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Endurance Specialty Holdings Ltd. (NYSE:ENH)

Q3 2012 Earnings Call

November 1, 2012 8:30 a.m. ET

Executives

Greg Schroeter – SVP, IR and Corporate Development

David Cash – CEO & President

Mike McGuire – CFO

Analysts

Matt Heimermann - JP Morgan

Matthew Rohrmann - Keefe, Bruyette & Woods, Inc

Amit Kumar - Macquarie Capital

Meyer Shields - Stifel Nicolaus

Ron Bobman - Capital Returns

Operator

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

I would now like to turn the call over to Greg Schroeter, Senior Vice President of Investor Relations and Corporate Development. Please go ahead, sir.

Greg Schroeter

Thank you, Alisha and welcome to our call. David Cash, Chief Executive Officer and Mike McGuire, Chief Financial Officer will deliver our prepared remarks. Before turning the call over to David, I would like to note that certain of the matters that we discuss here today are forward-looking statements. These statements are based on current plans, estimates and expectations and include, but are not necessarily limited to various elements of our strategy, business trends, growth prospects, market conditions, capital management initiatives and information regarding our premiums, loss reserves, expenses and investment portfolio.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the markets in which we operate, the economy and other future conditions and involve inherent risks and uncertainties. A number of factors could cause actual results to differ materially from those contained in the forward-looking statements and we therefore caution you against relying on any of these forward-looking statements.

Forward-looking statements are sensitive to many factors, including those identified in Endurance’s most recent Annual Report on Form 10-K that could cause actual results to differ materially from those contained in forward-looking statements. Forward-looking statements speak only as of the date on which they are made and Endurance undertakes no obligation publicly to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

In addition, this presentation contains information regarding operating income and other measures that are non-GAAP financial measures. For reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release, which can be found on our website at www.endurance.bm.

I’d now like to turn the call over to David Cash.

David Cash

Thank you, Greg. Good morning and welcome to our call. Before Mike and I tackle our prepared remarks, we’d like to take a moment to acknowledge hurricane Sandy and the damages it’s inflicted on the North-eastern United States. Many of our staff, clients, friends and their families have been affected by the significant hurricane. We wish them all speedy recovery from the storm damage and they can all be assured that Endurance Specialty will do its part to support them as they work to bounce back from this event.

Turning to our financial results, Endurance’s Q3 earnings were influenced by a number of positive factors, including like catastrophe losses, strong investment portfolio performance, improved pricing and a favorable reserve development. Beyond those positive drivers of results, in the third quarter Endurance also recognized drought losses in our crop book that were relatively in line with the estimates we provided on our last quarter’s call.

In the third quarter, net income to common shareholders was $31.9 million or $0.74 per share and operating income to common shareholders was $25.7 million or $0.60 per share. Both measures were up sharply from the third quarter last year as catastrophe losses were lower and investment portfolio performance was improved in this quarter. Book value per share grew 2.7% in the quarter and is up 8.7 from year end 2011.

Beyond the financial results, we also saw a continuation of the positive insurance and reinsurance pricing trends we’ve identified in our previous call. This was particularly true in the U.S. where casualty insurance pricing remains on an upward path. Later in the call I will provide some detailed commentary on the market conditions we’re seeing across our key lines of business and update on some key strategic initiatives underway and of course, some commentary on hurricane Sandy.

First, I will hand the call to Mike McGuire who will review our financial results in more detail.

Mike McGuire

Thanks David and good morning everyone. In the third quarter, Endurance generated net income to common shareholders of $31.9 million and $0.74 per diluted share and operating income of $25.7 million and $0.60 per diluted share. Our diluted book value per share ended the quarter at $54.95, up 8.7% from year end 2011 and up 10.5% when excluding the $0.93 per share in common dividends we paid during the first nine months of 2012.

Although our results are clearly impacted by the recognition of the drought losses in our crop insurance business, strong reinsurance segment results, stable results in our other insurance lines and improved investment portfolio performance enabled us to still generate a profit this quarter.

