濱特爾 (RNR) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the RenaissanceRe fourth-quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to David Lilly. Sir, you may begin your conference.

Good morning. Thank you for joining our fourth-quarter and year-end 2005 conference call. Yesterday, after the market closed, we issued our quarterly release. If you did not 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 1:00 PM Eastern Time today, through February 22, 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 replay numbers is 696176 4. Today's call is also available through the investors section of www.RenRe.com and will be archived on the RenaissanceRe website through midnight on April 12.

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

With me today to discuss today's results are Neill Currie, Chief Executive Officer; John Lummis, Chief Operating Officer and CFO; Bill Riker, President; and Kevin O'Donnell, President of Renaissance Reinsurance Limited. I would now like to turn the call over to Neill. Neill?

Thank you, David. Good morning and thank you all for joining us. 2005 was a challenging year for our industry and for Renaissance. We suffered our first annual operating loss due to a particularly active hurricane season in the U.S. Senior executives departed as a result of regulatory matters, and we saw new competitors join the market in the aftermath of the hurricanes, attempting to buy both for business and talent.

But the fact is, we met these challenges head on and came through the year in very good shape. This speaks volumes about the resiliency, the strength, and the loyalty of the people that work for our Company; and our strong renewal season tells you something about the loyalty of our customers and our brokers as well. We have a strong culture, great discipline, and are recognized as a true institution, rather than a company comprised of a handful of talented individuals.

We deliver to our customers and brokers by living up to our reputation for fast claims payments and being a stable lead market at a time when others are in disarray. We continue to lead the market in our risk analytics. We believe we were the first reinsurance company to institute revised assumptions for Atlantic hurricane frequency in our catastrophe models. This is a unique advantage of our proprietary models. Revised vendor models will not be ready for another couple of months.

This capability enabled us to be one of a handful of quoting lead markets at the January 1 renewals, an advantage that gave us access to the business we wanted to write.

Our conservative capital management over the years enabled us to sustain the hurricane losses of 2005 and maintain our financial strength. I think it's important to appreciate that in the worst year of catastrophe losses in history, we had a GAAP operating loss that was less than 15% of beginning GAAP common equity. This was a manageable blow to capital, and we did not have to raise additional capital as a result of the losses.

We emerged from 2005 with a strong balance sheet, with $2.3 billion of common and perpetual preferred equity, and we now have over $600 million at the Holding Company level that can flow down to the subsidiaries as warranted. We are a well-positioned, strong, and stable market.

We raised additional equity for DaVinci in December to better position that balance sheet in the market. As of today, capital is in excess of $700 million. With S&P and A.M. Best ratings of A, DaVinci is among the most highly rated cat companies in the market. We believe that raising equity capital in DaVinci was the best track for us, given its flexible capital structure. DaVinci's structure is ideal because investor money comes in and out at book value. We were successful at January 1 in increasing DaVinci's line size, giving it a bigger share of the property cat market.

Our underwriters did a terrific job this renewal season. The results of their hard work are very attractive portfolios for Renaissance and DaVinci. We are expecting over 15% growth in our managed cat business this year as pricing improves in several parts of this market. We're also seeing opportunities to grow our Individual Risk business, and we expect the top line there to be up by 15%.

Unfortunately in our Specialty reinsurance business, we found fewer opportunities at January 1 to write attractively priced business. We will work hard this year to find opportunities in reinsurance away from the cat book; but our expectation is that this book will shrink by 35% in 2006. Bill Riker and Kevin O'Donnell will discuss these businesses in greater detail in just a few minutes.

As you will note from our earnings release last night, we expect that given a normal level of catastrophes, we will return to a traditional level profitability and a high ROE this calendar year. Looking forward, we see an inefficient market where the conditions are not improving uniformly. We will maintain our discipline and pick our spots. But we're seeing opportunities to grow our book at attractive returns and expect to see more opportunities through the next two quarters. This is a market where we can operate quite effectively, and we intend to do so. Now I would like to turn the call over to John.

Thanks, Neill. Looking at the financial results, the dominant driver of our fourth quarter was clearly Hurricane Wilma. The $314 million loss that we experienced was just above the 250 to $300 million range that we had announced in October shortly after the storm hit.

The other unusual items for the quarter were, as disclosed in our third-quarter 10-Q, the $13 million charge relating to the accelerated vesting of Jim Stanard's options when he left the Company, and the $10 million for professional fees and other costs associated with the various regulatory and governmental investigations. If you back out those unusual items for the quarter, our operating earnings would have been $130 million, essentially a decent quarter if you can factor out those big items.

While I think you can essentially look at the storms and the regulatory matters as the drivers, I'd also point out that in the fourth quarter we had a modest amount of net unfavorable development from the major cats reported earlier in the year. The total there is about $23 million.

I would also mention that we completed our review of the Individual Risk loss reserves and had just $1 million for favorable development there. So that wasn't really a factor in the quarter.

Looking at premium trends, the reinsurance business is historically light in the fourth quarter, so I would not attach much meaning to that segment's premium results. You will see what appears to be a large increase in fourth-quarter premiums, and that was driven by reinstatements and other premiums triggered by the quarter's losses. When you back those out, we end up with a quarter about on track with our expectations for the business.

Turning to the full-year results, I see the key points as follows. The net impact of the 2005 hurricanes was over $909 million. That was offset by $227 million of favorable loss reserve development associated with our review of the loss reserves in the cat and specialty businesses. We also had a total of $53 million of costs associated with our internal review and the related regulatory investigations; and that number also includes the $13 million of costs associated with the acceleration of Jim Stanard's options.

