of pre-announcing, but given that, this is a -- in essence a reserve to cover multiple events over the course of the year, it’s not possible to break it down into individual events from a disclosure standpoint and so we look at it as part one of our general reserving process. And again, if you were to try and disclose it, it would have come within just a few days of our earnings call today.

Amit Kumar – Macquarie

Okay. Just moving on, then I’ll come back, on the discussion on capital. I think your 1:100 in U.S. is 21%, 22%. I’m curious how do you think of capital going forward especially as it relates to your outstanding buyback?

Jeff Consolino

Sure. Amit, we look at capital on a number of basis, we have regulatory requirements in Bermuda and in London, we have rating agency standards we adhere to our rating agency partners and we have our own internal risk appetites which we have communicated.

Overall, the movement you see in PML from the October 1 portfolio to the January portfolio reflects the full adoption of RMS 11 into our figures and that does erode, if you look at our stated risk appetite of 1:100 not being more than 25% of consolidated capital, the capital buffer we have over the net stated risk preference.

On the other hand, our utilization of zonal aggregate went down. So we have more room as of the January 1 portfolio than we had for the October 1. Net-net, we think we have more capital flexibility after January 1st than we had before and our excess capital figures as we measure them on any relevant metric exceed the $382 million we have remaining under our buyback authorization.

Amit Kumar – Macquarie

And then on to the plans for buyback?

Jeff Consolino

We have our Board meeting coming up next week. But we don’t need Board approval to undertake buybacks. In the past we’ve done things that were opportunistic as buying in the market and we’ve done things that are more targeted to get a lot of stock all at once.

Speaking as financial management, we’d have to evaluate where the stock price is to see whether we want to be in the market, whether we want to do something more significant and we’d also want to assess what we expect to do at June 1, July 1 elsewhere in the quarter. So, I don’t think we’re in a position to tip our hand right now as to what our repurchase plans are, but you’ll know it when you see it.

Amit Kumar – Macquarie

Okay. And final question and I’ll comeback. You mentioned the Japanese market how you were under rate, maybe Ed can expand on what is expectations are for 4/1 renewals and how much capital you can deploy at what you believe would be an adequate rate? Thanks.

Ed Noonan

Yeah. Amit, if you go back over the period of time on our call, it was probably either the first quarter less or the second quarter less, we talked about our analysis of secondary territories and I believe that the market was charging roughly half of what was required for extreme events in secondary territories, essentially the Pacific Rim, so in a market like Japan, if the cumulative rate increase gets to something like 100%, rates now start to meet our threshold. It certainly won’t be every program or but it will be some programs or some layers of programs.

In that eventuality we have plenty of capacity to put to use, I’m sure, frankly, I don’t imagine that there will be scenario where we would run out of capacity for Japan. Rates would have to get very attractive for that to happen. But if rates do start to move up into an area that we think is attractive then we do have the capital to put to work and we’d be happy to do so.

Amit Kumar – Macquarie

I guess what I’m trying to ask is, does it happen when you look at 4/1, you allocate capital, does the buyback come after that, I guess that’s what I’m trying to understand as to..

Jeff Consolino

Yeah. Anything we did in Japan wouldn’t affect our capital position for the year, because we do have capacity available for Japan without changing our overall capital position.

Amit Kumar – Macquarie

Got it. Thanks.

Jeff Consolino

It might influence our PML, our global PML slightly on a 1:100 win basis, but I wouldn’t imagine that would be material relative to our capital thinking.

Amit Kumar – Macquarie

Got it. Thanks. Thanks for the answers.

Jeff Consolino

Okay.

Operator

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

Josh Shanker – Deutsche Bank

Good morning, everyone. Couple questions, the first one regards AlphaCat Re, you grew your premium 1/1 by 10.7%, how much of that growth was provided by AlphaCat Re?

Jeff Consolino

Virtually 100% of it, Josh.

Josh Shanker – Deutsche Bank

So you didn’t take much exposure or price return figure out how the renewal sort of you changed your exposure I guess, but didn’t increase your exposure or how should I understand we’re not doing 1/1 a little bit better?

Jeff Consolino

Here is one way to think about it and I’m referring back to page two of our earnings release. So, overall, we had an increase in our January 1st business from $525 to $582. That’s an increase of roughly $57 million.

