濱特爾 (RNR) 2006 Q4 法說會逐字稿

Good morning. My name as Toni and I will be your conference operator today. At this time I would like to welcome everyone to the RenaissanceRe fourth-quarter and full-year 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 period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, David Lilly. Sir, you may begin your conference.

Good morning. Thank you for joining our fourth-quarter and full-year 2006 financial results conference call. Yesterday after the market close we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we'll make sure to provide you with one. There will be an audio replay of the call available today at 1 o'clock p.m. Eastern today through February 21st at 8 o'clock p.m. The replay can be accessed by dialing 877-519-4471 or 973-341-3080. The pass could you will need for both numbers is 835-7727. Today's call is also available through the investor section of www.RenRe.com, and will be archived on the RenaissanceRe website through midnight on April 20th.

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

With me today to discuss today's results are Neill Currie, Chief Executive Officer; Fred Donner, Chief Financial Officer; Kevin O'Donnell, President of RenaissanceRe Ltd.; Bill Ashley, President and Chief Executive Officer of Glencoe Group Holdings Ltd.; and Bill Riker, President of RenaissanceRe. I'd now like to turn the call over to Neill. Neill?

Good morning, everyone. Just wanted to point out that Bill Riker is at a remote location; we've got him out making some money for us this morning. So he has no prepared remarks, but will be available for questions.

Yesterday after the market closed we released the financial results of our most successful year as a public company. For the full year 2006 we reported operating income of $796 million, an operating return on equity of 38%, and growth intangible book value per common share of 40%. These record earnings are the result of two things -- a low level of insured catastrophe losses and the extraordinary performance of our team. Minimal losses in '06 followed on the heels of the significant events of '04 and '05. These three years exemplify the volatility of results that we can experience.

While '04 and '05 were worse than expected '06 was much better. We estimate '06 was a 15 percentile outcome, meaning that with the book of business we wrote in '06 we only expect to be this profitable about one out of seven years. Having said this, even though our results in '04 and '05 were worse than our expected outcome, they were in line with our range of modeled expectations. This reinforced our belief that our models, combined with experienced underwriting judgment, serve as useful tools in putting together an attractive portfolio of business. However, establishing and maintaining an attractive book of business is easier said than done.

In 2006 our reinsurance, insurance, ventures and support teams did a wonderful job. We were able to take a very good portfolio of business and make it better. We also increased our premium volume in the process while continuing to build our franchise for the future. But a lot has happened since we closed the books on '06. I know many of you have questions about our expectations for '07 and the impact of the recent legislative changes on our property cat business. However, before we turn to those issues, I would like to share a few more thoughts on '06. I believe it will help you understand how we run RenRe and ultimately how we are positioned for what lies ahead in '07 and beyond.

In early '06 we announced that we expected growth in our property cat business. After the events of '04 and '05 not everyone would have felt comfortable with that decision. While we were mindful of the recent hurricanes, we underwrote our portfolio considering the full range of potential outcomes, not just the outcomes that had occurred most recently. This is an important fact and we're pretty unique in that respect quite honestly.

Using our proprietary models to evaluate catastrophe risk we recognized with the price increases in the market the business we were able to write was quite attractive from both a relative and absolute perspective, so we grew the book. At the same time we realized that our own capacity could soon certain risk was constrained; there was only so much exposure to Florida that we could assume prudently. We also realized, based on our frequent conversations with clients and brokers, that it was unlikely there would be sufficient capacity in the market to meet the demand for cat in Florida.

Anticipating this gap we worked quickly with key partners to form two facilities, third party capital, to allow us to provide much-needed additional capacity to Florida clients. These facilities are Starbound Re and Tim Re. I know we've discussed this with you in the past, but I mention all of this to frame how we will approach '07. First, there is underwriting discipline which works both ways. It means discipline to grow when market pricing is attractive like in '06 and it means not writing business that's not attractively priced. Frankly some people are good at doing one or the other; there are not too many organizations that are good at doing both.

In response to the deterioration in pricing for certain books of business we are maintaining discipline and have reduced those books at 1-1-07. We believe underwriting discipline is the key to consistently drawing tangible book value through both hard and soft market conditions.

Second is the importance of doing the right things over time to build strong customer relationships. The role we and our partners play to bring additional capacity to the Florida market in '06 significantly strengthened our relationships with brokers and clients. We have also strengthened relationships by paying claims quickly when asked to for the '04 and '05 events. Now as we face more competitive conditions following the recent legislative changes in Florida, we will rely on the strength of these relationships in order to maintain our role as a meaningful provider of reinsurance capacity to that market.

Only time will tell, but we feel like we did the right things in '06 to maximize our ability to compete effectively in '07. We recognize that the residents of Florida and their elected officials are confronted with a difficult situation -- decisions made by the Legislature reflect an understandable desire to ease the financial burden of increased insurance premiums for property owners in the state. This situation has evolved over the past few years and this will continue to evolve over the next several years. So this is a fluid situation and it's going to take many, many years for it to settle out.

Long-term solutions, such as building structures that will better withstand hurricane force winds, unfortunately won't happen overnight. We will continue to try to help by providing insurance and reinsurance capacity, funding research projects and by our rewarding clients that are taking steps to mitigate damage. Kevin O'Donnell will talk more about our thoughts on the property cat market, the recent changes in Florida and specialty re later in the call.