Reversing those items for analytic purposes, you end up with a year of about $460 million of operating income, which is a little light of what I might have hoped for. That reflects a year of relatively heavy cat activity in 2005, even excluding the large hurricanes that have been the focus of recent commentary.

To look at our investment portfolio, we had a total return of 3.7% for the year and around 90 basis points for the fourth quarter, essentially beating our target allocation index. The backdrop for that is that we made a strategic decision to be short in duration, and at year-end the fixed-income portfolio duration was less than 1.5 years.

We also made a strategic decision to reduce our allocation to higher asset classes. With respect to hedge funds, the allocations stood at $215 million at year-end '05 compared with $293 million a year ago. We had another $71 million of redemptions at January 1; and we may further reduce this allocation in the future. We have also reduced our high yield allocations from over 10% to about 5%.

One other note on investments. I would like to note that beginning with the fourth quarter of '05, we changed our accounting procedures to record all unrealized losses as though they were realized. So you will see unrealized losses captured in the realized line. We will continue to approach unrealized gains as we have in the past, recording gains only at the time of sale.

We're doing this, taking this approach, in light of what appears to be shifting guidance in the accounting literature. I would underscore that this change does not affect the balance sheet, nor does it impact operating earnings. So this is likely a change that many people will simply ignore.

I would also mention that in the future we will look at moving our investments from the available-for-sale classification to a trading account basis; but we have not made a decision around that yet.

Moving to the subject of capital, we continued our philosophy of seeking to optimize our capital position. That translated into several steps. First we raised $270 million of common equity for DaVinci; and RenRe contributed another $50 million on top of that. In addition, here in 2006 we have just closed on another $54 million of equity into DaVinci.

The second step we took was to draw $150 million under a revolving credit agreement at the parent Company. We did that simply to have additional dry powder at the Holding Company.

The third step was that we exited our investment in Platinum and generated $114 million of liquidity. While we continue to have good relations with Platinum, we felt this was an appropriate step to focus capital resources on our business. We do continue to hold warrants in Platinum.

Following those various steps, at year-end we had over $600 million of capital available for general corporate purposes, including the possible contribution to our operating subsidiaries if we decide we need to increase their capital.

With that flexibility at this point, I am not seeing a need to raise common equity or other capital at the parent Holding Company. If you would like to have a more detailed summary of our capital position as it stood at year-end, I would encourage you to look at the text of our press release after the quarterly comments, where we have a section on capital.

Next I would like to comment on our guidance for 2006, which points towards a range of $6.50 to $7.00. As Neill mentioned, and Kevin and Bill will expand on this, the market is uneven in quality; and so our projected top line reflects strong growth in some areas and flat to declining premium in others.

To help you assess premium trends, I point you to a chart in the earnings release in the section on annual results, where we have taken reported premium and backed out nonrecurring items, which includes premiums from reinstatements and backup covers, to arrive at normalized premium. When we are talking about our premium growth rates for '06 versus '05, it is based off the normalized premium in view of the large impact from the '05 cats on the premium line.

The press release and Neill's comments gave you our premium growth assumptions relative to these normalized levels -- over 15% in cat, 15% in Individual Risk, and a decline of 35% in the Specialty reinsurance business.

Because our premiums come in large pieces and big lumps, I caution you that there may be some quarterly trends going forward in each of these segments, but they are not exactly in step with the annual growth rates that we have given. So watch for that as the year unfolds.

One other point that I make is to look at ceded premium, where in 2005 we see ceded $177 million on a written basis. I would expect that to decline somewhat -- around 10% is our current assumption. The decline in ceded premium could be even more, but we will be dynamically managing our portfolio and capital to handle that.

In general, I see the following margin assumptions, for the most part consistent with what we have suggested in the past. You can see or you can assume about a 50% combined ratio on cat; high 70s on Specialty; and about 90 on Individual Risk. We are using just under a 5% investment yield assumption for our investment income.

Looking at other revenue items, I expect the line items for equity and other earnings -- or rather, earnings for other ventures and the other income line item to aggregate in the range of $50 million. As a reminder of what is in there, the larger items are ChannelRe, Top Layer, the mark [at] our Platinum warrant, and miscellaneous investment income, and fees and other items.

Turning to expenses, I would be looking for expense levels on a dollar basis to be roughly flat in '06 versus '05. Obviously, with that and all these items, they're just assumptions and, while I think they're valid, clearly subject to some fluctuation. Most notably, and I would underscore this, the assumption of normal cat activity.

When I put all that together, I see a projection of a 25% return on equity for 2006; and we're looking forward to work hard to deliver on that. At this point, I would like to turn the call over to Kevin O'Donnell for his comments.

Thanks, John. I would like to discuss the Reinsurance segment; and to do so, I will put it into several sections. The first section I would like to address is cat.

Looking back at the 1/1 renewal, we saw wide disparity in returns generated by programs both within regions and across regions. Looking specifically at the U.S., we saw the largest price increases in accounts with losses; the second largest price increases in accounts with large hurricane exposures; followed by smaller increases in U.S. exposed accounts generally. It's important to note that even with the large percentage increases, many of the U.S. accounts still did not meet our return criteria.

Outside the U.S., pricing in Europe was disappointing, where in many cases we were seeing risk-adjusted prices being flat to down.

