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Endurance Specialty Holdings Ltd. (NYSE:ENH)

Q4 2011 Earnings Conference Call

February 10, 2012, 08:30 a.m. ET

Executives

Greg Schroeder - SVP, IR and Corporate Development

David Cash - CEO

Mike McGuire - CFO

Bill Jewett - President

Mike Angelina - CRO

Mark Silverstein - CIO

Analysts

Amit Kumar - Macquarie

Matthew Heimermann - JPMorgan

Meyer Shields - Stifel Nicolaus

Jay Cohen - Bank of America/Merrill Lynch

Ian Gutterman - Adage Capital

Operator

Good morning everyone and welcome to the Endurance Specialty Holdings Fourth Quarter Earnings Results Conference Call. This call is being recorded. Your lines will be in listen-only mode during the presentation. You will have an opportunity to ask questions after the presentation. Instructions will be given at that time.

I’d now like to introduce your call to Mr. Greg Schroeder, Senior Vice President of Investor Relations and Corporate Development. Please go ahead sir.

Greg Schroeder

Thank you, Nikki and welcome to our call. David Cash, Chief Executive Officer; and Mike McGuire, Chief Financial Officer will deliver our prepared remarks. To the question-and-answer portion of our call, joining David and Mike will be Bill Jewett, President; Mike Angelina, Chief Risk Officer; and Mark Silverstein, Chief Investment Officer.

Before turning the call over to David, I’d like to note that certain of the matters discussed here today are forward-looking statements. These statements are based on current plans, estimates, and expectations and include but are not necessarily limited to various elements of our strategy, business plans growth prospects, market conditions, capital management initiatives, information regarding our premiums loss reserves, expenses and asset portfolio.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the markets in which we operate, the economy, the other future conditions and involving other risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in the forward-looking statements and we therefore caution against relying on any of these forward-looking statements. Forward-looking statements are sensitive to many factors including those identified in Endurance’s most recent Annual Report on Form 10-K, quarterly report on Form 10-Q and other documents unfiled with the SEC that can cause actual results to differ materially from those contained in forward-looking statements. Forward-looking statements speak only as of the date on which they are made, Endurance undertakes no obligation publicly to update or revise any forward-looking statements whether as a result of new information, future developments or otherwise. In addition, this presentation contains information regarding operating income, number of measures that are non-GAAP financial measures. For reconciliation of these items to the most directly comparable GAAP financial measures please refer to our press release which we can be found on our website at www.Endurance.bm.

I’ll now turn the call over to David Cash.

David Cash

Thank you, Greg. Good morning and welcome to our call. The fourth quarter was once again a challenging one for the insurance and reinsurance industry, with significant catastrophe loss activity dominating company results. As was announced on January 19th, Endurance experienced its fair share of those losses and this is reflected in the results we reported last night. 2011 was a tough year and it’s one that we’re happy to put behind us.

Looking forward, I’m pleased to say that we’re seeing positive underwriting and pricing trends across our different businesses. And it’s clear that we’re moving into an improved underwriting environment. Given the positive direction of the market and the strength of our underlying businesses, I believe that Endurance is well positioned for a strong 2012.

Turning to our results. For the fourth quarter, Endurance’s diluted book value per share shrank to 2.1% and now stands at 50.56. After adding back dividends paid, book value per share is down 1.9% for the year 2011. For 2011, Endurance produced a net loss of $94 million, while experiencing 467 million of catastrophe losses.

In the fourth quarter, the company posted a combined ratio of 112.5%, a number which included 22 percentage points of current year catastrophe losses. Year-over-year, fourth quarter written premiums grew materially, with a 39% increase in the gross premiums and a 19% increase in net premiums. These premium increases were attributable both to price increases and growth in policy counts, both in our Insurance and Reinsurance businesses.

Net investment income for the fourth quarter was 41 million, down from the 57 million we generated in the fourth quarter of 2010, as a result of lower alternative returns and fixed income yields. Finally, our balance sheet and capital position remained strong with our loss reserves generating 42 million of positive development in the fourth quarter and our P&L position is being comfortably within our risk tolerances. Later in the call I’ll provide further commentary on our performance for the quarter as well as some thoughts on our positioning for the 2012 year.

With that I’ll pass the call over to Mike McGuire, who will review our financial results in more detail.

Mike McGuire

Thanks, David, and good morning everyone. Endurance generated a net loss of $27.4 million and $0.88 per diluted share for the fourth quarter and an operating loss of $31.3 million and $0.98 per diluted share. For the full-year we generate a net loss of $93.7 million or $2.95 per share and an operating loss of $128.2 million or $3.81 per share. Our diluted book value per share ended the year at $50.56, down 4.1% for the year. Adding back the $1.20 per share in dividends paid in the year, the decline in book value was 1.9%.