I'd like to touch quickly on our other business unit, individual risk. Bill Ashley is on the call and will talk more about this business, but it's worth noting that despite some quarter-to-quarter volatility '06 results for this business are right where we hoped they would be. The combined ratio is just under 90%, which is a great result and highlights another important initiative for us. We are willing to accept some volatility in the short-term to obtain an attractive result over the longer run.

So overall I'm quite happy with the way the team performed in '06. It certainly didn't hurt that the wind didn't blow and the ground didn't shake. But setting the luck aside, the team did all of the right things to strengthen our franchise and position us for the years to come. So with that let me turn it over to Kevin.

Thanks, Bill. Good morning, everyone. I'd like to divide my comments this morning into three sections. First, I'll give some brief comments on last year and the 1-1 renewal; second, a brief overview of windstorm Kyrill and third, an overview of Florida and the impact on us. Overall we saw fewer attractive opportunities at year end than we originally expected. In general there was far less fear around U.S. wind business and increasing competitor appetite for diversified business. I'll take a few minutes now to comment more pacifically by line within the reinsurance segment.

Regarding the U.S. primary insurance renewals, we saw an improvement in rates from expiring. But as we expected, price levels didn't achieve the 6-1 level from last year. Overall we estimate that the average rate increase was in the range of 20 to 30%, but these changes varied drastically by program and by layer. At year end many buyers shifted their programs higher by dropping bottom layers and purchasing new limit at the top end of the programs. As I mentioned, competition was greater this year for non hurricane programs which resulted in reduced economics year-over-year for those deals.

One additional item worth noting is that we successfully secured terms on several 6-1 renewals, but the written premium on those deals won't appear until the second quarter. Overall we were very pleased with the U.S. primary book and are still enjoying attractive economics in this business.

Moving over to the international primary renewals, we were less comfortable with what we were seeing at 1-1 in this market. We went into the market with some optimism based on early signs given by the 10-1 renewals last year. But as with the U.S. non peak business, we saw increased competition which resulted in rate deterioration with the exception of perhaps the UK. As we've done many times before, we remained disciplined and reduced this book year-over-year as many deals produced returns which were below our desired level.

With regard to the retro book, there was a large reduction in demand at 1-1 with buyers retaining more of their own risk through increased retentions and in many cases massive reductions in their open market purchases. On the supply side we saw an increasing willingness to provide capacity and specifically more worldwide than we originally expected. Like all other primary cat lines we saw the greatest competition for diversifying -- or in this case actually ex U.S. business. Based on these dynamics retro was far less attractive at year-end than we originally expected. We expected this book to have the largest percentage increase among all our cat lines and as a result of the market dynamics we actually reduced the book year-over-year.

Moving over to specialty, we continue to be disappointed with the pricing on many lines in this market. And although we had a good showing of business at 1-1, it remains difficult to find business that offers attractive returns. We've avoided the trap of pursuing growth over profit and have remained discipline in our underwriting. In this book we continue to experience low loss emergence which is adding to the profitability of the business.

Second, as many of you know, Europe was affected by windstorm Kyrill in mid-January. It was a broad storm affecting many areas in Europe with damaging winds, but at the low end of the damageability scale. This type of storm will result in damage that is broadly spread, but in most instances single location damage is light to moderate which adds to the time necessary to properly assess damage and ultimately cost.

One point worth noting is that Germany is heavily affected and many covers purchased in Germany are annual aggregate covers. Meaning that the contribution of the Kyrill loss to the overall aggregate will not be known until the contract is expired and all events are known. Our loss comes largely from our retro writings which is in the current excessive loss book. But our estimate is subject to some assumptions with regard to aggregate loss for the underlying seasons. With that said we have done a robust analysis which includes some of the required assumptions outlined above and have developed a preliminary estimate of $50 million.

Moving over to Florida, needless to say, we've carefully monitored the changes that occurred in Florida with respect to the state backed coverage. The first step in understanding the impact of these changes is understanding how each of our customers are affected. At this point we reviewed our book on an account-by-account basis and reworked every deal with the new Florida hurricane cat fund structure. We are confident we understand our customers' impact and look forward to working with them over the next several months to continue to meet their needs.

I'll spend a few minutes now outlining some additional comments about our Florida book that will help you understand the impact to us. We are dedicated to addressing our customers' needs and, looking at last year, we identified and addressed the expected capacity shortages by providing substantial new capacity in the form of Starbound, Tim Re and several other retrocessional arrangements. On a gross basis we increased our Florida market share last year which should help us, even with the [shuffle] Re deal occurring in Florida, as we have greater access to open market business that will be placed.

Additionally, with the overall reduction in no open market business due to the legislative changes we will likely have less need for Florida specific retro -- meaning we can increase the percentage of open market Florida business for our own balance sheet. Time and time again we discuss this business as a relationship business and, regardless of what you call it, we have ongoing dialogues with many of our customers and are very open about our view of their risk. And we consistently provide exposure based cat protection to them. As we've said, we believe that we have greater access to provide capacity around the new FHCF than any other reinsurer and believe that our customers will continue to choose us as a partner where it makes sense. With all the changes that have occurred in Florida I would not trade our position in the Florida market with anyone else's.

