RenaissanceRe Holdings' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb. 8.12 | About: RenaissanceRe Holdings (RNR)

RenaissanceRe Holdings Ltd. (NYSE:RNR)

Q4 2011 Earnings Call

February 8, 2012 09:00 a.m. ET

Executives

Peter Hill – Investor Relations, Kekst and Company

Neill A. Currie – President and Chief Executive Officer

Kevin J. O'Donnell – Executive Vice President, Global Chief Underwriting Officer

Jeffrey D. Kelly – Executive Vice President and Chief Financial Officer

Analysts

Keith Walsh – Citigroup

Joshua Stirling – Sanford Bernstein

Vinay Misquith – Evercore Partners

Michael Zaremski – Credit Suisse

Joshua Shanker - Deutsche Bank

Michael Nannizzi - Goldman Sachs

Doug Mewhirter - RBC Capital Markets

Operator

Good morning, my name is Natalia and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Fourth Quarter 2011 Financial Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

I would now like to turn the call over to Mr. Peter Hill. You may begin sir.

Peter Hill

Good morning, and thank you for joining our fourth quarter 2011 financial results conference call. Yesterday after the market closed, we issued our quarterly release. If you didn't receive a copy, please call me at 212-521-4800, and we will make sure to provide you with one.

There will be an audio replay of the call available from approximately noon Eastern Time today through midnight on February 29. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The pass code you will need for both numbers is 44625687. Today's call is also available through the Investor Information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on April 19, 2012.

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

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

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

Neill Currie

Thank you, Peter. Good morning everyone and thank you for joining us today. 2011 proved to be one of the worst years on record for insured catastrophe losses. And as one of the largest participants in the property catastrophe reinsurance marketplace, our results for the year reflected this. I am pleased to say that we were able to achieve positive operating results for the fourth quarter, even though the industry continued to experience significant global insured catastrophe losses.

We had good underwriting results and a rebound in investment income during the quarter. We recorded an annualized operating return on equity of 7.7% for the quarter and an increase in book value per share of 2.4%.

For the full year however, the company sustained its second operating loss since 1993, the year we were founded. With an operating return on equity of negative 5.3% and a decline intangible book value per share plus the change in accumulated dividends of 1.8%.

Given the extent of loss activity over the last year I believe RenaissanceRe performed admirably in 2011. Through the earthquakes, tornadoes and floods, and the economic volatility that has dominated the news we calmly said about serving our clients. We paid claims promptly, quickly assessed our losses, and incorporated new learnings from each event and returned to the market equipped with new information and insights.

Our losses were within our expectations and well within our risk tolerances. We managed the company to be able to withstand multiple extreme events in one year and this was illustrated last year in 2011 as it was in 2005. No one event alone would have caused us to lose money during either of those years which included record losses such as hurricane Katrina and the Tohoko earthquake.

We absorbed changes to natural catastrophe models quickly and we’re able to share our insights with our clients. We [indiscernible] protection for existing clients and others seeking solutions to their problems. Consequently, we were rewarded with strong January 1 renewals and the ability to build an attractive portfolio of business. As we were expecting the property catastrophe market continued to indicate signs of gradual firming driven by the catastrophe losses incurred during the year, learnings from those losses, and to some degree by the new model releases. We do expect to see these drivers continue to play out in the months ahead.

I’m pleased with the continuing evolution of our specialty reinsurance operation and our Lloyd's syndicate. Both operations have great teams and I am confident in their ability to contribute significantly to RenaissanceRe over the coming years.

Our joint ventures Top Layer Re and DaVinci Re demonstrated their value to our franchise once again during 2011. Top Layer Re incurred losses as a result of the New Zealand earthquake and the Tohoku earthquake, and was there to accept renewal business for our clients when they needed protection. For DaVinci as well as achieving a successful capital raise back in June, we were able to further diversify our investor base and bringing in three new long term partners effective 11. DaVinci continues to be a key element of our strategy in our ability to manage our net risk by attracting external investors.

In addition, we were able to attract capital into new retro side car Upsilon Re which we established for January 1 to write aggregate retro session protection. This vehicle is already proving to be successful and offers the flexibility to be scaled up as opportunities warrant.

Our weather and energy risk management operation, REAL, posted a significant loss in the fourth quarter due to unusually warm temperatures for the winter season in the UK and parts of the US. REAL manages weather related risk for clients and the power and utility sectors and justice for our other underwriting businesses, our goal is to achieve superior financial returns over the long-term.

We expect results in this unit to be volatile and seasonal. Over the past 12 months, the team has successfully grown its customer base by helping their clients manage their weather related risk. 2011 was a year in which we continued to position our company for success and build for the future. Despite our losses we began 2012 with a strong capital position and industry leading financial strength ratings.

We are ready for the attractive opportunities and improving conditions in the markets we target in the months ahead, and we are focused as always for the long-term.

With that I’ll turn the call over to Kevin.

