Arch Capital Group Ltd (ACGL) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2010 Arch Capital Group earnings conference call. My name is Jennifer, and I'll be your operator for today. (Operator Instructions).

Before the Company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied. For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the safe harbor created thereby.

Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current Report on Form 8-K furnished to the SEC yesterday, which contains the Company's earnings press release and is available on the Company's website. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your hosts for today, Dinos Iordanou and John Hele. Please proceed.

Thank you, Jennifer. Good morning, everyone, and thank you for joining us today.

We started the year with a mild reminder that cat risk is part of our business and should not be overlooked. With multiple cats, cat losses were above long-term average in parts of the globe, with the Chilean earthquake being the most significant event.

We fared reasonably well, with our losses being slightly below that of industry averages. Our annualized return on average common equity was 9.8%, which in our view is not adequate over the long term.

As I mentioned in our call last quarter, given the current market conditions in which we are operating in, a 10% ROE for well-capitalized companies is a realistic return for the 2010 underwriting year, even though it is not what we desire to achieve.

In a most important measure for creating shareholder value, with desirability to increase book value per share, we had a much better result. At $76.91 per share, our book value per share increased 41% from a year ago and 5.3% sequentially from last quarter.

From an underwriting point of view, we achieved a 96.4 calendar year combined ratio, which is very close to a normalized accident year combined ratio if you do the calculations.

Cash flow from operations remained strong at $185 million. Even though our book of business from prior years is maturing, our volume of business for more recent years has declined, and our mix of business is moving to more short-tail than in the past.

From a production point of view, our gross written premium was down 7%, and our net written premium was down 6.7%. Insurance was down approximately 1% on gross and up 2.6% on net written premium.

Changes in the mix of business and reinsurance structure explain the increase in the net written premium. We retain more of our low-limit small accounts business as we continue to shift that book of business in that direction.

From a rate point of view, for the first quarter, rates for all lines of business were down 2% in the aggregate. The area that we saw the most competitive pressure was executive assurance, with commercial D&O being affected the most. Also, we have seen more competition in the property lines, with global property down 2% and E&S property down approximately 7% for the quarter. All other lines achieved at least flat or slightly positive rate increases for the quarter.

Our reinsurance volume was down approximately 17% on both a gross and net basis. Most of the reduction was as a result of clients retaining more business net and moving from quota share to excess of loss contracts, which, although it may not affect the profitability of the business, it translates into less premium to reinsurers.

Reinsurance rates and terms were generally stable, with renewal as expiring the most common outcome. In the face of rate decreases, even though small, on the underlying primary business, together with claims inflation, we continue to see the deterioration in economics both for us and our cedents.

In challenging markets, such as the one in which we are now operating, we are always more conservative in projecting the future erosion of economics of the business we underwrite in reinsurance, and as a result, we're more cautious. In our insurance operations, we can change our underwriting posture almost immediately, while in reinsurance we are making commitments for the entire year.

In our cat PML deployment, we have committed slightly less so far this year, but depending on how market rates move, we intend to deploy most or all of our capacity by the end of the second quarter.

On capital management, our capital management philosophy, which we believe is an integral part of managing through the cycles, has not changed. We intend to continue to return excess capital to our shareholders as long as we do not see attractive opportunities to deploy it in our business. In the first quarter, we repurchased 2.5 million shares at an average price of $71.65 for a total of $181 million. At March 31, 2010, we had $810 million authorized for future share repurchases.

Before I turn it over to John for more commentary on our financials, let me update you on our PML aggregates. As of April 1, 2010, our one-in-250 PML from a single event was $719 million or 17.7% of common equity, down from [$733] million at January 1, 2010. This PML and the comparison to the prior quarter is for Northeast wind, and it was due in part to the seasonality of wind programs.

Our Tri-County, Florida, which is usually our highest PML area, was reduced from $750 million as of January 1 to $674 million as of April 1. If we are successful in deploying more PML in the second quarter, we expect Tri-County, Florida, to be our highest PML zone prior to the hurricane season, as it has been in prior years.

