濱特爾 (RNR) 2012 Q1 法說會逐字稿

Good morning. My name is Nan and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe first-quarter 2012 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. Peter Hill, you may begin your conference.

Good morning and thank you for joining our first quarter 2012 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 from approximately noon Eastern Time today through midnight on May 24. The replay can be accessed by dialing 855-859-2056, or 404-537-3406. The pass code you will need for both numbers is 682-32-084. 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 July 12, 2012.

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, 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, Peter.

Good morning, everyone, and thank you for joining us this morning. After two years of severe catastrophe losses, the industry experienced its first period of low to moderate catastrophe loss activity during the first quarter. Our underwriting results reflected this along with improved risk-adjusted pricing for our core product. We reported operating income of $155 million for the first quarter and an increase in tangible book value per share plus accumulated dividends of just over 6%.

Over the course of the last 12 months, we have been speaking on these calls of our expectation that conditions in the property catastrophe market would improve gradually and steadily. The pricing and terms we saw at the January 1 renewals bore out this view. Against the back drop of a favorable environment, our hallmark ability to integrate science with sound underwriting judgment and to deploy risk capital efficiently allowed us to grow our book of business significantly. As we have many times over the history of our Company, our strong technical capabilities, excellent customer relationships, and underwriting experience enabled us to provide coverage for our clients following large events while still building an attractive portfolio.

At the recently concluded April renewals, we continued to serve our Japanese clients by remaining a stable source of capacity for them after an extremely difficult year. We did not back away from risk in Japan or any of the other regions that were impacted by the catastrophe losses in 2011. Rather we used this information gleaned from the event, including local seismic stress changes post-event, along with our own internal assessments of risk, and took steps to further sharpen our underwriting. Our underwriters have been at work for some time now on the June, July Florida renewals where we are seeing interesting dynamics at play.

We continue to be encouraged by the latest initiatives in Florida with respect to reforming the property insurance market, reducing reliance on binding and assessments, and increasing risk transfer to the world market. We are hopeful that the Florida primary homeowners market is trending towards health after several challenging years. Kevin will talk about Florida in more detail in a few minutes. Outside of property catastrophe, we continue to position our specialty reinsurance franchise to expand meaningfully when market conditions improve. Our Lloyd's unit continues to develop business we would not have seen in Bermuda.

Our ventures unit has been active in recent months. As we announced earlier in the first quarter, we set up a side car vehicle, Upsilon Re, to target the structured retro marketplace globally. Capital was provided by RenaissanceRe and third-party investors. We continue to meet with investors regarding opportunities to deploy third-party capital. The potential for new ventures will likely depend on the level of attractive business opportunities we see emerging during the June, July renewals. The work of our ventures unit remains core to our strategy as these vehicles allow us to bring significantly more capital to bear for our clients while earning us fees and profit commissions.

Our investment portfolio benefited from the decline in credit spreads in some sectors, and a strong rebound in the value of our alternative investments. This was partially offset, however, by losses at REAL, our weather and energy risk management business, as the abnormally warm weather in parts of the US and Europe persisted through the first quarter. Looking ahead to the remainder of 2012, we expect ongoing favorable market conditions overall that should help top line trends. As always, we will remain disciplined in our underwriting. Our capital position remains strong, our client relationships are robust, and we are well-positioned to continue to grow our book of business in the right market conditions. With that, I'll turn the call over to Kevin. Kevin?

Thanks, Neill, and good morning. The first quarter is typically quiet once we get past the January 1 renewals, both in terms of renewals and loss activity, although last year that wasn't the case in terms of losses. We're very pleased with the portfolio that we constructed this quarter. We achieved strong growth at the January 1 and April 1 renewals and have positioned our portfolio well for the summer season.

Going into January 1, we felt that an increase in the geographical diversity of our book of business would serve us well and allow us to build a more attractive portfolio. I believe that even after adjusting for our updated view of risk, we achieved our objectives at this renewal and will enter this wind season with a portfolio that is superior to our portfolio of 18 months ago.

As I discussed on the last call, and really have touched on for the last several calls, we have been in an improving US cat reinsurance market with pricing firming in each of the last four quarters. We saw another positive move in pricing this year, and have been executing well, improving the quality of our book and successfully deploying more risk capital.

The Florida renewal is approaching quickly, and we believe there are opportunities to increase business this year. It has been our view that we would see a slower move by reinsurers to adjust fully for the updated view of risk and as predicted, we are continuing to see the effects of RMS version 11. Even though this model was released early last year, it appears that most markets are only now incorporating it into their risk model. As I've discussed before, not only did we adopt certain changes in RMS version 11 last spring, we had anticipated many of these changes prior to its release.

This has positioned us well with our customers, as we are ahead of the curve in understanding the effects of the new model on their books, and have led the market dialogue around the changed perception of risk. In general, as a result of model changes and other factors, including the increasing awareness of counter-party credit risk, we expect another small step forward toward improved rates on our book during the current Florida renewal period.

