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Allied World Assurance Company Holdings, AG (NYSE:AWH)

Q4 2011 Earnings Call

February 16, 2012; 09:00 am ET

Executives

Scott Carmilani - President & Chief Executive Officer

Joan Dillard - Chief Financial Officer

John Gauthier - Chief Investment Officer

Keith Lennox - Investor Relations Officer

Analysts

Matt Carletti - JMP Securities

Michael Nannizzi - Goldman Sachs

Matt Heimermann - JPMorgan

Steve Labbe - Langen McAlenney

Sarah Dewitt - Barclays Capital

Ron Bobman - Capital Returns

Court Dignan - Fidelity

Operator

Good morning and welcome to the Allied World Assurance fourth quarter 2011 earnings conference call. All participants will be in listen-only mode. (Operator Instructions).

I would now like to turn the conference over to Keith Lennox, Investor Relations Officer. Please go ahead sir.

Keith Lennox

Thank you. Good morning everyone. Our press release and financial supplements were issued last night after the market closed. If you'd like copies of either, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available through March 1 on our website and as a teleconference replay. The dial-in information for this replay is included in our earnings press release.

Our speakers this morning are Scott Carmilani, Allied World's President and Chief Executive Officer; Joan Dillard, the company's Chief Financial Officer; and John Gauthier, the company's Chief Investment Officer. Also here to assist with questions are several other members of our management team.

Before we begin, I will note that statements made during the call may include forward-looking statements within the meanings of the U.S. federal security laws. Forward-looking statements are subject to a number of uncertainties and risks that could significantly affect the company's current plans, anticipated actions and its future financial condition and results. These uncertainties and risks include, but are not limited to those disclosed in the company's filings with the Securities and Exchange Commission.

Forward-looking statements speak only to the date they are made and the company assumes no obligation to update or revise any forward-looking statements in light of new information, future events or otherwise.

Additionally, during the call management will discuss certain non-GAAP measures within the meaning of the U.S. Federal Securities Laws. For more information and a reconciliation of these measures to the most directly comparable GAAP financial measures, please refer to our earnings press release which was issued last night and is available on our website.

With that complete, I can turn the call over to Scott.

Scott Carmilani

Thanks Keith and good morning everybody. The company ended the year with a relatively strong fourth quarter, reporting net income of $183 million or $4.63 per diluted share. I’m going to lead off the call with some full year general comments as I think it’s appropriate since this is our year-end call and then we’ll turn it over to Joan to give more specifics on the quarter.

For the full year we generated $275 million of net income or $6.92 per diluted share. 2011 was a tough year compared to what we’ve been achieving over the past few years, but all in a good income compared to the market at large, our peers and the general economy’s performance. An 8.9% ROE on net income and on a net ROE of 6% on an operating basis isn’t too bad.

I want to mention, you should notice the $115 million of additional income via the break-up fee achieved from our attempted merger that was thwarted by certain shareholders. It isn’t part of the operating income that I stated or the stats I’ve stated in respect to that, but I think it should be counted, because it was certainly part of the value we’ve created for our shareholders (ph).

The company continues to focus on our specialty casualty initiatives and it is this business that continues to perform well and is the catalyst behind our posting $59 million of (inaudible) profits in 2011, despite the catastrophe losses. In addition our growth efforts and targeted lines in selected geographies throughout the world continue to payoff and are reflected in our financial statements.

The gross premiums written for the year were in excess of $1.9 billion, up over 10% from the prior year and a record top line number for the company. I’m very pleased that this growth was achieved organically across all three of our operating segments, demonstrating the expanded breadth and the scale of our operating platforms.

Our U.S. insurance segment now represents 43% of the company’s total writings and better than anything else illustrates Allied World’s transformation over the past few years to add smaller and commercial and middle market accounts to the platform. This business is providing a more stable rate environment and it is this market that is stickier business from our retention perspective. Segment’s full year premiums were up 15% in 2011 to $839 million.