In comparison to the fourth quarter and full-year of 2010, the decline in our results was primarily due to a higher level of catastrophe losses in our Reinsurance segment, reduced current accident year results in our crop insurance business due to drought conditions in Texas and other southern states, and lowered net investment income primarily due to lower hedge fund returns and the very low investment yield environment.

Starting with premium writings, the fourth quarter is typically our lightest premium quarter for both our segments. Net premiums written were $187.9 million, an increase of 18.8% over the same period in 2010. Our insurance segment generated net written premiums of $96.5 million or 8.2% higher than the fourth quarter of 2010 due to premium growth in our agriculture, professional and casualty lines of business, partially offset by declines in our property and healthcare liability lines of business. Agriculture net written premiums were up from a year ago due to an increase in the price of wheat and growth in policy accounts.

For the full-year, net premiums written in the Insurance segment were $1 billion, or 21.2% higher than full-year 2010. The growth was predominantly driven by higher commodity prices, which increased the agriculture premiums and increase premiums in the casualty line of business from a recently launched contract binding authority unit.

Fourth quarter Reinsurance segment, net premiums written were $91.4 million, up 19.5%. Growth in the casualty and property lines of business was offset by declines in the catastrophe, at Aerospace and Marine lines of business. For the full-year, Reinsurance premiums of $974.3 million increased 4.3% over 2010 as growth in our short tail catastrophe and property lines of business was partially offset by declines in Casualty, Surety, and other specialty lines of business.

Our combined ratio for the fourth quarter was 112.5%, up 28 points from the fourth quarter of 2010. The major drivers of this increase were $112 million, or 22 points of current year catastrophe losses recognized in the quarter. This included $76 million from the Thailand floods and $36 million from increases to earlier 2011 catastrophes, primarily the Japan and New Zealand earthquakes. It should be noted that our favorable prior year reserved development included $9.4 million in reductions to 2010 named catastrophe losses.

We also experienced reduced margins in our crop insurance business year-over-year. Continued drought conditions in Texas and the southern U.S. resulted in about a 4 point increase to our overall company loss ratio for the quarter compared to the fourth quarter of 2010.

Higher attritional loss estimates in our Property and Professional insurance lines also added about 2 points to our overall loss ratio. These impacts are partially offset by 3.2 points of increased favorable prior year reserve development.

For the full-year of 2011, our combined ratio was 112.9%, up 24.2 points for the full-year. Drivers of the full-year increase included $467 million in catastrophe losses from 2011 events, which added 24.5 points to the current accident year loss ratio. This compares to $96 million of catastrophe losses in all of 2010. Higher attritional loss estimates in our Property and Professional insurance lines also added about two points to our overall loss ratio. Draught conditions in Texas and the southern U.S. on our crop insurance business, which increased our overall full-year combined ratio by approximately three points year-over-year.

The fourth quarter was about break-even for ARMtech. And the full-year was slightly better than break-even for the accident year. For the full-year in 2011, we made a profit within our crop business with an overall combined ratio of 92% for the calendar year and 98% for the accident year.

Turning to investments, our portfolio’s total return was a positive 88 basis points in the quarter and 3.5% for the full-year. Our portfolio results for this quarter included mark-to-market gains on our alternative and equity portfolios as the markets improved in the fourth quarter offset by declining yields on the fixed income portfolio as new money rates remain below our book yield which was 2.7% at year-end.

Our fixed income portfolio duration remained short at 2.4 years due to our view that the rewards of longer duration securities do not match the attended risks due to the historically low interest rates at this time. During the fourth quarter, we increased our allocations to equities and alternative investments as a means of achieving greater portfolio diversification and return potential without dramatically changing our risk profile.

We ended the year strongly reserved with $432 million of IBNR for short-tailed lines held as of year-end. Excluding reserves for named catastrophes, at year-end we maintained $147 million of short-tailed IBNR for the 2011 accident year, consistent with the levels we held for 2010 at this point last year. In addition, 1.9 billion or 74% of our long-tailed reserves are IBNR.

As we have done in prior years, we published our global loss triangles last night to provide greater detail of our loss reserves and IBNR by accident year and by products. Our capital position remained strong with total shareholders’ equity of 2.6 billion and total capital of 3.1 billion at year-end. Compared to mid-year, our peak zone PMLs are lower relative to our capital and we continue to hold our capital at levels significantly in excess of rating agency minimum requirements, giving us ample capacity for the opportunities we expect to see in the balance of 2012.

During 2011, we repurchased 7.6 million shares or approximately 16% of our beginning of the year shares outstanding for $341 million. In the near-term, given the increasingly broad-based improvements we are starting to see across many of our businesses, it is likely that our repurchases will be less than in 2011 to ensure we have the excess capacity to expand as conditions warrant.

With that, I’ll turn the call back to David for some additional comments.

