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RenaissanceRe Holding Ltd. (NYSE:RNR)

Q2 2012 Earnings Call

August 1, 2012, 10:00 a.m. ET

Executives

Peter Hill – IR

Neill Currie – CEO

Kevin O'Donnell – EVP and Global Chief Underwriting Officer

Jeff Kelly –EVP, CFO

Analysts

Mike Zaremski – Credit Suisse

Sarah DeWitt – Barclays

Josh Shanker – Deutsche Bank

Josh Stirling – Sanford Bernstein

Michael Nannizzi – Goldman Sachs

Ian Gutterman – Adage Capital

Vinay Misquith – Evercore Partners

Operator

Good morning. My name is Dashauna, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2012 Financial Results Conference Call. (Operator Instructions)

Mr. Peter Hill, you may begin your presentation.

Peter Hill

Good morning and thank you for joining our second quarter 2012 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn’t receive a copy, please call me at 212-521-4800 and we’ll make sure to provide you with one. There will be an audio replay of the call available from approximately noon eastern time today through midnight on August 22nd. The replay can be accessed by dialing 855-859-2056, or 404-537-3406. The passcode you need for both numbers is 11170297.

Today’s call is also available through the investor information section of www.renre.com, and will be archived on RenaissanceRe’s website through midnight on October 10th, 2012.

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

With me to discuss today’s results are Neill Currie, Chief Executive Officer, Jeff Kelly, Executive Vice President and Chief Financial Officer and Kevin O’Donnell, Executive Vice President and Global Chief Underwriting Officer. I’d like to turn the call over to Neill. Neill?

Neill Currie

Thank you, David. Good morning, everyone. RenaissanceRe reported operating income of 111.5 million, and net income of 142.3 million for the second quarter. This resulted in an increase in tangible book value per share plus accumulated dividends of just over 4%. Our results reflected strong underwriting performance and benefited from continued relatively low levels of catastrophe loss activity.

Over the last year or so, we have been saying that we expected pricing in the property catastrophe market to improve gradually and steadily. That view generally held true through the first quarter of this year. We had anticipated additional firming at the 6/1 one renewals, but as it turned out, pricing was relatively flat. We believe this was due primarily to new supply entering the market, several existing reinsurers becoming more interested in writing southeast hurricane-exposed business, and the increase in demand was a little less than the market generally anticipated.

We believe that the primary factors that were driving the pricing increases for over a year, that is, those learnings from the cat losses of 2010 and ’11, and companies having the time to form a view on RMS 11. We feel like both of those things have been absorbed by the marketplace now. I feel our decision to grow our property catastrophe book substantially at 1/1 was a good decision, and although pricing was generally flat at 6/1, we were able to write enough attractive business, or to find enough attractive business and write it, to grow by 11% during the quarter and just over 20% year-to-date. We now have a larger, more attractive book of business. We were able to produce this attractive portfolio as a result of executing well on what we call our three superiors: superior customer relationships, superior risk selection and superior capital management.

Turning to our international business, we were also able to improve the quality of that book. As we indicated last quarter, we continued to serve our clients in loss-affected markets such as Japan, Australia and New Zealand, by being a stable source of capacity, being there for them when they needed us. We integrated our expertise in science and risk modeling with our underwriting capabilities, to develop an enhanced view of the risk we were assuming in those regions.

Our ventures team continued to work closely alongside the underwriting team this quarter, developing the most efficient ways for our clients to manage their risk, and creating attractive opportunities for investors. In early June, we announced the formation of a new sidecar, Tim Re III, to target a portfolio of Florida-specific risks. This vehicle was formed to help our customers and brokers by bringing more capital to the Florida marketplace. It also offers a flexibility to expand, and to provide more capacity should it be needed post-event.

Tim Re III typifies the flexibility we’ve built into our capital structure, which allows us to allocate the right capital at the right time for what we consider to be the best opportunities. We were also able to bring new partners into DaVinci Re, who we feel will be valuable additions over the long term of this franchise.

Outside of property catastrophe, we have a strong specialty reinsurance team that continues to evaluate opportunities in a challenging marketplace. It’s positioned to grow meaningfully when market conditions allow. We are pleased with progress and results at our Lloyd’s unit, where margins have continued to improve as the operation has scaled up.

With the majority of our book now written for the year, we will remain focused on serving our clients as the rest of the hurricane season unfolds. The dynamics of the upcoming January 1st renewals can be affected by the level of losses during the Atlantic hurricane season, and whether or not insurance and reinsurance companies are surprised by their losses that result from those events. From our standpoint, as we have often said, we don’t wish for any particular loss scenario or outcome; rather, we strive to be able to play whatever hand we are dealt, and to play it well. With the strength and flexibility of our capital structure, our underwriting discipline and solid client-broker relationships, we are well-positioned to continue to target attractive business opportunities as they arise. So with that, I’ll turn the call over to Kevin.

