濱特爾 (RNR) 2006 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the RenaissanceRe first-quarter 2006 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 Mr. David Lilly. Sir, the floor is yours.

Good morning. Thank you for joining our first-quarter 2006 financial results 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 will 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 May 17 at 8 PM. The replay can be accessed by dialing 877-519-4471 or 973-341-3080. The pass code you'll need for both numbers is 7305026. Today's call is also available through the investors section of www.renre.com and will be archived on RenaissanceRe's website through midnight on July 15.

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

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

Thank you, David. Good morning, everyone. I am pleased to report our Company enjoyed very strong financial results for the first quarter. Last night, we reported operating earnings per share of $2.73 and an 8% growth in tangible book value. Our results this quarter benefited from light cat activity and lower-than-expected reported losses in our Reinsurance segment.

We have used the term buck of luck in past quarters, and while this quarter exceeded our expectations by about a buck in terms of operating earnings per share, we don't chalk all of this up to luck. These strong earnings also highlight the strength of the RenRe franchise and the earnings power of our businesses.

We are positive about our business prospects for the balance of the year. However, we are approaching the market carefully because we are seeing fairly disparate market conditions. There is a strong hardening in some segments, while other segments are showing signs of weakness and softening.

As you have likely heard from others, the cat-exposed property market is one of the bright spots. As the year has progressed we have seen improving market conditions in our catastrophe reinsurance business. The combination of contracted supply of reinsurance capacity for U.S. wind business, increased demand for reinsurance protection, which is driven partially by more stringent rating agency capital requirements, and an increased perception of risk as revised vendor models become available have all served to push pricing higher.

The market conditions for cat business with U.S. wind exposure may be the tightest we have ever seen, especially in Florida. Remember you're talking to folks that were here in 1993 as well. While this market is very attractively priced, we are managing our exposure here carefully. We are able to evaluate our aggregate risk profile on a daily basis and are constantly seeking to optimize and improve the quality of our portfolio.

The team is energized and hard at work serving our clients. We continue to be a market leader for catastrophe reinsurance. In a tight market like this, our leadership provides value and strengthens our relationships with our brokers and customers.

We are able to write larger lines in DaVinci as a result of the additional capital we have raised for that business. This has enabled us to serve our clients better. DaVinci's capital base now exceeds $830 million.

Unfortunately, we are not seeing the same volume of attractive opportunities in specialty reinsurance. Our top line is down 43% for the quarter year-over-year, and we are expecting premium to be down 35% for the year. We will stay disciplined in writing this business, as we have always tried to do when faced with softening market conditions; and we will continue to seek out attractively priced deals where we can.

Part of what may be driving the softening prices in specialty is what we perceive to be a modest market shift away from cat-exposed property as some reinsurers seek to diversify. Kevin O'Donnell will talk to you more about reinsurance market conditions in a few minutes.

Moving to our Individual Risk business, we reported strong first-quarter underwriting results, with an 80% combined ratio versus our target of 90%. We continue to target a 90% combined ratio, so we're not adjusting our expectations for the underwriting margins in this segment. Market conditions are generally attractive in Individual Risk, particularly in property lines. As

I have mentioned to you and earlier calls, we feel it is helpful for you to get to know more members of our team over time. So I am pleased that Bill Ashley, who runs our Individual Risk business, is joining us on this call. Bill will speak later about the opportunities we are seeing in the Individual Risk market.

I would also like to mention correlation. Correlation among cat-exposed lines of business is an important issue and one which can have big implications if underestimated. We recognize this, and when we write U.S. property business we coordinate closely between our Individual Risk and Reinsurance businesses. We have developed sophisticated tools to track and aggregate risk. This allows us to write insurance and reinsurance while maintaining a diversified portfolio of attractively priced risk.

Overall, I am pleased with the quarter and how the team is working. We have an important period ahead of us, with most of the Florida business renewing in the next several weeks. We're well positioned to take full advantage of this market opportunity. We have a great team of people who are armed with the right tools and have long-standing relationships with our brokers and customers. With that, I will turn the call over to Kevin, who will talk further about what we're seeing in the Reinsurance segment. Kevin?

Thanks, Neill. The U.S. and retro cat markets are continuing to harden, and we're seeing improvements in both price and terms and conditions that are in excess of the model changes, meaning we are creating a better portfolio in 2006 than in 2005, even using the new higher loss from our model changes.

The largest rate increases are in U.S. wind-exposed property, followed by U.S. business in general. There are many factors adding to the pricing pressure in the U.S. We are seeing increased demand coming from existing and some new U.S. buyers, resulting in over 20% increase in new limits being purchased. As Neill mentioned, the primary reasons for this are the increase in expected loss from the wind events, and also the rating agencies are requiring more capital for each dollar of cat risk.

On the supply side, we have seen some reduction in appetite in both reinsurance and the retro market to wind-exposed risk and a growing tightening for earthquake-exposed risk as well.

