濱特爾 (RNR) 2009 Q3 法說會逐字稿

Good morning. My name is Stephanie and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe third-quarter 2009 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). I would now like to turn the conference over to David Lilly. Please go ahead, sir.

Good morning. Thank you for joining our third-quarter 2009 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 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 November 11 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 34024353. Today's call is also available through the investor section at www.renre.com and will be archived on RenaissanceRe's website through midnight on December 23, 2009.

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; Jeff Kelly, Chief Financial Officer; Kevin O'Donnell, President of Renaissance Reinsurance Limited; and Bill Ashley, President and Chief Executive Officer of RenRe Insurance. I would now like to turn the call over to Neill. Neill?

Thank you, David. Good morning, everyone and thank you for joining us. Our results were strong for the third quarter with low catastrophe activity in the Atlantic basin and a rebound in investment values generating solid profitability. We achieved an annualized operating return on equity of 33% and book value grew by 11%. Obviously, while luck played a role in our results this quarter, we have built the Company and our book of business to enable such result when things go well. Of course, occasionally, we are not so fortunate as in 2005, but if you look back at our results since we were formed in 1993, we feel the willingness to accept volatility has been appropriately rewarded and we feel our existing portfolio is constructed to yield appropriate reward for the risk we are now taking.

Our results were driven by a combination of factors. First, we experienced strong profitability and favorable reserve development in our reinsurance segment. Kevin is here and will provide more color later this morning.

Second, further tightening in credit spreads for fixed maturity securities and further improvement in the valuations of our alternative investments also boosted our results. Our ventures unit continues to contribute meaningfully to our overall results. Investors in our existing joint ventures saw excellent returns for yet another quarter.

Our increased stake in DaVinci earlier this year also paid off due to the strong performance of that joint venture. Over the last two years, we have been building out our specialty reinsurance unit and we are seeing many opportunities, but we have not yet written very many deals since the marketplace remains competitive overall.

We continue to invest in and grow our commercial property and agricultural insurance units, which are part of the individual risk segment. Our individual risk platform provides us with a number of distribution channels for our product, as well as the flexibility to allocate and shift capital from the reinsurance market to the insurance market and vice versa based on market conditions.

Our agricultural insurance unit, which constitutes the largest business in the individual risk segment, experienced hail losses in counties where we have a concentration of exposures. So the combined ratio for that segment has been tracking above the level that we would like. Bill is here to provide additional details.

Our Lloyd's syndicate has been up and running since June 1. I am pleased with our progress as we are building the foundation for what we expect to be an important contributor to earnings over the coming years.

In summary then, another good quarter. We remain focused on running the business for the long term. We continue to prioritize disciplined risk selection, superior client service and prudent capital management, as well as constantly refining our analytics. These have been the hallmarks of our approach since our inception. So I'll turn the call over now to Kevin.

Thank you, Neill and good morning, everyone. I will start with an update of our cat business and then I will talk a little bit about specialty. First, we met our objective with the cat book this year. We achieved good growth in premium and maintained discipline in our management of the risk return profile that we were seeking.

We have many levers to use in the management of our cat business. For example, as Neill mentioned earlier, we increased our capital in DaVinci, we executed on Tim Re II with the help of our ventures group and increased our external retrocession purchases. We manage this business by maximizing the flexibility we have been in shaping the distribution of net risk retained by our group to optimize our risk level and our return on allocated capital.

Our cat portfolio management will serve us well going into 2010. Although there is uncertainty about the pricing levels for the upcoming renewal, it is important to note that from an historical perspective, the expected returns for the business remain strong.

During 2009, we saw reinsurers and cedents reassessing the amount of risk they were willing to retain, which pushed prices higher and increased demand for cat reinsurance. Some of the drivers affecting our market last year have retracted and I believe there is less fear in the market. Although it is still early to determine price trends for January, I expect the improved economic conditions, together with the absence of major events so far, are likely to moderately increase the supply of capital and people's appetite for risk in 2010.

