濱特爾 (RNR) 2010 Q1 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 first-quarter 2010 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 first-quarter 2010 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 p.m. Eastern Time today through May 12 at 8 p.m. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The pass code you will need for both numbers is 67676069.

Today's call is also available through the Investors section of www.RenRe.com and will be archived on RenaissanceRe's website through midnight on July 7, 2010.

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, Executive Vice President and Chief Financial Officer; and Kevin O'Donnell, Executive Vice President and Global Chief Underwriting Officer.

I would now like to turn the call over to Neill. Neill?

Thank you, David. Good morning, everyone, and thank you for being with us today.

Despite the high level of industry-insured catastrophic events we have already seen this year and softening market conditions, we recorded positive operating results for the quarter. Our results were driven by favorable reserve development and strong investment performance. We achieved an annualized operating return on common equity of 14.8% and increased tangible book value per share by 4.2%, which I think is the most important metric to look at.

I have said before that our business is complex and volatile. The net negative impact we reported from the Chilean earthquake and Xynthia was well within our modeled expectations. Such events serve as a reminder of the importance of adequately pricing for the risks we accept and effectively modeling expected losses.

Timing and magnitude of catastrophic events are out of our control but we can control how we go about understanding and selecting our risk and how we manage our balance sheet to support our underwriting activities. Focusing on what we can control by building an efficient portfolio and writing attractively-priced business within our risk management framework has underpinned our superior record of delivering long-term shareholder value.

Improved economic conditions have resulted in clients retaining more risk and we continue to see moderate declines in market pricing. That said, we are obtaining adequate pricing for the risk we underwrite. Expected returns for our specialty book look good, although the portfolio is smaller than in past years because of the softening market.

Performance in our insurance business improved relative to the same quarter a year ago, largely driven by our crop business. A better-than-expected late harvest, favorable reserve development, and a decrease in claims all contributed to our results.

Our Lloyd's syndicate, which commenced operations in the second quarter of last year, in shaping up nicely and providing us access to new opportunities. Given market conditions, growth there is expected to be modest but we are creating a strong base for the future.

Florida renewal meetings are now underway. As has been the case for some time now, there are many dynamics at play in the Florida market. The state legislature is in session as we speak and we are continually monitoring developments there.

As one of the leading providers of property, catastrophe, reinsurance protection to the Florida market we are working closely with our brokers and clients to provide coverage during a difficult time for our clients.

However, we are beginning to see signs of improvement in the primary market in Florida. Of particular importance is the fact that several clients have obtained rate increases in a step towards achieving adequate premiums for the coverage they provide. However, it will take some time for the impact of those increases to appear in their results.

We do the best we can to provide service to our clients when they need us most. It is this commitment to clients during times of dislocation that has enabled us to build our reinsurance franchise while also generating attractive returns for our shareholders.

Our industry continues to face challenges. Pricing pressures persist and the situation in Florida remains delicate, and we are anticipating finalization of the SRA which will potentially reduce the profitability of our crop business beginning in 2011.

Despite these challenges, our prospects for 2010 remain attractive. We are pleased with the quality of our book of business, we are actively managing capital to optimize returns, and we are continually shaping the overall efficiency of our portfolio while buying back shares when prices are attractive.

We have the necessary tools and an experienced management team in place and our capital base and ratings remain strong. We are well prepared for the future.

Kevin and Jeff Kelly are with us this morning. They will give you a more detailed report on the quarter so I would like to turn the call over to Kevin O'Donnell.

Thank you, Neill, and good morning. I will update you on our reinsurance business, including Cat, specialty, and Lloyd's, and then move on to our insurance segment.

In cat reinsurance we saw a continuation of many of the trends that began during the January renewals with substantial capacity available and reduced demand leading to a more competitive marketplace. We some moderate deterioration in international markets in April which led us to exit some treaties. However, despite the more competitive landscape, we were able to build a portfolio that generates acceptable returns and on an expected basis our portfolio is well positioned.