As many of you know, most of the Florida-specific business in the market renews over the next several months. We have been very busy underwriting and pricing this business. We are encouraged by the pricing and discipline that we have seen in the market. As we discussed on the last call, we updated our U.S. models to reflect our view of the increased frequency last year. As with 1/1 we are leading the market with our revised tool. None of the modeling agencies have released updated models, so anyone relying on external models are at a disadvantage currently.

With regard to our aggregate in Florida, it's our intention to continue to provide capacity to our partners. But our current target is to hold our gross exposure to be about flat. This will result in a larger net exposure increase, as we may have less retro this year. Consistent with our strategy, we will allow ourselves to overweight at specific points on the distribution as well as in specific regions if we feel we are rewarded for taking that risk.

It is still unclear how the Florida legislature will address the issues facing insurance companies and policyholders. We are closely monitoring the changes being considered and, in particular, to the Florida Hurricane Cat Fund, which could have a material effect on what is purchased in Florida and affect the amount of private market premium.

In addition to Florida, we are continuing to see a lack of supply of retro capacity, which has caused terms and price to tighten substantially. We have remained an active writer of retro and will look to continue to deploy capital in this line as opportunities present.

The limited availability of retro has been further exacerbated by several large players losing their ratings, exiting the line, or just reducing their appetite for the risk. So lack of availability is having a knock-on effect to anyone who is relying on retro purchasing or needs retro as a required means of capital. This is still a very volatile line of business, but we feel with our tools and our experience we can continue to make money in this very challenging class.

Moving over to specialty, our specialty book continues to perform well with current year loss ratio of about 70% and low loss emergence on prior years. We are experiencing some softening, but most of the premium reduction, as we mentioned previously, is due to a few large deals. The primary driver for this quarter's premium reduction comes from one first-quarter deal that we expected to renew and didn't, and from premium adjustments on prior years.

The workers comp cat business continues be challenging as well, and we continue to allocate more capital to California earthquake through our property cat treaty group and through our individual risk group. Other large lines for us, such as surety and casualty clash, are holding up reasonably well from a pricing perspective.

We have a good rapport with our producers and are seeing a good flow of business. With that said, though, we're seeing fewer appealing new opportunities as many of our target lines are softening.

Finally, we believe we made excellent strides over the quarter with regards to management and modeling of the book of business. With that, I would like to turn the call over to Bill Ashley to discuss Individual Risk.

Thank you, Kevin. Good morning. As Neill mentioned, I'm going to give an update on the opportunities we're seeing in our Individual Risk business. Very similar to Kevin's comments on the Reinsurance segment, the primary business for hurricane-exposed risk are seeing the most disruption and very significant rate increases. This disruption of capacity is causing terms and conditions to tighten significantly. Retentions are moving up. Large property schedules are actually struggling to even get completed.

This is causing some creative solutions to start appearing in the market, where these large property schedules just can't get done. Examples of some of these creative solutions we are seeing are a willingness to take on, as an example, Category 1 through 3 hurricanes on a net basis and put a parametric trigger in place for Category 4 or 5. We are also seeing things such as -- will you write a second event cover only, and I will take on the first event net? We have actually seen in the marketplace an attempt to market a single occurrence policy as opposed to an aggregate property policy, which is normal.

The last month has certainly been the most chaotic activity we have seen on the hurricane property market, and it continues to harden. We actually at this point see no end in sight to the hardening.

The hardening market and the hurricane-exposed property business is starting to affect as well the California earthquake market. Although certainly not as hard as the hurricane-exposed property business, capacities are being reduced and prices are up.

Consistent with Neill's comments, the hardening primary market we believe is being caused by increased reinsurance pricing, pressure from rating agencies, the anticipated model changes by the third-party models; and these items are now making its way to the front-line underwriting from home office messages. The market also seemingly is willing to accept an excess and surplus line solution, where rate and coverage changes just can't be adjusted as quickly in the admitted market.

We're well positioned to take advantage of the current market conditions on the property side due to our existing relationships and also the ability to use both admitted and excess and surplus lines companies.

We are carefully coordinating with the Reinsurance segment for cat-exposed business in the Individual Risk unit, and we use the same modeling tools and proprietary REMS system as does the Reinsurance segment. This allows us to carefully monitor where can we get the best returns for the Company and coordinate the use of both capital and capacity at a corporate level.

Lack of capacity appears to be causing some markets to abandon property risk in favor of casualty risk. The casualty market is spotty. It depends on carrier, line of business; but there is some evidence of softening. However, markets such as ourselves are able to leverage property capacity with casualty, are actually able to stabilize or in some cases get slight increases on the casualty business.

The good news is that the slight softening we are seeing on the casualty side is having little or no impact on our program business. We continue to be pleased with the performance of our program partner business. We have not completed any new casualty deals in the first quarter, but anticipate completing one or two transactions yet in 2006. We are, however, taking our time reviewing new casualty programs very carefully, especially given current casualty market conditions.

So thank you, and with that, I would like to turn the discussion over to our CFO, John Lummis.

Thanks, Bill. Our quarterly operating EPS was $2.73 as noted in the press release. That is an all-time record, and the next highest result was $2.62 recorded in the fourth quarter of 2004. The story behind the strong performance was that almost across the whole business we saw performance in the quarter on track with or even better than expectations.

