濱特爾 (RNR) 2004 Q2 法說會逐字稿

Good morning and welcome to the RenaissanceRe second quarter 2004 financial results conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. Today's teleconference is being recorded. It is now my pleasure to turn the floor over to David Lilly. Sir, you may begin.

Good morning. Thank you for joining our second quarter 2004 conference call. Yesterday after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we'll make sure to provide you with one. We've reserved an hour for today's call. There will be an audio replay of the call available at 1:00 p.m. Eastern Time today through August 6 at 8:00 p.m. The replay can be accessed by dialing 877-519-4471 or 973-341-3080. The passcode you will need for both numbers is 4885229. Today's call is also available through the investor section of www.renre.com and will be archived on RenaissaneRe's website through midnight on September 10.

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 RenaissaneRe'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, Bill Riker, President, and John Lummis, Chief Financial Officer. I'd now like to turn the call over to John to begin with an overview of the financial results. John?

Thank you, David. We're pleased to report another quarter of strong financial performance. With good current and prior period loss experience in the second quarter, we again achieved an annualized operating ROE of over 25 percent and we generated operating earnings per share of $2.

Looking at the top line in each of our businesses, this is a tricky quarter to compare the quarterly performance with the longer-term trends, and I'd ask you to focus more on the annual trend numbers to understand what's really going on in the business. For all of our businesses, I'd also remind you that premium can come in or move out in relatively big lumps and that can skew some of the shorter-term comparisons.

Starting my comments first with our reinsurance segment, I'd ask you to look at the supplemental financial data describing premiums that's found at the end of the press release. Here you'll see managed CAT premium appeared to grow very substantially from over 103 million in Q2 '03 to over 175 million in Q2 '04. However, I caution you, as noted in the press release, that we had various timing differences in how we booked premiums in '04 compared with '03, so I'd focus you on our premium expectations for the full year, which is consistent with our discussion last quarter and we're looking at CAT premiums down for the year at 5 percent or more, comparing '04 to '03.

What that means in terms of expectations for the third quarter is that you should definitely expect a sharp decline in CAT premiums when you go to look at Q3 '04 relative to Q3 '03. That's the only way to make the number work -- make the numbers work for the projected 5 percent or more decline for the full year 2004.

Looking at specialty, we are seeing a real upswing in the specialty reinsurance business, and here you can see, again in the supplemental data, that managed specialty premiums grew to 65 million from 34 million, comparing the second quarter of 2004 with the same period in '03. The strong growth in our specialty book has exceeded our expectations and we are now looking at top-line growth in this unit of 30 percent for the 2004 year, compared to 2003. That exceeds our previous estimate of over 20 percent. The strong growth in the specialty book has been driven by better than expected activity across several of our existing lines of business and specialty.

Our loss and expense ratios in the reinsurance segment, also shown in this data, are essentially stable year-over-year. Like the rest of the industry, we continue to benefit from light CAT losses. We estimate about $15 million of total benefit across all our CAT related activities falling into the second quarter. We also saw positive prior year loss development this quarter of $27 million, the majority of that from CAT.

Turning next to the individual risk segment, we see growth in this segment looking at the second quarter premium of $112 million and comparing that to last year's second quarter of $98 million. You'll note that the premium in the first quarter of 2004 was 120 million, so you actually see a sequential decline comparing Q2 with Q1. We're down on the sequential basis largely due to one portfolio transfer out, which Bill Riker will discuss a little bit more in his comments. But I wouldn't want that sequential decline to be misinterpreted and based on the current pipeline, we still believe we're on track for 30 percent or more growth for '04 compared to '03.

To set your expectations for the third quarter, and looking at '04 relative to '03, I will ask you to remember that there was a $50 million portfolio transfer in the third quarter of '03. So we get to the third quarter of '04, that will make the quarter-to-quarter comparison a bit challenging. I think that's also another example of how premium can come in lumpy, both in our reinsurance business but also in the individual risk business.

The underwriting results for the individual risk segment have continued largely on track. The loss ratio this quarter is 52 percent with a couple of million dollars of favorable development. And the expense ratio was 39 percent, back into the high 30's as we had expected to be.

Next regarding our investor results, the backup in interest rates has obviously impacted our fixed income portfolio, and is responsible for the realized losses in the income statement and the unrealized losses on the balance sheet. We did benefit from our shorter duration and outperformed a bit versus our benchmarks. Total return on our portfolio was roughly a negative 1 percent. We're continuing to manage a short duration of 2.1 years. Our alternative investment portfolio was close to flat, off a little bit for the quarter after a very strong first quarter.

Moving to some other items, this is the first quarter where we've included the investment channel rate. The change in the book value of the channel reinvestment is included in the line, equity and earnings of unconsolidated ventures, and channel contributed $1 million in earnings this quarter. Because channel is reported one quarter in arrears, these initial numbers only reflect one and a half months of performance and also reflect some nonrecurring startup costs.

