濱特爾 (RNR) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. At this time I would like to welcome everyone to the RenaissanceRe second quarter 2006 financial results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to Mr. David Lilly.

Good morning. Thank you for joining our second 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'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 August 15 at 8 PM. The replay can be accessed by dialing 877-519-4471, or 973-341-3080. The passcode you will need for both numbers is 7639235. Today's call is also available through the investor section of www.renre.com, and will be archived on RenaissanceRe's Website through midnight on October 14th.

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, Fred Donner, Chief Financial Officer, Kevin O'Donnell, President of RenaissanceRe Insurance, Ltd., Jay Nichols, Executive Vice President, RenaissanceRe Holdings, and President, Renaissance Underwriting Managers, Ltd. and RenaissanceRe Ventures, Ltd., and Bill Riker, President of RenaissanceRe. I would now like to turn the call over to Neill.

Thanks, David. Good morning and thank you for joining us. I am pleased to report our company enjoyed strong financial results for the second quarter. Last night we reported earnings per share of $2.15 and over 6% growth in tangible book value. Good earnings, but that isn't the whole story for the quarter.

Actions we took during the quarter further enhanced our position in the market and strengthened our franchise. We anticipated 2006 would present us with opportunities to grow our cat book, so we had increased the capital of both DaVinci RenRe in anticipation of that. As the June 1 renewal season progressed, it became evident that our U.S. clients with Atlantic hurricane exposure were facing a severe capacity shortage. At the same time clients needed more coverage, some reinsurers reduced their catastrophe capacity.

Our (technical difficulty) combined with the expertise and capabilities of our team, enabled us to address this shortage, and we moved very quickly to help bring new capacity to our clients and brokers. Within weeks, working with outside capital providers, we participated in the formation of two new fully collateralized joint ventures -- Starbound Re and Tim Re. We were able to utilize this capacity where it was needed most, further strengthening our relationships and position as a market leader.

I'm pleased that Jay Nichols, who runs our Ventures unit, is on the call with us today. Joint ventures such as Starbound and Tim Re are handled in Jay's unit. Having a dedicated infrastructure and an experienced team is an important difference in the way we approach this aspect of our business.

Strategically, our ability to execute on these types of transactions gives us a competitive advantage. They allow us to provide capacity to our clients in dislocated markets, provide us with another valuable capital management tool in our tool kit, and produce fee income for our shareholders on business that is primarily incremental to our existing book.

We believe that we will be able to continue to attract the right type of capital during hard markets and return excess capital during softer markets. This allows us to optimize our share of the best business. Jay will tell you more about Ventures later in the call.

Also on the call today is Fred Donner, our new Chief Financial Officer. Fred brings great experience and expertise to RenRe in a variety of areas, including finance, strategy, compliance, audit and accounting. We're very glad to have him as part of the team. Already in a short tenure here at RenRe, we have found him to be a valuable contributor.

Later in the call Fred will give you would a more detailed breakdown of our managed cat premiums, which are up significantly. It's important to appreciate that much of the premium growth is being driven by improved pricing rather than exposure growth, and a meaningful portion of the incremental premium is written on behalf of joint ventures.

The exposure we retain has increased moderately and we have expanded into some areas of the market we now find attractive. We often choose to grow in areas that have been hit hardest by recent losses, as that is where the pricing and terms are most attractive. We try to avoid oversteering based on one year's experience. We prefer instead to make decisions on the basis of a total view of past experience, pricing, terms and our modeling. In addition to an update on our cat business, Kevin O'Donnell will give you an update on our specialty business later in the call.

As respects Individual Risk business, our U.S. casualty programs are performing as expected. However, we are seeing fewer new opportunities in the program area. There are opportunities on property business that is catastrophe exposed, but for the most part we are reducing our cat exposure in this segment and are choosing to deploy our capacity in our catastrophe reinsurance business instead.

Turning to other matters, as we disclose in our press release, we have reached a point where we are able to announce a proposed civil settlement with the staff of the SEC. The settlement would bring to a conclusion their investigation into the restatement we announced in 2005. The SEC staff has agreed to recommend the settlement offer to the SEC commissioners. At this time the settlement remains subject to that approval, and we cannot assure you that the settlement will be approved on the terms proposed.

The proposed settlement provides for a monetary payment of $15 million. In addition we have agreed to retain an independent consultant to review matters, including our internal controls, policies and procedures. As you know, over the course of the past several months we have cooperated with the government investigations. In addition, we have reinforced transparency, controls and compliance capabilities throughout our company. Perhaps most importantly we have sought to reaffirm at all times our commitment to best practices and a strong corporate culture.

We view this announcement as an important step forward. As I noted, the proposed settlement is still subject to certain approvals, including that of the SEC commissioners. You should also recognize that this settlement will not be a global settlement. It does not dispose of other governmental investigations, including the investigation being conducted by the U.S. Attorney's Office. Because this settlement is not not closed, and due to the ongoing litigation and investigations, we cannot elaborate further or answer questions on these topics at this time. Thank you for your understanding of that. However, I will say, as we have in the past, that we will continue to cooperate fully with these investigations, and we will make every effort to put these matters behind RenRe as promptly as possible.

In summary, I'm quite pleased with our performance this quarter. We lived up to our reputation for being a stable market when the market is in disarray. We are a nimble organization and are able to respond quickly to the needs of our clients and brokers, and with meaningful capacity. This is a testament to the team we have at Renaissance, a team that has built a true franchise which gives us access to the business we want to obtain. As such we are well positioned now and for the foreseeable future.