In particular, this was a relatively light quarter for cats, especially when compared to the fairly heavy losses that you saw in last year's first quarter. We also saw strong performance from our Individual Risk business and from our investment portfolio.

As highlighted in the press release, we did favorable reserve development relating to prior accident years, including most notably a takedown of $39 million in our Reinsurance business. In my view, the only substantial negative for the quarter was the top line for our specialty reinsurance business, where we saw premium decline by over 40% compared to the previously projected 35% decline that we talked about a quarter ago.

To comment on some of the specifics of the financial performance, in our Reinsurance business, we saw gross managed cap premium growing by 23% compared with last year, well ahead of our annual guidance of over 15%. Given uncertainties in the market environment that Kevin has alluded to, there is potential variability, real potential variability in where the cat total ends up for the year; so we have not adjusted our guidance for the top line on managed cat, although we clearly see some upward bias.

I would remind you that as you go to do your full-year projections, it will be important to look at the normalized 2005 premium as the base. Our normalized premium numbers reflected in our fourth-quarter press release -- and that backs out loss-related premium items from last year that include such items as reinstated premium and back-up covers -- you don't see material amounts of that for Q1, but that is a factor as you go to look in the third and fourth quarters.

On the topic of ceded premium, we ceded written premium of about $30 million, which is well less than our original assumptions. Essentially that reflects the strong market environment with higher demand and limited supply that Neill and Kevin have mentioned.

Turning to cat loss experience, losses were relatively light in the current quarter, but we did see some activity. Australian typhoons and the March storms in the U.S. were among the larger events in the quarter.

For the Specialty book we saw a premium decline substantially compared with last year. Again, essentially that is a reflection of the broader market that Neill and Kevin described, where we are seeing conditions softening spite of the hardening that we have talked about in the property and cat markets.

Regarding our loss experience in Specialty, the current accident quarter was essentially on track. If you look at the segment results, you will see $39 million of favorable development from prior periods; and that is primarily a function of the Specialty book and simply relates to the mechanical process of applying our existing loss reserving models. So I would underscore that there has not been any change in the methodology this quarter. There is simply lower reported losses than we would have expected.

Turning to our Individual Risk business, there we had our best quarter ever in terms of earnings. On the top line, premium grew dramatically, over 50% compared with Q1 '05. We view this as about on track, though, with our full-year expectations. We see that fitting up against our projection of a growth target of 15% for that business.

Regarding our loss experience, our loss ratio came in 5 to 6 points better than I would have expected. That is helped by a couple points of favorable development, but also generally saw good performance across our property business helping that result. In addition, we saw expenses coming in a couple points light of expectations, since we are still ramping up the business.

So although you see about an 80 combined ratio for the quarter, for now at least I would still look to project closer to a 90% combined ratio as the assumption for a normal quarter. Obviously this is also a book that can be hit with cat losses, so you have to look for some seasonality in the loss profile as well.

All that being said I would like to underscore for you the segment result for the Individual Risk business. You can look at that in the back of the press release. You will see $27 million of underwriting profit for the quarter. That is obviously before any investment income, so I think you can look at this quarter as a very real demonstration of the earnings power of our Individual Risk unit.

Turning to some other items, we also had a very strong quarter for our investment portfolio, with record net investment income of about $80 million. I want to note a couple unusual items in that. That includes $7 million from a very successful private equity investment, and another $7 million from other alternative investments that performed well ahead of our expectations. So I would really back out both those numbers to get to a more normalized view of investment income that would put you around $65 million for a quarter.

I would also note we have significantly derisked the investment portfolio over the past several quarters. Our allocation hedge fund has been going down. We're maintaining a duration of about 1.4 years. I caution you that down the road that could have implications of our missing some opportunities that may unfold for higher risk allocations or for longer-duration strategies. That said, that position may also mean that we will dodge bullets depending upon how events unfold. So for the moment we're comfortable with our investment strategy.

On the expense side, we also had a relatively good quarter. Given the growth that we expect to see in the business and some other factors, I think you should expect operating expenses to rise somewhat over the years as we grow out our infrastructure and also see some variability in that line. So you could easily see an additional $5 million or so of expenses per quarter in the future relative to what you see in this quarter.

Putting all that together, you clearly have a very nice result for the P&L for the quarter, and there is some positive bias obviously to how you have to look at the full year. There are a range of outcome that could continue to develop favorably for us, including the growth in our core cat business.

I'm sure that will lead some to look at revising earnings expectations upward for the year, but I do have to caution you that we obviously have to look forward to the third quarter with uncertainty around hurricane risk and also some uncertainties around how our Florida business will unfold in the top line given variability in that market. So at this state we're not adjusting our earnings guidance nor are we adjusting any of our top-line guidance.

Turning to the balance sheet, we're essentially comfortable with our current position. We see managing our portfolio, cat, and other risk to fit up against that balance sheet. We will probably look at paying down some of our bank debt in the second quarter, but otherwise see the balance sheet that we have as one that we are going to be happy with.

