濱特爾 (RNR) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your RenaissanceRe fourth-quarter and full-year 2004 conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to David Lilly. Sir, you may begin.

Good morning. Thank you for joining our fourth-quarter and full-year 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. There will be an audio replay of the call available at 1 PM Eastern time today through March 3rd at 8 PM. The replay can be accessed by dialing 877-519-4471 or 973-341-3080. The pass code you will need for both numbers is 5669815. Today's call is also available through the Investors section of www.RenRe.com, and it will be archived on RenaissanceRe's website through midnight on April 8th.

Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings, to which we direct you.

With me to discuss today's results are Jim Stanard, Bill Riker and John Lummis. I'd now like to turn the call over to John to begin with an overview of the financial results. John?

Thank you, David. To start, I'd like to comment on our annual results. And stating the obvious, driven by the third-quarter Florida hurricane activity, 2004 is our worst year ever viewed by various financial measures. I'd point you to our first single-digit return on equity ever for a year as one point of reference around that.

We've now recorded a net impact of $570 million from the third-quarter hurricanes. That reflects an increase of $50 million in the fourth quarter relative to our previous estimates. In the future, we may have offsetting benefit of additional recoveries on certain retrocessional coverage relating to our Florida exposures, which is triggered by industry losses. We just didn't have clear enough evidence of that to support recording additional recoveries in the quarter.

Turning to some comments on this year's premium results, our Cat Business showed some growth in terms of reported premium volume for 2004, coming in with a total of 753 million, an increase of just under 5 percent versus '03. That said, I'd point out that there's over $57 million of premium associated with reinstatement premium and backup coverage related to the Florida hurricanes. So I'd back out that $57 million from the premium to arrive at a normalized view of '04 premium of around $695 million. And that $695 million -- actually a little bit more -- should be the real number to use for annual comparisons in my view. That takes you to a essentially small decline on normalized '04 managed Cat premium when compared to '03's managed Cat premium of $720 million.

For the year, specialty came in very well and demonstrated growth of 30 percent year-on-year. That business was an important source of earnings for us in '04. The Individual Risk unit came in a little bit light of the guidance we'd given last quarter, which was indicating 10 percent growth for the year. In fact, that was a bit less than that, around 7 percent.

Looking at investments, we're generally pleased with the results here. We had a 4 percent total return across the portfolio -- a bit over that. The story is largely dominated by the short duration fixed income orientation of the portfolio. But we've also benefited meaningfully from over 10 percent returns in our alternative investment portfolio for the year. And we also have been benefiting from an investment in a energy or weather-related trading venture that we've invested in. So all told, alternatives were particularly strong in their performance for the quarter.

Next, I would like to comment in more detail on the fourth-quarter results. First, regarding premium, I'd remind you that the fourth quarter is normally a light one for the reinsurance business. So I don't think there's really anything substantive to comment on there. The Individual Risk business actually showed some modest declines compared with last year. And Bill Riker will comment on the underlying business environment around that.

There are a number of large or unusual items in the quarter. I would like to highlight those. First of all, there is $50 million of adverse developments from the third-quarter hurricanes, which I previously mentioned. Next, there is $64 million of favorable development from prior accident years. Another item is the $27 million of income associated with our investment in Platinum. As we previewed in last quarter's call, that's now running through the income statement because the relevant lockup around that has expired. Effectively, we're getting a onetime benefit from the initial recognition of the markup on Platinum. And in the future, obviously, only the marginal mark-to-market impact will flow through the P&L. We've included this amount in operating income in our computations as we said we would last quarter.

Offsetting the benefit of that markup on Platinum is a $6 million loss from a short credit derivative position that we have maintained as a hedge on certain credit sensitive risks. That hedge is not eligible for hedge accounting, and so it runs gross.

Also as noted in the release, we had a position in a non-dollar fixed income fund. And the FX impact of that fund itself runs through other comprehensive income. There's an offsetting position that is a hedge but is not eligible for hedge accounting, and that's the item that you see running through our FX line and producing a larger than normal FX loss than what you would usually see from RenRe.

On the subject of the tsunami loss, there's really not much to say here. We see ourselves with very limited net exposure. And so this is not a factor for us in the fourth-quarter results.

Next, I'd like to comment on the outlook for 2005. As indicated in the release, we're not moving our earnings guidance. And as most of you know, we don't attempt to adjust guidance every quarter. With that said, I want to highlight the fact that there's various factors that should lead to some caution around our earnings outlook. First and most notably, we're now anticipating a decline in gross managed (ph) Cat premium of over 15 percent when comparing '05 to normalized '04 premium. Given the reinstatement premium and rack-up (ph) premium in '04, that decline will look even larger on a reported basis. Previously, we talked about flat '05 Cat premium relative to normalized '04.

The Individual Risk business also continues to be an area of growth. But 2004 ended up growing a little less than the 10 percent growth we previously projected in last quarter's call. For '05, we're now talking about growth in the range of 35 percent against the somewhat lower base. That expectation is reduced a bit relative to 40 percent guidance that we previously discussed. Although the P&L impact of that is relatively modest. Here, I'd also like to highlight for you the fact that the first-quarter premium in Individual Risk is expected to be flattish when compared to prior periods. So don't be surprised with that result in the first quarter.