With that I will turn the call over to Kevin who will speak further about our Reinsurance operations.

Thanks, Neill. I'd like to start first with cat and then move over to specialty.

Firstly, the cat book is looking good, with our 6/1 and 7/1 renewal being successful on many fronts, and our RenRe in-force managed cat premium being over $1 billion for the first time.

The biggest changes in the market are occurring in the U.S., where we estimate that prices doubled on higher layers of cover. We were able to maintain our relationships and were successful in stretching our capacity, more recently across all layers of programs and also increase retention. In addition to the price tightening, we managed to improve terms and conditions as well.

It's difficult to discuss exposures as being up or down. We saw significant opportunities to deploy new capital both by region and by allowing us to increase our cross program diversification due to the better pricing. In our terms, we increased both vertical and horizontal diversification for our book, which is a good thing.

For example, with regard to horizontal diversification, or geographical diversification, we now have a larger market share of a loss like Katrina, as we saw more opportunities to deploy capital in the Gulf region following the large losses.

With regard to vertical diversification, or achieving more spreads through programs, we now would have the smaller loss for storms like the ones that hit Florida in '04 and '05 due to our ability to better deploy capital vertically through the distribution of risk in the region. Our models indicate that this diversification has produced a better book of business this year compared to last year.

Another key to our success is our coordination across the organization. With the help of Bill Ashley and his team, we managed to decrease the southeast [wind] risk in Glencoe and deploy that aggregate through RenRe, where we're seeing better returns for that business. We achieved this by replacing some of Glencoe's cat-exposed quota share with cat excess of loss in the Reinsurance segment, as the price increases in the excess of loss market were greater, making the business more attractive currently.

During the peak of the season we were a recreating our portfolio every evening for RenRe and measuring the returns in both RenRe's and Glencoe's portfolios to understand our accumulations and optimize our risk across the organization.

We have little to report about the international cat market, where we view our book is reasonably stable as the bulk of our portfolio renews in the first half of the year. There are some times that pricing (technical difficulty) estimates will be increasing towards the end of the year, but we don't expect to see the same levels of movement that the U.S. experienced.

There has been a lot of discussion about the retro market, but in reality there are few assumed retro opportunities between now and year-end. We are seeing most -- actually, if not all prospects, and are having some success structuring covers to sell to customers.

We have been more active -- we've seen more activity in the OLW market as well, but that's beginning to slow down at this point, too. As far as our ceded, we found more opportunities than we originally expected. In addition to our joint ventures of Starbound Re and Tim Re, which Jay will discuss in a few minutes, we have found a few other offers from both reinsurers and hedge funds that improved the portfolio, but we wouldn't expect to be able to buy much more at this point.

Moving over to specialty, we found the specialty markets less attractive, so we continue to look for opportunities in new lines of business -- businesses in hopes of finding well-priced and diversifying uses of our capital. As we discussed previously, this business is dominated by a relatively small number of large deals, so our premiums can be lumpy from quarter to quarter or even year to year. On a more positive note, we continue to see low loss emergence in our specialty Reinsurance book.

Thank you. And at this point I would like to turn the call over to Jay Nichols.

Thank you, Kevin, and good morning, everyone. Before I launch into our accomplishments for the quarter, I would like to provide you with some context regarding the role that our Ventures group plays within RenRe.

We have been creating and managing joint ventures to expand our market-leading property cat franchise since 1999 with the creation of Top Layer Re. In this business we are differentiated along several dimensions, with the primary differentiating element being our strong underwriting track record.

Another differentiating factor is the focus on this business as a franchise within RenRe. In 1999 we formed a separate operating unit dedicated to managing these joint ventures, creating a culture of balancing the interest of our investors, our clients, our underwriters and the RenRe shareholders.

When we establish a new joint venture, we work to construct the underwriting guidelines with the investors to protect their interests, while providing our underwriters with sufficient flexibility to optimize the risk portfolio of the joint venture. We have utilized our joint venture strategy to increase our market share of the best business in dislocated markets, to attract and match the right capital with the right risks and to generate fee income.

It's expressed in terms of total managed property cat premium written. 45% of the managed property cat premium for the first six months of 2006 was written on our joint ventures. RenRe is the exclusive underwriter for these joint ventures that we manage. At June 30, 2006 the capital of these managed joint ventures was $610 million higher than at June 30, 2005.

Now back to the specific transactions that were closed during the quarter. In late February we anticipated a shortfall of capacity for the June 1st Atlantic hurricane renewals, and mobilized to create a fully collateralized joint venture reinsurer to upgrade a segment of our Atlantic hurricane risks. We raised $50 million from third parties for Tim Re, bringing incremental capacity to our clients.

As the quarter evolved, the anticipated shortfall in market capacity became progressively more acute, and our participation in Starbound Re was designed to meet the needs of our customers. This company, Starbound Re, with 310 million of capital, went from whiteboard to reality within a month. Both of these facilities were laser focused on creating a market solution for the Atlantic hurricane property cat reinsurance dislocation, where demand significantly exceeded supply at June 1st.

We were able to deliver these joint ventures in time for our clients and brokers through a team effort, which included significant effort on the part of our property cat reinsurance underwriting team, working in concert with our Ventures unit and motivated external advisers. These all-out team efforts are one of the more energizing aspects of working here at RenRe.

