濱特爾 (RNR) 2003 Q3 法說會逐字稿

Good morning, and welcome to the RenaissanceRe Third Quarter 2003 conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn this over to Mr. David [Lily] [ph] [ph] [ph]. Please go ahead, sir.

Good morning. Thank you for joining our third quarter 2003 conference call. Yesterday after the market closed we issued our quarterly release. If you didn't get a copy please call me directly at 212-521-4878, and we'll make sure to get you one.

We've reserved an hour for today's call. There will be an audio replay of the cal available at 1:00 p.m. EST today through October 31st 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 671190. Today's call is also available through the Investor Section of www.renre.com, and will be archived on RenaissanceRe's web site through midnight on December 7th.

Before we begin I am 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 CEO, Jim Stanard, and the company's CFO, John Lummis. Also with us for today's call is Bill Riker, RenaissanceRe's COO and the President and CEO of Glencoe Group Holdings Limited, the holding company for the company's individual risk operations. Bill has joined us today to provide an update on the activities of our individual risk business and answer any questions about that that you may have.

I would now like to turn the call over to John to begin with an overview of the financial results. John.

Thank you, David.

For the third quarter the big story on the top line was the growth in premium from our individual risk segment. This is best seen in our supplemental financial information on the last page of the press release, where you can see that for the third quarter of '03 this segment produced $174m in written premium, compared with $81m in 2002. Included in the quarter is $50m of premium that represents the unearned premium on an in force portfolio business that was assumed in 2003's third quarter.

I would like to clarify that this is recurring business, that's normal course, individual risk premium, and we've highlighted this premium simply because it will be a lump in the third quarter. Although on an annual basis, clearly it should be included in anybody's sense of individual risk segment.

Just to get a view of the annual run rate, you can look at the nine-month premium, where we see $335m individual risk written premium. And I think the question like here is that this business is ramping up to become a very meaningful contributor to the RenaissanceRe Group's earnings. Bill Riker will speak on this later in the call.

To comment on the other onus to the top line, we saw reinsurance premiums essentially on track with our expectations, as discussed in the second quarter call, and we did have declines in the third quarter in terms of written premium. But basically see ourselves on track with the prediction of flat catastrophe premium, looking at managed gross written premium.

We're also looking for a 20 percent growth in terms of managed gross written premium for the Specialty Reinsurance unit, looking at the full year. Managed specialty premium was up 23 percent for the nine-month period. Here I would also like to reiterate the point that I've made in prior calls, which is the premium can come in lumpy on a quarterly basis. I think it's best to look at the nine-month data to get a sense of the trends. I'd also point you to net written cap premium, RenaissanceRe. I think it's important to appreciate that we're expecting growth of over 20 percent for '03 versus '02.

Looking at the loss activity for the quarter, for the current action here, we finally have what we characterize as a normal cat quarter, and in our cat reinsurance business we had losses from Isabelle, Fabian, Hurricane [Quibet] [ph], the Korean typhoon, to name the notable ones. None of these were individually particularly significant, but combined to produce a normal quarter of cat losses.

I'd also note that as reflected in the press release, we had $25m of reserve takedowns this quarter. More than half of those came from our individual risk segment, and the balance largely from cat. In general, this reflects a conservative approach we take in our reserving. And I want to underscore that our philosophy there remains the same going forward. The reserve takedown was based off the same processes that we've used in the past for cat events. For cat losses, as we go by an event-by-event analysis. And for our other lines we use the [Borheiter Ferguson] [ph] model.

Looking at our fee income, I would draw your attention to the fee income line for the nine months, where we showed $55m on an adjusted basis, as shown in the supplemental data, capturing [Davincy] [ph] under the equity method, as well as fee income associated with our seeded reinsurance. I think that's a very interesting number to focus on in looking at RenaissanceRe's earnings profile.

Looking at our investment results, we obviously continue to be heavy in short-term investments, and that continued to press field somewhat. That said, we expect to continue with the strategy, given our sense of the current interest rate environment.

For the quarter we had a total return of just under 60 basis points, given the backup in interest rates, and that puts us well ahead of every benchmark, notably the leaner aggregate which was a negative 15 basis points for the quarter.

Our duration currently is just over two years. And I'd like to note that I think this strategy has been an important one for us, allowing strong growth in book value per share. This quarter we grew from 2594 at June 30, to 2741 at the end of the third quarter. And so I think that's very powerful growth, both value per share, and should be appreciated in measuring the performance of RenaissanceRe this quarter.

As you'll see in the press release, we're moving forward with the joint venture transaction with MBIA and others. And note that we're looking at an investment in the range of $115m to $125m. We see that being comfortably funded out of our existing capital resources.

Turning to the balance sheet, we've adopted FAS150 which prompts the change of geography for our trust deferred. That will move from the mezzanine line to the liability section, and will also result in the recharacterization of the dividend off that as interest. I think the only people interested in this change are the accounting technicians, and we don't expect any practical impact to this move.

Perhaps the most noteworthy comment on our balance sheet is that there's not much to say. We continue to see ourselves positioned with a strong, conservative balance sheet.

With respect to 2004 earnings guidance, we will have no commentary on this call. We expect via commentary at the Bermuda [Angle] [ph] Conference in early December.

With that, I'd like to turn the call over to Jim for his comments.

Thanks, John.

We've got a lot we're going to try to cover today. I am going to talk about market conditions and our position in the market. I want to comment on our two new hires, and especially our reinsurance area, and our announced joint venture with MBIA.

Then in a change of format on the call, Bill Riker, who runs our individual risk segment, is going to, will normally in these calls comment on the individual risk segment, and this is the first call he's going to do that.

Turning to market conditions, I think there are somewhat of the same story as I've described the last couple of quarters, but I think a continuing intensification of opposing trends. Starting with the bad news, there is continued growth in capacity. Many companies want to grow their top line. And we heard that loud and clear at Monte Carlo. We hear that loud and clear from brokers.

However, we've got good news, is that the clients and brokers have the most serious concern about security that I think I've ever seen in my career. There's significant concern, both about ability to pay and willingness to pay. There's still, you know, most people would agree, there's tens of billions of dollars of bad news still left to come. And clients are quite concerned about who is going to be able and willing to pay their claims in the future.