We did experience some losses from the first-quarter events, but I am pleased that our actual results are clearly within our modeled expectations. Specifically, the 8.8-magnitude Chilean earthquake is a large and infrequent event and there is very little historical data about how structures respond to quakes of this magnitude.

To put the Chilean earthquake in perspective, the event was approximately 500 times as powerful as the recent earthquake in Haiti. Given the magnitude and complexity of the event it is also likely that there will be greater uncertainty relating to ultimate damages and claims could continue to emerge over time.

We are not an active writer of direct excessive loss or quota share reinsurance on contracts exposed to the Chilean earthquake and most of our loss from this event is from our retro book. We choose to accept this risk on a retro basis as we believe that we achieve better returns by writing some territories, including Chile, on this basis.

Chile is a unique market as domestic insurers are required to purchase substantial reinsurance resulting in 80% to 90% of the aggregate industry loss being paid by the reinsurance industry. On the other hand, we would expect to see events like windstorm Xynthia on a far more frequent basis and believe the primary insurance industry in the affected countries will retain much of the exposure from the event, transferring only a relatively small amount of the loss to the reinsurance industry.

We are spending most of our time right now on the Florida market and have begun preliminary discussions with our clients and brokers. At this time it's difficult to forecast the Florida market as there are a number of issues to consider, including the state's supply of insurance and reinsurance, primary companies ability to achieve rate adequacy, and the health of the overall marketplace.

As we have discussed on prior calls, the financial health of the Florida primary home insurers remains a concern. Although we expect sufficient capacity to be available, there will be a greater emphasis among reinsurers on the underlying credit quality of clients in setting terms and prices.

As with every year we are closely monitoring the legislature in Florida and the proposed bills being discussed. The [cat fund and collision] bill has been signed by the governor and the omnibus property bill, which we hope will bring positive change for our customers, continues to work its way through the legislative process.

Moving on to specialty reinsurance. We continue to see a flow of deals but have been cautious given the general difficult market conditions. Price reductions were modest and generally in the single-digit range for the lines of business we write. We did see some opportunities in financial lines, such as trade credit, political risk, and D&O liability, after the losses of recent years. In many cases prices and terms did not meet our requirements and we elected not to participate on many of these contracts.

With respect to Lloyd's, we expect modest growth to continue in property and specialty lines where we have seen a number of new opportunities. As Neill mentioned, our Lloyd's strategy is a long-term play that we believe will provide us with access to business we would not ordinarily have seen in Bermuda or the US.

In our insurance segment I will divide our comments first to discuss our agricultural insurance business and then give an overview of our other P&C business.

In agriculture ending 2009 we had a large number of open claims relative to historic averages. This was due to delayed harvest which caused farmers to file claims as a precaution. During the first quarter we benefited from many of these claims being settled loss free due to above average crop yields. This caused favorable reserve development on both multi-peril crop and crop [hail] books.

Looking ahead to the 2010 crop year, we expect premiums, which are mainly booked in the second quarter, will be slightly down from a year ago. So although we increased our insured acres and market share we were not expecting more premium due to the government reducing the contract price for corn and soybean crops.

The USDA Risk Management Agency will likely in the coming days release an updated draft of the standard reinsurance agreement or SRA for the 2011 underwriting year. The new SRA contemplates a number of changes which could negatively impact the profitability of the crop business for next year. We have the modeling and analytical capabilities to quickly assess the impact of any legislation on the profitability of our book and construct an optimal portfolio based on the SRA terms.

Finally, turning to our P&C insurance businesses in the US, the marketplace remains competitive and we were focused on the classes of risk that meet our return hurdles. As with all of our businesses, we were actively managing our risk and reshaping our portfolio which will allow us to set a framework for a more profitable book of business in the future.

Thanks and I will turn the call over to Jeff.

Thanks, Kevin, and good morning, everyone. On today's call I would like to cover the first-quarter financial results and also provide an update to our top-line forecast for 2010.

We reported profitable results in the first quarter as strong favorable reserve development in both specialty reinsurance and in our insurance segment overshadowed higher catastrophe losses in the cat unit. Investment performance was also a significant, positive contributor during the quarter.