David Cash

Thank you, Mike. I’ll now take some time to review the following areas; January 1 underwriting activity, crop insurance and capital resources. Turning to current underwriting conditions, I’m pleased to say that we’re seeing consistent signs of market tightening and improved pricing, terms and conditions across all of our full portfolio. This is true in catastrophe exposed lines of business and also for our various casualty insurance line of business. This is the first time since 2003 that we are in a position to talk about improved pricing across almost all segments of our business.

At January 1, we were able to expand our underwriting footprints and improved pricing in returns across most of our reinsurance businesses. At 1/1 our Bermuda catastrophe book of business grew modestly. At the same time we reduced our overall limits in PMLs across the business and we increased our model returns on equity.

Across London, Zurich and Singapore our 1/1 renewal portfolio also grew in size. The bulk of this growth came in Europe where we were effective in expanding existing client relationships and pick up new clients and programs as we have expanded our product offerings out of Zurich. The early results coming out of Zurich showed pleasing growth both in the size of our client base and our sidelines.

In Singapore, based on our discussions with key Japanese clients there’s a clear understanding that the Japanese interest of broad risks will either be excluded from treaties in the future or materially restructured including catastrophe standalone covers rather than risk and proportional covenants. If we cannot achieve these changes, we will withdraw from these covers at 4/1.

Finally in the U.S., at 1/1 we saw a modest written premium growth. In this market there was a good amount of turnover in programs and in places we cut back participation significantly, whilst where we found opportunities to grow. It’s fair to say the market conditions in the U.S. remained sure, still have a way to go before we view the situations as attractive.

In summary, we found Reinsurance market conditions generally favorable at 1/1. We had a good deal of its success at raising rates where we felt it was needed and we were also able to expand our presence in markets by virtue of expanding our product offerings. This was particularly true in Europe.

Looking forward to 4/1, 6/1 and 7/1, I believe that we will continue to see improved pricing across our reinsurance lines of business and as pricing does improve, we have the capital resource to expand our ratings in line with the opportunities that may present themselves.

Shifting focus away from Reinsurance to Insurance, January 1 is not a significant renewal date for most of our Insurance business. That being said, if one looks at underwriting activity for the fourth quarter and for January 1, a picture of strengthening rates does emerge.

Beginning in October, we’ve seen steady increases in pricing on many of our Insurance products. This is true for catastrophe exposed property products and also for casualty insurance products. These increases were first seen in our smaller risk lines of business such as contract binding authority business, but it expanded to include most of our middle market risks, and are increasingly being seen in the larger risks in our Bermuda insurance book of business.

As of today, the only places where we’ve not seen positive price movement are in higher excess coverage for healthcare and certain professionalized classes. In these markets, competition remains tough and loss emergence has been consistently benign. My sense is that in time, we’ll see price increases here, too. But for now, there’s enough capacity and perhaps less reliance on investment income such that rates are not yet moving.

Beyond the obvious benefits to insurance of pricing increases on our insurance business, it’s also important to note that these increases will additionally filter into our Reinsurance book through 2012. Our Reinsurance pricing assumptions at 1/1 gave little credit for potential insurance price increases. And so the shift in the insurance market will have a modest positive ripple effect on our portfolio.

Turning to crop insurance, I just like to take a few minutes in this call to share some observations on the performance of our portfolio for the 2011 crop year. Prior to 2011, the worst year we had experienced as a crop insurer was the 2008 crop year when we experienced dramatic drops in commodity and crop price at the end of 2008.Those price drops generated very significant losses in the Midwestern corn growing states causing ARMtech to produce a net after cover insurance loss ratio at 89% for the year. In 2011, we experienced a severe draught in Texas, the single largest state in our portfolio. Before the benefits of federal reinsurance, our Texas loss ratio for the year stands at 230% on 280 million of gross premiums for the state, while our overall loss ratio for the full country on a gross basis before federal reinsurance stands at 130%.

Notwithstanding the very challenging experience in Texas and the country as a whole, ARMtech’s net after federal reinsurance loss ratio for the 2011 crop year is 91% including IBNR. This is only modestly worst than the 89% recorded in 2008. The preceding comparison clearly points out just how protective against single state volatility MBCI insurers are.

For the 2012 crop year, we expect to use the FCIC reinsurance plan even more aggressively in Texas than we did in 2011. Last year, we see that approximately 60% of our risks and 50% of our premiums with the FCIC in Texas. This year we’ll be closer to an accident sessions rates of 75% of risks and 60% of premiums.

Further, we’ve improved our knowledge about farmers’ irrigation resources, which will enable us to better pick and choose the risks we hold and was received to the FCIC in Texas. Putting the pieces together, you can see why view ARMtech as a long-term generator of value and as a source of stability within our overall business mix.

Finally, turning to capital resources, I just like to provide an update on our capital position versus 7/1 of last year. At mid-year last year, I indicated that Endurance held between 400 million and 500 million of capital, in excess to the levels required of us by rating agencies. Since that date, we’ve seen a number of changes both in our capital position and our risk position. So it makes sense to update the group on our capital adequacy as of today.