What I've put in the category of 'okay news or reasonably good news,' is that pricing is reasonably healthy. You know, it varies by type of business. It's far from its historical peaks that we saw in casualty in the mid-80's, and property in the early 90's, and so details of underwriting are important. You can't just put a bucket out there and think that that's a good strategy, at least in my opinion.

But a good case can be made, I think, that pricing is going to hold reasonably well for awhile, because of this concern about balance sheets, because of, you know, there still is a willingness for competitors we see to exert pricing discipline. And so I'm guardedly optimistic about the sustainability of market conditions.

Given that market scenario, I think that RenaissanceRe is almost uniquely well positioned to compete in this market condition. Because we've got a combination of among the strongest balance sheets in the business, with clients not being concerned about any legacy problems for us, but at the same time we're not a startup. We have a 10-yaer established reputation with clients, brokers, and joint venture partners, a reputation for stability, consistency, prudent risk management. They've seen how we've behaved through claims situations. And a superb record of claim payment in both speed and lack of controversies.

Thirdly, we're focused on a limited number of defined specialties, where we are a first call market in those specialties. And so when you combine all those features, you know, who would you want to put your business with, if you were seeding reinsurance, and wondering if your claims were going to get paid?

In specialty - now turning to specialty Re, we've brought on two very experienced people. We've almost doubled our staff in specialty Re, of senior underwriters. We're moving from three to five. And so I want to emphasize that we don't have a big infrastructure, but what we have is a small number of very experienced people who are doing a small number of large, large transactions, and dealing with a small number of targeted specialties. In those specialties that we've targeted we are - have a very significant market position in several of those.

The two people joining us, and the press release was out this morning, Bob [Lamandola] [ph] is one of the industry's foremost experts in the surety business, had been with St. Paul as President, of surety and construction for 11 years. And I worked with Bob when I was at USF&G, in the early 90's. I'm very happy that he's joining us to focus on the surety business, which is an area that we already have a significant positron in.

[Jamie Louis] [ph], is a recognized underwriter in the malpractice business and reinsurance. This is an area that is new for us in terms of market position. We don't have, we have almost no exposure in that class at this point. It's an area that we have our senior management has substantial experience, in both myself and Dave Eklund over the years, in the 70's and 80's. I have dealt in that area. But it's a market that we are going to look at on a very targeted, very cautious basis, and we wanted to make sure we had a very experienced underwriter before we started looking at it, you know, doing more business in that area.

Finally, the - we're very pleased to be able to talk about the joint venture that we have planned with MBIA. There still are contingencies, you know, a deal isn't done till it's funded. But clearly, I'm optimistic that we're moving - that it's highly likely we're going to move forward on this.

You know, as John mentioned, we are anticipating investing between $115m and $125m. Some of the keys to this, it fits the profile exactly of the type of joint ventures that we are looking for. MBIA is the market leader in their business. I've known [Jay Brown] [ph] and [Gary Dutton] [ph] for a long time. I worked with Gary Dutton at USF&G, and so both myself and the rest of the RenaissanceRe Senior Management is quite comfortable with their expertise and position in the market.

We've been careful to design this as a win, win transaction, where interests are aligned with MBIA and the other investors. And the key here is we're starting with a portfolio of business that deploys the capital they want. I don't think, I don't see how we could have done a deal like this if we had to just put a lot of capital aside, and then grow it slowly. Because you'd have sub par returns for a long period of time. And so the fact that we can start out with this book of business right out of the box is a quite important feature of the transaction.

The -- so to summarize, I just want to go back to the premium comparison question, that John talked about, for a minute. Because when I think about our premium as managing the company, I mean we are subject to lumpy deals. How things fall by quarter, there is a lot of noise in that.

And I focus on managing the company by annual comparisons, as to how are we doing. And just to review how I think we're doing, we're right where we want to be. Our managed cap premium is about flat for the year which is what I said I expected last quarter. Our Specialty Re premium we project to be up around 20 percent, this is managed Specialty Re premium for the year, which is consistent with what we've said for the last year, we said we were on track for that. And so that's exactly where I wanted it to be. Individual risk is a positive surprise. We said previously we had said [up 40 percent] [ph] for the year now we are looking at [up 60 percent] [ph]. The JV activity we, I said I expected to do one or two deals over an 18-month period. We now have one in final stages.

And so I'm quite pleased with where we are. We're on track for another year, having the market leading ROE. Our conservative investment strategy has allowed us to grow tangible book value per share for this quarter. And as we said in the annual report, tangible book value per share plus accumulated dividends is the name of the game. I mean that's what we are, that is our ultimate goal, to develop real value, and we are - have continued to do that, and I think we're in great position to keep going with that.

With that, I will turn it over to Bill Riker to talk about individual risk.

Thank you, Jim. Good morning, everyone.

First of all, I'd like to apologize that we're having to provide the information about these specific strategy in individual risk over a conference call. We had originally planned on doing a fairly detailed presentation during the Bermuda Angle, but as most of you are aware, the Angle was postponed due to Hurricane Fabian, here in Bermuda.

What I can recommend is that we will, again, be providing significant information about the individual risk strategy at the Angle, which is now going to occur in the beginning of December. And so I encourage everybody to attend.

First of all, I'd like to review our unique definition of what individual risk business is. Our definition is somewhat different than a lot of people have done in this market. And it comes down to aligning skill sets with the business opportunity. Our definition of individual risk basically ranges from primary business all the way through the continuum to say quota share reinsurance. And this is different than a lot of people, because we believe that the skill sets required to manage primary business and quota share are actually much closer than say the skill sets required to manage quota share and cat reinsurance.

So when we look at a proportional reinsurance deal we will look at that business and drilling right down to the characteristics of the individual risks, and that's where the name 'individual risk' comes from. And so our definition is somewhat different, and in our individual risk unit we write some proportional reinsurance, we write some primary insurance, we write some, you know, excess and surplus, et cetera. But I think that is a different definition a lot of people have out there, and understanding that is key in how we execute in this arena.