During the quarter, premiums written by our DaVinciRe joint venture also increased significantly as a result of rate increases for Atlantic hurricane exposed business and higher volumes to deploy the increased capital of DaVinciRe. We are very satisfied with our DaVinciRe portfolio.

These activities provided significant additional capacity for our clients at market-clearing prices and provide an attractive business for the investors in these joint ventures. Our underwriting track record, compared with our seven years -- combined with our seven years of experience in the management of joint ventures and our consistent execution capabilities have placed RenRe in the forefront of management of joint ventures to attract capacity (indiscernible) clients in dislocated markets.

Now I will turn the call over to Fred.

Thank you, Jay, and good morning, everyone. You've just heard about some of our business activities, and what I will do is discuss how those activities have impacted our financial results.

The second quarter was a slow quarter for us. Operating earnings per share was $2.15, we grew our book value per share by over 6%, and we generated an annualized return on equity of 31%.

For the first six months of the year, we have grown book value per share by over 15% and generated an annualized operating return on equity of 37%.

Our financial performance this quarter was driven primarily by strong underwriting profits in our Reinsurance segment, along with the strong net investment income, which I will expand on in a moment. Clearly, the dominant theme for the quarter was our topline managed cat premium growth. For the quarter, our managed cat premiums totaled 528 million, and year to date we are almost at 1 billion, growing 75% over the same period last year.

Included in the managed cat numbers is $111 million of premium that was written on behalf of our two new fully collateralized joint ventures, Starbound Re and Tim Re. This premium, while written through Renaissance and DaVinci, is ceded directly to these two new vehicles.

As you may have noticed, we have included a table in our earnings release that helps you understand what we include in managed premiums. Essentially, it includes written -- it includes premiums written by RenRe, Ltd., our wholly-owned insurance company; premiums which are 100% ceded to the two new joint ventures, for which we earn a profit commission and expense override; premiums written through DaVinci, which is consolidated in our financial results, but which is a 20% owned subsidiary, and as such we only retain 20% of the risk; and premiums for Top Layer Re, which is accounted for under the equity method, for which we own 50%.

To further help you in understanding the managed cat premium variance from the same period last year, it is best to exclude the business ceded to the two new joint ventures. When this is done, managed cat premiums are still up 55% over the six-month period last year. We believe this is the most direct comparison to our original annual guidance of over 15% growth, because the underwriting result on the new joint venture premiums, net of profit commission and expense override, accrues to the investors.

As noted in our earnings release, we are raising our full-year managed cat premium guidance net of these joint ventures to [over] 40%. I would remind you that our annual managed cat premium growth rates are comparable to normalized 2005 premium, which excludes loss-related premium from the 2005 hurricanes.

In our specialty business segment, we are not seeing the opportunities we had originally hoped for. During the quarter we wrote $28 million of premium, which compares to 54 million a year ago. Year to date we are down 44% on the topline. Premium in this unit tends to be unevenly spread throughout the year, and we are not changing our annual guidance of down 35%, although we recognize there is some downward pressure.

Ceded premium in our Reinsurance segment was up significantly compared to the same period a year ago. Ceded premium for the period was $170 million. However, this includes 111 million ceded to start down in Tim Re. Excluding this, ceded premiums were up approximately 20 million over the same period last year. In premiums, we indicated that we would expect to be down by about 10%; however, we did find some attractive buying opportunities in the market, and also pricing is up. For the year, we now expect ceded premiums to be flat in this segment.

For the quarter, our Reinsurance segment generated $129 million of underwriting profit. While this is down from 150 million in the comparative quarter in 2005, it's important to recall that our 2005 second quarter benefited from net favorable loss reserve development of $66 million, versus 3 million of net favorable development this year. And regarding our 2005 hurricane loss estimates, at this time they continue to be holding up.

In terms of accident year losses, while this was an active cat quarter for us, there were no significant cats. However, we did incur losses from the storms in the Midwest in April and the flooding in the Mid Atlantic and Northeast in June.

Turning to Individual Risk, our topline was down 4% compared to the second quarter in '05, which, as Kevin just mentioned, was driven by our decision not to renew several cat-exposed primary (technical difficulty). These treaties were terminated on a cutoff basis, which resulted in a transfer out of about $60 million of premium written in the quarter. We are also not seeing as many attractive opportunities as we had hoped for in the U.S. program business. When you factor this all in, we now expect the topline to be essentially flat for the year.

Regarding our loss experience in Individual Risk, our loss ratio was about 16 points higher than we would have liked, which is primarily due to a few large losses that were reported in the period. However, the unexpected losses were principally in our quota share business, and our program business is performing as expected.

Let's turn to our investment results. We had strong performance from our investment portfolio this quarter, with $74 million of net investment income. We continue to have a high-quality, short-duration portfolio. The overall yield on our portfolio is now at 5.5%, up meaningfully from a year ago. Also, we had 24 million of realized losses, which was mainly due to other-than-temporary impairment charges, largely as a result of the rising interest rate environment.

With respect to capital, we are comfortable with our capital position at this time. Our reinsurance and insurance operating entities have more capital than we had going into the Atlantic hurricane season a year ago, and we have about $600 million of capital available at the Holding Company which we could deploy if necessary.

Altogether, we have a strong quarter of operating performance. Year to date we have generated just $4.88 of operating earnings per share. Clearly, there is some chance of upside for the full year, assuming normalized cat losses through the remainder of the year, although we are in the midst of what is forecast to be an active hurricane season and fairly dynamic market conditions. So we are not currently adjusting earnings per share guidance for the year.