A final comment on the balance sheet. You should note that we grew book value per share by 8% in the quarter, and obviously that reflect strong operating performance in the business. It also reflects a successful call on our decision to maintain our investment portfolio with a short duration and to pursue the investment strategy that we have. All told, a very strong quarter.

At this point, I would like to turn the call back over to Neill.

Thanks, John. I would like to point out that in November of last year John indicated his intention to retire effective June 30. Accordingly, this may very well be his last conference call with RenRe. We expect to be able to announce his successor sometime in the next few weeks, which will give John and the new CFO some time to conclude an orderly transition of responsibilities. We were pleased that John has agreed to stay on through the search process and are very grateful for the role he has played in establishing RenaissanceRe as a world-class franchise. So thank you, John.

At this time, we're happy to take your questions.

(OPERATOR INSTRUCTIONS) Tom Cholnoky from Goldman Sachs.

Neill or John, maybe you can help me with this. I've got a couple of questions. Number one, from a capital perspective, how much incremental business do you think you could write? Let's say the market conditions in June and July are better than what you would have thought, is there some limitation to how much more new business you can put on purely from a capital position?

It is Neill. Why don't I start off with that? Prudent capital management has always been a cornerstone of our philosophy here. So you carefully have to balance additional capital with improving your existing portfolio. If you write just a little bit more good business and you dilute the portfolio, you're hurting your existing shareholders by raising additional capital.

So we look at this very closely, and we are -- as you have noted, we have raised additional capital in DaVinci to get that up over $830 million. We continually look at what I will call soft capital solutions. I won't go into too much detail to show our hand what those solutions may be. But if we do that, buy additional retro, then is all very good news for our existing portfolio.

So I would say one of the last things we would want to do is raise capital, because of the dilution aspects. John, would you like to add anything to that?

Sure. I guess, a further thought would be we spent sometime projecting out our risk portfolio for the 7/1 time frame. As we are managing the business, as we're looking at our growth profile, we see every reason to think that we can manage up against this existing balance sheet.

As Neill mentioned, we're not keen to raise equity capital when we don't need to. I would also note that we are in a world where there is more premium per unit of risk, and that helps the equation a lot.

So at this stage, it is hard for me to see a scenario where we would be needing to do an equity capital raise, although I also don't want to draw a line in a sand on that either. This is obviously something we will dynamically manage.

I don't think there is a good way, Tom, to answer your question in terms of top-line growth, because this is a much more complex analysis than that. Because you really --if you are growing in, say, Northeast winds, that can balance out very nicely against the Florida risk. If you are growing at all in Florida, that is something else again. Even within Florida, you're going to have diversify impacts, if it is North versus South or what have you.

So there is not a simple way to sort of draw a top-line conclusion on this. People attempt to equate premium with risk, but if premium is going up and risk is staying constant, that is not the right analysis.

The bottom-line message is you don't feel you are capital constrained as you enter this period?

That's correct.

Okay. Second, just on a net to gross, how should we think about that for the year? The relationship on a year-over-year basis, you are up about 500 basis points. Is that something that should hold kind of roughly around those levels through the year?

Tom, I will start with that and then maybe Kevin will give some additional color. Unlike some other folks, we buy retro to maximize our portfolio. We don't use it just to lay off risk. We can go along quite nicely without buying retro. But even though the prices of retro have gone up, we think we will see occasional opportunities to buy retro in specific regions that will help make our portfolio better. Kevin, if you'd like to --?

That's exactly right. We use the same system to write inwards business as we do to make purchasing decisions, so that anything we're doing is accretive to the portfolio that we have pro forma-ed. The one thing I would mention is it is difficult to buy retro right now, but since we're getting more premium on inward side we can spend more money on the outwards and still maintain the spread that we had in the portfolio.

The other thing I would comment on is we have substantial capacity still in place. Some of it is still yet to renew; we're optimistic we will be able to keep it, but there is some uncertainty as to where it is going to be through the wind season.

But is it fair to say that that relationship -- I mean, you are going to be retaining more net than you did last year?

My guess is yes, we will probably be retaining more.

My final question, sorry, you mentioned that in Florida you felt that your exposures vis-a-vis '05 were roughly the same. How would your exposures look across other wind areas, whether it be the Northeast, or the Gulf? If a repeat of '05 happened again, where would you be on a loss basis? Would it be as bad in '06 as it was in '05?

There is a couple questions in there. One thing is, if you consider Florida to be a peak risk, which we have -- it certainly is for us -- we have been very active writing risks around Florida to grow the portfolio in California and the Northeast and elsewhere, to help balance the book.

Back to John's comment earlier, too, we're getting a lot more premium for the risk that we're taking for North Atlantic hurricane as well. So overall I think that we are in a pretty good spot there.

Your question regarding the 2005 losses, from taking those things into consideration, I think from a loss ratio perspective, looking at the book that we have now, I would expect that our loss ratio would be lower from the events in 2005 than they were actually realized in 2005.

Would you hazard a guess on that? Would you give us a number on how much lower? (indiscernible) All right, let me jump back in the queue. Thank you.