What I'm going to do is for the first time we're going to give some line of business break-down of our individual risk business for year-to-date 2003, and we'll give you some direction for where it's going to go in 2004.

So 2003 to date our individual risk business was about 83 percent property, about 12 percent commercial, auto, about one percent claims made liability, and about four percent occurrence liability. As most of you are aware the casualty market or the liability market is the one that is still showing probably the greatest amount of rate increases of all of the different lines of businesses.

And we actually believe that it's easy to get into businesses too early, just because a particular line of business is experiencing a 30 percent rate increase does not necessarily mean it's good business. But we are very happy to see that the liability lines have been receiving 30 percent rate increases the last two or three years, and thus now, the attractiveness of that line of business to us is much better than it's been in the past. And as Jim pointed out earlier, we are also very optimistic about the sustainability of the liability business, considering all the issues, and balance sheets, and people's concerns about security.

And so moving into the estimates for 2004, we expect our property percentage of our individual risk business to be declining. That is, a, because we will be writing more liability business, and, b, because the rates in the property market are flat to slightly down. The experience in the property business has been exceptional, and I think you're going to see market forces hit that.

One good element there is over the last year occasionally we will see pockets of competition, and we would almost characterize as irrational competition in the property market. But as the conversation we were having earlier, we've seen often those pockets disappear. And so, I am very optimistic about our competitors, you know, general discipline in this area. And so when you see somebody doing something foolish, generally three months later that person doesn't seem to be around anymore, which is a really, really good sign.

When you're looking at the three elements of our liability being commercial, auto, we see that going up. The claims made liability, we see that having the largest growth in that we - some of our business through our program managers is writing claims made liability, plus we're doing some claims made liability here out of Bermuda directly these days.

With the occurrence liability, somewhat increasing but we still have a real respect for the occurrence liability line of business, and we do not want to make that a major part of our business.

So at a high level, reviewing our key strategy in the individual risk arena, first of all, we believe we can use the current market dislocation to enter specialty areas. We believe that the specialty area is quite healthy right now, and the market dislocation gives you an opportunity to enter that business at attractive terms.

The second element of our strategy is to only partner with the best people in these different segments. This is something that is key to the current market conditions because three years ago, or five years ago, if you would have tried to enter some of these specialty areas, and only partner with the best people, there was no opportunity. The best people were tied up in, whoever their partners were at the time. And you just, the strategy could not be executed. But the current market dislocation enables us to do that. And one thing, you know, is whenever we talk about this business internally, and the people we're dealing with, that is one of our number one criteria is make sure we're parking with the best folks.

And then the last element of our strategy is to pluck the fire technology, which we have developed over the last few years, and I'll go into that a little bit more, to help ourselves and our partners create a long-term competitive advantage in their particular chosen specialty. People have asked us about some of the technology we're deploying. And we started developing a technology to drive down and understand the attractiveness of individual risk, approximately four or five years ago. We applied this technology to books of businesses we saw, say in 2000, and we just didn't find anything that was worth writing. It was really post to 9/11, really into 2002, where we actually are seeing business that is attractive to write, and we believe we get compensated for the risk taking.

And so in the end, our technology is always under development. All of our partners, when they actually see the technology we're using, get very excited about the partnership opportunity, and I think that really enables us to differentiate ourselves from others in the business who are trying to hook-up with the best in the business, as well.

A little comment on why we see this opportunity in the individual risk area is a relatively low risk, high payoff opportunity. First of all, something for everybody to understand is the business we are writing and, or assuming in the individual risk business is seasoned portfolios. These are portfolios where our partners have written them for five, 10, 15 years, and there's a demonstrated track record of success in these areas. And it's interesting in these areas, some of these areas are tough lines of business, but there are people out there who historically, even through the depths of the soft market were making money in these specialty areas.

And so we are not accepting new business risk by risk, where you do run, you know, a certain degree of adverse selection. And so we're only dealing with seasoned books of business. All of our partners have all the systems in place. This is a, for us, a key element where you're not trying to sort through a lot of these systems and operational issues in doing the business. This stuff is already in place, and our partners have made significant investments in technology over the last, you know, five to six years, so that's something that's not diverting our sort of underwriting focus. Is operationally, most of the folks we deal with are exceptional, using paperless offices. You know, really stuff that is very, very impressive. And I think you'll find that in the insurance environment there's a wide disparity between the really good players and the not-so-good players.

Another thing we try to look for in our partners is them having true franchise value in their operations. These are partners who are determined to make sure that the investment they've made in their operations over the last you know, five, 10 years is sustainable. And that's why they are looking for strong partners, like ourselves, to hook-up with.

I think this is very important because people in the past have become very leery of the program business, MGA business, but it's often the five guys in a garage with $10m of business that get people in trouble. It's rarely the really solid, franchise, large operations that have a sustainable track record.

We also look for people who are underwriters. In the end we believe in the specialty areas, there's people out there that really understand those areas, as well as any one in the market including, you know, the traditional insurance company underwriters. And so anybody we deal with, since we have such an underwriting focus is we look for them to have a similar type of focus. And if they truly are underwriters then they understand that you can, you know, select business better in these areas.

And the last thing that is very important to us, as I touched on earlier, our technology, is we're looking for partners who have a passion for data. We believe and we've found in the reinsurance arena that the ability to mine data and utilize data to better select risk is a very, very powerful tool. And if our partner doesn't have that same passion for data, as we do, then we don't see a fit. And so interesting to see how different organizations out there, you know, have historically captured data and proactively captured data.

A comment on, you know, our control processes. As most people are aware that when you deal with program managers, or quota share reinsurers, however you want t talk about it, making sure your control processes are really the best in the business is a key element. We've gotten feedback from a variety of sources, that the control processes that we put in place, are some of the most rigorous they've ever seen. Ranging from our program managers who complained about the detail of our audits and the detail of our contracts, to actually other competitors in the market who got feedback from our partners, saying that, you know, the Glencoe Group has really raised the standard on how these control processes get put in place.

