濱特爾 (RNR) 2008 Q3 法說會逐字稿

Good morning. My name is May and I'll be your conference Operator today. At this time I'd like to welcome everyone to the RenaissanceRe Third 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 session. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Lilly, you may begin your conference.

Good morning. Thank you for joining our Third 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'll make sure to provide you with one. There will be an audio replay of the call available at 1:00 p.m. Eastern Time today through November 12 at 8:00 p.m. The replay can be accessed by dialing 800-642-1687 or 706- 645-9291. The passcode you will need for both numbers is 68124551. Today's call is also available through the investor section of www.RenRe.Com and will be archived on RenaissanceRe's website through midnight on January 7, 2009.

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 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'd now like to turn the call over to Neill.

Thank you, David, and good morning, everyone. While the third quarter was unusual in that we sustained losses in our investment portfolio at the same time that we had catastrophe losses, we model such scenarios so a quarter like this doesn't come as a surprise to us. We manage RenRe to be able to withstand a confluence of significant events and still be able to provide consistent reliable services to our clients and brokers. So, like it was in our first year of operation in 1993, and after the events of '01, '04, and '05, today it's business as usual for us at RenRe.

Our team of scientists and engineers were in the field immediately after Ike and Gustav made landfall, learning from these events to enable us to provide useful information to our customers and appropriately reward clients that are doing a great job underwriting catastrophe exposed business. With our strong balance sheet, strong ratings and history of being one of the fastest claims payers in the business, our customers and brokers rest assured we will pay our claims promptly and usually within 48 hours. Our longstanding relationships and position as a market leader give us access to the business we want to write. Our experience in risk management capabilities enable us to provide alternative solutions for our clients very quickly. And we've put out large lead lines that our brokers and clients can be confident will be supported by the rest of the marketplace. In addition to the capacity of RenaissanceRe, we also provide the substantial capacity of DaVinci Re and top layer Re.

Top Layer Re is for international reinsurance. As a result of the investment and catastrophe losses, coupled with our stock buybacks, tangible book value per share was down this quarter. We expect this to happen from time to time. We are willing to accept volatility over the short-term and manage the Company to increase tangible book value per share at an attractive rate over the long term. There have been dislocations on many fronts recently and out of dislocation comes opportunity. We are always monitoring new opportunities as they arise and we have made strong hires in Ventures, Reinsurance, and Individual Risk over the past year that will help us to be responsive to our customers' rapidly evolving requirements.

The current economic climate is likely to reapportion appetites for risk as a result of the volatility in companies' investment portfolios and the difficulties companies face if they wish to raise capital. As Fred will explain shortly, we are appropriately capitalized to take advantage of opportunities as they present themselves if they fit our business model.

RenaissanceRe has a track record of being there for customers at all times, but particularly at times such as these, consistently providing solutions when fear and uncertainty prevail and when capacity seems scarce. It's at times of crisis that the value of judicious risk management becomes most clearly apparent. The risk culture underpinning our entire organization has served us and our customers well providing consistency and stability in an extremely volatile world. We enter the January 1 renewal season with a solid balance sheet and a superior underwriting talent base, ready to build on our industry leadership position and leverage the expertise and innovation consistently exhibited by our organization.

So with that I'll turn the call over to Kevin. Kevin?

Thanks, Neill, good morning everyone. I'd like to start by spending a few minutes discussing the losses over the quarter and give color around these events. As you know, we had several hurricanes so far. This is hurricane season but I'll focus on Ike since it's the most interesting of the storms. Ike was a large and powerful storm but had several characteristics that affected the size and types of losses we were seeing.

It was a large flood event which is not particularly well modeled and made the early reports difficult to rely on as these claims are more complicated and need to be inspected to develop a robust estimate. The formation of an eye wall just before landfall helped concentrate the winds of the storm to the eastern side, so even though the storm was better structured, the path and concentration of the wind field kept the strongest winds east of the major commercial and residential concentrations. Ike caused significant losses in the Midwest which again was not well captured in the model.

All of the information we collect and learn about this event will help us calibrate our overall models. After the events of '04 and '05 we learned a lot about frequency, and I'm hopeful that with this event, we'll learn a lot about damageability and, by extension, the benefits of mitigation. I'm certain that whatever we learn we'll emerge with even better technology.