Additionally, both RenRe and Glencoe work very close closely together with regard to Florida catastrophe and we will continue to optimally deploy our capacity at the best point in what we call the food chain to maximize long-term returns. By food chain we mean that we've built a flexible structure that allows us to deploy traditional excess of loss, quota share or write primary business and have the tools to determine which among these options provide us the greatest return.

I know you have more questions regarding the impact of these changes and look forward to answering them in the follow-up Q&A, but now I'd like to turn the call over to Bill Ashley.

Thank you, Kevin, and good morning. I appreciate the opportunity to talk to you this morning about our individual risk business. We're pleased that we finished the year 2006 essentially on budget for both top-line and bottom-line. I'd like to take a moment with you if I could just to highlight a few points of the year.

Our casualty business continues to perform at or better than our expectations. As Neill mentioned, we reported to you earlier in the year some volatility around our results. This came predominantly as a result of one large commercial property quota share. However, even with the impact of the losses of this quota share, we were able to achieve our combined underwriting ratio target of in the low 90s combined or better. The individual risk fourth-quarter results as reported in our earnings release were considerably better than our expectations. There were a few predominant reasons for the unusually good results; I'd like to walk through a few of those with you.

Our program business continues to perform at or better than our expectations; however, performed better than expected in the fourth quarter. We had a light year of property catastrophe losses on our property business and in the fourth quarter we booked the results for our agricultural program for the 2006 crop year. We reported to you earlier in the year that we had shifted some of our corporate capacity from individual risk personalized quota share to excess of loss cat reinsurance written in our reinsurance segment due to better returns overall for our capital.

In spite of this shift in top-line premium we were able to finish the year with a slight growth in top-line to the individual risk unit year-over-year. Our internal system's modeling capability and proprietary REM system at Renaissance are very valuable to the individual risk unit as they are in our reinsurance business unit. Our systems continue to allow us to seek out the best opportunities to deploy our capital corporately.

As Kevin mentioned, Kevin and I are both able to coordinate and carefully make decisions around best returns be it quota share, primary, excess of loss, cat reinsurance for the Corporation. We were able to take advantage of opportunities for both excess and surplus lines, hurricane exposed commercial property business and excess and surplus lines earthquake exposed commercial property business.

We believe that there are still some additional opportunities in both excess and surplus hurricane exposed property and excess and surplus lines earthquake exposed property available to us in 2007. However, we are watching market terms and conditions and pricing very carefully. We of course will withdraw capacity as soon as we're no longer able to obtain the desired returns.

We are still seeing some softening in the general casualty market and the property market where the risk of catastrophe exposure is perceived to be low or minimal. We continue to push for price increases to offset inflationary claims trends costs in our casualty book and we're proud of our program managers; they're executing very well for both the right price and with selection in this market.

We're projecting in most programs for the top-line to be flat to slightly down in 2007 due to our discipline of being bottom-line driven. We continue to be able to leverage some property catastrophe capacity with the casualty business in order to stabilize overall impact of softening market conditions.

We're reviewing several new program opportunities and our deal flow is fairly strong; however, we are being extra cautious due to market conditions. As discussed before, our standards are very high and we've reviewed many, many opportunities only to do a few. Our philosophy continues to have small numbers of important but large relationships both for the program business and the quota share business.

Overall we are pleased that we have the right program partners who are working with us to navigate successfully through this current market. We believe we're positioned well and have the right relationships and multiple -- primary (multiple speakers) to take advantage of what 2007 has to offer us. We have access to both admitted and excess and surplus lines primary companies to take advantage of new opportunities as they come along and put them on the appropriate balance sheets.

Using our proprietary REMS and other modeling capabilities we'll continue to source catastrophe exposed property business for the Company if it makes sense for us as a Corporation and if at the right returns. So thank you again for the opportunity to discuss with you this morning and I'd like to turn the call over to our CFO, Fred Donner.

Thank you, Bill, and good morning, everyone. As you heard Neil mention, this was an exceptional year for us. Operating income for the quarter was $198.6 million bringing the full-year operating income to a record $796.1 million or $11.05 per share on a fully diluted basis. The hard market combined with a low level of cat activity enabled us to generate over $693 million of underwriting income in 2006. We recorded a loss ratio of under 30% and our combined ratio came in around 55% resulting in an annualized ROE of just under 38% with over 40% growth in book value per common share.

However, our commitment is to generate growth in book value for our shareholders over the long term. While we are pleased with our results for 2006, we are also pleased with our results over the long term. Over the past five years we have generated an annualized compounded growth in book value per share plus accumulated dividends of over 17%. And just to remind you, this includes significant catastrophe losses that we sustained in 2004 and 2005. This is the measure that we believe you should evaluate us against.

Now I'd like to get into some of the details for the quarter and the year. For the quarter we generated $198.6 million of operating income or $2.74 per share on a fully diluted basis in 2006 compared to a $206.9 million loss or $2.92 per share in 2005. In the cat unit of our reinsurance segment our managed cat premiums were $25 million net of fully collateralized joint ventures, down from $99 million in the same period last year. Last year's premiums included $67 million of loss-related premiums so we are modestly down for the quarter.