Just four years ago only 13% of our business was producing within the United States. When we saw weakening in the excess casualty markets, we began shifting our resources and attention more towards the commercial US market place and move closer to our customers. We get to this business now through our 10 regional offices throughout the United States, from which we offer diversified products and enhanced service capabilities.

One last point on the U.S. insurance segment; about 3% of this segments premium in 2011 was generated from new business initiatives and from products and classes that were not underwritten at all prior to 2009. We continue to experience healthy growth in our newer specialty classes of business, including our expense based liability products, environmental and some E&O classes like cyber liability and coverages that are like it are developed specifically for niches and within industries.

We are seeing some increased traction in our healthcare, construction and public entity businesses as a result of product enhancements and our industry vertical focuses. One example of this is our recently announced and joint product offering with Marsh, where we will now be providing Corporate Officer coverage for the life science, pharmaceutical and healthcare industries.

Our international insurance segment is also benefiting some from the business expansion. Premiums in this segment were up 5% to $530 million compared to full year 2010. Our product sense are getting stronger and we are doing a better job at cross marketing our products and we are realizing increased opportunities in our healthcare product segment and in the European and Asia Pacific territories for those product lines, as customers are beginning to recognize these exposures and the insurance as a potential solution.

We are also seeing and developing medical tourism market in these emerging economies and is another healthcare related coverage opportunity. Our general property book has grown by 6% in 2011 as we take advantage of the increasingly favorable property raise environment, including through our Lloyds Syndicate where it’s probably most needed.

I should mention, we are achieving this without meaningfully changing our risk profiles and risk appetite. Finally this segment is also experiencing growth from our new business initiatives, including from our International trade credit and SME professional liability products, usually distributed outside the London wholesale market.

In our reinsurance segment premiums are up 9% for the year. We are very pleased with the traction that we’ve achieved in our global marine and specialty reinsurance division, which we launched in 2010. This unit wrote just over $26 million of premiums in 2011 and we are now an active re-insurer of global risk in both the marine and crop businesses and we see good opportunity in both these markets from a treaty perspective.

We are also seeing growth in our reinsurance property cap unions, where pricing and structures have begun to improve, including in the Asia Pac and Latin America regions, without materially changing our risk exposures again. The rate environment for casualty business continues to be a mixed bag depending on the line and geographic region where business is produced. While we are continuing to see some signs of improvement, particularly in our North American casualty business, we are still not seeing the wholesale changes in the market that are probably needed.

The timing of our potential market hardening seems like it will drag out for a while, but we certainly appear to be primed for an upward tick in rates, given that the excess capital positions are relatively weaker and you can see it at the wake of the global CAT losses, the idea of diminishing reserve positions and the likely lower sustained investment yield environment. Pressing against all this is the continued low inflation and a low loss cost operating environment.

In property the market has begun to respond to loss activity and we have achieved a significant double digit and high double digit rate increases in some of the CAT books and exposed businesses across our multi direct book and our property reinsurance portfolios, particularly in the loss affected areas. Disappointingly, the European property market is still not getting enough our rate, even though our models would indicate that additional rate is needed and probably terms tightened.

Now, let me turn it over to Joan to discuss some of the quarter and financial aspects of the quarter in more detail.

Joan Dillard

Thanks Scott and good morning everyone. Results for the fourth quarter were strong despite recording almost $60 million in losses from the Thailand floods, an additional development from other 2011 catastrophe losses. Net income for the quarter was $183.1 million or $4.63 per diluted share, that’s almost double the $92.8 million in net income that we reported in the fourth quarter 2010.

While the catastrophe losses detracted from earnings this quarter, they were outlaid by a number of positive factors. During the quarter we received an additional $66.7 million from the break-up of our merger agreement with TransAtlantic and we also recognized $31.6 million in realized investment gains for the quarter versus $3.7 million in realized investment losses in the fourth quarter of last year.

