濱特爾 (RNR) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the RenaissanceRe third-quarter 2006 earnings 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 session. (OPERATOR INSTRUCTIONS) Thank you. It is now my pleasure to turn the floor over to your host, Mr. David Lilly. Sir, you may begin your conference.

Good morning. Thank you for joining our third-quarter 2006 financial results conference call. Yesterday after the market closed we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we will make sure to provide you with one. There will be an audio replay of the call available at 1 PM Eastern Time today through November 14 at 8 PM. The replay can be accessed by dialing 877-519-4471 or 973-341-3080. The pass code you will need for both numbers is 800-7285. 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 January 15.

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; Bill Riker, President of RenaissanceRe; Fred Donner, Chief Financial Officer; and Kevin O'Donnell, President of RenaissanceRe Insurance, Limited. I would now like to turn the call over to Neill. Neill?

Thank you, David. Good morning and thank you for joining us. I am pleased to report our Company enjoyed a strong quarter with operating earnings per share of $3.42 and 12% growth in book value. These particularly good results are primarily attributable to the strong earnings power of our reinsurance operations and the low level of hurricanes making landfall during the quarter (technical difficulty) hurricane losses over the last two years, and lower than normal hurricane losses so far this year. That is the nature of the catastrophe reinsurance business. We expect such fluctuations.

So, while the third-quarter results are quite good, we do not focus on short-term results. We focus on actions that will produce attractive returns over the long term. Those actions have been the same sense the formation of Renaissance -- careful and disciplined risk selection, exceptional client service, and prudent capital management. This strategy has paid off so far, resulting in an annualized compounded growth in book value per share plus accumulated dividends of 17% over the last 10 years.

While strategy is important, it is execution that delivers shareholder value. I am pleased with our execution over the past year. We paid our customers' claims quickly. We helped our brokers provide much-needed capacity to our clients by bringing additional capacity to the market. We provided timely [lead quotations] when others hesitated. We made our portfolio of business better, and we managed our capital prudently.

We were able to do this because our experienced team, equipped with strong analytical tools, focused on the business at hand. It is because of their dedication and talent that we remain the market of choice for our clients and brokers. This gives us the all-important ability to see the best business.

We continue to see attractive market conditions in our core property catastrophe business. We are well positioned to take full advantage of whatever opportunities we will find there. Kevin O'Donnell will tell you more about the property catastrophe market conditions and the state of the specialty reinsurance market, where conditions are less attractive.

Rates are down in most nonproperty areas, though this varies by line of business. We are staying disciplined in specialty and remain focused on generating acceptable underwriting returns.

The joint ventures we manage on behalf of third-party investors are an important aspect to our reinsurance franchise. This year we further strengthened our role as a leader in this segment of our business with the two new fully-collateralized joint ventures, Starbound Re and Tim Re. It appears these ventures will turn out to be good deals for the investors and will generate profit-related fees for us. Whether we will execute successors to these deals remains to be seen. However we are confident that we are well positioned to pursue these joint ventures if it makes sense for our clients, partners, and shareholders.

Turning to Individual Risk, the combined ratio in 2006 is a little higher than we would like, at 95% for the year-to-date. Our goal is to run that business to a combined ratio in the low 90s over the long run; and we are working hard to achieve that. Given the higher combined ratios in 2004 and 2005 for this segment, you may be asking why Individual Risk isn't seeing the benefit of light catastrophe losses this quarter. There are two primary reasons for this.

First, as we mentioned on our last call, we made a tactical decision this year, given the relative economics, to shift some of the wind-exposed quota share business we were writing in Individual Risk to excess-of-loss reinsurance in the Reinsurance Company. Secondly, there are intracompany reinsurance arrangements that shift catastrophe exposure from the Individual Risk segment to the Reinsurance segment. The effect of both of these is to shift the benefit of the light cat losses to the Reinsurance Company.

The program business continues to perform well, with calendar quarter loss ratios below expected. However, results under commercial property quota shares produced higher-than-expected loss ratios this quarter. We are approaching new programs -- specifically those with casualty exposure -- with caution, due to softening market conditions.

Changing to rating agency matters, I am pleased to say we were successful this quarter in resolving the rating status of our A.M. Best ratings. Those ratings were all affirmed at their current levels and removed from Under Review. This returns all of our ratings to a stable outlook.

