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PartnerRe Ltd. (NYSE:PRE)

Q2 2012 Earnings Call

July 31, 2012 10:00 am ET

Executives

Robin Sidders – Director-Investor Relations

Costas Miranthis – President & Chief Executive Officer

Bill Babcock – Executive Vice President & Chief Financial Officer

Analysts

Jay Gelb – Barclays Capital

Mike Zaremski – Credit Suisse

Vinay Misquith – Evercore Partners

Joshua Shanker – Deutsche Bank

Greg Locraft – Morgan Stanley

Matthew Heimermann – J.P. Morgan

Cliff Gallant – KBW

Brian Meredith – UBS

Meyer Shields – Stifel Nicolaus

Amit Kumar – Macquarie

Ian Gutterman – Adage Capital

Operator

Good day everyone, and welcome to the PartnerRe Q2 2012 earnings conference call. Before we begin the call, I will remind all participants that they are in a listen-only mode. (Operator instructions).

If you haven’t received a copy of the press release, it is posted on the company's website, www.partnerre.com or you can call 212-687-8080 and one will be faxed to you right away. Once again the website is www.partnerre.com, or 212-687-8080.

I will now hand over to Robin Sidders, Director of Investor Relations at PartnerRe who will begin the call. Please go ahead.

Robin Sidders

Good morning and welcome to PartnerRe Ltd.'s second quarter and half year 2012 results conference call and web cast. As a reminder, our second quarter financial supplement can be found on our website at www.partnerre.com in the Investor Relations section by clicking on Supplementary Financial Data on the Financial Reports page. On today's call are Costas Miranthis, President and CEO of PartnerRe; and Bill Babcock, Executive Vice President and CFO of PartnerRe.

Costas will start the call with an overview of the quarter and year-to-date and hand over to Bill, who will provide more details on the results. And then as normal, Costas will come back at the end of the call to provide additional commentary on the market and then we'll open the call up for the question-and-answer session. I'll begin with the Safe Harbor statements.

Forward-looking statements contained in this call are based on the company's assumptions and expectations concerning future events and financial performance of the company and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

PartnerRe's forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments, such as exposure to catastrophe or other large property and casualty losses, adequacy of reserves, risks associated with implementing business strategies, levels and pricing of new and renewal business achieved, credit, interest, currency and other risks associated with the company's investment portfolio, changes in accounting policies and other factors identified in the company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking information contained herein, listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made. The company disclaims any obligation to publicly update or revise any forward-looking information or statements. In addition, during the call, management will refer to some non-GAAP measures when talking about the company's performance. You can find a reconciliation of those measures to GAAP measures in the company's financial supplement. I'll now hand the call over to Costas.

Costas Miranthis

Thank you, Robin and welcome everybody to our second quarter results call. As you saw from our press release last night, during the second quarter we continued to have strong underwriting results. Our non-life combined ratio was 9.6% for the quarter and 87.8% for the half year. The underwriting results were driven primarily by continued low level of catastrophe and other large loss activity during the second quarter, and we had another quarter of favorable reserve development, which again is consistent with our long-standing prudent reserving philosophy.

I would also remind you that during the second quarter we recognized into earnings a relatively small portion of our catastrophe premium, as we earned premium for catastrophe in a pattern that reflects the seasonality of risks assumed. Taking this into account, we are very happy with the results of our non-life operation.

Our life business also had a positive contribution to the quarter, but results were tempered by volatility in the valuation of our GMDB product and the incidence of large claims, both of which are within the range of fluctuations that we expect from quarter to quarter. In what continues to be a challenging and volatile investment environment, we recorded modest gains during the second quarter on top of the significant gains we saw in the first quarter.

However, with interest rates being at the current levels, our investment income will continue to be under pressure even though during the quarter investment income was modestly up. So [all in], a satisfactory first half of 2012, with an annualized operating ROE of nearly 12% and 8% growth in book value per share.

We remained active on the capital management front during the second quarter and through July. Bill will give you the specifics on share repurchases.

I will now hand over the call to Bill, and I will come back at the end of the call to talk more about current market conditions and events.

Bill Babcock

Thank you Costas and good morning everyone. Our second quarter performance resulted in us reporting operating earnings of $142 million or $2.20 per diluted share. This translates to an annualized operating ROE of 10.4%. In the comparable quarter of 2011, which was impacted by catastrophe losses we generated operating earnings of $67 million or $0.98 per diluted share.

Net income for the second quarter of 2012 was $176 million or $2.50 per diluted share representing an annualized net income ROE of 11.8%. Diluted book value per share at quarter end was $91.88, an increase of 2.5% over the prior quarter and an increase of 8.3% over year-end 2011.

Second quarter non-life net premiums written totaled $934 million, up 11% compared to the prior-year quarter, while net premiums earned were up 1%. These changes are on a constant FX basis as are all references to percentage premium changes for the remainder of my prepared remarks. The increase in net premiums written reflects growth in all our non-life sub segments with the exception of our catastrophes sub segment. The non-life technical ratio for the quarter was 83.1%, resulting in technical income of $150 million. This compares to the non-life technical ratio we reported in the comparable prior-year quarter of 93.8%. Our results for the quarter include favorable prior-year reserve development of $115 million or 12.9 points on the technical ratio.

This was down from the exceptionally high favorable development we reported last quarter, and is comparable to the development we experienced during the comparable prior-year quarter after adjusting for favorable development arising from changes in premium estimates. I will remind you that the favorable development we reported last quarter includes a one-off adjustment related to the settlement of the 2011 crop year, which we discussed on last quarter’s call.

The primary driver behind the current quarter favorable development was lower than expected [loss], a trend we have observed for some time now. We have not changed our reserving practices and continue to prudently book our reserves, especially in the early years on our longer tail lines. The distribution of current quarter favorable prior-year development was 43% from our short tail lines, 21% from our medium tail lines, and 36% from our long tail lines.