Finally, our operating expenses were lower by $14.6 million this quarter versus the same quarter last year, when we recognized additional incentive compensation expenses and incurred one-time expenses related to our Swiss re-domestication. For the full year 2011, net income was $274.5 million or $6.92 per diluted share, down from $665 million or $13.32 per diluted share for the full year 2010.

Last year benefited significantly from the rebound in the financial markets, while we recognized $285 million in realized gains versus the $10 million this year. We also saw about three times the level of CAT losses in 2011 at $292 million. We recorded operating income of $94.7 million or $2.40 per diluted share for the fourth quarter 2011, down slightly from the $97.3 million of operating income that we reported in the fourth quarter of 2010.

Operating income for the full year was $183.7 million or $4.63 per diluted share versus $397.8 million for the full year 2010. We excluded the TransAtlantic break-up fee from the operating earning since we consider it to be non-recurring.

During the fourth quarter 2011 we recorded $92.4 million in net favorable reserve development and $59.1 million in catastrophe losses. The catastrophe losses include $43 million from the Thailand flood and $16.1 million in development from the events that occurred earlier in the year. Now this included $7 million from the Japanese earthquake and tsunami, $6.6 million from the New Zealand and Australia events and $2.5 million from US catastrophe that occurred during the year.

Our reported loss ratio was 53.9% for the fourth quarter 2011, which was adversely impacted by 14.9 points of CAT activity that benefited from 23.4 points of net positive reserve development. Absent these items are accident year loss ratio for the quarter with 62.4%. The full year loss ratio was 65.8% for 2011, which was adversely impacted by 20.1 points of CAT activity, but also benefited from 17.4 points of net positive reserve development. Absent these items are 2011 accident year loss ratio of 63.1%. Our total investment return for the fourth quarter and full year 2011 was $73.8 million and $160.3 million or 0.9% and 2% respectively.

Let me now turn the call over to John Gauthier, our Chief Investment Office, who will give us some color on the markets and on the results. John.

John Gauthier

Thank you Joan and good morning everybody. We are pleased that our investment results bounced back in the fourth quarter and that we have weathered what was a very challenging year. During the quarter we saw the following; better economic data across the United States, the implementation of the long term repurchase operation, LTRO by the ECB and correspondingly positive capital market returns across the world. The S&P up 12%, euro stocks up 8% and spreads tighter across most investment grade and high yield sectors.

As Joan mentioned, the Allied portfolio returned just under 1% for the quarter and 2% for the full year. These numbers were disappointing, both versus our own expectations as well as by our historical standards. We made some modest changes during the quarter, but the major themes remained in tact. We maintained our short duration posture, but with a meaningful exposure to spread assets. We grew our bank loan portfolio and we had positive momentum and the capital activity and return profile of our modest by growing private equity portfolio.

As we move into 2112, we are cautiously optimistic for capital market returns. We see limited upside for treasury returns, but rates may stat at these historically low levels for a while as the fed had signaled a zero fed funds rate policy for the next two plus years.

On the other hand we see limited downside to most spread assets, so investment grade, the high yields and bank loans as fundamental remain positives and spreads remain above historical averages. We believe we have been well compensated for the true default adjusted risk.

Equities are off to a good start and we believe they remain cheap by historical standards and versus all fixed income alternatives. However, the caveat is volatility has moderated from its third quarter peak. We expect liquidity remain depressed in most over the counter markets and therefore headlines will lead to exacerbated periods of volatility.

Investors must remain highly convicted in their long-term strategy and be able to stomach the short-term volatility. And lastly, it remains critical to have a diversified portfolio, which we believe we have built over the last several years. Within this context and while we make some modest additional changes in the quarter, we like the way the portfolio is positioned and we believe it’s very well positioned moving into 2012.

With that I’ll hand it back to Joan.