We think there will be some new demand, and our expectation is that supply will remain relatively flat, resulting in what we believe will be an orderly market renewal. There is new demand due to reductions in the size of the CAT fund, some specific increased purchases, and the ongoing effects of RMS version 11, but not all of this increase will transfer to the private market.

Turning to international property now. Last year was an active loss year in the international property market, and we are seeing price increases in loss-affected regions. For example, at the April 1 renewal, Japanese earthquake layers became more attractive, with rate increases on some programs in excess of 100% and we are now writing more of this business.

We have been working closely with our scientists to better understand how earthquake exposure in Japan has changed after the Japanese earthquake. It is our belief that there is an increased risk in specific areas in Japan, in certain parts of the distribution and we have adjusted our pricing accordingly.

Japanese wind has also firmed but is still not to the point where we find the Open Market business attractive. We built some exposure and premium from Japanese wind risk, but it was largely from our retro writings and some private layer reinsurance relationships. In Thailand, the post flood pricing was up substantially, but we still struggled to find local Thai business that reached our hurdle rates. Outside of the loss-affected regions, prices were up, but disappointingly so.

With regard to retro, the vast majority of our book renews at January 1, but what did renew post 1/1 was positive. Like what we saw with the US primary market, we were disappointed that more post 1/1 purchasing did not materialize. We are a first-go market for retro, and are well-positioned to write more should demands pick up.

Our Specialty business is performing well, and we are seeing good business, a trend we anticipate will continue. While the long-predicted turn in the soft market is yet to occur, some markets are becoming attractive. We are growing our quota share platform and expect it to continue to provide attractive terms. Our specialty book continues to experience low loss emergence, which adds to our comfort with our underwriting.

Moving on to our Lloyd's syndicate, I'm happy with the continued progress made by the team as they are now about 2/3 larger than at this time last year. With this growth has come improvements in both loss and expense ratios. We continue to build out the underwriting teams which adds depth in existing lines and allows us to exploit more diversifying lines of business.

It is likely that growth will slow on a percentage basis going forward, as we now are working off a larger base. That said, we are seeing rate increases in our Property business, and are hopeful that the softening has not only stopped on the casualty side, but will slowly start to improve over the course of 2012. Overall, we are very pleased with the progress to date and the franchise we are building in London. Looking at our ceded portfolio, we remain active with our sessions from our assumed risk. These are in all forms from very traditional structures to private bespoke offerings designed to offer diversification to our counterparties. Additionally, we remain successful in attracting both mainstream markets and more diversified sources.

I would like to spend a few minutes on our ventures unit now, who as we've discussed in previous calls, manages our joint venture partners and strategic investments. The group performed well in attracting new capital and enhancing the performance of our existing investments. They continue to bring us opportunities to marry attractive risk with efficient capital.

The team is also responsible for managing our weather and energy portfolio through a very difficult season. As Neill mentioned earlier, REAL had a large, seasonal loss which affected both the fourth quarter of last year and the first quarter of this year. As you probably recall from my comments last year, REAL provides risk mitigation products against weather-related events, such as temperature and precipitation for corporate clients worldwide.

Given that our customers are end users, commonly utilities, we often sell them weather-contingent energy products. In winter, we are generally protecting customers from unusually warm weather, and in the summer, we are generally protecting customers from unusually cold weather. As many of you may have seen or experienced, this winter was unusually warm across both the US and the UK, and we have provided protection for this warm weather. I stated last quarter that the REAL deals are seasonal, so we remained on risk for this business through the first quarter of this year. Unfortunately the warm weather not only continued, it got warmer.

For many of our key markets, March was one of the warmest Marches on record. In fact, there were over 15,000 warm temperature records set over the winter, making this winter the temperature equivalent of a catastrophe. The first quarter and the season as a whole were modeled appropriately and our results were within our expectations. We are actively reviewing the book to better understand and manage this portfolio. As with any loss, we will continue to improve our modeling and strive to have the most updated view of our risk.

Going forward, REAL is seeing a good flow of Summer business and is continuing to invest in systems and distribution channels. Looking forward, I feel we have a very strong portfolio and a great platform. I'm very pleased overall with the way the quarter progressed, and I am enthusiastic about our outlook going forward with reasonable opportunity to grow the book and to continue to pursue some rate increases.

Thanks, and I'll turn the call over to Jeff.

Thanks, Kevin, and good morning, everyone.

I'll cover our results for the first quarter and then give you an update to our 2012 top line forecast. The first quarter was a profitable one for RenaissanceRe, due primarily to the relatively low catastrophe loss activity, a higher level of earned price increases, favorable reserve development, and strong investment returns. Top line growth was strong in the quarter, as we benefited from improving market conditions in property catastrophe reinsurance and our strong market position there.

The only significant loss activity during the quarter was the series of tornadoes in late February and early March which resulted in a net negative impact of $22 million on our financial results. As a reminder, the net negative impact is the net loss after accounting for net claims, reinstatement premiums assumed and ceded, lost profit commissions, non-controlling interests in joint ventures, and our share of top layer re-losses.