Having said that, the cost of capital remains greater now than it was prior to late 2007 and reinsurance continues to compare favorably against other capital alternatives in terms of consistency of offer and price.

Aside from the macro issues facing us at renewal, we are in the process of recalibrating our models following the release of the new vendor earthquake model. Neill mentioned our commitment to constantly updating and improving our analytical tools and whenever new models are released, we deconstruct the changes and adopt the features we think are best.

Our ability to develop our own view of risk and adopting the best features of each model is an important differentiator for us. As with any change, it brings along increased uncertainty as we do not have specific information about how these models will be adopted by the market. We expect that most will reduce earthquake curves by some degree, but the effect on pricing is uncertain. We are committed to looking at all the information and sharing the most risk-relevant facts with our partners and customers and reflecting the best available science in our pricing.

With regard to specialty, our premium is lower than it was last year, but the book carries more expected profit. Strategically, our specialty focus is not dissimilar to our property strategy in that we are targeting low-frequency, high severity business as this risk profile best fits our current portfolio. I want to reiterate Neill's comments that we are taking a disciplined and methodical approach focusing on long-term profitability of our business. We are seeing a healthy flow of business and are pleased with the momentum we are building here.

Our Lloyd's platform has already proven helpful in that we are seeing good opportunities and it has offered us the benefit of being able to pursue some specialty risk that would've been more difficult if we lacked our own syndicate. As we have said many times in response to the opportunities we are seeing, it is important to note that the growth in Lloyd's will be measured. We are building our platform for the long-term sustainability and our acquisition spectrum will benefit us for many years to come. With that, I would like to turn the call over to Bill Ashley.

Thank you, Kevin and good morning. While the third-quarter underwriting income for individual risk was reduced by the impact of severe weather in the Midwest, investments we have been making position us well for future profitable growth. These include building out internal underwriting and administration capabilities for our commercial property business, as well as enhancing the underwriting platform for our agricultural products.

We continue to gain marketshare in targeted areas for our agricultural insurance business, which we had previously highlighted as a growth area. Our efforts at building a culture of responsive and prompt claims payment is resulting additional growth opportunities.

Although there is still some uncertainty with regards to ultimate profitability for crop year 2009 on the multi-peril crop insurance business, otherwise known as MPCI, results are estimated to be strong. All crops have not yet been harvested and loss settlement will be based on a combination of yield and average commodity prices at various points in time during the fourth quarter.

Corn and soybean prices are currently only slightly below the level set in the spring versus the much larger drop in commodity prices we saw at the same time in 2008. We are currently not anticipating the large losses from price volatility we experienced in 2008.

Our crop hail product, which represents approximately 7% of our total agricultural gross premiums written for the year, was impacted by several hailstorms predominately in Nebraska. Several hailstorms impacted one of the counties in Nebraska, which has some of the highest concentrations of MPCI business. The hail losses were extensive and the results of this relatively small book of business partially offset the profitability of our MPCI book for the third quarter.

As we continue to increase the geographical diversity of this business in areas that offer high profit potential, we would expect the volatility of results relating to individual events to decline gradually. We continue to build out our capabilities in commercial property, which we have previously highlighted as another potential growth area for the Company when market conditions are right. The increase in our expense ratio in part reflects the costs associated with the people, facilities and technical solutions necessary for RenRe Insurance to produce and administer this book of business.

Our casualty program business remains on track. While we are seeing some signs of pricing declines leveling off, the primary casualty market overall remains competitive. We believe this is in part due to economic conditions on a rating basis for casualty, reducing written premium of primary casualty insurance companies.

We are pleased with the steps we have taken to build strong and sustainable franchises. We continue to evaluate new programs and growth opportunities while providing outstanding service and support to our existing portfolio. Our balance sheet strength and ratings remain a competitive advantage and with the A plus counterparty credit and financial strength rating assigned to the RenRe Insurance companies by Standard & Poor's this quarter, we are well-positioned to generate profitable growth in future periods. I will now turn the call over to our CFO, Jeff Kelly.