Also included on this line is the equity pickup for our investment in top layer re in the trading joint venture, which we introduced last quarter. Note that this line is down versus the second quarter of '03 due to a $4 million decrease relating to our equity pickup in top layer re. That decrease is driven by higher seated premium and FX losses from a strengthening dollar being recorded inside top layer.

You'll see the cash flow was again strong this quarter at $231 million and as an interesting point, you'll note that rather than having paid losses this quarter, we actually had net recoveries on a paid basis of $7.8 million. That was principally driven by reinsurance recoveries like our paid losses, just in the normal course of business.

Regarding our expectations for 2004, with two quarters of light loss experience, we've raised our earnings estimate for 2004 to a range of 695 to 725 of operating EPS, versus our previous guidance of 610 to 650. This guidance assumes normal loss levels over the remainder of the year and the change in guidance, essentially this reflects the strong first half, and doesn't involve really any recalibration of second half earnings expectations.

Reflecting on the first half of 2004 versus our original outlook, our CAT business has held up well in the market that has been softening. We're seeing more growth than we had expected in our specialty reinsurance segment. Our individual risk business continues to build momentum and looking at JVs, as we've closed two deals so far this year, channel re and the JV that trades weather sensitive instruments as we discussed on last quarter's call. Both of those transactions are performing well so far.

At this point, I'd like to turn the call over to Jim for his comments about the overall market environment and especially the reinsurance market. After that, Bill Riker will speak on the individual risk business unit. Jim?

Thanks, John. I just want to make a few comments about where we are in the cycle and what that means for '05, and I'm going to talk -- break it down by our business units.

Starting with property CAT reinsurance, looking back at the last soft market, we were the first CAT specialists to let our top line fall, starting in 1996 and continuing through 1998. When the losses hit in the '98, '99 period, we were sure glad that we did that. In 2004, CAT prices are falling again and again, we're letting our top line fall. And I expect that that decline will continue into next year, assuming no change in the direction of the CAT market.

So that's -- you're seeing the same movie again. What's different this time is our extremely strong market position, the long-term relationships we built with clients and brokers, our superb track record on claims, and our security is viewed as among the best in the market. What I'm calling this market position has had tangible value to us in the last period in terms of excellent signings on programs that we liked.

Turning to specialty re, the markets in specialty re are also softening. So you should grill us on why we're growing into a declining market. The answer is a combination of several factors. First, the strong relationships in the CAT market that I spoke about give us a very large potential market for specialty re, where we currently have a small share. So we're growing into a large potential off a small base.

Second, we do a small number of large deals, so growth can be driven by a few successes. And third, the few key additions to our small underwriting team in 2003 contributed to the 2004 growth. However, I think 2004 is probably the last year of our big growth in specialty re until the next cycle change. As in CAT, our security claim payment track record and long-standing relationships make us a very desirable partner and give us an advantage in getting the deals that we want.

Turning to our joint venture activity, John mentioned we have completed two this year, and our number one priority is successful execution of existing deals. Both of these are performing well. Anything in this area is going to be extremely lumpy, so I'm not going to make any predictions about 2005.

Finally individual risk. I'm going to turn it over to Bill Riker, where the 2005 story is more upbeat than it is in reinsurance. Bill?

Thanks, Jim. You know, in the individual risk unit for the second quarter, it was a relatively uneventful quarter with it -- with our results continued to meet our expectations. Our combined ratio of 91 percent basically reflects what we expect to produce from this segment over time and to date, everything has been in line.

The top line growth is a little lower than we expected in this quarter and this was significantly affected by a one-time unearned premium transfer of approximately 18 million. It's interesting this particular transfer was more of a timing issue and we expect to regain this premium again over the next 12 months, so it is not a net loss of business. So this was not a program or a lump of business that we lost. This was more of a timing issue.

We continue to be working at full capacity evaluating and executing new opportunities and we fully expect to see more volume run on in the next six months. You must remember that as we bring on new blocks of business, you know, our premium numbers will remain lumpy like really all the different segments in Renaissance, and we expect this lumpiness to remain in the individual risk unit for the next year or two.

One thing that we firmly believe in as we continue to adhere to our view that in this business, you do it right or you don't do it all. Often getting the details right takes time. We continue to see a nice flow of new opportunities, but as our standards and criteria, you know, are some of the highest in the market, we still decline the bulk of what we see.

Our view of overall market conditions in the individual risk carrier remain consistent with last quarter and frankly, with the remarks of others, which I'm sure you've all heard speak in the second quarter, but we do continue to see better conditions in our specialty areas -- one of the reasons why we're interested in these specialty areas -- but to be clear, no area is immune from some competition at this point.

Operationally, our decision support systems, which we believe will give us a competitive advantage over time, have made very nice strides during the quarter, and we foresee further strides during the last half of the year. As the second half is a little bit quieter, we expect to spend a lot of our efforts and times in this area.

So overall, we continue to be on track in executing our strategy in the individual risk area and really see no reason to change our course. So I'm going to turn it back to Jim, and I guess we'll move into Q and A. Thank you.