AlphaCat at 1/1 wrote $76.1 million, so that’s more than 100%. So if you take out AlphaCat, we were actually writing less business in our rated company Validus Re. However, we’ve cut our peaks zone aggregate for U.S. win, in fact Validus Re from $1.953 billion at October 1 to $1.641 billion at January 1st, that’s about 16% decline in aggregate employed during the quarter.

So, as I had mentioned in this commentary, we were in the process of trading off rate for exposure in Validus Re and holding a line on rate increase that had the effect of delivering an exceptionally well priced portfolio on Validus Re at the expense of our aggregate deployed and the opportunity in the retro market was the converse of that, we had great opportunity to employ a lot of aggregate at a very good rate. So I think you’re seeing, on a consolidated basis a mix shift away from first year reinsurance and towards retro at this point in the pricing cycle.

Ed Noonan

Yeah. The way I think but Josh we surely went after rate at 1/1 and we maximized our rate increase for Validus Re portfolio and that required us to shrink the portfolio somewhat because not every deal was going to meet our criterion and so we did cut our lines on programs in many cases where we felt that they weren’t up to the rates standard we wrapped or and that’s how you get to a 15.7% rate increase whereas the market is talking about 10%.

At the same time, the capacity that wasn’t used in Validus Re was essentially used in AlphaCat Re 2011 in the retro market where again we were going after price and price was extremely strong in the retro market. So, what I would say is that, our goal is to reposition the portfolio and maximize return against it as always and so we went after price in both of those two segments and I feel like we accomplished that very, very well.

Josh Shanker – Deutsche Bank

Okay. Additionally in the commentary from the press lease on the RDE, it says you currently have an RDE reserve, I guess of $96.6 million. So, if you subtract out the $78 million that gives you about $20 million from that you just put into it. How big was that RDE portfolio at the end of last year and how much got allocated through the course of 2011 to 2010 events?

Jeff Consolino

Hang on one second, Josh. We added in the first quarter of 2011 $50 million to RDE and then we have -- that down of course 2011 and put up $78 million. So overall our RDE going into the year, let me do that math, hang on one second. We had $18.6 million of carried RDE at the beginning of 2011.

Josh Shanker – Deutsche Bank

And so, it sounds all through the course of the year you deployed $50 million of it which, all -- is it wrong for me to say that you fully intend that this RDE that you have put up in the fourth quarter of 2011 will indeed de deployed.

Ed Noonan

Josh, there is absolutely no way of knowing. All I can say is that it’s really based on a level of conservatism on that, with so many events out there we reserve each one very prudently with its own IBNR and we have got a ton of IBNR for events.

The RDE is just the recognition that when you have major complicated events like this that there is volatility and the volatility typically works against reinsurers and so, it’s just a measure of prudence that we take.

I can’t tell you today whether we expect to fully utilize it or not, but it’s -- from our perspective, we’d rather be strongly reserved and confident in them and we’re not be in a position to come back talking about 2011 next year or year after.

As it’s worked out in the past, our reserves generally burn off very favorably and I think that just reflects our overall level of conservatives. But I can’t tell you at this point in time whether the RDE will get allocated fully in part, not at all, it’s just -- it’s not something that you can put tight parameters around that way.

Jeff Consolino

And, Josh, this is Jeff. I want to come back. I made the error in going balance sheet to balance sheet rather than looking at income statement to income statement. So, we posted in 2010 total RDE of $33.4 million, some of which was consumed during the course of 2010 and some of which has been consumed in 2011. So the $18.6 million number I gave you was the figure that stands for the 2010 postings. It still exists at our year end 2011 balance sheet

Josh Shanker – Deutsche Bank

Okay. Okay. And then just following-up on Amit’s question, you said that you wouldn’t know, if you only knew about the RDE a few days ago. Just to understand your thoughts if you were to $78 million general RDE charge, would you pre-announce that in the future, but you definitely didn’t know what the time or the types of that pre-announcement?

Jeff Consolino

No. We absolutely did not know the type of this pre-announcement. We sell RDE as a part of our overall reserving process at the end of each quarter and it’s in many ways at the backend of the process, so at the backend of the actuarial process as well and it’s really a collective assessment of everything we know about each individual event and how we look at it and what the potential for wildcards maybe.