Net premiums written in the third quarter were $514.1 million, a decline of 6.8% compared to the third quarter of 2011. Within our insurance segment, third quarter net premiums written of $221.3 million declined compared to third quarter 2011. The biggest driver of this change was in our agriculture business which declined $78.8 million due to the absence of positive premium adjustments, decreases in commodity prices for spring crops and greater sessions of premiums to the Federal Crop Insurance Corporation compared to 2011.

Property premiums declined 23.1% in the current quarter reflecting our strategy of reallocating insurance U.S. wind capacity from our all-risk insurance line of business to our catastrophe reinsurance line of business where we see greater return potential on that capital. Within the reinsurance segment, net written premiums were $292.8 million in the quarter, up 18% from the third quarter 2011.

Property premium growth is driven by an improved pricing, higher renewal premiums and modest growth from new business. Growth in casualty reinsurance was driven principally by a few new contracts and higher premium adjustments.

Our overall combined ratio for the third quarter was 99.5%, an improvement of 5.1 points from the third quarter of 2011. Our overall combined ratio benefitted from low catastrophe losses in our insurance segment and was adversely impacted by the recognition of Midwestern drought losses in our agriculture insurance business.

Catastrophe losses were significantly lower year over year in our reinsurance segment. The $13.2 million of 2012 catastrophe losses in the third quarter related to hurricane Isaac and a few smaller catastrophe events, compared to $96.3 million of catastrophe losses recognized in the third quarter last year. This change improved our overall combined ratio by about 15 points.

Net underwriting losses in our agriculture insurance were $62.8 million in the quarter and $43.6 million year-to-date. Our third quarter results include the full impact of increasing our MPCI loss ratio to 103.5% for the current crop year. In addition to this increase being applied to our year-to-date earned premiums, we also recorded losses in excess of a 100% loss ratio on expected fourth-quarter earned premiums.

The harvest is now in full swing and as expected, we’re beginning to see an acceleration of reported harvest claims and our teams are actively adjusting and settling claims. While we believe the worst part of this year is behind us, we still have a large number of claims that need to be adjusted and settled and more are expected to be reported over the coming weeks. So results could still change as things are finalized.

Outside the impact of crops and cats, we saw improved accident year results in our reinsurance segment and higher levels of favorable reserve development in both segments. The third quarter combined ratio included 10.1 points of favorable development compared to 7.9 points a year ago. The increased favorable development was driven by short tail lines of business.

Turning to investments, our portfolio’s total return was a positive 1.75% in the third quarter. Net investment income of $45.9 million was $31.8 million higher than the third quarter 2011 driven by stronger results in our alternative investments, partially offset by lower yields in our fixed income portfolio.

Our fixed income portfolio duration remained short at 2.5 years as we do not believe that the modest yield benefits that could be achieved by extending duration justify the risks inherent in the current interest rate environment. We ended the quarter strongly reserved with $351 million of IBNR for short-tailed lines. Excluding IBNR specified for named catastrophes, at quarter end we maintained $155 million of short-tailed IBNR for the 2012 accident year and $81 million for the 2011 accident year. In addition, $2 billion or 74% of our long-tailed reserves are IBNR.

Our capital position remained strong with total shareholders’ equity of $2.8 billion and total capital of $3.3 billion at quarter end. Capital levels remained comfortably above rating industry requirements and that buffer has expanded in each quarter of 2012. Although it’s much soon to accurately estimate the impact of hurricane Sandy, we believe we are well-positioned from a capital and liquidity perspective to absorb the potential losses that could arise.

With that, I will turn the call back To David for some additional comments.

David Cash

Thank you, Mike. I will now take some time to discuss market conditions and recent underwriting activities, our crop insurance business, strategic initiatives and finally, hurricane Sandy. We continued to see positive trends in pricing and market conditions in the third quarter. Within our casualty insurance and reinsurance lines of business we saw rate improvement, in most cases above trends as low interest rates and slowing loss reverse take-downs continue to push insurance companies to increase rates on commercial risks.