On another note, after careful consideration we have decided to stop giving earnings per share guidance going forward. It seems inappropriate to give guidance when we know there is such inherent volatility in results. We compared our guidance to actual earnings per share over the last five years and found we typically missed the mark by quite a significant amount, both over and under. Although we feel we have developed a book of property catastrophe business that will produce quite attractive returns over time, results can vary substantially from year-to-year.

However we do plan to give premium volume guidance, because we think that is helpful to investors. However, this should be used as a guideline, not a strict budget, because we are disciplined and opportunistic underwriters, as our track record shows. Volume will fluctuate according to opportunities. We will also continue to give you a clear sense of the drivers of our business and the general market environment, so you will have the means to make an educated analysis of our business performance and prospects.

In summary, I am not only pleased with the results for the quarter but the strides we have made in further enhancing our franchise. We have a very good portfolio of business, strong broker and client relationships, and are well-capitalized to take advantage of future opportunities. I am pleased to turn the call over to Kevin O'Donnell, who will give you more insight into our reinsurance operations.

Thanks, Neill. First I would like to start by discussing cat, and then I will move into the specialty line. We feel we are well positioned in the cat market. We recognize the market opportunities and have the people to leverage into them. With the help of our Ventures group we were able to bringing additional capital to address the market dislocation in the U.S. hurricane cat area. We feel that the problem-solving culture and flexibility in meeting the needs of our customers enhanced our position as a market of first call and overall strengthened our relationships with our customers.

It will be reasonable to assume that we will see increased capacity in the U.S. hurricane market in 2007, but we remain confident that we will have even greater access to the business due to the service we provided this year.

For the foreseeable future we are still seeing the effects of increased demand and restricted supply. We have seen a unique confluence of issues in the market comprised of model changes, often in excess to what was contemplated by the market; rating agency cat criteria changes that have served to constrict peak-zoned capacity; and increased purchase orders for cat programs to provide protection under the new models to the same level as previously purchased under the old models. All these factors have played a significant role in pricing over the last 12 months, and we expect that they will over the next 12 months as well.

Over the course of 2006 we saw rates increase at an increasing rate over the course of the year. With that said, we anticipate to see 1/1 rates increase substantially to bring this business to the return levels of those layers written in the middle of 2006.

As always, retro business seems to receive a lot of attention. We are a market leader in this area and continue to explore opportunities. As we have said before, this is a very sophisticated area of the market, and there is a large spread between winners and losers.

With regard to ceded retrocession, we uncovered some buying opportunities and purchased more than we originally expected at beginning of the year. We maintain a very flexible buying platform and continuously look at new opportunities that will spread our risk and improve our overall return on our portfolio.

Moving over to the specialty line, we continued to be disappointed with the state of the market. Much of what we are seeing in the market just doesn't make sense to us. For example we remain perplexed by the exposure adjusted price reductions we have observed in workers comp cat, particularly in light of the robust rates we are achieving in California earthquake risk. As these books are highly correlated, we constantly measure where the returns are best and allocate capital accordingly.

In addition to pricing, there are some important issues emerging, like pandemic exposure, particularly again for workers comp cat. We are not seeing the market discipline we had hoped for in terms of coverage clarity or exclusions for this exposure. Instead we're seeing broad or broader coverage at lower prices. As with all lines we write, we are happy to take risk as long as we are paid adequately for it; but we will remain careful to avoid gratuitous exposure.

Although we were disappointed with the market conditions in many lines, we remain pleased with the performance of book and continue to see low loss emerging. Additionally our team has done a difficult but admirable job in maintaining and improving the book of business that we have. We continue to look for new opportunities in this area, but we are staying disciplined. As we said before, profit is diversifying not premium. Thank you; and at this point I would like to turn the call over to Bill.

Thanks, Kevin. I am going to spend a little time trying to help folks put the 2006 hurricane season in perspective. Just to be clear, the season is not over yet; but our research indicates the Atlantic basin should have relatively low prospects of any significant activity for the duration of the season. Conversely, we are still wary of potential late-season activity in the Eastern Pacific, which could potentially affect Hawaii due to the current El Nino conditions.

A couple of years ago we would have looked at the 2006 season as a normal, quote unquote, hurricane season. The actual number of storms in 2006 closely matches the long-term average. For instance this year had nine named storms versus 10 for the long-term average; five hurricanes versus six for the long-term; and two intense hurricanes versus a long-term average of two per year. It is interesting to see how things have changed, or at least how the perception of risk has changed.