For the full year managed cat premiums net of fully collateralized joint ventures on a normalized basis are up approximately 44% over 2005. For the quarter and the year we generated underwriting income of $110 million and $472 million respectively. With no major cats to speak of for the quarter, our current accident year ratio was approximately 21%, which was further reduced by some modest prior year favorable development resulting in a calendar year loss ratio of just under 20% for the quarter.

For the year our cat accident and calendar year loss ratios were 16% and 17.9% respectively. A modest adverse development in 2006 relates primarily to a UK industrial fire loss from 2005 that we spoke about in previous quarters.

In our specialty unit gross written premiums this quarter were approximately $29 million which is relatively flat with last year when you back out loss-related premiums of $4 million. For the full year gross written premiums on a normalized basis were down approximately 43%. For the quarter and the year we generated $31 million and $164 million of underwriting income respectively. Our current accident year loss ratio was running around 65% for the quarter -- for the year and the quarter; however, we did have favorable loss development this quarter of approximately $22 million and about $139 million for the full year.

Just to comment on the favorable development we have experienced in our specialty book. We review our reserves each quarter and we book to our best estimate. The specialty book is a relatively young business for us and we don't have much in the way of historical loss data, so we rely in part on industry information. We reserve for this book using the [DF] methods and reported claim activity has come in less than historical loss information would predict, which is driving most of the favorable development.

In terms of KRW losses, there have been no material changes to the estimates in the quarter and we continue to feel comfortable with our carry reserves for these events, but recognize that given the magnitude of these [loss] losses, modest developments, either favorable or unfavorable on a percentage basis, can translate to large dollars.

Moving on to our individual risk segment, gross written premiums for the quarter were $142 million which is down versus the same period a year ago. However, on a full-year basis we are up slightly at $689 million versus $651 million last year, which is a little better than we expected. The big story in individual risk this quarter is the calendar year loss ratio for where we came in at 32% resulting in a combined ratio of 73%. For the full year our combined ratio came in just under 90% which is where we had hoped to be.

There are a couple of items that favorably impacted us here. The first, as you heard Bill mention, is the benefit we recorded in the quarter related to our current year crop business. Second, we had some modest favorable development on prior year losses which took about 3 points off the quarterly loss ratio.

With respect to capital, in December we raised $300 million of 6.6% perpetual preferred securities. The purpose of the offering was to refinance existing preferred and debt at lower rates. In January we redeemed $150 million of our Series A securities that carried an 8.1% coupon and we also issued a notice of redemption for $100 million of our outstanding 8.54 trust preferred securities.

Given the timing of a December capital raise with redemptions occurring during the first quarter, at December 31st we were carrying an additional $250 million of preferred securities on our balance sheet which will move back to more normal levels by the end of the first quarter. This was a good deal for us which will reduce our cost of capital going forward.

In terms of our overall capital position, we continue to actively monitor our capital position and remain comfortable where we are today. Our year-end common equity is now around $2.5 billion, the highest it has ever been, and we continue to have a strong balance sheet going into 2007. As of today we don't think we need to take any action, but we will continue to monitor our position.

Let me take a minute to explain the variance from our original guidance that we mentioned in our earnings release. Most of the original estimates of the 15% growth in managed cat contemplated a strong January renewal season which didn't materialize to the extent we originally expected. As Kevin mentioned, we saw a shift in the U.S. primary market, rate deterioration in the international renewals, and reduced demand in the retro market. This actually caused much of our swing.

Moving on to Florida for the June 1 renewal component of our estimate. In our original estimate we considered a softening rate environment knowing that the markets weren't likely going to maintain the levels we saw last year. Now after considering the changes to the Florida cat fund and our ability to continue to provide capacity around the fund and our ability to increase the business we retain for our own balance sheet, we expect our Florida cat book net of collateralized joint ventures to be down around 5% in '07.

So, looking at our full-year projections, we now expect managed cat premiums that have fully collateralized joint ventures to be down around 5% for the full year 2007 versus actual 2006. For specialty and individual risk our estimate continues to be flat over 2006. However, as we've indicated in the past, there continues to be much uncertainty in these markets and therefore these estimates are subject to change.

Lastly, I want to mention that with this quarter's earnings release we commenced distribution of a financial supplement which has been posted to the investor's section of our website at RenRe.com. We are providing this information in an effort to be responsive to the questions from the requests of analysts and investors. It's a work in process and over time we will continue to refine our supplement as part of our process to review and update our disclosures. I hope you've all found the supplement useful. At this point I'd like to turn the call back over to Neill.

Thank you, Fred. Well, hopefully we've responded to most of the questions and clarified some of the situation in Florida for you. Before we take additional questions I'd also like to address our other press release that we issued yesterday reaffirming our finalized settlement with the SEC.

As we announced, we have now fully resolved the SEC's investigation into the restatement we announced in '05. The terms of the settlement were identical to what we had disclosed previously. The monetary penalty was accrued in '05 so there is no current financial statement impact. For more detail I would direct you to that press release and our filings.