Vinay Misquith from Credit Suisse Securities.

How do you look at diversification now that the Specialty Re segment is a smaller part of your business and both the Individual Risk business and the cat reinsurance business has a significant amount of catastrophe exposure?

I would say, the one thing that is I think important to note is risk isn't diversifying; it is the profit associated with the risk that is diversifying. We have no different appetite in looking for diversifying risk this year than we did last year.

As I mentioned to Tom on the last question, we have done a good job diversifying within the cat book. Outside the cat book with regard to specialty it has been difficult to find opportunities, but we are actively looking. I would say there is no change in our appetite. I don't know if you have anything to add on the Individual Risk side, Bill.

Sure, I think a couple comments there. One, we don't look at diversifications for diversification's sake. It is all based on profitability of the business. We continue to grow that side of the business on the casualty side, predominantly in our U.S. programs side.

Also, I would not jump to the immediate conclusion that there is more risk in the Individual Risk side and on the property side than there was last year. That is not how we look at it. We look at it as measured across the business.

Same as Kevin's comments, price increases against risk are also part of that measurement, rolled up to the corporate side.

Right. On your cat book, I believe you said that your exposures will be flat but your net exposures will be slightly higher because of less reinsurance. Could you verify on the Individual Risk side, would your Florida exposures be higher this year than it was before? Or will most of the upside come from rate increase?

Well, it is a fun question to answer, because if you are looking at single event versus entire portfolio risk, the rate against exposure is certainly up, as it is on the reinsurance side. We have not, I would state it differently, intentionally -- increased our risk profile in Florida.

So you have not increased to risk profile significantly in Florida? Okay. The first quarter you seem to have had significant amount of payment growth in the Individual Risk segment. I'm just curious where that came from.

Yes, what you're seeing is it's actually inherent in our business, where we have put on -- the programs we do are fairly significant programs, premium-wise. So it is a timing issue of when programs roll on. We have rolled on a couple of new programs in 2005, so you're now seeing the effect of that premium quarter-over-quarter as it rolls on in 2006.

Thank you.

Alain Karaoglan from Deutsche Bank.

Several questions. First, John, I want to thank you for all your help all these years and the great job that you have done. We will really miss you.

My questions are -- I have several questions. The first one on the Individual Risk business, we have 50% premium growth in the first quarter. Are you suggesting, if you are keeping the 15% flat, that we should look for declines in the next few quarters on the premium side?

I am not suggesting you would see a decline. But I think a better analysis would be if you look at third and fourth quarter premium, you will see growth in 2005 that relates to the new programs that came on about midyear in 2005. So what you're seeing is that same effect of that annualized premium coming on first quarter of 2006. So I believe you have got to look at all four quarters (multiple speakers) to really analyze how that looks.

I would also underscore that there is some lumpiness in programs coming in and going out, so it is -- you can't quite look at sequential quarters or year-on-year comparisons and get to a simple answer that -- because of the lumpiness of this business as well.

Okay, on the catastrophe market point of view, in the past you guys have been known as a stable market. When the market underprices, you maintain your prices. If the market is overcharging, you tend to be fairly stable. Is it different this year? Are you writing business at higher prices than what I would say is adequate, because you have the opportunity? Could you tell us if anything on that front has changed?

I'll tell you, our view is to be a stable pricer based on exposure. The thing that has happened this year that is very different is the perceived exposure. The perceived risk associated with this exposure has changed.

So what we're doing is we are bumping up our pricing substantially to recognize that the expected loss on the deals we are looking at is greater. The other thing we're looking at is a component of our pricing has always been our capital, and also the opportunity cost of deploying capital.

So the combination of the increase in expected loss and the overlay with our capital cost is really what is driving most of the increase in the pricing. The other element is the market generally is pushing prices up as well, so we're seeing opportunities in areas where we may not have been as successful, like the Northeast, where the market now is much more in line with our expectation of pricing.

Okay. I hate to bring something like ChannelRe, when you're giving us 43% return on equity. Is ChannelRe working as you expected? Or have the returns on that investment been slightly disappointing?

It is Neill. Just about as expected. I would say the return on equity there has been a couple of points lower than we expected; but compared to many other operations, certainly an acceptable return.

Thank you very much.

Adam Klauber from CCW.

A couple questions around the catastrophe book. If you can give us, what is the general breakdown between quota share versus excess loss?

Within the cat book, we are almost entirely excess of loss. We have very little quota share in the cat book at this point.

Is that what you have written to date? Or is that historically you have been mainly excess of loss in the cat book?

Historically we have been -- within the Reinsurance company we been predominantly an excess of loss writer. At different points in time we will find a quota share that makes sense. Most of the quota shares that have made sense for us historically are ones where the vast preponderance of risk within the quota share is cat risk.

Okay.

Those typically have an occurrence cap.

Yes, it always has an occurrence cap and an aggregate cap.

Right, right. Going into the July 1 wind renewals, if I understand correctly, there is usually two -- it is usually bifurcated, either providing protection below the Hurricane Fund or above it. Could you give us an idea what the conditions, capacity-wise pricing-wise, are on those two markets? And what your appetite for participating in those two markets would be?