Kevin O'Donnell

Thanks Neill, and good morning everyone. I‘ll focus my comments for this call on the events of the fourth quarter as well as on the renewal and the market as we see it. Starting with cat, I think the overall market is relatively balanced in terms of supply and demand. Due to some large reductions in specific purchases and frankly fewer than expected new top layers purchased at year end, the overall US cat market did not grow appreciably.

However, according to our market segmentation, we did see an increase in the size of what we call the acceptable or most attractive portion of the market which reflects an increase in the number of desirable risks. We did see rate increases in the market generally but this varies significantly by region and the account loss experience. For the US, I’d estimate the rate increase is approximately 10% for the entire market. However, accounts that had seen losses were up approximately 25%, and accounts without losses or with hurricane exposure were up by as much as 15%.

Higher layers with low rate online saw larger increases than lower layers with higher risk on line. In general I am very pleased with the renewal with the rates we achieved moving up slightly more than I expected. In addition to the losses, rates were affected by the continued adoption of the new catastrophe model. With an updated view of risk increasingly incorporated into pricing.

As expected the rate change for the ’11 accounts was more easily absorbed by the more geographically diverse accounts that typically renew at ’11. We had a very good showing of business at year end and we achieved a combination of rate increases on existing accounts and growth in our portfolio. Overall, the US cat market expected loss ratio is higher after adjusting for the increase in rate given revised estimates of expected loss as seen in the vendor models.

This increase has not been across the board adjustment, the one that needs to be evaluated at the account level to determine rate adequacy. I believe our proprietary tools and our understanding of the impacts of the vendor models separates us from the pack and has allowed us to maintain the quality of our portfolio through a combination of rate increase and portfolio construction changes.

With regard to the international primary business, market continues to be significantly weaker than the US, and although we did see rate increases, unfortunately the net effect of the renewal was to increase this spread between the US and the international work as a whole. As we’ve seen over the course of the year, accounts with losses had greater increases than accounts without losses. For instance Australia and Japan were up more than 50% albeit from a very low base.

Loss free accounts, such as the European renewals, were up around 5%. We observed that even in very modest rate increases, attracted new or increased capacity from market players which capped the upside pressure on REITs. As in previous years, our portfolio continues to be dominated by non-concurrent or private deals, and we continue to be pleased with the composition of our own book and the returns we are achieving.

I think the retro renewal was the most dynamic one we’ve seen in years. The renewal was very late and capacity remained uncertain to the very end.

We saw significant opportunities and grew into what I would characterize as a dislocated market. We saw rate increases for retro driven by a combination of forces, including reduction in supply, and increased discipline in underwriting which was a result of both new models and more capital risk assessment by the markets. For non-US exposed retro, we saw positive improvements in economics.

In general buyers became increasingly shy about purchasing layers in this 30% rate on the line range. And these layers tended to be further geographically restricted which increased our appetite. Layers in the 20% rate online range were up over 15%. In general, I think focusing on price changes is not the way to look at retro, as coverages and the underlying risk seated often changes materially year to year. But directionally the market did improve materially.

In the past, our retro book was more heavily dominated by non-US exposure. While we continue to participate in this area, we also saw more opportunity to increase our US exposed retro. The US exposed retro comes in two main forms. The first is traditional access of loss retro accounts, and the second comes from our entrance into the aggregate structured retro market.

Worldwide retros in area that we’ve participated and at different times in meaningful ways got it pulled back substantially over the last few years due to pricing. The aggregate retro market is a market that has increased in size since 2005 and is one that we did not historically participate in, as the structures and pricing were not attracted to us. This market was heavily impacted by losses in 2011 resulting in significant improvement in both structure and price.

In addition to the improved pricing our underwriters increased our share of the market with Upsilon Re that was designed to efficiently accept this risk and allow it to be more readily available to the capital markets.

Historically much of this risk has resided in the collateralized markets, because it’s single shot which fits the collateralized product offering well and because for more technical reasons it’s a heavy user of capital on rated balance sheets.

Upsilon Re is structures that we can very quickly scale it up in response to increased opportunity or exit the market without much friction. We’re pleased with the initial results at year-end as we successfully wrote over 30 million of premium into this vehicle. We’re confident that our understanding of this risk and our retro underwriting capabilities generally will serve us well in attracting more capital should the opportunity persist.

Overall, 2001 was an active year for the cat business, and of course we were affected by the losses around the world. We’ve discussed many of these events on our previous calls, but I want to touch briefly on the Thailand flooding as it was a big part of the yearend renewal discussions for accounts with exposure in the region.

There is very little data available about real ultimate economic and industry total losses, and how we may flow through the reinsurance in retro markets. Additionally, I believe that the business interruption component of this loss will be very slow to determine and potentially unusually complex even for BI generally.

We continue to estimate that most of our exposure comes from retro, which I believe in this case, reduces uncertainty for us. At this time, we believe that the loss will likely be considered as single event for retro, for us it will be considered multiple events for reinsurance. It remains in early days and developments here will only play out over time.

As with all losses, we worked hard to evaluate the specifics of each event and to the extend needed to make adjustments to our macro view of risk as well as adjustments at the deal level to better reflect the risk that we took.

