濱特爾 (RNR) 2003 Q2 法說會逐字稿

Good day everyone, and welcome to the RenaissanceRe Second Quarter Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I’d like to turn the conference over to Miss [Laura LeClair]. Please go ahead [Laura].

Good morning. Thank you for joining our second quarter 2003 conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn’t get a copy, please call me at (212) 521-4859, and we’ll be sure that you get one.

We’ve reserved an hour, as customary, for today’s call. There will be an audio replay of this call available today, beginning at 12:30 p.m. Eastern, through August 2 at 8:00 p.m. The replay can be accessed by dialing (888) 203-1112, or (719) 457-0820. The pass code you will need for both numbers is 455964. Today’s call is also available through the Investor section of www.RenRe.com, and will be archived on RenaissanceRe’s Website through midnight on October 8.

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 the factors shaping these outcomes can be found in RenaissanceRe’s SEC filings, to which we direct you.

With me today, to discuss today’s results, are RenaissanceRe’s Chairman and Chief Executive Officer, Jim Stanard, and the company’s Chief Financial Officer, John Lummis. I’d now like to turn the call over to John, to begin with an overview of the financial results. John?

Thank you Laura. Renaissance again delivered a very strong quarter. Looking at our operating EPS of $1.75, we’ve obviously out-performed relative to street expectations. And that’s driven by a below cat loss quarter, to which we attribute about $0.25 of earnings, comparing a low cat loss environment that we had with the result from normalized cats. And we also, obviously, benefited from the foreign exchange gains that you see.

Our operating ROE was just under 29% for the quarter. And we delivered growth and book value per share of over $2.50 – over 10% growth in just one quarter. That’s thanks both to strong operating performance, as well as our investment results.

The high level view of our top line is that the individual risk segment is increasing momentum. Compared to last year’s second quarter, gross premium here is up over 28%, to $98m. By contrast, as we suggested in the first quarter call, reinsurance premium is off from the second quarter, compared to last year.

In the case of managed cat premium, which was $104m in the quarter, off 28% versus last year, that decline is driven largely by timing differences, arising from about $38m of premium that was booked in Q1 this year, which had been booked in Q2 last year.

For the specialty reinsurance book, the decline is explained by two factors. First, about half the premium decline arose from timing differences, representing transactions that were booked in Q2 last year, that are booked in other quarters this year, mostly Q1.

The other half represents three deals that we did renew this year, principally because we chose to decline due to pricing considerations. But I do want to underscore that we’re simply talking about three transactions. And it would be a mistake to draw broad market trends from those three transactions.

We’ve cautioned in the past that premium growth can swing from quarter to quarter, based on a few larger deals. And that essentially explains the big upswing in the first quarter of this year, and also explains this second quarter. You will recall that the first quarter had very elevated reinsurance growth rates, very high double-digit growth. And it’s more reasonable to look at the six month periods, for a better sense of trends.

A few other comments on the revenue lines for the quarter. You will notice that we’ve seeded significant premium in the quarter, a total of almost $52m. That mostly relates to our catastrophe portfolio. The second quarter has historically been a busy time for sessions. All told, net written premium declined by 20% in the quarter, roughly in line with, and driven by the story around gross written premiums. Net earned premium continued to grow, given the overall ramp up in our business in the first half.

To see the impact of our joint ventures and fee business, I’d point you to the table in the supplemental financial data in the press release. That’s the one labeled Summary of All Income from Joint Venture Relationships. There you will see the fee income grew to $15.6m, compared to $14.7m in last year’s second quarter, which is also a light cat loss period. The growth is modest, due to the way we’re calculating the profit commission. But long-term, we still a very positive story around this fee business.

Turning to the subject of losses for the quarter, as we indicated, we experienced light cat losses, consistent with general industry experiences. And we’re estimating around $18m of benefit from that – about $0.25 across the relative business units.

We saw our other businesses running essentially as expected in terms of losses. We’re booking individual risks and specialty in the mid to high 50s this quarter in terms of their loss ratios. And we view that as conservative. We have taken down a total of $13m in reserves across all our businesses in the normal course.

Looking at the investment side, we are faced with an environment of lower interest rates. And, not withstanding that, our investment income has stayed roughly on track as a result of two positive factors. First, our cash flows continue to be very strong. And secondly, our allocation to alternative investments has done quite well.

In particular, as noted in the release, we’re reporting the mark to market gains on our hedge fund and private equity investments through the investment income line. And that contributed $6m in the second quarter, and $3m in the first quarter. You will notice that we continue to be cautious in positioning our portfolio against the risk of the rising interest rate environment. And that explains the bulk of the increase in short-term investments.