As we have stated in the past, we firmly believe we are in a heightened period of hurricane activity which started back in 1995. If you were to compare 2006 with the averages during the period of '95 through 2005, 2006 would be considered a below-average year. For instance, statistics show five hurricanes versus an average of nine in the last decade per year, and intense hurricanes of two versus an average of four over the last decade. So in this regard, 2006 was below expectations this year.

The last decade has been a period of increased hurricane activity, as compared with the long-term average, and we have no reason to believe that conditions have changed. The key thing to remember is, even within a heightened period, hurricane damage is still an uncertain distribution which needs to be considered objectively. Our job is to consider this risk as objectively as possible and navigate the commensurate uncertainty in order to provide products to our customers and returns to our shareholders.

If you were to read the press last spring, everyone knew it was going to be another hyperactive hurricane season. The number of organizations [which] produced hurricane forecasts jumped exponentially, and all agreed it was going to be another bad season. So what happened?

In order to understand the situation you need to understand the forecast models being used by these organizations. As we said in the past, we have been involved in the research for seasonal hurricane forecasts for over 10 years. We employ some of the best minds in this field, and we consider it our job to understand the strengths and weaknesses of the current state of the art in seasonal forecasting.

To help shed some light on this issue, you need to understand that most seasonal forecast models are statistical in nature. They are the result of, in effect, trolling through data to look for correlations between climatic factors and hurricane activity. For instance, some of the statistical indicators are sea surface temperature, the ENSO anomaly -- being El Nino/La Nina -- NAO -- being the North Atlantic Oscillation -- and other factors such as Western Sahel rainfall.

The key thing to recognize is that as far as we know no one has figured out the true physical interactions between these statistical indicators and hurricane formation. The statistical correlations appear to exist, knowing with sparse data; but the physics of the situation is still uncertain.

Reeling it back in, obviously what we are most concerned about as a reinsurer is big storms hitting populated areas. 2006 is most likely going to be a year where our concerns were not realized. Ongoing, each year provides another point on an uncertain distribution.

As we have stated in the past, we continue to believe we are in a heightened state of hurricane activity, and we're managing our risk accordingly. We will continue to try to increase our understanding of seasonal forecasting; but we believe that the science of seasonal hurricane forecasting is still in its infancy and its effectiveness in managing risk on an annual basis remains suspect.

Thanks; and now I am going to turn it over to Fred Donner, who will give you some more details about our financial numbers. Thank you.

Thank you, Bill, and good morning, everyone. As you heard Neill mention, this was an exceptional quarter for us. Operating income for the quarter was a record $247 million versus an operating loss of $292 million for the same period last year. Year-to-date our operating income is a record $597 million versus an operating loss of $68 million for the same period last year.

This quarter's results were favorably impacted by several items, including minimal insured catastrophe losses; increased earned premiums, given our growth in catastrophe premiums during the second quarter; a $31 million benefit resulting from commutations occurring during the quarter; and also an increase in investment income of $19 million over the same period last year. As you have heard, this quarter also demonstrates the underlying earnings power of our organization in a period without major catastrophes.

In our reinsurance segment managed cat premiums were $70 million net of fully-collateralized joint ventures, down from $129 million in the same period last year. As you may recall, last year's premiums included $48 million of loss-related premiums, reinstatement, and backup covers. So we're down about $11 million for the quarter. Historically the second half of the year is a relatively light period for us in terms of reinsurance premium writing.

Year-to-date managed cat premiums net of fully-collateralized joint ventures, excluded loss-related premiums recorded in 2005, is up about 47% over the same period last year. We now believe that we will be up around 45% for the full year.

Gross premiums written in our specialty unit were $20 million this quarter versus $86 million for the same period last year. Specialty premiums this quarter were negatively impacted by $28 million of return premium relating to the commutations occurring this period. Also included in 2005 was $24 million of loss-related premiums which did not repeat this year.

Year-to-date premiums in our specialty group, excluding commutations and after backing out the 2005 loss-related premiums, are down approximately 38%. On a full-year basis after these adjustments, we now expect to be down around 40%.