The losses of last year, although painful, have been a good learning experience for us and we’ve emerged with a better understanding of risk and stronger relationships due to our quick claim paying response and ability to provide customers with their understanding of their risk.

As Neill mentioned, our specialty book is doing well. We continue to see new opportunities to grow and diversify our book of business. With that said, the market remains difficult and from a pricing environment many lines is challenging, although we are beginning to see a few price spots.

Much of the opportunity that we saw came from credit related lines, and additionally we decided to provide some proportional capacity the certain casualty lines and some credit related specialty market lines.

I’m very pleased with our Lloyd’s operation and the franchise we’re building in London, we’ve made great progress in building the syndicate and believe that we have sufficient scope to continue to grow the franchise in this environment, as we’re still coming off a very small premium in a very large market.

Finally, I’d like to discuss our ventures operations, which has been very busy over the last quarter. Our ventures team among other things looks after joint venture partners, structures new deals like Upsilon and manages our weather and energy risk management business.

As Neill mentioned, the weather and energy risk management business had a difficult year. To remind everyone this business provides risk mitigation products against weather events, primarily temperature and participation for corporate clients worldwide. As customers or end users commonly utilities we often sell them dual trigger weather and energy products, which more efficiently capture the customer’s exposure than a weather only transaction. This approach has differentiated us in the market.

For this winter season, we had a large exposure in the UK which experienced the warmest fourth quarter in 50 years which significantly contributed to our loss. We had largely hedged the natural gas exposure we assumed and we’re able to manage the size of the weather loss to certain of the hedges we had in place.

In general, we believe that our approach to weather risk modeling pricing and portfolio management in this business is consistent with our underwriting approach overall. Thanks and I’d like to turn the call over to Jeff.

Jeffrey Kelly

Thanks Kevin and good morning everyone. From my portion of the call, I’ll cover our results for the fourth quarter and full year 2011, and also give you an update to our top line forecast for 2012. The fourth quarter was a profitable one for Renaissance REIT despite it being another active period in terms of large cash traffic loss activity.

As we preannounced on January 25th the net negative impact on our financial results from the flooding in Thailand totaled $45 million and we had a $31 million after tax loss related to our weather and energy risk management business.

In aggregate, changes to loss estimates for large catastrophic events that occurred earlier in 2011 had a $7 million net favorable impact. This was due to a reduction to our loss estimates for the Tohoku earthquake and Australian flooding more than offsetting increases to our net losses for other events including the tornadoes in the US and the February New Zealand earthquake.

On a net basis, our overall estimate of losses from these large catastrophic events has remained relatively unchanged from where they were originally boooked. As you can imagine though, the number of scale of the events during 2011 makes estimating these losses challenging. But I think under the circumstances risk, underwriting, and finance teams have done a thorough job in analyzing our reserve adequacy for each of these events.

As a reminder, the net negative or positive impact is the net loss or profit amount after accounting for net claims, reinstatement premiums assumed and ceded, lost profit commissions, non-controlling interest in joint ventures and our share of Top Layer Re losses. We’ve provided a detailed table on page 10 of the press release relating to the calculation of the net impact of these losses.

Investment performance was relatively strong in the quarter benefiting from a narrowing and fixed income spreads and a rebound in evaluation for alternative assets. We reported net income of $82 million or $1.58 per diluted share and operating income of $58 million or a $1.11 per diluted share for the fourth quarter. Net realized and unrealized gains which accounts for the difference between the two measures totaled $24 million.

Our annualized operating ROE was 7.7% for the fourth quarter and our tangible book value per share including change in accumulated dividends increased by 3.1%. For the full year 2011, we reported a net loss of $92 million or a $1.84 per share and an operating loss of $162 million or $3.22 per share. This was largely a result of the close to record level of global insured catastrophe losses during the year.

Also for the full year 2011, tangible book value per share plus change in accumulated dividends declined approximately 1.8%. Let me shift to the segment results beginning with our reinsurance segment which includes cat and specialty followed by our Lloyd segment. In the reinsurance segment, managed cat gross premiums written in the fourth quarter totaled $1 million compared with negative $4 million in the year ago period.

The fourth quarter tends to be a pretty light one in terms of catastrophe reinsurance renewals. For the full year, managed cat gross premiums written increased approximately 8% from a year ago adjusted for a $160 million of reinstatement premiums in the current year and $28 million of reinstatement premiums in the prior year period.

Managed cat premium growth during 2011 was largely a result of improved pricing trends during the June and July renewal seasons last year.

As a reminder, managed cap includes business written on RenaissanceRe Limited’s balance sheet as well as cat premium written by DaVinci, Top Layer Re, and our Lloyd’s unit.

The fourth quarter combined ratio for the cat unit came in at 30.1%. This included underwriting losses of $47.5 million related to the flooding in Thailand and as I mentioned earlier there were a number of adjustments made to loss estimates for several large recent catastrophic events.