So they are really wasn’t some point in time ahead of the earnings release where we would have said, hey, we’re increasing our RDE by $78 million as it would have within just last few days before the earnings release came out and again it’s not a specific event, so I am not sure, how exactly we would disclose it.

Obviously, 2011 is a very unusual year we have, the earthquake in Japan is outside of human experience, the earthquakes in New Zealand and the effect on Christchurch is something the industry hasn’t seen and then you have the Thai flooding, which frankly again, we’ve never had such a widespread flooding in a very specialized manufacturing area where that capacity cannot easily be replaced.

And I would challenge anybody to tell me what the effect on -- of that loss capacity on the global supply chain is and ultimately the continued business interruption losses. So, with all that uncertainty out there, we just felt that it was prudent but it does come at the end of our reserving process which is really towards the end of closing process as well.

Josh Shanker – Deutsche Bank

Thank you. Here is too much calmer 2012?

Jeff Consolino

I’m with you.

Operator

Your next question comes from the line of Michael Nannizzi with Goldman Sachs. Please proceed.

Michael Nannizzi – Goldman Sachs

Thanks. Just a question on the new or the higher outside participation in AlphaCat, was that new investors or was it existing investors taking up their current share and then just a couple follow-up from that point, please?

Jeff Consolino

Michael, it was existing investors choosing to subscribe for additional shares after we as underwriting manager shared with them our business plan for 2012.

Michael Nannizzi – Goldman Sachs

Got it. And then, as you kind of talked about the retro market and it sounds like placing more of that business in AlphaCat. I mean does that -- does this kind of change your strategy into kind of looking towards expanding that platform or putting more business onto AlphaCat, if that market continues to show improvement ahead of the rest of the reinsurance market?

Jeff Consolino

We still have some capacity to deploy in AlphaCat Re 2011 if conditions continued to want so. The purpose of the entity is very much to address what we thought was a formal or a short period opportunity in the market. So, we’re matching a short-term opportunity with a short-term vehicle.

It’s unambiguously though our desire that when we come across market opportunities like this that can deliver attractive returns that we not only use our own capital to benefit from it, but create portfolios for investors so that they can benefit from it as well.

So even though AlphaCat Re 2011 might be designed by its term to expire at the end of 2012 under the AlphaCat brand, we’d like to continue to pursue this type of business venture…

Michael Nannizzi – Goldman Sachs

Okay.

Jeff Consolino

… depending on what sort of ever the market opportunity tells us are available.

Michael Nannizzi – Goldman Sachs

Got it. And then just in terms of, Ed you mentioned 15.7% rate change. Can you kind of talk about where that was relative to your expectations heading in and where that ended up being relative to where you’re trending losses on the cost side, just to think about margin contribution for that new written business? Thanks.

Ed Noonan

Sure. When going into a renewal season, we expect the rates to be up 12% to 15% and we kind of based on our assessment of the impact of global losses, the impact of the tornadoes in U.S., even though Irene was modest that still had an impact and model change. We felt like the market needed to increase by something in the 12% to 15% range.

So, hence we took a very strong position on it and we went out early and advised the broker’s program-by-program about pricing and for us it was a late renewal season. I think for the market in general it was, but probably for us a bit later, because it was kind of hand-to-hand combat for us to be able to get to that type of pricing.

So, ultimately, what it took from our underwriters was the willingness to say, well, if you’re only offering an 8% or 10% rate increase, then I’m going to cut my line on the program significantly and use my capital elsewhere where I can get better pricing and all that led to a risk-adjusted year-on-year increase in rate of 15.7%. So if you think about it model neutral, our pricing went up by 15.7%.

Michael Nannizzi – Goldman Sachs

Got it. Great. Thank you very much.

Operator

Your next question comes from the line of Brian Meredith with UBS. Please proceed.

Brian Meredith – UBS

Yeah. Good morning, gentlemen.

Ed Noonan

Hi, Brian.

Brian Meredith – UBS

A couple of question here for you. The first one, Jeff, I believe you mentioned that there was some additional IBNR in the quarter put up for current year events, is that true and how much was it, did it come from Japan, New Zealand, where did it come from and is that’s what’s impacting the attritional loss ratio in Validus Re?

Jeff Consolino

Yeah. The number is $38.6 million.