We posted an underwriting gain of $231 million in our reinsurance segment, reflecting minimal insured cat losses and the commutations I spoke about earlier. I would also like to remind you that this includes 100% of DaVinci, of which we only retain 20%.

In terms of the commutations, it is important to know that these related to contracts where we had an opportunity to bring certain prior-year positions to finality. These discussions are within the ordinary course of our business, and the item that is a little unusual is about a number of relatively large transactions that happened to come to fruition at the same time.

The impact of the commutations affects several lines within our statement of operations, including earned premiums, which were reduced by $24 million, and a total of $58 million of reserve releases, of which $44 million relates to prior years. The net impact including some other miscellaneous items related to the commutation was a $31 million benefit to operating income after minority interest.

The other item that I would like to mention is the growth in net earned premium in our cat business, which is up 77% this quarter versus last year. If you back out the loss-related premiums recorded in 2005, it is about double, principally as a result of our catastrophe writings in 2006.

Turning to our current accident year loss ratios, when you back out the impact of commutations we are at about 13% this quarter. This is still quite a bit lower than prior year, after adjusting for the 2005 hurricanes and the specialty reserve review. This is mostly a result of the change in our mix of business in this segment to more heavily-weighted cat premiums versus specialty premiums.

In terms of loss reserves, we are seeing a much slower payout pattern for the 2005 storms than is typical for U.S. windstorms. We are currently seeing a pay to ultimate ratio of approximately 54% for the 2005 storm versus 80% at this time last year for the 2004 storms.

We continue to feel comfortable with our carry reserve for these events, but recognize that, given the magnitude of these large losses, modest development -- either favorable or unfavorable on a percentage basis -- can translate to large dollars.

In Individual Risk, gross written premiums for the quarter remained relatively flat with the same period a year ago. We continue to expect our top line to be flat for the remainder of the year. Net written premiums are down by about $30 million over the same period last year, largely as a result of premiums ceded in relation to a program we terminated in the quarter on a cut-off basis.

Our loss ratio in this segment came in about 8 points higher than we would have expected, as a result of a few large losses in our quota share business; and also includes approximately 3 points of adverse loss development. We do have some volatile lines in this segment, so our ratios will move around a bit on a quarterly basis, although as Neil mentioned we are targeting a combined ratio around 90% for this segment.

With respect to capital, we recently increased the capital in our operating subsidiary, Renaissance Reinsurance, Limited, by $200 million to $1.6 billion to position ourselves for the upcoming January renewal season. We remain comfortable with our overall capital position. Currently we have more than $500 million of additional capital at the Holding Company, which gives us flexibility to move quickly if opportunities present themselves.

Now I would like to turn to guidance. Our earnings per share guidance for the year was between $6.50 and $7.00 a share. With our nine-month result $8.30 per share, we have already exceeded this estimate; and consistent with our policy of not providing earnings per share guidance, we will not be updating our 2006 guidance.

In terms of 2007, our current estimates related to gross premium volume are as follows. Managed cat premiums, net of fully-collateralized joint ventures, which includes premiums written on behalf of DaVinci and Top Layer Re, is expected to be up around 15%. Please keep in mind that there's a wide range around this estimate. There is much uncertainty in the property cat market, including how the FHCF will play out and the decisions of buyers and sellers at the renewals. As such, the level of precision is just not there at this time.

For specialty and Individual Risk, our estimate is to be flat over 2006 actual results. As with cat, there is much uncertainty with these estimates also.

As we have historically done, we will continue to be opportunistic and take advantage of the market opportunities while we will also be disciplined in underwriting our book of business. We will update you on our estimates periodically. With that I will now turn the call back over to Neill.

Thank you, Fred. I think the guys did a good job this morning, but you may have a question or two, and we are happy to take them.

(OPERATOR INSTRUCTIONS) Gary Ransom, Fox-Pitt, Kelton.

I had a couple questions. One was just on the growth rate, the guidance that you gave, the 15% for property catastrophe. Does that assume that you will get the rate increases you mentioned at 1/1 up to the midyear level, and then basically flattish rates in the middle of the year? Is that the basic underlying assumption?

One of the things we do is, in doing a budget, we do put in a pro forma as to what we expect rate changes not only to be at 1/1 but for the rest of the year. We anticipate that at 1/1 we will see rate increases.