Kevin O’Donnell

Thanks, Neill, and good morning, everyone. Today I want to talk to you about each of our businesses, so let’s begin with cat. Last spring, we revised our model and mapped out a strategy to optimize our portfolio against what we thought would be a shifting market. Through our efforts over the last year, we constructed a significantly better portfolio than we would have achieved simply by renewing our existing book. Although we found good opportunities to grow in 6/1, we made a good call by growing by a larger amount earlier in the year when we believed that rates were best. We increased our peak exposure in Atlantic hurricane, and the geographic diversity of our book. In addition to changing our inward book of business, we completed Tim Re III, and a more vertical diversification to our Atlantic hurricane exposure.

We also improved the portfolio through additional seeded purchases, leaving our net exposure reasonably flat compared with last year’s. The unique combination of our experienced team, strong ratings and superior access to business, allowed us to execute this strategy and construct a portfolio that we feel is an attractive one.

Moving on to Florida, there was a lot of speculation prior to the renewal that significantly more limit would be purchased. At the time, we thought that this view was optimistic, and the corresponding hope for significantly better pricing was unlikely. As it turned out, supply was greater than demand, with there being more capacity available than there was new limit purchased. Even though the net result was that market prices were about flat, we are nonetheless pleased with the portfolio we constructed.

Over the last year, we spent a lot of time talking with our customers about the impact of the RMS model revision. With the market having completed the full renewal cycle with the new model, we believe its impact on supply and demand is fully reflected. However, our customers remain concerned about the potential effects of future model changes, and I believe that the most enduring impact of the new model will be an increased focus on developing an independent view of risk. With our extensive in-house modeling capabilities, we believe we are well-positioned to assist customers in developing this independent view, which will allow us to further differentiate ourselves from our competitors. That covers my main points on U.S. cat.

The international primary cat and retro markets were pretty quiet over the quarter. We increased our international exposure during the first half of the year through better pricing in loss-affected regions and improved opportunities to cede risk, including through our sidecar Upsilon Re. I am pleased with the expanded profile of our book, and happy that we had success in growing some historically difficult perils such as Japanese typhoons.

Our specialty business is doing well, and while opportunities for growth are somewhat limited right now, loss emergence remains favorable. Persistent low yields should make cash flow casualty underwriting increasing less attractive, thereby increasing the likelihood of better market pricing at some point in the future. This trend has been going on for a while, and it still may be some time before prices increase, but I’m hopeful that conditions will improve and we will continue to monitor these markets closely. With all the attention on the U.S. drought, it’s worth noting that we have about 8 million of agriculture-related premium, of which 3 million is exposed to U.S. MPCI excess of loss reinsurance, mostly written through Lloyd’s. Although our premium is relatively small, keep in mind that this business is low rate online, and consequently we remain exposed to the ongoing drought.

Looking forward, if losses do materialize, we believe we are well-positioned to grow if the market improves in 2013. Our Lloyd’s business continues to improve, driven partly by our growth into existing infrastructure. The book is pretty close to our original forecast for this point in time, and I am optimistic that due to our relatively small size within the Lloyd’s market, we will continue to have good opportunities to grow, which should further improve our combined ratio.

I’m pleased to report, our ventures team has been successful over the quarter in adding to our franchise with the structuring and funding of Tim Re III, and raising new capital for DaVinci. Additionally, REAL is having a good summer. To remind everyone, REAL provides risk mitigation products against weather-related events such as temperature and precipitation for corporate clients worldwide. In general, the summer season tends to be a lot smaller than the winter season, and during summer we are generally protecting customers from unusually cold weather, so we are benefiting from the high temperatures across the U.S.

Thanks, and I’ll now turn the call over to Jeff.

Jeff Kelly

Thanks, Kevin, and good morning, everyone. I’ll cover our results for the second quarter and year-to-date, and then give you an update to our 2012 topline forecast. The second quarter was again a profitable one for RenaissanceRe, driven primarily by our relatively low level of insured losses, higher level of earned price increases and favorable reserve development. Weak alternative asset performance hurt net investment income in the quarter, although the total investment return was strong due to realized and unrealized depreciation in the value of some fixed maturity investments.

Adjusting for reinstatement premiums, topline growth was strong in the quarter and on a year-to-date basis. We reported net income of $142 million, or $2.75 per diluted share, and operating income of $111 million, or $2.14 per diluted share for the second quarter.

Net realized and unrealized gains, which accounts for the difference between the two measures, totaled #31 million. The annualized operating ROE was 13.7% for the second quarter, and 16.7% for the first six months of the year. Our tangible book value per share, including change in accumulated dividends, increased by 4.3% in the second quarter, and was up 10.8% year-to-date.