Thanks, Bill. And good morning, everyone. On today's call, I would like to cover the third-quarter results, provide some additional detail on our investment portfolio performance and also provide our initial top-line forecasts for 2010.

We experienced strong underwriting results from the reinsurance segment, favorable reserve development and significantly improved returns from our investment portfolio during the quarter. Activities classified as other income also contributed to the strong results. We reported net income of $259 million, or $4.12 per share and operating income of $242 million, or $3.85 per share. Operating income excludes net realized gains on investments and other than temporary impairments on fixed maturity investments available for sale of $17 million.

Our annualized operating ROE was 33% for the third quarter and 30% for the first nine months of the year. Our book value per share increased 11% in the third quarter and was up 27% in the first nine months of the year.

I will walk you through the operating results starting with the catastrophe reinsurance segment. Managed cat gross premiums written totaled $94 million, a decline of 27% in the third quarter. Excluding the $49 million of reinstatement premiums in the prior year quarter, premiums increased 19%. The third quarter historically tends to be light in terms of cat premium volume.

For the first nine months of 2009, cat premiums written, excluding reinstatement premiums, were up 20%, which is in line with our previous guidance. Ceded premiums were higher in the third quarter and year-to-date as a result of opportunistic purchases of retrocession reinsurance to increase the efficiency of the overall portfolio.

The cat unit combined ratio came in at 20.7%, driven by low reported losses and $38 million of favorable loss reserve development. The favorable development was driven by a reduction in our estimated ultimate losses for a number of events, principally for the 2007 underwriting year.

Specialty reinsurance gross premiums written declined by $3 million relative to a year ago. As we have mentioned in the past, premiums in this unit are prone to quarterly volatility since it is composed of a relatively small number of large contracts.

For the first nine months of the year, specialty premiums written declined 29% from a year ago, which is down a bit more than our earlier guidance of a 20% decline in 2009. The specialty combined ratio came in at a negative 5.4% benefiting from low loss experience and $25 million of favorable loss reserve development.

Individual risk premiums were flat compared with a year ago in the third quarter. Ceded premiums were higher primarily due to the profitability of the MPCI book resulting in premiums being returned to the federal government-administrated program. The MPCI book excludes the crop hail results.

Net premiums written here declined 51% in the third quarter. For the first nine months of the year, gross premiums written declined 7% compared to our most recent guidance of a decline of up to 10%. Our increased presence in crop insurance more than offset declines in our commercial multi-peril, commercial property and personal lines quota share books of business. Our individual risk segment came in at a 99.3% combined ratio for the third quarter compared to 110.1% in the comparative quarter last year.

Losses on our crop hail book of business, which totaled $16.6 million, hurt the overall individual risk results. The year-over-year swing in underwriting profits here was approximately $20 million. The combined ratio was also negatively impacted by the lower volume of premiums written and earned. Performance of our MPCI, commercial property and program business remains on track. Individual risk experienced $8 million of favorable reserve development in the quarter.

Other income increased by $11 million to $13 million in the quarter. The increase was driven by a $7 million increase in the valuation of platinum warrant the Company holds, which is marked to market. Other income also includes $14 million in pretax income from RenRe Energy Advisors Limited, our weather and energy derivatives-based risk management business.

RenRe Energy Advisors is a business was started in 2006 and has been growing ever since. This unit provides products to protect its customers from weather, energy and commodity-related risks and leverages our core competitive strengths of risk modeling and risk management. The increase in these two items was offset in part by an $11 million increase in the cost of assumed and ceded reinsurance contracts accounted for at fair value. Corporate expenses were a negative $4 million during the quarter due to the recognition of a corporate insurance claim.