With that, I'll turn it over to John for some more commentary. And when John is done, we will take your questions. John?

Thank you, Dinos. For the 2010 first quarter, premiums written by the insurance segments represented 66% of our gross volume and 59% of our net volume, about 4 points higher than the first quarter of 2009.

Property and other short-tail lines represented approximately 50% of our net premium volume for the first quarter of 2010, about the same as a year ago. On a consolidated basis, the ratio of net to gross written premiums in the 2010 first quarter was 80%, the same as a year ago.

Turning to our operating results, the consolidated combined ratio was 96.4% for the 2010 first quarter compared to 86.7% in the 2009 period. The 2010 first-quarter loss ratio of 63.9% included 8.7 points or $58 million of current cat events, which were primarily related to the Chilean earthquake, compared to cat losses of 1.1 points or $8 million in the 2009 first quarter.

The 2010 first-quarter combined ratio reflected 4.4 points or $30 million of estimated favorable development net of related adjustments compared to 6.8 points or $48 million for the 2009 first quarter. The prior-year development in the 2010 first quarter primarily resulted from reductions in shorter-tail property and property cat and other specialty reserves, along with continued favorable development in the reinsurance segment medium- and longer-tail lines from older underwriting years.

These reductions were partially offset by an increase in the reinsurance segment for casualty in the 2008 underwriting year, along with increases in the insurance segment in a small number of high-severity casualty claims from the 2003 and 2004 accident years. The 2010 first-quarter loss ratio also benefited from relatively light claims activity in noncat property classes.

The 2010 first-quarter underwriting expense ratio of 32.5% was 3 points higher than the 2009 first quarter, with a 0.5% decrease in the acquisition expense ratio and an increase in the other operating expense ratio of 3.5 points. The 2010 first-quarter acquisition expense ratio was influenced by a change in the mix and type of business, as well as reinsurance commissions, and also reflected a plus 0.5 points due to net favorable development of prior-year loss reserves, the same as in the 2009 first quarter.

The 2010 first-quarter other operating expense ratio reflects the impact of lower earned premiums in the reinsurance segment and approximately 0.9 points of expenses in the insurance segment, which are not currently expected to impact the ratio for the balance of 2010, while the 2009 first quarter benefited from a higher earned premium base and approximately 1 point of reductions in compensation costs which were nonrecurring.

Operating expenses also reflected costs related to the expansion of the insurance segment's presence in executive assurance and professional liability lines, the expansion in Canada, and the addition of the Lloyd's syndicate.

On a per-share basis, pretax net investment income was $1.67 in the 2010 first quarter, 9% higher than the $1.53 in the 2009 first quarter and 7% higher than the $1.56 in the 2009 fourth quarter. The growth reflects the accretive impact of share repurchase activity on per-share results.

Total return on the investment portfolio was 1.58% in the 2010 first quarter. Excluding foreign exchange, it was 1.98% in the quarter. This return has been accomplished while maintaining our investment portfolio's average credit quality of AA+. Our duration remained basically the same at 2.77 at March 31, from 2.87 at year end.

Given the significant impact on an insurance company of increasing interest rates, we continue to prefer a shorter duration versus a longer one. With our conservative investment outlook and low yields, we see new-money three-year duration investments at approximately 2.5% to 3.5%.

We were able to increase our participation in TALF late in the first quarter, adding $153 million in assets, with a corresponding increase in TALF borrowings of $128 million. Our total TALF assets are now $407 million, with a corresponding nonrecourse loan balance of $347 million. There are also additions of $90 million to other investments, reflecting new multi-asset portfolios in energy and global investments to further diversify the portfolio. The combined total of other investments and equity method funds remains at 6% of the total investment portfolio.

Our balance sheet remains in excellent shape, and our financial flexibility remains strong, with total capital amounting to approximately $4.8 billion at March 31. Debt represented 8.4% and hybrids represented less than 7% of our total capital.