At June 30, 2011, the company reported total shareholders’ equity of 2.67 billion. And at year-end, that number had declined to 2.61 billion. Over the same period of time, we have reduced our PMLs through targeted portfolio optimization efforts. When you combine the current capital base with the reduced PMLs along with other risk capital items such as loss reserve changes to our overall capital position, our capital position has improved modestly since June.

As a consequence I can say that Endurance is more than adequately capitalized in the business we have in our balance sheet today, and I feel confident that should market conditions continue their trajectory of improvement, we expect to have ample resources to expand even our most capital-intensive lines of business.

With that, operator, I’d now like to open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question will come from Amit Kumar with Macquarie. Please go ahead.

Amit Kumar - Macquarie

Just starting with the capital discussion, can you refresh us what your limits are in terms of PML as a percent of equity?

David Cash

Sure. In general where we have tried to hold our 100-year PMLs for the different sort of major peak zones, after-tax and after reinstatement premiums is at around $500 million. The numbers that we report in our financial supplement don’t include some of those offsets. And so when you include them, we’re within the $500 million threshold today. In general we tried to hold the overall capital risk number that we also have historically reported below 25% of shareholders’ equity. We’re inside that number as well today. So, in terms of sort our ability to grow, it’s clearly there. When you look at where we would see ourselves growing, there’s potential for some growth in the U.S. win, which is the sort of peak-peak for us. There is quite a bit of capacity to grow in Europe and there’s quite a bit of capacity to grow in California for which do those things in no way real constraints on us today.

Amit Kumar - Macquarie

That’s helpful. The other question I had was on pricing. I know you touched upon the size of the book in Bermuda, London, Singapore, U.S., but maybe separately talk about the rates, you were able to get I guess the range of pricing you were seeing at 1/1?

David Cash

Sure. If I focus on cat exposed business and really look at U.S. accounts and then really the European accounts, in the U.S., we saw price increases on wind cat 5 to 10%. Where we saw accounts with losses, we’ll call it effective rate changes were more like 25 to 50% and sometimes higher. And particularly in Midwest where we saw significant tornado activity last year, prices were up even approaching we’ll call it rates sort of the economic stuff as much as 100%. And what you’re seeing there is we, in addition, we’ll call it an improved pricing with rate (inaudible) points additionally and that seems to be in a market phenomenon. And certainly, something we would have pursued.

If you turn to Europe, there really were very only modest events in Europe last year. There was some flooding, some small wind events. And pricing in Europe did not move anywhere near as much as it did in the U.S. Now, that said, we saw price increases at single-digit of zero to 5%. And what we’ve seen on our book of business in Europe is loss ratios have been sound. We’ve been pleased with the loss ratios and the underwriting ratios in that book. And where we’ve seen opportunities to grow, we’ve wanted to grow generally.

And so the big thing we saw there was an expansion of the clients we do business with. So more of the business more of the clients we historically reinsured from Bermuda on a cat basis we’re doing business within Europe. And then additionally, we’re seeing some of the smaller insurers in Europe that might not have purchased from what we call a Bermuda company coming to us in Zurich and buying protection from the (inaudible). And price increase is lower there clearly than in the U.S., but leave the business to the places I consider to be quite acceptable.

There’s not really a lot of Asian activity or Pacific activity this time of the year. There’s a little bit of Australian renewal activity and the price increases there were pretty significant, but it’s not a large driver in terms of our premium numbers. And at 4/1, just based on, we’ll call it acknowledgment from clients in Japan, I’m expecting to see increases in the earthquake rates again. And we saw increases in earthquake rates last year. And I’m expecting wind and flood exposed accounts to show increases at 4/1 in Japan as well.

So from account perspective, it’s a strong environment. Just maybe kind of expanding into the casualty reinsurance space. Our historic experiences, on the Reinsurance side, property reinsurers can drive rate change. Casualty reinsurers generally are not able to drive rate change. Rate change has to be driven by the insurance market. And so, we saw improvement in some of the we’ll call it the structural features of treaties at 1/1, reductions in ceding commissions in particular. And we saw most reinsurers acting with a certain amount of caution in that market. There are one or two that were aggressive, one or two companies that were aggressive. But I’m seeing the market generally positioned defensively with respect to casualty reinsurance.

And if we do see we’ll call it sustained price increases in the casualty insurance market over the next couple of years, just really for us that will be a positive based on how we’re modeling the year. But if I have to guess the last market, the ultimate return will be the casualty reinsurance market. And that’s historically been the case as well. So, hopefully that helps you in terms of your question.