Turning to investments, it is nice to be able to report another quarter of strong performance. We reported investment income of $107 million and the total return on the portfolio was 3% for the quarter. Credit spreads declined again during the quarter, especially for riskier classes of fixed maturity securities.

Our portfolio of other investments contributed $63 million of the net investment income, generating an 8% return. This was driven by improved performance for our hedge fund and private equity investments and a continued rebound in the valuation of our bank loan funds.

While we are pleased with the recent investment performance, we do not expect the magnitude of spread tightening that occurred during the third quarter to extend into future quarters.

While we believe that the economy has stabilized meaningfully since the market dislocation we experienced in late 2008, we remain cautious and so continue to have the portfolio positioned conservatively with high liquidity and modest credit exposure.

Over the course of the quarter, we increased our allocation to US treasuries and reduced our exposure to US agency debt. We also modestly increased allocations to investment grade corporate securities and government-backed corporate debt. The duration of our investment portfolio remains low at 2.5 years and the yield to maturity on fixed maturity and short-term investments at quarter-end is 2.4%.

The average credit quality of the fixed income portfolio remains high at AA. We have included a page at the back of our financial supplement providing the impact of unvested share-based compensation on the calculation of operating and net income per share. We have also included a number of investment schedules in the supplement, which were previously included in our earnings press release. Additionally, we have begun to provide in our supplement a breakout of the components of other income.

Finally, let me turn to our guidance for 2010. Managed cat premiums, which include premiums written on behalf of DaVinci and Top Layer Re, are expected to be flat next year. Recall that our one-year sidecar, Tim Re II, wrote $42 million in premiums in 2009 and there is some uncertainty about how much of this premium we may elect to retain on our books in 2010.

In specialty reinsurance, we expect premiums to be up in excess of 20%. Our Lloyd's platform will likely be a contributor to premium volume in this line in 2010. In individual risk, we would expect premiums to be up slightly, driven by continued expansion of our crop insurance and commercial property books and somewhat offset by declining premium volumes in other lines.

Please keep in mind that there is a wide range of potential outcomes related to the foregoing guidance. We do expect to file our 10-Q this evening and that will contain more detail on many of the topics covered here and with that, I will turn the call back over to Neill.

Great, thank you, Jeff. I think pretty thorough summary of the quarter. Happy to take any questions.

(OPERATOR INSTRUCTIONS). Doug Mewhirter, RBC Capital Markets.

Hi, good morning. I guess the first question would be I guess maybe for Kevin. Just more detail around your retrocessional purchases. First of all, it was described as opportunistic. Was it because maybe some of these retro contracts just sort of looked cheap on an absolute basis or is it more where you saw an opportunity to take a little more gross risk and you just needed a place to lay it off for your risk management purposes?

Sure, I think the way we look at our ceded purchase is really just a portfolio-shaping tool. I think we can act in multiple dimensions. So to that, we have long-term partners in which we share a risk with and then we have -- you referred to as -- the opportunistic purchases. The opportunistic purchases are ones where we are looking to enhance the overall returns of our portfolio. I think the ones that we saw in the third quarter here were ones that -- it is a little bit of everything.

We did look at it on the basis is it enhancing the overall returns of the portfolio and the answer to that was yes. That is why we purchased them. I think the other question embedded in that is did we use it to reduce the overall risk that we were taking. And the answer to that is really not -- is really no. We were looking to shape the amount of net risk we wanted. Knowing that we had these ceded purchases rolling out of the book allowed us to shape the net risk appropriately. So it is not something we use to take down the overall risk in the portfolio.

Ever since we have started, we have never relied on retrocession. We have always used it to make the portfolio more attractive.

I guess as a follow-up to the retro question, was it -- your purchases this quarter, was it traditional reinsurance contracts or was there a mix of capital markets type industry loss warrantees or catastrophe swaps in there? And if there was, I guess would that introduce a component of basis risk into your purchases?

