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Executives

Rob Newman - Vice President and Controller

Jim Bryce - President and CEO

John Weale - Senior Vice President and CFO

Analysts

Josh Shanker – Citigroup

Dan Farrell – Fox Pitt

Bill Bergman – Morningstar

Mark Dwelle – Ferris Baker Watts

[Chris Nacvipor] – Goldman Sachs

IPC Holdings, Ltd. (IPCR) Q4 2007 Earnings Call February 15, 2008 8:30 AM ET

Operator

Good day and welcome to today’s teleconference. [Operator Instructions] I will now turn the call over to Mr. Rob Newman.

Rob Newman

Good morning ladies and gentlemen and welcome the IPC Holdings Fourth Quarter 2007 Conference Call. My name is Rob Newman, Vice President and Controller of IPC and with me this morning are Jim Bryce, President and CEO and John Weale, Senior Vice President and CFO.

During our discussion this morning we may make forward looking statements and while these statements represent our best know judgments on what the future hold they are subject to risks and uncertainties that could cause actual results to differ materially. As always we recommend that you refer to our public filings including our annual report on Form 10-K for the year ended December 31, 2006, also Form 10-Q and other public filings for more details on the risk factors.

Now I’ll hand it over to Jim Bryce who will talk about the fourth quarter and year ended December 31, 2007, earnings.

Jim Bryce

Good morning ladies and gentlemen. The fourth quarter was again a quiet quarter in terms of premium activity as it is traditionally our least active quarter for the year. Due to some program restructuring in 2007 actual deposit premiums in the quarter were slightly higher than the historic average. However this increase was more than offset by reductions in our anticipated reinstatement premiums as 2007 loss updates from our clients late in the year proved to be lower than originally anticipated.

Actual loss activity for the quarter was again somewhat benign with the only significant event being in October with the wild fires in Southern California. The Witch fire which was the largest fire ever seen in San Diego County at its height some 346,000 people were forcibly evacuated from their homes. PCS reports 22,000 claims from the fire and estimates in the final insured bill will be in the region of $1.1 billion. We estimate our involvement to be no more than $7.5 million at this time.

In the absence of any significant land fall in hurricanes and typhoon events and no earth moving in our cover territories the loss activity for the 2007 year focused on a number of small to medium size loss events. These included the European Wind Storm Kyrill, the Northern and Southern UK flood losses in June and July, the mid year storm loss in Australia and the aforementioned wild fires in California.

Despite this frequency of events we have achieved a near record profit in 2007 and our return on common equity is 20%. Our year end balance sheet closes in an extremely strong position and contains high quality assets unencumbered with any current market concerns relative to investments or losses concerning recent ongoing investment events. The 2007 year the numbers speak for themselves. We generally saw strong premium pricing and high demand for quality capacity.

The 1/1/2008 renewals were encouraging and we are generally in line with our expectations. In the US rates online were down an average of 9% due, we believe, to further increased client retentions as well as reduced exposures filtering through to us as a result of increasing primary deductibles and more stringent underwriting by our clients in the insurance sector. The original US policy holder has been forced to become more of a stakeholder in the overall listature and we view this as a necessary and welcome development and believe it bows well for the future.

In the Internatioal sector rates online were generally flat to down 5% to 10% on loss free contracts. Reinsurance contracts impacted by losses did see some price increases but these varied depending on the size of the loss and the historical experience relative to each specific program. We believe it fair to say that there remain healthy market conditions in the US and a stable market in the International area due to the storm activity in Northern Europe in January, the aforementioned flooding events in the UK and Australia and the wild fires in California.

The coming renewals in Japan in April however are expected to show market pressure on price stability from the lack of significant catastrophic loss activity there in the last few years. I will now hand over to John to give us some comments on the financials.

John Weale

Good morning ladies and gentlemen, the following are some brief remarks regarding the financial aspects of our fourth quarter results 2007. Investment income for the quarter was $24.4 million compared to $28.6 million in the fourth quarter 2006, which included $3.3 million of dividends from hedge funds. In addition to the difference in dividends, investment income was down primarily due to a small reduction in the yield on the portfolio as well as the impact of cash being used to buy back shares.

However, as a result of the decline in interest rates during the period our net gain for investments which represent a change in fair value of the portfolio during the quarter plus actual realized gains from sales were $26.3 million. This was comprised of the $31.9 million gain from fix income securities and a $5.6 million loss from non-fixed income investments.