The situation appears that we have new premiums coming online in Q1 and Q2, but they're not hitting the Q1 premium much as we now see things. Those programs should still feed into the premium growth story for the year.

Finally, as noted in the press release, we have now had a look at the results of the first-quarter European storms and anticipate that they will aggregate over $40 million of net negative impact to RenRe for the first quarter.

So against those negatives, I would like to note some positives. First of all, the Specialty Reinsurance unit continues to be a bright spot that is, in that we're looking for growth in the 10 percent range comparing '05 to '04, and previously we'd talked about flat premium. Secondly, I'd remind you of the possible additional hurricane recoveries that I mentioned in my beginning comments. And finally, I'd like to highlight for you that our business remains prone to the upside of finding large deals that can move our expectations around. And we certainly have some opportunities in front of us that have some positive impact for us.

To close, I'd also like to add a little more information around the restatement that we announced in our Tuesday press release. First, I'd like to clarify the transactions that are involved, and for the accounting technicians on the call, I'll also refer to the relevant accounting literature. So if you refer to the press release, there really are two categories of transactions which appear in the first paragraph of that release, both of them involving reinsurance that we purchased and that are referenced in the '01 to '03 timeframe.

First, the Tuesday press release refers to errors in the timing of the recognition of reinsurance recoverables, generating an increase of 26.4 million on 2001 income with an equivalent amount pulled out of 2002 and 2003. What this relates to is the set of transactions which on closer inspection we concluded did not have sufficient risk to comply with our requirement for FAS 113.

Second, the Tuesday release refers to errors for the recognition of premiums ceded on multiyear contracts. These contracts cover Cat risk for multiple events over a multiyear period. The contracts we record appropriately is traditional reinsurance under 113. However, as multiyear contracts, they are also covered by EITF 93-6. The transaction structures involved are fairly common -- somewhat complex, but fairly common. And it's also this transaction structure that relates to the errors reflected in our 2004 results that are also referenced in the Tuesday press release in the second paragraph.

As to who our counterparties are on these, we don't as a policy matter disclose the names of counterparties. But I can tell you that there are six different entities involved. In my mind, at this point, the key question is could these types of errors be repeated in future periods?

To answer that, let me say that we've substantially improved our control environment over time. We've been adding staff in our accounting function and elsewhere; holding seminars to educate staff about the key issues; and we are building in some features to flag unusual contract features in our underwriting system that would result in a more detailed and rigorous accounting review of any more structured contracts. So I believe that it's unlikely that we could see a repetition of anything like this in future periods. I would also note that we've gone through the general enhancement of our control environment as part of our overall Sarbanes-Oxley 404 efforts.

So I close with an apology around that restatement. We're obviously disappointed to have to bring that news to you. But we do want to face the facts and deal with them and that is what we've tried to do. At this point, I'd like to turn the call over to Jim Stanard for his comments.

Thanks, John. I want to make a few comments about the restatement and also about -- more comments about the market conditions and the various business units. Restating our financials is obviously embarrassing to me and all our management team. We try to be the best-in-class company; we've always tried to be the best claim payer, the most responsive to our clients, have the most effective risk management and produce the highest ROEs. We usually succeed in these goals, but like any organization, we can make errors. When we find errors, our culture is to acknowledge them quickly.

Having said that, I want to put this in perspective. First of all, this is a result of a review that was initiated by management. We have announced the errors that we have found so far. The only relate to the timing of income and in my view should not affect the analysis of the key trends of our business. We're not aware of any other adjustments coming. But we're still involved in a thorough review. So I can't be certain of the outcome at this point. As John mentioned, with the controls we have in place today, I don't think these errors could happen in our current environment.

But the most important point to me is that nothing has come to light that would give me any concerns about the strength of our current balance sheet. I believe the reported capital position is rock solid. As I've said many times in the past, I believe we have one of the strongest balance sheets in the business with no goodwill, tax assets, and with strong loss reserves. And I continue to believe that.

Turning to market conditions, in the property Cat Business, we found that market to be disappointing at year-end, especially in the assumed retrocessional area. There's lots of capital in the Cat Business now. The existing markets have added the capital through profits in 2004. And hedge funds are now coming into the market looking to deploy capital. Our biggest decline was due to losing about half of our assumed retrocessional business at the January 1 renewal period. So as John mentioned, we are expecting our full-year Cat premium '05 versus '04 to be down 15 percent versus normalized '04, which would equate to about 25 percent down versus reported '04 when you consider the reinstatements and backup covers from the hurricanes in '04 that presumably aren't going to repeat in '05.