Favorable development in our short tail lines was primarily driven by energy and specialty property in our global specialty sub segment, property in our global P&C sub segment, and agriculture in our North America sub segment. Medium tail development was driven by aviation space and credit in our global specialty sub segment, while long tail lines favorable development came predominantly from casualty lines in both North America and global P&C.

The majority of the favorable long tail development came from accident years 2007 and prior. You can find the distribution of prior year reserve development by sub segment in our financial supplement. Now I would like to take you through our non-life sub segment results.

In our North America sub segment, net premiums written and earned were up 12% and 11% respectively driven by our agriculture book. As we discussed on last quarter’s call, we found a large [one-one] agricultural treaty in April this year, which resulted in us booking two quarters of premiums this quarter related to that contract. Costas will provide you additional information on our agricultural portfolio in a few minutes.

The technical ratio for the North America sub segment for the second quarter of 2012 was 87.5%, 9.4 points better than the prior year quarter. This improvement was driven by the absence of large catastrophes and a lower level of mid-sized losses in the 2012 quarter, partially offset by lower favorable prior-year reserve development in the current year quarter.

In our global P&C sub segment net premiums written were up 10% compared to the prior year quarter, mainly on upward premium adjustments and new business in our motor line. Net premiums earned were down 11%, reflecting decreased writings in prior quarters. The technical ratio for the quarter was 96.2%, and includes 11 points of favorable prior-year reserve development.

The increase in the technical ratio from the comparable prior-year quarter when we recorded a ratio of 93.5% was driven primarily by a modestly higher level of mid-size loses.

Turning to our global specialty sub-segment, we saw growth in net premiums written of 21%, while net premiums earned increased 10%. We achieved increases in net premiums written in nearly all lines driven by new business, upward premium adjustments and increased treaty participations. The technical result of $57 million this quarter, reflecting an 84.3% technical ratio, was consistent with the result we reported in the prior-year quarter.

Favorable prior-year reserve development this quarter was 16.1 points comparable to the 16.9 points of benefit reflected in the technical ratio reported in the prior year quarter. Net premiums written and earned in our catastrophe sub segment were down 10% and 32% respectively compared to the prior quarter. The main driver for the reduction in net premiums written was lower reinstatement premiums compared to the prior year quarter.

Regarding net premiums earned, in addition to reflecting decreased writings in prior quarters, I would like to remind you of the way in which we earn our [GAAP] premiums. We earn them in proportion to risk, which means there is significant seasonality due to [win] premiums. We expect overall premiums in our catastrophe sub segment for 2012 to earn about 35% in the first half of the year with the remaining 65% in the second half.

Our catastrophe sub segment contributed $51 million of technical profit this quarter, reflecting a 30.8% technical ratio. We were not materially impacted by catastrophe events this quarter, and prior-year reserve development was negligible. I should add the $50 million of gross IB&R we established at the end of 2011 to provide for the significant 2011 catastrophe events remains unchanged.

We neither allocated any part of the reserve, nor did we reduce the reserve. We maintained the reserve as we believed that considerable uncertainty remains regarding the ultimate settlement of event losses, especially with respect to earthquakes in New Zealand given the low level of settled claims to date.

Turning to our life operations, net premiums written for the quarter totaled $199 million up 6% from the prior year quarter, while net premiums earned were up 4%. These increases were primarily the result of a new longevity treaty we wrote in the fourth quarter of 2011, partially offset by lower premiums in GMDB and our short-term mortality book. The life allocated underwriting result, which includes allocated investment income and operating expenses, was $6 million this quarter compared to $12 million we reported in the prior year quarter. The decrease was driven by a large claim in our long-term mortality book and higher claims in certain other lines.

In the financial markets, the focus remained on Europe, and evidence of slowing economic activity worldwide. Equity markets were down, credit spreads gapped slightly, and government yields fell a bit. Against this backdrop, our investment activities contributed $171 million to our second quarter pre-tax results, excluding investment income allocated to our life segment. Of this total, income of $134 million was included in pre-tax operating income and $37 million in pre-tax non-operating income.

During the quarter, we achieved a total return of 1.1% on a local currency basis. Investment income for the quarter was $153 million, which is up 3% compared to the first quarter of 2012 FX adjusted, primary due to the timing of dividend receipts. At the end of the second quarter of 2012 new money rates trailed our current portfolio investment income rate by 134 basis points, up slightly from the prior quarter. Absent the closing of this gap, we expect continued pressure on investment income going forward.

We maintained our short neutral duration position again this quarter as we continued to remain defensive against an increase in rates. You may have noticed in our financial supplement that the average credit quality of our investment portfolio moved from AA to A this quarter. This is not the result of any material portfolio reallocations this quarter, but rather a function of the tipping point of the average credit quality calculation.

The S&P downgrade of the United States and other sovereigns over the past year moved our average credit quality down to just above the A level. Minor changes in the portfolio this quarter resulted in the portfolio moving from AA to A in this binary calculation. Our investment portfolio continues to be very high quality, and we continue to manage it prudently.

Consistent with our disclosure in recent quarters, we will include details of our EU investment holdings in our Form 10-Q filing, which we expect to file later this week. In that disclosure you will find that during the quarter we reduced our EU sovereign holdings from $1.9 billion to $1.5 billion primarily through reductions in holdings of German and French bonds.

Operating expenses this quarter were $106 million compared to $98 million we reported in the first quarter 2012. The increase is primarily the result of seasonal cost items. Comparing year-to-date operating expenses maybe more meaningful, while the year-over-year comparison shows a decrease in operating expenses from $218 million to $204 million.

The effective tax rates this quarter were 13% on operating income and 59% on non-operating income. These rates reflect the geographies where profits and losses emerged. We will caution you that these effective rates can fluctuate materially from period to period as you can see by our non-operating effective rate this quarter. Comprehensive income for the quarter was $158 million reflecting our net income for the quarter of $76 million.