We reduced our loss estimate for the Tohoku earthquake primarily due to what we believe will be lower retro losses than we had originally anticipated and higher recoveries partially offset by higher losses on one large client. This more than offset moderate increases to our estimates for other large events in 2011 including the February New Zealand earthquake and the large US tornadoes in the spring.

The cat combined ratio also benefited from $27 million of prior period net favorable reserve development including for the 2010 events I mentioned earlier. For the full year, the cat combined ratio was a 126.7% primarily as a result of severe losses related to major catastrophic events that occurred earlier in the year. Favorable reserve development for the cat unit came in at $59 million for the full year 2011.

Specialty reinsurance gross premiums written totaled $21 million in the fourth quarter, which was down compared with $26 million in the prior year quarter. For the full year specialty gross premiums written increased 13% compared with the year ago to a total of $146 million. This is roughly in line with our full year forecast for top line growth of 10%.

The percentage growth rate for this segment can be uneven on a quarterly basis given the relatively small premium base. The specialty combined ratio for the fourth quarter came in at a negative 3%. There was no meaningful large loss activity during the quarter and the combined ratio included $5 million of prior year net favorable reserve development.

For the full year, the specialty combined ratio was again a profitable 47% and benefitted from $78 million of favorable reserve development. In our Lloyd segment we generated $24 million of premiums in the fourth quarter compared with $9 million in the year ago period. Specialty premiums accounted for most of this amount. For the full year Lloyd’s gross premiums written increased 69% to a $112 million compared with the year ago period. This compares with our guidance of growth in excess of 50% for the year.

The Lloyd's unit came in at a combined ratio of 149% for the fourth quarter. The results of this segment included $6 million of losses related to the flooding in Thailand. The expense ratio remained high at 60.9% although we would expect the expense ratio to decline over time from this level as we continue to expand business volume written on this platform. For the full year 2011 the combined ratio for the Lloyd’s unit was 162.4% largely a result of the severe catastrophe losses seen over the course of the year.

Moving away from our underwriting results, other income was a loss of $44 million in the fourth quarter and a break down is provided in the financial supplement. As we had preannounce this was primarily because this line item includes a $41 million pretax loss or $31 million after tax loss related to real. The loss arose on a few concentrated derivative transactions that REAL had entered into protecting its clients in the power and utility sectors from the risk of an unusually warm winter weather in the U.S. and the U.K.

Equity and earnings of other ventures was a loss of $23 million. This was driven primarily by a $23 million loss we recorded for our share at Top Layer Re’s exposure to the Tohoku earthquake. We call the Top Layer Re as a 50-50 joint venture we have with State Farm whereby our partner provides a $3.9 billion stop loss in excess of $100 million retention.

Our results for the quarter included a $2.9 million income tax expense. Essentially what's going through the tax line here this quarter is a large tax benefit related to the losses in our U.S. operations including REAL which is not offset by the $22.6 million right now of our net deferred taxed asset within continuing operations and $3.8 million within discontinued operations. The net resultant is the $2.9 million of tax expense.

We recorded a full valuation against the net deferred taxed asset during the quarter due to three years of cumulative losses within our U.S. group. Had we not put up this valuation allowance, our result would have improved by $26.4 million during the quarter. But we felt that prudent and appropriate under GAAP to establish this valuation allowance. From an economic perspective though the deferred tax asset principally relates to net operating losses and these are available to be carried forward to offset future profits.

Our corporate expense line item includes $5 million of impairments for goodwill and intangible assets related to certain write downs at our weather predict subsidiary.

Turning to investments, we reported net investment income of $52 million and total investment income of $76.8 million which was driven by a few factors. First, our alternative investments portfolio generated a $28 million gain. Performance was strong across our private equity, hedge fund, and bank loan and high yield funds driven by a rebound in evaluations for these asset classes during the quarter.

Recurring investment income from fixed and maturity investments remain under pressure due to low yields on our bond portfolio and total $26 million for the fourth quarter. The total investment return on the overall portfolio was 1.2% for the fourth quarter. Net realized and unrealized gains included an income that totaled $24 million during the quarter. For the full year, we generated net investment income of a $118 million and total investment income of a $180 million benefitting from healthy performance on our alternative investment portfolio.

Recurring net investment income from fixed maturity investments includes approximately $27 million in derivative related losses for the year resulting from hedging strategies employed by our external managers. A total investment return for the full year 2011 was 2.9%. Our investment portfolio remains conservatively positioned primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure.

During the fourth quarter, we did continue to take a little bit of risk out of our portfolio by further reducing our allocations to corporate bonds and to non-US sovereign debt. At the same time we increased our allocation to treasuries and SBIC guaranteed corporate debt.

Our current allocation reflects our outlook for a potentially uncertain economic and financial market environment. The duration of our investment portfolio increased slightly to 2.6 years. The yields maturity on the fixed income and short term investment portfolio declined to 1.9%. As we’ve said on the prior call a sharp decline in the percentage of the AAA rating credits reflects the impacts of the ratings downgrade on U.S. government debt that we hold by one of the rating agencies.