As of March 31, we continue to hold approximately $600 million to $700 million over our targeted capital level based on current rating agency models with an appropriate buffer. Our liquid cash, short-term investments and US Treasury securities represent about 21% of our investable assets.

As Dinos mentioned, we bought back 2.5 million shares of our common stock under the share repurchase program in the first quarter at an average price of $71.65 or 96% of the average book value per common share for the period. This added $0.25 to book value in the quarter and $2.52 on an inception-to-date basis. Since the start of the share buyback program in 2007, we've repurchased 24.5 million shares for $1.7 billion. We remain committed to efficient capital and insurance cycle management and continue to view buying back our shares when they trade below or close to book value as the best way to use excess capital.

With these introductory comments, we are pleased to take your questions.

Jennifer, we are ready for questions.

(Operator Instructions). Jay Gelb, Barclays Capital.

I was hoping to get a bit more color on a couple of issues. First, premium volume for the second quarter -- if Arch intends to deploy the majority of its reinsurance capacity in the first half, should we expect a decline in premium volume in the reinsurance segment similar to what we saw in the first quarter?

Well, we don't try to project. As you saw from my prepared remarks, it will depend the rating environment what kind of deals we believe make the cut for us. But it's our intention to use our PML capacity between now and the beginning of the hurricane season.

But there is a big "if." I don't know where the market is going to go. Right now, we're anticipating a slight reduction in rates, maybe 5%, maybe 10%. And if it's, 5% we will deploy more; if it's 10%, maybe a little less. If it's more than that, we probably won't deploy as much. But I ceased to be a predictor of the future a long time ago.

Okay, fair enough. And then, next, can you give us a sense of, given where the stock's valuation is, how quickly you might finish up the remaining share buyback authorization? I believe you said $810 million?

Well, it's, you know, in our usual style, and you've seen our performance, usually, third quarter -- fourth quarter, first and second is where we do most of our purchasing. We try to ride out the hurricane season because we have significant cat exposure there and holding on to the capital to see how that happens. So we have no intent of changing that. And, basically, depending where the price is, if we are trading at around book value, as John said, we will continue to buy shares. And we'll try to buy the maximum that we are allowed on an average day.

Okay, great. And then my final question is a bit more big picture. Can you give us a sense of how you are thinking about what type of return on equity Arch can generate in the current environment, assuming maybe a bit more normalized catastrophe results?

We truly believe that we are around the 10%. Part of it is not because our business is not healthy. It's a little better than that, but we're carrying excess capital, so in essence the R might be still adequate, but the E is a little higher than what we will normally have.

But when I look at our numbers and our mix of business, and I think we have a good mix -- I think we are more weighted to short tail than long tail and more to small accounts than larger accounts -- I truly believe that's where we are as an organization. And it's the best you can expect in this market. I don't think this market on a policy basis is giving the industry the opportunity to do much better than that.

That's helpful. Thanks.

Josh Shanker, Deutsche Bank.

I was interested in your PML disclosure and wanted to find out whether or not coming into the upcoming season whether you're preparing that that might change again, or what sort of are the drivers behind the adjustments in the PML?

Well, because it's seasonal, there is more deals that expose us into the Northeast on the January 1 renewals. You saw that our Northeast exposure jumped ahead of our Florida exposure, especially Tri-County, which was always our peak zone.

Because we deployed a little less PML in the first quarter, as I said, if all things being equal, we see the opportunities and what supply and demand the market might show us for the Florida season, probably we are going to increase PML in Florida. And then you know where our risk tolerance is. We will never go over 25% of common equity. But it's a big room between $674 million and 25% of $4 billion. So we've got plenty of room to deploy PML. It will only depend on market conditions.

And do you think in terms of the early chatter that reinsurers might be able to extract a pound of flesh out of Chile or that there's more respect for the risk associated with hurricanes -- I'm sorry, earthquakes?