Clearly it was a very unusual quarter in terms of our incurred loss amount being negative. As Jim has just mentioned and as noted in the press release as a result of updated information provided by our clients as well as our own analysis there are a number of reductions in our estimates of ultimate losses for the majority of 2007 events. This was only partly offset by the relatively small loss incurred as a result of the California wild fires in October of last year.

Our net paid claims in the fourth quarter 2007 were approximately $75 million compared to approximately $120 million of net paid claims in the corresponding period of 2006. Approximately $50 million of our net paid claims in the fourth quarter 2007 related to Katrina, Rita and Wilma. Other paid losses in the fourth quarter of 2007 included approximately $10 million for 2007 events and the balance on other prior year events.

Our net operating cash flow in the fourth quarter 2007 was a positive $11.4 million compared to a negative $20.2 million from the fourth quarter 2006. In addition, during the fourth quarter 2007 we used $105 million to pay dividends and to buy back shares. Fully diluted book value per common share was $32.42 dollars at December 31, 2007, a $2.76 increase over book value at September 30, 2007, which is a 9.3% increase in the quarter.

Over the course of 2007 dividends paid together with increase in book value totaled $6.25 for common share on a diluted basis, which represents a return of 22.35% on opening book value per share. Yesterday the Board of Directors increased the quarterly dividend by 10% incurring a dividend amount of $0.22 of common share. This amount will be paid on March 14, 2008, to shareholders of record February 29, 2008.

In light of the shareholder funds, the company continues to generate, the Board also approved an authorization of $300 million to repurchase shares. This authorization will be in effect until April 1, 2009. I’m going to hand back to Jim; he’s going to open the Q&A session.

Jim Bryce

On that note we will take any questions which you may have.

Question & Answer Session

Operator

[Operator Instructions] Our first question comes from Josh Shanker with Citigroup.

Josh Shanker – Citigroup

In terms of thinking about your excess capital position, given where you are right now, how much capital do you think that you need to maintain your ratings in the current amount of business you have on the books as of December 31, 2007?

John Weale

Certainly as far as the ratings are concerned they made it very clear last year in particular S&P when they downgraded us that our capital position was certainly not an issued from that perspective it was really the fact the we remain mono-line catastrophe insurer that was more the issue as far as they were concerned and in respect to the rating. Certain capital is not an issue for us with either rating agency at this point in time. We continue to try and repay our earnings either in the form of dividends or through share repurchases.

Josh Shanker – Citigroup

Is there any way we can get any idea on how many shares you could repurchase in the first half of the year before the hurricane season?

John Weale

I guess it really depends on what happens to the share price from here on in. Clearly we have $300 million authorization, I think we haven’t made any specific determination about how much we intend to repurchase before June but clearly based on what we achieved during the second quarter 2007 and the fourth quarter 2007 it wouldn’t be out the question to utilize the whole thing before the hurricane season. I’m not sure that we would necessarily do that.

Jim Bryce

We had done half before and we did half after this year for 2007 just to remind you.

Josh Shanker – Citigroup

The other question regards the renewal pricing for January 1. If you had to compare this renewal season with one of the last seven years of pricing where do you think rates are falling right now?

Jim Bryce

That’s a good question; I would say it’s probably in between post 9-11 and Katrina. I would say it’s probably 2004.

Operator

Our next question comes from Dan Farrell with Fox Pitt.

Dan Farrell – Fox Pitt

A couple questions, first on the expense ratio can you talk a little bit about the G&A ratio which seemed a little high, I think you mentioned some higher comp and other things. Is there anything else in there unusual that’s trending through?

John Weale

Not really, I guess one of the things that makes our expense ratio move sometimes is the fact that our expenses are so small. It doesn’t take much to actually reflect an increase in the expense ratio. There was nothing unusual, at the end of December we did accrue for expectations regarding long term compensation and clearly with a pretty good year with returns on equity over 20% the compensation was reasonably generous, at least our accrual for the compensation was reasonably generous.

Jim Bryce

If you look at the year end ’06 and the year end ’07 its 18% and 18.1% so on an annual basis its pretty much in line.

Dan Farrell – Fox Pitt

You guys give a great disclosure year end in your 10-K with regard to aggregate exposures by region and I may be jumping the gun because you haven’t filed the 10-K yet, but could you speak broadly about where your aggregate exposures are at this January 1, 2008 versus last year, where there any meaningful changes?