I think we will buy the way people like to sell because that often is the way they are most comfortable pricing it. With that, we are willing to assume basis risk on some of the ceded purchases that we take on board. I think one of the things that we have unique skill in is managing that basis risk. So whether we are going to pay someone to manage it on behalf or manage it ourselves, it is just an economic question. But I have a high degree of confidence that we understand the basis that we are taking and it is priced into the deal.

Okay. And if I could just -- I will ask one more question then I guess jump back into the queue. It might be a little premature to talk about Florida since June is a ways away. I have been reading in the press and some statutory filings that Florida homeowners insurers aren't doing very well on an aggregate basis despite the fact that there haven't really been any catastrophes this year. Is that affecting I guess -- do you think that will affect the way that they approach you in terms of reinsurance purchases either with retentions or the total amount they buy? Just describe how that might -- how you are looking at that going into 2010.

Sure. I think the first thing is it is a long way off before we are going to know exactly what the environment looks like in 2010. We are close to a lot of the Florida companies and understand some of the difficulties they are facing with their own balance sheets.

I think the way a lot of the local companies are structured in Florida, reinsurance is such a critical element of their risk management. Whether they increase retentions or buy slightly differently, I think there is a very strong place for us at the table. So I don't know exactly what will be different, whether they will be able to improve their financial position through rate increases or other between now and June, but regardless, I think they are going to need to buy reinsurance and we are going to be well-positioned to be the first call to sell it to them.

Okay, thanks. That is all my questions. I will jump back in the queue.

Jay Cohen, Banc of America.

Thanks, good morning. A couple of questions. First is on the retro purchases in the third quarter, as we look forward, what should we be assuming from a net to grow standpoint? In other words, does this just effect the third quarter or will we see that, in fact, going forward as well?

You will see the effect going forward. We bought them in the third quarter. They are annual contracts and I think strategically, in 2010, we are going to approach the [ceded] the same exact way. We don't have an obligation to renew these, but to the extent that they are going to be beneficial to keep in the portfolio, we will certainly pursue them.

Right. And then in the 2010 outlook, if I just focus on the RenRe cat premiums, I guess I would have suspected, given that your capital base is much higher and you still believe that the returns available in the cat market will be attractive, one would have suspected you would be able to grow that business. And I just wanted to -- you seem to suggest flat and I don't know if it was just because of Tim Re, but how do you reflect on the comment that I made about the ability to grow the business underlying?

I think our own capital is just another lever that we have. We talked about in the opening comments, and Neill mentioned it, the flexibility we like to build into the portfolio. If we go into 2010 and we are seeing opportunities and deploying our capital as the most beneficial way to do it, we will do more of that. I think what we are trying to manage is the net risk retained by our group. So whether we are growing or shrinking the top line isn't necessarily one-for-one transfer to what is occurring on the net line.

So I think the other thing to consider is we have Tim Re II, which currently is written on our paper, but is fully ceded to the facility. Again, if we change the amount of cession behind or (inaudible) on that one vehicle, we are changing the net risk retained by us and growing even though the top line may be flat.

Right. And Jay, this is Neil. I don't like giving guidance. We do it to help you guys out to give you a general feel, but this is always a band. It could be down a little bit, it could be up a little bit. At RenRe, it is part of our culture. I never put pressure on our folks to write business and that is one of the reasons we have such a good book. So just take the guidance with a grain of salt.

Got it. Thank you.

Vinay Misquith, Credit Suisse.

Hi, good morning. What premium rate assumptions do you have embedded in your flat top-line guidance for next year?

I don't think we talked specifically about how rates are going to change. There is a lot of uncertainty between the new models and people's appetite for risk and all those things and there is very little actual price discovery in the market right now. So I think the way we look at it is we are going into the 2010 renewal season. Our book is well-positioned. I think we understand the price we need to charge to get the returns that we need and we will go out with those expectations met. We don't really have an opinion as to how the ultimate market change in prices will materialize (inaudible).