You will notice that we had over $55m of realized gains in the quarter. And that largely reflects sales from our portfolio moving towards a more defense posture. As an example of that, among other things, we have exited from our mortgage backed securities portfolio.

Our portfolio duration is now 2.1, as of June 30. And we will continue to monitor our short duration strategy. So far we’re pleased with the results. Our total investment return for the quarter was 2.7%.

To close, I’d like to summarize the key factors looking forward, starting first with RenRe’s premium outlook. We see cat premium off somewhat, compared with our prior expectations. The good news that I don’t think should be lost – we continue to look for net written cat premiums on RenRe’s own balance sheet to grow around 10% for 2003, compared with 2002. As mentioned in the press release, we are currently projecting gross managed cat premium to be flat for the year.

Looking at specialty premium, we see that premium will be essentially in line with prior expectations, growing by around 20% on a gross managed basis. I would here like to underscore one point relating to both catastrophe reinsurance and specialty reinsurance. And that point is that if you take out our full-year premium projections and back out from those projections the first quarter’s very strong growth, you will necessarily get declines in the following quarters. That’s just how the math works. And I want to be sure that that’s well understood. That, again, is not to say anything negative about the trends for the year, but just to comment on how the quarterly premium is coming in.

Looking at our third component of premium in the individual risk business, we’re clearly seeing a real up side on the top line, beyond our original expectations. We’re expecting premium growth of over 40%. And for the second half of the year, we envision that specialty casualty lines will drive that growth. You will recall that we had previously indicated growth of 20% for ’03 against ’02. So we clearly have ramped up expectations here.

Looking at our earnings expectations for the year, we have increased our operating EPS guidance, large as a function of this year’s light cat loss activity, as well as the favorable impact of other factors, including growth in net [inaudible] per year, and the foreign exchange gains. We’re clearly making an assumption of normal loss activity for the balance of the year on the guidance that we’re giving. And I want to underscore that.

A final point, in getting to the $6.35 to $6.60 range, we’re also making a judgment that we will have some additional up side. And we’re making a judgment it will be around $0.30 or so, from one of several possible sources. And that could be our deal pipeline, or it could be improving performance in our current core businesses. So we remain very optimistic as we look forward. And at this point I would like to turn the call over to Jim.

Thanks John. I want to start by just summarizing some points about premium, although John really covered all the facts. But just to go through the three areas again, on property catastrophe, through six months, essentially all the differences in the second quarter were timing of bookings, so that the first six months went essentially as we had expected. And we held our own on renewals.

For the year, we are making a downward adjustment in our projections. So we’re being more pessimistic on the cat side, moving it from up single digit to flat for the year. And that is based on what we saw happen at 7/1, that our contracts can be lumpy. We did lose – we chose to non-renew one very large transaction, due to price competition. And a couple of smaller things moved around. But, based on what we’ve seen happen at 7/1, that’s causing us to adjust our full year view on cat to stay flat.

On specialty, through six months, really the surprise, to the extent that it was a surprise, in premiums being under what we projected, came really from, as John said, three contracts that were basically terrorism covers. And with the passage of TRIA, that market has changed quite a bit. So I don’t see that as a trend. I see that as a one-off kind of circumstance. However, for the year, we have enough optimism, with what we see – the deals we see going through, that we’re sticking with our previous projection of up 20%.

Finally, individual risk is exceeding our projections. Through six months it was up 55%. And now we’re increasing the projections from the year, from previously saying up 20%, we’re now saying up 40%, because that’s going very well. So the cat is going modestly worse than expected. The individual risk is going better than expected. Specialty is where we expected it. That’s how I see the premium story.

Turning to market conditions, and trying to compare where – how do I compare this quarter, view the market now, versus where I was three months ago? I do have to say that the market is – the softening in competition in the market is, to some extent, worse than what I would have expected. The cat market is softening to some extent. If you have to pick a number, I’d say down in the range of 10%, or maybe – but it varies quite a bit by territory and program of course.

But due to our strong position in the market, and the quality that we represent, we held our own in the cat renewals in the second quarter, as I said. Special re, similarly there was growing competition there. But we are strongly benefiting from the flight to quality there. And I’m still optimistic about our prospects for continuing to build that business.