Brian Meredith – UBS

Right.

Jeff Consolino

It is related to 2011 event obviously recorded in the fourth quarter of 2011, so that would be separate than the favorable prior accident year developments and that wouldn’t be picked up in the PPD, and are supplement to it elsewhere.

In terms of where it comes from the largest portion is Japan and then there are some ups and downs from other events, New Zealand earthquake part two, et cetera. So, obviously, there was one particular Japanese program out there that was well known to us it’s indications going up, so that would be a piece of this.

Ed Noonan

We still Brian maintain a lot of IBNR on the Japanese loss. Despite the reportings, our view as is I said, I don’t think anybody could have been surprised by the Zenkyoren loss.

Brian Meredith – UBS

Got it.

Ed Noonan

But we think that that could potentially have follow-on effect on other carriers and in the effected territories, and so we still maintain a reasonable level of IBNR against that individual event as well.

Brian Meredith – UBS

Got you. I’m just curious why wasn’t that $38.6 million an offset in the RDE?

Jeff Consolino

Well, that’s one approach to take although I observed that it’s greater than the aggregate RDE that we went into the quarter last which was $18.6 million.

Brian Meredith – UBS

Yeah.

Jeff Consolino

Our goal is to have an aggregate level of reserves which represent management’s best estimate and so that’s where we wind up.

Brian Meredith – UBS

Okay. Great. And then, taking a look at the U.S. hurricane PML 1:100, I’m assuming is that Southeast hurricane?

Ed Noonan

You can’t associate it with an individual event actually. It’s the 100 contribution from all U.S. windstorms in the model.

Brian Meredith – UBS

Okay.

Ed Noonan

And so it’s, likely there are any number of Southeastern events that would generate that type of PML, but they are equally event that could strike other parts of the country that would get you to that type of number as well.

Brian Meredith – UBS

Right.

Jeff Consolino

And bear in mind we also include offshore Gulf of Mexico in that figure.

Brian Meredith – UBS

Right. And I guess my next question is going into Florida renewals coming at the 6/1, given where your PML is right now. Are you going to be limited at all in your ability to take advantage of any supply demand imbalance that I think some people are anticipating that can happen there? And then, maybe your comments and thoughts on what’s going on down there, Ed?

Ed Noonan

No. I don’t really feel inhibited, Brian. I think our PMLs were up to 21% or 22% based on the impact of model change primarily, but in restructuring the portfolio, the way we did at 1/1, that still leaves us room for a significant amount of additional aggregate.

And if Florida is paying up, as well as we might hope it would, then I wouldn’t hesitate to deploy that aggregate. Pricing is pretty good and the Florida pays up much more then I think we’re starting to get back to pricing that we saw last in maybe 2007. So I think we do certainly have the room.

As far as what goes on in Florida, you don’t want me to read you board to figure out all the moving pieces there. It’s clear that citizens would like to start to reduce exposure, it’s also clear that citizens kind of residual home for everyone the takeouts that goes past. So I don’t imagine that citizens will be reducing exposure.

Again, they talked about buy reinsurance, it’s an annual event they talk about buying reinsurance and well, that materializes or not, I don’t know. So, I don’t have a clear picture today of what the aggregate demand situation will look like in Florida. I think that will probably emerge over the next month or six weeks.

Brian Meredith – UBS

Great. Thanks.

Ed Noonan

Okay.

Operator

Your next question comes from the line of Matt Carletti with JMP Securities. Please proceed.

Matt Carletti – JMP Securities

Hi. Thanks. Good morning. Just few questions, first one is on the accident year ex-cat attritional loss ratio, if I heard you right, Jeff it was about, I think 42%, which is up just a couple of points from kind of mid 39% last quarter? Is there anything in particular impacting that mix shift or otherwise?

Jeff Consolino

Of course, exactly, that’s go in mix shift as you got to look at the balance between earned premium in Validus and Talbot. Talbot of course is a very steady period-to-period underlying loss ratio and their earned premium has gone from, I think 191 in Q3 to 209 in Q4.

For Validus Re, we generally believe that the accident year non-cat loss ratio underlying would be somewhere in the range of 20% to 25%. Just trying to do that way throughout 2010 through 2011 when you adjust for the prior year quarter, you get numbers like you asked.