The one thing that is difficult to compare 1/1 to what happened really at 6/1 and 7/1 is 1/1 tends to be -- well it is -- a more diverse book than what renews at 6/1. 6/1 is heavily Florida-driven.

So I would say that there has got to be an adjustment between what our worldwide book will return and what the Florida-only book will return. So I'm not sure it will get up to the levels that we saw at 6/1; but it will be a strong move in that direction. So it will be significantly better than what we saw last year.

You're referring to the January renewals will be much better. But will the mid-year renewals? What is the assumption at that point?

I think the mid-year renewals -- we have got to look at, really, one of the things that is going to have a very big influence is to what legislative changes affect Florida, particularly with the FHCF. So there's so many variables as to have that could affect where we're writing.

If you look at what happened last year, we tend to be writing a little bit higher in Florida than we wrote in 2005, which is a result of really what happened with the FHCF. If similar changes that could adjust our book substantially, which will make it difficult to measure the exact rate increases. But in short it is really just too early to tell to what is going to be happening in six months.

Thank you. I had one other numbers question. Just on the commutations, I think you did tell us the effect on the losses and on the premium. What were the other effects in minority interest? Is that quantifiable?

There was a very small piece of the commutations that belonged to DaVinci. So it had a -- you could see a couple million dollars' effect.

So it was negligible or a small number?

Yes, it's pretty small.

Was there any other places where the commutations had an effect, either in the expense lines or elsewhere, that were material at all?

There was some again immaterial expense items running through. But I think in my prepared remarks I covered the bulk of it.

Okay, thank you very much then.

Brian Meredith, UBS Securities.

Two quick questions for you. First, on the hurricanes, the paid to ultimate on the hurricanes from last year, can give us a sense for how much of the remaining reserves that are up [or as] IBNR?

We try not to break that out.

I'm just wondering if it's just claims have been slow in settling, or that maybe there is a situation here where you have been just overly conservative maybe with what you assessment is from IBNR and in development. That is kind of what I am trying to get to.

My sense is that it is the former. I think the big part of this is Katrina. I think a lot of those claims are pretty slow in settling. But again we feel pretty comfortable with the carried level of reserves. So I would not read too much into it at this time in terms of whether it has additional development there.

Okay. The next question, on the equity and earnings of other ventures, I know you had an income increase sequentially to $10 million from the $9 million layer. But I would have expected that number to be a little bit higher given the light level of catastrophe losses. Is there something that I am missing in how that works? Because isn't there a profit-sharing part of it?

Yes, but when you look at our equity [pick-up] joint ventures, it really relates to the four areas -- Top Layer Re, ChannelRe, Starbound, and Tower Hill. A piece of that does come from Starbound. As we told you earlier we do expect that to be negligible over the year. But I am not -- when you look at the other two big items coming through that, that being Top Layer and ChannelRe, a lot of that isn't driven by the cat business. I am not sure why you would have expected that to be higher.

Okay. That is good. Then the last question. You mentioned that you're going to try to get the Individual Risk combined ratio down a little bit. What are the plans to do that? Could it potentially mean that premiums are down even more in 2007?

This is Neill. Yes, we have stayed very disciplined in the Individual Risk just like we are on the cat side. We not going to diversify for the sake of diversification. So that certainly could happen.

Okay, thanks.

Bill Wilt, Morgan Stanley.

Could you offer some comments on the new companies coming online for, or in the queue perhaps to come online for 1/1/07? Any sense for the number of new entities, the amount of capacity they might bring, and I guess importantly whether you think they will be a factor in the January 1 renewals?

The simple answer is I don't. There has been a lot of rumors as new companies starting; and also lots of companies that even over the course of the year that have been talking about starting and that actually have not started. So until they're actually formed and up and running, it is difficult to know what the impact is going to be.

The one thing I will say is that is talking about the supply-side. On the demand-side what we have seen, though, is still companies coming in to discuss their 1/1/07 or just '07 renewals in general. We're still seeing an increase in demand. So even with a small increase in supply, I still think we're going to be in a pretty strong market for pricing just because of the supply-demand imbalance.

That is helpful, thanks. Could you --? One other one if I may. On specialty reinsurance, I think as I recall excess workers comp was mentioned as an area of surprising weakness. Other classes of business that were surprisingly weak from a pricing rate adequacy perspective and that have fallen off?