Well, we've seen a little bit of movement in the Chilean market. As a matter of fact, I have an underwriting team from our reinsurance group going down there in the next couple of weeks to get our boots on the ground, so to speak, and see exactly firsthand what's going on. But so far it hasn't translated to great opportunities for us, even though there is a lot of talk in the marketplace. But we are looking at that. Unfortunately, we haven't seen the Chilean earthquake move attitudes in other parts of the world as of yet.

Understood. Well, thank you very much.

Vinay Misquith, Credit Suisse.

A question on the reinsurance margins. Those margins were really profitable this quarter, 49.1% accident year loss ratio ex-cat. Just wondering whether that's sustainable. And I believe you mentioned higher profitability on the fac business. So if we just normalize that, what should be expected for the rest of the year?

Well, you know, our book of business in the reinsurance segment is predominantly short tail. And we expect to underwrite that business to an 85% combined ratio or better. And sometimes we do a little better; sometimes we do a little bit worse. It depends what happens with either regional cat activity or big cats. But on a normalized basis, that's not a bad number.

Okay, so an 85% combined ratio for the entire reinsurance segment, correct?

Yes, based on the mix of business we have today. And we don't see opportunities for that mix to be changing for the time being.

Okay, and that excludes any favorable reserve development?

Yes.

Yes.

But as we mentioned last quarter, this is going to bounce around more, given we are in shorter-tail businesses now. Property fac can have very low claims in a quarter; it can have some higher claims in a quarter from time to time. So you need to really think about this on a rolling four-quarter average or something versus any one quarter.

Attritional losses might go up and down a bit in short tail. And you put some big limits out, and occasionally in one quarter, you might have -- so I think the profitability we like. The smoothness is not there, but who cares? We underwrite always for the long term. So that's what we focus our underwriters to be thinking about.

Okay, great. And could you give us some color on the adverse reserve development on the primary insurance segment, please?

Yes, it's pretty simple. We had one account that we wrote a lead umbrella on, $25 million in '03, $25 million in '04 was a product involved -- I'll give you more detail than you want to hear -- but that had phosphorus in it. It was in the market for 70 years, never had a problem. And then in -- I don't know exactly, '07, '08, there were starting to be some claims, some allegations that it was causing bladder and kidney problems to certain individuals.

There were several lawsuits. We were defending those lawsuits. We felt pretty comfortable with the outcome. Unfortunately, the outcome went against us. So, in essence, out of one account we had a significant loss, a $50 million gross loss and a net of about 50% of that, around $25 million.

Having said that, instead of us trying to either reduce IBNR and all that, we took it as kind of a cat loss, and we reserved for it fully, and we let it flow through our books. The big question is, should our claims department would've put a bigger number earlier on or later. Listen, based on the facts of how we knew them, and we were very confident, both us and our client, that we had a good case. Sometimes you lose good cases, and this particular one, we've lost it.

So, just to get this right, you had a $25 million adverse development from that one case?

Not entirely $25 million, because we had some reserves, because we thought we might get a settlement. But we didn't think we're going to lose the entire amount for both years, and that was the outcome.

Okay, fair enough. And looking at your primary insurance business, you've been reserving it at a very high level. So I would've expected some amount of favorable reserve development. Is there any reason we've not seen that so far? Have you not looked at your prior years --

Well, we don't look at every line of business every quarter. So all of our casualty is going to be reviewed at midyear. We do the reviews at midyear and year end. So whatever our triangles tell us, we'll take appropriate action in due time.

Matthew Heimermann, JPMorgan.

A couple questions, if I may. First, the conversation we've had around the accident year combined ratio in the reinsurance segment makes a lot of sense. I guess I'm struggling a little bit more with, given the commentary on pricing versus loss costs in primary insurance, that the ratio there is maybe not deteriorating a little bit more than it has. And I guess could you just talk to that and whether or not there are any, I don't know maybe if economic-related reserves or losses are fading, and that's influencing that, but just any more -- any color on that would be great.

Well, you saw how conservative we are on the reinsurance side. So we would rather lose volume than really reduce margins significantly. Not that we're not trying to maintain volume; we try as hard as we can. But sometimes we have a disagreement between what we believe the profitability of the underlying book is versus what our cedents believe it is.