We did not make any changes to our loss estimates for large catastrophic events that occurred in 2011, and our overall estimate of aggregate losses from these events have reed relatively unchanged from where they were originally booked. There still remains some uncertainty with respect to these events, including the nature of contingent business interruption, some data and reporting complexities in some of the affected regions.

Investment performance was very strong in the quarter, benefiting from a decline in credit spreads and a strong rebound in the valuations for alternative assets, especially in private equity. We reported net income of $201 million or $3.88 per diluted share and operating income of $155 million, or $2.98 per diluted share for the first quarter. Net realized and unrealized gains, which accounts for the difference between the two measures, totaled $46 million. The annualized operating ROE was 19.7% for the first quarter, and our tangible book value per share, including change and accumulated dividends increased by 6.3%.

Let me shift to the segment results, beginning with our reinsurance segment, which includes CAT and Specialty, and then followed by our Lloyd's segment. In the reinsurance segment, managed CAT gross premiums written in the first quarter totaled $559 million, compared with $529 million in the year-ago period.

Adjusted for $113 million of reinstatement premiums in the prior year, managed CAT premium growth was 35%. This compares with our top line guidance of managed CAT growth of 15%, excluding reinstatement premiums for the full year. This includes $34 million of gross premiums written by our new sidecar venture, Upsilon Re, which is targeting opportunities in the structured retro market. The top line growth was largely driven by hardening market conditions in the Property Catastrophe business, as well as growth of our book as more opportunities met our return hurdles.

As a reminder, managed CAT includes the business written on our wholly-owned balance sheets, as well as CAT premium written by our joint ventures, Da Vinci and Top Layer Re and our current sidecar Upsilon Re. The first quarter combined ratio for the CAT unit came in at 16.9%. The results included losses from the February/March tornadoes that hit Kentucky and Tennessee. These losses related primarily to regional covers we wrote that tend to attach lower down. Catastrophe loss activity overall, though, was relatively low.

There were no meaningful adjustments to loss estimates for the large catastrophic events of recent years. The CAT combined ratio also benefited from $35 million of prior-year net favorable reserve development, largely related to smaller events that occurred prior to 2009. Specialty reinsurance gross premiums written totaled $101 million in the first quarter, which was also up meaningfully compared with $75 million in the prior-year quarter. This is a bit above our full-year forecast for top line growth of over 20%. The percentage growth rate for this segment can be uneven on a quarterly basis, given the relatively small premium base. The specialty combined ratio for the first quarter came in at 60.4%. There was no meaningful large loss activity for our book during the quarter, and the combined ratio included $12 million of prior year net favorable reserve development.

In our Lloyd's segment, we generated $55 million of premiums in the first quarter, compared with $37 million in the year-ago period. Growth in this segment was consistent with our full year top line guidance of up 50%. Specialty premiums accounted for most of this increase. The Lloyd's unit came in at a combined ratio of 95.6% for the first quarter.

The results of this segment included $7 million of favorable reserve development, which helped the loss ratio by 29.3 points. The expense ratio remained high at 59.3%, although we would expect the expense ratio to decline over time from this level, as we continue to expand business volume written on this platform.

Moving away from our underwriting results, other income was a loss of $39 million in the first quarter, and a breakdown of this is provided in the financial supplement. As mentioned in the press release, this was primarily driven by a $35 million pretax loss related to REAL. As Kevin discussed, the loss arose due to the continuation of abnormally warm weather over the winter that we highlighted on the fourth quarter earnings conference call.

Equity in earnings and other ventures was a gain of $6 million. This was driven primarily by a $5 million gain that recorded for our share of Top Layer Re's results. Recall that Top Layer is a 50/50 joint venture we have with State Farm, whereby our partner price a $3.9 billion stop loss in excess of a $100 million retention. We also booked a $1 million gain resulted to our stake in Tower Hill Companies.

Turning to investments, we reported to net investment income of $67 million that was driven by a few factors. Our alternative investments portfolio generated a $43 million gain. Performance was strong across our private equity, hedge fund, and bank loan and high yield funds, driven by a rebound in valuations for these asset classes during the quarter. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio, and totaled $26 million in the quarter. The total investment return on the overall portfolio was 1.8% for the first quarter.

Net realized and unrealized gains included in income totaled $46 million during the quarter. Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments, with a high degree of liquidity and modest credit exposure. During the first quarter, we continued to reduce risk in our fixed maturity portfolio to some degree by further reducing our allocation to corporate bonds and to non-US sovereign debt. At the same time, we increased our allocation to US treasuries and short-term investments. Our current allocation reflects our outlook for a potentially uncertain economic and financial market environment.

Our first quarter investment performance was stronger than we anticipated, and we would caution against assuming annualized returns at this level. While we like the way our investment portfolio is currently allocated, with the current level of interest rates and credit spreads, we could see some volatility around these levels, and perhaps even periods where some of the return is eaten away by either rate increases or spread widening.