Joan Dillard

Thanks John. In summing up, our combined ratio for the fourth quarter 2011 was 83.5% compared to 82.8% for the same period last year. On a full year basis we are reporting a 95.9% combined ratio versus 84.9% for 2010, with the major differences being the increase in CAT activity and lower reserve releases in 2011.

Our expense ratio declined in 2011 to 29.6% and 30.1% for the quarter and full year ended December 31, 2011 and that’s a reduction of 6.5 points on the quarter and 2.7 points on the year, when compared to the 36.1% and 32.8% in the corresponding periods of 2010.

Our earned premium sort of increased by 15.4% for the quarter and 7.2% for the full year, reflecting the growth from our investments in new products and additions of new business that we’ve made over the past several years. But we’ve also had a 5.2% reduction in operating expenses year-over-year, resulting from prudent expense controls, lower performance based incentive compensation expense and the assets for some one time expenses that related to our re-domestication to Switzerland and the establishment of our Lloyd Syndicate in 2010.

And finally as you recall, we had suspended our share repurchases in the second and third quarters of the year because of our merger discussions with TransAtlantic. We restarted the program in mid December with the purchase of 450,000 of our common shares at an average price of $59.33 per share for a total cost of $26.7 million. In January we purchased an additional 524,000 shares at an average price of $63 per share for a total cost of $33 million. We have now $141 million remaining under our current share buyback authorization.

With that, let me turn it back to Scott.

Scott Carmilani

Okay, thanks Joan. With President’s Day coming up this Monday, I’ll take the opportunity to quote Ab Lincoln, who said, “Things may come to those who wait, but only the things are left behind by those who hustle”. At Allied world we’ve been hustling for the last decade and we believe the proof speaks loudly.

Since our company was formed in late 2001 we’ve written over $15 billion of growth premium. We’ve generated $3 billion of net income over that span. In our view, growing shareholder value is the ultimate measure of success and we are proud to have grown book value by over 2.5 times since going public in 2006.

We continue to evolve and differentiate ourselves from our humble beginnings as we continue to strive to be a well-balanced specialty P&C carrier. With the capabilities, capacities and the products and services insurers are looking for on a globally competitive landscape.

We have been able to grow the scope and the strength of our portfolio. We are also lowering the ultimate risk volatility of our results, while still achieving above average returns relative to the market place and our peers for all of our shareholders and that is something that our staff and the management team are very proud of and rightly so. So as usually I want to thank them and our valued customers for their support.

And I’ll put it back to the operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Matt Carletti of JMP Securities. Please go ahead.

Matt Carletti - JMP Securities

Hey thanks, good morning. I just had two questions. The first is on the buyback and that is December and January rounding about $30 million it looks like of buyback. Shall we view that as kind of the run rate in the near term or should we think about it in another way.

Joan Dillard

Hi. I think those are some good data points and a fair assessment.

Matt Carletti - JMP Securities

Okay, and then the other question relates to just page 21 of the supplement which shows kind of the IBNR trending, that’s percent of total reserves and its been the trend for a while and now the IBNR has been slowing coming in. Can you just provide some color on that? Is that a shift to short tail lines that’s happened in the book, its drive that, has it been more of just a maturing of some of the newer lines or something else.

Scott Carmilani

Yes, I think that’s absolutely right. As it should slowly as it matures as a company, I think shift a little bit from IBNR to more case reserves that typically – and also you’re absolutely right, in moving towards the shorter tail lines that will write primary and the U.S. will also have a little faster reporting pattern.

Matt Carletti - JMP Securities

Okay great, thanks a lot.

Operator

Our next question comes from Michael Nannizzi of Goldman Sachs. Please go ahead.

Michael Nannizzi - Goldman Sachs

Thanks. One question about the expense ratio in reinsurance that was down a bit; looks like it was the G&A line. I was just wondering if that was related to lower conversation ventures because of a lower profit due to CATs in 2011 and if that was more of a run rate for the expense line, just one follow up, thanks.