Yes. Let's open it up for questions.

(CALL INSTRUCTIONS)

This sounds like a first. We have no questions?

No. Our first question is coming from Terri Shu (sp) with JP Morgan.

I've never been called first, so I gather there's no one else on the call. Actually just a quick clarification. I didn't hear you, John, as far as what the CAT activity or with the lower CAT loss, you cited a number. I thought I heard 50-15 and what period did that apply to? And also the positive reserve development, I gather part of it is just the usual formulaic thing and part of it is the low CAT. Is that how it works?

First of all, on the benefit of a light CAT loss quarter, the number I was referring to Terry, was 15 million. It wasn't 50.

Fifteen, that's what I thought. Yeah, 50 sounded very high.

Right, right.

Right.

So that's really the story for the quarter currently. And then the $27 million for the reinsurance unit in terms of favorable development from prior periods relates -- the majority relates to CAT, but there's also some specialty in that as well. That's not double counting the 15 million that I just mentioned, that's separate from that number.

Okay, that's separate from that number.

Right. And it -- all of that really is essentially formulaic and there's some judgments around the margins of course as --

Right. I --

-- like (inaudible) factors and so forth, but it's essential formulaic.

Yeah, I can't quite remember what your full year forecast was because you had given us the number all relating to the CAT business for the full year, so I gather it's a bit higher than that?

Yes, it is.

Right. And I mean it's always puzzling to me why people take it out of your earnings. I mean, I would think it's better to have better development than worse development. So I would gather this is a continuous thing. When you look into '05 you would formulaically continue to have reserve releases. Is that the way to look at it?

Well, I'd say that we are driven by the data --

Right.

-- and the data will point us to the answer of how much of a -- either redundancy or deficiency we might recognize in our reserves. Our philosophy, longstanding here at Renaissance, has been to be conservative on reserving on the theory that you always get loss reserves wrong but --

Right.

-- they're only estimates, and so given that, we have a bias towards being conservative. And that bias I think in the natural course will be more likely to yield positive developments than the negative development. But it will -- it is what it is in terms of --

Right.

-- how that data unfolds.

Right. Right. I haven't really kind of reconciled any modeling stuff, but can you explain again the investment income, the drop off? Part of it is that mark-to-market thing, right, the $7 million or so swing for --

Right.

-- private equity investments and such?

Yes. This is our alternative investment portfolio which had last year, a very strong quarter performance and actually in Q1 had a strong quarter performance; this year had a -- or this quarter, I should say, had basically flat performance. So I would say that's -- you know, there's no real story there, normal course fluctuations.

Right. So it doesn't signify anything in particular as far as danger losses. It's just kind of comparison?

Yeah, that's right, Terri. I think this is, you know, really a small item in the big picture.

Right. Right. And if you look at your book value gain for the quarter, it's -- I think you're one of the few companies where you actually have quarter-over-quarter sequential book value gain, not only because of the strong operating earnings, but you probably had very little impact, right, from the declining rates, or the rising rates, I mean?

Yeah, certainly muted by our short duration --

Right. Right.

-- of traffic.

And what are you doing now with new investments, new cash flow?

We are essentially sticking with the existing strategy. The duration remains short and, you know, we're not at a point of moving from that strategy, which has been in place for some time and we can argue we were early with that strategy, but we don't think it's time to extend yet. And so we will, I think, continue to sit with the current -- the kind of mix that you see currently which is obviously very heavy in short term investment.

Right.

And I think we'll -- you know, you could see us in this kind of profile for a couple of quarters easily and when that changes will really be a function of market conditions. And frankly also, the other thing I'd say is if the market were to change in a substantial and quick way, you could see our strategy respond to that.

Right. But you're not committing more dollars to alternative investments or equities or anything like that?

Well, I would say that over time, we're expecting to see the allocation to alternatives grow both on the dollar basis, even just to keep the fix -- the percentage constant, you know, as the portfolio as well.

Right, right.

But also --

But not proportionately more?

And even if that -- I was going to go on, Terri, I think that over time you should expect to see it growing, you know, somewhat at the margins and I would say that it would on our current thinking, not get above 10 percent, but it could move up a percent or two from where it is currently.

I'm sorry, what is it again? What kinds again of alternative investments?

It's a -- there's a diversified portfolio of hedge funds and there is a portfolio of private equity funds.

Okay. One quick question for you, Jim, on the market conditions. I gather that it's almost impossible to predict inflection points. So to the extent we don't see any meaningful catastrophe losses or any events, that one should just assume that rates will continue to dribble down. Is that a fair comment?

That's what I've observed in -- ever since I've been in the business, since the early '70s.

Right. And when you talk about your better position this time, much better position versus last time, is it reflected in the rate levels you're getting compared to the last time that this -- just that you get better selection, better terms? Is that how it works?

Well, we're getting -- we great signings. And so --

What does great signings mean?