You know, looking at a little of our Management Team, we have a very experienced Management Team, averages 20 years of experience in the business. We get, we have slides of more details of the different manners in our Angle presentation, and so I am not going to go on that. But overall, we believe that, you know, having people that have been in this business that understand the business is very important.

Some of you may or may not know as part of our focus on this individual risk business, a good chunk of which is done in the U.S., I personally have relocated back to the U.S. to spend more time with these operations.

We have a very unique structure in our audit team. We have our largest group in our U.S. operations is dedicated to the audit process around our different partners, and as an additional element we are committed to have one of our employees in the office of each one of our partners. We're, you know, in an MGA type of relationship. This we believe is -- really helps us develop a better partnership, understand their issues and solidify a long-term relationship with these top flight players.

We've developed technology in the U.S. to look at the components and the data of each one of the, of each one of our partners, we call this pacer technology. I'm not going to get into details there. But our ability to mine data, I believe, is second to none in the business, and that comes under our pacer technology.

Another element is we believe when it comes to looking at the results of the individual risk business you have to look at what we refer to as exposure proxies. One of my personal thoughts is that once the accounting numbers say things have gone bad it's too late. You have to begin basically premium and exposure, you have to look at losses against exposures. And that's another element of what our pacer technology enables us to do.

And lastly, another unique characteristic of our relationship is beyond having financial incentives with our partners we also have operational metric incentives. Where we will set standards of operational behavior such as, you know, getting motor vehicle reports, et cetera, et cetera. And we will go in and audit the compliance of our partners with these operational metrics. And if they do not live-up to those metrics they will take a financial hit, if they actually excel in those metrics they can actually earn some more money. And so I think it's quite unique that we look at multiple ways to measure the performance of our partners, as opposed to just looking at the bottom line.

And one thing I think is also very, very important to differentiate our strategy with some of the other strategies that have fallen by the wayside in the past, is we do not see the authority to place reinsurance to any of our partners. We are, we retain the control overall of placing the reinsurance, and our goal is to keep our - at this point we are holding the bulk of our exposure net, and everything we look at we don't look at sort of the ineffective arbitrage into the reinsurance market, which has historically been what a lot of people in this arena have done. We believe keeping control over that will enable us to avoid some of the credit issues that people have gotten into, plus frankly, the complexity and sloppiness that came about in this market due to just too many moving parts when it came to placing reinsurance.

Looking at some of the tools. Well, of the tools that we have in place, what gives us an advantage over some of the other players out there? First of all, we have the, what we believe is the right amount of corporate entities. We have three different insurance companies in our group, which basically enable us to do anything we want in different types of lines of business. And so we have the tools in place.

Next, is we have relationships and production sources in place. The relationships that have been built-up over the years through RenaissanceRe are also being leveraged in the Glencoe Group, and so that is good news.

And then, finally, you know, the technologies I mentioned earlier, has been developed over the last year, and we're not really spending a lot of time building new technology as opposed to just leveraging this in place.

And so in conclusion, you know, outlining our business model, first of all, we're focusing on a small number of skilled partners, and these skilled partners have seasoned business in place. This is a real key to your thought process. We are, you know, leveraging our technology advantages which we believe is a key value add to our partners, and something that all of our partners are very excited in. And then we maintain very tight control to audit and other metrics that I discussed earlier. And as part of this we are learning from the mistakes of others. You know, this is like any good business. We're looking at what mistakes some of our competitors have made in the past, and utilizing them to make ourselves smarter and avoid the potholes.

And so in the end, you know, what we're doing in this arena we believe is creating a bit of a new paradigm. You know, we're redefining the partnership agreement between an insurance, reinsurance company, and in different partners, and one of the keys is to enable both ourselves and our partners to develop a sustainable competitive advantage in this traditionally inefficient business.

And so that's all I've got, and I'm going to turn it over for questions.

Thank you. The question ...

We'll take questions across any of the areas we've covered.

Thank you. (Caller Instructions.)

We'll take our first question from Vinay Saqi with Morgan Stanley.

Just a quick question on the financial guarantee business. John, if you could just give us a sense if this will be accounted using the equity method? And how much premium relative to the capital base do you think you have originally? And how fast do you think you can leverage it to get to a double-digit ROE?

Look, first of all, we do expect to account for this under the equity method. I guess, secondly, I don't want to really get into too much of the details of the book of business, and how this deal is coming together. There still are some moving parts, but I guess I would underscore a point that Jim made which is the business is set-up to assume an in force portfolio for MBIA, and that really will allow it to get out of the box with an attractive ROE right from the start.

And will the entity be a AAA entity?

That is the target.

Okay.

And from Goldman Sachs, we'll hear from Tom Cholnoky.

Yes, good morning. I just have two questions. John, as you guys start to expand into more liability lines, I assume this is going to ultimately tie-up more capital, and perhaps give you less flexibility going forward in terms of managing your capital, in terms of share buybacks and what-not. Can you kind of discuss how we ought to think about that?

And then, secondly, as we look out three to five years from now, and let's assume that the property cat business continues to kind of stay as is, and most of your incremental growth comes away from it, what kind of normalized loss ratios should we be thinking about going out a number of years?

Well, first of all, the question of the capital, I guess I'd go back to the theme that we had in the last call. Which is when we're producing ROEs in the 20 percent range, north of there, I think we don't really have much of a conversation about excess capital. And so I think you might ask others with a lower ROE before you get us on the topic of excess capital.

Second point, though, is that we, even after this transaction with MBIA still have some flexibility, but we may choose to exercise that flexibility in a couple of different ways. We're not done thinking about new business opportunities, and any buyback activity that we would do would have some sensitivity around valuation, obviously. So I think we continue to have flexibility, and I think we're in a good spot on our balance sheet.

Isn't it fair to say that you had more flexibility as a pure cat writer? I mean isn't it easier to shut the faucet off than if you're going into liability?

I wouldn't say that. I mean I would, I guess what I would say is, you know, the way we're managing the business we're pursuing as many good and attractive business opportunities as we can. We're not driven by any notion of excess capital to do that. We're focused on areas where we see good opportunities for our shareholders. And so, I guess I see it as a real positive for our shareholders that we are finding opportunities, diversifying the earnings base, maintaining a high ROE with opportunities to continue that sustained basis.