The reason I just focused in on that one is because we have a reasonably large book of workers comp cat business. A lot of the other areas that we are looking at we are seeing weak pricing. That is the reason we are not really moving into them.

We are either seeing coverage that is too broad or pricing that is too weak, or a combination of the two. But it would be difficult to go in it by line as to which ones are good and which ones aren't. The ones that we are currently in that are renewing are actually doing reasonably well, except for workers comp cat.

That is great, thanks. Paid losses for the quarter? Final one. Thanks.

I'm sorry, what is the question?

I'm sorry. Just total paid losses for the quarter. Apologies if it is in the release and I missed it.

Total paid losses are about $165 million for the quarter.

Thanks very much.

Alain Karaoglan, Deutsche Bank.

I have a few questions. First, congratulations on great results. The first question relates to the Individual Risk business. Looking at the net premiums written, you may have mentioned that in your comment but I missed it. It seems that you ceded a fair amount of business this quarter. Did you purchase any reinsurance on the Individual Risk business? Because the ceded to gross is around 49%.

This is Bill Riker. Fred could probably go into a little bit more detail. But the increase in ceded is primarily due to the program that we have terminated on a cut-off basis, where we are now ceding the earned premium onto another party.

That is exactly right. That is what the bulk of the change is. We have ceded all of the unearned premium as of July 1, and the premium in the quarter on a go-forward basis. So that makes up the bulk of the $30 million. (indiscernible)

Now, the results of the Individual Risk business, as you mentioned the combined ratio is higher than you have expected. It really, the last couple of years, hasn't done what you expect it to do. Some of it was due to cats. What is the issue there? Have you identified what is the issue, what you need to do different? Of course the overall results of the Company are great; but Individual actually looks different relative to the whole Company.

It is Neill. Very good question. Actually for the past few years one of the problems has been that we had the quota shares underwritten in the Individual Risk. Of course 2004, 2005 were bad years. As I mentioned in my comments we have changed that going forward, so they are not the beneficiary as much this year as they would be ordinarily.

The program business is actually doing well. So when you take that out, we are going to continue to work on the program business; and we have one of our staff with each one of the program managers. We continue to modify those programs and make them better, to underwrite the various classes of business. They are doing a good job. They are improving. Bill, do you want add to that?

Probably one other thought there is, as we look at our Individual Risk business, it is really sort of in three buckets. One being the program business that Neill mentioned, which we continue to be very happy with the results there. The second area, as Neill mentioned as well, is the sort of cat-exposed homeowners business which had a significant Florida component, which obviously got beaten up pretty good in 2004 and 2005; which now the bulk of that exposure has been transferred over into the excess of loss cat book.

Then the last piece is a commercial property business, where we have a couple of large relationships. That is the area where [unfortunately] we would love to see the results get better, and that is the one that we are trying to work on. We know the pricing in that arena has actually improved nicely. But we still get an occasional large loss that rolls through there. It is really kind of the luck of the draw to a certain degree; but that is where we're focusing our efforts on, (indiscernible).

The last question is relating to reinsurance premiums earned. Would you have an estimate as to how much of the premium was earned in the quarter based on the pricing in the second and third quarter, as opposed to in the first quarter?

No, we don't have that information with us.

Would it be fair to allocate your premiums written on an earneds basis, quarterly basis generally? Is that a fair?

That is fair, you could do that.

Great, thank you very much.

(OPERATOR INSTRUCTIONS) Vinay Misquith, Credit Suisse.

Great quarter. This quarter's accident year loss ratio was only around 13% in the reinsurance segment. I was wondering -- what is the real run rate for that segment? Was it so low because you have earned more premiums from cat and less premiums from your specialty re segment?

That is the bulk of the driver. What you see is a change in the mix of business. As you can appreciate, with the specialty business we've put up higher reserves at the inception of the -- as we earned the premiums on that book of business. With the mix of business changing significantly, we are putting up less reserves when you look at the segment in total.

Okay. Going forward do you expect it to be less than it was in the past, because more in the earned premiums from the cat business flow into earnings? Is that also fair?

I think that is fair. Because we don't expect to see a major shift in the mix of business going forward from where we are today.

All right. In terms of diversification, since you're pulling back a little bit on your Individual Risk business and your specialty re book, it appears that your cat business is taking on a higher percentage of your total business. How do you look at diversification and risk management, given the fact that you're reducing your other businesses?