Looking at retro and prior to renewal, there were many discussions about the likely attractiveness of this market. As a large player in the market we did see a significant volume of retro business and grew by approximately 100% at 1/1. Some of these opportunities were created through a contraction in available capacity, in particular worldwide capacity, which led buyers to being open to consider more restricted cover, which fits up much better.

You will recall we had shrunk this book meaningfully at 1/1 last year; so this is a nice outcome for us. It is important to appreciate that the retro market remains highly inefficient, and we continue to see significant volume of business with either low or negative returns. As seems to be the case over time, I would expect that this year will be no different, and we will see a large spread between winners and losers in this line.

Moving over to Specialty, we shrank the book at 1/1; and barring any major shifts in [marketing additions] we expect to be down around 35% this year. Much of this reduction came from one low-margin, high-premium treaty that is now being fully retained by the new owner. We saw additional reductions from cedants generally retaining more risk, and we exercised good judgment in getting off programs where pricing and terms deteriorated to a point where they no longer were attractive writes for us.

One line in Specialty that I think is worth specifically highlighting is workers comp cat, where we saw a substantial deterioration in risk-adjusted returns. We reduced the size of the book and deployed more capacity into California property cat. We see these lines as highly correlated, and the shift in the book to California property cat was good for the portfolio.

As far as new opportunities in Specialty, we are hoping to see some opening up after the 2005 and even the 2004 hurricanes. We spent significant time looking at new lines of business including per-risk, marine, onshore energy, and offshore energy. Historically, it's been our view that the cat components of these books has been underpriced, and we were optimistic that with the cat experience in these books we would see some opportunities. But after reviewing multiple programs, we came to the conclusion that, in spite of the price increases we were seeing, the structure of the deals and the underlying risk had not changed sufficiently and they were not meeting our return hurdles.

Before moving on to what's coming up in Florida specifically, I just want to revisit the model changes that we discussed last call. As Neill mentioned in his opening remarks, one of the major competitive advantages is our ability to quickly implement changes in our model. As we discussed, we increased the hurricane frequency for all U.S. exposed business this year.

It's important to note that none of the catastrophe vendor models released any updates reflecting increased hurricane frequency prior to the 1/1 renewal; and at this point the vendors have indicated that the new hurricane catalog won't be released until the second quarter at the earliest.

This analytical advantage had a meaningful benefit for us. We were comfortable quoting U.S. hurricane business throughout the renewal season. And we were told by brokers early in the renewal season we were the only quoting market for U.S. wind-exposed business. This early edge gave us an advantage throughout the renewal.

Once again, the flexibility of our modeling platform, which allowed us to quickly implement these changes in hurricane frequency, was critical to our success at year-end.

In addition to the frequency, I think more lessons can be learned from Wilma. As John mentioned we were outside of previous guidance of 250 to 300, which we released a week after Wilma's landfall in Florida. Immediately following the event we believed it to be the largest of all the events to affect Florida over the last two years. At that time, we estimated the industry loss to be between 12 and $15 billion, which was certainly at the high end of investments last fall, but now seems to be more accepted as the industry number.

Wilma versus our expectation for a storm of this size and intensity has caused much more inland and urban damage than would have been expected. This is important, because in addition to the much-discussed issues around frequency, it is a reminder that the damageability assumptions within the models are also an important assumption and a key driver of variance between models and actual results.

Looking forward to the June 1 Florida renewals, we are already seeing Florida customers approach us with requests to understand the potential pricing changes going forward. We have been encouraged by their understanding regarding the price increases related to the increased hurricane frequency, and look forward to working with them over the next several months.

In closing, we're very pleased with the portfolio we constructed at 1/1. We have great tools, strong relationships, and a very strong team. I'm confident that we will continue to find opportunities to improve the portfolio over the remainder of the year. At this point, I would like to turn the call over to Bill Riker.

Thanks, Kevin. I'm going to break my part of the call into sort of two sections, one a quick update on the Individual Risk business; and then the second part is to put some commentary around what we perceive as some of the current market dislocations out there.

To the Individual Risk, to review, our Individual Risk book really sort of has three areas to it, one being our program business; second area being sort of our cat exposed homeowners business; and lastly being our generally cat exposed commercial book.

Touching quickly on the program business, that continues to run on track with our expectations. We're very happy at the way that book has developed over the years. It is something that we continue to monitor closely, and as I mentioned we're very happy with the outcomes.

Obviously, our cat exposed homeowners and commercial books were affected by the storms, primarily Hurricane Wilma. Again, these books are coming in pretty much as expected. There was -- as Kevin mentioned, Wilma was a very big loss and we expected significant damage. But to be fair, the storms of '04 and '05 are giving us lots of good information about our processes in risk selection, and one of our key focuses is to continue to raise the bar on how we look at assuming different types of catastrophe exposed business through the Individual Risk section.

The current market conditions are providing very good opportunity in the cat exposed Individual Risk area. We are hard at work to determine the best way to assume that risk over the next few months.

As you probably realize, in the Individual Risk area 1/1 is really not a watershed date like it is in the cat area. So our portfolio really didn't change much. We did not sign up any new programs in the fourth quarter. But we do continue to be looking at new opportunities that come to us, and we are optimistic for the balance of '05. And as Neill mentioned, we are expecting approximately a 15% increase in the top line in the Individual Risk area.

