濱特爾 (RNR) 2008 Q2 法說會逐字稿

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe second quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Now I will turn the floor over to David Lilly.

Good morning. Thank you for joining our second quarter 2008 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 2:00 p.m. Eastern Time today through August 13 at midnight. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The pass code you will need for both numbers is 54802724. Today's call is also available through the Investor section of www.RenRe.com and will be archived on RenaissanceRe's website through midnight on October 8, 2008.

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 to discuss today's results are Neill Currie, Chief Executive Officer; Fred Donner, Chief Financial Officer; Kevin O'Donnell, President of Renaissance Reinsurance Ltd.; and Bill Ashley, President and Chief Executive Officer of Glencoe Group Holdings Ltd. I would now like to turn the call over to Neil.

Thank you, David. Good morning, everyone. Thanks for joining us. I am pleased to report another solid quarter with an annualized operating return on equity of over 23%. This was accomplished despite softening insurance and reinsurance markets and a very challenging economic environment. While part of our success is the result of favorable loss experience, the advantage of being a market leader with strong relationships and experienced, disciplined underwriters enabled us to produce the portfolio of business that generated these returns.

Of course, our goal is to continue to generate attractive portfolios and I am pleased to say our team did a great job during the June 1 renewals. Our seasoned professionals who have been through markets like this before assembled an enviable portfolio of business. Our strengths from a marketing and underwriting standpoint offset lower investment results. Losses from private equity investments contributed to these lower results.

In 2007, our gains from this portfolio were higher than we expected; this quarter they were lower. Over time, results from these investments have been quite attractive and, while results will be lumpy, we remain comfortable with our portfolio. We continue to exercise diligence in capital management this quarter, repurchasing stock at prices we felt to be very attractive. Over time, this method of returning capital to shareholders should maximize total returns.

In our last call, I referred to our strategy of taking advantage of the opportunities that markets like this provide us to focus on positioning our business for the future. This involves looking at how we apply our core competencies to new opportunities, exploring how we further improve the way we run our operations, and thinking creatively about how we can advance our business model.

During the quarter, we took several steps in these areas. We completed the acquisition of Agro National, strengthening our operating platform in a marketplace which we believe has significant long-term appeal. And we continued to recruit talented executives to expand the depth of experience in our Individual Risk, Reinsurance, and Ventures teams. We continue to take a broad view of how we can best protect our clients from risks they face, as well as extending the value of our franchise for our shareholders.

To expand on this point a little bit, as many of you are aware, part of the franchise value of RenRe are the scientists and researchers we employ across our organization. Many of these scientists are housed in our subsidiary, Weather Predict Consulting, which is a leader in global tropical cyclone prediction using our in-house technology. Our team of scientists provides valuable information and insight to our business units, helping them to manage risk posed by atmospheric events.

A natural extension of our business is our work in risk mitigation, which we believe presents the most promise for protecting property owners and insurers from preventable loss. You have already heard about the RenaissanceRe Wall of Wind, which is making meaningful contributions to wind engineering research. During the first half of '08, we also hosted hurricane risk management forums in Florida and Rhode Island. We brought together scientists, policy makers, regulators, insurers, and others to share ideas and to better understand the immense potential benefits of mitigation.

We feel these efforts will make homes and commercial buildings safer and over time lead to lower insured and reinsured expected losses. So we feel this is a win-win situation. Coastal residents will be safer, property owners and insurers will benefit, and we will improve our analytical skills in assuming and managing our risk.

Overall, this quarter demonstrates the enduring power of the franchise we have created at RenRe. Our results reflect our ability to take the core skills and values that have been at the heart of the Company's culture over the course of its history and to expand them, not only in existing areas, but also into attractive new business areas.

So with that, I will turn the call over to Kevin O'Donnell.