Within our property and catastrophe lines of business, we saw selective price increases in the quarter although not as consistently as those seen for commercial casualty classes of business. It’s our expectation that hurricane Sandy has the potential to result in a strengthening of prices in the northeast region and this may even cause a broader strengthening than just the northeast, as large commercial property schedules and natural account reinsurance programs seek capacity this year end.

On a more specific basis we’re seeing the following market trends in our portfolio. International catastrophe reinsurance. The third quarter is relatively light with respect to international renewals. However those renewals we saw showed rate increases in line with exposure growth. As we look towards 1/1 renewals, early indication suggests that rates would be flat to modestly down across the portfolio. Even after Sandy, this is likely to be true of European and Asia-Pacific risks. The one area where we would anticipate hardening would be for international direct and facultative business where we think Sandy will have a measurable upward impact on prices.

In the U.S. casualty reinsurance, price in this sector continues to show improvements in line with the pricing increases in underlying insurance lines. Much of the business we write in this portion of our portfolio is underwritten on a proportionate basis and consequently price increases flow directly through to Endurance.

Turning to our insurance portfolio, we saw the following trends in the third quarter. U.S. wholesale. Our middle market wholesale business experienced rate increases across the portfolio and excess of loss cost trends and up from pricing increases seen in the first two quarters of 2012, improvements were greater in small account lines such as the contract binding unit where rates were up 10% in the third quarter and are up 7% year-to-date.

Global excess in U.S. retail, our largest retail insurance business has showed mixed pricing trends for the quarter. Overall rates were up 1.3% driven by excess casualty where rates were influenced by loss impacted accounts in sectors such as energy where pricing has shown continued steady improvements over the last two years.

In our healthcare business, rates continue to be relatively flat. While excess professional lines continue to experience modest rate declines, the competition remains strong. For now we continue to exercise caution in these product lines and confident that our premiums have edged down over time due to price reductions and non-renewals.

Turning to crop insurance, as Mike indicated in our Q3 financial results, we've appropriately recognized the challenging drought conditions that had played out in the Midwest through the summer months. At this point, we’ve recognized our anticipated full year's losses offset by premiums in our Q3 reported results.

To give you a sense of where we are in the claims settlement process, today we've closed approximately 40% of the claims we expect to receive for the year and paid roughly 30% of the gross losses that we anticipate paying on the 2012 crop year. From those numbers, you can see that we still have a fair way to go before the 2012 year is finally put to bed.

While there is much work to be done on the claims adjusting and processing side, we’re well staffed and resourced to meet those demands. And the early feedback from our farmers and agents is that our team is doing an exemplary work in the field. That’s a very tough 2011 in Texas where claims team set records for adjusted claims. We saw strong year-over-year growth in our business driven by agents showing their appreciation for our quick and our thorough claims handling. We hope to see a similar bump-up in policy counts in 2013 which we demonstrate in our claims handling expertise to agents and farmers across the Midwest.

Reflecting briefly on this year’s very tough growing season, it’s gratifying to see how well our crop business performs on a stretch. There are not many businesses out there that can generate double-digit returns after which one in fifth year losses is manageable as this one we’re currently experiencing.

Turning to new initiatives, I am pleased to welcome our new underwriting Team to the company. Today marks the launch of our international trade credit and surety business in Zurich. Our new team is being drawn to Endurance from a number of different companies and markets. And out of the gate, we expect be in a position to provide a comprehensive set of reinsurance underwriting capabilities in Europe, Asia and Latin America both on a treaty and facultative basis.

The rollout of this credit and surety business in Zurich is the first of what we expect will prove to be a number of specialty reinsurance initiatives that Endurance will be undertaking over the next two years. In undertaking these expansion efforts, we’re seeking to boost the topline revenues of the company while at the same time adding margin enhancing business to our portfolio, something that’s obviously important to our shareholders and equality important to our clients as they look to expand their trading relationships with Endurance.