We reported net income of $165 million or $2.73 per share and operating income of $116 million or $1.91 per share. Our annualized operating return on equity was 15% for the first quarter and our growth in tangible book value for the quarter, as Neill mentioned, was 4.2%.

The impact on our results for the Chilean earthquake and windstorm Xynthia net of reinstatement premiums earned, loss profit commissions, and noncontrolling interest was $125 million. We have provided a table in our press release that breaks out the impact of these two catastrophe losses on our financial results.

I will walk you through the operating results now starting with the reinsurance segment. Managed cat gross premiums written declined 6% compared with a year-ago period. Although adjusting for $27 million of reinstatement premiums related to the catastrophe losses, gross premiums written would have declined 12%.

The top-line decline was primarily a result of softening market conditions during the January 1 renewals and our decision to exit treaties that did not meet our return hurdles. Managed cat includes cat premium written by DaVinci, Top Layer Re, our Lloyd's unit, although we have started to break the results of this business out separately.

The first-quarter combined ratio for the cat unit came in at 92.2% driven by higher catastrophe loss activity. The underwriting result impact on our cat segment results from the Chilean earthquake was $131 million and from windstorm Xynthia was $25 million. These losses are net of reinstatement premiums earned and lost profit commissions but include losses for DaVinci.

Net favorable reserve development totaled $32 million and included reserve releases of $8 million from the 2005 hurricanes and $7 million from the 2008 hurricanes.

Managed specialty gross premiums written increased by 15% from a year ago in the first quarter. This figure includes $8 million of premiums written by our Lloyd's unit. As we have mentioned in the past, premiums in this unit are prone to quarterly volatility since it is dominated by a relatively small number of large contracts.

Underwriting results for this unit benefited from $74 million of favorable reserve development. The main components of the reserve releases were as follows -- $31 million of net favorable development related to a change in actuarial assumptions, mainly for casualty clash and surety, although partially offset by reserve additions for workers compensation per risk; $26 million of reserve releases from case and additional case reserves; and $16 million of reserve releases for better-than-expected reported losses.

In addition, the segment's results included approximately $8 million of losses related to the Chilean earthquake.

Our Lloyd's unit generated $14 million of premiums in the first quarter. This consists of approximately $6 million of catastrophe premiums and $8 million of specialty premiums. The combined ratio for this unit was 141.7% and this was primarily a result of the 104.6% expense ratio. As the premium base continues to expand we would expect the expense ratio to decline.

Going forward the individual risk business unit or segment will be referred to as insurance. We have changed the name to more accurately reflect the business managed by that unit.

For the insurance segment gross premiums written declined 20% compared with the year-ago period. The decrease was largely driven by prior decisions to terminate several program manager and quota share relationships which reduced premium volume for commercial and personal lines property.

The first quarter tends to be a light one for the crop business in terms of premiums written. Net premiums written and earned during the first quarter in this segment reflected $25 million of premiums ceded to the Federal Crop Insurance Corp under the Crop Standard Reinsurance Agreement related to better-than-expected profitability for the 2009 crop accident year that came through in this quarter.

The insurance segment came in at 81.1% combined ratio for the first quarter. The segment experienced $56 million of net favorable reserve development, approximately $44 million of which was from lower-than-expected claims for crops that were harvested late, as Kevin mentioned earlier, including from the crop hail book.

During the quarter we also reflected a charge of approximately $7 million consisting mainly of software that was impaired following the Company's decision to discontinue the development of a new line of business that had not yet been launched.

Moving away from our underwriting results, other income was a loss of $6 million in the first quarter. This was driven by a $4 million decrease in the valuation of the platinum warrants the Company holds which are marked to market and a $2 million loss from RenRe Energy Advisors Ltd., our weather and energy derivatives risk management business.

Our results also included an $11 million foreign exchange loss resulting from unfavorable foreign exchange translations on the Company's non-US dollar-denominated assets and liabilities. The meaningful increase in operating expenses relative to a year ago relates largely to increased headcount and compensation, investments in our startup Lloyd's operation, and to write downs for exited business lines.