Amit Kumar - Macquarie

Yes, that’s very helpful. Just one other question. This sort of goes back to our favorite topic on the crop book, if you go back and look at what we were talking about in mid-2011, I think at that time we had a top line expectation of maybe 750 million in 150,000 policies, 7.5% policy growth. The numbers are obviously higher. Is that all because of commodity pricing and does that mean on a normalized basis the book trends down in 2012? Maybe just compare what we talked about at mid-2011, how 2011 turned out to be and how we should think about the crop book for 2012.

Mike McGuire

Sure Amit, it’s Mike McGuire, I’ll take that question. Well, I can’t recall the exact conversation we had in mid-year. I’ll give you a sense of where crop business ended for the year, the primary driver of the increases year-over-year in 2011 was commodity prices. Our policy counts were roughly flat in the calendar year 2011. We saw a few policies go away in the first half of the year and we saw policy count growth in the back half of the year. So, net-net our policy counts for the calendar year were about flat. So, the increases that we saw were all commodity price driven.

Now, looking forward as I think about our crop insurance business, we’re just now beginning the price discovery periods for our spring crops and for the 2012 calendar year. And prices are down. Cotton prices most significantly are down in the neighborhood of 20%. Corn and soy commodity prices are down anywhere from 5 to 10%, but we’re in the middle of that or just beginning that price discovery period now. So, if prices stay where they’re at, the apps and policy count changes, you can certainly apply those commodity price reductions and expect a relatively lower premium base. Now, offsetting that we have a number of anecdotal pieces of information that would support a strong view of growing our policy counts in 2012 versus 2011. We’re having good success picking up agents, agent books of business in the Midwest and even in the south, we’re still seeing agents and farmers moving their business to us due to the better technology and service propositions that we offer compared to many of our peers in that space.

Operator

And our next question will come from Matthew Heimermann with JPMorgan. Please go ahead.

Matthew Heimermann - JPMorgan

A couple of questions. First, maybe just on the crop and the reinsurance changes in Texas this year. Can you just maybe give us a sense of how that changes or how that affects your ability to kind of get a normal margin this year? In other words, can you get kind of the average loss ratio out of the book of business with the reinsurance change and is it fair to think about this, if that in fact is possible, it’s probably not likely that you outperform the average dramatically. There’s probably more or the downside of something [if worst] happens, but I just want to try to think about what’s possible and kind of what the band of outcomes looks like around that outcome?

David Cash

Sure, when I look at the crop business, I’m probably a little less focused on how the FCIC reinsurances have changed. A little more focused on rate changes for corn and soy bean in the Midwest.

Matthew Heimermann - JPMorgan

Well, can I cut you off, David?

David Cash

Sure.

Matthew Heimermann - JPMorgan

I’m just thinking your specific changes in Texas rather than.

David Cash

Yes, when you look within our Texas book, this year, Texas generated for us roughly a $50-million loss. And that was offset by roughly $50 million profit everywhere else unless we’re calling it combined ratio basis. And if you look then at the 50 million of loss we had in Texas almost all of that came from those risks we left in the commercial fund, so essentially where we had sort of more risk sharing, more loss sharing. And the risk we put into the assigned risk funds generated, they probably contributed maybe 3 or $4 million of loss. So you can see the benefits of being in assigned risk fund.

And so in 2011, we kept roughly 40% of risks and we seeded roughly 60%. This year I would expect us to keep 25% of risks and seed 75%. Now on the 75% we seed, we have to keep some of the premium there. And so the portion that will be in the commercial fund, which is where our $50 million loss in Texas came from were reduced by roughly 30 to 40%. So if we would have the same year and you do the same math, that $50 million would come down by $20 million as a loss. I can’t promise you that’s exactly what would happen in 2012.

If I look at 2011 was such bad year. It’s hard for me to imagine Texas being that bad again, but we can be proved wrong on that. And what we certainly we always have, we’re always aware of where farmers have access to irrigation. What is less clear is just how robust that irrigation is. And so not all irrigated fields are created equal and you don’t really find that out just until you have a draught. And so some of what we learned this year in terms of how farmers were able to irrigate through the year will change the way we make such choices. And so we clearly feel we’re better positioned to handle a tough year in Texas this year versus last year. Did that help you?

Matthew Heimermann - JPMorgan

Yes, that’s fair. And then, Mike, I just wanted to I think you said this, or maybe it was David in the opening comments, but in terms of quantifying the [Technical Difficulty] well, I was just going to say, the 400 and 200 million that you mentioned, those were 4Q specific numbers, but were those relative to the total company or the individual segments? In other words, the 400.

David Cash

Which 400 million?

Matthew Heimermann - JPMorgan

No, the 400 basis point impact of crop in the fourth quarter, was that on the total company loss rate combined ratio or the Insurance segment combined ratio, and then the same thing, I wasn’t clear on the reinsurance. Okay.

David Cash

I’m sorry, when I was speaking of those numbers, Matt, that was for the total company.

Matthew Heimermann - JPMorgan

Okay.

David Cash

So, you can roughly double that number to get the Insurance segment impact.