To close, I just like to provide some preliminary comments on hurricane Sandy. As you might expect, it’s hard to be particularly precise as to the impact hurricane Sandy will have on Endurance and for that matter the industry. As of today, modeling organizations have pegged the industry loss for Sandy somewhere between $5 billion and $15 billion. That large range comes as a result of the broad scope of the storm’s impact within densely populated area and possibly of solid loss data at this early state.

Given how broad the (indiscernible) downs from Sandy is expected to be, from Virginia to Massachusetts and the very severe damage that appears to be inflicted on homes, infrastructure and commercial premises, we still expect hurricane Sandy to produce significant industry losses. It’s my sense today that economic damages in excess of $30 billion and insured losses in excess of $15 billion are quite plausible. Beyond the sizable loss, the complexity of potential losses, a mixture of wind, flood, fire, business interruption and contingent business interruption means that it will take the industry longer than normal to identify and adjust individual losses and to develop an ultimate loss estimate for the industry.

Endurance’s largest exposure to hurricane Sandy is expected to be through our Bermuda catastrophe portfolio and to a lesser extent as a writer of working U.S. treaty reinsurance and excess FDIC insurance. Our property catastrophe reinsurance portfolio has a regional and personal line bias. And the key issue that we will be watching is the treatment of hurricane deductibles and storm surge losses. As of this morning it appears that the affected states will declare that hurricane Sandy was, in fact, not a hurricane. This will result in the elimination of hurricane deductibles and will in turn increase insured losses. To this point, we’re not hearing of any efforts to force insurers to cover storm surge as wind losses.

In our treaty reinsurance and excess insurance portfolios, we’re primarily concerned with large schedules of risk or flood coverage that’s typically provided. While it’s a bit of a simplification our main concern is with respect to industrial risks as opposed to smaller commercial risks. At this point other than the very obvious damaged infrastructure, it’s too early to tell just how severe the floodwaters have been other than with respect to coastal property.

We’re hearing of a few instances of river flood damage, which is good but at the same time not all water from properties is residential. We should expect significant commercial lines losses to emerge from this event. Beyond those guideposts which respect our risk concentrations it would be premature to provide more detailed guidance to potential losses of Sandy. It’s our sense that it will be sometime before we’re in a position to fill this information gap. However, I can assure you that once we have a credible estimate of our losses from this event we will share that information with our investors.

In the meantime, we would just ask for your patience as we work with our clients to adjust and settle their claims, and work to get our customers back up on their feet. If we take care of the claims, experience has shown that our clients will in turn take care of us.

And with that, I would now like to open the lines for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Matt Heimermann from JP Morgan.

Matt Heimermann - JP Morgan

A couple questions. Just with respect to margins in the quarter, it looked like there was some noise in the expense ratio in insurance. So I’d be curious on your thoughts there. And also it’s not atypical in the reinsurance segment to see accident year loss ratios decline through the year if frequency is low from a cat perspective. I'm curious to what extent with Sandy landfall recently whether or not that affected kind of how you were thinking about IBNR or anything else as you kind of exited 3Q?

Mike McGuire

Hey Matt, it’s Mike McGuire. Maybe I will start with that and David can add on. With respect to your question on margins, specifically on the insurance segment, and you highlighted the expense ratio, I think there is a couple of factors there, that the main one being the decline in earned premium and relatively flat expenses. We did have a few million dollars of system build cost as we’re continuing to build out US insurance business. It did add incrementally to that but it was more a function of the declined earned premiums and a relatively stable expense base.

With respect to accident year loss ratios, I think the trend that you noted that in general, you could expect as you go through an accident year if attritional losses are lower, then you would expect to see some improvements and as I look at our reinsurance business, outside of the cat impact, which I talked about in my prepared remarks, we did see some improvements certainly year over year in our ex-cat – our ex-cat loss ratios. Insurance was relatively flat and we did talk about her crop insurance losses as being the major driver on insurance. But on the reinsurance business, ex the cat we talked about, we did see relatively wide attritional losses.