Turning to investments, our performance was solid and a significant improvement from a year ago driven by stronger returns in our fixed income portfolios and especially in our alternative asset portfolio. We reported investment income of $67 million and the total return on the portfolio was 1.7% for the quarter.

Low interest rates on new investments resulted in a decline in investment income from our traditional fixed maturity portfolio, but a continued decline in credit spreads on top of a relatively modest change in interest rates during the quarter lead to higher total returns versus a year ago and versus the fourth quarter of last year. Our portfolio of other investments contributed $39 million to net investment income benefiting primarily from stronger returns on our hedge fund and private equity investments.

Our investment portfolio remains conservatively positioned with high liquidity and modest credit exposure. During the first quarter we continued to increase our allocations to US treasuries and investment-grade corporate bonds while reducing our exposure to Agency residential mortgage-backed securities and FDIC guaranteed bank debt.

The duration of our (technical difficulty) portfolio ticked up slightly to 2.7 years but remains relatively short and the yield to maturity on fixed income and short-term investments dropped slightly to 2.1%. The average credit quality of our fixed income portfolio remains high at AA with 69% of our fixed maturity securities rated AAA.

We continue to transition the accounting basis of our fixed maturity investment portfolio by designating new securities at acquisition as trading rather than as available for sale. The impact of this is that changes in the values of these trading securities will now flow through the income statement as net realized and unrealized gains and losses on fixed maturity investments. Over two-thirds of our fixed income portfolio has been transitioned to trading as of the end of the first quarter.

Our capital management strategy is flexible and utilizes several levers including share buybacks, portfolio management through inward and outward retrocession reinsurance, and returning capital to our joint venture partners. During the first quarter we repurchased $3.7 million of our shares at an aggregate cost of $204 million. Since the end of the first quarter we have purchased an additional 416,000 shares for a total of $24 million.

On March 17 we completed a $250 million debt offering, the proceeds of which we will use to replace a portion of our revolving credit facility and retain for general corporate and working capital require months. During the first quarter we returned $174 million of capital to shareholders in DaVinci Re and also unwound Tim Re II, which was our one-year sidecar deal established last year.

Finally, let me provide an update to our guidance for 2010. For managed cat, which includes premiums written on behalf of DaVinci, Lloyd's, and Top Layer Re, we continue to expect premiums to decline approximately 10% in 2010.

In managed specialty reinsurance we are maintaining our prior guidance of up in excess of 20% and in insurance we would expect premiums to be down around 10% for 2010 driven by a likely decline in premiums generated by our crop insurance business that Kevin discussed , market softening, and other insurance lines and continued efforts to realign our underwriting processes. Our prior guidance in the insurance area was for roughly flat premiums.

Now with that I will turn the callback over to

Thank you, Jeff. Operator, we are available to answer questions.

(Operator Instructions) Josh Shanker, Deutsche Bank.

Good morning, everyone. My questions both relate to reserves. I am interested in the uptick in workers' compensation reserves, wondering what you are seeing in that marketplace that caused you to revise your outlook.

What we have done, Josh, was we had -- we essentially applied some industry, some extensive industry information to our own information that we gathered on that and found that with the advice of our external actuary that it made sense to revise up our expected loss ratios there.

Would that be classified as like an ACR? Are your cedents not expecting as much of a loss as you are?

Josh, it is Neill. This is not driven by cedent behavior or ACRs. This is more industry-related development information that we are using.

Our workers' comp book was oriented more towards a catastrophic book and we did a relatively small amount of per risk excess on workers' comp. So we don't have that much of our own history to look at so we are using some industry available data. At the recommendation of our counselors we increased the reserves there.

I don't mean to push on this too hard, but the industry-related data that you have since you have a very exotic book is more conventional than your specific part of the market. Would that be a correct assumption?

In general, that is true. We are a large writer -- most of our premium in workers' comp is workers' comp cat. The reserve adjustment that is coming through comes from industry data, mostly around the speed in which the reserves are released. So we changed the curves more than really changing the expected loss ratios.