So you see us walking away from some business. And of course, sometimes, and usually, some of our clients, when their book of business is profitable, they retain more net themselves. So that's been our approach on the reinsurance.

Having said that, you've seen our mix starting to change. We're writing a lot less quota share. Not that we're growing the excess of loss that much, but in essence, as a ratio, that has been changing because we don't want -- we don't write as much quota share.

We believe that we're maintaining margins, and we keep looking at the accident year loss ratio in what we do by segment in the reinsurance, and we feel comfortable with the numbers that we have.

Okay, but with respect to the to the primary segment, though -- I mean, the reinsurance makes sense if I look at the percentage of (multiple speakers) property and other, it's gone up, almost doubled. But in primary, if I look relative to, like, the last three years, it hasn't changed all that much.

Well, but don't forget, the mix has changed significantly, right? If you go in our supplement and you look where we are writing business, you will see that there is more property or short tail. There is more A&H. There is more professional liability. All these segments, our professional liability, small accounts, they have a much lower loss ratio.

They do have a higher expense ratio, and that's why you see our expense ratio going up. It's the same thing with the property. Property E&S business has a higher expense ratio because most of that business comes from wholesalers. The commission cost is higher.

So you have to go and analyze the book and the shift in mix that we have before you can see that our accident year loss ratio -- as a matter of fact, our accident year loss ratio improvement this quarter versus maybe a year ago or a quarter ago, which is slight, is mostly because of the change in the mix.

Okay. The other, with respect to the -- I just wanted to clarify something in reinsurance with the quota share in XOL or the less quote share. Is that primarily affecting the casualty writings, or is there some impact on property as well?

Well, property cat is always XOL. Property other than cat, sometimes we write it XOL, sometimes on a quota share. A lot of the casualty lines, especially excess casualty lines, we always like to write on a quota share. When cedents try to move it to XOL, we usually don't find an agreement what is the proper rate. And, for that reason, I think we write a lot less than most reinsurers.

Okay. That's fair. And then, just if I could sneak one other in, I think the increase in the privately held securities that was increased in the quarter, what is it about those assets that you put them in privately held versus the equity method accounting?

Well, John will give you an explanation.

Sure. As opposed to holding them in a mutual fund or something, we actually create a separate account. We get assets in our own account. And we have an outside manager manage it for us in these sort of specialty funds. But then we -- with the book value accounting, we get the full investment income flowing through.

You see, it's our preference not to be a participant in a fund. But if we like the manager and they are willing to do a segregated account for us, that's our preferred way of investing. And we're not always successful, but we always look for those opportunities. And where we find them, we do it in that fashion.

Am I right to assume that even though it's in that account for balance sheet presentation, it will get marked-to-market treatment on the income statement?

No, it'll get marked to market on the balance sheet.

But will that change in value flow through the income statement?

No, only when assets are sold or if they -- certain assets might if they do some -- if they bought a derivative because it's a multi-asset. But there won't be much of that. But the domination of it will be (multiple speakers)

Right.

Okay. Is it actually private investment in private companies or is it broad PE portfolios or (multiple speakers)?

No, it's a broad range of some energy assets and also some multi-asset categories with another manager that can also be a bit global in nature.

But on a segregated account that is only for us.

Yes.

Yes, okay. Are any of the other underlying investments in publicly traded securities or (multiple speakers)?

Yes.

Yes, absolutely.

Mark Dwelle, RBC Capital Markets.

A lot of my questions have been asked and answered, but a couple more still. I know on the acquisition costs, a lot of that moves around as a result of mix. But are you seeing any significant changes just in the underlying rates that you're paying in terms of the different (multiple speakers)

You mean commissions that we are paying, right?

Correct, yes.

Yes, it probably is costing us about -- forget about the mix change. Probably it's costing us about 1 point higher year over year. So I think we are compensating our producers a little better this year than we did a year ago.