Thanks, Neal. Good morning, everyone. In the U.S., the property cost cat market is continuing the trend we discussed on the last call, with the supply of reinsurance capital remaining above demand. We are seeing the rate pressures that one would expect to see from this imbalance. Although market rates have fallen, we are still seeing sufficient volume and desirable business to build an attractive portfolio. It's important to note that the regional differences in returns are quite profound, so as with any softening of the market, risk selection and portfolio construction are increasingly important.

As you would expect, we actively manage our book and may continue to reduce our top line. But at the same time expect to increase our share of market expected profit. The main renewal over the quarter was Florida and I would like to give a little color around our participation there. Overall demand for cat cover was about flat this year in Florida. Unfortunately, the legislative changes to FHCF that were being discussed never materialized, so we didn't see any increased demand and state participation remained constant.

We retained our leadership position in the market. Although we did experience some rate reduction, we have built a great portfolio producing attractive returns. Early in the renewal process, we determined that the market capacity would be satisfied without additional vehicles and decided not to renew Starbound, our sidecar. This decision provided us with additional flexibility to retain these risks and helped us construct a portfolio with better-than-average market returns.

In general, we actively manage and adjust our book in response to the pricing we are seeing in the market. We sometimes think of our books in terms of vertical and horizontal diversification or horizontal or geographic diversification, which is reasonably consistent. Our vertical diversification, or share of risk throughout the distribution, has changed.

We increase our market share of smaller losses in Florida compared with our portfolios over the last two years. In fact, if you look back over history, the structure of the present portfolio is more in line with our historic portfolios than what we achieved in the last couple of years.

We have a strong presence in the Florida market and bring many tools to help us manage our risks there. These include primary opportunities we see with our Individual Risk segment, our ability to bring financial solutions through Ventures, and of course our underwriting discipline and strong ratings in the Reinsurance group.

Moving on over to other markets, outside the U.S. the only area of renewal I will touch on is Japan. For many years now we have not been a broad participant in the Japanese market due to pricing levels. Not surprisingly, with the current pricing trends, we did not deploy additional capital in the market this year. We do have strong and long-standing relationships in Japan and feel we are well-positioned should the pricing environment improve there.

Moving over to Specialty now, we have been surprised not to see greater dislocation and opportunity accompanying the increased risk posed to several lines of business due to the economic downturn. We constantly review lines of business and rate them as to the likelihood of dislocation to make sure we are prepared to provide capacity when needed.

In summary, we remain disciplined in our underwriting and risk selection resulting in reduced top line, but maintain the portfolio that produces returns we are happy with. We continue to actively seek new opportunities in all market segments and ensure that we have the resources and tools available to capitalize on them as we find them.

Thanks, and with that, I would like to turn the call over to Bill.

Thank you, Kevin, and good morning. We are excited that our Individual Risk business unit was able to close another acquisition during the second quarter of 2008. We acquired the assets of Agro National, the managing general underwriter of crop insurance, offering high-quality products and services to the agricultural community. Earlier this year, we acquired Claims Management Services, a provider of claims administration, adjustment, and consulting services. Both of these acquisitions are consistent with our strategy to build out our capabilities for the future.

The integration of both is going well. We should see benefits in the future of owning these capabilities versus partnerships as third-party relationships. As Fred will discuss further, our gross written premium increase this quarter is primarily due to the premiums associated with the multi-peril crop insurance program written by our new subsidiary, Agro National. This growth in premium in part is due to increase in commodity prices for both corn and soybeans.

May and June are heavy renewal periods for wind-exposed commercial property book. Even though pricing in this market continues to decline, we were pleased with the pricing and returns we were able to obtain on this portion of our book. For the rest of our existing program business due to our pricing discipline, we may see this portion of our book continue to shrink further.

We incepted two new programs this quarter. New programs that incepted in the fourth quarter of 2007 and the first six months of 2008 will ramp up slowly and have a greater impact in the second half of 2008. We have also terminated two programs with policies expiring at various times in the future.

Our results this quarter were impacted by several weather-related events that will have an effect on the crops grown in the Midwestern section of the United States. We believe our exposure and expected losses stemming from the flood events were not extensive due to the geographic locations of some of the hardest hit areas.