Scott Carmilani

Let me answer that in reverse. I think we were just driving for the expense ratio for it to be more of a run rate, below 30%. I think we made good strides towards that in 2011, but some of that quicker reduction that your seeing is coming from lower compensation expense as well in 2011 because of the cash.

Michael Nannizzi - Goldman Sachs

Got it. In reinsurance in particular, because I’ve seen more exaggerated I guess in that segment than the other two.

Scott Carmilani

Well, I’m going to say its all for one and one for all in that respect.

Michael Nannizzi - Goldman Sachs

Okay, all right, fair enough. And then I know in the past you talked about the US insurance segment and working on getting the expense ratio down there. Just wanted to get some color there? It looked like the acquisition cost was down a little bit, but the other cost were kind of more in line with where you were for the fill year. So just trying to get an understanding of how you think that expense path progresses from here as that business continues to mature?

Scott Carmilani

What I can say is – what I just said is, we are aiming for a run rate of sub-30 on an expense percentage, G&A included. So acquisitions is the A of the G&A. Some of that if fee business versus commission business and there’s certainly still quite a bit of pressure from all the brokers who want more commission and in some cases where we see margin we are trying to help them and in other cases where we don’t, we are not.

Michael Nannizzi - Goldman Sachs

Okay, great. And then just one last international segment; you mentioned the small medium enterprise and the national trade credit. I think you mentioned those on the same quote as well where we saw some year-over-year growth and written premiums. Just want to understand, what’s happening to the old, like the Bermuda, North America access book, size wise and it sounded like if I remember right from your Investor Day, that that should be kind of trending down but maybe its being more than off set by some of these new initiatives. Can you just kind of talk about that dynamic a little bit? Thanks.

Scott Carmilani

That’s exactly right. It has been trending down for each year for the last three or four years. In fact second half of 2011 was the first time it didn’t shrink in that whole time and some of that’s coming from cross marking. We actually grew the large healthcare platform a little bit. Those two new classes of business that you just mentioned, trade credit and SME have provided some additional upward shift.

That whole segment I think grew by 5% for the year, so its not negative, its slightly positive and the Lloyd Syndicate would be – I mean, Lloyd Syndicate helps a little bit as well, but the Bermuda excess book on it’s face value is certainly a little bit smaller. I do believe we have regained the number one Bermuda position in that market place, from other competitors though.

Michael Nannizzi - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from Matt Heimermann of JPMorgan. Please go ahead.

Matt Heimermann – JPMorgan

Hi, good morning. A couple of questions; first, just on the reserve development in the quarter. I’d be curious if you just give us a little more color there and then in particular, if you can may be touch on ‘08 and ’10 accident years, because that’s an area in the past you suggested it might be better than people think and some of the terms we’ve seen so far.

Scott Carmilani

Yes. Since Marshall Grossack, our Chief Actuary’s here in the room, I’m going to ask him to give you some color on that.

Marshall Grossack

Okay yes. Just quickly as far as the development opportunity released $92 million, a little color on that. $58 million or $59 million was for 2007 and prior; that was virtually all given by our causality lines, there’s not much release though left on the property lines.

For 2008, 2009 and 2010 we released $33 million, of which $19 million was associated with shorter tail property lines. Specifically to 2008 and 2010, we have released 6.5 million total on 2010 and we released $18 million or else $19 million on 2008, 2008 of which $13 million was property lines.

Matt Heimermann – JPMorgan

Okay, thank you for that. Also just to be curios, the paid losses have been the last two quarters kind of increasing and I’m assuming that’s related to CATs, but just wanted to send a check back and make sure nothing else is affected.

Scott Carmilani

You are looking at the absolute number?

Matt Heimermann – JPMorgan

Yes.

Scott Carmilani

Yes, volume is up too, but it’s mostly related to cash.

Joan Dillard

Yes, it’s defiantly related to cash and then on the flip side we are actually having some cases or take downs on some old leaders. So overall our merger has been a much lighter than they expected in the fourth quarter, which was one of the reasons we had a fairly outsized reserve release of $92 million.