Is that both on the reinsurance side as well as the insurance, or--?

Yes, I think there is pressure on both sides. Ceding commissions ask and what we pay in reinsurance have inched up, and also commissions have moved up on the insurance side, too.

Okay. And then the other question is, I'm sure you probably don't know amounts yet, but do you have any exposure on the Deepwater Horizon rig failure?

Yes, we have some exposure, is minimal. I think between insurance and reinsurance on the first-party covers, if it's a total loss, like $800 million-plus for the industry, it probably will cost us around $13 million. On the liability side, we have exposure excess of $0.5 billion.

Too early to tell. First of all, it's a lot of issues as to is the owner responsible or the operator, and how those contracts go, etc. But also is the third-party liability, which is mostly depending if they will plug the well or not and how much oil they would be losing, and will it get to the shore?

Too early to tell about if that is going to be a significant loss. The limits that we have, excess of $0.5 billion, not significant to really to be a big event for us. But that's what we have, and that's what we know so far about that platform.

Okay. Thank you very much. That's all my questions.

Brian Meredith, UBS.

Two quick questions here for you. First one, Dinos, can you talk about how you protect yourself in Florida in the reinsurance business from credit issues from cedents? (multiple speakers) problem, right?

Well, yes and no. It depends whom you underwrite and what you do. We don't have a significant number of these what we call monoline [pops] that might not be able to pay your reinstatement premium, etc. So when you're going to price or you're going to structure the deal, you've got to take that into consideration, that -- are you writing the business with a probability that if you have that event, if you're going to try to reinstate limits, you might not get the reinstatement premium? Because that's where most of your exposure is going to be.

Of course, you might get exposure if you are trying to write it with installments, which we don't like to do. So there is a little bit of risk, but it's part of the underwriting process, understanding what credit risks you have in a particular deal and how to deal with it. We don't write a lot of these small monolines. A lot of what we write in Florida, that comes from the bigger companies and national programs.

Okay, good. And then a second question. Dinos, can you talk about any changes you've seen in the marketplace in terms and conditions in the first quarter? I've heard from some other carriers that things started to weaken up a little bit more.

Well, I just came from a nationwide trip. I visited a lot of our branch offices just to stop being bored in Bermuda. So I visited the US. I'm scheduled to go to Europe in a week.

The flavor of what I got in -- there's been more ask and more request for broadening terms, and at least the E&S market is resisting it. They are losing business because of it. We've seen a more rapid movement of either classes of business that in our view -- of course, it's a biased view, being an E&S writer, belonging in the E&S market and moving into the standard markets. And also, we see standard markets writing a broader contract with less exclusions on it.

But it hasn't affected our book other than volume. And basically, I think it might affect some that the standard markets are writing. But only time will tell if they are making the right calls or the wrong calls.

It's not just price. It's ease of doing business, getting [admitted] paper and not having to collect surplus lines tax and remit it, having a broader contract. Some of that business is moving to the standard markets, and I don't like it, but I know that the market won't turn until that happens. And it's always, in my view, a predictor that we are getting on the bottom of the market.

And I think we have probably reached close to the bottom of the market. And at some point in time, it's got to go the other way, because we've seen these kind of things. But it hasn't got as crazy as it was in '99, for example. This is not 1999 yet. We've got a little more room to go before we get crazy, but not a good market to operate in.

Dean Evans, KBW.

Most of my questions I guess at this point have been answered. I just wanted to tie back a little bit to the discussion we had on the accident year loss ratio. We covered a lot on the reinsurance side. Could you give a little bit of color maybe on the insurance side? That also seems sort of a bit lower than what we've seen for recent trend. Is there anything one-off in there driving it or anything else?

Well, no, it's the change in mix. When you add the components, as a matter of fact, we have inched up accident year anywhere from 1 to 3 points, depending on the line of business, based on what we see from our rate monitoring systems. But the mix is changing by what I said before; we are writing more -- a little more professional liability. We're writing a little more of A&H business. We're writing a little more of even executive assurance, both in the US, concentration in the not-for-profit or small-account D&O. And most of what we do in Europe is all in the SME, which has a lower loss ratio. So I think it's the mix that is causing it.