Our capital position remains strong and we continue to have industry leading financial strength and ERM ratings. As Neill alluded to in his opening comments our ventures team brought three new cornerstone investors to DaVinci. As a result we took the opportunity to reduce our own stake in the joint venture to around 34.5% from approximately 43% at the end of the third quarter.

We view DaVinci as a long term vehicle that offers clients a balance sheet that is parallel to that of our own. During the fourth quarter, we resumed share repurchases buying back a modest 234,000 shares at a total cost of $17 million. Recall that we had stated last quarter that the level of share repurchases would likely be determined by our view of the market opportunities and capital utilization as we approach the January renewals.

For the full year 2011, we repurchased 2.9 million shares for a total of $192 million with most of these buybacks completed in the first quarter. As we head into 2012, we will continue to look for attractive underwriting opportunities to deploy our capital and we remain committed to returning excess capital to our shareholders. So far this year, we’ve repurchased a very modest 51,000 shares for a total of $3.6 million.

Finally, let me give you an update to our top line forecast for 2012. Before I do though please remember that there is considerable uncertainty around these top line estimates. The June-July renewals are our largest and are several months away. A lot can happen over the remainder of the year, so obviously our actual premium growth could be higher or lower in these estimates.

With that qualification for managed cat we estimate premiums will increase 15% in 2012 excluding the impact of reinstatement premiums. This compares with our prior top line guidance for managed cat of an increase of up to 10% including reinstatement premiums. In specialty reinsurance, we’re maintaining our forecast for the top line to be up over 20% and then our Lloyd’s unit we continue to expect premiums to be up 50%. Recall this growth is off a relatively small premium base and we’re in the building and growth phase for this platform.

Thanks, and with that I’ll turn the call back over to Neill.

Neill Currie

Thank you Jeff, good job guys, but there may be a question or two outstanding and we’re happy to answer those.

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from the line of Keith Walsh.

Keith Walsh – Citigroup

Hey, good morning everybody. First question for Neill. With the change in the guidance and the managed cat from 10% to 15% for 2012, has there been any tweaks to how you view retentions of your clients within that number and then I’ve got a follow-up?

Neill Currie

Good question Keith, first of all that’s almost an ammunition that I say every time that it’s not my preference to give guidance, but we found over the years that it is helpful to give you guys a view of the future, otherwise it can be a pretty wide distribution of guesses about the future. So you always have to take this with a grain of salt, pretty sure it won't be 15% and it will be higher or lower.

We like the way the market is shaping up. So, I’m looking forward to the coming year. It’s interesting, it varies client by client, there’ve been some increased retentions by some clients. One of the interesting things that we will be looking forward to during the year is will people be buying additional coverage on top primarily due to the model changes. We think there might be a little pent up demand there. So let me turn it over to Kevin, if you’d like to elaborate Kevin.

Kevin O'Donnell

We are thinking about retaining clients or retentions, average clients are purchasing?

Keith Walsh – Citigroup

Just as far as your client is retaining more risk.

Kevin O'Donnell

Yes, I think it’s different – I think that needs to be put in context of the model change as well. So what we’ve seen over the last 12 months is really the increased adoption of some of the new vendor models, and associate with these new vendor models the expected loss three premium is in general increased. So even at the same level of purchasing I think it’s reasonable to assume primary companies are increasing their retentions just by standing still.

Keith Walsh – Citigroup

Okay. That leads me to my second question I guess, you mentioned RMS 11, how it’s been a factor in the market. Can you just talk more specifically about the rate of adoption you’ve seen amongst your clients and do you think 2012 will get full adoption by year end.

Kevin O'Donnell

I think I’ve changed adoption with kind of understanding. I think there has been a significant increase in the understanding of RMS ’11 as well as the other vendor model changes that we’ve seen. There has been different strategies as to how that’s going to be reflected in their view of their own risk. But in general, there is a more uniform discussion around the way customers are viewing the risk in relation to the new version of the model, so whether it’s explicitly adopted or their view has been amended by the changes in each of the models, it is much more organically within the market now.

Keith Walsh – Citigroup

Great, thanks a lot guys.

Operator

Your next question from the line of Joshua Stirling with Sanford Bernstein.

Joshua Stirling – Sanford Bernstein

Hey good morning. Thank you. Listen I want to follow up on, if you could say personal your guidance of plus 15% for the year versus what you have already seen in ’11, and will you give us a sense of whether we are on track to already be at that 15% level of whether you’re going to accelerate through the year and if – and separately I think related to that are you – should we think about a seasonal acceleration and are you saving more capacity for the possibility of greater hardening as it move through the year?

Kevin O'Donnell

The 15% I think is based on the way we normally estimate our growth or pfo construction which is go account by account, make amendments and then build the portfolio from the bottom up. So I think we ‘ve tried to incorporate our best view in the future into that estimate. As Jeff mentioned, it’s an uncertain future, so there could be some movement up or down around that, but it is incorporating – for the rest of the year we anticipate seeing in the market.