I prefer to look at them on a full year basis, so for the full year 2010, it was 20.0%, specifically. For the full year 2011, it was 26%. And so, I think that’s in the range that we’re talking about if you’re building a model you select whatever you thought was appropriate.

Matt Carletti – JMP Securities

Okay. And then…

Ed Noonan

Interesting, Matt, out of our specialty book, one or two programs that were running hot in the quarter, nothing that suggest to us some systemic issue but it’s something that we watch very closely, but other than there was nothing untoward.

Matt Carletti – JMP Securities

Okay. And then going back to kind of you talked about part of the addition in the quarter, the largest part of it being related to Japan. Can you make -- can you give us any indication where you are versus limits now and whether it would be total Japan exposure or Zenkyoren in particular?

Ed Noonan

Oh! Yeah. Certainly, Zenkyoren, yeah. Yeah, as far as total limits exposure, Matt, I’m not sure, I apologize, I should probably have that at the tip of my fingers, but I don’t. We do have -- having totaled the Zenkyoren program and several others really or at least our exposure on several others. I’m not sure that I can give you a great number as to limits exposed, part of it I guess, whether there is some remaining limit exposed in the retro account or some of the global covers.

So I apologize, but probably the best indication I can give you is that, in Japan on top of reserves we carry, we still as part of that have a pretty meaningful slug of it is IBNR. But I don’t know the remaining limits exposed today but we can back to you on that.

Matt Carletti – JMP Securities

Okay. Fair enough. And then last quick one is, just revisiting the buyback discussion. The stock is a little below book value now, is it open this morning. I mean is there, what’s your view on buybacks generally right now as it relates to book valuation and I guess specifically, is there kind of a hard and fast stop at book value or might we see you in the market at small margins above that?

Jeff Consolino

When the stock was 23 or 24, I think that’s a no-brainer then you want to be aggressive buying the stock.

Matt Carletti – JMP Securities

Yeah.

Jeff Consolino

And anytime you buy stock full of book value not, only do you get a bigger piece of the pie of future earnings for your remaining shareholders but you give them an increment in their book value per share just by retiring shares below book.

That phenomenon gets eroded and ultimately gets eliminated if you’re buying stock back at book or premium. And so we need to situationally look at what we think about our prospects, what we think about retiring stock at or above book and we’ll pace our buybacks accordingly.

Matt Carletti – JMP Securities

Okay. Thanks. Best of luck in 2012.

Ed Noonan

Thanks, Matt.

Operator

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

Ian Gutterman – Adage Capital

Hi, guys.

Jeff Consolino

Hi, Ian.

Ian Gutterman – Adage Capital

First on Concordia, can you -- was that all at Talbot or is it a bunch of that flow down to reinsurance?

Ed Noonan

It varies depending on the size of the loss, but Talbot is roughly a third of the contribution.

Ian Gutterman – Adage Capital

Okay. Got it. Okay. On the PML, Jeff, can you help me understand how AlphaCat flow is into the PML disclosure, is everything that right go in there, just your ownership stake and none of it now the recent equity investment, how does that work?

Jeff Consolino

It works really in proportion to our participation in the capital structure and so there is PML that’s resident within AlphaCat that we contribute, but once in advance it goes out the top of our equity no one would make any kind of contribution to our PML.

In the same way, I think, included within our aggregates to the extent of our equity investments. So our current carrying value of AlphaCat is $53 million. So the contributing $53 million of aggregate and all the zones that’s exposed in $53 million would be the outer limit of what it could contribute to PML.

Ian Gutterman – Adage Capital

Okay. Got it. Okay. And so, what I was trying to figure out was, if including Alpha then premium for 1/1 is up 10% and that’s mostly rate, which implies units didn’t grow, why is PML up so much. I understand aggregates are down, but I would think…

Jeff Consolino

Okay.

Ian Gutterman – Adage Capital

… if you’re recently writing the same amount of units, PML shouldn’t really change?

Jeff Consolino

The adoption and publication of RMS version 11...

Ian Gutterman – Adage Capital

It is…

Jeff Consolino

… within our the caps model.

Ian Gutterman – Adage Capital

And that wasn’t in Q -- you didn’t have that in Q3?

Jeff Consolino

No.

Ian Gutterman – Adage Capital

Okay.