David Cash

So the only thing I would add on IBNR is that for that fleeting moment at September 30, we were essentially at a point where I think all of our cat losses were well understood. Our clients had a very clear handle on what they were in. And so it’s not uncommon in those situations that our attritional reserving process tended to generate a little bit of income. And so I think you saw that in this quarter. Sandy obviously will change things for year end and it will be sometime before you have a better handle on just what that loss would be. So the IBNR trend at year end may be different.

Matt Heimermann - JP Morgan

Are we also starting to see mix have an impact now with some of the growth in casualty on the binding authority side and on the primary side and also on the reinsurance side to some extent as well?

Mike McGuire

I think yeah on the insurance side, yes and you can look at our investor supplement where we break out our earned premiums by line. You can see that ag was a lower component to our overall earned premium based insurance. Within our contract binding, we are seeing a growth in earned premiums relative to other lines and that does bring with it a little bit higher expense ratio than some of our larger risk insurance lines. That was another contributor on the acquisition expense side with that ratio ticking up a little bit in the quarter.

David Cash

Just to kind of jump in, the only other trends or sort of mix shift you would see is that over this year we’ve seen our workers’ comp IBNR performed well. And so in some ways by subtraction that's a change in mix as well in terms of how reserves perform.

Matt Heimermann - JP Morgan

And then just on Sandy, I’d be curious how you – well, what areas of your – you kind of walked through the areas of your book but if you kind of compare and contrast this – actually maybe a better way to ask this is relative to kind of – how is the northeast different in terms of how you'd expect a storm like this to generate losses relative to other storms you’ve seen over the last seven, eight years which have primarily been more Gulf Coast, Southeast? And then just curious how when you think about the northeast event, how you would think about your share of industry loss in that context and whether it’s higher or lower than kind of the events we’ve seen in the past?

David Cash

At some level, if you’re just talking about modelling, the northeast is not necessarily different from the south. So the similar structures, the models will apply to those structures and generate damage ratios. So in that way similar. This is going to have a heavy wind component – I mean flood components and that would change things pretty significantly. I think perhaps the one difference that exists here between sort of we’ll call an events in a less densely populated state is, as a reinsurer we try to develop a portfolio that’s balanced sort of by almost by landfall. That’s not exactly the way we would say but balanced by landfall in terms of potential losses that could come from that.

And so in a less populated state like Texas you tend to have a little more share in that market. It’s a sort of part of balancing. In a state like Florida, you have less just because there is so much value in Florida, you try to be sort of proportionately a lower part of the industry loss. In this sort of upper right hand corner of the U.S. it’s got so much value there that I think you will find that reinsurers would sort of go into that balancing exercise, we try to have a little bit of a lower share of the industry loss than it would normally be the case. Beyond that, there is enough commercial risk in play here that it means there are probably (indiscernible) we’ll call layered treaties, not layered cat treaties but layered sort of risk treaties out there. But often it’s very hard to model. And it think that's sort of an area that will be challenging and then commercial property schedules in general will be tough, because what you tend to find is just the water loss takes a long time to sort of we’ll call it adjust and then identify sort of whether the coverage is fair and so forth.

And so I think it’s different because there is flood and it’s different because it’s going to take a long time to settle. And I think on balance we'll get some of what we call those bouncing techniques the companies use, I think you’re going to find reinsurers try to be a little bit less exposed in this northeast scenario than they would perhaps be in some other states.

Matt Heimermann - JP Morgan

And then just – did I hear you right, Michael that – so you expect it to have a premium deficiency in 4Q so you move forward losses, so that should imply 4Q we should think about a 100% combined ratio in crop?

Mike McGuire

I’d say 100% loss ratio in the named, to the extent that our ultimate stays the same in the fourth quarter, and the only thing you’d expect to see would be just the normal expense coming through.