Okay. It means that we get -- in terms of the shares of the programs, because the desirable programs are very much over line, which means that, you know, there's probably 2 to 300 percent placement capability. If you go across everybody who wants a share and you add it all up, the programs could be placed two times over. So then the client and broker go back and decide well, who is actually going to get shares, and we do really -- we've done exceptionally well in terms of getting the shares that we want in those situations where -- and, you know, so frankly if you go back to '86, when we were not as well established, we would not have gotten such good signings and what that meant -- would mean is our premium would have fallen more. So I think basically, the good signings keeps the -- has prevented our top line from falling more than the 5-ish percent that we're projecting for the year.

Thank you. Your next question is coming from Gary Ransom with Fox-Pitt Kelton.

Good morning. I wanted to ask a little bit more about market conditions also. And just following up on that last point, the getting on the desirable programs, you're saying that you're increasing your participations? You were presumably on some of these programs last year? And you're now increasing them?

Oh, we're -- you know, we're probably the largest CAT writer in the market, if not the largest. We're, you know, up at the top. So we're on -- yes, these are either programs that we have been on for a long time and to the extent that there are some additional programs being bought in the market, we're usually one of the first calls on those programs. But it's not -- and it's, you know, our CAT premium is declining, so this is not a case of where we are increasing our shares. In some cases, we do, but overall it's just that we're not losing as much as we otherwise would have.

Okay. And on the business that you -- I mean, you comment that you're not writing some business because it doesn't meet your terms and conditions. Who are the other players out there that are presumably getting that business? And just in categories, are there -- is it still all the A-rated or better carriers that are picking up what you don't do, or is it others out there?

Well, I mean, it's really across the board. You can look at who writes CAT business and that's where it's going. And I mean, you know, the interesting thing about CAT business is that in the -- if there aren't any losses, price -- the price you charge is irrelevant. I mean you look -- you know, everybody runs a zero loss ratio if there are no losses. It's only when there are losses that you see who is getting adequate prices.

Thank you. Your next question is coming from Alain Karaoglan with Deutsche Bank.

Yes, good morning. A couple of questions. On the reserve releases, what is embedded in your guidance? At the beginning of the year, you had said that you expected there would be $30 million of reserve releases for the year. So should we assume basically embedded in the guidance is $15 million for the second half of the year?

I'd say that's roughly correct, Alain. And we gave that guidance really just to give a sense of how we thought reserves would unfold if data, you know, had accumulated in the past the way -- or accumulated in the future the way it did in the past, obviously, kind of a tricky thing to predict. And in fact, what's happened, obviously is that we've gotten more favorable data and thus, you know, more favorable reserve tickdowns.

Okay. Jim, if you could comment a little bit on the joint venture opportunities. I mean, in the past, even though you've done two, they were fairly small ones and you have commented that you were contemplating joint venture opportunities. I think a year ago that you expected in 12 to 18 months some of them could be significantly larger than the one that you had. Are you seeing -- did these opportunities go away? Could you update us on that?

Well, you know, I certainly would count channel re as a significant investment and we're putting a lot of management focus and time into successful execution of that. The -- you know, this is lumpy and I would say that the pipeline is not as full now. There have been, you know, a couple of opportunities that are not coming to fruition, in one case because of market conditions of -- ourselves and our partner looking at the market conditions, decided this was not the right timing to start that particular venture. So at any rate, that's the answer, is that we -- you know, we have been successful at putting two in place and we're still looking. There's still a flow and, you know, tomorrow all of a sudden, a jumbo deal could heat up, but right now there's nothing. I'd say there's jumbo deals imminent.

Thank you. Your next question is coming from Joshua Sanger (sp) with Smith Barney.

In terms of growth in the other specialty sections, are you seeing rate growth or if that's your unit growth in terms of how much business you're writing in which lines? And does that include -- which lines do you find are falling away from you?

It's not rate growth. I mean, you're not seeing rate growth really. I guess there's probably some minor exceptions but you're seeing rate decline. So it is unit growth and, you know, I'd rather, for competitive reasons, not get into the specific specialties that we like right now and, you know, as we -- I'll give you an example of one that I think in the past we gave that we -- you know, we have almost exited the aviation market, except for a very minor (inaudible) exposure. We were -- had a reasonably significant aviation portfolio which in the last round of price declines, we decided it didn't meet our return hurdles anymore.

And are you looking into future programs to grow your program business right now or how is that shaping up?

Well, that would be on -- your question would be individual risk programs. Let me turn that -- as opposed to specialty re -- let me ask Bill Riker to answer that.

Okay. You know, we continue to evaluate new programs all the time. I'd say one of the interesting things about the program manager arena these days is that there's still not a lot of new entrants. If anything, you might even still see a net exit of people out of that business because it is hard to do and in the past people have gotten in some trouble if they don't do it correctly. So we continue to see a very significant flow of opportunities, but as I mentioned earlier, we generally decline most of them because the standards we adhere to are really, you know, is higher -- or as high as anybody applies in this business. So -- but I would say that there is still a lot of program business looking for a home or looking for a better home out there, and so it's -- we're very happy on the flow.