Matt Heimermann – JPMorgan

Okay, that’s helpful. And then I guess just one for John on the portfolio, there haven’t been any major changes I think for philosophically to kind of how you’ve been approaching the portfolio the last year or so. But I guess, I’m a little surprised that the duration now is sub-2. So I didn’t know if we should expect that to keep going or we’re just seeing that shorten a little bit more, then maybe we should the duration to be longer term just because as you pay some of these losses out the duration, naturally we’ll start extending.

Scott Carmilani

Yes, Matt I’d say its – you’re going to see it down in that 2 range, unless we see a meaningful up-tick in rates. It’s really not ALM related. It’s more of a view of as we’ve diversified the portfolio, one of the risk that we wanted to take down is the interest rate risk, so it’s more of an active call.

Arguably if you look at the last couple of quarters of 2011 we were early there. The good news is, the book yield that you see there is kind of equal to our new investment yield. So we think we’ve kind of gotten through the continued degradation of the book yield and we are now in a place where income should be kind of you know static and even growing a little bit.

Matt Heimermann – JPMorgan

Okay and so, so I’m just putting Harris here. So 199 –1918 it’s about as low as it realistic would go.

Scott Carmilani

Yes I think, we are not going to put any more active views into the portfolio. You can see it in the next quarter or two going up or down a little bit but we are down at the bottom.

Matt Heimermann – JPMorgan

Okay, that’s fair and then just casualty declines in the reinsurance segment. Were there any premier re-estimates or is that just getting off a renewal in the quarter.

Joan Dillard

There were some small operating adjustments in the quarter of that $8 million, but the big difference was last year we wrote a two-year contract for $31 million, that of course won’t renew until next year. So 2011s Q4 was absent the renewal of that.

Matt Heimermann – JPMorgan

Okay, I just missed that then, Okay. Yes, even years is what you are saying.

Joan Dillard

In years that it will renew, that’s right.

Matt Heimermann – JPMorgan

Yes, yes okay. Thank you for that; I just missed that. All right, thanks much.

Operator

(Operator Instructions) Our next question and hard on the pronunciation comes from Steve Labbe of Langen McAlenney. Please go ahead.

Steve Labbe - Langen McAlenney

That was actually pretty good, good morning. A couple of quick ones and then maybe a longer one. Can you please update us where your 1 in 250 PML stood at the start of 2012 and maybe also comment if you think you’ll have exposures of the cost of Concordia disaster and then…

Scott Carmilani

I’ll start. We have a little bit of exposure to the Concordia disaster, but not meaningful or material. You want to give us a little update on the PML here in January.

John

Yes, as fare as there is the PML and this includes the January 1 renewal, so it’s as of kind of January 2 if you will. And 1 in 250, that win is 633 million and our 1 in 250 quake is $354 million and keep in mind that’s using RMS 11 and that is using the near term rate of storms which is higher. It also includes a storm search loading. So we do still have room, (inaudible) allow us to get it for 20% to lower our capital. So we are still do have headroom for both.

Steve Labbe - Langen McAlenney

Thanks and one more question please. You alluded to the generally favorable loss environment for casualty-oriented risks. I’m wondering, what are the less filed topics or developments that perhaps the market who isn’t as specialized as you all are, that you are watching closely for a potential delta.

Scott Carmilani

Well, let me try to answer that. This is Scott, Steve. I think the market developments that we are watching closely for development is the lead umbrella market, which I believe is lawfully under priced per unit of risk but I think creates a lot of volatility for those who are in it right now.

We’ve been fortunate that where we participated in the excess causality markets we are fairly above what we call the burning layers for most of our portfolio and where we do come down, we are in a much more specialized produce or position either by industry or by seat or by company we are insuring. So we’ve been picking our sports better and other people say that’s a lot of hard work, but the reality is, we’ve been beating our log ticks for quite a long time now. So we are showing that we’ve been able to execute on what we are trying to do here.