That is a great question. We look at everything within one system which is our proprietary system, REMS. So back to sort of what I was talking about, between cat and workers comp cat, and looking at the correlations, and allocating capital to where it is producing the best returns -- we do that in every line of business. So whether we are increasing or decreasing Individual Risk or specialty or even cat, we are all measuring the returns within the same environment, so we can quickly determine which area is producing the best returns.

Included in that is capital allocation. So something that is using more capital will require a higher profit to generate the same return.

Okay. The last question would be on the minority interest. Since this quarter's minority interest I believe was about 17% of pretax income, was that because of higher earned income from the cat business because of DaVinci? Should we expect a similar level going forward?

The higher minority interest clearly is driven by the favorable results in DaVinci, which was driven by the low level of insured cat losses that we all enjoyed. So I think it is just a reflection of how well DaVinci did, consistent with how well we did this quarter.

Thank you.

Tom Cholnoky, Goldman Sachs.

Can you just refresh me, if you have in the past, just talk about Starbound and Tim Re. How much flexibility do you have to retain business next year if your capital base continues to grow as you expect? I mean, is that -- the terms of those joint -- or those sidecars if you will, can you just review those with us?

Sure, Tom. It is Neill. Both of those vehicles automatically expire. So a couple things can happen. Either we can reup and redo those joint ventures; or we could take on that business ourselves if it seemed inappropriate to put them in joint ventures.

Also I might say that we continue to look in this area to see if there are additional opportunities and are poised, based on our position as a lead in this area, we can see lots of different things. So this is something that we will be looking at closely over the next month or two.

Have you disclosed how much premium you actually put into those two?

Yes. If you recall, the second quarter we put in $111 million between the two of them. This quarter there was an additional $3 million that blew in, for a total of $114 million.

And those have effectively expired as of now? Were they less than a year?

Tim Re is a seven-month deal which expires December? January. And Starbound is a 12-month deal which would expire June 1, May 31.

So at that point you will look at your capital position; you will look at the business; and you will determine a combination of where you see the returns, of whether it makes more sense to retain that yourself.

Exactly and we are not waiting till then. We think about this on a daily, weekly basis.

Okay. I am sorry; then just going to your 15% top-line growth, does that growth assumption contemplate that you will be taking on some of this business?

Tom, I think that is why when you go back to Fred's comments about there is a pretty wide range around that 15% -- obviously it matters quite a bit as to whether we put something in a fully-collateralized JV or we write it in Renaissance or DaVinci or Top Layer.

Yes, it does. That is what I'm just trying to understand. So in other words does that 15% assume that you don't renew these? Because if -- I mean it would imply that basically if you simply drop them you will hit your 15% target without any problem, if you don't renew.

There are a lot of moving parts there, Tom. You have got to see what the pricing is like (multiple speakers) renewal periods.

So 15% could actually be a pretty conservative target? Could prove to be?

I'm sorry, Tom. Say that again, please.

The 15% managed cat premium growth in 2007 could prove to be a pretty conservative target if in fact pricing remains reasonably good, and you have the ability to retain the Starbound and the Tim Re premium volume.

Yes, that is right.

Okay. Just wanted to clarify that. Okay, great. That was my question. Thank you.

Joshua Shanker, Citigroup.

Great quarter, everyone. My question involves the premiums that you booked at about a 100% combined ratio in the last quarter. I'm trying to figure out how much they depressed 2Q '06 earnings by; and how much they helped the 3Q '06 earnings by.

Could you refresh my memory as to what you are referring to from last quarter?

During the last conference call you talked about some premium business that you wrote that was weather dependent. So as an early proviso you booked it at 100% combined ratio.

Right.

Then I assume that with the lack of weather activity you've probably taken that down. Or maybe you haven't taken that down. I'm wondering if that is included in the favorable developments that you reported for the quarter, and how much affect that would have on earnings?

Let me just take you back and explain to you what that is. That is a -- what I would refer to as a weather-sensitive product, not necessarily a hurricane contract. We booked that to our best estimate as of the point in time. That can fluctuate. It could be 100%, it could be 95%. It moves around.

$33 million of that was earned premium in the third quarter. I would say that there isn't any significant favorable development related to that contract coming through in the third quarter. Because we are still not in a point where we are certain about what our income on that particular contract is going to be.