Yes, actually there is also a sliver piece along the FHCF as well, but that is a small component. I'd say generally, the pricing is substantially tighter than what it was. That is in excess of what the model changes have seen.

I think there has been more willingness for people to participate above the Florida Hurricane Cat Fund than below. Some of the things you're seeing being discussed in the legislature are a result of some contraction in capacity below the FHCF.

Our view of the risk is, again, we look at the entire distribution for somebody's loss profile, and we will allocate capital based on our own portfolio as to where we're getting the highest return. So in some cases we are participating below the FHCF; in some cases participating on the sliver or above the FHCF.

From what I understand the takeout companies have had a lot of trouble getting reinsurance capacity. Is that a market you're interested in participating in?

One of the things within Florida, we look at -- we see most of the business down there, we are pretty recognized leads. So we have good relationships with takeout companies as well as the larger companies down there.

Without commenting specifically on any individual companies, yes, we would be -- we will look at takeout companies, we will look at existing companies, new companies, whatever.

Thank you very much. That's helpful.

J.F. Tremblay from HSBC.

I have a question about the Florida cat market. There is a speculation that increasingly we're going to see property programs coming to market with separate wind covers. Are you seeing much of that? How meaningful do you think those opportunities can be?

Are you talking on the Individual Risk side or the Reinsurance side?

That's correct, the Individual Risk side.

Would you restate your question again? You're looking for a split of (multiple speakers)?

What I am saying is we have heard from other market participants, I guess, that the market is so [spectated] that what would have been in the past a full property program including cat would now be coming to market with a separate stand-alone piece (indiscernible) against the wind-related losses.

Certainly, I understand now; thank you. Yes, that is a factor and it has happened before in hardening markets like this, where the policy gets split into perils. The natural perils get split up and actually tend to go towards the excess and surplus lines market to find capacity on the natural perils side.

Okay, so you're saying it is happening this time around again?

Certainly, yes.

Then for a while I think there was a concern about RenaissanceRe's ability to excess public markets. Can you give us an update on those rate issues?

Sure, this is Neill. We feel like we could raise additional equity capital at the Holding Company level. The regulatory issues are something that would have to be taken into account when we did so, but we do not feel like we are unable to go and raise additional equity capital if we so desired.

Okay, thank you.

Brian Meredith from Banc of America Securities.

I wanted to echo Alain's comments, John. Thanks a lot for all you have done for us. A couple quick questions here. First, I believe your pro rata business is contained, just a lot of it is contained within your Individual Risk book.

Maybe the question there is -- how much of the growth here was actually pro rata contracts in the quarter? Have you entered in many new pro rata contracts on the property side in that book of business?

Thank you, Brian. No, we have not entered in the first quarter of the year any new pro rata contracts. Some of the growth that you are seeing is actually premium that was spillover, again as I said before, from year 2005 coming over from whatever pro rata contracts were in place.

Great. Next question, on the cat book, any changes in the layers that you have been writing in that 1/1? Did you move up higher, lower, or basically the same where you have always been?

I would tell you, there was no fundamental shift in where we are participating. It is pretty much the same as where it was. I would say the one thing, with some of the changes in people's view of the wind risk, some of the programs were restructured. But in general I would consider our appetite to be pretty stable.

Okay. Next question, DaVinci on the new capital, any changes in the terms and conditions on the new capital coming to DaVinci? Or was it the same as it has always been?

There were some modifications in some of the detail terms, but nothing particularly noteworthy for this purpose (indiscernible). Given the variability in cat, the details of the terms of the capital are rounding errors.

Okay, so no real significant impact in potential earnings going forward for you.

I think that is a fair summary.

Okay. I guess the last question, can you talk a little bit about what happened with retentions on your property cat business at 1/1? Were they up significantly, same, down? Not your own retentions, I mean what you were assuming.

Okay. I would say, again, there's a couple of ways to answer that. I'd say if you're switching from our old model to our new model, I would say is about the same. With that there has been some shift upward because there is more expected loss coming into each of the companies that we are trying to build. So from an expected loss standpoint I would say it is pretty stable.

It is pretty stable from an expected; so therefore -- I guess what I am trying to get at is if we get a 5, 6, $7 billion event, we would expect to have relatively the same amount of losses that you would have had, call it, in '04 during kind of in a $7 billion event, the same event coming through. You're (indiscernible) further away from the loss?

The one thing I want to say, it depends dramatically as to where the loss is. I mentioned earlier the Northeast. We were probably further away from pricing on that last year than this year. So if there is that size event coming into the Northeast, we will have a larger loss this year than last year. Other places it could be the same or less.

The one thing to think about, too, is we're getting a lot more premium coming in for it, too. So from a loss ratio perspective is probably a better way to think about it.

Got you, thanks.

[Terri Shu] from JPMorgan.

John, I wanted to echo what everybody else said. Most of my questions have been answered. Maybe you can elaborate some. For the first quarter the strong growth, I think you talked about -- I am not sure where it came from, because the Florida opportunities are still yet to come, with stronger than expected growth in the first quarter. Which market? And can you talk about Europe where people have said -- or markets (inaudible)?