The other area that I think is concerning is the lead professional liability market, particularly D&O. Less so E&O, but particularly D&O where the financial institutions market I think has been in for a fair amount of pain for the last couple of years and I do now believe it is out of the woods by any stretch of imagination.

Now we’ve altered how we participate in that portfolio, that area of the business quite dramatically in the last two or three years and I think we’ve talked about that frequently on this call and I think our results are showing in that area as well and its an area that we are watching closely, but one that we don’t see a lot of change.

I mentioned in my comments that the European property environment is not responding enough to change in risk and you can say that for a lot of the world’s property market. As I said our premiums are up slightly, but our risk isn’t and the reason for that is because I think there has been a material shift in risk and exposure and so even though the rates in some parts of the world have gone up 300% or 400% in some cases, its not enough relative to risk adjusted exposure.

Its better than it was, so if you’re writing a dollar today and you’re expecting a 40% loss ration, may be it’s a 60% loss ratio, that’s better than it when it’s gone the other way and then maybe it’s better risk than it was last year. But Mother Nature has shown us in the last 18 months that we could be in for many more events like we’ve witnessed in the last couple.

So we don’t – and we’ve been spending an awful lot of resource, time and effort and brain power on perfecting out models, ripping apart the RMF (ph) 2011, adding AUR and adding our own interpretation of the components thereof and we just don’t see enough things that make it exciting to really ramp up our exposure and dive deeper into that market, right now. But its – that’s something we are paying close intention to as I’m sure many others are as well.

Steve Labbe - Langen McAlenney

Well, thank you very much for the answers and taking my questions.

Scott Carmilani

My pleasure.

Operator

(Operator Instructions) Our next question comes from Sarah Dewitt of Barclays. Please go ahead.

Sarah Dewitt - Barclays Capital

Hi, good morning. I was wondering if you could just talk a little bit about your appetite for M&A going forward after this TransAtlantic deal was terminated last year and then, would you be more interested in expanding in insurance or reinsurance. Thanks.

Scott Carmilani

Well, I think we have a disciplined view of M&A and we come at it from an opportunistic perspective. So I wouldn’t be more or less interested in insurance versus reinsurance as I would on the franchise, the value we think we can create with it and the value we could spend in acquiring it. So absent those key variables, there’s not a lot of opportunity in the M&A space as we see it today and the shareholder community and the market place makes that difficult when we are trading demonstrably below book value.

We don’t have currencies to do a big deal and if the market place isn’t going to be copasetic to a merger then that makes it that much harder. So, lets put it this way; I’m extremely comfortable with our 2012 budget and operating plan and it does not contemplate us needing to, wanting to or desiring to do a deal.

Sarah Dewitt - Barclays Capital

Great. Thanks for the answers.

Operator

Our next question comes from Ron Bobman of Capital Returns. Please go ahead.

Ron Bobman - Capital Returns

Hey Scott, hi Joan. I have a couple of questions and I apologize if you covered this, but would you talk about sort of changes to your catastrophe aggregates, sort of at one-one and maybe even more importantly sort of going forward where you might expect to write more CAT business where you might be pulling back and taking sort of geographically and what your sort of outlook is there. That was one question and I got a couple of others. Thanks.

Scott Carmilani

Okay. First let me start with, if our PML is up on a 1 in 250 model basis. It’s because the model is changed a bit, not because our aggregate exposure is changed, in fact it hasn’t changed at all; it might actually have gone down a bit. We have the RMS new models and the output thereof will show that we have a moderate increase in our PML, but relative to our capital and our portfolio not a lot. I believe that Marshall quoted that and I’ll have him quote it again.

So but our aggregate and our exposures property underwriters will tell you this all day long, the actually account and the premium relative to the exposure hasn’t changed much, other than the rate increase that we started to experience in the fourth quarter and into the first quarter of this year. So we’ve got a little more premium or in some cases a lot more premium.