Jim Bryce

I guess we really addressed it in two arenas as the US and the non-US and in the US we did see higher retentions, larger programs were purchased last year, not as much additional cover was purchased this year so overall our aggregates in the US will be down. In the UK we are probably about the same or slightly down but of course we’ve got the exchange rate in Europe I would say we are probably with the exchange rates the way they move the same or slightly down. With some pretty strong movements in terms of Sterling and Euro.

John Weale

We expect to file the 10-K probably in a week to 10 days; you’ll be able to see the actual aggregates then.

Operator

Our next question comes from Bill Bergman with Morningstar.

Bill Bergman – Morningstar

Compared to say a year ago what you might have expected for the growth rate at IPC over the next five years or so. Do you think we might expect, perhaps stronger growth given the improvement in financial position relative to other people involved in the investment problems you’ve mentioned?

Jim Bryce

I think we’ve got plenty of opportunity for growth in terms of comparable positions strong, unfortunately the buying habits and market conditions are really limiting how much we can grow. We do have a strong underwriting discipline as you know we did non-renew quite a bit of business either due to terms and conditions or pricing. Right now the industry overall unfortunately has too much capital and that’s affecting terms conditions and pricing. Opportunities, at least in the near term, unless we have a major event are rather limited.

Operator

Our next question comes from Mark Dwelle with Ferris Baker Watts.

Mark Dwelle – Ferris Baker Watts

A couple of questions, if you undertake your various share repurchase initiatives do you withdraw from your investment portfolio ratably between the equities and the fixed income or will you be ratcheting down the equity proportion?

John Weale

Irrespective of the share repurchases we do take a long hard look at the application within the portfolio and we have been making some adjustments at any length as a result of market movements. I think what we found last year was during second quarter we were able to fund the share repurchase mostly out of operating cash and the same was true for the most part for the repurchases we undertook in the fourth quarter.

We wouldn’t necessarily use the share repurchases to do anything specifically with the investment portfolio. We treat that side of the balance sheet a little separately.

Mark Dwelle – Ferris Baker Watts

Especially with cash flows so strong at the first half of the year that makes good sense. The second question I had is, with respect to the composition of your reserves, you have some $395 million of lost reserves there really haven’t been any sizeable events for a couple of years now. Is the majority of that reserve position really IBNR?

John Weale

I think if you look historically at how much is actual cases versus IBNR it’s typically about 50/50, its not always 50/50 but typically about 50/50 and while I don’t have the exact numbers in front of me for December 31, I’m pretty sure it is roughly that level for the December 31. Maybe 60/40 at this point in time in cases to IBNR.

Mark Dwelle – Ferris Baker Watts

A last question, if I recall correctly in last years first quarter there’s a fair portion of reinstatement premiums relating to Wind Storm Kyrill and whatnot. In light of that I guess it would be fair to assume that when you are describing 1/1 renewals you are certainly excluding that from your consideration as far as premium comparisons year over year?

John Weale

Absolutely, yes.

Operator

Our next question comes from [Chris Nacvipor] from Goldman Sachs.

[Chris Nacvipor] – Goldman Sachs

Have any of the smaller events in the first quarter, whether tornados or the Australia typhoon which I guess is still going on. Have any of those resulted in any meaningful losses to your book yet?

Jim Bryce

We do not anticipate at the levels that have taken place so far to be involved in major way though.

John Weale

As you say, the Australian event is sort of ongoing so that one we will wait and see on but certainly as far as the tornados we are not anticipating much of anything.

Jim Bryce

I think the only losses really, I think there was some marine but we are not involved in marine but we are not involved in net tax has been relatively quiet so far this quarter for reinsurers. Storms in the Midwest were pretty horrific and obviously there was a lot of destruction but that’s really, most of that will be net basis insured.

[Chris Nacvipor] – Goldman Sachs

Do you have the actual share count number at the end of 2007?

John Weale

I think its 65.57 million.

[Chris Nacvipor] – Goldman Sachs

Last question, could you walk us through what the thought process was in terms of capping the price that you won’t buy shares back at, I think it was no shares shall be repurchased for a price in excess of $41?

John Weale

We basically utilized the same possibly optimistic view that it might be possible that our share price may one day get to about one times one point times book value. We took the projected book value that we have for the end of this year, beginning of next year and said we wouldn’t want to buy back shares at greater than one point one times that number. Maybe being optimistic given our current valuation.

Operator

[Operator Instructions] It appears there are no further questions at this time.

Jim Bryce

It looks like we have no more questions. I just want to thank everyone for dialing in. Thank you for your time and thank you for your interest and Happy Belated Valentines Day!

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Source: IPC Holdings, Ltd. Q4 2007 Earnings Call Transcript

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