Okay.

So I wouldn't say it's specific to having a bad experience on one or two of the deals. It's much more around how we are running off the reserves that we have.

All right. Thank you for that. The other question, coming back to a similar discussion on the last conference call, I am wondering in your reserves looking at 2004, 2005, and 2008 hurricanes to what extent are reserves currently on the balance sheet for those events?

Josh, for they total reserves on the balance sheet for the 2004, 2005, and 2008 hurricanes are $235 million. $220 million of it is related to the 2008 hurricanes and then the other amounts would relate to the -- I am sorry. I am sorry, Josh. I messed up.

It's $325 million; it's $220 million for the 2008s, I believe it's $18 million for the 2004s, and $67 million for the 2005s.

Okay, that is perfectly clear. Thank you.

Doug Mewhirter, RBC Capital Markets.

Good morning. I had a couple questions; I guess I will ask you a few and then I will re-queue if I get too long-winded.

First, going back to the reserves in the specialty reinsurance business. I guess it just seemed like an unusual development -- I hadn't historically seen a whole lot of movement from that line. Obviously there has been some in the past.

Was this review, I guess, a regularly scheduled actuarial review? And you sort of hinted at that there some external actuaries involved. Was it sort of a regularly scheduled external review? Was it one you did internally and then you brought in some external actuaries to help you finalize the numbers? This would be for the positive on the casualty clash and related lines.

Yes, we do have a regularly scheduled first-quarter review of our assumptions each year. And so this was the result of that typical interaction in the first quarter comparing industry loss information with new information we have along with our third-party actuary.

Okay. And could you give some -- to follow on that, this same topic, was there any particular accident years that stuck out for the positive reserve development? Or is it like Kevin said, you are just more like shifting the curve?

Yes, I think for the -- the review included all of the accident years in the portfolio. The principal ones impacted by the reserve releases were 2007, 2006, 2008, and 2009.

Okay. Moving on to a different topic, a very, very quick question for you, Jeff. Could you just refresh my memory, is there a one-quarter lag on your alternative investment reporting or is it the current quarter? In terms of your mark-to-markets on your funds.

It is largely current quarter and there are some firms who do not get us information on a timely basis. I think most do. I believe it's about 75% that get them to us on a real-time basis. The rest of them we estimate.

We have an estimation process that we have used that I think has been historically pretty accurate and essentially assuming that the returns on the ones that we don't get are quite similar to the ones that we have. But it's an estimation process that seems to have worked very well but largely it's real-time.

Okay, thanks. My last question, if I may. With regard to your agricultural business, the first quarter seemed -- the last two first quarters seemed to have very volatile o results in terms of truing-up the final reserves. I guess could you compare your experience this year first quarter to last year's, which is obviously a very different result?

And would you say that the common thread is more of -- the uncertainty of the markets is hard to see where prices and yields would go or was there just unique factors in each of the last quarters which may or may not happen in the future? In other words, looking at these two experiences, would it be reasonable to expect a lot of fluctuation in the first quarter's going forward assuming you maintain your crop business where it is now?

Let me explain a little bit of what kind of occurred this year and then talk about why I think it's a little bit unique. It was a late harvest. We are pretty heavy corn driven and corn will be harvested in the December time frame.

This year with the weather it ended up being that a lot of the corn -- where claims have to be put in in early December a lot of the corn hadn't been harvested yet so we had a lot of claims coming in. Significantly above what we would traditionally see; still very different than what we experienced last year in that context.

A lot of those claims ended up in reviewing it being what I would say is precautionary, where if they didn't get the claim in in time they wouldn't have the opportunity to claim later. So it was kind of a weather-related issue that brought in a lot of claims that ended up being settled with out any loss.

I think we are -- because we are heavy corn and soybean insurer we may have some more exposure over the year-end because that is the harvest time. But it's not something I hope to have continue with reserve changes in the first quarter based on the assumptions we are making.