Well, I'd comment, because I - I mean I think the - I'm not really interested in looking for businesses where we're just going to shut the faucet off. I think the - simply trying to play the cycle, the cycles don't get good enough for long enough to just, to make in and out an attractive long-term business proposition. I think you have to have true competitive advantages in whatever specialty business you're in order to have a portfolio above the market average that allows you to run through the soft market.

Now clearly we have to be, you have to be disciplined in capital management, as we were in the soft cycle. But I don't think of it, and we don't think of it in terms of just wanting to turn the spigot off. We value, and our clients value, our consistency in the market. We'll manage over the cycle but we're looking for sustainable businesses. And to the extent we can find a second, a third, and a fourth one, that's, we see that as all good.

Okay, and then about the loss ratio?

I really wouldn't want to make predictions about the loss ratio three to five years out. And I think what I would predict is that our standards in terms of return on capital will remain high and will remain consistent it over time.

I mean it's clear that, well, it's clear to believe that your loss ratio is going to climb as you write more liability business, is it not?

Sure. Everything else held equal, that's a correct statement.

Okay, thank you.

And our next question will come from Brian Meredith with Bank of America Securities.

Hey, a couple of questions. You know, one kind of following on what Tom was asking about. Number one, can you tell me, again remind us what your return on capital, you know, threshold is? And do these businesses that you're getting into have the same return on capital longer term, that the cat business has been able to produce? And Jim, you said that you want to earn a return better than the market average. Well, the market average in areas like the merchant, auto, and medical malpractice were pretty poor at some points in time.

Well, I think, you know, our - I believe in the past we don't give out a hard ROE target, but it is, you know, what we will say, and I think we've said this consistently ever since 10 years ago when we started - is, you know, we look at ROE consistently across the business opportunities.

And so we're using the same metrics, risk adjusted, so lower risk activities would require less ROE. But we are managing to try to keep the ROEs of the organization consistent with what we've produced in the past. And so we're not, there should be no implication here that with this diversification that we are moving to a, in the long run, to a different ROE profile than what we've historically produced.

Okay. And then, I guess, another question. You made a comment how the market right now is looking at like the quality with respect to security in the property cat reinsurance market, and how you think that's going to keep discipline in pricing, and it's got some great opportunities for you. Well, if that's the case, why haven't we seen growth in your property cat business?

Well, and maybe I should have been a little more clear on that. My comments were meant to the general reinsurance market, not only the cat market. The cat market, actually, has led in terms of the capacity coming in quickly. I think that was sort of the first line. And Bill referenced on the primary side, being the property market being the first one, where there is a capacity pressure affected market conditions.

You know, the cat market has - so of all the markets, the cat market and the property markets have more pricing pressure because there's - we've had very good experience, and people love good experience. Our, you know the fact that in those market conditions we're satisfied that we're holding our business volume flat, you know. If we could find more equal quality business I'd like to grow, but I am not going to grow just for the sake of showing top line.

And you know, our market, we're by far the largest writer in the world of property cat business, and we're in a very significant, the most significant position in the market. And you know, and so it is, that gives us some advantages of clients wanting to continue with the stability that we offer. And you know, we do many contracts that are private contracts, contracts, you know, one-off layers, thing that are, that are specific things that Renaissance designs, and has specific relationships with clients. And so we're not, you know, certainly we're very big in open market business, too. But we're not entirely tied to what happens in the open market business.

Okay, and the last question, and I'll turn it over to some other people. The $50m, what type of business was that? The assumption, portfolio?

Commercial business, commercial mix of properties, and liability, commercial auto.

Commercial auto, okay, thanks.

And with UBS, we'll hear from Michael Lewis.

Hi. I have just two questions. Number one, can you define the amount of capacity that's come into the property cat business? Is it coming in at a greater amount that you thought maybe even few months ago? When will we see the impact of this beyond now? Is it any kind of a January renewal, you know, additional pressure likely? And why is it that discipline, if it's pretty clean capital coming in, I mean why does it have to be that disciplined, can't we see a sharper falloff because rates seem to still be pretty adequate at this point? And so maybe you could just kind of address, you know, the magnitude of this capacity that's come in, and what you think the spill out is going to be there, and how it's going to affect your business going forward?

The other question has to do with, again, defining how quickly individual risk business shifts from a property to a non-property orientation from the 83 percent you had. And kind of the impact on profitability of the business? I mean, in other words, you're talking about hitting acceptable ROEs, can you kind of give us a little more flavor, really, on what kind of returns you expect from a property versus a non-property kind of business, and the individual risks? And lastly, what's the risk element here? If you are concerned - it can't be that easy even though you have all of this, all these advantages, what is the biggest risk of something going wrong there?

Well, I don't, I can't think of a way to quantify it. I mean clearly there's, as more capacity comes in, as people want top line growth, there's - that in itself would press prices down. Prices, the downward pressure on prices, though, is mitigated by this issue of concern about stability. I mean it's not - security is one piece of it, but it's not only security it's stability.

It's a big step for a client to walk away from a, you know, a large capacity from an organization like Renaissance, that has provided stability over a period of time, that has, you know, paid the claims quicker than anybody else, to break those relationships in a market like this. And a market, if everybody is feeling really good about things and not as worried about turmoil in the market, it would be more likely for a client to break those relationships. But I mean there's enough concern now that continuity of relationship, with stable partners, is, has value. Moreso than I've seen it in normal markets.

And so that's the countervailing pressure. Where that plays out at 1/1, you know, my crystal ball is cloudy. I don't, you know, I don't know, there are pressures in both directions, but I am guardedly optimistic that our position is so strong in the market, and so strong with our relationship with our clients and brokers, that we're going to do okay.

Thanks.

And the comment about the second part of your question, if I've got it straight. Is that what they did, to try to be really clear, is that when we look at a risk adjusted return on different elements of our business, be it cat, be it property, be it liability, we have the same hurdle. And so we don't look at different types of businesses, and say 'well, we need less return on that.' We have to determine whether it actually has less risk, and thus, requires less capital. But our sort of risk adjusted return is very consistent around the organization for all of the different types of businesses we look at.