As part of our loss review, we examined several data sources such as flood gauge level data and soil saturation data relative to the location of our exposed crops. Although we will have a few losses from the floods, we believe our share of these losses to be below our market share. More certainty of the results will be known in the third quarter when the crops are harvested.

We have also in this quarter made a few strategic hires. We believe with our existing infrastructure, the acquisitions made thus far in 2008, plus the additions of a few key individuals, we are well positioned for the future. Thanks, and I will now turn the call over to Fred Donner.

Thanks, Bill. Good morning, everyone. Now that you have heard from our business unit leaders, I will take you through the financial results. After the market closed last evening, we reported operating income for the quarter of $160 million, or $2.50 per share; achieved a 23% annualized operating return on common equity; and grew our book value per share by almost 3%, which includes the impact of our share repurchases. Our top line declined by a little over 4%, however, our underwriting profits remained strong and we generated 53.5% combined ratio.

Let me move on to the segment operating results, starting with the catastrophe unit of our Reinsurance segment. Our Cat unit generated gross written premiums $465 million as compared to $513 million for the same period last year. On a managed basis, our premiums are down about $47 million, or 9%, which is in-line with our full-year forecast of down approximately 10%.

Underwriting income during the quarter for our Cat unit amounted to $127 million, up from $95 million from the same period last year. This period's results were favorably impacted by a lower-level of current year losses compared with last year's results which, as you may recall, included the impact of the UK flooding. Overall, we generated a combined ratio of 23% versus 44% for the same period last year. Favorable development in the quarter amounted to $18 million, principally arising from a reduction in small-cap losses from the 2007 and 2006 accident years to the reported losses coming in better than expected.

Moving on to our Specialty unit, we experienced a significant decline in the top line of our Specialty unit, but delivered strong underwriting results. Gross premiums written in this unit was $23 million versus $94 million last year. Last year's results include the transfer in of a personal lines quota share contract which amounted to $75 million of written premium. The contract was renewed this quarter at a lower participation. $2.6 million of premiums written related to this contract in the quarter reflects the net impact of the change in the participation.

Our original full-year forecast was to be down 25% for the full year. However, based on current market conditions, we now expect our full-year top-line results to be down approximately 50% over last year, which includes the impacts of the quota share contract mentioned. I would remind you, however, that since our Specialty segment is impacted by a small number of large transactions, these estimates are subject to change.

For the quarter, underwriting income was $31 million versus $26 million last year. This year's results reflect a lower level of current year losses and a lower level of favorable loss development. Favorable claims development in the quarter amounted to $20 million driven by favorable claims emergence.

Our Individual Risk business unit produced gross written premiums of $315 million, a strong increase over the $238 million we reported for the second quarter last year. This increase is driven by $86 million increase in the premiums associated with the multi-peril crop insurance business resulting primarily from increasing commodity prices that you just heard Bill mention. This increase was partially offset by a decline in the commercial multi-line and commercial property business due to overall softening market conditions.

Looking at our gross premiums written forecast, for the six months we are approximately [1%] ahead of last year. However, with a challenging market and the seasonal nature of the Individual Risk business, we are maintaining our full-year forecast of down about 5% compared with last year.

Our current accident year loss ratio came in at 70% versus 65% last year. The higher loss ratio stems primarily from two things. First, the change in the mix of our business. The crop business generally carries a higher loss ratio. Second, the impact from several weather-related events during the quarter that have had an impact on the crop season, as Bill just mentioned.

Included in this quarter's underwriting results is $12 million of favorable loss of element as compared to $9 million last year. The business produced a combined ratio of 88% for the quarter, compared to 91% last year.

Turning to investment income, fixed income and equity markets remain choppy this quarter. With rates backing up during the period, our fixed income portfolio returns were impacted. The fixed income and short-term portfolio was roughly flat in terms of total returns and, as Neil mentioned, the results on our alternatives and investment portfolio were down.