Jeff Consolino

We’ve been running at for purposes of testing. We’ve been providing that data to the rating agencies from the time that we had it first out of the box, but the January 1st portfolio is the first time we’ve put that information out to the public. So that’s why you get the dichotomous results of aggregate being down about 16%, yet you’ve got 1:100 went from PML up about 21%.

Ian Gutterman – Adage Capital

Okay. Got it. Yeah. I was wondering if there was some kind of shift in where you’re writing, if you’re writing up higher than before and therefore using less ag limit and taking more PML or something like that, so there is no sort of change in the shape of the portfolio then?

Ed Noonan

A little bit, Ian, in that, what we found was that the high layers in the U.S. were less attractively priced in general. And so in the main our portfolio probably shifts down just a bit not because we look to move down but because we reduced our high layer participations on programs that will be about the only shift.

But, you know that change in PML that you just referenced, when we look across the market, I was saying in my comments before, it’s difficult to gauge because not everybody actually discloses the information and as I said, those who do were little bit suspect about it.

But our view is that when we know lots of about many of our competitors to say, this is a big event and not everybody will be able to adjust their portfolio the way we did and come out with fully embedded revised model data and still have adequate capital to write their business they currently write.

And so our sense is that it may well create an interesting moment in the marketplace where there could be some players who have to raise additional capital or otherwise reduce their business as a result of model change. It wouldn’t surprise me to have some people kind of flux the model change based on our sense of how they do PML in general.

But I think there is only so much you can do, when we look at the, if you took just the raw impact of the RMS model, I don’t think very many companies would be in that position, but you’re talking about roughly a 42% increase and expected losses across the typical reinsurance curve.

Now, I think most company is probably or less than that, but still we’re talking about very, very meaningful increases in PML. And so, it will be interesting to see if one of our competitors actually have the capital to sustain the type of risk that they’ve been writing historically.

Ian Gutterman – Adage Capital

And I think unfortunately a number I have tried to deny the changes and convince the agencies that it’s okay to ignore it, but we’ll see how long that last? Thanks, guys.

Jeff Consolino

Yeah. Thank you.

Operator

Your next question comes from the line of Mariza Costa with Stifel Nicolaus. Please proceed.

Mariza Costa – Stifel Nicolaus

Hi. Good morning.

Ed Noonan

Good morning.

Mariza Costa – Stifel Nicolaus

I have a quick question on the Concordia. Actually I -- one of your competitors in Europe had a conference call this week and someone asked a question if that event would drive up prices and they said, no. So, obviously, that’s a bit different from what you guys are expecting. If you could comment on that and also there’s been a few cargo ships that’s been sinking this year so far, the one in Turkey and the two in the Philippines, would you guys have exposure to any of those?

Ed Noonan

No. Nothing, I’m not aware of any exposure or anything of those and so anything we might have would be, I don’t want to say, trouble, but insignificant. The issue on Costa Concordia, I think the European company you are referring to is a primary insurer, and whether or not it affects primary rates is unclear. I’m pretty comfortable it will affect insurance rates. The marine reinsurance market in general has gotten beat up. The P&I Clubs I think on this event are going to be smarting as well.

So, I’m pretty confident in its effect on the reinsurance market. We don’t necessarily agree with the view that it won’t affect direct prices. If you think about it, Lloyd’s is still perhaps the biggest marine market in the world. Lloyd’s has had a brutal year. The marine classes have contributed to that in terms of offshore energy losses and so while Costa Concordia and hull in particular may not be as bad as the rest of the market, I think there’s a general correction that follows as a result of Lloyd’s is likely to post this year. And so, I’d be surprised if we didn’t see direct hull rates rising as well.

Jeff Consolino

I believe the operator of the Costa Concordia is the biggest purchaser of hull coverage in the world and I think it’s counterintuitive that they wouldn’t see a rate increase based on this event?

Ed Noonan

Yeah.

Mariza Costa – Stifel Nicolaus

Yeah. Now, probably a dumb question, but could the actual loss for this event go up, if the loss were to reach like crazy amounts of money for the people that or is it not included in the policies or would that be a separate policy, how does that work?