Thank you, and at this point I will turn it back over to Neill.

Thank you, Fred. A couple of points. Fred, you did a great job. All the guys did. Hopefully Fred was able to add some color about premiums and what's going on in Individual Risk. It's pretty complex with all the joint ventures we have going on, so hopefully you'll find that helpful. And secondly, Bill Riker is here saying put me in the game, coach. As we introduce you to our new managers, we take some of our managers and put them on the sidelines so we don't have too much commentary in the beginning. With that, I'm happy to open it up for questions.

(OPERATOR INSTRUCTIONS). Tom Cholnoky, Goldman Sachs.

I guess I just wanted to ask a question on your exposures. This quarter is kind of like catastrophes on steroids, if you will. Help us just understand a little bit what is going on with your net exposure. You did say that most of this was rate-driven and not necessarily exposure, although in the discussion on the managed cat business, it did seem as though you are expanding vertically and horizontally. Help us, or give us some comfort or just some guidance on where you are today versus where you would have been last year, in the event of a very large hurricane.

Good questions there, Tom. I'll turn this over to Bill, if I might.

We kind of expected to get this question, so hopefully we're somewhat prepared. A couple of thoughts on that. First of all, as you guys may or may not be aware, we have a lot of different ways to measure exposure and risk. And what we focus on is actually our most robust measure, which is from a probabilistic risk measure over the overall organization. And we are happy to say on that measure, we're basically flat from last year. Basically what we do is we have a slight amount of increased net underwriting risk, but that is offset by increased fees in Jay's area, plus increased investment income. So on an overall global basis we have our risk to be pretty flat from last year.

Expanding a little bit on some of the regional diversification that Kevin pointed out, we found that the renewal this time was actually very beneficial, in that we found places outside of Florida, especially those that are subjected to Atlantic hurricane risk, to actually have significantly improved pricing. As you may or may not be aware, in the past we've been relatively light in the northeast, relatively light in the Gulf area, as you can tell from Katrina last year, etcetera. So we found good opportunity to expand our geographic diversification.

One of (indiscernible) I know we've said in the past you always wonder where we might be increasing our exposure, and we have historically said generally it's wherever the last loss occurred. So, as Kevin pointed out, in the Gulf area, especially those (technical difficulty) that were affected by Katrina, we will have increased our exposure there, so we would expect on a pure loss basis for a recurrence of Katrina to actually have a larger absolute loss. But the good news is that is offset by higher premiums and higher retentions, etcetera. So we will have increased in that area, but we believe the risk return is actually a much better equation.

Lastly, to think about when you think about our risk, the actual premiums we're getting are significantly higher than they were in the past. So our risk return -- our return relative to risk is really -- I think we can say that it's the best that it's ever been. So the changes in the market were fairly significant, as Kevin mentioned. Many (technical difficulty) were up close to 100%. And so we managed to keep our corporate risk about flat, and significantly (technical difficulty) significantly improve our risk return equation.

If I can just have a quick follow-up on Individual Risk. Based on your comments, is it fair to say that the 15 or 16 points of incremental loss ratio points there is something a little bit over and beyond what you would have expected? I wanted to clarify that.

There's two points. One, as you'll recall from Fred's comments, we book to a pretty high combined one seasonal contract. So that's part of the equation. The other is that we have a couple of large quota shares that can have sort of spiky results. So they will be recurring results, but they will be spiking. We may not have any losses one quarter and have a lot of losses another quarter. I would say this past quarter we had some of that spikiness.

Could you just add a little bit of clarity to that seasonal contract? I don't understand how that -- why you would book that at a higher loss ratio.

We booked that contract to 100% combined.

And why would that be? What's different about it? I know you don't like to talk about your accounts, but I'm just a little curious as to why that's different than your overall book.

Because of the seasonality, Tom.

So it's a very short-term contract based on hurricanes?

I try not to get too specific on these contracts. Let's just say it's seasonal, and we'll know the ultimate results before too long.

Alain Karaoglan, Deutsche Bank.

A couple of questions. On the Reinsurance side, you mentioned that you were affected in this quarter by some cat losses. What exactly were you affected? Obviously, for us, this was not a very heavy catastrophe quarter in the second quarter. And are you playing that (indiscernible) in the layers? That's the first question. The second question -- could you tell us what happened in the July 1 renewal? Do you have -- what you've written or how do you see this environment. And going forward, do you see anything to change this environment for the January '07 renewal? You mentioned international may be getting a little bit better, but anything that would change it on the negative side or on the positive side?

Looking at the cat losses, there were some losses in the quarter that related to the floods up in the Northeast, which were pretty significant. And also there was quite a few Midwest storms, one in particular, which is looking quite large. A lot of this is -- we'll put in our best guess of the loss prior to even receiving notifications from some of our clients because of the modeling that we've been done to make a loss that they'll have. That's really where we're seeing the bulk of the loss come in from.

As far as the pricing environment, 6/1 and 7/1, certainly the pricing improved substantially from where it was at 1/1, which helped us to -- back to some of Bill's comments, helped us to better diversify the book, and we saw more opportunities in the Northeast. We saw more opportunities in the Gulf, as well as in Florida. And it's important to note that in Florida we're seeing opportunities not just below the cat fund, but throughout the distribution. So that's a good thing for us from the pricing perspective.