Let me shift to the segment results, beginning with our reinsurance segment, which includes cat and specialty, and then followed by our Lloyd’s segment. In the reinsurance segment, managed cat gross premiums written in the second quarter totaled $628 million, compared with $619 million in the year-ago period. Adjusted for $23 million of reinstatement premiums in the prior year, and 31 million of negative reinstatement premiums in the current year, managed cat premium growth was 10.6% in the second quarter.

It’s probably worth spending a minute or so on the negative reinstatement amount. During the second quarter of 2012, our remaining IBNR for the 2011 New Zealand and Tohoku earthquakes of approximately $130 million was allocated to the contract level, and in so doing, we re-estimated our allocation of losses from higher rate online retro contracts to lower rate online primary reinsurance contracts, resulting in a $30.7 million downward adjustment to our estimate of ultimate reinstatement premiums from these two large events. In addition, the reinstatement premiums were also impacted by changes to the ultimate losses for these two events. The net impact from the $30.7 million movement in ultimate reinstatement premiums, and $4.7 million of favorable movement in reserves in these losses for these two events, was $19.8 million after considering DaVinci non-controlling interest, profit commissions and other items.

Premiums in the quarter included $38 million of gross premiums written by our new sidecar venture, Tim Re III, which targeted a defined portfolio of Florida-specific contracts. On a year-to-date basis, managed cat premiums, gross premiums written increased approximately 20% compared with a year ago, after adjusting for reinstatement premiums in the prior and current year periods. This compares with our topline guidance for managed cat growth of 20% excluding reinstatement premiums for the full year.

The topline growth during the quarter, and on a year-to-date basis, was driven by favorable market conditions as well as growth in the book. As a reminder, managed cat includes the business written on our wholly-owned balance sheets, as well as cat premium written by our joint ventures, DaVinci and Top Layer Re, and our sidecars Upsilon Re and Tim Re III. The second quarter combined ratio for the cat unit came in at a profitable 33.8%. The results included $21 million in estimated losses from the derecho storm system that hit the mid-Atlantic states in late June.

We experienced net favorable reserve development of $33 million for the cat unit. Some of the major drivers of the net favorable reserve development, including reductions to our net loss estimates for the Tohoku earthquake of $11 million, the Thai floods of $4 million and a $24 million reduction related to a number of smaller, prior-year events. Partially offsetting these was $6 million of reserve strengthening for the February, 2011 New Zealand earthquake. For the first six months of the year, the cat unit generated a 24.4 combined ratio, driven by generally benign catastrophe losses and favorable reserve development.

Specialty reinsurance gross premiums written totaled $37 million in the second quarter, which was up meaningfully compared with $24 million in the prior year quarter. The topline growth was primarily due to the inception of several new quota share programs and some loss-related premiums. For the first six months of the year, gross premiums written totaled $138 million, which was up 39% compared with the year-ago period. This compares with our full-year forecast for topline growth of over 20%. Percentage growth rates for this segment can be a little uneven on a quarterly basis, given the relatively small premium base.

The specialty combined ratio for the second quarter came in at 64.7%. There was no meaningful large loss activity for our book during the quarter, and the combined ratio included $8 million of prior year net favorable reserve development. On a year-to-date basis, our combined ratio was a profitable 62.7%, and included $20 million of favorable reserve development.

In our Lloyd’s segment, we generated $50 million of premiums in the second quarter, compared with $34 million in the year-ago period. For the first six months of the year, gross premiums written increased 49% to $105 million. Growth in this segment was consistent with our full-year topline guidance of up 50%. Specialty premiums accounted for most of this amount.

The Lloyd’s unit came in at a combined ratio of 103% for the second quarter. The results of this segment included $3 million of net favorable reserve development, which helped the loss ratio by 11 points. The expense ratio remained high at 53.7%, but has been declining sequentially as business volume in this segment has increased. For the first half of the year, the combined ratio was a profitable 99.7%, with a loss ratio of 43.4% and an expense ratio of 56.3%.

Moving away from our underwriting results, other income was a profit of $11 million in the second quarter, and a breakdown of that is provided in the financial supplement.

Our weather and energy unit REAL reported a $6 million profit for the quarter, and we also booked $4 million gain for assumed and seeded reinsurance contracts accounted for at fair value. The profit at REAL was a result of summer positions we took on in the U.S. and in the U.K., which benefited from unseasonably warm temperatures. For the first six months of the year, other income was a loss of $28 million, primarily related to losses at REAL.

Equity and earnings of other ventures was a gain of $7 million. This was driven primarily by a $5 million gain recorded for our share of Top Layer Re’s results. We also booked a $2 million gain related to our stake in Tower Hill companies.

Turning to investments, we reported net investment income of $15 million, which was driven by a few factors. Our alternative investments portfolio, principally private equity, generated a loss of $10 million in the second quarter. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio, and totaled $22 million for the second quarter. The total investment result in the overall portfolio was .7% for the second quarter. Net realized and unrealized gains included in income totaled $31 million during the quarter.