As far as saving capacity it’s really the same discussion where we look forward and we construct our book to optimize against the amount of capital we have its group and try to deploy it against the opportunities that we seek. So it might get on a dimension that we did increase the size of the portfolio. Going forward there is an element of both pricing increase and portfolio construction change as well.

Joshua Stirling – Sanford Bernstein

That’s great. And if I could just ask a question around Japan, just to sort of make sure we understand how things are moving. It looks like you recognized favorable development on your own book against the Tohoku losses, but then have losses additional losses at Top Layer. I assume that sometime I should have had – the two portfolios have been designed but I’m wondering if you could like walk us though both sort of what’s happening as well as how you are recognizing that – disconnect in the reserves and then – or in the direction of the changes. I think most importantly how you guys see Top Layer evolving next year, it will be a pretty attractive 401 opportunity in Japan?

Unidentified Company Representative

Josh it’s me and I’ll start off there. Being very creative grid that we are, I think we named top layer very appropriately. So if you think about the exposure is typically for top layer we don’t go into detail on an account by account basis. But if you think about that little bit it would make sense that we have a little bit different view on the loss as the year progressed and as we’ve got more and more information. That’s a huge loss and it’s been a difficult one to reserve for but I think we’ve done a good job there. As respect Top Layer’s positioning we think it’s very well positioned for opportunities both opportunities that have come up and opportunities that lie ahead of this over the coming year, knowing that Eddie think of him.

Unidentified Company Representative

There are significantly more deals in RenaissanceRe than there are in Top Layer agent in construction of the vehicles. So they wouldn’t always move in uniform depending on what’s happening on the line individual accounts.

Joshua Stirling – Sanford Bernstein

Okay, great.

Neill Currie

For example, we could have a situation where, just theoretically, Ren Re and DV were on bottom layers and top layer was on the top layer. So they don’t move in ten.

Joshua Stirling – Sanford Bernstein

Got it. Thanks.

Operator

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

Vinay Misquith – Evercore Partners

Hi, good morning. First question is on pricing at the June 1 renewals, do you expect pricing sort of midyear for the June renewals to be higher than it was last year?

Kevin O'Donnell

I think as we talked about last year I think it was gradual adoption of the increased [Unclear] risk, I think that’s likely to be the theme throughout the year. I don’t think it’s appropriate for us to talk in general about where the market is going to go from a pricing perspective as we look at on an account by account basis. We brought ourselves on being exposure based pricers and between the renewals that we had last year in Florida and the renewals we had this year, our view of risk will be very consistent. I think the rest of the market may increase their adoption of the new deal risking that may have an effect from our standpoint where it can be very stable on our view of risk.

Joshua Stirling – Sanford Bernstein

Yeah, that’s helpful. The second question was actually when the fixed income securities and the income from fixed income securities that was around $26 million this quarter. Last quarter I recall that there was a derivative adjustment and so if we add that back that was about $30 million, so we are seeing about a $4 million sequential decline last quarter versus this quarter. I was wondering if you could give some color on that.

Jeffrey Kelley

We had about 15, I think about $15 million in derivative related losses last quarter which would have run through the fixed maturity investment line. So actually it’s – I think if we added and we had just about a $1.5 million loss this quarter in derivatives. So I think if you include both of those adjustments in the two lines they are actually pretty close to one another. The investment portfolio the yield on the investment portfolio is pretty much unchanged and given its relatively short duration we don’t look for any significant changes absent, significant change in allocations.

Jeffrey Kelley

One last one if I may. So some of Top Layer Re given the loss that happened this quarter do you expect to earn some income on Top Layer Re next year of is that a draw back from State Farm.

Unidentified Company Representative

I expect next year will be on standalone basis that we are looking forward hopefully you know Top Layer by nature what it does is pretty far out on the tail of distribution so I think there is higher probability of making a profit there than there is having a loss.

Jeffrey Kelley

Okay, that’s helpful, thank you.

Operator

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

Michael Zaremski – Credit Suisse

Hey good morning. I was curious about a lot of talk and news and bills in the Florida house about changes to citizens in FXGF. Do you think – any color there on whether you guys could be a potential beneficiary?

Neill Currie

Yeah, that’s a great question. Yes, it’s early days. We like the way the wind is blowing if you will in that area, and obviously if things ultimately pan out in the direction that you are hearing we would be beneficiaries.

Michael Zaremski – Credit Suisse

Could you remind us what percent of your book is Florida related?

Kevin O'Donnell

That’s a question that is difficult to answer. Because we participate in various segments of the market which have Florida related exposure, so we don’t really talk about in context of how, what percent of the local Florida market compared to what percent of nationwide have Florida exposure. What percent of our retro, so it’s fair to say we are a meaningful participant in the local Florida market, but we have exposure generally that’s highly correlative with Florida as well.

Michael Zaremski – Credit Suisse

Okay. And then lastly, in terms of the weather and risk management trading losses and you can disregard this question if you answered in the prepared remarks, but were they mark-to-market losses make it reverse themselves and if so can you provide color on how to think about that?