It's almost the same as it was in the fourth quarter, I think, if you look at the trend. And a year ago, there were some just one-time current-year losses in there. I think there was an aviation loss a year ago that lifted it up a little bit.

Right, some attritional --

There is no material difference really between what we've been doing.

And you saw, we are booking it at about 72 or so or thereabouts, which is what we believe our mix on an accident year is.

Perfect. That's very helpful. I guess also wanted to touch on an item that's a little bit less exciting now than it was maybe a year ago, but the bank loan pools, can you just sort of give us an update on those, where they are marked and kind of how those are playing out so far?

Have you been active at all (multiple speakers)?

They have been performing extremely well in the quarter. We have still on our supplement on page 16 they're $439 million. And I believe they returned about 5% in the quarter. So they really had a solid return. These are senior loans. And as the global economy stabilizes, then these are going to be continuing in better shape.

At this point, how much -- I guess I'm just trying to get at how much upside is there really left in them? Or is -- where are they -- do you know where they are currently marked, or--?

Yes, we didn't print it in this supplement. It's around -- it's slightly over 80%, 85%. We'll see how the global economy goes.

They are not at par yet. But they are very close to where we actually bought them. And we were buying these things at about $0.85 on a dollar before even we delevered some of them. And when we delevered, actually, our costs even went below that. So I don't know if there is a lot more upside to it, but they are performing very well. Don't forget, we are clipping a pretty good coupon on these things.

So we're not -- I'm personally not counting on a lot of upside from this, but it's a good coupon, as Dinos said, and gives us some solid investment income.

Jay Cohen, Bank of America-Merrill Lynch.

Question is on the claims side. You look at your accident year numbers ex-cats, and again, there's a business mix shift, but clearly there is no disturbing trend there. You're still seeing, at least on the reinsurance side, the favorable development. You take this data, it appears as if the claims trends really haven't escalated yet. Is that an accurate assessment?

Yes, you know, the trend is positive. So you've got to account for it. But when we see frequency and/or severity -- listen, forget about the one account that we slipped on a banana peel. It occasionally happens, and it happened to us on that account, '03, '04 writing.

But other than that, we haven't -- I'm not seeing anything in the data that tells me that I ought to worry a lot about frequency or -- severity is going up, but it's part of the trend. And basically we try to adjust our accident year projections in that combination, where we see trends going from a claims trend, and also trying to factor in rate increases or reductions that we're getting.

In a lot of our business right now, we are flattish, a little bit plus, at least for our book. Of course, as I said executive assurance in the second quarter and property brought the overall aggregated to a minus 2. That's not a good number in a soft market to be still losing a little bit of rate. And then you have to make up for claims inflation for the trend. So things are getting slightly worse. The margins are getting slightly worse. But that's the environment that we live in.

But clearly, you guys are obviously, as evidenced by the declining premiums, you are allowing business to go and instead buying back stock, which (multiple speakers)

Not easy to do, Jay. Sometimes when I go home, my wife beats me up.

Ian Gutterman, Adage Capital.

I thought you were going to be quiet, but it never happens.

I'm almost out of questions, but I have a little bit left. First, can I get you to clarify this? It sounded like you said that you have $500 million of liability on the oil rig. I assume you meant the market does?

Yes. If the first-party loss, which is over $800 million or so, goes, which we believe is probably a good outcome, our net exposure to that is $13 million.

Right, but on the liabilities, you said something about $500 million. You sounded like you said that was your line.

No, no. $500 million -- we were excess of an attachment point of $500 million.

Excess of $500 million. Okay. What's your line size on that?

It's difficult on -- the reason I'm hesitating is because on the reinsurance, I don't know how many of our clients they [have at position] yet. So, very hard for me to count, but our limits of what -- our line size of when we participate in these treaties, they are small. So it's not going to be a significant event for us.