Okay, that is helpful. Just a quick follow up to your answer and then I will get off and let someone else ask questions. You said you had a lot of claims come in. Did you incur a lot of those claims in the back half of the year or was it mainly built a lot into your IB&R already?

We incurred quite a bit. We did actually quite an extensive review in the fourth quarter just trying to sort through what we had and we did put up quite a bit then till -- the release now is based on the fact that we had reserves against a lot of the claims that settled loss-free in the fourth quarter.

Okay, thanks very much. That is all my questions.

Vinay Misquith, Credit Suisse.

Good morning. Could you help us understand how the buying patterns of primary insurers will change now that the governor of Florida said you don't have to buy to the 1-in-100 year limit? Do you think that they will buy more frequency covers and would you be more favorably impacted by that?

Why don't I start with that one, Vinay, and then turn it over to the expert, Kevin, here?

But I think people were doing what they wanted to do anyway. These companies have to protect their solvency and based upon retentions sometimes you might want to go sideways in buying your cover. Some clients are more concerned with the vertical loss and buy more cover.

So it's interesting when you say 1-in-100, what does 1-in-100 mean? And it means different things to different companies. So I think it was just the OIR in Florida telling people we want you to protect your balance sheet the way that you think is the best way to do it.

So it might drive some people to buying some aggregate cover down low. It might cause other people to buy more on top. So with that sort of macro view, Kevin?

Yes, I think it's -- I also think there is a rating agency component to this as well as to if they see material changes in the level in which people are buying from one year to the next. That is going to be certainly a management issue they are going to have to contend with.

The question really is how will it affect us. I am not particularly concerned about that and having a significant change on the amount of reinsurance we are going to have the ability to sell this year.

Okay, that is great. Second question is a finance question; it's on the new debt. I believe the new debt is to refinance some old equity. Just explain that to us, please, a little bit more?

Sure, Vinay. The debt that we issued was actually done to create, for lack of a better term, kind of a synthetic revolving credit facility. So we actually have plenty of liquidity at the holding company for various reasons but when we looked at the markets for bank revolvers as opposed to where senior debt could be issued in the market for the first time in some time it actually looked less expensive to us to actually borrow the money.

What essentially we have done is put it in a segregated account, if you will, and invested in a matched maturity set portfolio of bonds and essentially gotten the rating agencies to -- or Moody's at least -- to view it as not leverage in our financial ratios but essentially as a synthetic revolver. So they would view that as having creating leverage (technical difficulty) if we actually sell off the investments that are offsetting the debt and then have a mismatch then on that account.

But for right now we are just -- we look at it as relatively inexpensive compared with bank revolvers and also still at a lower cost and with less covenants.

Fair enough. So from a modeling perspective your interest expenses would increase for the next few quarters but you would also get higher investment income because you put that money to work? Would that be fair?

Yes. Yes, that is fair to say.

Okay, that is great. Thank you.

Cliff Gallant, KBW.

Good morning. Just a quick question, I was just curious about the unlaunched product line. Was curious if you could talk a little bit about what it might have been and really I was -- more of what were your change in thinking, what happened in the process?

It sounded like you went pretty far down the line. What caused you to change your mind about launching?

Well, we did -- this is Neill. I guess anytime you make a mistake I have to take the blame for it. Hard as it is to believe, occasionally we do do something and then we learn more and decide to change plans.

This was something that was really very heavily oriented towards IT. When we looked at the combination of the long-term business attributes as well as the challenging marketplace we feel is ahead of us for the next several years, combination of factors, is we decided instead of starting something that we thought was going to be pretty expensive and for the long term not deliver the right benefits to our shareholders we decided to pull the plug.

Okay, all right. Thank you.

Brian Meredith, UBS.

A couple of questions actually here for Jeff. The first one is quickly on the Lloyd's business should we expect premium seasonality there like the cat business and the specialty reinsurance business?

No, not the same way. There is a property cat component of the book there but it's not the reason we are there. There will be a mix of reinsurance and insurance written out of there, so I expect that it will be somewhat smoother throughout the year than certainly the cat book.