Looking forward to what -- there's a ton of things between now and 1/1 that can change what the pricing environment looks like. And I think -- we don't have a strong view either way, because there's too many variables, and a lot of it depends on what our peers are going to do coming into 1/1, whether they want to deploy more capital into the cat space or not. I would say we're certainly optimistic going into 1/1, but I don't have a clear sense as to whether -- to give a number as to what the rate increases could be.

In terms of reserves movements on prior year, there wasn't much. But was there any -- the net number wasn't much, but was there any in and out, some reserve addition offset by reserve releases in other lines?

In the cat side -- on the Reinsurance segment, it was approximately $3 million of net favorable development. There was one large loss that came through of about $17 million or so, offset by about $20 million of favorable development.

Any of that related to KRW?

As I mentioned earlier, we're -- actually -- there was some favorable development, some modest favorable development on a net basis related to the 2005 hurricanes. But it's pretty modest, and we feel pretty comfortable that at this point in time those losses are holding up. We still have a long way to go, but from what we're seeing today, our initial estimates are holding up nicely.

Terry Shu, JP Morgan.

If we could go back to the point about the premium forecast. You went through a lot of the components and the details and told us to strip out what is going to be ceded. I'm just going through the model now. If you roll it all together -- if you could help us on that; I haven't finished doing that -- what does it mean in terms of overall net premiums written, both the gross and the fact that you said you found some attractive opportunities to cede premiums. I suppose that means to buy reinsurance. So net net, what will we see in terms of overall net premiums written?

Unfortunately, you broke up a little bit there. I think you're talking (multiple speakers)

On the premiums written, when we net it all out, the very substantial growth in managed cat premiums, and then the reduction in the Individual Risk. Overall, if you can help us a little. I haven't gone through all the modeling. What does it mean in terms of overall premium growth for the year?

As we indicated (multiple speakers) we expect to see managed cat premiums for the year up about 40% (multiple speakers).

And that more than offsets the decline in the Individual Risk decline, shifting the business out to the managed cat area.

(multiple speakers) we look at them separately.

When you said that the risk reward is much better, that the returns are better than they've ever been, I'm assuming that you are implying that the return on your capital is as good as it was post-Andrew? Is that correct, Bill?

The way we measure capital in our models (multiple speakers) obviously done a lot of -- a lot of changes over the year. So the comparison back to 1993 is kind of hard to make, but our gut is is it's as good as it's ever been. The comparison that we have done is really over, say, the last 10 years, that we can do sort of explicitly through our computational methods. And that is the case.

In the case that now it's much improved pricing, can you give us kind of some new guidance with respect to what would be the normalized combined ratio if we were to do modeling for the cat business, for the Reinsurance book? What would be the normalized combined ratio now when we plug it into our model? Because presumably it's a lower number with much better pricing and better terms. Is that right?

You're a very persuasive lady, and we would like to tell you virtually everything, but that's getting a little bit close to the vest there. So let's just say that it's very acceptable.

Okay. Back to the question that was asked about the combined ratio for the Individual Risk, the 15, 16 points. Part of it, as you said, is the seasonal booking; the other is the couple of large losses, and you describe it as being spiky. Is it still within the realm of, I guess, your expectations, when it occurs like that, spiky on a quarterly basis? Are there some signals whether or not it's within your pricing, within your expectations, or anything to be worried about? How does one gauge that? How do you gauge that?

Another good question. We'll answer part of that one. Yes, it is within our expectations. These contracts involve Individual Risk business that can have volatility. I don't want to -- we always have to have the careful line here between being informative without giving away sort of competitive secrets. So for these contracts there's going to be spikiness, and there's no indication that it's indicative of a trend. So we feel comfortable with that book right now, and the pricing on those two books of business.

Going back to the other contract, I just can't -- I don't want to give you too much color because, once again, I don't want to disclose what some of these programs actually are.

That's fine. The last question, on the program business, you said that it's stable but you don't see as many opportunities. If you can elaborate on that point. You had talked about the fact that you've discussed it over the last year or two -- Bill, you did -- in terms of how many types of programs are there out there that looks attractive to you and takes a while for you to study it and then put it on your book. When you say that there are fewer opportunities, or -- what do you mean by that?

I'd say by stable, the results of the program business continue to come in as expected. We very closely monitor that. That is an area that historically people have been quite concerned about. It's turned out to be a very stable book. Obviously, we're actively managing that book. We see deals come, we see deals go.

I think the comment around the opportunities is -- unfortunately there is a little bit more interest in the program business these days. When we entered it three or four years ago, it was -- nobody wanted to get anywhere close to it. Now we're starting to see people who had said they would never get into it starting to come back into it. So we feel very good about the stability of the bulk of our relationships, so that's all good. But you're not seeing people exiting the business as vigorously as they were a few years ago.

So from our point of view it's pretty much steady as you go to manage the book of business we have. We do have a flow of new opportunities we're looking at, but it's just not as vigorous as a few years ago. But you can read the industry press to find out that people are more interested in [program] business now.

(indiscernible), Credit Suisse.

I am trying to get a sense of, versus last year, are you more exposed or less exposed to frequency risk versus severity risk. That's the first question.