Currency translation reduced comprehensive income by $19 million this quarter as the US dollar strengthened against the Canadian dollar. Operating cash flow was $103 million this quarter compared to the $256 million we reported in the comparable prior year quarter, reflecting loss payments during the current year quarter related to the catastrophe events in 2011. The time value of money in our non-life reserves was $494 million at quarter end. We calculate this using the risk-free rates for each major reserving currency.

This is a decrease of $124 million from the value we reported at the end of the first quarter of 2012, and is due to the decrease in risk free rates during the quarter. Total capital at quarter end was $7.5 billion down from the $7.6 billion we reported at the end of the first quarter. Comprehensive income for the quarter was more than offset by accretive share repurchase activity and dividend payments this quarter.

Regarding share repurchases, we repurchased a total of 3 million shares at a total cost of $210 million this quarter. Additionally since the end of the second quarter through this past Friday we have repurchased an additional 350,000 shares at a total cost of $26 million. This activity brings our year-to-date share repurchases to 3.5 million shares for about 5.4% of our shares outstanding at the start of the year.

The total cost of these repurchases was $240 million and were executed at an average discount to book value of just 20%. We currently have 1.8 million shares remaining under our existing share repurchase authorization. If our shares continue to trade at similar levels, and absent a change in market conditions we expect to continue to repurchase shares albeit perhaps at a more modest pace through wind season. Now I’ll hand the call back to Costas to update you on how we view current markets.

Costas Miranthis

Thank you, Bill. (Inaudible) July renewal accounts were around $415 million or slightly more than 10% of our gross non-life written premiums. Our current projection is that the portfolio, the premium for the portfolio will be modestly up by around 3% and although there are some variations by line perhaps the most significant changes will be increased premium written in our global specialty lines, and reduced premium in our global P&C line.

So it is not a big renewal for us but it is an important one to take stock of market trends. Towards the second quarter our clients have been reporting an improving pricing environment, particularly in the US, and to a more limited extent in global markets. In the US, price increases were generally keeping up with trends and in many cases exceeding them with the E&S markets showing greater increases in (inaudible) markets and property showing greater increases in casualties.

However the rate of price increases is not as intense as it was in the first quarter and remains to be seen how much sustained this momentum will prove. Internationally price increases tend to be concentrated in lines and areas that have experienced losses in the recent past. So you see typical post loss reaction with the remaining lines broadly flat.

But encouragingly we also saw modest price increases in some of the longer tail international lines. For CAT for the US June and July renewals we saw price increases up to approximately 5% when adjusted for rate. Capacity was plentiful and there was no market dislocation. On the margin, I believe collateralized capacity did have an impact in moderating price increases. Where we go from here will to a large extent depend on what happens in the remainder of the year.

Absent major losses I expect we may see some modest pressure on current pricing come January 1. Internationally the June-July renewal is dominated by Australasia and there not surprisingly given last year losses we saw risk-adjusted price increases ranging from 20% to 40%. So overall we are in a mixed environment with a wide spread of returns across lines of business and across geographies and differentiation between good and bad risks is often coming down, not so much on price but on particular items in terms and conditions.

In my view it is certainly a market that is not deteriorating and in many areas has improved. As I said before, PartnerRe can do very well in this environment. We have the people, the franchise and the balance sheet to capitalize on any opportunity. We are confident of our ability to navigate reinsurance markets of any kind but of course going forward, microeconomic challenges, the euro zone crisis, the persistence of low interest rates and the threat of a US fiscal cliff present uncertainty and potential threat to our industry that from a market perspective will dominate the effect of short-term price movements or incidence of any single event.

Before I hand the call over to questions, just a word on our US agriculture group. As I expect we will have a number of questions on this. The ongoing drought conditions in the US Corn Belt have led to forecast of significantly reduced levels of crop production for corn and soybeans and future prices for these crops have risen significantly over the recent weeks. While it is clear that crop conditions in some states are such but even significant improvement in weather conditions will not have an impact on some crops. The overall situation regarding the impact on the MPCI insurance is not as clear, and will depend on several factors that will become clearer in future months.

I would like to offer you the following information. Number one, the underlying product is conflict with several different types of coverage in state reinsurance and assignment to risk funds complicate the translation from the underlying loss ratio to final losses paid by insurers.

Secondly, there are several months to go until the harvest. The final yields for each crop as well as the price of crops in November will depend on a number of factors between now and then and it is too early to attempt to speculate on final outcomes. Third, footprint by state as well as footprint within state and mix by crop is likely to have a meaningful impact.

Initial report indicate that there is considerable variations in yield projections even on adjacent farms depending on local climate and soil condition. So while it is clear that the industry is likely to face more claims than in any other recent year, we share our clients’ views that it is far too early to try and forecast results. As more facts emerge, we will evaluate the estimated loss in combined ratios for the portfolio in our usual prudent fashion.

So instead I will try and give you a few facts about our portfolio. Our North America portfolio is predominantly a proportional portfolio. The current estimate of the 2012 underwriting year premium for our North America agriculture book is about $240 million of which the MPCI proportional quarter share portfolio is approximately $210 million. Final acreage reports are not in, so there can be some variation in this estimate.

We do not buy repossession on this portfolio, or the maximum possible loss ratio is capped through government reinsurances. We underwrite a small amount of MPCI surplus premium and currently that is slightly more than $2 million in premium while our total surplus limits are approximately $40 million. The majority of this contract attach at high layers of this (inaudible) meaning the remaining North American crop business, not meaning that the remaining North American crop business of approximately $30 million in estimated premium consist of specific hail coverages as well as Canadian business both of which are currently progressing very satisfactorily.

Over the years, the MPCI crop business has produced very good results for our portfolio including very good visibility over last year. The structure of several of our treaties provide some sharing of the profits during the good years in return for reduced cost and commissions in loss situations.