This market to me feels like it felt in 1996. Back then, the market was really starting to -- the Cat market was really starting to soften. Many of our competitors were still growing and we were swimming against the tide as the first market to cut back then. We seem to be one of the first major markets cutting back now in an environment that feels to me to be similar. I think the market reacts to surprising losses more than it reacts to large losses. And the Florida losses are not particularly surprising. The models didn't do a great job, but they did better than in prior large losses because I'm sure you recall that the models were terrible in the World Trade Center, the 1999 European storms, Northridge, and the Japanese losses, for example in predicting the loss sizes. I think it's important that the models are estimates; they're not facts. One of our underwriters commented to me that he's seeing more modeling and less underwriting in the market now. And that's not a good sign.

Turning to specialty reinsurance, although there are some softening trends there, but our opportunity as one of the strongest broker market reinsurers means we still have opportunities for growth. That growth comes -- is lumpy -- that's a small number of large transactions.

In the joint venture/venture capital area, we're happy with what we see -- Channel Re and Platinum are both going well from our perspective. John referred to our weather-based energy joint venture, which is also going well. The softening market means that new opportunities are smaller than in the past. So I can't say that the pipeline is still bulging as I said a few quarters ago. But there still is a flow in it. Let me turn it over to Bill Riker to talk about Individual Risk.

Thanks, Jim. The market forces in the Individual Risk business really continue to be subsegmented into different areas. The first one I'm going to talk about, which is actually our area of the largest sort of pullback in the last six months -- sort of in a large commercial property area. And we're seeing significant competition in that area both from overseas and also even from some of the traditional carriers who had sort of backed away from that business. And the thing that we find interesting a little bit, parallel to what Jim just said, is that the Cat exposures are either disregarded or often underestimated in our view. We think that people are going through a rote process of potentially looking at a model but really not drilling down to understand the Cat exposures in some of these larger accounts.

So it's somewhat hard to measure exactly, but our commercial property book is down well over 50 percent of its peak volumes in '02 and '03. So as you see the Individual Risk premium over time, it seems stable or not moving that much. But actually what's going on is the commercial property, especially in the large area, is shrinking down very much in our direction. And then we're backfilling with some of the more middle market business.

One other comment -- the commercial wind market, which I know on this call in the past and really back in the fall, people were fairly optimistic about after the four hurricanes. It was interesting that there was initially some good signs in that market. But as it came, as one approached, that market to a certain degree in our view sort of fell out of bed and all of a sudden everybody was after that business. So the opportunity in the commercial wind market, we have really haven't seen materialize.

Moving to sort of the middle market commercial area, I know we had a bunch of other releases in the last few weeks. Is that that's a nice underwriter's market. It's an area where pricing is stable. It's pretty much tracking around inflation. It's a risk selection market and it's one that we actually think is a good market to be in and hopefully for the next few years as well. There are occasional soft spots. But usually it's limited to a specific carrier as opposed to a general trend.

Moving in the area where I think right now has the greatest amount of interest is the homeowners market. Remains actually quite firm, especially in Cat-exposed areas. You know the Florida storms shook up a lot of homeowners riders (ph). You know it was a very, very large retained loss for most people who are in that business.

And it's interesting, in Florida itself, there's a lot of legislative issues being considered and it's starting to sort itself out. And we actually continue to be optimistic that our position in that market will afford us to execute on some excellent opportunities over the next few months. And just most of our Florida homeowners business comes via quota share reinsurance.

We have two MGAs in the ramp-up stage in the first quarter. We've been working hard on those guys and we're very optimistic about how that's going to come out. We signed up another one in the last few weeks and that should be hopefully coming on somewhere second quarter. So we're very happy where that business is going. The results are coming in as projected if not slightly better.

And the thing that really makes me most optimistic is our model, which is very different than the traditional model in this whole MGA area is really starting to gain good traction. And our flow of new opportunities that fit our relatively tight criteria is actually increasing as our existing partners are starting to basically become our best advocates in the market.

You know as before, the ramp-up can be slow. We have talked about quarterly premium changes, etc. We see this as a long-term business. We see that we are working with partners who will give us a long-term competitive advantage in those specific markets. And the way we look at doing it right is better than doing it fast.

Talk a little bit more about the specific results. Again, the hurricane again impacted our quarterly results. About half of our development came for our Florida homeowners’ quota share business and the other half came from the smattering in commercial business. Overall, the development was somewhat less about 15 percent on the gross and well within the tolerance of model uncertainties. Jim mentioned earlier modeling is a very uncertain science in that plus or minus 15 to 20 percent is actually pretty good in that business. And we've been spending a lot of time learning from these events, drilling down into data. And we've actually -- very, very optimistic about some of the things that we've learned that we can deploy hopefully quite quickly in the revised market.

Our results, excluding the Cats were great in the fourth quarter -- as the first quarter turned out to be a very, very low-loss quarter outside of our hurricane development. It's just one of those things that -- the fourth quarter just didn't seem to be a lot of losses out there. So our actual combined ratios came in quite a few points below our target of 90, excluding the hurricanes. So I'm not going to say that's going to happen again in the first quarter. But the fourth quarter for ourselves and from what I've seen from a lot of other companies was one of those sort of lucky good quarters where the losses were low.