The duration of our investment portfolio decreased to 2.3 years from 2.6 years at the end of the year. The yield to maturity on fixed income and short-term investments declined slightly to 1.6%. The lower duration of the overall portfolio is largely the result of our increased allocation to short term investments.

Some of the allocation to US treasuries and short-term investments is due to some funds being parked as we transition funds from one investment manager to another, so both the duration and the yield on the portfolio could rise a bit as these funds are redeployed. Despite having deployed more capital to our underwriting activities, our capital and liquidity positions remain strong.

As always, we will evaluate our options to deploy capital profitably in our underwriting activities, and should we remain overcapitalized, we will consider returning excess capital. As Neill alluded to in his opening comments, our ventures team continues to speak with potential long-term investment partners about joint venture opportunities that could help bring additional capacity to the market.

We have frequent dialogue with investors looking to purchase a stake in Da Vinci RE where our current ownership stake stands at 34.5%. We view Da Vinci as a long-term vehicle that offers clients a balance sheet that is parallel to that of our own CAT book.

During the first quarter, we continued with a very modest level of share buybacks, repurchasing 51,000 shares at total cost of $3.6 million. The level of share repurchases for the remainder of the year will likely be determined by a number of factors, but especially our view of the market opportunities and capital utilization as we approach the mid-year renewals.

Finally, let me give you an update to our top line forecast for 2012. Keep in mind that there is considerable uncertainty around these top line estimates, given that the June and July renewal seasons are still a few weeks away. With that qualification, for managed CAT we now estimate premiums will increase 20% for the full year 2012, excluding the impact of reinstatement premiums. This compares with our prior top line guidance for managed cat of an increase of up to 15%, excluding reinstatement premiums.

In specialty reinsurance, we're maintaining our forecast for the top line to be up over 20%, and as we've said on many occasions, including this call, premiums in this segment can be a little uneven from one quarter to the next. In our Lloyd's unit, we continue to expect premiums to be up 50%. Recall this growth is off a relatively small premium base, and we are in the building and growth phase for this platform. Thanks, and with that I'll turn the call back over to Neill.

Thank you, Jeff. Operator, we're happy to accept questions now.

Thank you. (Operator Instructions) Mike Zaremski, Credit Suisse.

Hi, good afternoon. I'm hoping we could get more color on how to size up and think about the REAL weather segment. Is that a book that renews on a quarterly basis or are the contracts that have been causing losses locked in for longer?

Mike, hi, it's Neill. Why don't I start off responding to the topic, and then I'll turn it over to Kevin. It's interesting, one of the things I look at with the losses we've incurred at REAL is the difficulty of growing new business. This is still a relatively new business for us, and the value of having a good portfolio of business. Here at RenRe, we've been in business about 20 years, and sometimes people say, gee, RenRe is pretty good at what they do, are they worth paying over book value for? I think this shows you the value of being around for a while and putting together a very attractive portfolio of business. So with that preemptory comment, I would like to turn it over to Kevin.

Thanks, Neill. Very simply, there's two seasons for that book. There's a winter season, which is really predominantly exposed in the fourth quarter and the first quarter, may extend a little bit into the second quarter. And then there's a summer season which is really more the third than the second, but it's the second and third quarters. The two sets of deals are discreet from each other, and we enter into most of our contracts to be single season deals. The overall risk that we take generally is significantly more in the winter than the summer. So hopefully that's a good way to frame it for you.

Okay. That helps. And, second, can you provide color on where the growth within specialty reinsurance is coming from?

Sure. We've written a little bit more quota share business as a component of it. That had been more specialty casualty lines and in general we've been successful in some credit lines, but I would think of it more as specialty casualty than traditional casualty.

So pricing is getting better in those lines, I'm assuming, then?

Within certain segments, yes. I wouldn't say -- across casualty, I think we're hopeful that it's going to get better, but within very specific lines, there are a few opportunities.

And lastly, did growth pick up or slow at the April 1 renewal season versus 1Q?

I guess for the overall book, it's such a smaller percentage of our book that the overall growth on the book is a lower percentage. But we did experience pretty good growth at the specific deals that renewed at 4/1. But against the overall, it's just not that big a piece of our book.

Okay. Thank you.

Sarah Dewitt, Barclays.

Good morning. First on the top line growth, clearly plus 20% is a very good result, but why do you expect that to slow versus the first quarter, given the opportunities that you're seeing? Is that driven by rates or something else?

What renews now is really a Florida-specific book, so I think it's a little bit of apples and oranges as to what elements are available to construct your portfolio. And we, looking back, in the fourth quarter of 2011, when we're setting up our pro forma portfolio for 2012, we felt that increasing the diversity of geographical and diversity within the book was going to be helpful in constructing the portfolio with the way we thought the market was going to shape up. So it's really a specific portfolio shaping to us more than a market comment.

Okay. And then separately, if we go through this hurricane season with no losses, could you talk about what your view on the sustainability of rate increases is?

I hope to be -- in that case, I guess, to think about that. I think we'll be under -- there's excess capital in the market, if there's light hurricane activity, I would expect there will be increased excess capital. So I would anticipate that would put pressure on rates, whether it will drive rates down or flat or up at a lesser degree, I think it's something that's harder to call.