Our team has been committed to putting all these matters behind us and I believe that we have. We will continue to demonstrate leadership in the months and years ahead as a company that strives to operate with the highest level of integrity at every level. So with that I'd like to it open up for questions.

(OPERATOR INSTRUCTIONS). Tom Cholnoky, Goldman Sachs.

Good morning. I just wanted to kind of understand your guidance a little bit better on the top-line, because when you talk about that you're talking about gross premium written if I'm correct. And I'm just trying to understand -- the variance is about $164 million in premium volume on a gross basis, but what is that going to translate into on a net basis?

We took the position last quarter that we were only providing top-line guidance on a gross basis. So what we've presented to you is just that, what we expect our top-line gross written premiums to be. I will share with you that at this point we don't expect any significant changes in any of our CD programs, but that's likely to change depending on market conditions as we go forward.

But do you have the option of discontinuing Starbound and Tim Re and taking those premiums on yourself?

Yes, we do and I think Kevin alluded to that and I alluded to that as well. Those numbers are in fact included in our gross numbers. When we talk about the change in our managed cat business, we reflected last year that it would be net of those numbers. We believe that depending on market conditions some of that will remain in our book and not be seeded back out. We may retain some of that for our own balance sheet.

What I'm trying to get to is that if you take a $164 million swing on your gross and you just apply a simplistic 50% loss ratio to that business and it's disappearing it's worth over $1 a share in earnings to you. Are you suggesting -- I know you don't provide EPS guidance, but if you just take ex as a number, should we be reducing our numbers by roughly $1 because you don't have this premium? That's where the confusion arises.

Right. And again, our position, Tom, is to provide you with top-line guidance. If you're doing an analysis that brings you down to an earnings per share number, it sounds like you have assumptions there that make sense, but we're not going to comment on that at this point in time.

If I can just add a little bit about the sidecars is they are -- I want to separate sidecars from DaVinci's for this purpose as well because DaVinci we don't consider a sidecar. That's more of a strategic vehicle for us. The sidecars are really Starbound and Tim Re. Both of those deals are finite term deals. Tim Re we already unwound and Starbound is a may 2007 deal. So it's at our option as to whether we want to keep it or unwind it.

One thing I mentioned in my comments is that we do have a lot of flexibility as do what is in our gross book and what is in our net book through retrocessional arrangements. So as far as managing the portfolio that sticks to us, that's something that we'll dynamically do depending on what opportunities we see from the Florida business at 6-1.

Okay. And sorry, just one last question and (indiscernible). Do you have any flexibility in how much premium you actually seed to DaVinci? Could you actually increase your net by reducing those sessions?

Yes, we have a lot of flexibility as to how we manage across our company. If you think about it, the more permanent vehicles we have are RenRe, DaVinci and top layer Re. And DaVinci specifically allows us a lot of flexibility as to how we're allocating lines between RenRe and DaVinci. Top layer Re a little bit less though, because that's a different type of business that we're targeting for that vehicle. The sidecars are much more of a binary thing where they can be very helpful in a hard market. We've made the decision already on Tim Re and we'll make the decision in May regarding Starbound.

So it would be a mistake on our part to simply assume that your net premiums will be down or will it change at the same rate your gross will?

Yes, that's fair.

It would be helpful to get a little more guidance on your net, but that's okay. I'll just rekey in.

Tom, let me just go back and clarify something that I had a chance to think about. The guidance that we're giving is off of last year's net of what's been seeded to our joint ventures. So it's 5% off of the 971.

Right.

I don't know if that helps. I don't know if that's what you were anticipating. It's not 5% off of the top-line gross.

No, I understand that. I understand that. Okay. Thank you.

Alain Karaoglan, Deutsche Bank.

Good morning, congratulations on a great year. I just want to follow-up on this top-line guidance, just to make sure that I understand why isn't it worse than actually just down 5%? I think in the past you may have said, or others may have said, that the Florida cat market represents 10% of the worldwide cat market. And probably it falls in the bucket of more attractive returns bucket.

So simplistically why isn't the Florida cat just taking essentially most of the reinsurance business away? And do you think you have still opportunities to write that -- opportunities to write business? Why shouldn't it be more than a 10% decline in premium, even more if Florida is a more attractive -- than that?

The second question relates to capital management. You've grown your book value by 40%. Your business exposure doesn't look like it's going to grow much beyond that. Why aren't you considering more aggressively some share buybacks or capital management or are you waiting for hurricane season? And last, Fred, I just want to thank you for the financial supplement; it's great to have it and it's very helpful.

Why don't I start answering some of the questions specifically around Florida? I think you're right, Florida is an attractive market. The thing with the changes in the Florida hurricane cat fund, we don't want to specifically get in as to how we're going to position ourselves with that, but I believe that we are well positioned for the pieces of business that are going to go to the open market. We're going to be the market of first call for those pieces, so that gives us some flexibility.

The other flexibility comes out of the retrocessional arrangement that we have in the fully collateralized vehicles that are sidecars. We have the ability to either put more or less risk into those vehicles. Moving that net risk back onto the RenRe balance sheet is certainly something that we are considering this year.