For the first six months of the year, we reported net investment income of $82 million, which benefited from strong performance of the alternative asset portfolio in the first quarter. Year-to-date investment return on the overall portfolio was 2.5%. Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments, with a high degree of liquidity and modest credit exposure. During the second quarter, we added some credit risk to our investment portfolio by increasing our allocation of corporate bonds while reducing our exposure to U.S. treasuries and short-term investments.

The duration of our investment portfolio remains short, at 2.2 years, which was roughly flat compared with the first quarter. The yield to maturity on fixed income and short-term investments increased slightly to 1.8%.

Despite having deployed more capital to our underwriting activities earlier this year, we believe we have capital in excess of our requirements. During the second quarter, we resumed active share repurchases, buying back 1.2 million shares at a cost of approximately $88 million. Subsequent to quarter-end, we’ve repurchased an additional 71,000 shares for a total of $5.3 million through this past Monday.

Our ventures team remains active in meeting with potential long-term investment partners about joint venture opportunities. Our stake in DaVinci declined again to 31.5%, as we have continued bringing on new investors. We view DaVinci as a long-term vehicle that offers clients a parallel risk profile to that of our cat unit.

Finally, let me give you an update to our topline forecast for 2012. Given that we have already written the bulk of our full-year premium during the first half of the year, we are maintaining our prior topline forecast for each of our segments. As a reminder, that guidance is up 20% for managed cat, up over 20% for specialty and up 50% for Lloyd’s.

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

Neill Currie

Okay, thank you Jeff and Kevin. I’ll impart a little bit more information for the folks in the call. I broke our FRIPP principles or values. You may not know what those are, but they are focus, respect, integrity, precision and passion, and I failed number four. I referred to Peter as David, his predecessor. So, with that, we’ll open the call up for questions.

Question-and-Answer Session

Peter Hill

Operator? Hello?

Operator

(Operator instructions). Your first question comes from the line of Mike Zaremski from Credit Suisse.

Mike Zaremski – Credit Suisse

Hey, it’s Mike Zaremski, thanks. So, in layman’s terms, I’m hoping to clarify what exactly triggered the changes in [inaudible] premiums, and how that ties in with reserve changes? Was that triggered by downward [inaudible], that’s ’11 cat events, or was there a contrast misinterpretation? If you could help with that.

Kevin O’Donnell

Yes, sure, let me give it a try and perhaps then just a couple of minutes on this because it is a bit of a unique situation, and that we rarely see significant movement in reinstatement premiums, unless there’s a large movement in the underlying loss estimate for the events, and in this case there really wasn’t. So, the two events that contributed to the negative reinstatement premiums were the 2011 New Zealand quake and the [inaudible] quake. So, just in explaining the dynamics at work here – when we initially estimate our ultimate loss after an event, that is a ground up assessment of the event that contracts we believe could be exposed. And then in some instances, we have reported claims, and can attach some of the reserves at the contract level that is ACRs, but frequently, earlier on, a significant portion of that loss estimate is classified as IBNR. Most of the contracts in the property cap market contain a reinstatement future, so we also have to estimate a level of reinstatement premiums resulting from the event. For IBNRs, since we don’t know which contracts will attach to those premium – those premiums are estimated based on an estimate of the underlying business mix. So, the relative mix of whether in this case it was retro, or primary reinsurance. As we get more information we can begin, and in deed in this instance, did move IBNR – even IBNR down to the contract level, or down into ACRs. During that process, then we are better able to judge the level of reinstatement premiums, what they will be, and that was the case with our exposure as to the Japanese and New Zealand quakes this quarter.

As I said in my prepared remarks, we moved about $130 million of event IBNR for these two events down to ACRs, and the process obviously had to make a call on which contracts were attaching and which were not. For both of them, more of the loss was – ended up being allocated to lower rate online primary contracts than higher rate online retro-contracts than what we had originally estimated. And as a result, our estimate of the premium, our reinstatement premium came down. The difference in rate online for between the retro-contracts and the primary reinsurance contracts can be significant, and as an example, could be as much as, say 25 percentage points, and that was really the drive – the primary diver of the change, not a significant change in the ultimate losses for either of them. As we noted, the premium came down $30.7 million in the net favorable reserve development between the two events was $4.7 for overall $26 million impact. And the other thing that’s probably worth noting at this point as well is that these – for quakes, these events are still relatively recent, and with a passage of time, more information is going to become known to us, and our estimates about the ultimate loss, and therefore, most likely the allocation of reinstatement premiums among these contracts will continue to change, and as soon as we have any new information, or better estimates for those, they will be reflected in that period. So, it’s – it was mostly a function of the allocation among contracts, whether than a change in the overall loss for the events themselves.