So in conclusion, we still very much like the business we're in. We think that the technology advances we're making are really starting to take hold and we're really starting to get others in the business, primarily our partners, to embrace that. And it's interesting -- we're really starting to get some real converts on the way we're doing this business versus the traditional methods. So that's all I've got. I guess back to John.

I think at this point, we're ready to open it up for questions.

(Operator Instructions). Joshua Shanker, Smith Barney.

Given your premium guidance of Cat being down 15, Specialty up 10 and Individual Risk up 35 in this coming year, is there a business mix migration going on overall? Are you changing the ideal weighting of your portfolio?

Let me take a stab at that. I would say that our approach to business is to write as much good business as we can and then we solve to the capital base behind that. So we don't have any preconceived notions about business mix comparing specialty to Individual Risk or Cat or what have you. Except of course we do spend a lot of time aggregating the risk profile of each of those businesses and where they correlate; we're obviously mindful of that from a risk management standpoint. But aside from that consideration, we really don't have targets of business mix. We have a target to write as much good business as we can find out there.

Is there any color you can give around run rate loss ratios for the specialty business as opposed the Cat business?

I guess maybe to just keep it simple, I'll refer to expectations on a calendar year combined ratio basis. And I would say that specialty has been unfolding. It's migrating towards a 70-ish combined ratio.

And Cat obviously is a variable, given the year and whatnot?

Sure.

And in terms of the specialty lines, where are you finding business remains attractive? I thought you were growing the business a little bit in terms of there's opportunities. But are there any specific lines that still seem to be unfolding favorably in terms of rate development?

No, I would not say that there's a broad categories of lines of business that are still -- have favorable rate trends. It's more a question of a small number of large transactions that are very specific to our close relationships with our clients. So it's not an across-the-boards thing in any particular area.

Okay, very good. And finally, when are we going to be able to see the restated numbers for the various quarters? Or maybe we're not going to see that.

Well, the press release itself includes -- or reflects the impact of the restatement to the extent relevant to the periods covered in the press release. So that's been given effect to there. The rest of the restatement is work in process and I think we'll have updates as that unfolds. But I can't be any more precise than that.

Okay. Well thank you very much.

Kerry Schuh (ph), JP Morgan.

Yes, hi Jim and John. I didn't hear any answer completely on the restatement. Did you say that there was or was not a high probability of a delay in filing your audited financial results?

I would say that we're targeting on a March completion date. That's what I'm aiming for. But I don't want to put too much precision around that or make promises that we're not sure we can deliver on. So there could well be a delay; and it's actually very hard for me to handicap the probabilities, other than to say that really the process is to get it right. And so whatever that takes is whatever it takes.

Why would it take longer than a budgeted time? Isn't it just a matter of course to go through all the transactions? I'm not sure why it would -- because we are in let's say still not quite the beginning -- we're going into March and so you have a month to do it. Is it a matter of questionable issues that you have to check on or the outside accountants? I'm not sure I understand the delay issue.

I'd say it's just a matter of completeness in the review process. And that will take the time it needs to take. And we're working with our advisors to be sure we're really done.

Right, right, right. And as far as the rating agencies, were there -- I gather they heard about it the same time the public did. Or were you in conversations with them? I'm a little confused why they would have the credit watch.

We contacted them as we often would ahead of this release coming out. And I guess their actions speak for themselves. I think they -- you can refer to their press releases to understand their actions.

But they were sort of -- were they involved like all along, kept informed? Or is it sort of before you issued your release you would inform the rating agencies kind of thing?

A few days before the release came out, we talked to them.

Okay. Okay. All right. Thank you.

Vinay Saqi, Morgan Stanley.

Good morning. Just a couple of quick questions. One, given the guidance that you have provided for 2005 in terms of premium growth, does that change in any way your capital management? Does it free up additional capital that you won't be writing as much in the way of Cat premiums? And second, is there anything the rating agencies have told you what they are looking for to resolve the negative outlook or the watch issue that they currently have, especially S&P?

First of all, on the subject of capital management, I would say our philosophy is the same as it's been for years, which is we do look to manage capital, factoring in a range of considerations. And those considerations haven't changed. We obviously don't disclose our price points. And as a matter of fact, we don't feel a huge amount of pressure on capital management given a view of 2005 ROEs in the high teens range. It's hard for me to feel concerned -- if that's the word -- about capital levels. So I think we will look for our opportunities and see some where it makes sense all things considered for the Company.

As to the rating agencies, I really can just refer you to their press releases. They obviously make their own decisions. And I don't think there's anything to be added from what's in their releases. I guess the thing I would underscore the practical reality of all this is the balance sheet strength at RenRe is rock solid in my estimation. And the issues that we're talking about here really don't touch that basic proposition. And it's very, very difficult for me to see any question around that. In fact, I don't see any way really to challenge the balance sheet strength at RenRe. That from my mind is the key standpoint from an investor viewpoint and a customer standpoint.