And as far as the worldwide cat market, the new structure there is certainly taking some demand out of the system, but it's our belief there will be still some demand for private market reinsurance and it's just a matter of how much of that you'll be able to get. And I think we've built a flexible structure on what we did last year that will allow us to get a greater share of that this year.

Alain, this is Neill. Just to further what Kevin said is that going forward we anticipate the expected return on our book of business to be very similar in '07 to '06. So you have to remember that we've got a well diversified book of business company wide. And so there will be some diminished demand, but we've still got a good-looking book of business to look forward to in '07 if all things shake out the way we anticipate.

To your capital question, I don't have to think back very long ago about excess capital. We were in a good position to go forward after the events of '04 and '05 and it helped to have a little bit of dry powder. So we're not going to allow excessive amounts of capital to build up and we will actively manage capital, but we don't feel like we have excessive amounts of capital now.

Things happen; something will happen in the next one, two or three years that will give us opportunities to deploy the capital, but we will consistently look at it. We think about it regularly. And to let you know, one of the things that we would do first as things progressed if we did feel like we have excess capital would be share repurchase. So Fred, anything you'd like to add to that?

I think that's it. As we continue to say, we manage capital, we're comfortable with where we are, we're comfortable with the returns that we've generated and comfortable with the returns we expect to generate going forward. So until such time that we may see a change in that we're not going to take any action.

And if I may, a follow-up on the individual risk business. Last year you seem to have increased your retro purchases opportunistically. How should we think about that for 2007?

Again, I think it would be similar comments to what Kevin and others have given you about gross versus net in the cat side. We obviously managed two returns here and that's how we think about it. The best place to deploy the capital is it gross within the organization or is net in open market conditions. And we'll just take it one at a time as it comes throughout the year.

Thank you very much.

Brian Meredith, UBS.

Good morning. A couple quick questions. First, just following up on the Florida question as far as your projection of down 5%. I'm curious, if indeed this capacity is coming out of the marketplace, which it clearly is, wouldn't you expect some fairly significant price declines in the Florida market given the amount of aggregate that's leaving the market? And what have you assumed as far as price declines in the Florida market when you've come up with your 5% down? And is the market just so attractive right now that your returns you're earning are so far in excess of where your target returns are?

That's a great question. If it's just straight supply/demand economics we're going to -- we expect a demand reduction because of the increase of the state backed reinsurance there. The way that affects the reinsurance market is not going to be uniform I don't believe. And I think, again, we're well positioned with our clients to be the first call for what does fall out around the edges of the FHCF.

I think as far as the price decline, we've been open saying that what happened last year was a bit of an anomaly. So we have a realistic view as to what the prices are in Florida this year. I don't think it would be prudent for us to discuss exactly what those are, but we are looking at the overall dynamics of that and it is built into to our model.

Great. And just one other quick question on that one. You mentioned that you had already I guess bound some 6-1 contracts. I guess the question I have is are those contracts -- do they have the ability to actually get out of them now given the changes in the Florida legislation?

No, actually those contracts are bound. The thing I'd mention is we have a relationship with these people, if people have a specific issue regarding a coverage the way we build the long-term partnership with our clients is we do listen, but the contracts are set in stone at this point.

Got you. And in the contracts, were they bound before the Florida legislation was enacted?

They where -- I'm hedging a little bit because I'm not sure exactly the timeline. What was changing was known; I'm not sure if it was actually law yet or not. But we weren't doing this to rush out before we thought the changes in the FHCF were coming down the pike.

Understood. And last question. Just on the Kyrill $50 million number, I remember back when you had the Erwin loss, I think John Lummis mentioned that the losses from Erwin, there were about $25 million that was kind of above expected run rate for the quarter. Do you have any kind of similar thoughts on the Kyrill number? Because obviously some of that $50 million is already built into expectations.

Brian, this is Neill. I just wanted to go back to your prior question briefly. I don't want to go into too much detail about individual contracts, but you don't necessarily leap to the conclusion that these contracts are all Florida related. Some clients just with the volatility in buying and pricing, supply and demand, just like to lock in longer-term deals. So I don't want you to think that these are all Florida related.

Understood.

The losses that were sustained from Kyrill at about $50 million on a net basis are probably a little higher than what's built into our expectation for the quarter -- I'd say somewhere between 15 to 20 points.

Terrific. Thank you.

Vinay Misquith, Credit Suisse.

Good morning. On the Starbound and the Tim Re, I believe management had mentioned in the last few quarters that they should have about a 10 to $15 million positive impact on earnings. Now that those two deals are off the table I'm just curious which lines did you report those earnings in '06 and what were those numbers?

The total benefit for '06 so far for the year is $12 million and it comes through a couple of lines on the income statement. There's a small amount that's appearing in equity pickup on our equity investment and there are also amounts appearing in our acquisitions, costs and operating expenses. But when you add it all up it's about a $12 million benefit for the full year.

So we can expect that to go because those to deals are now off the table, but you'll be taking the premiums under your own books, which is included in your guidance but down 5%, is that correct?

The first thing is Starbound runs out through the end of May. Tim Re is off the table as of the end of January, so there are still going to be some benefits coming through the P&L in the first half of '07. And yes, when we did our '07 top-line guidance we did estimate that there is a potential for some of that business to come back to us.