In our 2000 financials to date we have recognized only a modest profit in respect of our 2012 crop book at around $7 million after-tax. Clearly for the US crop growth this year is likely to prove more challenging compared to recent years but we believe this is not a only a profitable line over the longer term but it also brings welcome diversifications of portfolio without being a pig race. So we are now happy to take any questions that you may have. Operator we are ready for our first question.

Question-and-Answer Session

Operator

Thank you (Operator instructions) And we will take our first question from Jay Gelb with Barclays Capital.

Jay Gelb – Barclays Capital

Thank you. On the crop insurance business, I understand being in the reinsurers position that the information takes longer to get to your level as opposed to the primaries, but we understand you gave us also the premium volume, can you help us out little more though in terms of trying to determine what the magnitude of impact could be on earnings in third quarter, fourth-quarter, I mean should we look at that from a potential loss ratio perspective or my guess is blue you gone through this number internally, and I think anything you can help us to put some boundaries around the potential loss will be helpful. Thank you.

Costas Miranthis

I’m not sure whether my answer will be extremely helpful to you, but number one, for sure, as reinsurer, the information comes to us with a lag, but we are in constant communications with our -- so we do have pretty good information from the ground. As I said, the greatest uncertainty is what will happen over the next coming months. It is not all (inaudible), the harvest is not in till the fall.

So a lot can happen between now and then. Yields in a lot of states will clearly be reduced. Some states are worse than others, but in a lot of states the situation is very meek and difficult to predict yields. If I give you some historic information to help you frame this, we have been making profits, technical profits between 10 and 20 points on this business over the -- in good years. The worst loss, the worst year that we have had was approximately 15 points loss.

Where we go from here this year will depend on, as I said, on a lot of things that can happen between now and then. As I said before this is not a limited product, there is no situation where this is a capital threatening event, but it can have an impact on our earnings if we are in a loss situation.

Jay Gelb – Barclays Capital

Do you think that will be more of a third quarter or fourth-quarter recognition of the impact?

Costas Miranthis

We will have a better idea as we move to the end of September, but a fuller picture will emerge over the fourth quarter.

Jay Gelb – Barclays Capital

All right, and in terms of that historical 15 point worst case historically, I mean could it be a multitude of that this year, is that possible?

Costas Miranthis

It is possible that is higher than that. Actually as I said before these are not limited products. So therefore for this to get to the 140s, 150s, this requires scenarios that is basically the whole of the US, right. I mean, the top losses that operate state by state, so it will depend on which state get impacted, to what degree, but I don’t expect this will impact every state.

Jay Gelb – Barclays Capital

Okay, that is helpful. Thank you for that. And then, on a separate issue, the life underwriting results, you mentioned a couple of impacts in the current quarter, what do you view is the current normalized underwriting results within the life segment on a quarterly basis?

Costas Miranthis

I think you can take our year-to-date results and average them and that would not be a bad indication. I think we have favorable things going last quarter that were reversed this quarter, and there could be a reasonable running rate.

Bill Babcock

Yes. The only thing I would caution you Jay on that one is just take a look in the financial supplement, we do show you the variability related to GMDB. It can be fairly sizeable. It does add noise to the quarter. So…

Costas Miranthis

But it was positive last quarter and negative this quarter. So it is…

Jay Gelb – Barclays Capital

Okay. And then if I -- one of the things I have been getting questions on is the 103.5 accident year combined in 2Q and what was broadly viewed as a pretty light CAT quarter. Was there anything else in there that we should view in terms of -- was it medium-sized losses that weren’t called out, or anything else we should keep in mind there in P&C?

Bill Babcock

Let me take that Jay. Well, first of all, I should remind you of our reserving policy and the fact that if you try to do the back out game of prior year reserve releases, you will always end up with this picture because of our prudent reserving philosophy. We book current year [as heavy].

Nothing has changed and that continues to be so. In terms of large capacity losses, although this was a life quarter, we did pick some losses out of Italy. The Italian earthquake was slightly more than 25 million, 27 million. The brunt of this was felt in P&C where we had one factory that was impacted and that was the majority of the loss, and we will hold a large part of that as potential IB&R for smaller claims.

We had other losses in the quarter. For example there was one factory that -- it is about 10, 15 million. But we have these kind of losses every quarter.

Jay Gelb – Barclays Capital

Right, understood. That is helpful. Thanks very much.

Operator

Next we will hear from Mike Zaremski with Credit Suisse.

Mike Zaremski – Credit Suisse

Hi, thanks. Costas last quarter you talked about new business trending in the 9% to 10% ROE range and you said there was a wide variability. Could you update us on that and could you also potentially talk about what parts of the business are running in the bottom quartile. I think we -- or maybe I’m wrong, but I think we can assume that -- the prop CAT dominates the top quartile. I’m curious about the bottom quartile.

Costas Miranthis

Sure. I think the numbers that I gave last quarter are still about right, and I think what we have seen has changed dramatically. The overall picture, 9% to 10% just scraping into double digits for the whole portfolio is about right. And also you are right, we assumed that our CAT business is solid mid-teens, perhaps higher. Our specialty business is around in -- as a whole is around the 9%, 10% and P&C varies from 3% to 4% to 7%, 8% and that is about it. So, the more (inaudible), the lower they are.

Mike Zaremski – Credit Suisse

So, which businesses will be 2%, 3%, 4% if you don’t mind, then why would you continue writing them?

Costas Miranthis

If we are always going to make 2%, 3%, 4% we won’t continue writing them.

Mike Zaremski – Credit Suisse

Okay.

Costas Miranthis

If the question is, if this is the state of the market you can exit, but then you will have two enter again some of these markets.

Mike Zaremski – Credit Suisse

Okay. So do you feel comfortable that those lines will -- pricing will improve and have they improved in those 2%, 3%, 4% ROE lines?