Now, you earned premium on that on the second quarter also as well, yes?

Yes.

So was this booked in the third quarter to the same degree of combined ratio as the second-quarter earned premium was?

It is pretty close. It moves around a little bit, but not much.

The contract has a one-year duration to it, yes?

Yes.

Okay, that is my question. Thank you very much.

J.F. Tremblay, HSBC.

I have three questions for you. First of all regarding the commutations, can you provide some initial color on the type of contracts and what exactly triggered the commutations? So if you can say anything about the clients, whether they are still ongoing clients; or whether you just decided to put an end to the relationship there?

Happy to do that. This is Neill. I am pleased to say that in all of these instances that we have good relationships with those clients. One of the clients we don't have ongoing business with at this particular time; but we expect to do more business with them in the future. One of the other clients we have a substantial relationship with.

Things change sometimes. The companies go in and out of various lines of business. Their needs for purchasing reinsurance change. Sometimes you have a multiyear contract where, gee, it seemed like a good idea two or three years ago; but the third year things are different. So you just agree to finalize it, and by commutation you go ahead and settle up.

Good. My second question has to do with your appetite for retro reinsurance. In your prepared remarks you alluded to some of the market conditions there. Can you elaborate in terms of what you are seeing in supply and demand trends, and how it is impacting your appetite?

Sure. We don't look at retro as a separate line of business; we look at it all within our property cat. As we have discussed before we have developed a proprietary modeling. With that we have very high resolution when we are looking at a retro contract, so we can gain comfort in the analysis that is behind it.

A couple other things I would point out. The retro market isn't that big. We are one of the largest players in it. We know the market very well. I think there is opportunity for it. There has been a lot of new capacity that has come into the market, particularly in an ILW form. But there is still a bit of a supply-demand imbalance in there.

So again from our perspective, we are indifferent as to whether we write it on a primary basis or on a retro basis, as long as we are getting -- we can allocate as to where we are getting the highest returns.

That is very helpful. Thank you. Finally I was curious to hear your thoughts regarding your appetite for European property cat risk, Asian cat risk. As I understand, your non-U.S. cat business is written through Top Layer Re. Since you are now developing significant capital base, have a lot of options ahead of you what you can do with your capital, are you giving some thought to potentially writing more property cat reinsurance on European or Asian risk?

I guess the first answer. Top Layer Re writes a specific segment of the international book that we have. Top Layer Re targets very high layers, generally single-region covers. So that is kind of an add-on to what RenRe and DaVinci is doing. RenRe and DaVinci write an international program.

We see quite a bit of the business that is out there. We have a strong appetite for international cat risk. But again we are looking at it in two ways -- first is on a stand-alone basis to see if there is profit in the deal; and then secondly adding it into our portfolio to see how much return that profit is generating.

What we're seeing right now is it is difficult in certain regions around the world to find business that provides us with adequate returns to improve the portfolio. It is not a problem of access; it is a problem of profitability within it.

The other thing I will mention is the retro book that we write is sometimes used to add international exposures to our portfolio. Because we think that with [all] the clarity that we can gain on underwriting our retro, we can bring in some international exposures through that book in a way that is still additive to the overall portfolio. Does that answer your question?

Yes. It is very helpful. What are your expectations for property cat pricing in Europe around the general renewals? There has been some speculation potentially there could be a slight uptick in property cat rates in Europe. Do you share that view?

It is one that -- a lot of what happens with property pricing is beyond our control, particularly in some markets where we just don't have that big a presence, because the markets are below where we need them to be. It wouldn't be appropriate for us to comment as to how much we think the prices will increase or decrease at a single point in time.

Thank you very much.

Jay Cohen, Merrill Lynch.

In the third-quarter numbers is there any favorable current-year reestimation of reserves that flowed in from the first half?

The only thing that is coming through is the commutations that are coming through current year. I think I mentioned there is $13 million of favorable development coming through current year related to commutation. Absent that there is nothing worthy of note.

That is great. All my other questions are answered. Thanks.

Operator, I think this next question will have to be our last one.

Sir, we have no further questions. I would like to turn the floor back over to you.

Great, perfect timing then. Thank you all very much for tuning in this morning. Great quarter, and we feel like we are very well positioned for the future. Thank you.

Thank you. This concludes today's RenaissanceRe conference call. You may now disconnect.