In parts of world where rates have gone up the most dramatically, I’ve been in places in the Asia Pac, Japan, New Zealand and Australia territories where there’s been an awful lot of losses and those rates might be up 300% or 400%. 300%, 400% over too is still well below what the U.S. property CAT rate might be for say Florida or earthquake rate for say California would be.

So relatively still now then, where you can see Europe should be in the middle of that, hasn’t really responded at all. Now we’ll say that many of the bigger U.S. companies which have global manufacturing plants and capabilities around the world, are recognizing that their exposures are bigger than they were and we are seeing significant rate increases in that portfolio, but not necessarily bigger risk, although the modeled risk is higher. You want to re-quote our PML.

Marshall Grossack

Yes, I’ll re-mention those. Our 1 in 250 win to net PML right now is $633 million and for quake it’s $354 million and that is used in the new RMFC 11 with the kind of the more punitive switches turned on.

Scott Carmilani

Which is well below our percentage of equity threshold that we self-described to ourselves.

Ron Bobman - Capital Returns

Got you. But the trend line for rates, what would be sort of a reasonable expectation for April 1 and then the June and July business. It sounds like you’re saying that if those markets move as you currently expect, we should not expect a dramatic change to your writings and your appetite for exposure.

Scott Carmilani

Yes I would say you won’t see a dramatic effect to our exposure. You will see a bit of a effect to our writing and here’s why. In the U.S. direct market where an insured has no business or operations that have been directly effected, the rates are single digits to maybe plus 10%. If you take the same big company, a fortune 500 companies that has plans around the world and their rates are up 40% or 50% and we have a balanced portfolio of some or both of that, so the next effect of that will be the premium writings and that portfolio by default will be beiger.

Ron Bobman - Capital Returns

Thanks and I’ve got just a very specific question. Some time ago you highlighted the – called the private equity related professional liability reserves and you took them up in the first quarter, maybe nearly two years ago I think. I’m just wondering how those have held as more time has passed and presume the claims have developed or evolved.

Scott Carmilani

No disrespect meant to any private equity firms out there, but that debacle is still ongoing, very fully reserved and it will hold well regardless of outcome. How much of that falls to their insurance versus out of their own pockets I think is still up for debate.

Ron Bobman - Capital Returns

That’s an interesting comment. All right, thank you and best of luck. Hope it all continues.

Scott Carmilani

Thanks

Joan Dillard

Thanks.

Operator

Our next question comes from Court Dignan of Fidelity. Please go ahead.

Court Dignan – Fidelity

Hi, thanks guys. Most of my questions have been answered. But I just wondered if you can talk about sort of reserving methodology pertaining to the certain and new initiatives over the last couple of years. Obviously the company has a pretty sterling track record at this point in terms of picks and development and can you give us a sense for how you are balancing sort of this using industry data versus your own experience in the new initiatives.

Scott Carmilani

Yes, I mean first of all, for a lot of the new initiatives we are looking at, they are relatively shorter tailed lines compared to a lot of the kind of our historical business. So our approach is then we do an analysis since we don’t really have our own data. We do analysis of industry results and those lines of business where we do have people in Europe and people in Asia that have a lot of experience in these areas that we’ve hired. So we work with them to get what we think are appropriate loss picks to star with and frankly we are on a bit of a punitive kind of reporting pattern till we kind of build our own. So really I doubt we released any IBNR so far from those initiatives, so that maybe release a little bit, but any type of third party cover we would wait.

Court Dignan – Fidelity

Great and thanks for the phenomenal results given the prevailing conditions.

Scott Carmilani

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Carmilani for any closing remarks. Please go ahead.

Scott Carmilani

I just want to thank everyone for joining the call and have a great day, thank you very much. We’ll see you in April.

Operator

The conference is now concluded and we thank you for attending today’s presentation. You may now disconnect your lines.

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