Unidentified Company Representative

They were mark to market losses, and so you know some of them – so some of the loss was based on the weather that occurred in the fourth quarter and some of the loss related to the markets expectation for future weather patterns and so you know without making a comment as to what will or will not happen in the first quarter I think to some extend that some of the first quarter could be discounted in that fourth quarter mark.

Michael Zaremski – Credit Suisse

Okay, thank you.

Operator

Your next question is from the line of Joshua Shanker with Deutsche Bank.

Joshua Shanker - Deutsche Bank

Good morning everyone. Thanks for taking my question. I wanted to talk about prior development a little bit and understand your thoughts on earthquakes and what you saw the cause, releases, you saw the tornadoes were not – are these IBNR reserve or the case reserves, what about the movements there and what do you think about reserving for the future for those kinds of disasters?

Kevin O'Donnell

I think starting with the earthquake component of your question, I think earthquake as talked about before it’s difficult to assess because of the way that you damage – if I go the damage is less visible at the early stages of a lot, I am very comfortable with the process that we have in order to estimate our losses which is both a bottom up and top down. So we will look at what we think the market is, try to assess it using any resource we can, including satellite photos as an overlaying exposure to looking at the accounts specific information and building a loss from that direction up to best estimate. So I don’t see any change in the way that we are going to be estimating these loses in the foreseeable future.

Joshua Shanker - Deutsche Bank

So in taking down the number for the [indiscernible] for the fourth quarter what kind of information came in that caused you to do that?

Kevin O'Donnell

It’s not any one single variable that I can point to. It’s the combination of things. As we talked about the poor and significant deployment of that loss gage from our retro books and part of the assessments that we are able to give in the fourth quarter was because of the increase information that we had from the renewals of that book. Additionally, we had some retro-sessional recoveries that we changed our view on at the – as our determination of the sides of the laws increased.

Joshua Shanker - Deutsche Bank

The information that’s information from [indiscernible].

Kevin O'Donnell

For the first part correct without the inward slip.

Joshua Shanker - Deutsche Bank

And in terms of the Tornado information.

Kevin O'Donnell

You know, I think that’s one where continuing to access about this just more time is passing we are getting better clarity and some of these discussions we were able to have the client and their increasing comfort with zero and estimates.

Joshua Shanker - Deutsche Bank

And in terms of [indiscernible] the hurricane losses were very favorable for you over time. Do you expect there is any indifference in duration on how long you maintain a earthquake IBNR reserve as oppose to a hurricane IBNR reserve.

Kevin O'Donnell

I think forget whether you dived in ASCR. I think in general earthquakes have a longer hang out pattern than hurricanes. There are some unique features within the Japanese market that I think challenges that general assumption.

Joshua Shanker - Deutsche Bank

Can you go into that a little bit?

Kevin O'Donnell

I think there is, it really comes down to understanding, the way the follow seeds in any local market and being able to evaluate, how expeditiously a claim can be submitted. But primary policy terms,, so if you are looking around the world policies are told, Jeffrey in the US and they are in Japan, then they are in New Zealand. Sometimes they are even better between stop companies and mutual companies.

Operator

Your next question is from the line of Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Hi, thanks. Just had a question about Upsilon, you mentioned the structure being more capital efficient than using a radius structure like pay DaVinci for example. Can you talk about that a little bit help explain how that works? Thanks.

Unidentified Company Representative

Yes. In general something is more correlated with your existing portfolio requires more capital to support the risk you are assuming. In a collateralized market you can only use your capital once. So very simply its argue that if you build the diversification of the leverage into the product and provide the capital launch you are receiving a return on an artificially in a single capitalist, where if you go to a rated balance sheet and you buy regional accounts you can build a diversified portfolio in a way that’s not available to you in the collateralized market.

Michael Nannizzi - Goldman Sachs

Got it okay. That makes sense. And then just one question I had about you talked about rate online being on a relative basis better for higher risk layers where I was in lower rate online layers versus higher rate online layers. Can you talk about that and did the orientation of your book relative to last year changes as a result of may be seeing better changes in rates for the high layer business if I understood that right.

Michael Nannizzi - Goldman Sachs

Okay, I understand and then. Just one last on the NOLs. So it was based on the mark to market loss and I could change. Is there any other business that you can apply that NOL to other than the derivative business?

Unidentified Company Representative

Yes, there is. So we have in addition to the weather and energy trading business trying to think of. Yeah, we have our weather predicts subsidiary which generates a relatively small amount of income.

Michael Nannizzi - Goldman Sachs

I see, okay. Okay great. Thank you very much.

Operator

The next question is from the line of Dough Merriter with RBC Capital Markets.

Doug Mewhirter - RBC Capital Markets

Hi, good morning. Just had two questions. First, I guess Jeffrey, Neill, or Kevin, Upsilon Re what's your percentage stake in that vehicle and what's your dollar stake depending?

Kevin O'Donnell

Doug that’s subject to change and we don’t disclose that at this time.