Overall, the cat exposed market remains in what we perceive a state of dislocation across the different parts of the food chain. Some examples of this would be, as Kevin mentioned, the retro market is very tight. From what we have seen, there's quite a few historic buyers of retro who to date really haven't purchased anything yet. Primarily because they went to the market, or heard rumors about the tightness of the market, and decided to wait and think that maybe the prices will do gown, or they would take a look at their assumed portfolio.

But these same players were also assuming cat risk out of the primary market, so we think they're in a pretty tough spot right now in trying to balance the high cost of retro versus some reasonable priced business, especially in the U.S.; but as Kevin mentioned, you have some international business where the price is actually deteriorating. So there is a real disconnect there between people's retro capacity and what they are assuming through the front-end.

Another example is the primary property business versus the primary cat business out there. Especially in the U.S., as was mentioned earlier, some prices, especially in the commercial area, increased significantly year-on-year. But from what we are seeing, many of these companies still have not passed down the required price increases into their upfront property writings. This is obviously also a function of per-risk treaties and other types of treaties out there that we're really not a big player on.

But we see that the reality of increased cat pricing really hasn't taken hold as strongly as we like to see in the primary market. But I think this is still just more of a function of how difficult it is to manage large underwriting organizations and to get the word down to the front lines.

Another example that we're seeing out there is primary property versus the facultative cost versus actually the costs of reinsuring the facultative risk in the direct and fac -- the D&F market. Again, the facultative writers are asking for increased pricing. The upfront pricing is not being increased as much as the facultative writers are looking for. Then the facultative writers are being put in kind of a bind in the middle, because their reinsurance in the D&F market has gone up significantly in cost. So again there is a dislocation in that.

The last area, which Kevin pointed out, which for us is not baffling, but one that I was a little surprised about, is the workers comp cat market, which is really a highly correlated market with earthquake risk out there, deteriorating in price, when most people believe out there that the cost of carrying cat risk on a balance sheet has gone up. So how people believe they can cut pricing, sort of earthquake markets, and then make sense is something that we're a little surprised about.

So one thing that we continue to believe, though, with these changes is that managing cat risk will be a growth business especially in the next few years, with the increased frequency assumptions that are coming through the models, plus just people's general sensitivity to cat risk, whether it be in the Wall Street Journal or otherwise. There will be a significant amount of more money sort of coming into the food chain to support cat risk.

Obviously the models will increase the perception of risk out there and keep managing cat risk in the forefront of people's minds. And we believe that is good for our business.

But another element that we believe is additional money needs to be in the system to deal with the increased costs of construction. Anyone who has tried to remodel, not just repair, homes in the last year or so understands that the increases in construction costs have really been general CPI indexes, etc., which a lot of companies use to approximate the increase in construction costs. We believe over the next year or so that companies are going to have to do some real work on recalibrating what these revised construction costs are going to be.

Much of the market changes that I have talked about here are really on the demand-side. We believe the major changes have really been demand driven in our market. Moving a little bit to the supply side, obviously a lot of moving parts there, but the supply-side we perceive to be fairly stable at this time. A lot of the capital raising that went on in Bermuda, the formation of the new companies, etc. etc., has served to bring the supply up to pretty much close to what it was before.

One thing to also remember, over the last couple of years, a lot of companies in the cat market were not getting their full signings. They were authorizing significantly more than they were actually getting. So that also provides a certain amount of slack to the system.

So the eventual balance between the supply and the demand is still quite uncertain. Obviously, demand will be up. Supply seems to be flat. That would indicate that over the next 12 months the market will continue to get more interesting. But again, this is a difficult thing to precisely measure.

So, we believe these dislocations do exist out there, and it will probably take really almost the balance of '06 in order for the different parts of the market to align around this new reality. We are hard at work figuring out where the best returns can be obtained, and that is going to be our focus. So that is the end of my comments, and I will return it back to Neill. Thank you.

Thanks, Bill. Well, it's hard to believe there would be any questions after those discourses, but in case you have some, let's turn it over for questions.

(OPERATOR INSTRUCTIONS) Alain Karaoglan of Deutsche Bank.

I have a couple of questions. The first one, John, with respect to the capital position, how should we think about that $600 million at the Holding Company? Should we think of it that you have enough capital to write the business and the growth opportunity that is in your guidance, and that $600 million is there in case the opportunities are bigger that what you have in your guidance? Or you are planning to downstream some of that capital already to your subsidiaries?

I guess what I would say is that the existing capital structure is the one that we have assumed in our guidance. We're assuming no further capital raises. So as best we can see at the moment, the status quo works. We do historically operate with some margin of excess capital, and I think you can look at the capital at the Holding Company to some degree in that light.

I would, all that being said, underscore that the process of managing capital is art and science; and we have our own risk-based capital models. We also look at the rating agency models, which themselves are sort of under development given the new hurricane frequency assumptions. So we will be dynamically managing capital as the year progresses.

We could also be faced with bigger opportunities than we have reflected in our guidance or see other opportunities. So I would not want to rule out equity capital; but I think you can for purposes of your model assume that the status quo capital structure is what is in place around this earnings guidance.

Okay. And you referred to normal cat. With this new environment and the frequency and severity increases, what does that mean, normal cat, now for you guys? What should we understand that to be? I know you gave us guidance on combined ratios specifically; but if you can help us more on the normal cat side of it.

Sure. The loss ratio assumption is consistent generally with what we've talked about in the past, around a 30. But that is baking in our dialed-up frequency assumptions in the current portfolio. So it happens to be basically consistent, although that is reflecting some price increases and other changes in the portfolio.

So if I look back to 2005, what would have been normal cats for 2005?