Costas Miranthis

It is -- like I said it hasn’t gotten worse and is modestly better, but we need to see a lot more improvement than that. The large part of the reason it is 2%, or 3%, or 4%, some of these lines have a leverage on interest rates. What is currently 2%, 3%, 4% in a different interest rate environment could be a solid double-digit return, with only minor rate improvements.

Mike Zaremski – Credit Suisse

Okay. And lastly, then in regard to crop insurance, so what combined ratio did you run at last year on MPCI and was the portfolio similar to the mix this year?

Costas Miranthis

Last year, our combined ratio was in the -- technical ratio was in the 80s. And in the mix, we have some new treaties, but the mix is not hugely different. It is slightly more broadly spread this year than it was last year.

Mike Zaremski – Credit Suisse

Okay, and did I hear you right, and you said that you have some [XOL] business, and $2 million of premiums relative to a $40 million limit, is kind of what we should be thinking about?

Costas Miranthis

Yes. And all of that attaches at very high -- I mean that is top of the table of all of that. The vast majority of that attaches are the top layers of the reinsurers. So the industry has suffered a big loss before a lot of that comes into play.

Mike Zaremski – Credit Suisse

So, the $40 million limit that will be analogous to your comment about the whole US…

Costas Miranthis

Yes. I mean a lot of the -- for us to go through the 40 million all the primaries will have to run out of coverage.

Mike Zaremski – Credit Suisse

Okay. Thank you very much.

Costas Miranthis

(inaudible)

Operator

Next we will hear from Vinay Misquith of Evercore Partners.

Vinay Misquith – Evercore Partners

Hi, good morning. So, just a follow-up question on crop again, Costas it appears that you are reserving the whole business at about 97 combined, likely the MPCI business north of that, can you give us a sense for what -- sort of what combined ratio are you reserving that $210 million?

Costas Miranthis

I said earlier, we recognize about $7 million after tax, which is about 8.5, close to 9 pre-tax during the first-half of the year. So the ratio is around [95%].

Vinay Misquith – Evercore Partners

Okay. And what limit does the government stop loss kick in? So, what is the absolute upside that you think to losses that you have, and the absolute worst case scenario?

Costas Miranthis

It is a very complex product, which I can’t explain to you fully right now. These are divided in different groups. The group, the tier one, and tier one states effectively the way the government backs the maximum loss that you have for tier one state is about 185 loss ratio, and for tier two state is about 145, something like that. And premiums are roughly split equally between the two. So, that gives you the absolute limit of the -- if every single state hits the maximum possible, which is not a scenario that we envisage could ever happen.

Vinay Misquith – Evercore Partners

I am sure that this helpful. The second question is on the global non-US P&C, I believe you said that there were some higher midsize losses, did that also include the Italian earthquake or was it excluding the Italian earthquake?

Costas Miranthis

The Italian earthquake, as I said before it impacted our results for global P&C. It absorbed about $15 million in losses, most of it out of single rates…

Vinay Misquith – Evercore Partners

15.

Costas Miranthis

15, one five.

Vinay Misquith – Evercore Partners

Sure. And you mentioned that there were some other smaller midsize losses, do you have a sense for what numbers…

Costas Miranthis

I don’t want to go too detailed. We go through that every quarter. We have losses 7 million, 8 million, 9 million every quarter. So we don’t talk about that.

Vinay Misquith – Evercore Partners

Okay, fine. Fair enough. Just one last question if I may, how much of your fixed income investments are maturing over the next one year?

Bill Babcock

I -- Vinay, I don’t have that number off hand. Let us see what I can get for you. Give me a minute.

Vinay Misquith – Evercore Partners

Sure. Okay, thank you.

Bill Babcock

I will come back and answer that question in a moment.

Vinay Misquith – Evercore Partners

Yes. Thanks.

Bill Babcock

Actually Vinay, I have got the answer. It looks like it is just a little bit, it is a little less than 900 million maturing next year.

Vinay Misquith – Evercore Partners

Okay, that is helpful. Thank you.

Operator

Next we will hear from Joshua Shanker with Deutsche Bank.

Joshua Shanker – Deutsche Bank

Hi, there. It is going to be all crop all the time I think unfortunately. Can we talk about crop in terms of PMLs, what is a one in 50 type crop loss, what is one in 100 type crop loss, so we can compare this to catastrophe?

Costas Miranthis

You can compare it to a small CAT, all I can tell you we are on much bigger exposures in most of the zones we are exposing CATs, anything that will ever have [crop].

Joshua Shanker – Deutsche Bank

So, we can say in the worst-case scenario skewing for crop is far lower than the worst-case scenario skewing for I guess for natural care, or I don’t know what you want to call it exactly, (inaudible)?

Costas Miranthis

Absolutely. I told you before in our CAT business, we see our CAT as a pig race. A lot of the CAT, especially a lot of the major zones can be capital events. There is no way there is losses out of the crop business can have any meaningful impact on our capital position. I gave you ranges on how bad, in the absolute worst-case scenario there is some things that we don’t -- we don’t expect this to get anywhere near to that level. We are not focusing there, and frankly the range of scenarios that are predicted right now just range from losses to the extent that we have reported that before, to small profit.

I mean this is a very complex product. It is done state-by-state, and as I said earlier it is far too early to be making a call, but also some of the extreme things about what could happen it is very small compared to the exposure that we take in pretty much any zone, catastrophe zone in the world where we have exposure.

Bill Babcock

And Josh, we gave you the split, proportional versus the stop loss, the stop losses fairly leverage the proportional, which is almost the entire book. That is where these by state caps apply. So that really does put a limit on the downside.

Joshua Shanker – Deutsche Bank

And along those lines with the limits in place, how close are you to how maybe the government is thinking about this. If they subsidize the loss dramatically, is there a risk in 2013 that crop changes in terms of what they are willing to cover.

Costas Miranthis

I am sorry. I didn’t understand what the question was.