As far as the more forward-looking comments, I feel optimistic about the one-one renewals. We're having a lot of broker and customer meetings and it's interesting to note that the discussions are much more about the availability of capacity rather than the price of capacity. I think the mind set is a function of the general macroeconomic environment rather than a specific response to cat losses. I'd like to think of it in terms of behavioral finance. If you ask someone the question, "Do you want more or less risk right now?" most people will respond they want less risk. There's more than one way to achieve less risk but I'm hopeful that, at the end of the day, it will come down to our customers buying more, and, if we're lucky, our competitors writing less.

But even with the same supply, I think that more demand alone should be enough for us to find a new equilibrium price for risk. Additionally, I think that with all that's going on in the world there's growing recognition that the cost of capital is rising. We will need to be careful to manage lines as it's more difficult to scale up capital due to the overall financial market conditions. So with both the real cost and the opportunity cost of capital higher, I expect that these increased costs will need to play through the system and be reflected in the year-end terms.

So if you break it down there's a whole bunch of issues affecting the insurance and reinsurance business. It's been a high frequency of small cats, largely retained by insurance companies. There's been one large hurricane, an increase in frequency of large risk losses, increased risk to several lines from the realization or threat of recession, asset writedowns, investment losses, and limited access to the capital markets. So if you're at a company with great risk management and strong balance sheet like RenaissanceRe, it's really an exciting time to be an underwriter.

So with that I'd like to turn the call over to Bill Ashley.

Thank you, Kevin and good morning. Despite more than a fair share of challenges this quarter, there are a number of reasons to feel optimistic in Individual Risk segment. We are already experiencing the economical and other advantages of owning our agricultural platform versus the prior MGA Company relationship. We are also beginning to see some signs of capacity leaving the market for commercial property business. It is early days; however it is becoming clearer that our customers will be paying closer attention to financial security and stability when deciding how much capacity to place with a carrier. We are optimistic this will lead to further price strengthening and opportunities.

Although we experienced hurricane losses this quarter, predominantly from Hurricane Ike, with some losses coming from the other three US landfall events, the overall impact to our combined ratio for multiple catastrophe events has improved over prior years. The change in the mix of business of our portfolio which has less exposure to natural catastrophes has helped reduce the volatility in our results. Hurricane Ike impacted our commercial business in Texas as more of a flood event than a wind event. Many commercial risk purchase flood coverage either standalone or excess of the national flood insurance program. Due to the hit or miss nature of flood losses, we found it necessary to go beyond modeling in individual case reserving and do a detailed estimate at the location level to arrive at our loss estimates.

The 2008 multi-peril crop year has proven to be challenging for the industry. There have been many severe weather events during the year such as flood, hail, and drought, plus a significant decline in commodity prices for corn and soybeans this October. In spite of this, we believe our agricultural business to be profitable and at our expected levels.

In general, insurance contracts for soybeans and corn get set in February. As the close of the markets last evening, corn prices were down by approximately 28%, bean prices were down 34%. Corn yields are estimated to be up, which will mitigate some of the potential losses from the market price decline. Bean yields are estimated to be down which will increase insurance losses.

It is highly unusual to have inverse correlation of lower yields yet lower market prices. Given the average of October prices will be used for final loss settlement for beans and a portion of the corn products, and given all crops are not yet harvested, there is still some uncertainty in our loss ratio estimates for multi-peril crop this quarter.

Market conditions have certainly been unsettled, to say the least, but the strategic hires for the last several months, our acquisition of agricultural and claims operations, our ongoing investments in system development, and the continued application of our strategy and risk management approach position us well for future opportunities.

I'll now turn the call over to Fred Donner.

Thanks, Bill, and good morning, everyone. Our operating results this quarter are obviously driven by the net negative impact of $276 million from hurricanes Ike and Gustav, as well as the impact of the turmoil in our financial markets on our investment results. In light of our results, there are five topics that I will cover in my remarks with you today. I'll cover the impact of the hurricanes, I'll give you some insight into the positioning of our investment portfolio, I'll have a brief overview of our business results, discuss our capital position and strength of our balance sheet, and end with our preliminary top line forecast for 2009.