Ed Noonan

Well, the loss can be whatever, the liability component of it, it ends up determining those. The hull itself is worth about US$513 million, is varying estimates of what it will cost to pump all the oil off and essentially remove the wreck. But we are working with an estimate of something in the $100 million to $200 million range and that maybe conservative. There’s probably some salvage value to the hull, maybe $75 million.

Mariza Costa – Stifel Nicolaus

Okay.

Ed Noonan

And then the remainder of the loss would be the liability component.

Mariza Costa – Stifel Nicolaus

Okay.

Ed Noonan

Italy is not a signatory to the Athens treaty and so it’s not clear that that will apply. There are already class actions being filed in the States. Who knows whether they will get jurisdiction. And so the liability piece of it is the wildcard and I think that will take a good deal of time.

As I say in our own case, the outward protections that we buy against our marine portfolio mean that the loss could go from $950 million today to $1.50 billion and it wouldn’t change our loss at all. So, we are -- I think we feel pretty comfortable with our own positioning. But a lot of this is just going to depend on who gets jurisdiction in the courts, what the class actions look like and what Carnival is able to settle the liability claims for.

Mariza Costa – Stifel Nicolaus

Yeah. Okay. Thank you.

Ed Noonan

You’re welcome.

Operator

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

Amit Kumar – Macquarie

Thank. Just two quick follow-ups. You mentioned a risk adjusted rate increase of 15.7%?

Ed Noonan

Yeah.

Amit Kumar – Macquarie

What exactly is that number? Is that just the year-over-year change in rate online or maybe just explain on that?

Ed Noonan

If you think of our units of risk as the total insured value underlying our business, year-over-year we got 15.7% more rate for the same amount of total insured value.

Amit Kumar – Macquarie

Got it. Make sense. And then, secondly just…

Jeff Consolino

Ed you miss that, that’s the U.S. portfolio…

Ed Noonan

Right.

Jeff Consolino

… out of the three that Ed referring to.

Amit Kumar – Macquarie

Okay. And just going back again to the RDE discussion, we can’t get enough of that. How exactly is this estimated? I’m just sort of going back and thinking about other cat players and obviously, this is not widely used by our competition. I mean, are you estimating, I don’t know like pure IBNR and then setting some amount for incurred, but not enough or what exactly, how do you -- so just walk us through how you came up with that number?

Ed Noonan

So each of that we reserve individually and we have the reported claims, we have our assessment of exposure and likely claims and ranges around that, and so we establish an IBNR for each event. And those two components make up our reserve for each event, and those are we think prudent and conservatively stated.

But when you have so many multiple big events like this with so much uncertainty around them, our -- my view from experience is that earthquake claims are very tricky. They have a longer tail than most other catastrophe claims. There are unexpected outcomes. We are seeing that in New Zealand, three or four months ago nobody was thinking that such a wide area of Christchurch would be deemed to be inhabitable forever and always, and that the significant change of loss.

I’m not sure that we understand yet everything that may come out of Japan and so while you do the best you can to assess your exposures and then to put an IBNR on it based on everything you know there is still things you don’t know. I’m sorry to sound like Donald Rumsfeld, the things that we don’t know that we don’t know is essentially the issue.

And then if you add the Thai flood on top of that, actually we didn’t base our loss estimate on an industry loss we’re kind of thinking it was $12 billion, but it could be $15, it could be $20, I frankly don’t have a clear idea of what the industry loss will be and I’m not sure how anybody could at this point.

And so, we -- I broke down all the different areas of exposure that it could come from. We look at our exposures there and what it would take for us to sustain losses. And today we feel very, very confident and comfortable with where we are. But we know that things are going to change. They may change for the better. They may change for the worse. But so much of this is just unknown.

So, for me to set an IBNR for Thailand, for example, I’ve already got IBNR for the individual event. But for me to establish the level of prudence that I’d like, for that I’d like to have a lot more than what we think we need on the new individual event, because there is some small potential that the loss could have some different dimensions to it and that’s true each one of the claims.

So, when you have, if you think about from a mathematical standpoint, you’ve got a series of events, we know that the more large events you have, the more volatility that will be around the ultimate outcomes. And so there should be some reserve to reflect that volatility and that’s what the RDE is, that’s really reserved, it sits above all the events to reflect the potential from volatility.