Operator

We’ll go next to Matthew Rohrmann from KBW.

Matthew Rohrmann - Keefe, Bruyette & Woods, Inc

Just really two questions. I guess, could you just talk about sort of your positioning within regional versus the national coverage for the affected areas from Sandy and then how that would perhaps change your view of it at all for buyback in 4Q?

David Cash

Taking them in order, when you look at our cat book of business it tends to be skewed towards the regional players. As we don't have a lot of limit out on a big, say, Allstate without trying to be specific about the terms there. And so we will see regional exposure kind of New Jersey and New York and then some of the other states. I wish I could tell you how to take that information and then extrapolate from it. The reality is we’ve been making outbound calls to customers to see if they need help from us and something we do after each event in terms of offering, we will call speedy disbursement of cash where it’s warranted. And our customers are not in a position to come back to us yet. And so I think when you have a slightly smaller kind of regional book of business, I means you can risk manage it better but it does mean there’s some lack in terms of getting communication back.

In terms of the capital management question, we’ve been pretty careful to grow our capital base over the few years. And so I feel very comfortable with the capital we have today. We’re probably 600+ million in excess of what rating agencies would ask us to hold and that's meaningfully in excess of what our own internal tolerances would be. So we certainly have the ability to absorb a loss year and not need to raise capital and I think we probably have the wherewithal to grow it one more and if that’s something that the pricing indicated we should do. So that’s where we see it today. So I can't offer more detail on that kind of regional sort of national question in terms of how to use it for estimating.

Matthew Rohrmann - Keefe, Bruyette & Woods, Inc

Just one quick numbers question, did you define the crop losses of 1 in 50 year loss?

David Cash

I mean yeah but I am not a farmer. And it just could be a new normal now so that it could be something different. It could be one in 10 or one in 20. But it definitely is given the way coverage is structured versus how it was in the past,, this feels every bit as severe since ‘88 which was the last to the series one. So it’s a big number, whether it’s 50 or whether it’s 30, I don’t know.

Operator

We’ll go next to Amit Kumar from Macquarie Capital.

Amit Kumar - Macquarie Capital

Just two quick follow up questions. First on the discussion on hurricane Sandy and I really appreciate the color. Earlier today on a conference call another management team remarked that they might view this as one in 10 event. I am wondering would you broadly agree with that comment that hurricane Sandy would be one in 10 event for you, or would it be much different?

David Cash

We try to – the problem with, when you do the one in 10 thing, you’re really trying to use the models to guide yourself to the likelihood of being on the tail. And the models are really wind models. And so it’s not possible to mathematically get there. My own sense and this sort of speaks to my comments earlier in the call is, I think people will look at this as sort of reasonably likely event going forward. And I think that’s probably going to cause some change in terms of the capacity available to northeastern risk, particularly commercial risks and possibly kind of what we call cat reinsurance risks.

And so I suspect people will start to view this is a more likely or possible event. And I am not uncomfortable with the one in 10 number, but it's not one that – that is sort of useful in some ways in terms of loss estimation because of the disconnect between where the losses are coming from, and the models can be used to do.

Amit Kumar - Macquarie Capital

And on page 5 you gave the PMLs, it’s for broader US hurricanes. Do you have the northeast and Mid-Atlantic PMLs available?

David Cash

We don't have them available. When you look at our wind PMLs obviously it runs from Texas all the way to Massachusetts. The big node in there is Florida, although we tend to position a little bit lower down. When I think of Florida losses, those tend to be the ones driving the 10, 20 year numbers. When you start to get to the kind of tail, you’re really talking about a Miami event or you’re talking about a very, very large New York event. And so this one which is definitely not a very, very large New York event, as loss is somewhere in that middle ground in the PMLs. It’s quite possible that going forward to 1/1/ that we should try to provide some more of that regional information. But I don’t have it right in front of me now, I am afraid, Amit.