Mike Zaremski – Credit Suisse

So, then to clarify, then was there adverse involvement on New Zealand, and positive development, or lower development on Tohoku and the Thai events, or was that kind of – is that kind of noise related to the reinstatements?

Kevin O’Donnell

No, there was a slight amount of favorable – there was, I think, a little over $10 million of favorable development on the Tohoku quake, and I think it was just under $6 million adverse on the New Zealand quake.

Mike Zaremski – Credit Suisse

Okay, switching gears, would you be able to comment on your – on the limits on your XOL US MPCI, I know some peers have said that limits sound – are fairly high relative to the premiums.

Neill Currie

Hi, this is Neill, maybe I’ll take a crack at that. As Kevin indicated, some of that business is relatively low rate online business, so you have more exposure, there are higher layers. But to put it in context, that’s the $3 million premium item. We have over 100 $3 million, or greater premium items on the [inaudible] book. So, I wouldn’t want to focus too much attention on this particular area.

Mike Zaremski – Credit Suisse

Okay, thank you, I’ll get back in the cue.

Operator

Your next question comes from the line of Sarah DeWitt from Barclays.

Sarah DeWitt – Barclays

Hi, good morning. Given your comments that property catastrophe reinsurance prices are flat, to what extent do you think you can grow and manage cat premiums further in the current environment.

Kevin O’Donnell

Thanks, Sarah. The next opportunity to have meaningful growth in the property capital is really one-one, and thinking about that, I think the way to think about the world is what’s driven pricing increases over the last 12 to 18 months, and I think we need to split the world into very simply US and non-US. The primary driver in the US really has been an updated view of risk primarily driven by the RMS model release, and then outside the US is really a response to some large losses and specific territories. Most of those elements have been built into pricing, so going forward I think we’re going to have a different set of dynamics that can play into how prices have changed, but a lot of that that will be determined over the next several months. I think where prices are generally, particularly in the US, is there amp opportunity to build good portfolios – outside the US it is a little more difficult, but we certainly have seen a lot of rate increase moving many deals to a more – to what we would call the attractive bucket. So, I think there is still opportunities to grow, but as far as where pricing goes, I think there’s a lot of that score that will be told over the next couple of months.

Neill Currie

Sarah, it’s Neill, I had a couple of things to what Kevin has said. I think we will see how the financial crisis in Europe plays out. We saw over the last year, one during meaningful client decide to purchase more reinsurance because of the effect on their assets, so as some people with exposure in that area, if things change there, or people – people may decide to buy more, which would create opportunities, and even I said that the RNS11 was pretty well digested by the market place. There might be a few people who want to top up their program, so those are other influences that may create opportunities.

Sarah DeWitt – Barclays

Okay, could you be a bit more specific about what opportunities you are seeing in the US?

Neill Currie

No, ma’am. I’m not going to be trite, but we just do – you know, see potential opportunity, and there may be people that want to top up their programs. Kevin, do you want to add anything?

Kevin O’Donnell

No, I think the – Neill pretty much summed it up.

Operator

Your next question comes from the line of Josh Shanker of Deutsche Bank.

Josh Shanker – Deutsche Bank

Hey, good morning everyone.

Kevin O’Donnell

Hi, Josh.

Josh Shanker – Deutsche Bank

I’m sorry to ask more questions about the negative restatement, but would it be wrong to say that you had favorable development in areas of the business where you get a reinstatement premium, that you had unfavorable development in areas of the business where you did not receive a reinstatement premium?

Jeff Kelly

No, I don’t think it would be right to say that, Josh. It’s – specifically on the two events that I mentioned, all though the one, the one event, New Zealand quake from February of 2011, actually had adverse development and negative reinstatement premiums. So, if you had adverse development you actually expect positive reinstatement premiums, but the other things being equal. The issue there was as we allocated the IBNR down to ACRs, we – the change in mix there between retro-contracts and primary had such an effect on the re-estimation and the reinstatement premiums that it was more negative – it was negative as well as even seeing a small increase in the loss estimate for that.

For the Japan quake, we had favorable development there, so you expect to see negative reinstatement premiums there, but again, the reallocation of the IBNR to ACRs result in then, mostly in a mix affect there on the reinstatement premiums.

Neill Currie

Josh, this is Neill, I can’t resist to weigh in. I think Jeff has done a very eloquent job explaining this, but picture this scenario, if some of these loses were in remote regions, say New Zealand, therefore, a lot primary business is relatively low rate online, whereas the retrocession business covers many territories. So, you might have a rate online on a primary book of business that say look for a rate online, and on a retro book, it could be 18 to 22% - ish. So, this is a highly unusual situation where you’ve got the differences in the rate online. Typically, what would happen is that you would have one client go down and another client go up roughly the same exposure [inaudible] would be talking about this.