When it comes to what are the key risks around the liability business we're looking at, frankly, I think it's relatively low risk. It's really a pricing problem, is are you getting enough money to, you know, cover your eventual costs? And, you know, as I made a comment earlier, we believe that the pricing in the liability area is starting to make sense now. It probably didn't make sense a year ago when a lot of people writing the business, I think you're starting to see that, actually coming out in some numbers.

And so, but once the price, the true variability of the outcome, the outcome of the losses, it's frankly a lot less than sort of the cat business. But in the end, I see our entry into this business and the books of business we're dealing with, they're very seasoned, and so we don't have a lot of the adverse selection issues that a new book of business would have. And it's, and if everybody has got, you know, well wrong on price at the same as market, frankly, we're going to be a lot better off than a lot of people out there.

Then the last piece is just making sure that we get the execution/operational risks done right. As I talked about earlier, we've spent a lot of time, and you know, our greatest resources are around making sure we're dealing with the execution risk better than anyone else has ever done in this business. And I can assure you that's our largest discussion point internally, to make sure that we're doing that right, and to accomplish that we brought in very seasoned people, and we have what we believe is some of the most skilled people at this type of business, spending 100 percent of their time working on mitigating and controlling that type of operational risk.

Okay, just a comment, and then I'll pass it on also. I just believe as individual risk, eventually and not too far down the road becomes larger than property casualty, as far as just volume of business done. I guess it would be important for us to kind of get more and more, you know, disclosure on the businesses on a more timely fashion, to see how well you're tracking with expectations. Okay, thanks.

Yes, I think that's - yes, I would agree with your statement, and that's why we're having [inaudible] on a regular basis, specifically a report on it.

Thank you.

(Caller Instructions.)

Up next, we'll hear from Adam Klauber with Cochran Coronia.

Good morning. I have two or three questions. Number one, if the cat environment does continue to soften next year, what does that mean for your fee income? Number two, the expense ratio moved up somewhat this quarter, and you mentioned that obviously has to do with the shift in the primary. Is there a reason that it jumped up, is there another reason it jumped up more quickly this quarter? And number three, where did that $50m in primary business come from?

Okay, number one, if I take your premise that the cat market softens and if that has an impact on us, on our top line, then that would have a, you know, [inaudible] the income in the wrong direction. But as I said before, I'm -- you know, I'm guardedly optimistic that we're going to be able to do okay in the cat market at 1/1 because of the advantages that we have. But if I assume that the market is performing worse than what I'm talking about there, then that would push the income down.

The other question?

On the subject of the expense ratio, I think there are two factors at play here. One is, as noted in the press release, broadly speaking, that there is a ramp-up in the individual risk business, which carries with it a higher expense ratio, and so that's a business mix phenomena, expense ratio dial-up.

Looking at operating expenses, just in terms of absolute dollars, [inaudible] also, that's driven by predominantly by personnel costs, that's close to two-thirds of the increase. Some [inaudible] increase, also some comp accruals that come with producing returns for our shareholders. We also are seeing a ramp-up in various other operating areas, software expense, building expense, et cetera, essentially what you would expect to see with a growing business.

And then, where that business is coming from, one thing I'd like to establish is we are going [inaudible] the reinsurance business. We do not want to discuss the specifics of our partners. We believe that if our partner wants to disclose that we do business with them that's their business, but that's not our business. But I can give a little flavor for that particular transaction, it was a - it used to be on a company whose made a wholesale exit from the business in general, and because this particular partner was one of their, you know, strongest, best partners prior to them deciding to wholesale exit the business, they were very flexible on moving the relationship more quickly to us on a wholesale basis. If that helps.

Thank you very much, that is helpful.

With Prudential Equity, we'll now hear from Jay Gelb.

Great, thanks. Just a quick numbers question. Do you have paid losses for the quarter?

Paid losses for the quarter were $41m.

And then just a couple of quick on the individual risk. Could you give us a better feeling for -- you're assuming seasoned business - really, just if you could drill down what type of business that is, that'd be helpful, particularly on the liability side. Rather than just saying claims made and the current?

A little bit more description, what are you looking for?

Is it net now, is it D&L? Or what are you looking at here?

By lines of business it is, it's not D&L, and it's not net now. It's, I would say it is business that comes from specialty commercial problems, such as, you know, we've said we've done some day care, we've done, you know, wholesale, and storage companies. It's types of organizations that have special requirements in the types of coverages they look for, and the type of business where the experts in the arena from an underwriting basis are relatively [inaudible].

Okay, so program business would be a good way to describe it?

I guess it depends on what your definition of program business is? I've heard so many different definitions, but you could look at it that way.

Okay, and when you look at setting the pricing, as well as the reserves? Are you planning on depending mostly on the managing general agent's data to set that? Given that you haven't really been involved in that business yet?

Absolutely not.

So you're not depending on their data?

All of the people you do business with have historic track records. That data is often held by the insurance organizations they were doing business with, not necessarily them. And that'' part of our due diligence, to look at the potential, or the past results of these organizations from a variety of different sources.

Okay, but it's not your internally generated data, it's someone else's?

Yes, absolutely. Well, we wouldn't have the internal data from some of these lines of business, but we also do research, you know, on competitive pricing. We do research on, you know, ISO, et cetera, et cetera.

And just to clarify one thing, data is coming from our business partners, judgments about what to do with that data and how to price, how to reserve, are RenaissanceRe's.

Okay, and then finally, just a numbers question. Do you have cash flow from operations for the nine months?

Yes, cash flow was very strong for the period, and for the nine months, $274m.

Okay, thank you.

Our next question comes from Jay Cohen with Merrill Lynch.

Most of my questions are answered. Just I guess a quick follow-up, the $50m of the block of business, what's the - what would be an annualized premium level, it's just basically that three-quarters of an annual number?

The annualized premium from that relationship is approximately $120m.

$120m, great. Thanks a lot.

If I could interject, I'd like to correct the statement, I misspoke in answering the question. The $274m number that I referred to was a three-month number, and I think I misspoke and referred to it as nine months.

From Credit Suisse First Boston, JF Trembley.