If you work to back out the large events, the Katrina, Rita Wilma, we would have been left with a cat loss ratio north of 40 for the year. So it was a little bit high, as I indicated in my opening comments. That was largely a function of Irwin in the first quarter, was the big driver around that.

So even without the headline hurricane events, it was the year that was a bit heavy compared to what we would view as our baseline assumption. I would give you the obvious caution that we can't look at one year's results in cat as a way to define the average over the long term.

The last question is to Kevin on the cat business. You mentioned you're very enthused about the catastrophe opportunities. But in your comments you said that many accounts are still underpriced. Could you give us a sense? You mentioned the retro was up 100% versus January. What happened to your U.S. catastrophe reinsurance book at 1/1 in terms of renewal and opportunities?

Sure. I think one thing to look at is we have always looked at the market as being in three distinct areas. The two that I reference is the low return and the negative return. We tend to participate more in the high-return bucket, as you might imagine.

The opportunities we saw -- we look at our portfolio on a dynamic basis, so we are somewhat fluid between moving into retro and out of retro, into the international markets and out of the international markets, and also within the U.S.

I would say the opportunities we saw in the U.S. were not that every account came up uniformly. You needed to pick your spot on programs, meaning you may have liked the bottom layer on one program and the top on another; and also across regions. So it's hard to put it into sort of distinct summary. But it's been much more of a balancing in the portfolio, looking for improved gross results for the book.

I would refer you to some of our prior investor presentations, where we have broken out worldwide cat premium into the three categories Kevin mentioned, high return, low return, and negative return.

The interesting thing is, even after World Trade Center, there was still a substantial component of the worldwide market that was priced to a negative or low return. So that is just a basic feature of this market. That there are big segments or big parts of it that look good to us; but there are also going to be big parts that don't meet our standards.

Thank you.

Josh Shanker of Citigroup Investments.

Looking at the 15% promise in volume increases in the managed cat -- or not promise but expectation, can you describe how much of that is a rate versus how much of that is volume increases?

Yes, that is a difficult thing to look at, because we are comparing against different models where -- since we have rebuilt our model to reflect the new hurricane frequency, it is a little bit more difficult than it normally would be.

But one thing we can look at is how much our aggregates are growing, compared to how much more premium we're getting. I would say that within the U.S., the bulk of what we are getting is increased rate; where outside the U.S., it is much more of a mixed bag, where on the retro stuff we are seeing significant improvement in terms. Meaning we are going from accounts that were previously placed worldwide to accounts that are placed on a more specific basis. And then as I mentioned in my opening comments, the international markets, and specifically I referenced Europe, the rates are down there.

So looking at the exact split between what is just pure growth and what is rate enhancement, it's a difficult one this year because of the model change. But hopefully that helped clarify a bit.

The one thing I will mention is we did grow in DaVinci, so not only with the rate but since we increased the size of the book, we actually did put in more volume into DaVinci.

Looking at DaVinci, with the volume increase (indiscernible) I noticed that in 4Q '05 DaVinci performed worse than in 3Q '05. Is it possible to describe how the risk selection at DaVinci differs from the RenRe proprietary book?

One thing is we have -- RenRe has a different book generally, because within DaVinci we look to keep it as a property cat vehicle. Within RenRe we have other lines of business.

The other big difference between the two books is there is a different ceded structure supporting both books. Overall, we try to keep the books somewhat balanced; but it's never -- it is more of an art than a science, where a lot of it is up to the clients to allocate lines.

So I think DaVinci did very well. But in general, I would say the books are close, but with those are the kind of the major differences between them.

Okay, a couple quick things. One, just curious about the dividend given your current capital outlook. I assume you're concerned the dividend is safe? There is no reason to cut it?

We will, obviously, look to a discussion with our Board this quarter to affirm the decision. But I would not expect any change in our pattern.

Okay, very good. And finally, following on Alain's comments about normal cat activity, I realize you are not meteorologists, but it's part of your business. Is it reasonable to assume at this point in the market that it should be expected that 2006 is going to be a normal cat year? I mean of course there is a lot of press that says the likelihood is for high hurricane frequency again this year. Do you have any commentary regarding that?

Yes, this is Bill Riker. Some quick comments. The arts/science. Seasonal hurricane forecasts have been around for quite a few years now. You may or may not be aware, ourselves and some other companies in Bermuda through a vehicle of the RPI actually did a significant amount of funding of a lot of the studies that are now showing up in the Wall Street Journal, etc., etc.

Because we have been involved with this for years, we have a healthy skepticism for the accuracy of these forecasts. Today, they're getting a lot of hype because obviously they said the '05 year was going to be bad and '05 ended up to be a very bad year. So actually they didn't do a very good job of actually predicting how bad it was. But it is what it is.

For 2006, most of the seasonal forecasts are coming in again predicting an active year. They vary on those predictions. But we are assuming in our underwriting process that we should expect the probability of hurricanes to be greater than they have in the past, which is why we have modified the frequency assumptions in our models.

We are looking at the forecasts for this year, and we don't consider them to be significantly different from our model adjustments. But I also think that the attention to these forecasts will continue to go up. You'll continue to see them in traditional press as opposed to just the academic press. It's something that we are very well positioned to actively manage, if there is an opportunity to actively manage our exposure.

So that's a long way of saying that the forecasts are predicting an active year. I would not get too fired up about their accuracy, because you actually expect this stuff over the years. They have been all over the map as well. But these guys are putting a lot of good research in and they're getting better.