Just one final follow-up on the capital question. Any change in how you're looking at capital today versus given your previous guidance going back to October, based on what your outlook is for 2005? Is it -- do you believe it's incrementally better, worse, the same?

I'm sorry, Vinay; I missed the question.

In terms of just looking at how you're going to manage your capital for 2005 and your guidance for 2005 versus what it was in October, has it changed in any way in terms of having more flexibility to do things, less flexibility, the same?

I would say roughly the same.

Okay. Thank you very much.

Alain Karaoglan, Deutsche Bank.

Good morning. Actually it's Darin Arita on behalf of Alain. A few questions here. The first is on, I guess what were the January managed Cat growth compared with a year ago? I know you mentioned, Jim, that some of the retro business went away, but what about the overall managed Cat Business?

Obviously, the first quarter is still underway and that's still unfolding. I guess all told what we're looking for in the first quarter is declines in premium to be essentially somewhat greater than the 15 percent or greater guidance that we give in the release. And the backdrop for that is the assumed retro premium that Jim referred to. And on the other hand, the counterbalancing consideration is the fact that we have prospects in Florida later in the year. So I think you could see the first quarter looking potentially a little bit worse when you just slice that out. But we still blend all that together to look for the result I mentioned for the full year.

Let me just add that the two areas that got hit with losses last year, Florida and Japan, are not heavily January 1 renewal periods. Japan is April 1 and a fair amount of Florida business is a June 1. So the 1/1 renewal was disproportionately contracts that had not been hit -- not exclusively. But there was a tendency there. On the other hand, retro was all 1/1. And as I said, the retro market was ugly.

Okay. And on the European losses in the first quarter, how should we put that into context with the normal attritional losses for the quarter?

I see it as ballpark 15 million or so worse.

Okay. And also, last question here. With respect to DaVinci, is there any thought on shifting more business written on RenaissanceRe's books versus DaVinci?

No. DaVinci is I think -- we view that as a stable franchise and it has its own client base. I mean, the same clients as Renaissance, but we're not going to be arbitrarily moving business back and forth. So we see DaVinci as being a reasonably stable kind of platform.

Thank you very much.

(Operator Instructions). Mark Therapin (ph), Banc of America Securities.

I was hoping you could maybe elaborate a little bit more about the expense ratios in the individual risk segment -- to the extent that the lower acquisition costs are sustainable, just to kind of get a better sense for run rate going forward?

Yes, there's a couple of moving parts there. Probably the most significant is a bunch of the business we've had in the past has been quota share business, which if you think about it, the quota share business usually embeds a little bit of a front fee in there, you know, say 5 points or something like that. Now our business mix is moving to be more of our own paper, where so that front fee comes out of the equation. So that is sort of a permanent reduction in the expense ratio.

The other element is just as our volume goes up and our -- as I've mentioned before -- our infrastructure we built in anticipation of making sure we did this business correctly, our infrastructure primarily based in Dallas to do this is pretty much built out, with really any additional expenses coming as a result of significant increases in business. So it's -- really those are the two major factors.

Okay. And then just kind of shifting to investment as you look at the investment portfolio, what's like the recurring investment yield right now?

Well I would say that looking at the alternative portfolio, basically we target a 10 percent-ish plus type of return there. And in the portfolio, more broadly the fixed income portfolio, around a 4 percent type return.

Okay. And last thoughts around your reinsurance. And do you anticipate any changes in your purchasing behavior in 2005?

No, but that will depend on where the market goes. So we could -- if we find coverage that we think improves our portfolio characteristics, we would -- and at good security, we'll certainly use that capacity. So I don't have an expectation right now that there's going to be a major change, but there could be depending on market conditions.

Thanks a lot.

Thank you. Charles Gates, Credit Suisse First Boston.

Hi. Good morning. I only had one question at this time. That one question -- one of you in response to an earlier question I believe said the retro market was ugly. Could you elaborate on that?

Well, the fact that we lost half of our renewal business at January 1 was pretty -- that qualifies as ugly to me. The -- there is a lot more capacity coming into the retro market. We're seeing a much wider range of companies starting to write a little bit of retrocessional business I think in reaction potentially to losing some other business they have capacity. So they're starting -- they're entering the retro market where they weren't in it before. We see the hedge funds in the retro market. And I think the retro market is a particularly -- one that is susceptible to believing your models too much. Because if -- I think the common problem is you run models for the major exposures for Florida hurricane, California earthquake and so forth, but don't account for the other exposures -- the un -- the perils that are exposed retrocessional contracts, but are not well accounted for in the model. Such as in the past things like the Australian hail storm and many of these more frequency losses. And so when a lot of new markets come into the metro market, in our view, ignoring those exposures -- it's -- we can't compete on a price basis.

Two follow-up questions. Weren't you historically one of the largest writers of retro here?

Yes. At various points in the market cycle, we were one of the top two retro writers, I would believe. But recently, our percentage of our business that is retro business has been declining. And that's been declining pretty steadily over several years.

I guess my only other question is could you identify what portion of your business was retro at January 1 renewal? Or can you in any way quantify that?