Good morning. So you provided some more information regarding your [indiginal] [ph] risk segment, is there any way you can give us a better sense of the segmentation within your Specialty Reinsurance business?

Well, let's see. We have talked to, you know, we've talked - we have five, we had three and we now have five experienced, high level underwriters involved with this, in addition to the rest of top management that's very focused on it, including myself and Dave Eklund. It's a small number of large transactions. We have you know, some of the lines that we are strong in, there's workers comp, catastrophe, terrorism, specifically insurance, surety, are three of the examples of the types of lines. There's a few other things that we're in, but those are the three largest.

Okay, year to date, what part of your business in that segment would be tied to surety?

We have not disclosed specifics around premium levels, by those subsegments.

So would you say, most meaningful segments in that segment, or?

Excuse me, I didn't understand the question.

So would you say that surety is a large portion of that segment, or is it a relatively minor portion of the segment?

Well, I mean there are several things that we are, have significant shares in, surety is one of the several. It's not the - it certainly is not a majority of the premium.

But, and, I know, both in Specialty Reinsurance, and in individual risk, you know, I want to, we've set a policy of where we want to draw the line on disclosure, not because we wouldn't like to be open to our shareholders, but there are competitive disadvantages to us by being too specific about what business we think is great, because we'll have, you know, five other of our friendly competitors looking at that business the next day.

And so, you know, we've decide that we don't want to give some breakdowns by specific classes within the specialty group. Similarly, on individual risk, you know, we're giving the breakdown by property, commercial, audit, commercial liability, and [inaudible] liability, and occurrence, but we don't want to get into the subsegments for competitive reasons.

I'm sure and I understand. Thank you.

We will move now to Mike Hallett with Fox Pitt Kelton.

Good morning, I have a couple of questions for you. Firstly, can you break-out the third quarter combined ratios between your individual risk business and your reinsurance business? I know you're provided that data in your Q's.

Secondly, can you break-out the reserves development along those same lines, as well?

And then, finally, for Bill, I'd be interested in getting a clear sense of what kind of expected combined ratio you're currently pricing the individual risk business to? And also, how much capital is currently in the [inaudible] things?

I'll go first, these guys are digging up those numbers. OK, you want to go John?

Yes, let me start. For the individual risk segments the combined ratio for Q3 is 91 percent and change. And that does include, or incorporate the reserve take-down that I mentioned in my comments, more than half of that take-down was associated with individual risk. And so you will have the temptation I think to add that reserve take-down into this combined ratio. And so, you know, to adjust, to get to - the number, I guess the thing I would caution there is just to recognize that we are bringing it into a conservative reserving approach to this book of business.

Okay, just to help me with that, what were the earned premiums then in the individual risk or what was the actual defined ratio points?

The net earned premiums is $82m.

Okay. And your comment, you said more than half of the development was in individual risk? Do you have specific numbers on it.

Yes.

All right, comments on sort of the targets. I think the, you know, the highest level thing to think about is we don't believe that we should be in any type of individual risk, or any type of insurance business with an expected combined ratio above 90. And that as you get into riskier type of things, you know, be it cat risk, et cetera, then it just goes south from there.

And so, when it comes to looking at what type of margins you need to take the risk, I don't - we can't, you know, 90 is as high as you're ever going to get, no matter what, how stable, or predictable people perceive the business is, because stuff happens that people are not sure of. And I personally believe that people that thought they could write business at 120 combined on the float, et cetera, were just underestimating the risks they didn't know about, at that time.

I don't know if that answers your question? And so each individual deal that we look at has different expected combined ratios depending on the risk, but nothing we look at is over 90. And ongoing, you know, to John's comment, we believe in being conservative when we look at projecting results. And so we make sure that we hopefully will never hear us saying we have to put up reserves on anything.

Okay.

I'd say hopefully, never say never.

Yes.

We will say that one day.

We will say that. But that's our goal.

Well, can you just reconcile there, then, just so we don't have confusion here, the 91 percent combined that you reported with, you know, favorable development, was $12m or something like that, you're looking at 102 percent combined ratio, plus. Can you just reconcile, was that an anomaly in the quarter, or was there something ore behind that?

No, I think that's reflective of how we look at green business. You know, when things are green on the books we don't assume we're necessarily making money till we get true facts that we believe we are making money. And so it's a - and again, that's just our reserving practices. I think we were very fortunate that the 2002 year is actually coming in very, very nicely.

Absolutely.

Yes. But 2003, actually is very green. And we, you know, try to be cognizant not to lean too much optimism out of a green year.

And so I guess going forward then, the net affect of conservative current accident year, reserving plus potentially some continued reserve, favorable reserve development in that line, gets you to kind of that 90 percent range, is that a fair way of looking at it?

I think that is a fair way to look at it. Obviously, as Bill said, we're focusing to a degree on a green book. And, you know, we can't predict the future, but that's what we're aiming for on our bias.

Great, thanks very much.

(Caller Instructions.)

And from JP Morgan we'll hear from [Terry Shu.] [ph]

All of my questions have been answered. Thanks a lot.

Ron Bobnin [ph] with Capital Returns has our next question.

Hi, thanks a lot. Great quarter. I think you deserve truly to be commended with this favorable development which has been a great recurring event. I have a couple of questions. One is on the financial guarantee opportunity, what's transpired in that reinsurance market to bring about the need for an additional guarantee reinsurer, is my first question?

Well, it's the downgrades. MBIA previously had a lot of opportunities to have AA and AAA reinsurance, and with all the downgrades now there's a - there's a severe shortage in the market of very highly rated reinsurance.

Okay, and should we view your capital investment as one where you've identified a market opportunity, you're able to partner with what we believe to be the industry leading primary player. But beyond that there's not an incremental value added that RenaissanceRe is contributing to the new venture, or is there something that ...

Well, our value add is a track record of successful joint ventures. We understand how to set-up. This is a Bermuda based company with the advantages that are inherent in a Bermuda based structure. We're very expert at understanding how to structure the deals that way. So I mean I think our value add is our expertise in designing and working through somewhat complicated joint venture transactions, and a track record of all of them having been successful, and all of the partners having been happy up to this point. And, but other than that, the real business expertise is coming from MBIA.