Sure. And did you receive any profit commissions from DaVinci in '06?

Yes, we did.

And would that also potentially come down because you have less business now that you're writing in Florida?

The profit commission from DaVinci is based on the profits that DaVinci earns. So again, if the earnings are there the profit sharing is going to be there, the profit commissions are going to be there as well. So not sure exactly if that's your question, but I hope I answered.

Well, what I meant was that a certain portion of your Florida business will go away. And since you write some of that through DaVinci your profit commissions from that business should also go away -- or should come down a little bit, correct?

That's correct. But again, I want to emphasize that the profit commission is based on actual results.

Okay.

And there is a fair amount of Florida business that goes through DaVinci.

All right. In the past management has talked about the expected combined ratios for the businesses. Would you mind refreshing us what those numbers are for '07?

As we discussed last quarter, and I just want to reemphasize this for everyone, going forward our -- what we'd like to do and what we're going to do is to provide you with top-line guidance and top-line guidance only. So we'd like to avoid giving you any further guidance.

Sure. On the cat side would it be fair to assume -- because I think in the past management estimated a 50% combined ratio. Now that prices are falling and that you potentially have less profitable business even in Florida should we expect it to tick up a little bit?

I can answer it -- not from an accounting standpoint, but just from the business standpoint. We have not changed our model. We are going to take business on the same basis we took business last year and the year before. And what that means is if the business is accretive to our portfolio or is above our overall expected return rate for the portfolio it's a good thing to add and we'll continue to add it to the portfolio. So as far as we haven't changed the way we're taking the business in, so that's going to obviously come out in the results depending on what nature does.

Okay, thank you.

Jay Cohen, Merrill Lynch.

Just a numbers question that I might have missed. Did you identify what the favorable current year development was in each segment, just development from the first three quarters of the year?

I'm sorry, Jay; repeat the question. You're looking for the quarter or for the full year?

In the fourth quarter you had favorable prior-year development, but I also understood that you had some favorable development from the current year -- from the first three quarters of the year that flowed into the first quarter. Is that correct and if it is can you quantify it?

Yes. It's really only one significant thing coming through in this quarter relating to the current year and that's what I refer to as the individual risk business where we released some profits for a crop business in the fourth quarter. And that's probably worth somewhere around 9 points or so on the loss ratio.

I guess that's typically how (indiscernible) the agro business?

Yes, I think that's right. In terms of the agro business, what we try to do is estimate the losses on a quarterly basis using historical long-term industry loss information in our estimate of current experience. And you run it through the exposure period. This happened to be a good crop year and profits emerged when the exposure period was over.

Last question, any exposure to the California freeze in that business?

We actually believe our exposure is minimal and not material enough to even discuss it because we went through that.

Perfect. Thanks a lot.

Gary Ransom, Fox-Pitt, Kelton.

Good morning. I was wondering if you could just discuss your thought process. And as your top-line declines you have DaVinci on the one hand and RenRe, there are fees that you've talked about before, and you get a little bit of equity interest in DaVinci. How do you think about the option of doing it on your own balance sheet versus DaVinci and what are the parameters you think about in making that decision?

Gary, that's a great question. One of the things that I want to remind everybody is we anticipate DaVinci will be here forever. It's a permanent vehicle and the -- plus the premium volume and the capital will go up and down over time. So we want to be very fair to our partners who are shareholders of DaVinci, we're a shareholder of DaVinci as well. And typically what we do is at the beginning of the year we figure out what the ratio of business split between RenRe and DaVinci will be and try to do the fair thing for the partners and our shareholders. Kevin, do you want to --?

That's absolutely right. And what we do is we continually look at that split of business between the two companies. And as things develop we will adjust it depending on where the business looks best. So we may adjust our operating assumption as to how much business goes into which entity depending on where the business is most accretive to the individual portfolio. So it's not a static number throughout the year, it's a number that adjusts depending on the economics of each individual portfolio.

As you look over the sweep of time that you've had DaVinci, has it grown pretty much the same as RenRe in harder markets and softer markets or has it varied?

Gary, I'm thinking last year DaVinci outstripped RenRe a little bit, we raised capital for DaVinci to be able to take advantage of the situation less year. So the growth aspects probably last year might have been a little different for DaVinci than RenRe. Kevin, thinking back over time?

Yes, I'd say -- that's a tough question to answer too because there is retrocessional consideration. So on a net basis how the business sticks to one entity or the other. I'd say in general directionally they're both going to be the same, but it may be different year-on-year depending on what the business looks like on the inward side and how it fits against the portfolios that already exist within each company.

Okay, thank you.

Terry Shu, JPMorgan.

If I can go back to the Florida question. I'm still a little confused; just looking at the Florida Hurricane Catastrophe Fund, the proposed structure and how much the state -- how much of the business the state is taking and the rate online, the reduction in rates online. Why is the profitability still the same for you? And if you can also talk about -- you said that you feel like you have first call on the business. Are you talking about the lower layers, the excess of loss? Maybe go into a little more detail.