Matthew Heimermann - JPMorgan

All right, that’s fair. And then I guess just big picture question on expenses. I was a little surprised just by the level of G&A in the quarter and I’m not quite sure what to make of it because it was a pretty big sequential increase, but it was also pretty big year-over-year increase. And I recognize a year ago, 4Q was disproportionately high relative to the rest of the year as well. So just curious of whether or not this is kind of what drove that or whether or not this is we should expect this to kind of be a normal seasonality on a go-forward basis as well.

Mike McGuire

Sure, Matt. It’s Mike McGuire. There’s a couple of moving parts there. One, our expense base is somewhat seasonal, so you do see them just based on how our earned premiums come through a lot of our expenses come through in the fourth quarter as well. We did have, as we mentioned in our press release a handful of, I’ll call them, one-offs on the expense side, related to some office shutdown and some severance within our insurance business. So, that certainly influenced our expenses in the quarter.

Matthew Heimermann - JPMorgan

I think that was about 5 or 6 million of the expense in the quarter. Okay, perfect. I missed that. So, thank you for that. And then just last thing, just on how you thought about Thailand in the fourth quarter and just how the reserve position ended the year. You mentioned that the IBNR on the cat events this year was consistent with last year. I guess given the magnitude of the cats this year and given that we again we had a late 4Q event, is that as conservative as last year when you think about that number? How should we think about that?

David Cash

Sure. Our model for booking cats is we literally try to go risk-by-risk, treaty-by-treaty, get information from our cedents and make sort of individual judgments on how large the loss maybe. And that is the number that we’ve historically booked. And it’s generally worked for us. I mean really for the last three or four years, we’ve tended to do if anything our estimates have been a little bit high. This year obviously in Japan and New Zealand that proved not to be the case. But the model is cedent by cedent sort of treaty-by-treaty come up with the best estimate including that sort of a view of IBNR from the client’s perspective with the events sort of apply to the number we carry.

Turning to Thailand, sort of a long running event and didn’t really start to come into focus until December. And that’s true particularly for the clients. And the clients’ challenge was that we’re not able to get into Thailand until December. And what we found is in the beginning of January. Really the first two weeks of January our Japanese clients, (inaudible) large commercial insurers in Japan. We’re in a position to start giving a specific estimates on claims on a treaty-by-treaty basis and on a layer-by-layer basis. And so we have reflected our conversations with them. We’ve reflected their view on whether it’s a one-event event or a three-event event. And we’ve reflected the kind of layers and the shares we have. So it’s sort of consistent with how we’ve historically done it. We’ve tried to be realistic in our assessment of what clients’ IBNR should be, as we do the calculation for layer-to-layer. And so it’s not a change we’re seeking to make. I know there are a few different approaches to booking cat IBNR. This one has served us well for the last five years. And I don’t see making changes to it this year.

Operator

And we will go next to Meyer Shields with Stifel Nicolaus. Please go ahead.

Meyer Shields - Stifel Nicolaus

Two questions, one on Thailand. I just want to just a sort of view (inaudible) analogy. I think, Dave, you said that your understanding of the distinction between farmers’ access to irrigation was good over the course of this year. How confident are you with the level of information you have with the various Thai exposures? How good is the data there?

David Cash

One thing that was sort of very clear is when you look at risk exposed treaties in Thailand, where you’re looking at overseas interest, and so this is true of Japanese interest abroad, but frankly it’s also true of European interest abroad and U.S. interest abroad. Clients are not giving us the level of detail that we need to understand whether you have an absolute a very large concentration. And what we have Thailand is sort of almost a super concentration of manufacturing facilities. And so, that was not evident to us. The data we’re using was more aggregate than it needed to be. And so that clearly makes it very hard to think about taking this risk on going forward. And when I look at some of our non-Japanese clients, something similar exists there. And so during the course of 2011, there were a number of different cats that happened. Many of them from my perspective were not outside the ordinary and the underwriting decisions we made when we got on to those risks were appropriate and the way we were paid for taking those risks were appropriate. My own feeling is that the risk we picked up in Thailand, we weren’t paid adequately for and we didn’t have the information to make those judgments, be it about exposure concentrations or for that matter about coming flood plains in Thailand. And so that is clearly a lesson learned and clearly an area that we need to make changes in this year.

Meyer Shields - Stifel Nicolaus

Is that something that you can apply to other regions?

David Cash

It’s certainly, if you look around the world, I think everyone understands that there are many, we’ll call it urban concentrations in the developing world, but are just a great deal bigger than fewer perhaps perceived and the way manufacturing is now sort of we’ll call it outsourced to globally. There’s more potential for, call it, first world treaties to develop third world losses. And be it in Southeast Asia, the place like Jakarta or Mexico City or Latin America or places even like Turkey. And from our perspective, we’ve historically sought to be a regional writer of risk. We’ve historically when we’ve been international in some of these regional areas, try to do it more on a cat basis. And there really is only a modest amount of our treaty limit that’s done on an aggregate basis or in my mind, sort of exposed to these kinds of risks. Unfortunately, we got hit by then. And so I think that a step back is indicated at this point, not just in Thailand, but in some of the other developing world nations as well.