Well, it was -- I don't have a figure to give you. But I think we've given you our projections for full-year Cat premium. And I gave you the comment on how much our 1/1 retro business was down. I mean that doesn't give you an exact way to calculate it. But the retro is not -- it's a meaningful but certainly not a majority of our business.

A better question -- if someone was to ask you what was the percentage decline say in retro, how would you answer -- in pricing, that is? What would be a rough approximation?

I have a lot of trouble answering. I understand -- I get those questions, obviously, all the time, so I understand the reasoning behind the question. But I always struggle answering it because it really is a deal by deal kind of question as opposed to -- so I mean that's not a number that is important to me or that I really think about. I'm much more interested on deals A, B and C, what our pricing is, what the market pricing is, and how it changes versus renewals. So another point is there's a wide range of -- the Cat Business and the retro business is an inefficient business. There's a wide range of pricing adequacy or inadequacy around whatever averages you talk about. And we're much more focused on the range of the outliers than we're focused around the averages. Sorry I can't be more helpful on the answer.

That's cool.

Walter Koch (ph), Tier Leader's (ph) Fund Management.

Yes, I have actually two issues. The first one is on the property catastrophe business. The Benfield Group has a consortium with tropical storm risk in which they've done some estimates on the Florida Cat Business for '05 in which they're predicting 14 tropical storms, eight of these being hurricanes and four intense hurricanes. There being a 67 percent probability of above normal U.S. landfalling hurricane activity. And so I wanted to get your thoughts on that if you've looked at the paper.

And along the lines of the Florida Cat Business, as you know, the committee has submitted actually 20 recommendations. The Legislature doesn't start meeting until March 1st. And as I recall, you saying and by knowing them, the Florida Cat renewals are June 1. And so you have a kind of a three-month window of opportunity for Florida politicians to help you out. So that's my first question. How do you make decisions as an underwriter having come off a horrific hurricane season, going into perhaps another horrific hurricane season without knowing what the Florida Legislature is going to do?

That makes the business interesting. It makes it hard to do, which is the good news. A couple of comments. The hurricane predictions -- our Company has been at the forefront of hurricane prediction for the last 10 years. We have a whole series of different forecasts that we use -- most of them are not public, unlike the Benfield one. You drill into the factors that utilize to try to project future hurricane activity and you look at their past track record. Sometimes they do a good job. Sometimes they don't. So, but it's looking at all the different potential seasonal models is part of our process to determine whether our risk appetite should be modified or not. But the precision at which that forecast comes out, you'll get a similar one from Bill Gray out of Colorado State, is we consider the precision to be very false. Maybe there's something in the different trends. But actually, most of these folks have very little track record behind them. And if you actually test them there -- it's the best guess they have and that's what we use, but that's the way it goes.

As far as the Florida market, there are definitely a lot of interesting moving parts. I think the insurance regulators and politicians in Florida are dealing with a difficult situation. You have a lot of capital that was lost in Florida. You have a lot of companies that are concerned about continuing to risk their capital in Florida. And they're also trying to balance the concerns of their voters and constituents. So we fully expect there to be a significant amount of moving parts as we come closer to the renewals. You have moving parts around citizens, around the FACF (ph), around aggregate deductibles. There's a whole bunch of interesting things that need to be analyzed. We consider ourselves to be in very good shape because it is a complex situation, which we have very, very good historic information and a good understanding. So all that uncertainty is part of what we have to deal with all of the time in this business. And frankly, I kind of like that. I think that provides part of the opportunity.

I'm just going to reinforce what Bill said. I mean I think this is a great example of why as a specialist and one of the largest writers in the world, we have a competitive advantage versus newcomers in navigating through these complex waters.

Absolutely. It's very complex and there will a lot of news and a lot of changes before it's all said and done, I'm sure.

My second and last question has to do with the issue -- the headline issue of finite risk reinsurance. Just can you comment on your involvement in it, whether you consider yourself immune from Attorney General Spitzer’s looking into it, being an offshore company?

Well, we're not going to call ourselves immune from anything I don't think. We are part of the industry and so I don't want to overstate our position. I would say that we have not been large writers of finite -- we don't have a dedicated finite unit or anything of that nature. In terms of our assumed business, we have written I'd say a relatively small handful of transactions I think could be characterized as finite on the assumed side.

On the ceded side, similarly, there have been some pretty highly structured deals that we've written, which could be characterized as finite. And indeed the transactions that are reflected in the press release I think could be characterized by some as finite. But it's not anything that is in our view baked into our business. I think that's the key point from an investor's standpoint. It's not part of the profit engine here in any meaningful way. And it's not been a big factor in our ceded portfolio either.

Thank you for your candor.

Joshua Shanker, Smith Barney.

Just a quick follow-up. Could you give us any indication of the percentage of your three-fuel (ph) for hurricane losses that have been paid -- how much remains in case and the sense of when the remainder will get paid?

I do not have those statistics right in hand. I will say that they have been -- we've been paying out fairly promptly and a lot of the reserves up our case, although we still have significant IB&R as well. So I just don't have those statistics in hand.