The definition of frequency and severity, if you put it out there, can be quite varied. I would say a couple of (indiscernible) to reinforce what Kevin said is in Florida, especially, and even to a certain degree most of the hurricane risk out there, our portfolio will be less susceptible to smaller, more frequent losses, primarily due to increases in retentions and the fact that we found some of the upper-layer business to be more attractive this year than we have in the past. We'd always had a more pessimistic view on severity than the rest of the market. I think Hurricane Katrina sort of changed everybody else's view to be more in line with ours, so that pricing on the upper layers were more attractive.

As far as severity, I would say severity isn't really much different than it's been in the past. As Kevin mentioned, our sort of market share or spread of risk along the size of loss is flatter than it's been in the past. As we've talked about in the past, we've always -- we used to be quite [high] in small Florida losses. Now, our sort of hot spot in small Florida losses has decreased significantly, and our sort of spread around the businesses has just become a lot smoother.

And also, just to comment, we also found opportunities outside of Atlantic hurricane, primarily in the U.S., to deploy capacity. So, not only is our geographic spread a little bit better, so is our (indiscernible) spread a little bit better. Overall, Florida was, obviously, the banner area that everybody was talking about, but we found good opportunity to find attractive business sort of across the board. (multiple speakers)

That's interesting. So would it be fair to assume that even though your purchases of reinsurance this year are less than that of last year, since you've moved some of the peak risk out of Florida a little bit and spread it around some more, your peak risk are now sort of flat as compared to last year?

I think ceded premium is higher than we anticipated from what we were saying earlier in the year, because we saw more opportunities through the first and second quarter. With that, we have some very specific covers protecting regions around the world, really. And it's very different as to whether you're talking about whether our -- the tail of our risk is greater in Florida compared to whether the tail is greater in the Northeast.

Back to what Bill was saying is we did see more opportunities in the Northeast, so that our losses can be greater there because we did a better job diversifying our book into that region. Within Florida, we did a good job buying protection for that book of business. And back to what Bill was saying, we have a better spread of risk throughout there, so it's going to depend. On smaller losses we may have a smaller net loss. On larger losses our net loss will probably be a little bit (technical difficulty), but not dramatically different.

That's great. In the Reinsurance segment, the accident year loss ratio picked up ever so slightly from the first quarter. I was wondering whether that was just because of the Northeast floods and the Midwest storms, or was there something else? Because I would have expected that to come down because of stronger pricing.

Are you including specialty?

No, I'm just -- yes.

I think it's hard to talk about them together sometimes. I think within cat business we're certainly seeing a lot of price enhancement, which is going to be a positive effect on the loss ratio going forward. Within the specialty it has been a flat -- pricing has been flat to down, and we've been decreasing the book pretty substantially. So I think you need to look at them separately, where on a going-forward basis I'd expect the cat loss ratio to look very robust. The jury is still out as to where, really, the specialty is going to end up throughout the rest of the year.

Adam Klauber, CCW.

You, obviously, (indiscernible) a lot more business in joint ventures this year. Could you give us, I guess, an idea of -- have the classic dynamics changed compared to what you historically have structured in those joint ventures? That's number one. And number two -- assuming a moderate hurricane season, what type of growth could we see in fee income?

You kind of clicked out on us. Can you repeat the first question please?

Sure. You're obviously writing a lot more business in joint ventures this year compared to last year. Number one, could you comment -- has the structuring from an economic standpoint of those ventures -- has that changed compared to what you've done historically? And number two, assuming that it was a pretty light or moderate hurricane season, what type of growth could we see in the fee income?

In response to the first part of your question about the profit dynamics within the joint ventures -- and I'm speaking for -- primarily for DaVinci, because we had forecasts for DaVinci ahead of the season -- Starbound and Tim Reid, the profit dynamics of those came out a little better than we put out originally, but they are shorter-term facilities. Within DaVinci, the profit dynamics are up. As Bill said, the portfolio is very good. And for DaVinci it's the best portfolio that we've seen for DaVinci, in terms of the expected results for that portfolio. So those profit dynamics are up significantly in DaVinci, relative to where we thought we would be going into this year. And I'll turn it over to Fred to talk about the fee income question.

The incremental fees on Starbound and Tim Re are modest. We talked about those in the past. We expect those to run anywhere between 10 and $15 million for the 12 month period which began on June 1st. And depending on underwriting results, that number could fluctuate. So, I think to it's safe to assume a number that is a good number to work with in any given period.

Thank you. Also, could you give us an idea what the shift in your overall reach catastrophe book has been, excess of loss versus quota share, now compared to a year ago?

Within the Reinsurance book, we really haven't been a big provider of quota share. The Reinsurance book, which is RenRe, Ltd., is really comprised mostly of excess of loss business. What I mentioned in my comments was we took some of the cat-exposed quota share within Glencoe, and working closely with Bill Ashley and the Individual Risk team, we were looking at how those returns were looking between that book of business and the RenRe excess of loss book business. And working with the clients who were ceding quota shares to Glencoe, we were able to migrate those to excess of loss contracts, increasing our returns and being able to provide them with better cover on a going-forward basis.

And one final -- I know this is a tough one. But we're only in early August right now, and some people are already coming out and saying the hurricane season isn't as strong as the earlier predictions. I know some expert just came out and said that the last day or so. Do you give any credence to that, or are you still expecting a much higher-than-usual hurricane season?

We could answer that collectively, but why don't I be the voice for everyone and say we don't put too much credence in that.

Joshua Shanker, Citigroup.

Excellent quarter. I wanted to ask you a question about the zonal exposures. You're diversifying out of Florida, but does that remain your largest zonal exposure still? And what other zones are becoming key areas of focus for you in terms of potential loss?