Net investment income was $39 million as compared to $118 million for the same period last year. Both the fixed income and alternative portfolio had very strong results in the second quarter of last year, so on a year-on-year basis the returns are off meaningfully. Our realized and unrealized losses from our available-for-sale portfolio this quarter totaled $59 million as a result of the rising rates.

As you may recall, our policy is to realize our other than temporary impairments, that is we take the unrealized loss through net income. This quarter our impairments amounted to approximately $27 million. It was all interest rate driven and we have no impairments related credit. At June 30, we have no available-for-sale securities in an unrealized loss position.

Our other investments generated a loss of $18 million as compared to $42 million of income for the same period last year. Including other investments are our hedge funds and private equity investments, which generated $29 million loss compared to $35 million of income last period.

One other item worth mentioning is the breakdown of our agency exposure. At June 30, we were approximately $981 million of U.S. treasury and agency debt in our available-for-sale portfolio. Included in that portfolio is approximately $330 million of agency debt, primarily to Freddie Mac and Fannie Mae.

In terms of how we are positioning our portfolio in these turbulent times, we continue to seek opportunities to add risk modestly where we believe we are getting paid appropriately for the risk. You may have noticed that we increased our investments in our agency mortgage-backed securities slightly. Again, all highly-rated, investment grade securities.

Our duration is still relatively short at around 2.1 years and the majority of our portfolio is invested in highly-rated investment-grade securities. As such, we believe that the portfolio is well-positioned for the current market conditions.

Let me touch on the tax benefit that we have coming through this quarter. The benefit stems from losses taken from private equity investments by our U.S. operations. Lastly, during the quarter we purchased approximately 2.2 million common shares at an aggregate cost of $113 million. Since June 30, we repurchased an additional 1.6 million shares for approximately $75 million. Also since we began our program in the first quarter of 2007, we have repurchased approximately 11.6 million shares representing approximately 16% of our outstanding shares. Thanks, and with that, I will turn the call back over to Neil.

Thanks, Fred. I like to hear that we own more of the Company now than we used to. I'm happy to take questions, operator.

(OPERATOR INSTRUCTIONS) Vinay Misquith, Credit Suisse.

Good morning. On your Individual Risk business, you bought less reinsurance this quarter. Was it purely due to the business mix change?

Vinay, this is Neil. What we do when we purchase reinsurance in any segment of our business -- we don't run our business to operate it on a net basis. We just use reinsurance to make the portfolios more efficient, so that is going to fluctuate from time to time based upon the portfolios and the opportunities presented. Go ahead, Fred.

Vinay, this is Fred. The only other thing that I would add, if you are comparing it to same period last year, last year's results included the impact of the terminated program, which we were ceding 100% of. So you have to take that into consideration, to.

Sure, fair enough. On the reassurance side it seems that you purchased more reinsurance, if we exclude Starbound, would that be -- once again you found more opportunities to buy more retro this quarter?

Kind of reflecting what Neil had said, buying you are long or short-risk within the portfolio, it's typically just trying to optimize the amount of risk within it. I would say that what you are seeing in there, as far as the increase, is partially some of the things that we bought last year coming through as well. So as far as our desire to buy more, it's our desire to add ceded to the portfolio. It's the same as it has always been. What you are seeing is some of the effects of what we have previously purchased.

Sure, and just to clarify, I think on the call you mentioned that you are more exposed to the lower layer risk than the higher layer risk. Is that correct?

I was speaking specifically about Florida. The way the Florida market tends to trade is alongside the cat fund, above the cat fund, or below the cat fund. And what I was referring to is we have written a little bit more in the layers below the cat fund.

Fair enough. Last question is on the investment yields. Now, the investment yield on the fixed income portfolio it had declined significantly this quarter versus the last quarter. Should we use this as a run rate, at least for the near term, given that you have such a large portfolio of short-term securities? Or have you moved your fixed income portfolio to really take advantage of higher spreads in other areas?

Your question is you are asking about the total return on the fixed income portfolio. Is that correct?