Sure, so even if prices fall a little bit, you believe that you can grow the business more next year in part because of the Florida hurricane cat fund producing its reinsurance provided?

That is certainly one of the things that we look at. I think there is a lot of other levers or purchasing that may or may not occur between now and then. I think to focus in on one single thing at this early point in the renewal is not the way we would think about the business.

Sure. Fair enough. Second question is on the [venture] and energy risk operations. I was just wondering whether there was something special that happened this quarter whether -- because you had a pretty high number of [forward] earnings in that line this quarter.

I would say that beyond just the normal -- the normal level of profitability in the business, we did have a single transaction that contributed a little more to earnings in that unit than we would have otherwise expected.

Okay, great. And one last thing if you could, give us the dollar number for the corporate insurance recovery that you had this quarter.

Yes, it was about $9 million and so I would just say we -- it was $9 million.

Sure, that's great. Thank you.

(OPERATOR INSTRUCTIONS). Seth Bienstock, Times Square Capital Management.

Hi, good morning. I was hoping that you could provide us a sense of how much capital is currently sitting up at the holding company.

Let's see. I guess I would answer the question this way. We have -- let's see -- hang on just a second. Well, I would say we have probably -- I'm trying to think -- I think it is a little over $1 billion in capital resources at the parent.

Okay.

I will come back to that one later. We will check our numbers here.

That's very helpful.

Seth, hi, it's Neill. Why don't I give you a civilian answer as well? So part of it is, yes, we do have some dry powder and it is up at the holding company and it is also in the operating subsidiaries. So we have additional capital available, which we find very helpful in today's economic environment.

Okay. That's helpful. And I was curious if you could remind us just roughly what the contribution to return equity has been from fees and profit share say over the last seven years or so?

Seth, that was a toughie. It is somewhere in the range of -- I think this was made public in a recent investor presentation. It is in the 3% to 4% range. We don't have that number as you might imagine right in front of us. So it is a meaningful number.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS). Ian Gutterman, Adage Capital.

Hi, guys. Good morning. Two questions I guess. One, in the cat subsegment, it looks like your accident year loss ratio had been running about 10% the past few quarters and it bumped up to 20% this quarter. And just given pricing, I would have thought that would have been stable to improving. Were there some large attritional losses or did you change your picks? I was just kind of curious why that went up this quarter.

For the cat book specifically?

Yes.

The cat book -- we don't actually have to (inaudible). What we do is reserve by event. So I think the -- what you're seeing is just the natural flow of things coming through the book. We think about it slightly differently. We are looking at it much more on the efficiency of the portfolio and the -- due to kind of the cat nature obviously of the book, the losses are kind of just an outcome. We tend to think much more about the efficiency of the portfolio and the portfolio efficiency is actually quite strong. One of the contributing factors to that is the addition of the ceded over the third quarter.

Okay, I guess what I am confused about is, given it was a loss-free quarter, why would it have gone up? Is it solely the cost of retro in that now, in a loss-free quarter, you'll report to us a higher loss ratio, which, again, like you said, might mean the worst quarters have better results, but that, in loss-free quarters, we should now be expecting a little bit higher combineds through the retro costs?

The retro is going to come out of the premium and the losses are going to be a function of what is going on as far as events. And I think to be perfectly honest, I'm a little confused as to how -- what you are pulling up to get to the 20%.

I am just taking your reported loss ratio and taking out the development, the prior period development.

Right, so it's going from 10.7% to 19%.

I'm looking at just within -- okay, yes. I was doing it just on the loss ratio, but yes.

Okay. I wouldn't forecast that forward if that is the question. It is going to be -- that's going to be a little bit -- that is going to be a bumpy number just based on what is going on in the quarter.

Okay, fair enough and then I also had a crop question. Given what we are seeing from the initial reports coming in on the harvest that the harvest has been slow due to wet weather, what concerns do you have about potential yield problems? Are we more susceptible to early freeze than normal now because the harvest has gone slow or if it stays wet for a while, could that be a concern? Just what issues might lead to a lower yield than expected?