Got it. I was just checking. Okay. So just following up on the whole accident year topic, and I guess on the reinsurance, that 85% normalized you talked about, is that -- what's the cat load involved in that?

The cat load is about 18, 20 points, normalized cat load.

Okay. So I guess what I'm looking at, when I'm looking at your accident year ex-cat for the last several years, it's been in like the 83% to 85% range.

Yes.

So if I throw -- but you're saying with cats it's an 85%, no?

Yes, with normalized cat, that's what we expect. That's where we're pricing that business, yes.

Right, but I'm saying when I look at it ex-cats, right, if I look at what you reported accident year ex-cats in the reinsurance.

In the reinsurance side?

Yes, for like the last four years -- 83% in '06, 83% in '07, 85% '08, 84% '09.

I don't get to those numbers unless you're looking at the total book, including the casualty book.

Okay. Well, I'm looking at the reinsurance segment. So you were just talking about the property segment (multiple speakers)?

That's correct, that's correct.

Okay, okay. I thought that 85% was (multiple speakers).

No, no. I hope we're that good, but I don't think we are.

Okay, that's why I wanted to clarify that.

It's just the property, right.

Okay. That makes more sense. And what sort of -- when I look at the accident year ex-cat this quarter, I think it's the lowest you've ever had almost. And I understand there were a lack of attritional losses. What's sort of like a normal attritional loss load?

Well, we have a normal attritional -- depending by class and all that that we underwrite to, when we report numbers, is whatever happens. In some quarters it's a little less, and in some quarters it's a little more.

So we don't publish our numbers based on expectancy. We based our numbers on actuals, right? So I'm not trying to avoid your question, but if I am writing let's say a homeowners' quota share with a cat load, maybe the attritional, it might be in the 30%, 35%, sometimes 40%, depending on what part of the country. And then I have a cat load that it might be maybe as low as 15% or as high as 20%, depending if it's wind cat or it might be middle of the country and it's more tornado/hail cats.

So there is a lot of determinations that goes into our pricing when we price a particular line. And then, when you aggregate all these deals and you come up with your annual expected attritional for that year, and it might change on you the following year because the deals change.

Right. The reason that I'm asking is --

I know why you're asking. You want to build your model, right?

Well, no, no. What's interesting is, pretty much everyone who has reported so far has shown improved accident years. And a lot of the argument from most companies has been the attritional loss. But there's been other quarters where there's been light losses and we don't see this kind of improvement. And given what's gone on in pricing over time, you would think accident years would be getting worse.

Right, but don't forget, a year ago that you're comparing me to, and we mentioned in our call, if you go back and look at the transcripts, we had unusually high attritional losses a quarter -- a year ago.

(multiple speakers) I'm looking at the trend, to be honest, not just pure year over year. I'm just looking at where it is now versus the past four to six quarters. And it seems everyone is doing better than that, which, thinking where pricing has gone, you would think everyone would be taking PIKs up. And I guess I'm just wondering --

Well, probably everybody -- and we agree with that assessment on the -- let's face it, the executive assurance, the D&O world probably had worse years in '07/'08 because of the financial crisis. '09 and '10. they're going to be better numbers. We might have disagreements. Some, they're more optimistic than others. But I think that has improved. Even though we are competing so hard with it, maybe whatever improvement, we might be giving it back because of rate reductions. But we try to see where that's going. But other than that, I --

And the shift from long tail to short tail in reinsurance is quite a big shift over the last three years if you think of the mix. And that's going to affect the current accident year loss PIK.

Okay. No, that all makes sense. It's just I want to make sure that we're not just attributing everything just to a light attritional quarter (multiple speakers).

There's the mix. The mix.

Yes, okay. Okay, that makes sense. I think that's all I had. Thanks.

There are no further questions at this time. I would like to turn the call over to Mr. Iordanou for closing remarks.

Thank you, Jennifer. Thanks, everybody, for listening to us. We're looking forward to talking to you a quarter from today. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.