Amit Kumar - Macquarie Capital

And the other question is going back to the discussion on the crop book, and we were talking about buying reinsurance going forward. Do you have any update on that and sort of what level of reinsurance would you be thinking on the crop book for 2013?

David Cash

We’ve been doing a little bit of what we call optimization analysis and that will pick up over the next months. And so when you try to optimize the portfolio, one of the things you’re doing is you’re becoming a little more aggressive with what you keep as opposed to what you send to the federal government. And depending on how aggressive we decide to be on optimizing we will then look at stop loss to sit on top of that. But I will be honest, we’ve not finished the optimizing exercise. So we’re way off of that second part of the question.

I do – I have had face-to-face meetings with investors where they would push in either direction and buy the protection because it helps to sort of think about putting a cap on the potential for some of an adverse outcome in an unusual year. And others that would say this year improves, you don’t need to buy it. So I am not mixing one way or other on that for now. But over the next – between now and sort of early January we have to reach resolution on that question.

Amit Kumar - Macquarie Capital

And just a follow up on the buyback and maybe I didn’t understand your comment. You have enough capital, it’s not a binary sort of option, right? I mean you could do a buyback based on the current valuation or are you going to see what hurricane Sandy losses come in and once you get to the point of your comfort, then I guess you start thinking talking any level of capital management.

David Cash

My bias we could go would have been steady capital management from this point forward. With Sandy out there I think we’ll take a range check on that for the next month. But going forward I really would want to see us in a mode where we’re steadily managing capital even as we’re building capital. And I'd like to feel that there are – we talked about earlier our trade credit and surety business. And I think that there are lot of opportunities to deploy that capital but the same time we would be prepared to buy back stock more aggressively if we felt valuations collapsed the way they did over the last couple of years. But for the next month, I think we're all taking a bit of a time out on capital management.

Operator

We’ll go next to Meyer Shields from Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus

Can you give us an update in terms of where the market is for the trade credit surety reinsurance business? Is pricing trending there in light of European trouble?

David Cash

What you’ve seen in that market really over the last year particularly in trade credit is a very aggressive move to cut Greek exposure out of portfolios. And there is a bit of a trend towards that in some of the other peripherals. And so at the moment I tend to see that market more trying to underwrite, I will call, underwrite safely rather than necessarily try to play with price. The kind of the overarching trend that we think is an important one is those risks are correlated risks, they are technical risks and clients need large amounts of capacity, and I will give you just a working example. It’s not uncommon to find international contractors that need as much as $10 billion worth of bonding support for their business. And there's no way for a local insurer to provide that.

And so insurers need reinsurance partners that are familiar with the underlying risks, are willing and able to manage some of the correlations that come out of those portfolios. And at times they’re able to provide facultative support. And so we’re more entering that market in the belief that, that long-term trend is a meaningful and that it plays just to the strengths we have. And so we’ve assembled a team that we think are skilled with the technical side of the business but are capable of working very comfortably across a number of geographies. But the underlying trend in terms of pricing in that market is relatively stable, and that's what I would expect to see a real peak in pricing people experienced it was sort of more 2009.

And so we’re not sort of – we’re belatedly trying to take advantage of 2009. We’re trying to position in a product area that we think will have meaning and relevance for the next five or 10 years.

Meyer Shields - Stifel Nicolaus

And if we turn quickly to the short tailed lines of reserve releases, was the sequential increase more a matter of setting up cases that were lower than the IBNR amount or settling claims were lower than the reserves

Mike McGuire

I think it was a handful of things that were driving the short tailed reserves. The biggest part of it being in this quarter we saw very light levels of attritional losses coming through from prior years on our short tailed lines. That was far and away the biggest factor. In addition we’re several quarters past the significant event that we saw in 2011. So in earlier quarters that had created some headwinds in terms of releasing some of those reserves as those loss events have stabilized in terms of ultimates, the attritional reserves that were held up there tend to find their way to the bottom line this quarter.

Operator

We’ll go next to Ron Bobman from Capital Returns.