Meyer Shields - Stifel Nicolaus

Okay. That’s thorough. One separate question. I think we heard a lot of companies mentioned the professional lines’ pricing is not returning (inaudible) that other lines are. Is that sort of different underlying results in that line or is the different competitors maybe behaving differently (inaudible)?

David Cash

I guess when I look at the professional line space out distinguished between the large professional risks, which I think it is being premium risk, or kind of a large Fortune 1000 companies would buy D&O and E&O protection. And then smaller risks sort of like most miscellaneous E&O for instance. And the smaller risks tend to be written more on a primary basis. Loss emergence tends to be a little bit quicker, little more consistent. And I think there has been a recognition in the market over the last year that prices there are not adequate. And we’re seeing price increases in that part of our book. And that book is written out of New York City and it’s our miscellaneous E&O book. It’s reported in our professional lines’ line under Insurance.

The other sort of book called small professional lines line would be our environmental insurance treaty where we write contractors. They’re rates to come down over time. They’re starting to push back up and that sort of reflects the sort of emergence of loss. If you shift to the large D&O, E&O books of business, with the exception of the spike of claims that came out of the financial crisis for 2008, there really have been almost no claims since sort of the Enron era, Enron and WorldCom exposed AIG era.

And that lack of claims and we’ll call it the growth in the number of providers capacity in that space has fueled steady rate reductions. And we’re still seeing rate reductions in that space today. They’re probably easing a little bit. But where we’ve seen other casualty market show price increase, it’s often a little more primary layer, where emergence comes in quicker and you can recognize, we’ll call it, the difference in premium and loss quicker. And I think people’s business model in those spaces often include, there’s an element of interest income in terms of the way they think of their overall economics. And when you get some of the higher access layers particularly the Bermuda layers, the bulk of the margin comes from what have been historic margins rather than interest income and the margins had been strong and part because pricing has been pretty good even if it has come down, and probably going to be just have no head losses. And in those layers where you have syndicated capacity that is sort of a recipe for sustaining price reductions and it’s still continuing now. It’s not established it was a year ago.

Operator

And our next question will come from Jay Cohen with Bank of America/Merrill Lynch. Please go ahead.

Jay Cohen - Bank of America/Merrill Lynch

I guess first question, quick one. Can you talk about your exposure to the Concordia sinking?

David Cash

Sure, that one’s simple and we probably have best estimate a couple of million dollars exposure there. We’re not a large risk marine player at this point. And I couldn’t see it growing significantly.

Jay Cohen - Bank of America/Merrill Lynch

Nice to avoid one. Good.

David Cash

Thank you.

Jay Cohen - Bank of America/Merrill Lynch

Second, in the insurance business the favorable development was more modest than it had been really going back many quarters. And I’m wondering if there’s anything behind that, are there any trends in there that are real red flags for you to see that sort of fall-off in a favorable development?

David Cash

I guess when I look at the year, the 2011 year, on the insurance side and I’m really thinking about long-term insurance, the favorable emergence in here was roughly the same as the year before. So, that trend, I guess persist. When I look sort of deeper into the book for some of our large-risk insurance business, we’ve seen sort of consistently very positive trends in that part of our book of business and that’s been true really other than we’ll call it the blip that occurred around the financial crisis, so that is a strong one.

Over the last couple of years, we’ve seen emergence on our workers’ comp book of business. It’s on run-off. And in some ways, that is self consistent to me with just the environment particularly in California for reaching settlement on claims. And we are now just at the point where we are really all claims that are being submitted, they have to declare in some ways whether they’re going to be a permanent, a disability claim or a temporary disability claim. So we have, in my mind, resolution around the claims that we’re looking at.

I think we’re coming out of the woods in that part of our book of business. And so the trend there over the last year has not been a good one, but I don’t see that as discontinuing the way it has before. Then when you go beyond that and you look specifically at the quarter, I think, there’s some small noisy items that’ll be hard pressed to put my finger on individual large cash claims that emerged or didn’t emerge. I don’t tend to associate trend with those really. But the trends that I focus on particularly being the very strong performance on our large risk insurance book of business over the years.

Operator

(Operator Instructions) And our next question will come from Ian Gutterman with Adage Capital. Please go ahead.

Ian Gutterman - Adage Capital

I guess, first, Mike, the pays were really, really high this quarter. I assume there were some crop impact, but it’s a lot, lot higher than ‘08 was after that being a tough crop year. So what’s going on there?