Doug Mewhirter - RBC Capital Markets

Okay, it’s fair enough and I assume that you would accrue profits via both as profit incentive as well as just straight underwriting profits.

Kevin O'Donnell

Sure, so for the park we ‘ii we take underwriting profits and then once again we haven’t disclosed the profit commission etc. terms of that give get from third party capital, but it’s similar thought process through a DaVinci or any other short term side care where we take underwriting profits and fee in profit share income usually.

Doug Mewhirter - RBC Capital Markets

And I assume that would – any of that would run through the other section of your income statement. The other line item.

Doug Mewhirter - RBC Capital Markets

Oh, okay. Thanks for that and just the second question in a more conceptual – Kevin is your added to change towards South East Asia enough where you would make potential being more active in April.

Kevin O'Donnell

We have been – the risk retro look and from international multi territory accounts. I think if there is increase opportunity there from a pricing perspective we understand the risk well. It is something that we easily moved into and I believe we have – reasonably good access to the business there.

Operator

Your next question is from the line of Jeffrey Cohen with Bank of America/Merrill Lynch.

Jeffrey Cohen – Bank of America/Merrill Lynch

Yeah, good morning. Just on the Lloyd’s business you obviously gave us some top line growth guidance. That’s helpful. We can moderate the expense ratio I think pretty easily. I guess the problem is a loss ratio. You had if guess about five, six quarters and during that time obviously we thought a huge amount of events around the world. Can you give us even a range of what you would suspect a normalized loss ratio is for the business you are writing there?

Kevin O'Donnell

I think the cat book is going to probably look reasonably similar to ours. I think what I would proxy for the rest of the book is whatever you are suing for the specialty. I think the place is particularly reinsurance and insurance, especially assumptions you are making on the reinsurance business are probably close enough to be assumptions within the Lloyd’s book.

Jeffrey Cohen – Bank of America/Merrill Lynch

That’s great Kevin, thank you.

Operator

Final question is from the line of Gregory Locraft with Morgan Stanley.

Gregory Locraft – Morgan Stanley

Hi, good morning guys. Wanted to just a quick one. Do you have any exposure to the Italian cruise ship at all?

Unidentified Company Representative

I think there is a lot that came in from a lot of different places on that. We are a very – very small participation on the marine market. And at this point the loss [Unclear].

Gregory Locraft – Morgan Stanley

Okay, great, thanks. And then secondly for Neill, I'm trying to think through your ability to flex the balance sheet into the improving environment. That’s your sighting. Obviously you know you had a great – great year in terms of partners coming into the business on the capital side through the side car and DaVinci. You know how big can you be from a top line perspective. What is the growth constraint for the business as you see it?

Neill Currie

Oh, sure well we can give you is definitive an answer to that as you would like. I can tell you that we have excess capital at the holding company, we have got people we have developed additional interest into DaVinci. We can increase the capitalization in DaVinci if we wish. We have the ability to buy retrospection we have the CPPs that we have so. We do have a material ability to grow the book going forward.

Gregory Locraft – Morgan Stanley

Okay and without sacrificing the ability buy back stock if it’s attractively priced.

Neill Currie

I will have to look at my accounting types so we are here, but I don’t think we can get away with that. I think mathematics either mean you are going to buying new share back or you are going to be deploying your capital. We look first to deploy the capital and then secondarily we look at buying back stock with excess capital and of course we take into account the voice of the stock and we do that.

Gregory Locraft – Morgan Stanley

Okay, thanks guys and congrats on Gen One.

Neill Currie

Good, thank you very much.

Unidentified Company Representative

So operator I believe you mentioned do we have one more or is that it.

Operator

You have a question from the line of Ian Gutterman with Adage Capital.

Unidentified Company Representative

Okay, this will be our last question operator. Ian, how are you today?

Ian Gutterman – Adage Capital

Good. First, DaVinci said additional investors came in and do that increase the size of the vehicle or did it stay constantly reduced to [indiscernible].

Kevin O'Donnell

This far we have kept the size of the DaVinci static. So it’s just reduced our ownerships, buy we have flexibility to increase we can put money back in or raise additional capital.

Ian Gutterman – Adage Capital

Okay, great. I'm just curious if the size of the vehicle was increased. And then just really quickly Jeff, the changes you know from prior period cat that’s on page 10. Did some of that come through the specialty lines when they try to attribute it all to the CAT lined capital buying ratio itself that looked unusual for cap versus special day.

Jeffrey Kelly

Yeah, there was some of it that went through specialty.

Ian Gutterman – Adage Capital

Do you have a rough number on that?

Jeffrey D. Kelly

About $15 million.

Ian Gutterman – Adage Capital

Got it, okay. Thank you very much.

Unidentified Company Representative

Thanks Ian. Well, operator I believe that’s our last one that we will take for today. We have run little bit over our time. Good questions today. As always we have enjoyed being with you and looking forward to an interesting and hopefully prosperous 2012. Thank you very much.

Operator

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

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