Ron Bobman - Capital Returns

On the trade credit and surety, could you describe the limits profile you intend to put out (indiscernible)?

David Cash

Sure. On a treaty basis, what happens in those books is you end up with what we call exposure across geographies and exposures to single names across the different geographies. And as sort of insurer you are contingently exposed to the we’ll call the contracting industry for this failure to deliver on a specified piece of work. And so in that space, it’s not uncommon for you to be multiply exposed to contractors and have multiple threads of work that they are carrying out. Each of which is sort of running off and in a sense taking it further from risk.

And so as we rolled that business out for now, we’d be trying to put ourselves initially in a position where the nominal limit would be about 200 – nominal exposure we would be willing to take in a country about 200 million. But the reality is what you tend to find as those numbers come down quite significantly, if look at the possible loss or the kind of probabilistic loss. Over time as we have a better handle on our ability to risk manage some of these on our portfolio, either by balancing achieving diversification or place it by hedging, we’ll like to see those numbers expand. It tends to be – depending on whether you’re looking at surety where you talked about single named concentrations, or trade credit where you talk about concentrations, I come to a different ways of looking at those. But 200 million is sort of the nominal basis, it’s a good starting point for thinking about exposure, probabilistically that number comes down quite a bit.

Ron Bobman - Capital Returns

That booking of 200 million I should think of that as a net potential? Putting probability aside, and sorry about the noise in the background, I apologize.

David Cash

Yes, I think probably the way I would classify is if you look at insurance businesses, when you have to look at insurance premium you will have billions of dollars of limit out there. And that billions of dollars of limit will be exposed to accumulating or correlating events. And then probabilistic number that can come out of that will be very much reduced. And so for us we think $200 million of limit to begin with by country by region sort of is sensibly size to our portfolio. We think about the realistic losses that can come out of it quite a bit less. And that sort of we’ll call it factoring down what occurs in the insurance space, in the space.

Ron Bobman - Capital Returns

On the – what about counterparty? Would that number be anywhere close to the 200 million or would it be materially lower, sort of as an aggregation of a counterparty?

David Cash

Sure, when you talk about single named, you can have exposures to run north of 100 million to single names there. And when we talk about a single name, what you will actually have then is multiple individual, we’ll call it construction activity turn away. And each one of those construction activity then if they're carried out you slowly come off of risk there. And so I will give you an example. A very large Brazilian contractor might initially have $10 billion worth of contracts in force at any one time. But any point in time they would've been paid for doing say $100 million worth of work and they might've done $80 million worth of work on that particular piece.

And so the place where you have exposure is the fact, if not is that were completed the work up to the point they’re being paid and so there is a real difference between kind of nominal limits in the space and limits that are exposed.

Operator

We’ll go next to Meyer Shields from Stifel Nicolaus.

Meyer Shields - Stifel Nicolaus

Are you seeing a loss – a mix benefit from the growing contract binding business, are you seeing an offset in the losses that matches the increase on the loss ratio?

Mike McGuire

It’s Mike McGuire. Yes, that business is pretty slow to ramp up and we’re recording a loss ratios and expense ratios that are at the close to breakeven and it is heavily casualty focused operations. So as those reserves mature we should expect to see that – we hope to see that come through. But the expense difference was really comparing contract binding to our large excess business and there are lower margins in the contract binding but much, much lower volatility. Their average limit sizes are $1 million or so in the contract binding size versus $15 million to $20 million plus on an individual account. So the volatility potential is much, much lower in the contract binding space versus the larger risk. So you would naturally expect to see some margin on premium compression.

Operator

At this time, we have no further questions. Mr. Cash, I would like to turn the call back over to you for any additional or closing comments.

David Cash

Thank you. And thank you again for joining us on our call. Over the rest of this quarter, we will be hosting several investor groups in Bermuda. We hope to see you in one of these meetings. So thank you operator. This concludes the call.

Operator

That does conclude today’s conference. We thank you for your participation.

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