Yes, not the alternatives, but the fixed income portfolio, yes. That's correct.

Yes, what you are seeing in the impact on the total return is just the reflect -- the result of the increase in the rates. It's a -- the duration of portfolio is very short. It's about two years. So you are going to see moves anytime there is movement in the rates. A significant movement in the rates, like we saw this quarter, is going to have an impact on our total yield, total return.

Thank you very much.

Brian Meredith, UBS.

Good morning. A couple questions here. First, Kevin, just to clarify, you are writing more below the FHCF. Is that excess business or is that quota share?

Below there it tends to be excess of loss business.

Okay, so it's not like you are going to get the attritional losses. Pure cat cover. Okay, that makes sense. Second one, could you walk through what is going through the other income line this quarter?

Sure, the biggest swing in the other income items this quarter is almost a $10 million swing in income generated from our weather derivatives trading group. Last year at this time it was about a $5 million loss. This we generated about a $5 million income.

Okay, then last question. Kevin, I wonder if you could give us a preview of what July 1 renewals look like.

Yes, actually, it wasn't that much different than what we saw, I think, in June 1. We -- one of the things we do is when they look at any deal, we have to pro forma what is likely to happen. So when we are scoring in the changes between June and July have less of an impact because we have already built in what our expectations are of the changes. So from the standpoint of the business that we have written, it didn't really have that big of an effect on our portfolio.

Okay. Lastly, Kevin, maybe you can give us a sense of what do you think has to occur here to get rates maybe stabilizing at one-one? Is there just so much capacity out there that we need a massive, massive storm? What do you think?

That tends to do it. That's one way, I guess. I think there is a lot of capacity in the market right now. So the thing that I would focus more on is -- there is always rating competition, but we have seen pretty good discipline in the market. One of the things we look at is to see how many deals are short placed or come back into the market for repricing. We have seen a fair amount of that, which demonstrates that the market is getting somewhat disciplined.

The other thing I would say is we are still trading in a universe that has a pretty healthy supply of attractively priced business. So even though rates are coming down, it's not a market that it is producing -- where a broad segment of the market is producing negative returns. It's still a pretty good universe producing good returns.

So as far as the need for it, it's not as strong as it has been another cycles. But I don't have specific answers to what could possibly -- a million things could turn the market around, but it could be a loss. It could be adverse development of people's casualty reserves -- any number of things.

Okay, thanks.

Alain Karaoglan, Banc of America.

Good morning. Kevin, just following up on your comment, in terms of the cat market could you give us an indication of either price decreases or if you have put the business into the various buckets of attractive low return or negative return? Or maybe how is your portfolio this year relative to last year in terms of quality? Because even though pricing are going down, it sounds like the environment is still providing you with very good opportunities. So maybe if you could expand on that.

Then the next -- this other question related to crop insurance exposure, could you talk to -- is there any pattern to the premiums written and to the losses? If there are any losses, how would they come about?

Going back to kind of the first questions on the cat market, the cat market right now is actually pretty -- from a regional perspective, the market is very different. Where if you look at Atlantic hurricane, there is very little business in the Atlantic hurricane market that is negative returns. There is some low return, but there's quite a bit of interactive returns. If you flip that into some areas in Asia, we are seeing large volumes of the business according to our modeling to be in the negative returning bucket. So it's very much a regional play.

The other thing I would mention is, going back to Atlantic hurricane again, if you go back several years before the models changed, there is a lot more dollar per dollar TIV for reinsurance than there used to be, because there is a lot more expected loss running in from the old model -- in the new model compared to what the old model had. So it's a little bit of a different comparison there as well, because there is, depending on your view as to the old model compared to the new model, there is more reinsurance dollars per dollar of TIV.

As far as specifically, I would say the market is still, for the bulk of the way we are building the portfolio and what recently renewed is Atlantic hurricane, the bulk of that, again, is in adequate or attractive returns or low return. There is a little migration between the two, but it wasn't all that significant. There was no migration from low to negative.