Mike McGuire

Yes. Sure. The crop was a big driver and we also had payments from all the cat losses that we’ve seen over the last two years were really coming through. So the fourth quarter is in some ways, you see it as a cleanup quarter where a lot of claims come in and a lot of clients seeking payment. But crop was really the big driver. And the difference between ‘08 and the claims this year were, I think posted earlier and settled earlier than they were in 2008. In 2008 the majority of the claims volume really came through from commodity price reductions, which were identified and reported and settled quite late in the harvest season as opposed to the drought claims, which in many cases had been on the books for a long time. So the claims settlement process for crop this year versus 2008 was much, much different.

Ian Gutterman - Adage Capital

Got it. That’s what I was suggesting. Okay. Also when I look at the process for the Insurance segment next year and in this year, I guess now 2012, I just have a quick look through your triangles and it seemed like crop was about 10 points higher than normal and U.S. property was about 40 points. And if I sort of adjust those back to the normal, that was maybe eight or nine points, which will get you slightly below 100. Is that a reasonable expectation, again, assuming normal losses?

David Cash

Yes, Ian, we don’t provide the specific combined ratio targets. I think the math that you’ve done is reasonable in terms of identifying the drivers of the Insurance segment. Last year, we really had an almost a complete lack of large property insurance losses. This year we had quite a handful, so I would view them kind of this was not a normal year, I would say in terms of the types of large losses that we saw through in the property insurance side. And on the crop side, the difference in accident year 2010 versus 2011 was quite significant. It was probably close to a 20 point difference than on those pieces. So I think the math you’ve done is it sounds reasonable. But I wouldn’t offer specific guidance in terms of the combined ratio. There’s a lot of moving parts there.

Ian Gutterman - Adage Capital

No, that’s okay. I was looking for a direction more than guidance. I wasn’t trying to sneak guidance out of you. But just I want to make sure the math wasn’t unreasonable. And then just my last one, is David, can you just talk about there’s been sort of dichotomy of behavior amongst your peers with some people doing more similar to you and looking to start growing now and maintaining PMLs reasonably close to where they were and then some of your competitors have really cut back significantly on neither one of two hospices. One being that prices not good enough yet and it’s going to get better and we’d rather hoard the capacity and wait. And then maybe there’s been an unstated mode of which some others and just that you got burned too bad and felt they had to pull back. But I guess I’m really thinking more about the former camp, who just said it’s too early to pull the trigger, let’s pull back the capacity and wait for things to get better versus the camp (inaudible), which is good enough to start to growing now. So, can you maybe talk about that thought process?

David Cash

Sure, kind of two points of view, the same point of view expressed in different ways. Well, particularly when we look at our cat book of business we have roughly 300, maybe 350 clients. We had them for 10 years and we have worked very hard over the years to sort of progressively select the treaties we’re on and the clients that we work with. And so we don’t, our mindset is not to view cat as an opportunistic sort of cycle play. We think the product is fundamentally good. There are moments where the events went by when you have losses, but it’s a business that we want to be seen as being a sort of a steady supplier of capital to the market. And so that’s sort of the philosophy that’s in place there. We obviously want to do it at the right price.

When you look at the 2012 year and you look at the sort of idea of managing your capital and so that you put it in, it’s just the right market at the sort of perfect point in the market cycle. The last time I really saw an opportunity to hold capital back and get progressively more and more for that capital we should put it into the capital was 2006. And the June 1 Florida renewal season really ran into July. And the longer you held your capital back, the better you get paid.

In 2007, people felt there might be a similar opportunity to do it. It really in my mind was not there. And if you look at the reinsurance market this year, the only risk we have a chance to sort of pick you spot in the year is U.S. wind. Most of the Europeans (inaudible) January 1. If you hold your capital dry at January 1, well you’re waiting 12 months to get your capital wet as it were. If you do that at 4/1, you’re waiting 12 months to get it into the market at 4/1 the following year.

And so when we look at the U.S. wind market and the sort of questions to where we want to play and when we want to play, my own experience has been that the Florida companies are become progressively more robust. We call it, desperation or need for capital is much less than it was a few years ago. And the market’s ability to drive sort of an outrageous deal with those clients just is not there.

And so my own view is the sort of the steady application of capital through the year, the clients you’ve worked with over time, is the right model. I can understand if you are a provider of retro capacity, we’ll call it spot protection the [IOW] market, why you may want to hold back. But with our model, we’re just sort of client-focused. It’s not a kind of retro [IOW] model. It doesn’t make as much sense for us.

Operator

(Operator Instructions)

David Cash

Okay. Thank you, Nikki. With that, thank you, everyone for joining our call today. During the first quarter this year, I’ll be presenting at the Bank of America Merrill Lynch conference next week and Mike McGuire will be meeting investors at AIFA and then we’ll be speaking at JPMorgan conference towards the end of March. And so I hope you all get a chance to with us at these events and I very much look forward to talking to you again in three months’ time on our call. Thank you, operator. That concludes the call.

Operator

And that does conclude today’s conference. Thank you for your participation.

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