On the individual risk side, once again, there is growing competition. However, our growth is very strong. In fact, we’re – it’s growing faster than we had previously expected. The growth so far has come – through second quarter has come, with short-tailed business. We have some specialty casualty business coming on line in the third quarter. But on the individual risk side, I would still say that the pipeline is bulging with opportunities there, even in the face of some more competition in the market. Our joint venture activity is still quite active. But at this point we have nothing new to announce.

In looking forward, I just want to go back to our track record for a moment. We have a track record of growing early as the market hardens. We are the only cat market that I’m aware of to grow in 1999. We’ve had strong growth since then. And we do have a track record of cutting back when the market softens. We’re not at that point yet in my view. I mean we are seeing some competition, some softening. But it’s not to the point that we feel that we need to start cutting back our top line due to that. It’s more an individual deal here or there we don’t like the pricing on.

I believe we have the strongest balance sheet in the business relative to our capital size. We have a great reputation with our clients for quickly paying claims and responsiveness. And those things put us in just a tremendous position as the flight to quality continues, because we’ve got a very peculiar situation in the market, where on one hand we are seeing, as I said, a surprising amount of competition.

But the issues that caused the market hardening haven’t gone away, in my opinion. There’s still a lot of balance sheet questions out there, and a lot of uncertainty. And that means that a company like Renaissance, who is viewed as a very strong balance sheet and high quality, is where clients want to do business. And that makes me continue to feel bullish about our prospects. So with that, I’ll open it up to questions.

Operator, is the floor open for questions?

(Caller instructions.) We’ll pause just a moment to assemble the roster. We’ll go first to Michael Lewis, UBS.

Good morning. Jim, maybe you can expound on the competition side of the equation. You said it picked up in the last few months. You were surprised. I’m not asking for specific names. Can you tell me where the competition is coming from? Or can you define it a little better?

And another question is, I know you can’t look out that far, but based on the trends you’re seeing now, and the fact that a lot of your business is short-tail business, what is the ramifications, looking out beyond the next six months? And again, you’re a very controlled writer of business. And you pulled back early, you say. Would that affect meaningfully the trend on the growth side in the managed cat business?

Well, to answer the second question first, yeah. I really – my crystal ball for January 1 is kind of cloudy, because first of all it’s going to depend on loss experience over this quarter. We’ve had one good year in a row. And so the market is feeling good about cutting some prices. But there will be losses. And when those happen, we need to see how the market reacts.

Secondly, I don’t think the balance sheet issues have been put to bed yet. We’ve continued to see ratings downgrades. And how that plays out, and how that affects January 1 business, I am – I don’t know. So those are kind of wild cards in the equation.

The first question about where the competition is coming from, I don’t think I want to – obviously I’m not going to name names. So –

What was the start-ups – [inaudible] – are they aggressively seeking business? I mean you don’t have to tell me a name or so. But is it very widespread? Or is it just a few names here and there? Can you give any kind of tone to what you see in general? Because you were kind of surprised by the change in the climate, so to speak. I mean I got that message.

Yeah. And I think I really would prefer not to generalize about where I see it coming from, because the generalizations are always going to be unfair. And it’s more just a series of individual decisions of organizations seeing, hey, let’s get some more top line. So I really can’t comment.

Okay. Thank you.

We’ll take our next question from Marco Pinzon, Smith Barney.

Good morning. Just a couple of questions. First of all, John, I was wondering if you could expand on your alternative investments. What kind of strategies are you looking at there? What kind of funds, or how many funds? And it strikes me that it might be adding an element of increased volatility to your investment income stream. What, if anything, are you doing to protect or hedge yourself against that?

Okay. First of all, I would say that we’ve had this allocation now for some time. We gave it visibility this quarter, simply because it was a notable factor in investment income, and we wanted to be transparent around that.

The current allocation is $90m, a little bit over that, in hedge funds; $20m funded into several private equity funds. Most of the gain this quarter was driven by the hedge funds. And we have, among these funds, attempted to put together a diversified portfolio, with a range of different strategies. And so we’re not making a bet on any single fund. It’s not that kind of play at all, but more a diversified strategy.

Clearly there is volatility in the returns on these funds. But our judgment is that over time there clearly can be expected to produce incremental returns that compensate for that volatility. And what’s more, that volatility in general is not that tightly correlated with the rest of our investment portfolio, and moreover bears virtually no correlation with the cat portfolio. So in terms of the portfolio characteristics, looking at the combined investments and liability portfolio, it actually is a very favorable addition.

Okay. And then, Jim, you had spoke about some specialty casualty business that you expected to be bound or come in the third quarter. And I think you were referring to individual risk at that point. Is that the case? Are you looking to write some specialty casualty on a primary basis? And can you give us more color on that?