Let's begin with the hurricanes. These events impacted both of our business segments. The impact to our Reinsurance unit underwriting results was $380 million, adding 166 points to the combined ratio. This is before taking into account the impact of minority interest, which reduces the bottom line effect by $144 million. The impact on our Individual Risk segment was $40 million, adding 30 points to the combined ratio. I caution you that it's still early days assessing these events. We applied our usual prudent reserving philosophy in estimating these losses but as with any estimate they will evolve. These estimates and other event related estimates will likely change over time, perhaps materially.

Moving on to investments. Our investment portfolio generated net investment income of $16 million, an $80 million decline from the same period last year driven primarily by declines in returns in our alternative investment portfolio. Included in net investment income is a $30 million loss related primarily to investments in senior secured bank loan funds and non-US high yield funds, and a $15 million loss related to our hedge fund and private equity portfolios. These losses are predominantly mark-to-market losses that we've run through net investment income. The metric that matters most to us is total return on our investment portfolio. Our total return was a negative 1.5% this quarter, which reflects the significant mark-to-market adjustments in our fixed income portfolio totaling $120 million.

I'd like to remind you that our current process is to impair fixed income securities that have an unrealized loss, and as such we are not carrying any securities on our balance sheet in an unrealized loss position at September 30th. One other point worth noting is our credit related exposures, which we previously announced in our press release on October 1. Included in the mark-to-market adjustment is approximately $7 million related primarily to Lehman Brothers debt. We did not have any other specific credit related impairments this quarter. Our other temporary impairments is primarily a result of increase in yields driven by the widening of spreads.

Given the ongoing financial market turmoil, we enhanced our disclosures around our investment portfolio. We have provided you with a lot of detail in our press release, but as I see it, the takeaways are as follows: One, we have a portfolio that has been constructed to provide us with ample liquidity to meet the demands of our business where we need to stand ready to pay claims quickly after an event. The duration of our portfolio is just over two years. Second, our fixed maturity portfolio has an average yield to maturity today of around 5.6%, with over 90% of the portfolio rated A A or higher. Third, a securitized asset portfolio is comprised of high quality AAA rated securities.

We've also provided a break down of our corporate fixed maturity portfolio by industry, and have provided you with the names of our largest 10 holdings across our fixed maturity and short-term investments. And lastly, as it relates to investments, a portion of our investments are in alternatives. This asset class has produced good returns in the past and we evaluate them over the long term. As we've discussed in the past, we did not view the highly attractive returns on this portfolio that we experienced last year at this time as representative of the expected long term performance. Over time, we do expect this portfolio to perform well but at this point, we do expect some continued volatility in the near term as we have seen this quarter.

Next I'd like to comment on the results of our business segments. Let me begin with the premium trends. And here I would focus you on the nine month data which gives you a good indication of what to expect for the full year. Managed cat on a normalized basis is coming in with about a 7% decline versus last year, and to derive normalized premiums I'm backing out $49 million of premiums from reinstatements from this year. Specialty is running at about 48% decline from last year, and our Individual Risk premiums are up about 3% over last year.

Let me move on to underwriting margins and here I'm going to discuss the quarter rather than the nine months. Within the Reinsurance segment, our cat unit combined ratio came in at 15% excluding the hurricanes, which is lower than last year's 29% representing a lower level of smaller cats this year versus last year and more favorable development. Favorable loss development this quarter amounted to $30 million primarily from accident years 2006 and 2007. Our expense ratio was up slightly due primarily to a reduction in profit commissions on reinsurance seated and a slightly higher run rate of underlying expenses.

Our specialty unit generated a combined ratio of 72% as compared to 112% last year. Last year we had a large number of relatively small losses that increased our current accident year losses. Expense ratio was up a little as we have a relatively stable expense base against a declining earned premium balance. On a year-to-date basis you can see that our combined ratio is running about 59%, almost four points better than last year.

Our Individual Risk combined ratio is at about 110%, and if you exclude the impact of the hurricanes it was about 80%. Expense ratio was down from 34% to 23%, which reflects the impact of the change in the mix of business this year driven primarily by the increase in a multi-peril crop business. The crop business carries a lower net acquisition expense ratio than the other lines of business but also carries a slightly higher expected loss ratio.