You're breaking up a little bit on here.

Okay, maybe elaborate more on the growth in the first quarter since the Florida opportunities are yet to come. I am not sure whether you commented specifically on where the growth came from in the first quarter.

Also, if you can comment on Europe, because market participants to date have said that Europe has been more disappointing in terms of pricing.

Sure. We have had some success on the retro side, where we been able to provide more retro capacity this year that last year. One thing we did last year is we cut about half our retro book at 1/1, that renewed at 1/1. This year we saw more opportunities and increased by about 100%. So there is a lot more retro into our book. We also saw opportunities for this business that came up either nationwide, but generally more U.S.-exposed business.

I think your comments about Europe are pretty good, where Europe was somewhat disappointing at the 1/1 renewal. There has been a little bit of movement in Europe, but it is not an area that I would call a hardening or particularly attractive at this point.

One other point I would underscore is that even with the comments that we are making about favorable conditions, say in Florida or in retro, it is not 100% across the board good even in those areas that we consider to be more attractive.

There is still -- there has always been a pretty wide gap between the best deal and the worst deal; and typically, the worst deal is something we just couldn't think of putting in our portfolio. So I think that is a very important thing to appreciate that.

There is a tendency to have broad market commentary that makes you think that all of the retro world is good, for example, or all of Florida is good, and it's just not that simple even now. It is being a smart and careful underwriter, and a smart and careful constructive portfolio is essential.

You talked also about buying more retro, so you are not only selling more retro but also buying more retro. Because I think one of the comments is that your gross exposure may be flat but net exposure is up some because you are buying less, or buying less retro. Am I understanding that correctly -- that you would like to buy more but you're buying less?

That is correct. Southern boys are hard to understand sometimes, I guess. But yes, we would like to buy more, but it is expensive. I would say that we would anticipate we would buy less retro this year than historically. We would like to buy more if we had more money to pay for additional retro, and we will buy it specifically in instances where it helps make our portfolio better.

In a very general sense, if your net exposure is up some and your premiums were up 20% plus, the rate on line is up 20% plus. Again, in a very, very general sense, can one look at it that way?

Not really, because it depends a lot on the mix within the book. Because as we have said, Europe really isn't increasing very much and then you are looking at what is being increased in Florida. So it's a lot more as to -- when you think about risk, it is where your capital is being used. You're writing more diversifying risk. You can be growing premium but not adding a ton more risk to the overall portfolio.

In the Individual Risk area, I gather you're also taking advantage of opportunities in the property area directly. You have the program business as well as the direct property business. Am I right there?

It is correct, we have both. The program business, think of that as more casualty-oriented than property-oriented. Certainly we're taking advantage of the market conditions on the property side as well, as mentioned earlier on the call. But doing that, obviously, carefully coordinating with the Reinsurance segment and the Kevin, making sure that where we deploy that capacity is the best opportunity for the Company, between the two.

So what would be the breakdown? Like for instance, the very strong growth in the first quarter, I think you commented some of it is timing, how the programs role in. I gather some of it is also in the property area with more opportunities to come in Florida, direct property business. Is that correct?

There is some growth in the property. I would not say that it is all Florida. That is not our intent to be Florida only. We are obviously trying to diversify the portfolio, such as Kevin is as well. Some of it as I mentioned is we are seeing a pickup in the California earthquake market at the same time.

Can you give a rough breakdown as far as how much of it is program business and how much of it is nonprogram business?

At this stage, it's about 50-50 between the two.

Then finally, one last question, your comment about your investment portfolio. I believe you said you are maintaining your short duration and also lower allocations to alternative investments in hedge funds. Is that sort of a call on the market, where you see fewer opportunities in the alternative investments?

I would say there are two dimensions to that judgment. First of all, at this stage in the investment cycle we think it is a sensible call to make. Then furthermore, we are essentially marshaling our capital and liquidity to be focused on what we think is the most attractive area to deploy it, which is our core business.

Thank you.

Gary Ransom from Fox-Pitt, Kelton.

I just had a general question on the returns on capital in the property catastrophe business. Looking at the capital needs and the increased pricing, I was interested in what the range of possible ROE outcomes is. How much better is the high end of the range when there is no or very light cat, considering everything, the capital needs and the pricing that has improved?

Gary, that is the $69,000 question. It's a good question. We keep up with that information internally, but I don't think it's appropriate for us to say what our opinion is there.

You can agree that it has improved, though, compared to last year? Can you not?

Yes, and you have to remember there are different dynamics. Because we have, like most people -- we were one of the first ones to do it -- but we tweaked our modeling for the increased frequency and severity going forward. But yes, I would say that it is higher than last year.

How about on the other end, on the negative end when you have a big storm that happens? Has that improved at all or -- ? And I'm relating this to capital rather than premium. The maximum expected loss relative to capital, has that changed materially from last year?

Gary, I think the way to answer that really is to start with a commentary around our risk management processes. We have a number of tests that we use to assess our risk portfolio; and then we look at those tests relative to our capital base.