Bill, if you would like to address the crop question?

Sure, Alain, if I could just get a little clarification on your question. Is your question on the timing of both premium and losses, how those are recognized? Is that the question?

That's correct.

Well, there is two main seasons. Let's talk about premium first in the crop space, if you would. There is a winter crop season. There is a spring crop season. The winter crops, obviously, start planting in September for 2008, an example. Those premiums then are recognized as they become known throughout the end of '07 into the early part of 2008.

The spring crops, we have a premium estimate of what those premiums look like now. The spring crops' closing was just a month or so ago. So those premiums are recorded as they come become good estimates are known to us, so as you can see, it was pretty lumpy every quarter, this quarter and then a pretty big lump from a written premium standpoint.

The earnings of both of those are not your typical one-twelfth earning that you would see in the P&C business. They are earned throughout the crop cycle. As example, the spring crops are harvested starting in August, September, and October, so there is an earnings pattern that relates to the premium, how the crops come out of the ground.

In terms of losses, losses on the spring crops, which is what we are dealing with now, we certainly know where losses have occurred. We have some loss notices that have been reported. But here are some of the variables to think about on those losses. The farmers have a replant option. We don't know how those replant crops have worked out or what options they have actually selected. If it's a hail loss, for an example, some of the crops could recover and we don't know what that looks like.

Market prices are actually determined when the crops come out of the ground. As you have seen the last few weeks, market prices have actually come down from their heights. That is based on higher estimates now of what corn and bean yields are actually looking like versus what they were just a few weeks ago. Higher or lower market prices can work for or against you, depending on the options that the farmers select.

So very difficult to determine exactly what those losses look like until they harvest the crops and the market prices are actually known later in the year. So we have done our best estimate of what we think that looks like with the information that we have at hand today, as I mentioned on the call.

Thank you very much.

Bill Wilt, Morgan Stanley.

Good morning, thanks. Question on the catastrophe premiums just for the quarter, the Renaissance cat premiums were down about 15%. Da Vinci premiums flat. I know that you use your discretion and balance those two portfolios, but I guess the discrepancy was wider than -- I believe wider than it has typically been. Wide enough that it warranted question and perhaps some color.

Sure, we allocate lines based on the returns that the individual portfolio is achieving a marginal basis for each risk we are looking at. So with the -- what we are seeing this year is balancing out the DV portfolio little bit by putting a little bit more business in there than the normal mix between RenRe and da Vinci.

I think the important thing is we look at each portfolio independently, marginally, look at how much capital each deal is using within the specific portfolio, and then allocate based on the returns we are seeing. So although we have some basic benchmarks that we look at, we do optimize depending on the returns. So you will see some movement like that from time to time.

Okay, thanks for that. Second unrelated question, if I could. Bigger picture, what percentage of total company premiums would you be comfortable allowing crop premiums to ultimately represent?

I will start off with that, Bill. We are very comfortable with the level of premiums now and we would like to see it grow. We don't have -- we don't put a ceiling on it, but that is one of the interesting things to us about the opportunities here. We like where it is. We think it has the potential to grow and we are happy for it to grow some.

I guess the other comment I would make about it is that we believe the crop business, actually, to be a good returning business and one that is a long-term franchise for us. Actually, it's not that correlated to the rest of our business in either the casualty or in the cat space. So we actually don't look at this as is there a how much and full stop and what's the top end. It's really, as Kevin was alluding to on the rest of our portfolio, what does the returns look like and the marginal return of the portfolio. That is how we would determine what we would do in the future in terms of amount.

Thanks for that. From a follow-up on that point, from a political perspective, are there -- have changes to the crop program been -- do they occasionally come up in the political cycle? I guess philosophically is there a point at which the returns are too good? Of course there is a lot of -- there is on-again off-again questionings about the Bermuda tax issue and the relationship between Bermuda reinsurers and U.S. primary business? Philosophical or political concerns about doing too well on the crop business?