Okay. Thank you.

Steve Burman (ph) of Stinerow (ph).

I would like to go back to the outlook for the Florida Cat renewals. Could you start possibly and say how much of your Property Cat Business is sort of tied in to the Florida marketplace? And then a question of appetite -- I guess that will vary with the pricing of course. But given your heavy exposure in that market to medium-sized storms, are you definitely willing to even increase that exposure further, should the pricing be right? Or do you feel as if you want to hold your risk exposure where it was as opposed to actually increase it?

Well I don't have a number to disclose on specifically a percent of our business. We are heavier than our average market share. So in terms of our worldwide market share, we are relatively heavy in Florida. There's a number of exposures, other areas, obviously, that we are relatively light in, offsetting that. And in evaluating -- and we took very seriously the fact that we had a underperform last year for the first time, our first single digit ROEs. So we've looked very carefully at the question -- is this telling us some -- are we learning new things about the models? Is this telling us something that we should change our strategy or adjust our strategy? And we learned some things, sure. We always learn some things concerning the models.

But I would say overall, our conclusion was that we would have -- we were happy with the decisions we made prior to the storms. We were getting paid appropriately for the risk we took. And we would do it again. We in terms of going -- so it's not really changing our view of how we manage risk and reward. So going forward, we have our criteria about how much we are willing to risk against our capital base. And given our capital base, which has grown since January -- since a year ago, even in that case, we've got more capacity than we had 12 months ago going into the season. So I wouldn't hesitate to do more business if it is attractive business. But within all of our risk management constraints, which are -- we have many different things we look at in terms of earnings volatility, in terms of balance sheet impact, in terms of cash flow impact. And we're carefully modeling the effect of any changes in our portfolio on those kind of numbers.

But the short answer is we -- I believe we have the capacity to grow if the business’s return warrants it. We don't have unlimited capacity to grow. There obviously are limits.

This is Bill Riker. A couple of comments that -- from a high level of thought, we believe that Florida hurricane risk is about 10 percent of the worldwide Cat risk. So to give you some idea, Florida hurricane is one of the largest risks out there. So that's not how it reflects in our book, but just sort of gets you somewhat calibrated around that.

And then the other thing is we have found in the past that we are not as concerned about small losses that might impact earnings a little bit. We're much more concerned about large losses that will impact our solvency. So in the end, when you get a year like 2004 where you have four small losses, each one of them almost really insignificant to us, putting together as a bunch, that -- and when you think about what we're much more worried about is large losses than small losses, you can sort of get a little bit of feel for our risk appetite. You know again, even with those sequence of four, we still end up making it single-digit ROE. But that's kind of the way we think about this.

And I also just want to emphasize that our modeling, even before the fact, our model takes into account multiple loss events like that. So those are in no way shocking to us. It was a somewhat rare event, but not an event that we wouldn't have -- it's an event that we feel we need to plan for.

Thanks a lot.

Ron Bobman (ph), Capital Return.

I had a question about the retro business. And I haven't heard much more than the adjective ugly to describe it despite everybody else's attempt. But it was -- you touched on it a little bit. In light of it being ugly as a risk bearer of that business, is it approaching a point where you might become in essence a buyer of the coverage, is my first question. Then I had a question about the hedge fund participation and what's the nature of the contract and the collateral that the hedge fund players provide as a counterparty since they're obviously non -- in some respects, nontraditional.

Okay. Well sure, as I said before, we're going to, depending on where the market goes, we could end up buying more. But there's two important things in our buying decision. Not only is price one of them, but security is the other one. And while there may be a lot of capacity out there, there's a fair amount of it in security that we're not that crazy about.

And security -- how do you describe that? Obviously -- I assume it's somewhat short-tail business. So in I guess you're fearful of a dramatic event and then that is sort of blowing some of these offers out of the market or out of the business?

Well, there's a number of things. But actually when you talk about security, you also have to think there's ability to pay and then there's willingness to pay. So I think people tend to be more comfortable about short-tail risk than -- in terms of taking lower credit ratings than they are about long-tail risk. And I'm not going to necessarily disagree with that. But it's more complicated than just looking at the credit rating, the way we look at. It's not only -- as they say. Even though Cat contracts are simple contracts, you can have disputes. You can have some new players don't necessarily play by the same market practices that the reinsurers are used to playing by in terms of interpreting wordings.

And I mean actually, another point is that the negative impact on security for one of our counterparties doesn't necessarily have to come from the Cat. I mean you could have a situation where a -- we have Cat coverage from some company and they get blown out of the water because they can't collect on their own coverage on some other -- on asbestos or something, so it's --

Yes, good point.

I've just got one comment just so we don't see hopefully on top of a bunch of reports this afternoon. I would refer to the retro market as sloppy, as opposed to -- (multiple speakers). But my only comment is what we did see in the retro market was often additional territories and perils and stuff just sort of thrown in for free, which is very consistent with Jim's comment. And so the price might have looked the same on the slip, but then you just have a lot of extra coverages were just sort of tossed in.