Josh Shanker – Deutsche Bank

I think that is a good explanation. Given the new allocation in the reserves, a number of your competitors have started using some [inaudible] RGE which is a general pool for future losses. Are these losses that you have reallocated to, are you comfortable with the evolved case, or is this sort of unallocated losses for multiple events that could develop and therefore you have the reserve up.

Neill Currie

No, Josh, this is not, I think what others might call an RDE, or what you might call an RDE. These are event – we reserve specifically for and separately for each event. So, this is simply a process of moving event IBNR so that when the event occurs, we establish both ACRs and IBNR for each event, and this is just the process overtime of moving as we get more information about that event, moving that out of it, then IBNR down to the contract level.

Josh Shanker – Deutsche Bank

Okay, thank you, and I just want to say that I appreciate the high level of disclosure, especially telling us where your losses remain for those events. If you could do that in the future, it is always appreciated.

Neill Currie

Okay. Thanks, Josh.

Operator

The next question comes from the line of Josh Stirling –Sanford Bernstein.

Josh Stirling –Sanford Bernstein

Hey, Good Morning. So I just wanted to followup on two if I heard them correctly, comments that Kevin made. Both sort of around your risk taking, and risk management posture. I think I heard you say (Kim-Ray) adds vertical decertification. And separately, that you took – that you’ve increased your topline obviously pretty substantially, but you kept your net-exposures relatively flat. And I’m wondering if you can walk us through sort of how the different pieces are moving, whether you’re buying more Retro, you’re getting better terms, or just sort of restructuring in a clever way to be able to, you know, to be able to improve returns for shareholders and not taking much more risk. Thanks.

Kevin O’Donnell

Sure, let me start with Tin Re III, what I mean by saying we’re more vertical decertification, is historically we’ve commented that we’re hot down low in Florida, meaning we have larger market share of smaller losses than larger losses. What Tin Re III really focused on is taking some of the high rate online with the lower layers in Florida. So, we changed the risk profile throughout the distribution per Atlantic hurricane.

The second piece is just what I was commenting on our netbook, for exposures last Atlantic hurricane, for last wind season to this wind season for Atlantic hurricane are about the same. That’s really a combination of how we road our (Inwards) book of business over the last twelve months. But the bigger piece really is the amount it’s seeded and in the way we (inaudible) are seeded for the year. So, it’s kind of a combination of things where Tin Re III played in that seeded, but very much focused on the low end. The rest of the seeded was a blend of things across the distribution, as well as specific hotspots within the distribution.

Neill Currie

So, to add to Kevin’s comment. We would have written the business we put in Tin Re III ourselves, but by seeding that off to other investors, in fact it gave us more vertical distribution in the Florida Market than we had before.

And I do think it’s worth pointing out, the teams done a very good job purchasing Retrocession to making the track to book even more attractive and efficient.

Josh Stirling –Sanford Bernstein

Okay, I’ll ask the follow up. You know what you just said, this is almost a softball. But investors spend a lot of time talking about the impact of the capital markets, new capacity coming in, taking the edge off pricing. Yet you guys are big Retro buyers, and I suspect you’re probably buying reinsurance from a lot of these new entrance. I’m wondering if you could comment on how the net-net, you know with perhaps lower peaks but more counter parties with which you spread the risk? You know, how we as shareholders should be thinking about the (Inaudible) benefit for RenRe, thanks.

Neill Currie

Well, Josh any softballs being toss, I get first crack. But I appreciate you’re reasoning. That’s quite true, sometimes people say “Oh my goodness there’s competition out there”. Well there’s always competition out there, and we’re in a very fortunate position to control so much business coming in, that we have the opportunities on the incoming, and then we avail ourselves of new capacity to make our portfolio more efficient. So, that’s the good side of additional capital coming to the market, it can help us out.

Kevin O’Donnell

I think Neill is absolutely right. There has been a lot of discussion about the collateralized markets, and I think we’re uniquely position where we can sell across the spectrum of products that people want to buy. So, we have partner balance sheets, we have the ability to provide collateralized products, and the ability to provide traditional reinsurance on rated balance sheets. So, from a competition standpoint, I think we’re uniquely well positioned.

And you’re absolutely right on the capital side, we’re also I think very well integrated to know when there’s opportunities for us to purchase seeded from collateralized markets and manage the basis risk that might exist between reinsurance and those collateralized products. So I see that yes, there is a degree of competition that’s introduced, but it also creates an opportunity for us.

Josh Stirling –Sanford Bernstein

Great, thanks guys, good luck this summer.

Operator

Your next question comes from the line of Michael Nannizzi – Goldman Sachs.

Michael Nannizzi – Goldman Sachs

Thanks. Just a follow up on that difference I hear. Can you just talk about these collateralized vehicles, and where are you seeing the most competition to your own preferred slice of the market head-to-head, and how do you differentiate the capacity and service that you provide from these collateralized vehicles? Just wanted to follow up, thanks.