You know, the comment on the politics would feed just pure speculation. But as you are probably aware, the federal crop bill did get signed into law earlier this year and was within our expected range of what we thought the outcome of that bill would be. It's predominant the changes in that bill at this point are some reduction in A&O. We are very well positioned to deal with that. It was in the expectations when we acquired Agro.

These are very low-cost operators, so we are actually pleased with the changes now and how they came about. Frankly, I think that presents some marketing opportunities for us. What happens in the future, my only comment would be that the food program is very important to the U.S. economy. I will leave it at that and let the politician decide where to take it from there.

Bill, it's Neil. I am in charge of political prognostication, which makes it probably the most difficult job we have. It's very hard to ascertain, but speaking of the tax situation, we have found historically to be taught there. And then, at the end of the day, not to have action because it increased costs to consumers, et cetera. So it's hard to say what will happen on that standpoint. But we feel that if something does happen, we are very well positioned.

We have a reinsurance company here with 130 people in Bermuda. We like the Bermuda location. For the business that we have in the states, we do pay tax in the states and just have a reasonable quota share that is in place for capital reasons.

Thanks for that. Is the quota share -- does that apply to the crop business as well? Is it wrapped into the overall corporate quota share and reinsurance program onshore/offshore?

Sure, it works its way up.

Got it, thanks very much.

Jay Cohen, Merrill Lynch.

Yes, thank you. Most of my questions are answered. Kevin, just one for you. As you look at the renewals, are you still seeing ceding companies increasing their retention of risk or has that stabilized?

I assume you are talking about what just happened in Florida?

Yes.

It has been pretty stable actually this year. I wouldn't say that -- the trend that we saw in other renewals, it didn't really exist this year for what the Florida renewals were.

Great, thanks.

Josh Shankar, Citi.

Thank you. My question regards areas that don't get enough discussion, or at least not in the investment community, regards to both your exposure and pricing. Could you talk about the pricing and exposure for Long Island hurricanes and St. Louis earthquakes?

I would be happy to. Long Island hurricanes tend not to be purchased as a stand-alone peril? So when we think about the risks that we are taking on that, it's traditionally within broader programs. So it's a one risk within a larger group of risks that are being purchased.

We have -- I think there is -- there are certainly commercially available models that will give you an indication as to what the risk is there. We have our own internal models as far as what the potential for Northeast hurricane could be; Long Island being a large component of it. There is some complications as how Long Island is modeled as well as to what is inland and what is not, which I think adds to some of the expected loss.

But to get more specific than that, I don't want to move too far into it because it's not something that is specifically purchased in the market. Then you are talking more about New Madrid earthquake as well?

Yes.

New Madrid, I think that is a unique area where it's -- the potential for very large losses is certainly there. It's an area that we are actively managing. It's not an area that we look at as being remote therefore ignore. Again, as commercially available models. We have our own model that we use to gauge the risk in that, but it's a -- and it is a very real risk that we have monitored, as actively as we monitor Southeast hurricanes and California quakes.

How accurate do you think these models can be given the lack of data, of actual events coming through?

So there is a couple of things that I think the models are good for. It's a consistent platform to compare deal to deal so that, even if the models are wrong, you can pit the best deals against an objective framework. As far as whether the models are right or wrong, I think we believe internally, certainly, that all the models are wrong. That is why we model them. If we knew the answer, we would not need the models.

But we think we take very prudent measures. As Neal mentioned, we have Weather Predict to help us calibrate the models internally and use the best science available to come up with our view of the risks, not rely on someone else to do it for us.

In terms of -- what are the inputs to the data out here? I know, obviously, it's proprietary for you, but how do you go to build a model when you don't have a lot of inputs?

There are inputs to the model, some of which are historic events. But then there is also just the physics of the events. So you can think about it as looking at the historical record and building a model off that or taking the physics of the underlying either geography -- geology or the physics of what's going on in the atmosphere and try to build a model with that.