Sarah, it's Neill. I was a reinsurance broker for 17 years and I remember going through a loss-free hurricane season, and a client wanted a rate reduction on a top layer. And I'm saying, you have gone through one season without losses and you want a rate reduction on something that's a 3% rate online? Are you kidding? So there's a little bit of human emotion that goes into a loss-free year, but frankly there are more technical reasons that come into play that offset any emotional reaction to a loss-free year.

Okay. Great. Thanks for the answers.

Yes.

Michael Nannizzi, Goldman Sachs.

Thank you. A couple of questions on the Florida market. Can you kind of talk about the market there? We've seen some releases related to Everglade's Re on the supply side. Just wondering what the impact there is. And then a little bit more context on your comment on the demand side of the equation there. And just one follow-up. Thank you.

Sure. I think there's a couple of things. One, we've seen some positive movement in the reduction in the FHCF, which is helpful, and some other structural changes with the state-provided reinsurance, which will add demand to the private market. One thing that I think needs to be considered in thinking about that, though, is how much of that ultimately sticks with private insurers compared to state insurers. Our view is that each dollar of premium that goes to a private insurer in Florida has more reinsurance associated with it than that which stays with the state, so that will dampen the increased demand based on the reductions from the state-provided reinsurance programs. As far as new people coming into the markets, we're in the midst of the renewal now, so I think that's just more of an expectation for the market, but it's harder to read.

Great. Thank you. And then just thinking about growth throughout the year, you say you're seeing some better opportunities, or feeling better about June renewals. How capital intensive do you expect that business to be, and how much capacity do you have to write more, given you've written more already both from a peak zone and from a capital perspective?

Again, going back to what we -- when we construct our portfolio for 2012, we pro forma the full year. Included in that pro forma is our expectation as to what we're going to change at the June and July renewals. So we do have more capacity, should the rates be sufficient for us to deploy it. Florida in general, or Atlantic hurricane in general is among the most capital intensive risks to put on most reinsurances books, because it tends to be the peak user of surplus. So with that, it is expensive surplus to deploy, you just need to match it up against the rates that are offered for that deployment.

And is growing Da Vinci also an option? You mentioned taking your ownership stake down there, but is that another lever if you choose to exercise it in terms of grabbing more business that you like?

Yes, I think one of the real benefits of the platform that we have is we have lots of different ways to match capital with risk, and growing Da Vinci, growing RenRe Limited, as Neill mentioned, the sidecar that we started --. There are lots of different options that we have, and we look at the efficiency of the capital we have, and deploy it best against the risk we desire.

Great. Thank you very much.

Greg Locraft, Morgan Stanley.

Good morning, and thanks. Wanted to just once again pursue the second quarter improvement in the supply demand equation you're seeing for Florida. It's hard to size, but I'm trying to put dollars around the Florida market and the opportunity set there, because as I look at it, the book is about the same size as it was in 2009, it was the same size last year or so, or thereabouts. And I'm trying to understand how big the market opportunity is growing, and then lateral and whether or not you will be taking share in that world, because it sounds like you will. Can you put some parameters around that, in terms of how big the market is growing for private reinsurers?

Yes, I think a couple of things I would -- rather than talk specific, I'll talk about the way we think about it -- is how much is the private market growing relative to what's going to state insurers, I think is the first part. Then looking at how the reductions in the FHCF, the LAC, and other programs, how much of that really sticks with the private market, is kind of the way that we break the world down. I think when you extrapolate the macro changes that have occurred, the amount that actually sticks to the private market is significantly less than the reductions seen in the FHCF and the LAC, is really the way we size it up. So there is an increase, but it's not one that I would say is particularly large.

Okay. Okay. Good. And then on a separate topic, relative to your peers, I don't think there's another carrier on the planet that is taking this much market share. I'm just looking at first quarter results, if you just look at the top line growth in managed cat of 35%. So just a general question, is your view of the world different than your competitors? Maybe can you talk about how does one execute in a world where supply/demand is changing the way it is? What is propelling your market share gains right now, vis-a-vis your competition?

Yes, I think one is we -- early before 1/1, we thought there would be a dislocation in retro, so we grew our retro writings pretty substantially. A component of that is what Neill mentioned with our sidecar. Additionally, we have very strong relationships in some international markets, and with the capacity that we have, we were able to continue to build out some private layers within the international markets. With the rest of the book at 1/1, we have a lower percentage of our book that renews at 1/1 than most of our competitors. So being that we have a lower percentage of our book, the opportunity to deploy more there I think was greater for us than for some others, as well.

Right. Greg, I would just add to this, sort of speaking about macro, and the way companies operate, and pressures on management, and interactions with boards and analysts such as yourselves, is we just have been through two years of a lot of losses in the cat area, and does management feel confident? Does the Board have confidence in management to write more catastrophic exposure? You have to be comfortable with the risk you're taking. I think some people after the losses said, boy I'm not sure I want to increase my catastrophic writings. I think that happened with a few of our competitors. We remain comfortable with the risk attribute. Some of the risk has changed in the world, but we were able to step up confidently to write more business as things evolved.