Florida continues to be the highest demand area in the reinsurance market, which is why the price dynamics there have been so attractive. I would say you can look at your exposure a lot of different ways. You can look at it as what is your market share of the industry loss? What is your market share of the reinsurance business? What's your absolute numbers, etcetera? And I'd say Florida still will remain one of our peak risks; there's no doubt about that. But I think the most interesting dynamic, especially in our portfolio, was that last year, Florida was more of a peak risk than it is this year. And so our overall spread is better than it's been, and that was primarily due to our ability to deploy capital at attractive returns. Basically it is a (indiscernible) focus primarily in the U.S. at this point.

Which non-Florida risk have you seen the most growth in?

Say that again?

Which non-Florida risk have you seen the most growth in?

I think one thing -- people to focus on, the place where risk perception has changed the greatest is Atlantic hurricane risk, not necessarily Florida. And so Atlantic hurricane risk has become more attractive. Interestingly, we're also seeing improved conditions in the general (technical difficulty) market. So those are the major (indiscernible) you're doing in the U.S., and I think we're seeing relatively healthy markets in both at this point. Earthquake still is lagging a little bit behind hurricane, but time will tell how that develops over the next six to 12 months.

Are you doing any wildfire protection?

Some of our coverage provides protection for wildfire, both in the U.S. and outside the U.S.

Jay Cohen, Merrill Lynch.

Given the big increase in cat premiums in the second quarter, does it limit you at all as you look at the third quarter from a capacity standpoint?

The third quarter, there's not a time that really comes up that we need to be reserving capacity for. We've done a good job deploying our capacity up to this point. We still have room to take more risks. I think it's kind of a double-edged sword. If there's more capacity to be put out in the third quarter, it's probably backup covers, which means you've lost some of your first-event cover, and that depends, I think, on where the storm hits, how big the storm is. But we have historically been a large provider of both live cat protection and backup protection. And I expect that if those opportunities arise in the third quarter, it will still be an active market for those covers.

Fred, you had mentioned a fee number of 10 to $15 million annually. Was that for all of the joint ventures you have, or is that per joint venture?

That's for Starbound and Tim Re.

Bill Wilt, Morgan Stanley.

I just had a series of numbers questions, given the time. Confirming Starbound Re and Tim Re had 310 million for Starbound, and the equity at Tim Re was -- was it 50 million?

That's correct.

At DaVinci, capital at the second quarter was how much?

DaVinci capital -- it was 699 at the Reinsurance company at the end of the second quarter.

That's helpful. And Top Layer?

Top Layer is tough to say what the capital is. We've disclosed publicly in the past that it has $4 billion of underwriting capacity through the equity in the Company and the stop loss from State Farm.

The last one, just confirming the amount of excess -- the amount of liquid assets at the holding company. You mentioned that in prepared remarks.

There's about 600 million of capital at the Holding Company, of which 350 million we consider to be liquid investments, liquid assets at this time.

Is the -- how much of that would be -- I guess could be deployed for -- to support premium writing?

I would say the full 600 million is available to us to deploy.

And that's currently -- you currently consider that to be unencumbered from that perspective?

Yes.

Ron Bobman, Capital Returns.

Congrats on a strong quarter. I had a question. I don't believe you've commented -- I know you commented that the PMLs were flat year over year, but would you share with us how much capital -- company capital, non-JV capital, that you put at risk or are willing to put at risk for some sort of return period, whether it be a [1 in 250] or some other of your choosing?

A couple of thoughts. Our discussion on risk is -- takes into account all issues (indiscernible) premium to offset risk, etcetera. So our overall risk is flat. When it comes down to 250 of PMLs and things like that, we historically do not disclose that. We think that's part of our competitive advantage, and we monitor risk in many different dimensions. And we think that just a single number like a 250 is really not a very robust way to look at your risk.

What's a better way for me to look at it? Because I understand you're saying it's flat year over year, but I have no sense as to what sort of balance sheet risk in a dollar magnitude that you're willing to risk.

I can't really give you the right answer to that, but one sort of side which you might find helpful is we manage -- we look at our risk a lot of different ways, but one way we'll also look at it is relative to rating agency capital requirements. So you can look at our ratings and assume that we tailor our risk to be appropriate for the capital in the entities that are being rated.

So it sounds like a trust me. To hear Neill use the point about increased transparency in his prepared remarks and not provide that level of sort of capital risk seems quite inconsistent, but I do applaud your results. Thanks a lot.

Before you go, there's always a balance in this. We have several different risk constraints we look at. For example, we're not going to tell the rating agencies how to rate the companies. They are expert in doing that. Every agency has their own way of doing it. We have several internal risk constraints that we use. And also, we feel like it's very important to look at our risk on an aggregate basis. Some other entities look at it on a return period for occurrence. But we think the most important is to look at our aggregate exposure during the year.

And we do look at it in the return periods as well. It's many different measures, and we just -- there's a dozen or so that we use.

[Ian Gutterman], Adage Capital.

Just a couple of numbers questions. The managed cat guidance -- I just want to make sure I'm understanding it right. Can you remind me what the -- what sort of the base is from last year, when I take out the reinstatements and such?

It's about 675 million.

So if I -- taking that 40% growth gives me, what, 945; you did 877 in the first half. That's only about 70 million in the second half, and last year's second half was over 100. So are you saying down managed cat in the second half? And if so, is that because you've moved premium forward, and therefore there's less capacity? Or what exactly is happening there?