For Individual Risk, however, I think it's best served looking at the results on a year-to-date basis. There you'll notice our combined ratio is running about 97 points, a little higher than where we would like given that we target this business to generate a combined ratio in the low 90's. Excluding the hurricanes, however, the combined ratio is about 86% which is a couple points better than last year.

Moving on to our capital position. For the past 18 months, we were returning capital to our shareholders through share repurchases. During the third quarter, we acquired $76 million of stock, bringing the year-to-date total to $428 million. And since March of 2007, we returned just over $628 million to our shareholders. We suspended share repurchases in the early part of the third quarter because of the changing market conditions. While our stock is trading at prices we find attractive to acquire, we believe there are far more opportunities to deploy our capital today in the market.

We remain in a strong capital position. We are looking at our current risk portfolio and our internal risk test. we are comfortable with our capital relative to risk. We have ample capital resources at our holding company and our operating subsidiaries are well capitalized. RenRe Ltd. has $1.6 billion in capital, DaVinciRe has just over 1.1 billion, and Top Layer Re has $4 billion of capital resources available to serve our clients. We are appropriately capitalized to take advantage of the future opportunities.

Our book value per share declined this quarter by 10% to $38.94. On a year-to-date basis it has declined by approximately 5%. Several things have impacted our book value year-to-date but the most significant is, since the beginning of the year, we've repurchased approximately 12% of our outstanding common stock which contributed substantially to all of the decline in our book value per share.

Looking forward into 2009, there are a lot of potential opportunities, and with the expected increase in demand that we currently anticipate, as Kevin and Bill described, I thought it would be helpful if we provide you with a preliminary view through our 2009 top line forecast. Overall, we expect gross written premiums to be up around 7% , but as always it helps to look at the parts. For managed cat, we're estimating our top line to be up 10% on a normalized basis. That is excluding the reinstatement premiums from this quarter. Specialty is also expected to be up around 20%. And for Individual Risk, right now we expect to be flat. Crop makes up a large portion of our Individual Risk book, and swings in commodity prices can have a dramatic effect on our top line. We have been somewhat conservative in our forecast for our crop book for 2009.

There are a lot of moving parts throughout the 2009 top line forecast but since we just completed an early round about budget, I wanted to give you some insight with what we were currently thinking.

And at this point I'll turn the call back over to

Thank you, Fred. I believe we gave you all some valuable information there, and we're happy to answer additional questions.

Operator, we're ready for questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Tom Cholnoky with Goldman Sachs.

Can you hear me?

We can now, Tom.

Oh, sorry. The financial markets obviously took a toll on your investment income in terms of your alternative investments. Can you remind us of how you book those losses and if you have any insight into how the fourth quarter is looking, at least through October here, and should we expect similar pressures on investment income? And then I'll follow-up with another question.

Sure. Tom it's Fred. Let me discuss how we book our results in our alternative portfolio. Hedge funds, if you look back to prior year, we were on a one month lag. Earlier this year, we changed the process and we are now reporting on a current basis. So what you see coming through in our hedge funds is the current results.

On our private equity funds, generally we are in a quarter lag. Due to the turmoil in the market this quarter we reached out and obtained current information where we could. I'd say we captured about half of the portfolio, and as a result, we brought that portion of the portfolio current and realized some additional negative returns for the quarter.

So going forward, there's still a portion of the private equity portfolio that we haven't been able to capture in the third quarter results, and I would presume that those results for those funds are going to be negative like the rest of the book, but I really don't know for sure. So that's how we address our alternative portfolio.

So just to clarify, September hedge fund results are obviously then included in third quarter?

That is correct.

And then, if I could, Kevin, just two questions on the cats. I'm just curious, you've seen some of the various services continue to raise their estimates of what Ike is going to cost the industry, and I'm just wondering if you had any views on that. And then, secondly, in terms of what the buyers are talking to you about, can you differentiate between discussions based on buying down retentions versus simply buying more limits, and where do you see those trends moving towards?

Okay. I saw there was a revision yesterday on the size of the loss. If you were to take a look at it, I think it's probably $10 billion to $12 billion in taxes, $3-ish billion outside of Texas. So for the onshore piece you're looking at $13 billion to $15 billion. And then offshore, we're not the best -- we don't have an offshore book so we're probably not the best to estimate that but the numbers I'm hearing are 2.5 to 4 for the offshore piece.