Yeah. Thank you for correcting what I said in terms of the terminology. It is an individual risk area. I was using the term specialty generically, not referring to our specialty reinsurance segment. But I realize that’s confusing. It is in the individual risk area. But I wanted to describe it as some specific niche classes, as opposed to a broad range of business.

Now moving from individual risk to specialty reinsurance, we do look at casualty programs on the specialty reinsurance side, although currently our specialty reinsurance book is very heavily short-tail oriented. But we will write some casualty business in that book. We have written some, and we would continue to write some.

Okay. And then just two numbers questions. I just wanted to make sure I heard it right. Did you mention in your prepared remarks John that it was $13m of positive reserve development you recorded in the quarter?

Yes. That’s correct.

Okay. And then the loss ratio on the individual risk business – was it in the mid to high 50s?

That’s also correct.

Okay great. Thank you very much.

And we’ll take our next question now from [Zenay Saki] at Morgan Stanley.

Good morning. Just a quick question on thinking about the outlook as we head into 2004. Given that property cat I guess is still a significant portion of the business, and where pricing is today, and assuming let’s say a flat environment from here until next year, is it possible that your growth outlook for 2004 could be down from 2003? And could that affect, I guess, the way you utilize capital as we look at 2004?

If the market is flat, based on that assumption, I don’t think we would be down. I mean it’s going to – it will depend on a handful of big deals, and whether buyers choose to restructure their programs. But my expected value guess would – because we continue to be able to gain market share, because of the flight to quality, and there still is plenty of business that we feel is adequately priced that we’re writing, I think if the market is flat I would not expect us to be down. But if we were, it would be because of some random, big program losses.

So from a cat standpoint, it seems as though if the market is flat, you still think you can grow share in 2004?

Yes.

And then in terms of terrorism risk, is there a significant portion of terrorism risk that you wrote in the second half of last year that we should know about?

No. No. I don’t – this loss of business in the second quarter and specialty re due to those three contracts, we don’t see that repeating itself in the third quarter, if that’s your question.

Yeah. And then the final question is, if we look to 2004 again, individual risk I assume will be a much bigger portion of the total pie.

Yes.

Okay. And then how are you guys thinking about the margins on that business, and the fact that some of it is going to require float in the returns on that business relative to what you’ve historically written?

First of all, the comment on returns, we basically put all business opportunities up against the same framework for assessing return relative to risk. So there’s no difference there. In terms of the margins, there will be a trend upward in combined ratios which, obviously with casualty business coming, will be a larger piece of that business.

So the combined ratios that we talk to, just on a pure property basis, have been 80, although that can move around with the occasional large loss or so. Whereas the casualty, at this point I would be looking to see more in the 90 range. But details to come obviously. We’re going to be making those decisions around the specifics of each situation.

Great.

We are – I mean we’re looking at that – I want to reinforce John’s comment, that we’ve looked carefully at the financial model, given today’s interest rates. And also, given the fact that casualty business, from a capital utilization point of view, you can’t look at just this year’s capital. When you put loss reserves on the book, you have a stream of capital into the future that is being utilized by those loss reserves. And we’ve taken all of that into account, and finding business that meets our hurdle rates.

Great. Thank you very much.

And we’ll go next to Lee Cooperman at Omega Advisors.

Thank you very much. I apologize if this question was asked, because I had to leave the call for a few minutes. But in terms of the capital that we’re generating, a) how generally do you view your capital adequacy presently? And second, how would you think, over the next 12 months, you’re likely to use the capital within the firm. And I’m obviously referring to the alternatives of writing more business, paying out large dividends to shareholders, or stock repurchase. Do you have any sense of how you would prioritize those alternatives at the current time?

Sure. Well I’d first comment, I think we’re at just the place we want to be today. We do have – we look at our actual capital relative to allocated capital from our risk model. And there is some excess. And we like to see some excess, so there’s a little room for growth. And indeed, we have, I’d say, some dry powder at the moment.

As Jim alluded in his comments, we are looking at a couple new business opportunities down the road. And so I think it’s constructive for us to have some dry powder to be able to allocate to those. So, taking those into account, I think we’re in the place that we want to be today, looking forward probably for the next quarter or two.

And I think the way we approach capital at this stage really is I hope the way you’d like to hear it, which is we look hard at what is truly excess. And then if that excess grows to the point of burdening our returns on equity, then we try to manage it. That’s not something that I think is today’s business. But it is certainly something that we would look at down the road, if we really see returns being burdened by excess capital.