Oh, and they'd be carving out certain staff that will become solely employees of this reinsurance enterprise?

Well, we are, the enterprise will have dedicated, permanent, full time staff. MBIA would be a likely place to go to find those people. But it's not necessarily going to be 100 percent from that source.

Okay. And shoot me if I missed this, whether it be on the call or in the press release, did the company buy any stock back in the last quarter?

No, we did not.

Okay. And who - my final question is from, in the underwriting area and the surety line, in particular, who has been the chief underwriting officer at the company? And should we assume that this new hire today in some respects is assuming that management responsibility?

Well, let me go through the organization. You know, [Mike Cach] [ph] runs our Specialty Reinsurance area. And he has been the one focusing on it. When most of these deals are written, he was sitting 30 feet from and facing myself, and surety used to report to at USF&G 10 years ago, and so I have some understanding of it.

And Dave Eklund, who is our chief underwriting officer of the reinsurance group, and so, I mean Dave and I were very much involved with Mike in the analysis of the deals, the decision to get into it, you know, these are a small number of large transactions that are really looked at very carefully at the highest levels. And now, bringing in Bob Lamandola who has deep experience in the surety business, Bob will report to Mike Cach.

Got you, and is he relocating? Is my final question. To Bermuda?

Yes.

Thanks a lot, and continued good luck and success.

Thank you.

Steven Gambios with Dreyfus has our next question.

Thank you. Good morning. A couple of questions directed to the individual risk business. Bill, you had highlighted that you have a small number of quality partners, you partner with so far. How many is that?

Second question, you know, if these books of business are so great, you know, where are you getting them from? I mean clearly the example you shared in this quarter was somebody who was leaving the business. But barring that, how are you able to switch-over a quality partner and a quality book of business, which one would assume would be desirable to a lot of people? And where do we usually see transactions, like the one we just saw, where you've got an in force sort of rollover on an ongoing?

And thirdly, do I understand you correctly to say that you're booking the '03 accident year for individual risk somewhere around the 107 range?

Okay, a couple of thoughts. Okay, as far as current MPA relationships, we have five. And you know, we want to keep that number low. We don't believe you can manage, you know, we know people that have been in this business that have had 40, 50, 60 different relationships. We don't believe that that's doable by us at the standard at which we want to operate.

When it comes to where did we get this business, that's a good question. The business that we've gotten to date has primarily been through referrals and personal relationships where either ourselves or other people we come in contact with have recommended these particular relationships as the, you know, these folks being the best in the business.

We see a flow of business that is staggering, and I don't have the exact number, but assume we've seen over t200 to 300 different offerings come into this. And the bulk of them we just say 'no' to because they don't fit our criteria. And the other types of people who produce these different opportunities come from the reinsurance brokers, come from, you know, you name it. Everybody out there has got a certain thing they want to show us.

And really, it's the reputation of our organization, has really enabled us to be a first call. I think most of our partners that we do business with have selected us to do business with over other very good offers. There's one example I'd like to give, but I can't. Where we were selected over someone who would be considered, you know, super blue chip, but they decided to business with us because of the specifics of our relationship, technology, et cetera, et cetera. And so.

And let me just add. I fully agree with Bill. Also, we don't have, you know, channel conflicts and so forth. I mean we're, there are a lot of other, you know, there's other quality organizations out there, but they may be doing similar business, they may have other sources of business that's competing. I mean we're a plain, simple organization at this point. Sorry, Bill.

Okay, and so I agree with Jim on that, as well. We try - and that's another reason to keep the number of your partners small so you don't end up conflicting yourself all over the place.

As far as the results, I know we're not specifically giving out the reserve, you know, changes by segment. And so I will not confirm your number. And all I can do is say is we believe that we always have been, as a corporation and always plan on being very conservative on [inaudible] and then as the chips come in then you recognize the news.

Okay.

Let me just skim on that a little bit. The - I think, Steve, it's hard to resist the massive, your comment. I do want to avoid getting into specifics, you know, these lines of business, at this stage, because there is going to be some noise, there is a little bit of noise this quarter that's got the number a little bit higher than a normal run rate. And so I think the key theme is the one that Bill has mentioned, that we're up front, reserving conservatively, and you know, what you see in the calendar year results, I think it's really the number to lock on rather than getting hung-up on individual years, or for that matter, a variation in quarters.

We let this call go longer than normal, because we were covering so much, and spent so much time on individual risks. But I guess should we take one more question?

Why don't we try to take one more question, and then I do think we need to wrap-up.

And that question will come from Marco Pinzon with Smith Barney.

Hi, yeah. Just two questions. Number one is can you give us any ore insight on the, your 2004, I guess, initial guidance on directional premium movement in the individual risk segment? You know, for example, can you give us an early read on where you see total premium growth going? And, you know, what do you mean by the largest growth and the claims made liability? Is that like one percent to 10 percent of that entire book, or is it one to 25 percent, just to get a better sense as to what you're thinking there.

And then, the second question, another numbers question, is can you give us the net written premium numbers for your individual risk and the captive, that you wrote on balance sheet in the quarter?

I'm sorry, could you just give me a quick repeat on your first question?

Yes, the first question. You gave us some kind of views on what you saw the directional mix of your individual risks business was going to do in 2004. You know, and can you kind of give us some views, some more insight on that for, you know, can you give us some numbers there, I guess?

I think it's premature at this point. We really do [inaudible] a full presentation at the Bermuda Angle Conference in early September. And I ask you to defer to that for details. I guess at a high level, I think you've heard some of the key themes that Jim has alluded to in terms of looking at the cat market, the specialty market, and individual risk. And I think you'll hear more of those themes, but as to the specifics I think we're going to look to the December conference.

How about just an overall growth number for 2004?

No. Sorry.

Okay. And then the second one was the net written premium numbers for the third quarter?

We haven't disclosed net written by segment.

Okay, all right. Thank you.

Okay.

Okay, thank you very much.

That does conclude today's teleconference. We do thank you for your participation, and ask that you do enjoy the rest of your day.