Okay, great. Thank you. And then on the buyers?

Yes. As far as it's a little bit -- it's not that specific at this point yet. We've seen some people coming out looking to top up their programs but I don't have a sense as to whether there will be increased low purchases as well. We're looking at it even if there was an increase, the preponderance of the limit that will go out will be at the high end of the programs just because of the way the layers will be structured, so I think there will probably be some of both. The only real information I have is more at the top end. But even if they do come in buying more limit at the bottom, the limit spread will still be more towards the top than the bottom, if that's helpful.

That's helpful, thank you.

Your next question comes from the line of Vinay Misquith with Credit Suisse.

Could you contrast the opportunity now versus in 2006 of the hurricanes?

Why don't I start off with that, Vinay. I think we're expecting a little bit more broad dislocation than in 2006, so I think we'll see opportunities in the property cat area but we also envision opportunities in specialty reinsurance and Individual Risk this go around, so it will be a little bit more broad based than '06. Kevin, would you or Bill like to?

Sure, I 100% agree. I think what happened in 06 was really people adjusted their view of hurricane frequency and that flowed through the US wind market but didn't really affect much outside the US wind market. With such a confluence of events out there and people's reluctance to accept additional risk, I think -- I'm hopeful, I should say -- that there will be a broader array of price increases than just what we saw in 2006.

How much has the property casualty insurance pricing fallen since the peak of '06 to now, and how much do you expect it to go up?

We think about it a little bit differently, where we look at the business as to what is the size of the pool that we want to play in which is the acceptable buckets, back to the way we've traditionally talked about it. I think the size of that bucket has gotten smaller over the two years. I don't have an exact number on it. There's been not much migration between the adequate return to the lower turn, or to the negative return, I should say. But I think we'll see a bigger pool of both by business moving up its returns and also by new business coming into the market so that the pool that we're fishing in will become larger. But as far as estimating it I don't have a specific number for you.

Fair enough. And in terms of side car activity do you think there will be any demand from hedge funds on side cars at all this year?

Vinay, that's an interesting question. I'll remind the folks on the call that we were one of the few operations that have a unit specifically set up to handle those types of transactions, and we've done those before, and in fact DaVinci was one of the first early joint ventures in our industry. So we have continual conversations. There is a possibility of side cars or joint ventures. The structure will be a little different because the ability to obtain debt in the structure is virtually non-existent, but there is a possibility and we continue to look in that area very closely.

That's great. And finally, if I may, on the crop insurance side, help me understand the comments. So there's a fair amount of volatility with where the pricing and the losses might end up being. Have you already reserved that to those levels or should we see an increase in the loss ratios with the individual risk business related to crop insurance in the fourth quarter?

Sure. We've done our best to do our best estimate of where we think things ultimately will come in. As I mentioned, a majority of the crops actually are set between a differential of a price that was established in February and then the average of prices set in October. However there is some portion that gets set with an average of commodity prices in November and it's anyone's best guess of what those prices look like in November. But we feel we've been very prudent in how we've established our reserves, based on those uncertainties.

All right that's great. Thank you.

Your next question comes from the line of Brian Meredith with UBS.

Yeah, thanks. A couple questions this morning. First one, I'm assuming that with the guidance that you provided some premiums that your capital position today is adequate to absorb that type of growth. And I guess, secondarily, how much additional growth do you think you could put on over and above that given your current capital position?

Yes, Brian, I think let me take the first part of that question. As I explained, we're feeling pretty comfortable with our current capital position. To give you guys a sense for what our capital is by our operating entities, we also have a fair amount of capital resources available to us at our holding company to deploy down to our operating subs should we need more capital there, as well as we still have some availability, or we still have $350 million of availability under our line of credit facility. So we feel very comfortable that we have the capital to support the growth looking out into 2009, as well as beyond.

Brian, yes, and also, we feel like in times of dislocation, people come to us, so we envision additional opportunities to leverage our core skills here. And also, we have reinsurance as an additional ability, additional access to capital where we have people that have reinsured us over the years, so and our joint ventures, and additional possibilities for other joint ventures.

Between the sources and the various balance sheets that we have available to us and there's a lot of flexibility.