My impression is that the profitability will be meaningfully impacted because of a reduction of risk for the private reinsurers with the state taking on a big part and also the reduction in the rate online. Can you generally comment on that? I'm just a little confused -- why isn't there a greater impact on profitability?

The Florida hurricane cat fund -- I think there's been a lot of discussion as to where other reinsurers expect to play in that market, that's not something we really want to get into. I think we can agree that there will be pieces around the structures that will come to the open market. And based on the conversations we've had and the services we provide to these clients, we do believe -- and there's no way to quantify that -- but we believe that we will be a first call market.

Another thing to consider is that -- I'd like to expand the conversation beyond just Florida and think of it as Atlantic hurricane. And I think whether it's deployed in Florida or around Florida you're looking at getting a return on an event that has Atlantic hurricane. And I think by looking at that mix Florida is a meaningful component of that, but building the portfolio you want to think of what your Atlantic hurricane risk looks like. And that's the way we're moving the portfolio.

And we have studied the profit impact on that against the portfolio. It's not something we want to discuss specifically, but we are active managers of this portfolio, but we're active managers of an Atlantic hurricane portfolio, not just a Florida portfolio.

Okay. But are you saying that for the Florida piece, your participation, you don't really expect too much change in the expected profitability or, more simplistically, in the rate online?

I think what we said before is what happened last year was a bit of an anomaly. And if you look at it over the long-term, I still think adding the Atlantic hurricane risk that we expect to add to our portfolio will be accretive to our portfolio.

I was reading something on Louisiana today. Is there some risk that what happened in Florida would spread? And also, because Florida is such a large part of the world cat market, with a big part of the demand being kind of taken out by the state fund, wouldn't that have an overall impact on the cat market in terms of profitability? Wouldn't it depress it more?

Terry, this is Neil. Very interesting questions. We look at these questions over a long period of time. It wasn't that long ago that we were talking about California and the CEA and then you got the Florida situation, other states may be looking at this, you've got the possibilities of a national fund.

These situations are fluid, dynamic and there will be an ebb and a flow. A lot of it's got to do with what happens on the loss side. I'd be willing to bet that the structure you've got in Florida right now is going to change quite a bit over the next five or 10 years and some of it's going to be based on what happens with respect to losses. So we don't have a crystal ball. We try to stay tuned in and be realists and then work with what hand we've been dealt.

I absolutely agree with you that it's fluid and that the Florida thing will change once again. My question is much more immediate. What happened recently, the immediate impact on the market and the change will not likely happen until we have another catalyst. And it's very hard to predict when the next catalyst occurs. I was just confused why with this fairly dramatic change that the Florida profitability for your book doesn't come down meaningfully. I'm just a little confused because this change seems very massive.

You're asking sort of two questions there, Terry. Kevin is going to respond I think to the Louisiana question. But one of the things -- I think Kevin did a good job earlier responding to a similar question -- is it's the whole book of business. So yes, things change in Florida, but Florida is part of the overall cat book that we write. So when we talk about expected returns we're talking about for our whole book of business, not just Florida. So Kevin -- Louisiana?

With regard to Louisiana, one thing to think of too is that there are not that many Louisiana specifics in the market, those are generally wrapped up into larger programs. Florida is a bit unique where it's the direct impact on a state only reinsurance product. So I don't think we have any insight as to whether -- what Louisiana's next legislative steps are going to be, but the impact on our portfolio could be very different because the mix of business Louisiana belongs to is very different than the mix really the Florida only covers.

Terry, looking at the clock we're past 10. It's my understanding one of our friendly competitors here in Bermuda has got a conference call starting about now.

All right, thank you very much.

Thank you, Terry. Operator, one more quick question if we can squeeze one in, otherwise we better close it down.

Joshua Shanker, Citigroup.

Thank you for taking my question. Just quickly, I understand how awful it is to be in the prognostication business. To the extent that some of your commentary on this Florida stuff, it's still premature in some ways to be making conclusions about what the impact is going to be on your book of business or are you pretty confident that you can see the direction things are going?

Obviously there's a bit of prematurity because it's a 6-1 book. But I think with the work that we've done we have a better handle on how it affects each of our customers. So as far as the confidence scale we have a reasonable high confidence. But one, things can change legislatively between now and then; there could be a loss between now and then and behaviors may be different than what we expect. So there is a lot of uncertainty around it. I think we've done everything that we can possibly due to model the effect and are having realistic assumptions as to how it's going to flow into a portfolio. But it is preliminary and there is some degree of uncertainty.

And do you have any thoughts on Citizens and the Florida homeowners program business, how that might come into play?

This is Bill Ashley. From the individual risk side I think there's more unknown about how Citizens come into play in the commercial market who is and what's known at this point. As you're aware, the legislation is fairly lengthy, 170 pages plus. So it's our belief that this is pretty fluid. There are still opportunities out there for us. And we'll watch as this unfolds and work around the opportunities of how where Citizens decides what it's going to do and certainly not be in a competitive mode with Citizens.

I appreciate the answers. Thank you very much.

Thank you. I would now like to turn the floor back over to Mr. Neill Currie for any further or closing remarks.

Thank you. We all appreciate you tuning in and sorry for running a little bit over time. Look forward to talking to you at the end of next quarter if not before. Thank you.

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