Great. And then one last one, if I can. It was a great quarter, probably outside of the weather energy business. You mentioned some of the triggers for that business, and how it works, and I know it's an emerging platform, but what I'm wondering is, is this book constructed in a way where -- we just took a catastrophe, or effectively a catastrophe in the first quarter in that book. Can we see a gain or profitability of $30 million out of this unit in this specific quarter, or what sort of profit metrics can we expect in a more normalized return period for that book of business?

Yes, we think about this book very similar to how we think about our reinsurance book and other books, where we're providing protection for extreme events to customers, and for that we expect to be paid a margin. The margin that we're paid, though, is how much capital is being deployed, and we see this book as adding a degree of diversification to the overall risk that we're taking. So on a marginal basis, the returns are actually quite strong, and on a stand-alone basis, we obviously have a profit. Otherwise we wouldn't be in the business. The type of loss we had in the fourth quarter is certainly moving out towards the tail of the distribution, which we would expect from the extreme weather that we experienced. So the upside would be more in the meat of the distribution, as would be in a normal year, but to disclose specifically what our margin is on any line of business is probably more detail than we're comfortable giving.

Okay. What I'm trying to understand, is this like the reinsurance -- I guess it is like the reinsurance business analytically. And I'm just trying to understand -- because you've successfully endured two quarters of a catastrophe in that world. Does that mean that this line item is going to grow significantly going forward from a profit contribution perspective?

That's a good question. We're coming into the summer season, which is a smaller season, generally in the market, and for our book as well. We are really going to have the opportunity to look at the book as a renewal book for the first time this coming winter season.

Interesting. Okay. Great. Well, thanks, and congrats on the start to the year.

Thanks, Greg.

Josh Shanker, Deutsche Bank.

Thank you. Greg touched on number of my questions. Just one, though, if you could touch upon the incidences where the favorable development is emerging from, and talk a little about claim emergence from the 2011 catastrophes.

Okay. Thanks, Greg. On the cat side of the ledger, we had $35 million of favorable reserve development. The vast majority of that was from smaller events pre-dating -- I think I said in my comments, 2009 or earlier. So more than two-thirds of the favorable reserve development in the cat book came from things prior to that. The remainder was related to smaller events in 2011, but virtually none of it related to the large events that occurred in 2011. The favorable reserve development that we had on the specialty book really derives from a review every year that we do of our actuarial assumptions in the specialty business on initial expected loss ratios and loss development factors, and that was the outcome of that review. Then, sorry, your other question was?

And so what are you thinking, although we can't touch it in reserves, what are we seeing on claims emergence from the 2011 catastrophes?

Well, the answer is it depends on the event. And there's actually kind of a very wide distribution of things that we're seeing, so to take an event like the April and May tornadoes from last spring, those have paid out over 50% of what we expect as our ultimate loss. So something like that is paid out relatively quickly, and significantly. By way of contrast, some of the earthquakes that we saw last year have paid out very slowly, and one of the earthquakes has actually paid out reasonably quickly. And then something like the Thai floods which occurred late last year, we've seen virtually no claims activity paid there.

In terms of -- this is probably going to be a difficult one and you guys may say we just don't have the answer -- that's fine. To what extent are you guys paid up on Hurricane Ike?

For the 2008 hurricanes, we're about 85% paid out of what we anticipate as our ultimate loss.

Okay. Thank you very much. I appreciate all your answers.

Yes.

Doug Mewhirter, RBC Capital Markets.

Hi, thanks, good morning. I just had one kind of a big picture question. Just trying to maybe help understand how you have shifted your reinsurance portfolio. So it looks like you -- I guess you expanded your appetite a little bit in January, both because of favorable pricing, and also that a little more diversity helped and that also you implied that in June, that the market might be a little more finite, but there's still a lot of opportunities, and you could mainly grow the book through better pricing. So could you give me an idea, like in January, how much of that expansion was due to taking on more risk, however you might define it, and how much would be expansion in the price per unit of risk, however you might define it?

Yes. That's a great question, and I think at the broadest level, the rate environment, we think is very strong, and as we've always done, we grew into a better rate environment. When we think about price or return in capital, we actually think about it across the whole distribution. So, what we're talking about is geographically, we did write more business, we wrote a more diversifying book, which improved the efficiency in the return. So, within some specific areas, we did increase the risk we're taking to certain perils in regions. Also we were successful in adding some diversification across the whole distribution. So in some areas we found more low layers that were attractive, in other areas, we found more high layers that were attractive.

Again, that improved the efficiency and the return of the portfolio. So it's really a combination of things that we're looking at as to, at the end of the day what the portfolio looks like. And we have improved the quality of the portfolio as a whole, but to thing of it as a price increase or a price change in any one region isn't consistent with how we manage it. Being that we saw more opportunity to build a more diversified portfolio, we were able to add more risk capital it to, as well. So in general, if we're paying more for the risk, we're certainly going to look to deploy more of our capital. And that's what we did, but it's not in any one region. We improved the overall efficiency of the portfolio.