And I think there are circumstances where we could choose to be opportunistic with capital management. If there was some unique market pricing dislocation, then I wouldn’t discount that. But I don’t think that is today’s business. I think that’s more a question for 2004.

I will also say that our broad philosophy is that we do not feel pressure from capital to write business. And we write as much business as we can, and then solve for capital behind that. So the build-up in excess capital is not going to put any pressure to write premium. That’s not how we think about the business.

What about – what is the board’s philosophy regarding a dividend? Our payout ratio is quite low. And our yield is relatively low. Would you say that there is a philosophy that favors repurchase versus dividends? Or that’s an open question.

I would say the philosophy certainly historically has favored repurchase. And I think it’s likely to favor repurchase going forward. The reason is, I think we very much like the flexibility of a low payout ratio, and a relatively low dividend, so that, say post a large cat event, we have the capacity to retain capital and build the business up, without disappointing anybody with a dividend cut.

So I think we’re likely to maintain that bias, just for capital flexibility. So I think that removes the debate between share repurchase and special dividend. And I think, for the long term shareholders, a share repurchase is likely to remain the more attractive technique for us.

Okay. Thank you very much.

We’ll take our next question from Tom Cholnoky at Goldman Sachs.

Yeah John, I just wanted to just pursue a little bit more the casualty focus, which you obviously outlined in your Q, because if you talk about the market, you are – you hear more about RenRe coming into areas such as finite programs and surety and workers’ comp. And I think you alluded to the loss ratio differential.

And I just wanted to understand that as you potentially grow that business, if the cat premiums stay relatively flat, we should assume -- I assume we should think that your combined ratio will trend higher, given that the casualty businesses do carry higher loss ratios. And I am just wondering if you could just delve into some of these areas in specific that you are – that I hear in the marketplace that you’re pursuing.

Actually, let me clarify one point there. And then, once again, this is clarifying specialty reinsurance versus individual risk. The classes that you mentioned, from sort of market rumor, are classes that typically we are writing in specialty reinsurance, not in individual risk. I think, having said that, in terms of answering your question about the loss ratios, John, you want to take that one?

Sure. Your assumptions, in fact, are right Tom for the casualty component growing. That’s going to have a higher combined ratio. And so you’re going to see, everything else held equal, be consolidated, combined, moving up with that.

Did you mention a 90 combined ratio? I thought you mentioned a 90 combined on I think it was [Zenay]’s question. Is that right?

Yes. That was a crude ballpark pick for specialty casualty. But it could well be south of that, depending on business mix.

And your views on finite – is that an area that you’ve been pursuing as well?

Not – we have done a small number of significant what I’d call structured transactions. But not the – we have not been that active in the – in what I would consider to be the mainstream finite market of low risk, low margin transactions. But there is a number of other companies that are much more aggressive on that business. We tend to be more effective on transactions that have more meaningful risk in them, and where we can get paid for bearing that risk.

Okay. Great. Thank you.

We’ll take our next question from [J.F. Trembly] at Credit Suisse First Boston.

Hi. This is Charlie Gates here. I have one question. Jim, in your prepared remarks, I believe you opined the catastrophe market is worse than we had expected. Could you simply elaborate on that? And in your answer, would you opine as to what kind of adjustments from a generic standpoint you think people might be seeing?

Well, I think in just comparing where I was three months ago, I think I was saying there is more capacity, there is downward – which is putting downward pressure on pricing. But let’s see where the programs end up actually getting placed. And so at that point we hadn’t see the 6/1, 7/1 business actually being completed.

Now, having had that data, I am mildly disappointed, in that I said that roughly it was down 10%. And I could have foreseen a possible situation where it was closer to flat. So that’s the difference in my point of view now, versus what it was three months ago.

And going further, I think I commented on my crystal ball. I’m not sure I can add anything to that. I think it’s the – the big issues are where does the balance sheet problems play out, the ratings downgrades and flight to quality. And secondly, we’re going to have losses sooner or later. What are those, and how do they impact the market?

Is this roughly analogous to what the world looked like say in 1996?

Well, that’s an interesting question. I mean I could say yes pretty quickly. But there are different issues. I mean in ’96 you didn’t have the balance sheet issues still as a – overhanging the market. You had people feeling pretty darn good about their capital.

So I mean I think there is a much more fundamental sense of unease in the market, a concern about credit, than there was in ’96. On the other hand, I think the parallel to ’96 is the growing amount of capacity that wants the business. So some things are the same. Some things are different.

But seemingly, isn’t one important difference that now you’ve got 16 new competitors that you didn’t have back in ’96, post the 911 event.