Kevin O’Donnell

I think the collateralized markets are increasingly playing across the distribution where going back historically, (Cat) bonds came in (inaudible) at the high end of the reinsurance filler, you know, as different funds formed with different strategies, they participate at different levels within the reinsurance tower. I think we again don’t – we look at them as just competition whether it’s a reinsurance company we’re competing with or collateralized market, and I don’t think that it’s been a particular disruption at any one point in the distribution. Again, it does create some opportunity in that we can buy from the collateralized markets to manage the basis risk.

And secondly because of our flexibility of thinking of, you know, how (inaudible) transfer risk and how we want to match that against our capital. We can start an UpsilonRe, we can do lots of different things to play in if we think there’s a certain (inaudible) in the market that is providing attractive returns.

Neill Curtis

Michael, it’s Neill. One additional comment that several of our clients have mentioned to us, is collateralized reinsurance is great, you have a high probability of collection, et cetera. But they don’t know the long term liability of that collateralized market necessarily. So, we’ve been around about 20 years, we’re known for paying claims and being there after a loss. Where sometimes people are a little more hesitant to seek business with somebody that may be there for the short term. So, I think that’s an advantage to us, by having multiple capital resources and having a track record of being there for our clients for the long term.

Michael Nannizzi – Goldman Sachs

Thank you for those answers. And then on Davinci, obviously the stake moved lower as you had some outside investors get involved. I’m guessing you sold a piece of your interest and didn’t increase the size, the total size of Davinci’s capital base. How do you anticipate that move from here? I think you’ve mentioned a range of what you’d like your stake to be, or you’d like it not to be outside of. How should we think about that and whether or not you would choose to issue new paper or continue to sell down your own stake? Thanks.

Neill Currie

Good question. I won’t answer it too specifically, but what we do as we have opportunities to introduce new partners into Davinci, if we think they are good long term partners, we’ll try to make room for them. And that’s what happened in this case. So, we would have been happy keeping our own stake, we had some mid-long term guys come in, so it was reduced. I think we have said historically that we typically like to keep our ownership between 25 and 50. It could go a little under that or a little over that, but we think that’s the strike zone.

Michael Nannizzi – Goldman Sachs

Great, thank you.

Operator

Your next question comes from the line of Ian Gutterman – Adage Capital.

Ian Gutterman – Adage Capital

Hi, thanks. First that was very helpful for the discussion on the reinstatement. I just have one clarification left on it. The fact that – as you allocate the (IBNAR) that there was less Retro than you thought. Does that imply then there’s still unused Retro limit that could develop adversely in the future?

Jeff Kelly

Yes, this is Jeff. I think the answer to that is probably, but I think what we’re saying here is that our assessment at this point is some of those contracts are not being hit, or not attacking related to this specific event. So, I wouldn’t say that they have the potential to develop adversely, because of the way we allocated. They did say though, the one thing you should remember is, that this allocation that we just made this quarter is based on what we know today. And we could learn more going forward, that I guess theoretically could – we could reallocate some of the loss to back to the Retro accounts, but his is based – our allocation this time is based on what we know right now.

Ian Gutterman – Adage Capital

Okay, that’s kind of what I was getting at.

Neill Currie

Let me just add to that briefly to make sure there’s not any misunderstanding, because once again Jeff did a good job and he’s technically correct as a good CFO should be. But when we take down reserves on an account, we’re not going to take those reserves down unless we’re pretty confident that we’ve got the good data from the clients. That’s what happens, we start off putting out, you know, putting out the loss, then we get additional information. As that information comes in, if we feel confident we can take that down, then we’ll do it.

Ian Gutterman – Adage Capital

Okay, but the reason I asked you can probably guess, is obviously one of the big New Zealand (cedence) , I can’t remember if you’re on them or not, but they raised estimates substantially again here. So, I didn’t know if that sort of thing would pose a risk, if we saw that or more of those.

Neill Currie

The way our book is written those large assessments by some of the big primary riders in these regions, actually affect the Retro as well. So we try to map it through the whole exposure set that we have, not just look at primary’s up. We look at it if the primary is up, what impact is that likely to have on our Retro ridings as well.

Ian Gutterman – Adage Capital

Okay, great. And then one other, and this Jeff may be a little complicated too, but I’m focused on pate 19 and 20 of the supplement where you sort of do the reserve roll forwards. I know that’s - but I continue to be surprised at how little paid Cap there has been. So, I guess what I was looking at, I looked at those disclosures as a year-end first, and it looks like last year you have about a billion dollars of 2011 acts in your account losses, and you paid about $300 million in 2011, so about $700 million left on a gross basis, and I see you only paid $32 million from prior year losses year-to-date so far. (I’m on page 20). That just seem incredibly slow, but then the other thing I noticed, was that 32 is net and your gross was $257, so you had a huge recoverable paid this quarter of $225, I’m just kind of trying to understand, is that sort of a – is that something that can continue? Is that $700 million of loses works down, or is this kind of up front and going forward gross will sort of be net on your page? It just surprising how much of your gross pays were covered net this quarter.