Thank you. Your next question is coming from Adam Klauber with Cochran, Coronia.

Good morning. I have a couple questions surrounding the individual risk business. What's the component of casualty compared to a year ago, number one. Number two, what's the average tail on the books now compared to a year ago?

I -- Bill, I've got the premium numbers handy if you'd like me to answer that question.

Sure, why don't you do that.

Okay. Looking at the year to date 2004, a bit more than half of the business on a gross written premium business is property. The balance is split among three areas, commercial auto, claims made liability and occurrence liability, the latter being the smallest. That's the look of 2004 year to date. 2003, a somewhat similar profile although the share of property business is over two-thirds and the other shares are smaller. So the business mix is clearly migrating to -- away from property towards these other lines.

Will the casualty portion necessarily carry a higher loss ratio of return than the property portion?

I would say, you know, in the end, because of the longer tail nature of casualty, theoretically if there's any kind of reasonable float on it, you can carry a somewhat higher loss ratio, but we also are firm believers that the casualty business is very uncertain and the idea is that you need to, you know, produce nice significant underwriting margins in the business is very important.

You know, all you have to do is look at some of the numbers coming out of other folks and you realize the ability to predict casualty loss ratios within 1 or 2 percentage points is very, very difficult. So we do believe that the casualty market, you cannot be looking just for, you know, investment income float to provide your return, that you do have to make solid underwriting profits in that arena in order to really get compensated for the risk you're taking.

Just one last comment on duration, as John pointed out, you know, it's -- in the first half of '02 we are just a little bit over 50 percent in property, but in the casualty side we're down around 10 percent of that business's occurrence. And the bulk of it being claims made in commercial auto, which obviously, has a shorter tail on it. So we still be -- we're still quite leery of just assuming long term liabilities that are very difficult to gauge over time and that's -- that primarily comes out of the occurrence product.

Thank you. Your next question is coming from Richard Diamond with Inward Capital Partners.

Yeah. Two years ago on a July call Mr. Stanard, you were worried about excess capital building in property CAT, since -- in case there weren't any incidents. Since we've gone 11 quarters without an incident, I'd be curious if you would indicate how much excess capital that you believe is now devoted to short tail property CAT or --

You mean in the industry?

Yeah.

Well, I don't have a number for your but I think -- and actually I didn't -- let's see. You got a good memory or keep good notes, probably, but I think that, you know, what's happened is consistent with that statement. I think we -- in the absence of losses, there's more capital chasing the business. That is reflected in the fact that you get 200 programs or 200 percent placed or more, the programs that are considered desirable. And so a lot of capital that wants to write CAT business ends up going home disappointed because it doesn't get the business that it's bid for; it doesn't get the signings. You know, I don't know how big of number it is but it's clearly happening and as the profits continue to accumulate, the number continues to grow.

The capital that doesn't get placed, where does it go?

You know, I know that's too much of a straight line. It -- you know, it's -- you know, I think it should -- it -- if it's Renaissance's capital, it, you know, we retain it and look for opportunities and if there aren't any opportunities, over time, we have a track record of returning it to shareholders. What other people do with their capital, you know, I mean, you can draw your own conclusions.

Thank you. Your next question is coming from Vinay Saqi with Morgan Stanley.

Good morning, just a couple of follow-up questions or a little bit more detail. In terms of the timing differences on premiums, John, can you just touch on how that affects the accounting? Do you guys recognize the premiums a little bit earlier than you would have otherwise and does that affect how the income flows through over the course of the year? And the second question is I think, Jim, you mentioned that there were a small number of large deals that you completed in the specialty reinsurance side which helped your growth. Any sense of magnitude as to what number those deals were this time versus last year?

Starting on your question about the timing of premiums, there are really a variety of transactions feeding into this, each with their (inaudible) some with their own story. I said that there are two large categories. One, Q3 '03 premium that as renewed in '04, is being booked; instead it's being booked in Q3, is being booked in Q2. And then in addition in the second quarter, there was also some late signings of first quarter incepting business. And I've described all of that really as normal course of reinsurance business fluctuations, and I guess in general, would say that the impact on earned premium is not really going to be material to any sense of earnings here; that, you know, that you could have some catch up recognition of earned premium on the late signing or what have you, but I think those will -- those kinds of events cancel out with other transactions. So I think that's -- this is really noise that can be ignored for purposes of earned premium.

I really don't have any specifics to give you on, you know, number of programs. I mean, it was -- I didn't mean to imply that it was just -- that the growth is driven by one or two programs, but we do have, I think as you know, a small number of large programs. So if we hit on a few of them, that can drive meaningful growth. But maybe to put the numbers around, you could find a program that might have $5 million of premiums, for example. And (inaudible) and you do a few of those and you can move your numbers for the quarter in a big way.

Great, just one follow-up question. What drives these timing changes from the perspective of the client? Why would they do it earlier or later relative to the prior year?