I think historically there has been a heavy reliance on the historical catalogue to build models. Moving forward, I think there is an increasing importance at looking at the physics for building models. One of the things Neal mentioned is with Weather Predict we are building that capability very strongly on the wind side. There is a lot more data of the geology available from the earthquake side.

Josh, one of the things to remember is that we are out on the tail of possible outcomes here. Most of our exposure in areas like this are on the reinsurance side, where it's excess of loss, so we can calculate our maximum loss. So we have got a little bit easier time of it than some of the large primary companies.

I appreciate the color. Thank you very much.

(OPERATOR INSTRUCTIONS) Chuck Hilton, FTN.

A couple of quick questions this morning, one for Kevin. Firstly, given the fact that we had a trembler in California, 5.4 earthquake, could you remind us once again what your one-in-250 year PML for California quake might be?

You are right, we did have a quake yesterday. I don't think it's a one-in-250. It's something that happens from time to time, but we -- to remind you of something would be indicating that we have told you it before. We don't think that thinking about the risk within a single point of the distribution is that helpful. We try to talk about the way we manage risk, which is across the distribution. So we are not looking at optimizing our risks to a one-in-250, we are looking at building a portfolio of risks throughout the distribution for each peril that overall rolls into an efficient portfolio for the cat book that we are writing.

Okay, let me follow up on that, Kevin. In terms of risk management and for the investors to be able to assess risk, company against company, do you have information you can provide us then that talks about the maximum exposure? Perhaps the zonal limits by peril, specifically to California quakes?

I think what we would go back to is, I think you are asking for a simple measure to quantify a very complex portfolio of construction. So what we try to do is reflect that our historic returns are a pretty good measure as to what we are likely to achieve or what our portfolios can achieve. But to go out and give the amount of information that would be required to have a comprehensive understanding as to how we are managing risk would be to compromise the advantage we cultivated in building the book that we have built.

Okay, we will go on from there. Fred, a question for you. In terms of the hedge fund performance this month -- this quarter, can you give us a little more color in terms of perhaps the different strategies and the breakdown in return on the various strategies incorporated within that hedge fund?

Sure, the hedge funds pretty much were flat this quarter. What you are seeing in the losses coming through are coming from our PE funds. We had one -- of the $29 million coming through there was one significant loss of $23 million related to one investment. So you know our strategy hasn't changed.

You go back a couple quarters, you go back to last year the results exceed our expectations to the good. This quarter the results were, quite honestly, less than we had hoped for exceeding our expectations to the bad. I think, overall, long-term we still feel pretty comfortable with our portfolio.

Returns over the long-term have been pretty good. We are going to stay, we feel -- we basically feel comfortable with our position and where we are going with it.

In terms of the $23 million hedge fund loss from the one investment, can you give us a little more information in terms of what -- how that arose or what type of investment that was made in?

Yes, it was a co-investment with a private equity fund. It was an investment that we had for a number of years. It was pretty small, it built up over time. The results were pretty good over time. It just went bad.

Have you taken that specific investment down to zero at this point or is there further room to fall, Fred?

It is down to zero.

Okay, great. Thank you very much for your answers. I appreciate it.

Gary Ransom, Fox-Pitt Kelton.

Yes, most of the questions have been answered, but one more on the reserved development. I was wondering if you could give us an idea of what accident years that was coming from and perhaps how that -- if that is different at all from what you saw in terms of reserve releases in the first quarter?

Gary, it's Fred. I could tell you that in the cat book we have most of the reserve development coming from the 2006/2000 accident years coming from some small cats that are coming in better than expected. You know, the Specialty line, where we employ the BF method, it's a formulaic approach and you have development coming from several years back beginning with '07 and going back as far as '03. So we are not seeing much difference years, development in different years than we saw last quarter.

Great, that's all I wanted. Thank you very much.

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

Thank you, operator. So in closing, I am just very pleased to say we have a terrific portfolio in force. We have got hurricane season and earthquake season upon us. We have got this great portfolio. If claims arise, we are standing able and willing to pay claims quickly, as we have in the past. So we will look forward to speaking with you next quarter.

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