I think it will be a little bit of a spike here and there because even if we write D&F, D&F will be potentially larger in the second quarter. There is some agro in there so that will flow into different quarters as well, but it won't be the same seasonal renewals, lack of a better term, than we have in the reinsurance book.

Got you. And just curious, were there any start-up expenses in the first quarter of 2010 that would have made the expense line a little bit higher than we might see going forward, operating expenses?

Not -- do you mean for the Lloyd's business?

The Lloyd's business, yes.

No.

No, okay. Then second question, Jeff, wondered if you could talk a little bit about investment strategy and why the big allocation to treasuries. Does that have anything to do with the debt issuance? Do you have to keep treasury to get to that?

If you can flesh that out a little bit more, because your portfolios are obviously way, way, way down. I am wondering if that is -- we are going to continue to see them down substantially like they are.

Well, you are quite right, Brian. Initially when we issued the debt the portfolio of investments that we bought against it were 10-year treasuries. So that has, I suppose, incrementally, given the yield on 10-year treasuries, it actually had the impact of increasing the yields on the investment portfolio. But we would expect over time, as I mentioned, to invest those proceeds at $250 million in a portfolio more likely of investment-grade corporates.

I would say just from an investment strategy standpoint I did mention in my comments we have been reducing rather significantly some allocations in residential mortgage-backed securities and a couple of other areas and increasing our allocations to treasuries and investment-grade corporates.

I would say generally speaking we are still positive on high-quality credit spreads, but we do manage the portfolio on a total rate of return basis. So at any given point in time we are not necessarily allocated to maximize the current yield on the portfolio as much as where we think the best returns lie for the horizon.

So I wouldn't necessarily draw from our current allocations to expect a continued decline in investment yields.

Thank you.

(Operator Instructions) Ian Gutterman, Adage Capital Management.

Just to clarify on the debt again, so at the moment then you are earning I guess a negative spread and over time as you invest in the corporates you will get to -- will it be a flat spread or do you anticipate a positive spread?

We anticipate a slight positive spread.

Okay, got it.

Over time. But we just didn't want to -- I think to put together a portfolio of $250 million, a diversified portfolio of high-quality corporate bonds we just didn't want to rush into that. We wanted to be able to purchase them at a pace that we felt appropriate, so we just temporarily invested in treasuries.

Okay, that makes sense. My other question is on the reserves, I guess specifically in the insurance segment -- I am looking at page 16 of the supplement. At the end of Q2 last year you had a little over $600 million of reserves total; now you have a little over $400 million. That has come down by almost a third in three quarters and the majority of it is IB&R.

I mean I understand there has been redundancies, but I just -- on the surface of that that just seems like a very large decline in reserves in a short period of time. Can you help me get comfortable with why that is sort of normal type volatility or is there something really unique and special about the last three quarters that we won't see again? Do you know what mean? At first glance it just seems surprising that we see total reserves come down by a third in a line of business that quickly.

Yes, I would say it's a function of a couple of things. One is just paying down of claims over that period of time and also of the book of business shrinking a bit.

Okay. Is there anything unusual as far as timing of crop that this is a normal occurrence, that you get a build of reserves early in the year and then it comes down throughout the year? I assume that is part of it, but I would have thought that would have been less IB&R, I don't know.

I think they really -- in the crop business they tend to go up during the course of the year and down in the first quarter.

Okay, okay. Fair enough. Then my other question on the reserves was there was the breakout you had that I think it was $25 million that was case and ACR and there was another $16 million that you called I guess actual claims. And that $16 million, did that also come out of case or are you calling that a different bucket?

So I assume if you settled something it was in case until you settled it, right?

That should be correct.

Okay. So that whole $41 million was that a case you were just trying to give us color on the components of it, is that fair?

Yes. We were just trying to give the individual components of it, yes.

Okay. I just wanted to make sure there wasn't something I missed about the description. Okay, I think that is all I had. Thank you.

Jay Cohen, Bank of America.

Thank you. On the debt that you raised you had suggested you would be using some of this to payoff a revolving credit facility. Is that accurate and when would that be?