Okay, well, thank you very much.

Tom Cholnoky of Goldman Sachs.

I just have a couple of questions. Kevin, maybe just talk a little bit about what is going on from a buyer's perspective. Is some of your growth expectations in terms of managed cat a function of primary buyers simply retaining more risk and pushing the market higher up in layers? Granted that on a risk-adjusted basis you should be indifferent. But I just wanted to kind of flesh that out to see what is going on from a buyer's perspective.

I think, and I will talk about the U.S. here, within the U.S. I think we're seeing a kind of -- we are seeing new entrants to the market, where people are buying new cat layers. What they are trying to balance with that is their spend compared to the coverage they're getting.

I would not say uniformly we're seeing an increase in retention, although I would say that it has been a theme throughout the renewal.

For us, I think to your point about us being indifferent, one of the things that we have is great tools, that once we have modeled the exposure we can very quickly determine whether we would like -- at what point in the program is best for us, not only as far as returns on that deal but returns against the portfolio that we have built for that region.

So I think your question is kind of two things. It is, how is it affecting us? It's affecting us in that, yes, we are involved in the quoting of it; so we have pretty good ability to place our capacity where we want on the programs.

We have more -- many of the buyers in the U.S. are buying more limit; and in some cases they are buying it at a higher beginning point. So looking at all three of those things we're still doing exactly what we did last year, is trying to optimize our position within the structure (multiple speakers).

I understand that, but I guess my question is, are you finding that on average your retention or the point at which you are attaching your programs is higher? Will it likely be higher in '06 simply because the market may be either underpricing some of the lower layers and not pricing correctly or whatever?

But I am trying to just get a sense of a premium perspective. Because even if you do get a rate increase in higher layers, and you're further away from loss, it's still going to [imply] a lower rate on line versus a lower layer.

I understand what you're saying. That is not -- in some cases we saw, in some nationwide accounts, where the retentions went up and the bottom layer was not reducing in portion to the amount that they removed themselves from first dollar risk. So I think it is more of a balancing act from what we saw this year. I would not say that uniformly we're getting a lower rate on line for the risk that we're taking in.

Okay. Then I guess a numbers question if I can, John. How should we think about corporate expenses? Are you going to keep spending $50 million a year legal?

I would look for that to file down to a degree in '06.

But can you give us some idea of what we should kind of model for corporate? Because it was a huge number in '05. Are you going to get back to kind of '04 levels?

I would say that for the moment, on expenses generally, I would just hold dollar amounts flat; that may be at the conservative end of the spectrum, but --.

Do you include corporate in that?

Yes.

Okay, all right. I may jump back in. Thank you.

[Terri Shue] of JPMorgan.

Two questions. One, because of your risk selection you are shaping your book; and you talk about the opportunities mostly being in the cat exposed, wind exposed area. I assume Florida figures prominently there. What should we think about in terms of risk concentration? I assume that you manage it very carefully. But are you tilting your book more towards these areas? How should we think about that?

It's Bill Riker. Obviously, Florida is a key question out there in the top of everybody's minds. I think we put out in the past Florida is the sort of the largest sort of dollop of cat risk in the world. So how you manage that and how you address that is very important.

So far through the year, we have taken an approach to see how we can -- the best places to assume that risk. You know, as it is already clear, we have a bunch of Florida. So it is unlikely for us to go in and significantly increase our Florida risk over the next year.

But it is really a puzzle. We are very fortunate because we have multiple ways to assume that risk. One of our most important issues is -- how much do we assume through some cat exposed Individual Risk business, versus cat coverage, etc.?

As you probably know the Florida market is a real moving target right now, where you have some primary companies that are going to be in a very, very tight squeeze as costs go up and they have a limited ability to pass through those costs; even though I do believe the state of Florida is being about as proactive as they possibly can in understanding. They have some issues with the economics in their market.

So, again it's too early to tell. It's a micromanagement problem, determining where we want to deploy our capacity. But I think as Kevin mentioned in his discussion, that we have seen that the people who are assuming risk in Florida are doing so with our eyes generally wide open, understanding that the cost to reinsure that risk is going to go up substantially, and for them it's a matter of -- they have to actively manage their portfolios as well.

So I am sure you are looking for a specific up, down, same number, but it's really actually a lot more complex than that. But we expect to hopefully get our -- deploy our capacity in the best way possible.

Right, but you are not increasing? I guess the question is, zonally you are not --?

To a large extent, we don't know the pricing yet. We have started to get good indications of what the pricing will eventually be, but you know --.

But if the pricing is good enough, you might increase your exposure [that]?

I think as a corporate strategy we have always said that; if the pricing is good enough, expect us to increase exposure.

The thing I would add at that point is we may start to have questions about capital as you look at increasing the risk portfolio.

Right, right. In terms of the proportion of business renewed 1/1 and the proportion of business to be renewed the rest of the year, I gather there has been a shifting towards the later period. That is what all of the reinsurers seem to say. Is that right? If that is the case, by how much has the renewal season been -- or business to be renewed been pushed out? Or is it as expected?

I think what I would say is it was generally a reasonably late renewal, in that things didn't firm up until late in December. But for the 1/1 business, most of the 1/1 business that needed to be placed was placed.

I think there has been some retro that potentially will be bought throughout the rest of the year. But I think that may be a slightly higher amount than previously, but it's not a meaningful change and it is kind of typical for the market.