Joshua Shanker – Deutsche Bank

Is there any risk in terms of timing like as the laws as it stands currently, how long do you think they will persist. Let us just say the government shoulders most of the loss, everyone wants austerity in Washington, how many years are you guys with the current wording in the law to the extent that the current way the business is written will stay intact?

Costas Miranthis

Right. Clearly this is a business where government intervention is clearly meaningful. So changes to the [SRA] agreement can be -- can have a meaningful impact in the future profitability of this product, as well as those will depend on a number of factors and in fact the fact that there is risk out there will concentrate the mind, and I view this as positive.

Bill Babcock

I think in fact the reason -- sorry.

Joshua Shanker – Deutsche Bank

You are not hearing anything about the government’s expectation of losses this year, there is no rumblings in Washington going on or anything like that?

Bill Babcock

No.

Joshua Shanker – Deutsche Bank

Okay. Thank you.

Bill Babcock

There is no information I have right now.

Operator

Next we will hear from Greg Locraft with Morgan Stanley.

Greg Locraft – Morgan Stanley

Hi, thanks. Sorry to beat this crop situation, but I do want to pursue and I think you have given a lot of great disclosure on it, so I just want to run some math that I am doing to make sure that it is correct based on what you guys have said so far. So I guess in the tier one areas, your stop loss kicks in at 185, and about half your premium is coming from there. If the business is currently booked at a 95 call it mid-90s you know, combined which is what you said, then you know, an extra, the 90 points of theoretical maximum exposure on 100 million of premium is $90 million. So that is tier one. Tier two, mid 90s combined, which is where you are sitting. 145 is where stop loss kicks in. That is 50 points on 100 million of premiums, 50 million. And then you have got the [XOL] contracts sitting out there which is 40 million. So 90 plus 50 plus 40, is $180 million theoretical worst case pre-tax losses. Is that correct or what are the flaws?

Costas Miranthis

That is roughly right, and you have to add a little bit of commissions atop those reduced substantially we are in a non-profit situation. So that is right, and that is really the absolute limit of it.

Greg Locraft – Morgan Stanley

Yes, I mean that is why when people talk PMLs, it is not even -- I mean, 200 million loss on a $5 billion plus capital base, it is not even relevant.

Costas Miranthis

Yes. PMLs don’t even come close to those numbers.

Greg Locraft – Morgan Stanley

Got it. Okay, great. So…

Costas Miranthis

And I’m glad that you mentioned it. If you compare that to what we take as a risk, as a limit, the limits we underwrite in many risk zones of the world, they are multiples of that number.

Greg Locraft – Morgan Stanley

Okay, great. Exactly, so…

Bill Babcock

Maybe a few other points to make on that. Just to put it in context to how severe that scenario is, we highlighted the stop loss. On this proportional business, you know, farmers elect to purchase a percentage of their past yields, and the max they can purchase is 85%. So if you are even in a situation where you say, crop production is 15% lower than it was last year, where these covers actually start to kick in.

So when you think about a scenario where you end up with these kinds of losses, I mean it is absolutely catastrophic in every state.

Bill Babcock

It is a very complex product. I don’t want to dominate the call with it, with this product. But I said in my prepared remarks that going from the underlying loss ratio to the loss in combined ratios that we experience is a complex process. If you look at the underlying loss ratios, ultimately we run down to 20% to 30%, but because the government claws back a significant portion of the premium in profitable years, that is how we end up in the 70s and 80s. Obviously in years where the profits are not there, those claw backs disappear too.

Greg Locraft – Morgan Stanley

Okay, and then just to clarify two more things on this is just you all are booking it, and your competitors are booking it in and around a profitable level still year-to-date. And is that based on everything we know today, so in other words things would have to get demonstrably worse than what we are reading about in order for you to get concerned?

Costas Miranthis

I think we made the decision based on the facts that we knew at the late June, first week in July, the situation is a little bit worse now and we have been making the -- have we been reflecting what evolved there, we probably wouldn’t have recognized any profit, but I’m not sure whether we have -- we would have gone a lot further than that right now, it is too uncertain.

Greg Locraft – Morgan Stanley

Okay.

Costas Miranthis

The whole amount is immaterial, as I said, it is about 7 million after-tax.

Greg Locraft – Morgan Stanley

Great. And then last one is it sounds like this will be a fourth quarter exercise, will you treat this like a catastrophe, in other words, will it have to be more than $35 million to call it loss for the year, and then you will “preannounce” it in November or what not?

Bill Babcock

Right. We will assess that. I mean if it is something we think is meaningful and you should know we won’t surprise you. We will put it out. If it is a relatively modern number, then we will wait for our press release and our earnings call to discuss it.

Bill Babcock

And I guess not necessarily fully a fourth-quarter event. We will know more -- we will not know everything, but we will know more by September, and as we know more we will reflect that in our numbers.

Greg Locraft – Morgan Stanley

Okay, great. That is really good disclosure. Thank you.

Bill Babcock

You are welcome.

Operator

Next we will hear from Matthew Heimermann with J.P. Morgan.

Matthew Heimermann – J.P. Morgan

Hi, good morning everybody. A couple of questions if I may, I guess just first on some of the changes you made to the portfolio over the last six months. Just being curious, where you are seeing growth opportunities, does that kind of across-the-board your client base or are there any specific types of clients that are giving you more opportunities?

Costas Miranthis

I wouldn’t say that it is focused by clients, and I haven’t identified any trends in that way. I would say probably more of the opportunities are coming in the specialty area. We see more opportunities and we are writing more premium growth in our global specialties, and within the US portfolios specialty and other segments.

So if you think about how our portfolio has been evolving there is less of a stand of P&C in there, more specialty and we talked in prior quarters about the fact that we had to reduce the CAT, but the CAT is now stabilized at the current levels, and fine tuning reflects the way it goes in particular zones. But there are no specific trends by clients.