Right. Just on that, on the topic, the people that have reinsured you in the past, I imagine their balance sheets are strained right now, as well. And the question is, going forward is, one, what do you think their appetite is going to be going forward to continue to participate given that their balance sheets are probably also strained. And then, two, with respect to DaVinci, the investors in DaVinci, do you anticipate there may be some fall out there just because of, like I said, some capital strains at the investors?

So two points. First of all, on the folks that reinsure us, I'm not aware of any people that have constraints. They look at it as a diversifying source of opportunity for them, so I don't envision any big turnover there, and maybe additional opportunities. And there's always an ebb and a flow. The way we handle DaVinci is people get in at book value and exit at book value so there will probably be some transition.

Okay, and I had one other. With respect to your alternative investment portfolio, do you have any other additional commitments to that portfolio?

Yes, we do. That's going to be disclosed in our 10-Q. I don't know the number off the top of my head. I think it's approximately about $175 million, but it's a little less than $200 million. And as you can imagine, that goes out over some period of time but we do have future funding commitments.

Okay. And then last question, in your other income line, what, if any, was the losses from your cat fund activity. And also just expanding on that, can you tell me what your thoughts are about the cat bond market going forward given some of the issues we had with a couple cat bonds?

Yes. There's not much activity coming through the other income line related to the cat bond activity. There's some other things coming through there. The biggest thing coming through there is, we had a large number, a large contract last year that was accounted for at fair value, a large reinsurance seated contract, so that's the biggest thing coming through there, but there's not much coming through in the way from our cat bonds.

As far as the market, I think it's, certainly the issuances will be down this year. So we're all aware of some of the credit exposure that was embedded into these structures that perhaps was not fully baked into the pricing, so I don't have a crystal ball as to how this will work out. I think there's less of a threat from it in the near term. Over the long term, I don't have a view as to whether it will rebound but right now I don't see it as something that is keeping me up at night.

Great. Thanks.

Your next question comes from the line of Alain Karaoglan with Banc of America Securities.

Hi. This is actually Rohan Pai on behalf of Alain Karaoglan. Neill, one of your competitors cited increase rating agency scrutiny for companies exposed to the cat fund in Florida potentially resulting in increased demand for reinsurance. Is that something you're seeing and if so, what is RenRe's appetite for additional Florida business?

Rohan, that's a good question. I'll just mention that briefly and turn it over to Kevin here. Yes, there will be additional opportunities we feel like in Florida, and there will be an ebb and a flow in the cat fund. Kevin?

Yes, I think there's a lot of things being discussed as to what can change in the cat fund but there's a lot of time between now and six months. The stuff that's renewing at 1/1, what happens is a little bit less relevant just because it's a bigger commercial book and more of a national book so the six-month stuff will be the stuff that's most heavily affected by what changes there. So I think we have time to respond to whatever ultimately changes.

As far as our willingness to accept more hurricane risk, I think it's not a surprise that for most property cat writers , US Atlantic hurricane is a peak exposure, it's a peak exposure for us, but we certainly have more capacity to write that peril. Part of it will be a function as to where the FHCF, if it does change, where the new limit becomes available and secondly,

And Kevin, as a follow-up, does the current capital constrained environment factor into your models? So is there any potential that it may lead to reduction in exposures in certain peak zones for you guys?

I think it's something that, we look at every deal on a marginal basis, so we're looking at it against the overall portfolio of risk that we have so that we can measure the amount of additional capital a new line takes. Secondly, we pro forma our book to reflect what we think will happen, so we're scoring against no our in-force portfolio necessarily but what we think we're likely to have when we settle our book down. So we are actively looking at it and we do, we're cognizant of the difficulties potentially accessing the capital markets but it's not something, it's just not a change in our process. It's just another variable that we're putting in and perhaps waiting a little bit differently in how we're looking at the risk this year.

Okay, great. Finally, on the specialty reinsurance guidance for the 20% growth, are you able to give any additional color on to what classes you may be seeing the opportunities in?

There's a lot of things that I think we're going to see opportunities in. The one thing to remind you of is that book is pretty lumpy, so one or two large deals can affect the outcome pretty substantially. I think with the, the way we think about it is we have a grid which outlines things that are more or less likely to dislocate. So if you take an example, we're not a big DNO writer but with all of the things going on in the world, would you expect that DNO is more or less likely to dislocate? We would expect it to be more likely to dislocate and that's the way we think about the world. So when we're coming up with our budget we're looking at where we think the opportunities are and then we'll respond with our resources depending on those areas that we think have the highest probability of dislocation.