The one area that really hasn't renewed, but that is as expected, is our Florida book, which is heavily concentrated in June and July. But overall, I would say that there wasn't that much that came out to be renewed that was not renewed at 1/1.

My only comment on that, that might be sort of older news. Because there is no doubt the Florida business has tended now to concentrate more around the June 1 renewal as opposed to around the year. But that trend really started three or four years ago.

It's actually become pretty much a given that if you have a big Florida exposure you have to wait and get the -- you have to understand the dynamics of the Florida Hurricane Cat Fund how that interacts. Because they really don't solidify that until really sort of the late spring, that is always a moving piece of the puzzle.

So that is sort of well known, nothing new there. As far as your volume guidance, your premium guidance, you talked about how 1/1 you were very happy with the renewal book that you acquired. When you look at the variability, is there still a bit of an unknown as to how much more the market firms, or opportunities that you see, so that the guidance number may still vary? Or you think -- is there more uncertainty? Are things much more fluid this year because of what you have described as the environment?

I think the market is always moving. I think knowing that Florida -- back to Bill's comment -- is such a big piece of everybody's portfolio and that does not renew until June, I think there is a lot of question as to how that is going to shape up. You need to make some assumptions as to what the pricing increase will be for that book.

But overall, I think going through 1/1 the message, at least from us, was out early that we had changed our hurricane frequency and to expect it to come through on accounts with exposure in those regions that were affected. So I would not have thought that that had much of an impact.

Really the variability, I would think, is more around what is coming up in the year. But that is no different this year than other years. I don't know if you have anything on that, Bill.

I would say actually there's a lot of uncertainty in the market right now. You have just had massive losses flow through. You have, as I mentioned, a lot of dislocations out there. It is kind of the fun time. It is a lot more uncertain right now than if you'd just come through a year of benign activity and everybody was predicting just a small deterioration in rate. So there's a lot of uncertainty out there right now.

Thank you.

Gary Ransom of Fox-Pitt, Kelton.

I have a couple questions. One is the State Farm put option, whether you're assuming that that happens in your guidance and whether that changes your thinking about overall exposures at all, if that happened? That is the first question.

Then I have a second question on your comments in the text about the ceded premium earns that was attributable to Wilma, whether that is just reinstatement premium or what is that; and whether that is included actually in the overall $314 million Wilma estimate.

On the subject of the State Farm put, what happens with that is their decision, obviously, and I would not want to speak for them or predict what decision they get to.

The assumption that we have made in our model is the capital structure as it stood at year-end, which means an assumption that the put would not be exercised. But again, that is a decision that they will make. We do continue to enjoy good relations with them, and obviously, at any level we'll hope for that to continue.

Just to follow up on that piece, though, is that -- the $600 million that you have up in the Holding Company, using 150 or something more than that perhaps in the exercise of that option, you are still content with the capital that you have available?

For the moment, yes, so I would say that we position our capital to plan around that eventuality. That said, we will be looking hard at capital as the year progresses, and so I wouldn't want to draw a final conclusion on capital. We never do. We manage capital dynamic, and so we'll keep looking at it as the year progresses and we see how opportunities unfold, especially in Florida.

Okay, and then the other question about this ceded earned premium?

Can you repeat the question for me? I'm sorry.

You talk in the text about ceded earned premium attributable to Wilma as the $20 million in reinsurance and another $21 million in Individual Risk. And just the way that is written, it is not clear to me whether that's reinstatement premiums or whether it's something else.

It's essentially reinstatement premium, premium triggered by the loss event.

And that is included in the overall $314 million Wilma loss.

Yes, it is. Yes, it's netted down to that number.

Okay, thank you.

Jay Cohen of Merrill Lynch.

Actually, my question was answered. Thank you.

Adam Klauber of Cochran, Caronia Waller.

Good morning, thank you. Looking at the Florida market, the takeout companies obviously picked up -- make up a good portion of that market. With increased rating pressures, can those companies, do they have to change their model? What do you think is going to happen there?

Yes, a couple of thoughts. Most of the -- there is a significant amount of Florida risk that is resident in the smaller takeout companies often that were formed as -- by taking a portfolio out of the JUA. Realistically, the bulk of those companies are unrated. Most of the pressure around their balance sheets and risks, etc., come from the Office of Insurance in Florida.

And again, I think the Office of Insurance down there is being very proactive. I think they understand the issues. They know that models are going up; they know that costs are going up, and it's an active process down there. But the rating, the A.M. Bests, the S&Ps, etc., really generally don't rate those companies. Not in all cases, but it's sort of a different game for them. Did that answer your question?

Yes, it does. Also a follow-up. As far as the Florida Hurricane Fund, are you seeing any significant changes going to the 2006 season?

Again, you never know what the Florida legislature will do. I did recently hear from Jack Nicholson, who is the director of the Florida Hurricane Cat Fund, and it's always reading tea leaves, but he indicated they could probably -- it's likely to have a certain amount of stability in that fund for this year.

As you know, their cash balance is down quite low. Just the way I perceived his comments is they are probably looking for stability as opposed to wholesale changes. To date it has been a very successful venture for -- and a key provider of capacity to Florida companies.

Thank you very much.

Brian Meredith of Banc of America.

A couple quick questions. First, John, on the managed cat premium growth, is that going to be disproportionately to the RenRe book or the DaVinci book, because DaVinci has increased its capital? Or is it kind of uniform, the 15% growth, should we assume?