Matthew Heimermann – J.P. Morgan

Okay. When I hear you say that those a fair takeaway that if you are growing more on the specialty side, but those are more and less on the standard side, there might be a little bit more mid-sized bias versus large to kind of what is happening with clients?

Costas Miranthis

Perhaps. It doesn’t seem there is an obvious trend. Some of our contracts on specialty lines are with bigger bias.

Matthew Heimermann – J.P. Morgan

And then just in terms of the premium reestimates in the quarter, you mentioned in a press release, I don’t know if that was a number worth quantifying or not, and if so what segment just proportionally?

Costas Miranthis

Bill.

Bill Babcock

I am sorry, overall or any particular sub segment?

Matthew Heimermann – J.P. Morgan

Well, I was going to say in aggregate, and then whether or not it had a disproportionate impact on any segment.

Bill Babcock

Yes. The -- I wouldn’t characterize it as being very unusual. We have upward premium adjustments. We had them in the comparable prior-year quarter. They may have been across the entire book a little north of 20 million higher this quarter. Any particular segment other than the agriculture adjustment that we talked to you about is probably not worth mentioning.

Matthew Heimermann – J.P. Morgan

That is helpful. And then just in terms of the -- Costas when you were talking crop, earlier you were quoting technical ratios, so I was just wondering if you could give us a sense of the G&A that was on top of that, whether using the whole company as a proxy was a good idea or whether there was some deviation there.

Costas Miranthis

I think the way to think about -- obviously, our fixed cost, the commissions that will come down in a lot of situation will vary depending on what contract will be arranged from about 5 to about 11 using an average about 9, 10 may not be a bad proxy.

Matthew Heimermann – J.P. Morgan

Okay that was acquisition or expense ratio in total?

Costas Miranthis

That was the acquisition cost.

Matthew Heimermann – J.P. Morgan

Okay.

Bill Babcock

And Matt just add to that, you know, it sounds like we have a team of, you know, 20 underwriters that do ag. We do it with a fairly slim team people.

Matthew Heimermann – J.P. Morgan

Yes, I mean, they --

Costas Miranthis

I always -- I mean if it comes down to very low numbers. There is a team of 2 or 3 of underwriters for this.

Matthew Heimermann – J.P. Morgan

Okay, that's helpful. Thanks so much.

Bill Babcock

You're welcome.

Operator

Next we’ll take a question from Cliff Gallant with KBW.

Cliff Gallant – KBW

Good morning. I want to talk about your trade credit book and what the outlook is there and how you've been booking losses in that line of business?

Costas Miranthis

You know, we run a trade book with worldwide exposure including significant exposure in Europe. The first is we, the trade book we have priced an expectation of increased loss activity going into this year, and what we see here today is that the actual loss activity is actually slightly below than what we expected. So so far we haven't detected any trends in our trade book portfolio -- I don't remember the exact combine rates that will run this, but it is not a high combine. Sorry, we haven’t recognized a very high amount of profit out of the current year.

Cliff Gallant – KBW

Okay, and it is approximately $200 million portfolio annual…

Costas Miranthis

Yes, thereabouts.

Cliff Gallant – KBW

Okay. Thank you.

Costas Miranthis

But that puts -- that can change very rapidly obviously as you know as economic situation, if the economic situation deteriorates. The one thing I would offer you on that portfolio what really matters is silent and unexpected changes to the extent that changes you see the train coming students generally prepare for it and loss ratios are lower but although you're not immune from economic downturns.

Cliff Gallant – KBW

Okay, thank you.

Operator

Next we’ll hear from Brian Meredith with UBS.

Brian Meredith – UBS

Yes, good morning. Two questions here. First one and I apologize is quickly on the crop again and hopefully just quick here, is it possible Costas and Bill to give us what maybe your five largest states are and how much percentage of business those are. Just give us a perspective because the primary guys we can see that, fortunately because you are reinsurer, it is hard for us to kind of see that.

Costas Miranthis

Yes, highest states by a long way is Iowa. Then we have I mean it is also Illinois at about the same level and then Dakota, Nebraska, that’s it.

Brian Meredith – UBS

And what percentage to those?

Costas Miranthis

Iowa is close to 20% of our portfolio, Illinois and Minnesota about 10% each, and Dakota is about 7%-8% and Nebraska is 6%-7%.

Brian Meredith – UBS

Great, it is very helpful. And then last question Costas, I saw the Japanese you know, 250 PML for quake came down pretty significantly, are you comfortable where your PMLs now are in Japanese earthquake, you know, do you have some capacity there, maybe write some more business there. Is that kind of where you want to leave it and what do you want to do with PML capacity?

Costas Miranthis

We can write some business but not a lot more than what we do and the shape of the portfolio that you see today is roughly the shape that we want to keep. If you compare with the peak US zones that with the non-peak it is roughly where we want it to be. It doesn't mean that there is no capacity in any single zone. If given the right pricing we have the ability to expand perhaps significantly in percentage terms in any single zone.

So pricing has gone up in Japan as I've mentioned before. Also our perception of risk and risk by client has changed and that is influencing how much capacity that we are putting out there.

Brian Meredith – UBS

Okay, thank you.

Operator

Next we will hear from Meyer Shields with Stifel Nicolaus.

Meyer Shields – Stifel Nicolaus

Thanks. Good morning. Two quick questions if I can. One, as we've seen interest rates in many cases continue to decline, is that affecting either the loss cost trend in terms of what you are seeing in paid claims or how you are booking losses.

Costas Miranthis

As the interest rates decline is that affecting claims, the broad answer is there is no direct impact on claims. There are some limited number of products, which to a large extent we don't participate, which are annuity, in payment. Some of these products are in Europe and their lower interest rates will affect certain values of claims but that does not have a major impact on our portfolio.

Meyer Shields – Stifel Nicolaus

Okay, so there is no major connection, I'm sorry, go ahead.