Those tests are basically the same today as they have been for years. We make minor adjustments from time to time or look at different issues. But the basis of the framework is the same. So our tolerance for risk (inaudible) concept in that framework is the same.

The big change is that we dialed up our North Atlantic hurricane assumption, and we are now fitting that new assumption or new set of assumptions up against our old set of rules and our old capital base. So I think that's the more robust way to think about it.

It is very tempting, and I have seen a lot of this in the analyst commentary, to try to draw very simplistic views of risk or capital, and look at as if Katrina happening again last year. I think that is absolutely the wrong way to think about risk. Because it is highly likely that it won't be Katrina that is the next big one.

In fact while we are all focused on hurricane, I would remind you there are things like Japanese earthquakes, Japanese wind, and North Europe wind, and so forth. So the risk management process would have to be much more robust and consider the full range of eventualities.

So we are continuing on track with our existing framework, and our tolerance for risk is about the same.

Okay, that is very helpful. Thank you very much.

Jay Cohen from Merrill Lynch.

Just a couple of questions. The first is if you could talk about the '05 hurricanes and sort of the developments you have seen from them, at least qualitatively. What has surprised you either positive or negatively?

Then second question is related to the cat business. What would you describe as being a bigger part of the growth? Is it bigger participation in the contracts that you have been on? Or is it new contracts where previously you had not been on them and now you find an opportunity?

Jay, this is Neill. Bill Riker has dialed in on this call; he cares about the investment community and our shareholders and you guys, and we have not let Bill answer one yet. So Bill if you are there, do you want to respond to Jay's questions about the hurricanes and any surprises there, and what we have learned?

Sure. Thanks, Neill. Can you all hear me fine? I would say looking back into what the lessons learned were from the '05 storms, and Katrina especially, which had a lot of interesting elements to it, it is just a lot of details. It is a lot of -- we saw different parts of our portfolio have results as we expected. We saw little places we were surprised.

I actually know our team in Bermuda and our scientific team in Dublin has been spending a lot of time looking at the specific details of individual losses relative to expectation. Really in the cat business, you only get the opportunity to validate your models every once in a while.

So I really don't want to tell any grand generalizations, because it really is just a lot of little things. But it is just, to me the biggest takeaway, there is still a lot to learn in understanding cat risk; there is still a lot to learn in understanding hurricane risk. As a firm we are committed to pushing as hard as we can on that. We think that is where value is created.

Great, thanks. Then the other question about the growth?

Kevin?

Sure. It comes from actually a little bit of both. We are seeing quite a few new opportunities where there has been some new buyers into the market. There has also been some programs where, before, our pricing would have been out of the market; it is now in the market. So we have been able to participate there.

Also on the retro side a lot of the business we're writing is new business to it. With our ratings and with the relationships we have, we generally have pretty good ability to increase on the programs that we like. So we are bigger on certain programs that we have targeted.

To Neill's comments, too, we have added more money into DaVinci so we are able to increase our lines there as well. So it's a little bit of both, I would say. It is not one really driving that, it is all new or all just being bigger.

That's great. Thanks, Kevin.

Operator, I think it is probably time to take one more question.

[Dan Johnson] from Citadel Investment.

Lucky me, although I think about all of them have been answered. Maybe just one last one. On the Renaissance catastrophe premiums, the [pieces] to gross that was up -- I'm sorry, I can't remember if it was 8% or 11% in the quarter. Did you give any indication so far in terms of how much of that you actually thought was increased units of risk versus just the effect of renewal pricing increases?

Yes, we don't look at it, per se, on an individual deal basis. We try to look at it as for the portfolio, because I'll go back to the example I [gave you], which is in the Northeast. If we had nothing in the Northeast on a specific account [and] we are on it, is hard to differentiate between how much is new risk to us and how much is rate increase because we did not like the rate previously. It is just at a rate that was now acceptable to us.

But overall, I would say within the U.S., we are seeing a good portion of rate increase, particular for wind-exposed business. Outside the U.S. it really has not been that interesting for us. So it is not a simple thing, coming in and saying it is 22% of this and (multiple speakers).

I guess what I was just looking for with, let's call it, the high single digit growth that approximately it was, whether that actually reflected taking on net-net more limit exposed; or if it was actually less limit with just more money. Kind of a 50,000-foot view.

You know, I think you're asking about aggregate limit, and aggregate limit is not something that we look at tremendously in managing our book of business. Because how correlated is our California earthquake book with our North Atlantic windstorm book? So whether the aggregate limits are up or not, if it's diversifying risk it is not really raising the overall risk within the entity. So it's a difficult question to answer.

All right, well, thanks for taking my question.

Yes, thanks Dan. John, I would like to turn it over to you.

Thanks, Neill. I would like to close by saying thank you to everyone here. I appreciate the kind comments on this call and also the comments I have gotten in various other calls to me over the past quarter. I have enjoyed very much my relationship with the Street and my relationship and times with Renaissance. So it's been a great period, and thank you to everyone.

Thank you, John. Thank you, everyone, for calling in, and we will look forward to talking to you next quarter.

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