Great. Thanks for the answers.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Terry Shu with Pioneer Investments.

There were lots of questions on the pricing of environment. I dialed in a little late and I'm sure you commented on it. You now have most of the reinsurance or many of the reinsurers commenting on the prediction of a turn in the cycle. So is it already upon us? Do you see it? Is it because of the submission activity or is it just a prediction based on the conditions of the market and what we've seen in the financial market? Is it more of a reinsurance kind of phenomenon because you don't seem to hear the same confidence from the primary writers. And when you have given the guidance on your top line growth and commented on where you see dislocation, so is it again very much looking at the conditions and making a prediction?

Let me respond specifically on the reinsurance and I'll turn it over to Bill to respond on the insurance side. On the reinsurance side there's not a lot of actual price discovery in the market right now where most of our discussions are about what's going to happen at 1/1. There's been a few ILWs done that has given some insight and we've seen those as reasonably attractive from a selling perspective, so there is the one tangible piece of evidence. But most of it comes around from what we're hearing from our customers' desires for their renewal structure and some of the angst brokers are sensing about the amount of capacity that's going to be available to meet the increased demand. So it's a big prediction at this point but it's not unqualified and solely based on what's going on in the financial markets. And Bill, do you want to talk about insurance?

Sure. I think, as I commented before earlier when Kevin talked about it before, it's not any one single event that we see driving this market. It's a multitude of events that are coming together. I don't know if you could label this a perfect storm over time but that's how it appears from this end. And typical of the hardening market like this, you would see the reinsurance market react first, and see the primary market react many months later, which is our thoughts here, as well.

But in terms of what we're seeing already, as to my opening comments, no question that the lack of some of the capacity that used to be in the market, and without naming names of carriers involved that are either having their lines reduced by customers or themselves reducing their line sizes that are out, is causing a little bit of flurry in the market, is causing a change in submission activity there. And over time, I do believe that the consumers that ultimately buy the insurance are going to be more cautious about how much they place within any one single carrier that comes across. The size of the capacity coming on the market, in my view, without question, is going to cause firming in the market, it's just a question of time and how much and how long it's going to take to get there.

You may have already commented on AIG. In terms of AIG's impact on the market, you hear on the one hand that they are very aggressive on the primary side, I would assume, to try on the primary side to keep the business and lowering rates and putting even more pressure on rates. On the other hand, they must be having a meaningful impact on the reinsurance market being that they are not using or exerting their power or market power anymore to push down rates. So maybe you can elaborate a bit more of how AIG, what's happened to AIG fits into the equation?

Sure, Terry. A couple things. We typically don't comment on individual relationships. AIG is so big a topic right now that we'll give you a little color. We don't have a huge book with AIG. It's not a particularly meaningful part of our overall reinsurance assumed portfolio. There's lots of moving parts on the insurance side and I'll turn it over to Bill to address that.

Sure, and I want to be very respectful to AIG, so I'm going to caution my comments in that direction. I mean, without a doubt, a carrier that's going through what they're going through would do their best to retain both employees and business frankly. And we certainly understand that. However, what we're seeing is, the ultimate decider is not necessarily around price, or not necessarily within AIG's control. The ultimate decider is the consumer that's looking at this going, "Gees, given the turmoil in the market, given the financial issues involved, given credit quality and worthiness, how much risk am I willing to place in any one single position?". And that's not just with AIG, that's really across-the-board, I'd say, in the marketplace. So, we are seeing that. We are seeing aggressiveness on one hand, retained business, and yet we are seeing that either through the agent, the wholesalers, for the ultimate buyers of the insurance side making a decision that's actually different than what you'd expect the original outcome when it was first sought or quoted in the marketplace.

Thank you, and then finally, one last question on crop insurance, and I may have missed it. If you've already commented, I apologize. The impact of commodity prices, you say that it's an important input. What kinds of risks do you undertake relative to commodity prices if at all?

Sure. In brief, the insurance products that are constructed around multi-peri crop business are both a factor of yield, and many of the products are a factor of a combination of yield and price. So there's a locked in price in the contracts in February for, call it a strike price, if you would, better way to think about it, for the commodity prices.