Bill Babcock

No because we refrain from writing that business.

Meyer Shields – Stifel Nicolaus

Okay. I guess if there are any connections between the interest rates and the inflation rate you're seeing in terms of loss trend?

Bill Babcock

Much of the inflation rate that affects us is -- inflation rate obviously is a very important part of the lost trend but it has two parts, one is overall economic inflation, sort of price inflation and then total inflation and socioeconomic trends on top of that and perhaps the latter is the more important component that affects our long tail casualty lines.

Obviously, low inflation rates, low help, so to the extent that low interest-rate correlate to low levels of economic inflation that impacts the loss trends going forward and they absolutely haven’t factored that in our pricing. That is some of their historic trends that we observe based on higher inflation rates.

Meyer Shields – Stifel Nicolaus

Okay, thank you. That's very helpful. Second question if I can, you talked earlier about French and German sovereigns’ debt holdings coming down in the quarter. I was wondering if you can talk about what's driving that decision.

Costas Miranthis

Bill.

Bill Babcock

Yes, sure. You know, with the significant repurchase activity we did during the quarter and loss payments, we needed to find money somewhere to repurchase shares and those portfolios, I guess two different situations there, perhaps we all else equal like to be a little underweight that sovereign. We don’t think it is necessarily the strongest and the German issue is basically zero yield on the German bond. So that's why we elected to reduce those. It wasn't anything you know, more than that.

Meyer Shields – Stifel Nicolaus

Okay, great. Thanks very much.

Bill Babcock

You're welcome.

Operator

Next we will hear from Amit Kumar with Macquarie.

Amit Kumar – Macquarie

Thanks. I promise I won't ask the crop question. Just, maybe, you know, talk -- let's talk about something else. One is you mentioned the $56 million growth IB&R. There has been some discussion in the press regarding Suncor raising its estimate. Maybe just remind us if you were booked to the full limits and if that estimate for Suncor if it does move you know, to the max how does that interplay with your limits and on allocated IB&R. I mean, I guess what I'm trying to ask is that is it -- would it be fully covered with what you have set aside or could there be any other movement.

Costas Miranthis

Amit just to make it short, we don't have any further potential exposure to any movement in the season that you mentioned.

Amit Kumar – Macquarie

Oh fantastic. See that was easy. Secondly, just on the capital management discussion, clearly you are running a bit ahead of, I guess, you know, what we were projecting. I'm just wondering you know, is it still you know, what we have said in the past that this program gets over in 2012. I guess, you know, does the $1.8 million, is that still the number we should think for the remainder or is there a possibility just based on where stock is trading it, you could either revisit you know, the buyback or I don’t know about the dividend. That's already good, but could you revisit that or maybe how should we think about capital management going forward?

Bill Babcock

Yes, you know, you shouldn't think about the $1.8 million as any kind of target we have for year end. We don’t see any reason that we couldn't complete that by year end or before that and we could do more than that. It depends on what market conditions are, we are comfortable with our capital base and that's what we think about it.

Amit Kumar – Macquarie

Okay. That's all I had. Thanks for the answers.

Bill Babcock

You're welcome.

Operator

Next we will hear from Ian Gutterman with Adage Capital.

Ian Gutterman – Adage Capital

Hi, good morning. I was going to ask something other than crop, but I messed up my question there. So I am going to go back to crop. Costas can you talk about, actually one for Bill first, can you remind us how much reserve releases year-to-date have come from crop?

Bill Babcock

Reserve releases.

Ian Gutterman – Adage Capital

Right, from last year’s business.

Bill Babcock

Yes, in the first quarter I recall the number being about -- I'm sorry year-to-date it’s -- I'm sorry -- $35 million.

Costas Miranthis

Right, almost all of that was set by premium returns to the government. So the net impact of the crop business on prior year results is negligible.

Ian Gutterman – Adage Capital

Okay, (inaudible) to answer. Okay, great. So I just want to make sure anything about the ultimate on ’11 right away. And then just on your concentration you know, by [precedent], I mean, I know obviously some of your clients are the big national players but it looks like some of them are also sort of some of the smaller ones who are kind of concentrated in the corn belt, can you give us a way without obviously getting into names you know, a sense of the dispersion of your book because I guess my concern is you know, to say differently, a feel a lot better if your quarter share on one of the top three guys who has a diverse mix then some of you just in the corn belt and is going to be looking at a lot higher loss ratio.

Bill Babcock

Without -- we have some big treaties as I said before approximately 50% of our premium comes from the tier one states and if you look at what the tier one states, (inaudible) and 50% of that premium comes elsewhere. It is slightly higher than the industry as a whole, which is probably about in the mid-40s.

Ian Gutterman – Adage Capital

Fair, right, but I guess, it will be better for you if that whole 50% came from the megaplayers right, and if all your small players were you know, somewhere in the Southeast right. I was just trying to get a sense you know, on a contract by contract basis that you might have some you know, some of those national players, your group 1 exposure might not be a big deal because there is other good states you will now have good loss ratios that the real risk I’m guessing is sort of the smaller players who are in the group 1 states that you insure?

Bill Babcock

I gave you the distribution of our premiums by state and that is across all [states].

Ian Gutterman – Adage Capital

Okay, fair enough. Can you give us any sense, again I'm obviously not looking for a name but the $140 million contract you raised, I assume that was with one of the larger players to be of that size.

Bill Babcock

Yes.

Ian Gutterman – Adage Capital

Okay, great. Thank you.

Bill Babcock

You're welcome.

Operator

At this time there are no further questions. I’ll turn things back over to Costa for any additional or closing remarks.

Costas Miranthis

So thank you very much. This concludes our second quarter call. Thank you for joining us today and thank you for your interest in PartnerRe. We look forward to speaking with you again next quarter when hopefully we will know more about all the questions that you guys are raising in this call. Thank you.

Operator

And that does conclude today's teleconference. Thank you all for joining.

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