Well, I mean in ’96 you had – there was the class of ’93. And at that point, a number of them were growing – interested in growing top line. You also had the Australian market coming in with totally irrational pricing in ’96, which we don’t have now.

I mean we don’t have anything that’s parallel to the Australian market, in the ’96 market in our current market, that’s just totally off the wall pricing. I mean we have prices that we don’t agree with. But we don’t see things that we think are just extremely unsound.

Thank you very much.

And we’ll take our next question now from Jay Cohen at Merrill Lynch.

Actually my questions were answered. Thanks.

We’ll go now to Brian Meredith of Bank of America.

Yeah. Good morning. I have a couple of quick questions here. One, on the topic of pricing again, could you give us a breakdown, Jim, of international versus domestic? Is there any differentiation between what’s going on in the property cat reinsurance markets?

I wouldn’t say a whole lot, other than peak territory prices tend to stay firmer than those in territories that are not worldwide peaks, for obvious reasons. The non-peak business is the first people want to get to diversify their portfolio. But no, I think my comments roughly apply both in the U.S. and non-U.S.

Okay. The next question is you’ve talked about pricing. What about what’s going on with retentions out there? Have there been any changes in retentions or terms and conditions in contracts? And then with respect to your portfolio, would a change in kind of where you’re playing on programs have had any impact on the year over year comparisons?

Nothing. No significant change in the composition of our portfolio. I mean it always moves around on a micro basis. But there are no big trends. And in terms of retentions, I think many of the buyers now are sitting back. We certainly have come out of the period of time where there was a lot of pressure on the buyers just to complete their programs, concern about capacity. I mean that part of the hard market is clearly over.

And now buyers, I think, are more looking at the whole structure of their program, considering whether to buy on an individual territory basis, buy on a combined basis. I mean we do see some moves towards buyers taking out a clean sheet of paper and saying let’s look at the entire design of our program.

So, to that extent, there can be some big changes. And that can cause – that’s a source of lumpiness for us. We can lose some programs, or we can gain some programs. But I would say that type of activity really plays to our competitive advantages, because we are considered to be one of the prime markets to work closely with buyers when they are looking at that type of restructuring, because of the kind of modeling and what we can give, and the flexibility that we give in program design.

Okay. The next question is related to DaVinci. I believe when you established DaVinci, you kind of viewed it as potentially a contemporary kind of a company here, to absorb capacity shortfall in the industry at the time. As we look forward here, is it reasonable or unreasonable to expect that DaVinci may be actually a source of premium for you all going forward, if indeed you’ve got the capital and you don’t need to lay off the rest of the DaVinci?

Well, let me clarify one thing. I mean DaVinci is a permanent company. We view it as a permanent company. We view it as potentially a capital base that can grow or shrink. But we certainly don’t view it as a temporary company in any sense.

Now what we are going to do with that capital base in terms of growing or shrinking, that’s a question we’re looking at closely right now. And I don’t have any conclusion to report. But that’s obviously a question that we would look at as market conditions begin to change.

I guess my question is if I look out let’s say into 2004, and pricing is flat, would you, instead of allocating on a particular program, let’s say you take 20 and you give DaVinci 10, would you actually take that 10 onto RenaissanceRe’s balance sheets in ’04? Or would you just continue to keep the same type of line size?

Yeah. We like stability. And our clients like stability. And our joint venture partners, we also – we have a bias for trying to be – provide stability. So I mean unless there was a reason to change, we would – if the market was flat, we’d just keep doing what we were doing. We’d keep the – the buyers have chosen to sign DaVinci on for certain shares of programs. And we would – our bias would be to keep those programs in DaVinci.

Okay. And then last question, for John, operating expenses in the quarter up a couple million sequentially. Anything unusual in those numbers?

No. I would say that really just reflects the general ramp-up in the business, compensation-oriented from incentive comp.

Great. Thank you.

We’ll go next to Alain Karaoglan, Deutsche Bank.

Thank you. Good morning. I have a couple of questions. John, you mentioned that basically what we used to call luck this quarter accounted for $0.25 in the second quarter. How much would it have been in the first quarter?

We pointed to about $0.35 in the first quarter.

So for the full year so far, it’s around $0.60 that is in your $6.35 to $6.60 guidance?

That’s right. $0.55-$0.60.

The second question is what is the assumption that you have on the yield in the investment portfolio embedded in your guidance?