So an example would be one of the products, when the crops are actually harvested in the fall, the commodity prices drop significantly from what that price was set in the contracts in February, then that loss is actually covered by the insurance profit. However if some of the products, if the yields are actually higher in the fall, that's a mitigating factor and it can be depending on the stress crop that's written. So certainly, natural perils are a factor in the crops which actually drive some of the commodity prices up or down. But as mentioned in my opening comments, in the case of soybeans, yields are actually expected to be down somewhere, I've been reading, as much as 20%, and yet commodity prices are going down at the same time which is counterintuitive or inverse of what you would expect. So built into these products that we do, multi-peril crop, inherent is just a fluctuation risk of commodity prices throughout the period.

Okay, thank you.

Our final question comes from the line of Ian Gutterman of Adage Capital.

Just a couple clarifications. First just to follow-up on that crop question. I understand on the beans with yields being down why the revenue comes into play ,but my understanding is on most revenue coverage, I thought it's not eligible unless there's a decline in yield, so if corn, just to pick some random numbers, if corn yields are up 10 but price is down 30 the fact that yield is up means you're not exposed to the price decline. Is that correct? Or your contract is not written that way?

Our contracts are the same as everybody's, for opening comments there, because they're actually approved and written, if you would, by the federal government, or by us I guess, ceded to the federal government. So our policy forms, if you would, in multi-peril crops are going to be the same as everybody's. There are many different insurance products that are offered and it really depends on what's chosen, if you would, by the insured, how that impact happens. But one of the products, which is a revenue product, if you think of it, is actually, think of it as bushels times price. And so bushels go up and price remains constant, that's good. Bushels go up, price goes down mitigates until you have a total economic loss, the factor of the two. But each one actually reacts differently to that.

Okay, so you do offer some products it sounds like where you can be on the hook if just if pricing goes down even if yield goes up?

That's right. And to be clear, there's actually one product on the market called GRP, a GRIP product, that is a county level loss type of trigger, if you would. It's only about 2% of our portfolio but our estimates are that the industry could be experiencing a loss across that product for corn even though yields are up, and that is the predominant product written in some of the Midwestern states.

Okay and then another clarification for Fred. On the impairment policy, can you just review that? I was a little confused. You said basically anything that has unrealized loss gets permanently impaired?

That is correct. Our policy, in order to carry a security on your balance sheet that's in an unrealized loss position, and carry the unrealized loss in your equity section, you have to assert that you're going to be able to hold that security to maturity, that you have the intent and the ability. We manage our portfolio for a total return. We have outside program managers that are making investment decisions along with us, so we can sit here today and assert that we're going to hold all out securities to maturity. As such, we impair any security, or any fixed maturity security, that's in an unrealized loss position.

Of anything? So even if it's down 2%?

Yes. We don't give any regard to the amount or the time it's been impaired.

Okay and the fact that you impair it means obviously you can't write that up as the price goes back so then you might have something where a bond's down 2% in the quarter and it's up 10% the next quarter and it's at 1.08, and you have it permanently impaired then?

That's correct.

Does that mean then the investment income or, I'm sorry, that that discount then gets a accreted to investment income over time?

Yes.

And how much, I'm assuming then that you've had this policy in place for awhile, that you have some of your investment income currently that benefits from this? From a GAAP standpoint?

Yes. I mean, by definition, it would have to. But the other thing you got to take a look at is our turnover is pretty high. I mean, if you look at our cash flow statement today, you could see that we've turned over the portfolio about three times so far this year, so it's an actively traded portfolio.

Okay, that makes sense. That's what I was missing. Okay, thank you. Appreciate it.

We have reached our allotted amount of time for questions and answers. I will now turn the call over to Mr. Neill Currie for closing remarks.

Thank you, Operator, and thank you all for joining us today. You know, many of us plan to go trick or treating with our kids or grandkids this halloween. I know I am, and this phrase "trick or treat" reminds me a little bit about what we've got ahead of us over the coming months. There will be tricks, or threats, and there will be treats, or opportunities, out there, and I feel at RenRe we are well positioned to manage both the threats and the opportunities ahead. So, thanks for joining us and look forward to speaking with you next quarter.

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