There might be transactions that's being restructured. There can be a variety of considerations that are around. The client needs, and I also state from our standpoint, we're trying to improve our systems for more consistently accruing at the end of each quarter so there's a little bit of systems improvement this year versus last year, although that's only, you know a small factor, really. So, you know, really it is client by client and you know, situation by situation.

Thank you. Your next question is coming from Steve Berman with Steinwell (sp) Investments.

Yeah, I have a couple questions. Have you lowered your expectation for what you might consider normal CAT losses in light of the fact that we just haven't had any bad weather? And the second question relates on the change in the business mix and the rate environment looking forward. Can you provide any thoughts about your decline in the ROE looking forward into 2005? What are you shooting for there?

As far as your first question, I'd say absolutely not. Our assessment of CAT's probabilities is based on models that use data going back, you know, at least -- I mean, there's very good data back to the '50s in terms of hurricanes, for example, and some data going back earlier than that. They're based on physical models of hurricane formation, earthquake geology and so forth. So, you know, the effect of a couple of years of no -- of light losses is really, we view as just luck, so that does not affect our view of probabilities.

What do you consider normal CATs, by the way, for yourselves? I mean, what would be normal with the models that you have?

Something north of 30 as the loss ratio for CATs.

I mean, that's -- the trouble with normal, however, is that it almost never happens because it -- that's -- we're talking about a mean on a very skewed distribution. So in that normal number, we are averaging in the potential for a small number of very large events. Now as to the second question, could you repeat your second question please?

Yeah. The business mix is changing; the rate environment is weakening, and I wonder if that implies a lower ROE for 2005. And I guess my question is, any help on how much lower we're going on ROE?

Let me start by just taking issue with your comment about business mix pointing towards a lower ROE because we attempt to bring the same set of fertile rates across all of our businesses. It's actually hard to compare non-CAT lines to CAT lines and we certainly try to bring the discipline of looking at all lines of business with the same goal of expected return on allocated capital. So I don't see any business mix connection with lower returns on equity. That doesn't connect with how we think about the business. We might be wrong, but we're certainly trying to get it right and maintain high hurdle rates.

So the only -- in my mind, the only factor that is really an issue to talk about in terms of declining ROEs in '05 is whether our capital buildup gets to the point where it's -- there's a really substantial excess capital and that drives a decline in ROE, and I think that's where the question really lies. And at this point I guess I'm -- I don't have enough of a crystal ball on '05 to really want to predict too far as to where I think ROE is going to go, and also don't want to predict at this point precisely where our repurchase activity might go. That's a bit of an imponderable as well, but I think -- suffice it to say, I would look at our long-term track record on ROEs and, you know, that's the kind of targets that we're shooting for.

Thank you. Your next question is coming from Christopher Nolan with UBS.

Quick question, just to follow up on the excess capital. If you did find yourself in a position of excess capital, would you prefer a share repurchase, or what has been your stated position on that in the past, please?

We've preferred a share repurchase as the vehicle for capital management and our theory is that that just gives us so much more flexibility. We don't like the idea of taking in a high regular dividend and a high payout ratio. We also like the idea of being able to hold some excess capital repurchase opportunistically when the price moves our way. So we're -- our approach in buybacks are price sensitive and there are points in times where we've been able to buy back stock on a basis that's favorable -- quite favorable to our long term shareholders and really what our goal is in capital management.

Are there particular ratios that relate to capital levels that you keep an eye on, rather than just debt to capital?

Yeah. Debt to capital is something we're cognizant of, of, but that's really not even at the top of the list. We're mindful of the rating agency models; we're mindful of financial leverage but the real starting point of our analysis is to look at our risk portfolio. We have a view of modeled required capital to support that risk portfolio, and then we will compare actual capital to that amount and see how much is in excess. There's always some excess. The question is how much and how much you're prepared to tolerate.

To look at the judgment of what price we like for a buyback, we're focusing very closely on the payback period for recovering book value per share dilution, assuming we're buying back premium to book. We also have a number of qualitative factors that enter into the consideration, so this is not just a formulaic approach and obviously we have to look at our incentive business opportunities going forward and other factors of that nature. So it's partly science but also partly art.

Thank you. Your next question is coming from Jay Cohen with Merrill Lynch.

You know, I didn't think you guys were going to get any questions. I buzzed in; I didn't want you to feel lonely, but --

We have other things to do.

Actually, I do have some questions. First one, could you break down the individual risk business a little differently, say between like MGA business, pro rata reinsurance and just individual stuff you're writing. I don't know if you've done that before, actually.

Bill, do you want to take that? I --

You know, it's true; we have not done before. It's hard to draw any firm conclusions from that because the -- you know, occasionally, for instance, when we enter a MGA relationship, we might do that by taking an unearned premium portfolio in which would be, you know, we could be accounted as reinsurance, but actually, initially the, you know, the source of that business would be our program manager partner. Why don't we do this, is we'll talk internally and determine whether that's something we do want to release. I know it's something we haven't done in the past, but I think one thing you can be -- you can assume is the percentage of the business that is coming through the MGA business continues to increase relative to the quarter share.