That's a great question. So far, the estimated deals in most of the areas we are concentrated in we are not seeing that as problematic. That doesn't mean that it couldn't be in the future, which is why we put some cautionary statements until things are actually settled, harvested and prices are settled accordingly. A couple of the states that you have heard about, which are some of the southern states like Arkansas and so forth, we have very little business, if any, in a couple of those states. That is not a problem for us.

In terms of the early freeze, crops are basically developed at this point, so it is just a question of whether, with the hybrids they have today, everything stands until the time that it gets harvested. I'll give you a number -- it's probably wrong. I saw estimates just last week that showed that, at this point in time, typically 50% to 60% of the crops are out of the fields and s somewhere in the 30% range is out of the fields right now.

That is kind of what -- those are the same numbers I was looking at. I was wondering if that posed any concern to you about the delay.

Yes, so far, so good. But certainly as you are suggesting, there could be an issue in the future.

Okay, all right, thank you.

David Small, JPMorgan.

Good morning. I just want to ask you maybe a little more about your excess capital that you discussed earlier. Can you just -- given your outlook for growth that that you gave earlier, how do you view deploying that excess capital throughout 2010?

Well, I think it is fair to say that we have more capital on hand than our models indicate that is required for our current book of business. And I think even absent a large cat, probably more than enough to satisfy any needs we have over the next year.

On the other hand though, the capital that we keep on hand is also reflective of the economic environment and the capital markets environment and both of which we think are more than a little unsettled and are concerning. So we have considered it at least to this point prudent to maintain more capital on hand than we might otherwise in a more stable environment. And I would say that we are obviously monitoring that closely and should the economy and capital markets stabilize further, we would reconsider how much of that cushion, if you will, we would continue to hold on the balance sheet.

In the past, I think we have returned capital to shareholders whenever we have felt we had more than we could prudently deploy. And as you know, the principal vehicle for doing that has historically been share repurchases.

The other thing I would say is we do have approximately $380 million remaining on our share repurchase authorization and that is certainly a tool we would consider for reducing excess capital next year.

And in terms of where you would buy back stock, the current -- is the current valuation compelling to do that?

Yes, I think if you look at where the stock of the Company has traded historically versus its tangible book value, we are at the very low end of that range over the years. So it is a range -- it is an area that's I think in some instances somewhat below where we have historically purchased and it is an area that I think is attractive, other things being equal.

David, this is Neill. I feel compelled to say I agree with that.

Okay, thanks a lot.

Doug Mewhirter, RBC Capital Markets.

Hi, this is just a follow-up question. Just to clarify, on your energy and weather advisory business, just help me understand, is it more of a market-making function where you are just sort of standing in between a buyer and a seller or maybe doing consulting for a fee or is there also an element of I guess directional risk in the derivatives and services that you do?

I would say that it is probably a little bit of all three, but principally an area where we are providing customized risk management solutions in many instances where ready markets for those don't exist, otherwise they could probably easily do it themselves. So they tend to be more customized solutions and our group does seek to have long-term relationships with our customers where they are seen as a risk adviser to them. And they do use liquid capital markets to hedge their position somewhat and do so actively, but I would say that the vast majority of what they do is not just standing in between a buyer and a seller.

Okay, so it's customized enough where it's -- you are standing as the counterparty to an OTC product and then you do your best to hedge, but there is still probably some basis risk involved in there too.

Yes, that's correct.

Okay, thanks. That is all my questions.

Thank you. I would now like to turn the conference back over to Neill Currie for closing remarks.

Once again, thank you, everybody. Good questions today. We are looking forward to the renewal season at January 1 where we can serve our clients. We feel like we are very well-positioned to provide the best solutions for them. Thank you very much. Enjoy your Halloween.

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