That's a fair answer. And if I heard you correctly, correct me if I'm wrong, it does sound like that although the Florida is a more finite market, and you've actually been able to sort of nail down how it's going to change, that you actually do have the capacity, and you actually can see a path towards even taking a little more risk in that area, with all of the caveats that you've explained in the first part of your answer.

Yes, absolutely. And the one thing I would add, as well is, included in the growth that we had at 1/1 is we took on more Atlantic hurricane risk in that platform, which we thought was adding efficiency to the portfolio. But we do have more capacity that we can deploy with all of the right opportunities should the Florida market need it.

Okay. Thanks. That's all my questions.

Josh Stirling, Sanford Bernstein.

Good morning. Thanks for taking the call. Two questions. One around your comments on RMS version 11. I just want to make clear whether you are commenting on the slow pace of adoption by cedents or whether there are pockets of the reinsurance universe, either perhaps Europeans, Lloyds, cat bond investors, ILW funds. If whether there are systemically people who aren't using RMS11, and therefore there's a little bit less of a frothy edge on the price firming than perhaps people might have expected.

I think it's been adopted differently in all segments of the market. I think in general, the comment I was making is last year, coming into the Florida renewal, there was a feeling that it was both reinsurers and insurers didn't have an opportunity to digest the changes, so most of the risk we saw was absent a RMS11 view. This year, it's much more part of the dialogue, but it's not -- I wouldn't say it's been a specific adoption from RMS10 to RMS11. There's been much more creativity in thinking about blended models and interpretations as to how to think about the risk that someone has. But in the dialogue, certainly is RMS 11.

Specifically, our view of it is we build our own models, always have. RMS 11, when that was released, we did what we always do which was we dissected the model and then pulled out the elements of the risk that we liked. Over the course of the year, we've been having the dialogue with each of our customers about the elements that we liked in RMS 11, and what they may see by employing some of those elements into their own risk. So it's a bit of a mix, but I wouldn't say that last year was RMS10 for Florida and this year is RMS11. It is much more of a blended approach, but it is part of the dialogue, which last year it was not.

That's helpful. I guess I'm trying to just get a sense of do we think this story is largely played out and we're now at a basis where the repricing that might have occurred from a combination of greater view of risk plus increasing demand is complete? Or whether that's something that you think is going to support demand or, again, competitors repricing over some extended time period?

You know, one of the things I think, that Neill has been talking about is the slow -- that we've been in a hardening market over an extended period of time. I think with the Florida renewal this year, we've completed the first cycle of that, which is each renewal has been through the new model releases. With that, I think that part of the dialogue will shift. The one thing I'll reflect back on is in my comments, is we've been surprised that there's been increased purchasing from US domestic carriers, and then as a knock on in the retro market. So that shoe may still fall, and we may ultimately see that increased purchasing based on everybody's updated view of risk, but that's harder to tell at this point.

Right, right. And is that just waiting for the rating agencies to be more direct and prescriptive or do you think there's still an organic process of people just digesting the numbers?

Yes, I think rating agencies always play a component in people's thinking about structuring reinsurance programs, but I have to think it's something more organic within each of the companies.

Great. Hey, listen, I don't want to take too much more time. But I wanted to point out, I appreciate your disclosures on the REAL story. And this was never obvious to me, but I presume you guys have gotten into this business because you see it as effectively negatively correlated with a lot of your exposures, especially down on the Gulf where warm weather presumably drives losses. And I guess the question would be, one is that how you strategically think about it? But also, if that's true, given the number of scientists you guys have on your payroll, do you guys have a view on should we expect warm weather to persist and drive greater frequency this summer?

A couple of questions in there. Taking REAL firstly. We look at REAL the same way we look at all of our other businesses. We look to see that it's stand-alone profitable and then we look to see whether it's marginally profitable against the rest of the portfolio. The second analysis includes, obviously, correlation with the other risks that we're taking. We don't believe REAL is negatively correlated with our portfolio, but we believe that there is a diversifying element to having that risk within the overall construct of our risk portfolio. The second question is really our view on forecasting, and I think we are familiar with all the research about weather trends and increasing warmth, and then whether that will ultimately mean that there will be greater volatility. That's really a science that is emerging, and one in which we're closely connected with, but not something that we would put out a specific opinion on.

Great. Thanks so much.

Vinay Misquith, Evercore Partners.

Just a few quick questions. First is on the Upsilon Re, the $33 million, is the first quarter most of the premiums or do you expect that to go on for the remaining year, and do you expect that to continue next year, or is that just a one-shot deal?

Most of that premium will be the first quarter, just by the nature of the type of risk that's in there, which most of that the retro premium is really January 1. We do have capacity to write more, and we continue to look for opportunities to write more into that vehicle. The second part of the question is really whether the vehicle persists into 2013. We remain flexible to have it or not have it, but are optimistic that we'll be able to deploy it of at least the same size in 2013.