We refinanced our revolving credit facility actually just this week so we didn't have any outstandings under the revolver. But that revolver that was negotiated a year ago had a capacity of $345 million; the one that we just renegotiated was for $150 million. And so with the $250 million in senior debt we just raised back in March we have, as I would call it, essentially a $400 million capacity.

Okay, perfect. That is helpful. And if you could, maybe, Kevin, talk about the change in the SRA. What are some of the key aspects of the changes that you are looking at? And how close are we to feeling comfortable that the changes are what they are? In other words, that the proposal won't change further.

As far as whether it's going to change more or not, I am hoping that the next round is actually slightly more beneficial for the reinsurers. But I think it's a process that is ongoing so we will have to wait to see what that is.

The primary drivers are really there is an increase in the [cooler] share, there is some A&O expense reductions, and then there is some realignment of subsidies across -- really think of it in terms of three zones. So the ones that I would say we are the most focused on are the A&O expense reimbursements and how those are coming through.

There have been a lot of discussions on whether they would be capped or different elements can be put into the next version of the SRA that will limit the negative impact to reinsurers. But I don't have kind of a clear sense as to whether that is going to materialize or not. I think directionally it's going in a path where it's going to be worse than the existing one but I am hopeful it's not as bad as the current proposed one.

Great, thank you. That is helpful. Kevin, for you as well, the competitive environment on the cat side, you gave us some sense of what is happening. I am wondering if you could flesh it out a little bit and talk about some of the behavior of the other large reinsurance companies. And included in that just share with us anything that you find surprising in the market at this point, if anything?

I think -- well, what I will talk about is our behavior. Our behavior is going to be consistent this year to last year. I think one of the topics that we are spending a lot more time discussing with our clients is their solvency and the credit risk associated with future premium payments. My guess is that is a consistent conversation they are having during their reinsurance renewal visits.

It's a component of the risk that we have long thought of. I think people think that you write Florida you are writing hurricane. Well, there is other risk that can bubble through the contracts that we have and we try to capture those. But it's on very much a case-by-case basis.

I think hearing some of the other calls that have occurred people are making more bright line statements as to how they are going to think about the market. Our review is these are individual accounts; we will assess the risks individually. And consistently we have priced for credit, management, claims handling, all those sorts of things; we will continue to do it this year.

Okay. Do you find others -- you have heard others talk about having a more rigid approach. Are you seeing that in the market?

To be perfectly honest, it's pretty early in the renewal for Florida right now so I am not sure if the behavior will match the statements at this point. I know ours will.

I also think last year -- when we think of credit risk, which I think is the primary concern this year, in two ways. It's the risk if there is a hurricane and then there is the credit risk without a hurricane.

Last year was a difficult year. We had obviously no hurricanes and we saw about $15 million of premiums due to us that weren't paid. This year I think we are seeing rate increases coming through. I am hopeful that the financial condition of most of our customers will improve over the year so we are thinking about how to mitigate that risk even through price or terms.

And I think the risk this year is about the same if there is a hurricane as what it normally is so our process is unchanged in thinking about that risk.

And then just lastly, just to finalize this, so excluding the credit issues just the general behavior among your competition, anything surprising that you are seeing or is there still a general level of discipline on the cat side?

Again, we are already a strong presence in the market. We are exposure-based pricers. We will maintain our discipline and I am hopeful that with our leadership the market will remain disciplined.

Great. Thanks, Kevin.

Doug Mewhirter, RBC Capital Markets.

Just one quick follow-up question. Did you have any meaningful losses from the United States' snowstorms? I guess your insurance business might have taken some of those.

Actually, I think it would be more on the reinsurance business but it wasn't a material loss for us. We are typically on an excess basis and it didn't really get into the layers that we are writing.

Okay, thanks.

At this time there are no further questions in queue. I would like to turn the conference back over to Neill Currie for closing remarks.

Thank you, ma'am, and thank you all for joining us today. We will look forward to speaking with you next quarter when we will give you an update on what really June 1 and July 1. See you, thank you.

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