Jeff Kelly

Well, Ian your right. I mean there was a lot of – there were a lot of paid loses combined with a lot of recoveries. Off the top of my head, I can’t predict how those recoveries will flow through, except that I think if you look at the net recoverable on our balance sheet, it has declined significantly over the course of the year. So, it can’t go – it can’t fall below zero obviously.

Neill Currie

If I can add just a couple of comments to Jeff. We do have some quota share which will participate proportionally to our loss. The other thing that can happen is for the international events, Sigma reports, which is the trigger for many IOW’s in the second quarter, which will trigger some payments for the access of loss in that states contracts.

Operator

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

Vinay Misquith – Evercore Partners

Hi. The first question is on the investment income. You usually have a bit of adjustment in that. Can you help me understand what that is for the year for the fixed income securities please?

Neill Currie

Are you talking – Vinay, are you talking about the fact that sometimes we have derivative mark to market or realized gains and losses?

Vinay Misquith – Evercore Partners

Yes.

Neill Currie

Yes, so if you look at that, Page 15 of our supplement and the top line, actually, if you look at the fixed maturity investments from March, the first quarter to the second quarter, there’s about a $4 million decline, virtually all of that difference is related to derivative gains and losses in the various – in those two quarters. So the $26 million in the first quarter contained about $1 million of derivative gains and the $22 million in the second quarter contained about $3 million of derivative losses. So on an – you know, it’s basically, absent the derivative gains and losses, which are primarily offset in unrealized gains and losses in the investment portfolio, that number is really pretty constant over the two quarters.

Vinay Misquith – Evercore Partners

Okay, that’s fair. And what’s the normal number that we should use for the derivative gains? Are they zero or are they plus 1 million, minus 1 million? I’m just trying to get a sense for the run rate.

Neill Currie

I really don’t think you can take a run rate, Vinay, it depends on what happens in the market and in this instance, interest rates fell. I think some of those derivatives are hedging duration and some of the investment mandates we give are managed so that when interest rates fall as they did during the quarter, we experienced derivative losses that are marked against that fixed maturity income number. So it’s kind of – I wouldn’t say there’s a run rate number you can use.

I think if you think about it though, Vinay, just in terms of thinking about, you know, if you went back to the beginning of the – the beginning of the second quarter and just say we ended with a portfolio of about $5.5 billion worth of fixed maturity investments. The yield on the portfolio was about 1.6%, that was – that’s about 24, $25 million of income which is right around what the derivative – absent the derivative number, the number would have been. And then the hedge fund number has been kind of tracking – not the hedge fund, the private equity and hedge fund numbers have been tracking recently pretty close in line with movements in the S&P 500 and we had – I think the S&P 500 was down 3.3% in the second quarter and if you multiplied that times our $360 million private equity portfolio you would have come up with about a $12 million decline, which is pretty close to the 10 we posted.

You can’t always think of the private equity exactly mapping to the S&P 500 but I think the last few quarters it’s been pretty close. That’s one way to think about if you want to think about how to look at that investment income number going forward. With the derivative income, or losses, really just offset in unrealized gains and losses on the investment securities.

Vinay Misquith – Evercore Partners

Okay, that’s great. I mean, you guys have some great disclosure, so it would also be helpful if you could just [inaudible] that line in somewhere so that we could have a sense for the run rate.

Neill Currie

Okay.

Vinay Misquith – Evercore Partners

The second point, the second question was on Tim Re and Upsilon. I’m curious about what your plans are for next year? Should you choose – I mean, will you be more willing to keep those premiums net for yourself and how much will you reinsuring that this year?

Jeff Kelly

Sure. Okay, it’s really a question of what happens with the pricing as to whether we decide to renew these vehicles or not. I think from the Tim Re perspective, you know, as Neill had mentioned, that business we are happy to keep, it depends on really how we structure the portfolio but it’s more of a portfolio shaping vehicle than it is one in which it’s pure risk transfer. I think from the Upsilon one, that one’s a little bit more difficult, so if pricing moves down substantially, I think we would exit some of that business and we would not renew Upsilon Re. But if the market’s about flat, I would anticipate that we’d be very comfortable with the vehicle going forward.

Vinay Misquith – Evercore Partners

And if you could remind me how much you get net from both these vehicles this year?

Jeff Kelly

Tim, I’m trying to remember, just off the top of my head, Tim was just under 20% I think is how much of that we kept net and then Upsilon, we added a little bit more to the quarter and we’re at, I think, about 55% of that, ballpark. So those numbers are rough, but we’re about 20% just under for Tim and just over half for Upsilon.

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