That's right. You have the numbers right. We came in the last half of last year at about 100 million, and we expect that to be down this half of the year.

Is that just because you wrote more in Q2, and therefore there's less capacity to write in Q3? Is that -- did you sort of shift forward business that you would -- business that normally would occur in Q3 and deciding not to write more Florida, or what's behind that?

Going back, in Q3 there's not a whole lot of business that comes up naturally over the course of the quarter. A lot of what we had last year was reinstatement premiums coming in from the losses, and also backup [coverage]. It was an extraordinarily active year last year, with people coming in trying to protect their book. If you looked at it, you had an active year, but then you also had storms coming in -- very strong storms coming in close behind one another. You had Katrina, you had Rita, you had Wilma. So people were much more enthused about purchasing backup, and that's a lot of the premium you're seeing in the third quarter.

So the guidance is ex-reinstatement but including backup? I thought it was ex-reinstatement and ex-backup.

It is ex-backup as well.

Minority interest -- I was surprised it wasn't a greater negative number at -21 million, given DaVinci's premiums are way up. And past last three quarters, that would have been about a 30 million negative, and this quarter was only about a 20 million. Was there some kind of adverse profit at DaVinci this quarter? And also, given your ownership is less, I would have thought the minority drag becomes higher.

The minority interest in DaVinci has a lot of components in it. (technical difficulty) backing out the ownership of the equity investors, and then it's also got the fees in it as well. So there's -- there's a lot of -- a lot of moving parts in the minority interest. But that's -- what's reflected in minority interest on our balance sheet is primarily the DaVinci income for the investors, net of fees.

I guess I'm just wondering -- the Q1 and Q2 are both kind of loss-free quarters, and the minority interest on the income statement was a lot different. Which one is a better run rate?

I would take the average of them for the better run rate, if you're populating your model.

Last question. I just want to make sure I understood earlier when you talked about exposure being flat. From the way you guys look at it, if I'm understanding it right, basically, if an event happens and there's a loss, the loss as a percentage of your capital might be a higher percentage than last year? But you're saying that it's flat because the ROE for the year will be the same because the pricing is greater. Am I understanding that correctly?

I would say you're getting there. Risk is a function of premiums in the door versus exposure and potential losses out, and also a function, obviously, of potential fees that we create, as well as return on our investment portfolio. So you add them all together, and that's approximately flat from last year. But you also -- your absolute dollar of loss could be higher. But then again you have increased reinstatement premiums; you have increased general premiums to offset that.

Exactly. I just wanted to make sure I was thinking about (indiscernible). Thanks so much.

This next question will have to be our last one.

Ernest Jacob, [Longmuth Capital].

Would you mind explaining how the gross catastrophe premiums are allocated among the risk-bearing catastrophe entities?

Just to clarify your question, is that -- you're asking about the allocation between RenRe, DaVinci, Starbound --?

Exactly. Top Layer. Yes.

I'll walk through it slowly; that's a pretty complicated question. What we try to do in the DaVinci RenRe split is DaVinci has what we refer to as a companion line capacity to RenRe. So we have a targeted allocation for RenRe, and then DaVinci, in terms of the total line on a program, we try to get as much of the best programs that we can by putting down lines on both DaVinci and RenRe paper. We move that allocation depending on the capital of DaVinci relative to the capital at RenaissanceRe and the opportunities of the market.

Over the longer term, we would look to move DaVinci's capital up and down based on the opportunities as well, which we've done in the past. Then when it comes to Starbound Re and Tim Re, those were incremental capacity. So, it wasn't a question of allocation, it was a question of -- we were done at RenRe and Tim Re, and working with Kevin and the underwriters in the property cat book. We had a pro forma book, we knew what we wanted, and then we had pretty much a significant amount of extra opportunity that we captured in these two vehicles and brought those opportunities to investors at pretty attractive returns. So that allocation was just whatever incremental business we could get on the business that we already had to bring capacity to our clients.

And then for Top Layer Re, we tend to write a significant amount of our non-U.S. property cat business that -- with an attachment point of 1 in 100, about or above. Most of that gets written into Top Layer Re, which is a much more efficient vehicle for those higher layer vehicles -- higher layer programs. So that's the way we allocate to Top Layer Re. I'm not sure if I covered everything that you wanted there.

I think I got it. So, the 111 that was written in the new ventures effectively could not have been written in DaVinci and RenRe?

I'll let Bill respond to that. I think it's better --

A couple of thoughts. We could have written that and taken that additional risk in, but we decided to -- at this point to keep our overall risk profile at the Corporation about flat. We feel -- we think we did the right thing in bringing that capacity to our clients. (technical difficulty) shortfalls in their programs.

So in the end, we believe that our capital structure -- we want to have a diversified structure so that we can write business on our equity, on our sort of flagship joint venture, being DV, and then potentially in these shorter-term vehicles, such as Starbound and Tim Re. I was telling somebody the other day, in retrospect it will be very clear whether we should have kept it or ceded it. But unfortunately we'll never -- we don't know when -- before hurricane season what's going to happen. So it's a judgment call that we put some analytics around to figure out where the best place to put that risk is.

This does conclude the Q&A session. Gentlemen, do you have any closing remarks?

We appreciate everybody calling in today. We are real pleased with the quarter and look forward to talking to you next quarter. Thank you.

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