I think you've got to assume it's about uniform. Given the growth in the DaVinci capital we are tilting a little bit more toward DaVinci than in prior periods. But you can make it proportionate to that growth in capital and get to the answer.

Great, second question. Some of the changes in the investment portfolio, particularly scaling back some of the hedge fund exposure, as well as the high-yield bonds exposure, does that have anything to do with your kind of capital adequacy and rating agencies?

I would say fundamentally, it's a function of our view of the investment environment and our view of how well we are being compensated for taking risk in the investment environment that we are in today. That is a key backdrop.

Then secondly, we also did have in mind wanting to focus our risk-taking resources, capital resources, on our core business. So that is also the backdrop to have plenty of liquidity, plenty of high-grade investments to support the core business. On top of that, as I said, we didn't feel like we were giving up much when we did that, given the cycle.

Last question. On the ceded reinsurance, you said that ceded reinsurance as a percentage of premium is going to be dropping during the year. Is that because there just was not as much opportunistic buys in the reinsurance market? Or is it that the standard deviation around your expected losses are going down, or your volatility of your book is going down? What is driving that decision?

I think we're going to look at ceded retro the same this year as we looked in other years. Mostly that decision is what's going to be available in the market, rather than anything to do with specifically our portfolio.

We don't go out with a normal -- we don't approach ceded as many other companies do, with a program that goes out at one point during the year. We look throughout the year to figure out what our portfolio balance is, and then look for ceded opportunities that help us further balance it. I think the availability of that may be reduced this year.

Said another way, the prediction on ceded premium is no better or worse than our prediction on the gross written. It will be a function of what the market opportunity is. And we could be wrong, but we certainly don't have a budget on ceded that anybody feels that they have to meet or that defines a program that we have to execute.

Last question. Quota share reinsurance buying. Did you see a reduction in quota share reinsurance buying? Did that have any impact on why you might be seeing more cat buying and less in scenarios?

Are you still talking about ceded?

No, not ceded, I am talking more on your assumed side.

I think, the quota share buying I think is done in some markets before or after what is purchased on the cat. I didn't see any real impact on the cat that was being purchased.

If anything, as we said and I think Bill said in his comments, within the U.S. there has been more cat purchased this year. So regardless of what's going on in the quota share, I think the cat market on an excess of loss basis is seeing increased opportunity.

Right, but more cat buying, could that potentially mean that there is less quota share buy?

This is Bill Riker. A couple of comments. We've never been sort of a big traditional player in the quota share per-risk markets, which -- so I think we're probably not best to comment on that. Because we really do not sit in the major flow of that.

What we did see in a couple areas is some of the proportional contracts that supported large capacity commercial writers seem to have come under an awful lot of pressure. But frankly we were not on them to start with, and we really are not on them now. So you're better asking that question to other reinsurers who are more mainstream in that environment.

Thank you.

Tom Cholnoky of Goldman Sachs.

Just a quick follow-up. Do you expect as these models come out that some of the companies that actually bought prop cat in 1/1 may come back to the market to try to top out their programs for the hurricane season? So actually increase the ultimate amount of capacity they buy?

I think one of the areas of uncertainty is really what the models are going to produce as far as expected 1 in 100 or 1 in 250-year losses. So I think people are taking guesses at it, but I would not be surprised at all if we see people coming back into the market needing additional capacity up top, when they realize how much the models affected their book specifically.

Sorry, one last question just in terms of your guidance for this year in terms of top-line growth, and I may have missed this. Are you expecting basically the same pricing trends in 7/1 or actually better pricing trends?

I don't think you can boil it down that way. Because 7/1 and 6/1 are so Florida oriented; and 1/1 is much less so. So I don't think you can talk about a monolithic price trend.

I'd agree.

Okay, that's it. Thank you.

Operator, we understand there is another earnings call at 10:00 East Coast time. So let's just take one more question.

Thank you. Your final question is from [Benet Nesmith] of Credit Suisse.

Could you remind us about the profit-sharing agreement between DaVinci Re and RenRe, please?

Well, I guess the short answer is no, I can't. We haven't discussed the details of our fee arrangements between RenRe and DaVinci. I can say that we adjusted them modestly as a function of the recent capital raise. But I don't think there's anything in that that deserves highlighting in this conversation. We have in general not given out the detailed terms of those agreements.

Would it be fair to assume that you, besides the equity pickup, you also get some sort of fees for managing that business?

Yes, that is certainly true. We get both a fixed fee and variable fee in addition to the equity pickup. So that we have disclosed. But the details of the drivers behind that we have not disclosed historically.

Right, and on the 15% premium growth guidance for the cat business, that appears to be a little conservative given the strong pricing we're hearing on the U.S. cat business and considering that you are writing more special business. If this is all rate increases, then would I be right in assuming that your exposures are going down a little bit?

The thing I would say is -- what you're saying, if it is all rate increase then exposures would have to go down, and it would have to be true. The one thing to keep in mind is, when you're looking at it, we're talking about only one pillar of risk here, which is Florida, which really had the largest increases, and then kind of trailed off from there, to the extreme in Europe where we saw price reductions in some cases.

I think, thinking about the portfolio and what the balance of risk is in the portfolio is a better way. It's probably going to be about stable. I would not necessarily judge that the 15% increase is going to -- dollar for dollar represents what the price increase is or what the exposure reduction could be.

Thank you.

Thank you. I would like to hand the floor over to Neill Currie for any closing comments.

Thank you very much for phoning in this morning. We hope we have answered all your questions and look forward to speaking with you next quarter. Thank you.

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