At this point the portfolio yield is a little bit under 3% that we’ve been working from. This quarter obviously did better than that for us. And I think it’s a fair point to question how readily that can be sustained. I will say that that number is going to be pretty sensitive to market conditions. And if you assume a low interest rate environment for the rest of the year, that’s going to speak to one outcome. And use in the back-up, that will speak to something else.

But what’s in your guidance?

In our guidance, we’re assuming around 3%.

Okay. And if I can revisit a little bit the capital issue, you had raised a couple of hundred million dollars earlier on in the year that you hadn’t utilized by the end of the first quarter. Your net income so far in the second quarter is $180m. And the business hasn’t grown. So that’s another – so we’re almost at $400m of additional capital.

And in the second half, you ought to generate another couple of hundred million dollars. Do you believe you can utilize that capital in the next three quarters? Or do you see it as we will get significant excess capital in three quarters?

Well we have – and there are two areas that actually we’ll absorb capital looking forward. One is the ramp-up in individual risk. The entities are separately capitalized, and may well call for extra capital, depending upon how they grow. And then secondly, we’re working on a couple situations that could call for some excess capital.

So I think if you just look at allocated capital relative to actual capital, there is excess. And as each quarters grows on, the excess grows. But I don’t see that we’ve got an issue for today. I mean I would acknowledge looking out we may well have issues down the road. But it’s not today’s business. And it’s not at today’s stock prices.

And I’d just like to add, because there have been a couple of questions about this excess capital question, that we have our internal ways of measuring capital. But I also think – and John alluded to this before – that as long as we are at the highest return on equity in the worldwide property and casualty insurance business, which I think we currently have, I have trouble thinking that we really have excess capital from a practical perspective.

So I really would start being focused on the excess capital question when it’s hitting our actual ROE and our ability to generate the well above average ROEs in the business that we have in the past.

Okay. So you think you’re going to be able to utilize a good portion of that capital in the next few quarters? And your ROE is always high. So you always generate a lot of capital every quarter?

Right. I guess I’d put it maybe a little bit differently. I think there is a good enough prospect for us to be deploying that capital, that it makes sense to be where we are.

Okay. And in terms of the reserve release of $13m, any specific lines of business or any specific year that you released it from?

Yeah. Really cut across essentially all business units. And I don’t know there’s anything that particularly deserves comment there.

Okay. Thank you.

We’ll go next to Steven Gavios at Dreyfus.

Good morning. It seems a lot of the disappointment on the premium side relates to historical stuff that we all wish we knew, but we didn’t. Is there any other stuff in coming quarters that we’d wish that we know, that you can talk about, with regard to anomalies?

And the second corollary question, with regard to the specialty reinsurance, I think you’ve done a good job of explaining why it fell, but not as good a job explaining why it didn’t grow. A lot of us have been hearing about pretty strong market conditions. And we all know about your talent and your presence. Can you talk about why there weren’t more opportunities that you thought were good for you to write in the specialty reinsurance business?

I’ll answer the second one first. And John can answer the first one. We are seeing more competition in the market. So I would say the market conditions are not quite as favorable in the second quarter as I viewed them three months ago. So some things that we may have been looking at, areas that we may have expected to grow, we chose to take a pass on.

However, I want to emphasize that that comment doesn’t mean that I am turning pessimistic about our prospects in this business. I still think we’re going to grow at 20% ’03 versus ’02. I still think we’ve got very good prospects of continuing to grow the specialties that we’re in, and also look at some new types of transactions, some new specialties.

And because of the talent we’ve got, because of the very strong position we have with our brokers and clients, and the flight to quality, it really puts us in a strong position to see this business. So the market is not as wonderful as I might have hoped. But I’m still optimistic that we’re going to be able to grow in this area. But it’s – I mean it’s – the growth requires selectivity. It requires selection. And so it’s going to be lumpy.

And I guess, Steve, I’ll try to take your question on what to expect for the future quarters. And I think I’d back to a comment in my prepared remarks. If you just – if you look at what the first quarter was, say in specialty, we grew, just inside Renaissance, $85m, an 84% growth rate. And then we also had just under $20m in DaVinci. So we really had phenomenal growth in specialty reinsurance at that time.

And, notwithstanding that, at the time we also pointed to the fact that we anticipated 20% plus or minus growth in managed premium for the year. So it’s just impossible to connect that huge growth in Q1 and the 20% growth for the year without seeing down quarters against the prior year for Q2, Q3 and Q4. So I will predict for you right now that unless we see some up side, and we might, from the factors Jim’s talking about, our current projections would show that there will be decline in Q3 and Q4 of ’03 against last year. There’s up side potential. But each of those will show declines in the range of 20% plus, often for relatively small premium bases. There’s a little bit less in those quarters.