And outcomes typically are asymmetrical and with a strong upward bias, and so it may well be that, I spent too many years in the casualty business and so I’m always looking for belts and braces. But I tend to look at it and say that, knowing that there is a upward bias in the outcomes, I rather be as prudently reserved as we possibly can.

So, that’s how we end up there and that’s why I cannot tell you that that reserve should apply to any one claim whether a dollar of it should go here or there, it really is just a judgment based on the totality of the claims and the volatility, particularly the claims this year that are so far outside of a normal events.

This isn’t like estimating a U.S. hurricane or U.S. tornado. These are mega events in well-developed urban centers, with lots of follow-on implications that the industry has never dealt with before…

Amit Kumar – Macquarie

Yeah…

Ed Noonan

… so it’s really safe than sorry.

Amit Kumar – Macquarie

No. What I was, I think what I was going to ask is, what is the estimation process, is it X percent or is it the difference between, current IBNR and ultimate limits, like how did you exactly come up with this $76 million number, what is that based off of?

Ed Noonan

Yeah. I mean, I think you hit on some of the elements of it. If you look at the way I described how we think of Thailand, we break losses down into all the particular components and potential exposure areas. It is the same in setting up an RDE. We look at every element of exposure on all the different claims, sometimes you measure that in limits exposed and sometimes you measure it in other ways. We look at what we know about the loss, what our ceding companies know about the loss at this point in time and that’s really a critical issue to us.

How much do our clients actually know? If you are basing your report at least in part off of what clients are reporting to you, you need to understand how much they know and in these events of this magnitude and complexity our clients know relatively little.

So, I can’t give you a formula. It really is based on an assessment of all of these various risk elements around all the claims that we got that our best judgment as to what a prudent reserve above that should be.

Jeff Consolino

Amit, I know you started this by saying you couldn’t get enough about the topic. So I would point you to our critical accounting policies disclosure commencing on page 51 of our 10-K and page 44 of our third quarter 10-Q, if you wanted to have a look at that and…

Amit Kumar – Macquarie

Okay.

Jeff Consolino

… review it at your leisure.

Amit Kumar – Macquarie

Yeah. I will do that. Thanks so much.

Operator

And your next question comes from the line of Ron Bobman with Capital Returns. Please proceed.

Ron Bobman – Capital Returns

That’s a great idea, Jeff.

Jeff Consolino

I wouldn’t by the way limit Ron your review of our SEC filing that we believe that all of the approach is creeping.

Ron Bobman – Capital Returns

I think just thank to what the Street times you are in white paper there, you should put that on the website. I had a question about Thailand and it seems that sort of, I don’t know if you used the word horrific, Ed. But it seems that the worst portion of the loss to make its way into the reinsurers is going to get -- is going to do so by the way of reinsurance of direct Thai companies or…

Ed Noonan

Participation there, I mean…

Ron Bobman – Capital Returns

Yeah. Participation on some of the JIAs and in the past, I have heard you sort of describe it as Validus exposure as sort of virtually nothing and then today you described the JIA participation as very, very little. Could you get more specific as far as how much business you actually assume from those two different types of exposure channels?

Ed Noonan

So, indigenous companies, I think what we’ve got at this point is $3 million loss on small auto program that we liked and I guess that could get worse, cars get flooded out. But I don’t think that that goes to $10 million or $20 million, or anything like that. And for Japanese, we have a very small percentage on a single risk excess of loss program that has an event cap on it for -- that may pick up exposure coming out of Thailand.

So I think my past descriptions were accurate, I probably should have reviewed them and used the same wording, Ron, but I didn’t think anybody would be so analytic to go back and actually get all my adjectives right call to call, but I credit you for that. But I hope that doesn’t make it into the transcript.

Ron Bobman – Capital Returns

I’m sure it will. Okay, guys. Best of luck.

Ed Noonan

Thanks, Ron.

Operator

With no further questions in queue, I would now like to turn the conference over to management for closing remarks.

Ed Noonan

Well, thank you all very much. As I said, I feel like the company is extremely well-positioned for 2012. I think we came out of the gate very strongly, the price per unit of risk is up very nicely and we’re looking at market conditions that I think again favor the short tail lines pretty significantly. So we look forward to talking to you at the end of the first quarter and like everybody else, we’re hoping for quieter year, but we’re prepared for either. Thank you.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect. And have a great day.

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