And the sort of overall view on that is a lot of our quota share business had been in the sort of CAT exposed property area and as I've mentioned in previous calls, that's the area that is probably experiencing some of the toughest competition out there. So we are consciously backing off in how much of that business we assume, you know, because you have the difficulty in maintaining the discipline is unfortunately some markets that are assuming that risk, which we believe actually don't quite understand that there -- how much CAT is in it. So -- and thus, the margins aren't appropriate. So I hope that's helpful.

Yeah. It is helpful actually. And the second question, I guess for Jim. You kind of compared a little bit of what's happening now to 1996 when you guys were the first to begin shrinking. It seems like that CAT market is a lot different than it was in 1996 and most of the players obviously have changed. Is the deterioration you're seeing of a different nature than what you saw in the mid-'90s?

Well, we don't -- in -- yes, in the sense that there is more -- okay. Well, it's a good question. The -- there's more modeling now than then, which on balance, is good news for market stability but frankly, you get -- sometimes I think in the market we see too much faith in the models and blind reliance on model numbers with, you know, not enough logical underwriting going on. There are -- the buyers are much -- okay. So the first point is good for reinsurance market stability.

On the other side, though, the buyers I think are much more sophisticated in understanding how to retain risk using the models and sophisticated risk management themselves. So they are -- the -- so it's a tougher market for that reason. I guess the final point is, you know, we still -- you know, we're within -- we expect this year to be within 5 -- you know, roughly 5 percent of our peak premium volumes, so that indicates that we still find a large amount of business that we like. We do get better signings but there still is a substantial amount of business there that we think is adequately priced. And we don't have, you know, haven't had the influx of what in the last soft market, where the new Australian markets and the guys that came into just totally, you know, undercut prices; you haven't seen an influx of new capital that is just coming in at crazy low price levels.

Thank you. Your next question is coming from Kevin Gavios (ph) with Dreyfuss.

Good morning, everyone. If I can just get a little more clarification an all this timing difference stuff. My question comes with two pieces to it. One, John, noting the color that you mentioned before about how some (inaudible) balances the second quarter versus other quarters last year, what is the magnitude of all that? And two, Bill, in your comments, you mentioned that that 18 million that came out this quarter was likely to come back. I didn't understand how that worked. So if you could explain that, I'd appreciate it.

Steven (sic), the magnitude, you know, really accounts for the bulk of the apparent increase, you know, quarter -- second quarter '04 against second quarter '03. There's also some new business in that and the comparison actually gets a little bit tricky too. We've had some new business come on that you can argue is restructured or what have you, but I think you can look at a high level, you look at the increase that appears to be there and that's essentially driven by timing.

That's in CAT or all reinsurance or --

I'm sorry, that's in CAT reinsurance.

Okay.

As for specialty reinsurance, there's really not the timing story or not one of note in that, but that that's pure unit growth.

So CAT on an apples-to-apples basis is basically flat?

Right. Yes, and I would really go against the seam of the annual trend that we're pointing to of down 5 percent or so.

Okay. And on the individual risk side?

We did, for example, in Q2 pick up one large new program, which is great so that was a pickup on new business so good news around that, but we also know of some things that are going away in Q3 and that did go away in Q2. So it's a -- there are a variety of ins and outs, you know, on a more micro basis, but looking at the second quarter, it's a timing driven story.

Okay. And I guess similarly the third quarter decline will largely be a timing driven story as well?

Correct. Although there won't -- there's also, you know, some lost business, real lost business (inaudible).

The trend's down, but the magnitude of it will be exacerbated by timing?

Right.

Okay. And what's the scoop with the individual risk thing?

All right. I'll -- basically what that is, is a transaction that we have actually had in place for the last two years, and what actually is happening is this -- there's going to be some movement of the business between companies. And so even though our annual expected premium for the, you know, July 1,'04 through June 30, '05 period is the same as the '03, '04 period, the bulk of the earnings and the bulk of the written is going to come sort of back loaded in the last nine months of that transaction.

So we still expect that transaction to produce the same amount of annualized earned premium as it has in the last couple of years. It's just there's been a timing change where there's a portfolio out, so our earnings for the first -- for the next quarter are going to be lower, but they're going to accelerate in the second, third and fourth quarters of that particular transaction. I don't know if that's hopeful, but it's a -- it's actually a good thing.

Thank you. Your next question is coming from Bob Gullet [sp] with Newton.

I think you've probably answered everything I wanted to ask. I've been listening in to all the questions that didn't -- weren't there in the beginning and I think I've got everything I need.

Thank you.

Thank you. Your next question is coming from Alain Karaoglan with Deutsche Bank.