But that is just the math of what we’re saying. I do think we should be careful not to read into that a comment around declining prospects or an undue sense of pessimism, because that’s really not at all what we intend. This is a first quarter loaded business.

Okay. Well I’m glad you made that clear to us, because that’s important to know. But in terms of things like premiums being booked in one quarter this year versus another quarter last year, or other large contracts that will fall off, or finite business that you’re not intending to renew, anything like that in coming quarters?

Well I think – I mean other than what John just said, that the fact that things are falling, that premium will be down in third and fourth quarter, that has to reflect either – I mean where can that come from? That has to come from those factors that you just laid out. It’s going to be either deals that we know were one-time deals. It’s going to be booking differences. I mean particularly post 911, in the turmoil of the market, there were a lot of – a number of deals that were not 12 month deals, or 15-18 month kind of deals. And that then screws up the quarter to quarter comparisons, when those get renegotiated.

So I guess my takeaway here would be that if you’re trying to think about what this business is doing in ’03 versus ’02, the 20% growth is the direction to fix on. And quarter to quarter, I just don’t think that there should be such a lock on that. This quarter, the decline was really driven by a handful of deals. And we’ll see that in future quarters as well.

Okay. Thanks.

We’ll go next now to Susan Spivak, Wachovia Securities.

Most of my questions were answered. But Jim, I guess I’m just curious, in the past you’ve talked about the fact that of your success has been because you don’t offer the lowest prices during the bad times, and the highest prices during these good times. And that keeps you with a consistent client base. Can you tell me whether that is changing?

And then the second part is, as we start to see a decline in the ROE, at what point – what ROE are you targeting? And at what point would you step in and manage capital to get to that return?

Okay. The answer to the first question is it is definitely not changing. And I think we are benefiting with our long-term client relationships, our demonstration in the art market that we were there to provide capacity, and providing pricing on an exposure basis, where the client always understood why we were quoting what we quoted. And that, I think, serves us well in the market we’re going into.

The second question – I don’t want to give you a specific target number. But I’d just point you to our historical results. Our historical track record of ROEs going from the hard market to the soft market is kind of just that I would expect to continue to see at Renaissance, and want to continue to see. And if we – we’d certainly – I would want to take steps if we saw ourselves getting outside those ranges.

Okay. And I apologize if you answered this already. But what are you seeing in terms of casualty market conditions? You’re obviously attracted to that market, to go into it. But then some of your comments imply that there was more competition in there. And that doesn’t really connect with the comments that we get from other managements, where there is actually less competition, because of the increase in the need by a highly secured rated companies.

Okay. Well I – we are benefiting from the flight to quality. We have a reputation with our clients and brokers that are considered to be a very good company to put your business with. And so we are, and we have – part of our opportunities in specialty re is in clients and brokers wanting to put more business with us. So we – I think it’s fair to say we are one of the beneficiaries of that flight to quality.

In terms of comments on specific markets, because we are not as large a player as some of these other companies, I would defer to them to describe the market conditions. We’re seeing a more narrow range of things. We don’t have a large staff. So we’re more doing rifle shots at [inaudible]. So I mean it’s not – I am not in as good a position as some of those other company managers to give an opinion about the broad casualty market.

But you’re not seeing fewer opportunities? You’re not seeing that there is increased competition are you?

Well I said, from my perspective, there is increased competition. And I think to try to resolve that with what you’ve said others have said, there is increased competition in more people wanting to grow top line and right the business. And we see that in casualty, in addition to property.

However, from the client side, there may be a narrowing of a market that they want to deal with. And so some of that increased competition is coming from markets that are not as highly rated.

Okay.

And then, so then that presents clients with what’s always a tough choice, is do you sacrifice security for a lower price. And sometimes people do. Sometimes they don’t.

Okay. That’s great. Thank you very much for your answer.

Ladies and gentlemen, due to time constraints, we’ll take our final question today from [Matthew Moniat] at Omega Advisors.

Well I’ll make it a short one then. Can you guys give us the paid loss number for the quarter?

It’s $26m.

Okay great. That’s about what I figured it would be. Great. Thanks very much.

Okay. Thank you very much.

Gentlemen, I’ll turn it back to you for additional or closing remarks.

Okay. Well I don’t have anything to add. I think we covered the issues in the questions and answers. So thank you.

Ladies and gentlemen, thank you for your participation in our call today. This does conclude the conference. And you may disconnect at this time.