So, but Jim, you -- just a second ago said you were going to see where the market goes to. So is it -- for the security and the counterparty quality you're looking for, it's not ugly enough for the acceptable counterparty that you're willing to sort of do business with, and not sloppy enough? Or are we there yet but you just haven't pulled the trigger?

Unfortunately, I can't give you a good answer to your question because the way -- I don't look at it on sort of an average basis. Once again, there's a wide range in the market and our decisions are on a deal-by-deal basis, not sort of a market average basis. So I'm sorry I can't really help you there.

One other point -- this is John Lummis -- I'd reinforce is that there are long-term relationships that we have in the retrocessional market, where we expect to do business with people over a long period of time. And it's not -- shouldn't be seen as a purely cutthroat environment to try to take advantage of somebody one year. That's not the relationship that we try to have with a lot of our counterparties.

Yes, I think that's an important point to make, John.

Okay. And how about the nature of sort of the nontraditional players? How a buyer or shorter (ph) is getting comfortable with the collateral? What's the nature of the contact? Is it different from the type of contract and collateral if any that a traditional player provides?

Yes, this is -- well, yes. In my -- I personally haven't spent time quarrying over the differences between reinsurance contracts and isthuz (ph) and collateral agreements. But I know that there are -- there's a lot of -- there are differences. And it's you know, there's some uncharted -- just the same as in Cat funds, once we see how they actually have responded to losses and what the legal interpretations are, I'll feel more comfortable that I understand exactly what the words mean. I know how -- you know -- I mean -- having been in the reinsurance business over thirty years, I mean I understand what the practices are in the reinsurance business, how losses are responded to, where -- how wordings work. When we deal with a whole new set of wordings coming from a different direction, I think it's -- it puts some uncertainty in my mind.

Are those players offering security LI's, collateral or LC's?

I'm not in command of the details. I've heard in some cases they are. But once again, a lot of complications in terms of what that really means. I mean I think there's collateral and then there's collateral depending on what the contracts look like.

A lot of work to make that collateral actually effective.

Right, willingness to pay and -- okay. Thanks again and good luck.

Gary Ransom, Fox-Pitt Kelton. Please go ahead.

Good morning. I just had one question to follow up on the comment that Jim made about there's less underwriting going on and more reliance on models. And I just wondered if you could perhaps give a couple of examples of what types of underwriting efforts are not being done in those examples.

Well, I think you know I will just generalize some of the -- when I see steam coming out of the ears of our underwriters, in terms of wordings and the market paying attention to changes in contract wording, I think we have a concern that it's -- there's not as much precision as there was a few years ago. And that can just be in a few pockets. I'm not trying to say that that's a broad trend across the board. But we have seen those things. And also, just taking a vendor model out of the box, run potentially on incomplete exposures, run without recognizing which perils are covered under the contract but are not modeled and just sort of taken as a fact.

The way I look at it is that I can teach somebody in six months how to run a model and do the math, to calculate expected losses to a model. It will take ten years to teach them whether they actually have complete information and whether the answers are correct. What you have now is people are utilizing the tools very rotely, and just assuming whatever comes out must be the right answer and it's a much more difficult problem than that.

And you know, I want to make sure there's some balance in this conversation. There are a number of very sophisticated professional reinsurers out there who we think are doing a great job modeling. So I'm not trying to throw mud at the rest of the industry here. I'm just saying that around the edges, we see that this is a trend that we see from some of the newer players.

Do you think there's any less of a due diligence done on the ceding or the primary companies that are writing the property? If you are the reinsurer?

In some, yes. And actually in some cases, that's -- we see, yes. You see situations of primary company giving data on what exposures they have and there may be some missing exposures. And that basically can be taken at face value.

Steve Burman, Stinerow.

Thanks, again. I joined the call about 15 minutes after you started. But I just want to ask you about your outlook for 2005, your guidance. Your press release says you're not changing it. Did you make any earlier comments on this? And what is the guidance at this time for 2005? Sorry.

The guidance we previously issued was 630 to 670. And the comments that I made around this were just to say that we don't attempt to adjust guidance every quarter. And thus, we're not seeking to particularly recalibrate this quarter. But I think it's important to note and the press release alludes to this that there are some factors that should lead to a more cautious outlook around that guidance. And the decline in the gross Cat premium that we're projecting in '05 is I'd say the leading factor that I would point to there. You can go back and listen I think to a recording of the call for a more complete (multiple speakers)

Yes, I will. Thanks.

Thank you. At this time, there are no further questions.

Okay, well, thank you. And just in summary, as I said, I'm embarrassed to report the restatement. However, I still wouldn't trade our platform for anyone else's in the business right now. The balance sheet strength we have -- the rock-solid balance sheet, our client and broker relationships and reputation and the management team we have has a track record of success in navigating the soft part of the cycle as well as the hard part of the cycle. As we go into a softening area, this is -- I wouldn't trade this team for anyone in the business. Thank you.

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