Yes. Good morning. Actually, I didn't get to ask the last question that I wanted to ask, which is John, on capital management, one of the reasons for having the capital, even though you're earning a 25 percent ROE on that business, was to take advantages of these potentially large on-venture opportunities. And in the past, you've said you have enough of these opportunities that capital management is not an issue that you're focusing on yet. Are you focusing on it now, and do you foresee that 2005 would be a year where you should be giving back a fair amount of capital to shareholders?

Well, I guess in 2004, I don't think we've got, you know, an immediate issue that's taken -- again, when we're running at 25 percent ROE, I just have a hard time feeling pressure on capital management. So my headset today really isn't different than it was a quarter ago or two quarters ago, but, you know, that said, I think if we fast-forward a year from now, and we don't have something developing or fast-forwarding even six month from now, we'll have -- our headset will start moving. I think Jim might have something to say about the --

Yeah. I'd just like -- I want to try to clarify this question about joint ventures and how I'm looking at it, and how I'm looking at the capital needs against that, which is, you know, we've had -- these are very lumpy. We have periods where we may have a couple of deals that are looking somewhat realistic, and then we need to plan for where we're going to get the capital. You know, now we're in a period as I indicated before, where the pipeline is not as full with large potentials, but that in no way means that it's not going to fill -- the pipeline won't fill up again.

And so I mean, in no way do I want to imply that that game is over and that therefore we, you know, don't need to continue to think about capital around those opportunities. I mean, I think the softening market is a bad factor for opportunities for joint ventures, but the market turmoil which I think is still -- and the balance sheet turmoil that I think still continues, is a good factor because these ventures come about when business shakes loose from one end of the -- our capital, and everybody has capital needs and so forth. So -- and I think that turmoil is still very much alive, so I just don't want an implication that this, you know -- that we're -- that we don't think that these -- that we don't think there's potential deals out there in the future.

Thank you.

Thank you. Your next question is coming from Andy Schaeffer with Farleigh Capital.

Can you quantify the level of price declines you're seeing in the market for property CAT and also specialty?

I really don't think I can give you a number that is meaningful, particularly for specialty because it's so heterogeneous. And as far as property CAT, I mean, we really -- it varies by territory and I think you know, I wouldn't disagree with some of the numbers that are out there from -- that others have stated, and it also varies by program. I mean, the point is that the market may be down 10 percent, but the programs that we ended up writing may have only been down 3 percent, and I'm somewhat making those numbers up, but they're probably the right magnitude.

Okay, thanks.

Thank you. Your next question is coming from Adam Engleberg (sp) with Silvercrest Asset Management.

Good morning. I had two questions, actually. The first question has to do with -- I guess maybe just sort of market commentary. A lot of people are talking about pulling back from the market because pricing is down. These are all the same people that wrote a ton of business back in '97, '98, '99 at prices that were, I don't know, 20 to 40 percent of today's levels. And I'm just wondering do you think that this is, you know, newfound discipline on their part that some of the players are going to actually shrink? Or do you think maybe this is a little bit more lip service based on some of the actions that you see in the market? And the second question has to do with whether or not, as your property CAT business pulls back a little bit, whether you might pull some business off the DaVinci balance sheet and put it onto the RemRe balance sheet? Thank you.

That -- very interesting point, and I do think there is a -- I don't think it's 100 percent lip service because in a lot of cases, it isn't actually the same bodies. It's the same corporate entities, but you've got a lot of new CEOs in there. And I think that -- you know, and frankly, I think it's -- it is more acceptable from a rating agency point of view and from a shareholder point of view to be taking a conservative position and letting the top line fall. And you can get applauded for that in this market.

In the other market, I mean I don't think I'll ever forget one of my good friend analysts saying that we ought to go to "Retro-buyers Anonymous" in 1997 because we were sending out too much of our top line. So we were -- it was a more contrarian move, I think that we made in '97 versus now. So, you know, having said that is -- that would make me -- that's one factor would make me more optimistic about -- there's the will there for discipline. But at the same time, the temptation of excess capital is just -- can be overwhelming to management teams and, you know, I -- to the earlier question about the excess capital building up in the business. You know, I don't -- you know, I think that is -- will inevitably overwhelm the will of discipline. So -- but I don't know. We'll see what happens.

To the second question, I'd say it's -- you know, we don't have any specific plans. The one thing I'd say is that DaVinci is a franchise. I mean, it is a -- it has a client base; it has some -- you know, the DaVinci brand is important. Clients want DaVinci. They have had renewals for a period of time in DaVinci, so, you know, we don't want to just arbitrarily start messing around with business going into DaVinci.

Thank you, once again, if you do have a question, you may press star one on your touchtone phone at this time.

Okay. Well, I think -- why don't we then wind it up? And after that initial lull, I thought we got good questions. And just a quick summary, you know, even though we've talked about the softening market conditions, as I've said in the past, I can't feel more strongly about the fact that I'm happy, very happy about the position Renaissance is in. When I look at our management team, I look at our market position and I look at our balance sheet, there's absolutely no other company in the world that I'd want to trade places with, no other company in the insurance or reinsurance business that I'd want to trade places with in terms of those features in being able to deal with this market condition. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.