That's great. The second question was in Florida. Now, just seems that you guys are pretty full up. Do you have a little bit more capacity to write more business to pricing rises. So my question is, what level of rate increase do you think in Florida is required for you to pick up your exposures?

Really, that's an account by account discussion and a layer by layer discussion. We don't think of the market as something that needs price or doesn't need price. We look at it based on the exposures and how they've changed for specific clients. One of the things that, reflecting back on before is, many of them have an increased view of risk because of model change, but many of them also have changed the construct of their portfolio, which mitigates that. We take all of those factors into effect, when looking at it, but it really is a client-specific answer, not something we look at for our market.

Great. And then finally on the share repurchases, given what the guidance is for the top line growth, do you think you'll be able to do some further share repurchases for the rest of the year?

Yes, Vinay, we do -- our current assessment of our capital position indicates a fair amount, still, of excess capital, and we will consider share repurchases over the course of the remainder of the year.

Okay. That's helpful. Thank you.

Jay Cohen, Bank of America Merrill Lynch.

Yes. Thank you. Question within the Lloyd's business. And you may have mentioned this and I missed it, but the net to gross went down quite a bit there. What's going on there, and what should we expect for the full year?

I think the net to gross is -- we're not changing our strategy there. I think as the books become a little bit bigger, we will purchase a little bit more, but it's not something that we're going to look to have it run with significantly different ceded strategy than what we've had to date, except for managing it against some of the Lloyd's criteria, which really only comes into play if the books become of sufficient size. So over time, I think a greater percentage -- we'll have an increased session, but it's really going to be in the context of the Lloyd's capital frame work, but it's not a strategy shift.

Okay. No big change. Thanks, Kevin.

Okay.

(Operator Instructions) Ron Bobman, private investor.

Hi. I had a couple of questions. Hope you'll be patient with me. You comment on the pay to encourage actually the difference on the quakes in 2011. I assume New Zealand is the quick pay, and Japan is the slow pay. What order of magnitude are each of those at paid to incurred. And obviously, correct me if I'm wrong in my guessing.

Actually you are wrong in your guessing.

Yes? Stick to my day job. (laughter)

Our level of paid claims on the New Zealand quakes to this point is actually much lower than the Japan quake.

That's the extent of the relativities you'll give us?

Well, I would -- to this point, our guess -- or not our guess, but what we have paid out on the Japan quake exposure is nearly half of what we estimate to be our total incurred loss there. New Zealand is probably 20% of that or less.

Okay thanks. Moving along. The weather business, are those exposures, are those contracts supported on your main balance sheet, or is there a special capitalized entity?

Yes, there is a -- we do put some guarantees out. Those guarantees come holdings. But they're finite. We're writing it on the guarantee. We're not exposing the balance sheet, we're exposing the guarantees from the balance sheet.

Got you. And like you said, the guarantees themselves are also limited with specific dollar amounts or contract limits or anything like that.

That's correct.

Okay. Thanks, Kevin. You made a mention -- I think Kevin did, about -- or someone did, about the sort of uncertainty, I think it was in discussions related to the Thai flooding. And I was wondering, in the early days of the Thai flooding, there was some discussion as to qualifying losses, maybe one event, multiple events, maybe there were other elements raising questions as to which losses would be aggregating towards retro coverage. I was wondering if there is any level of disagreement between your counter parties and Ren with respect to the Thai coverage that you've written, as far as losses that are allowed to aggregate or eligible for coverage for the coverages you've written?

Yes, I think we're certainly aware of that as the market dialogue. Most of the exposure that we have from the Thai losses really comes from our retro writings, and due to the retro contract not having an hours clause, there's strong support that it is going to be one event from a retro-perspective. At this point, we don't have any disagreements with any of our counterparties on that.

Okay. My last question is Florida, the Florida primaries, I guess largely private. But any of the Florida primaries that write facing higher reinsurance costs, but at the same time getting more primary rate. Are they -- Kevin, do you estimate that their 2012 underwriting margins have widened, stayed flat versus '11? Any sort of thoughts on their margin? Thanks.

I think there's a -- that is a hard one to answer, frankly, because the system in Florida between the managing agent of Florida company reinsurers and then attritional losses has moved around quite a bit. So going back, the primary insurers have faced increased attritional losses from sinkholes, which is something that we didn't really foresee. So I think they're building a platform, obviously, with better rates, to have more sustainable better margins, but it's such a complex system. We need to look at it on an each-account basis, look at a percent of premium for reinsurance expand attritional, then how much is moving among the different entities within each Florida private company's own holdings, meaning between the insurance company and the managing agency.

I was sort of thinking on a collapsed basis, where you consolidate all of their service companies in effect, is that enterprise? That consolidated group that's buying cover that has a part of it, the services. Do you think they're running in place, or you just don't know?

Part of it is going to depend on what happens through this renewal, but compare this March to last March, they're better positioned strictly from a reinsurance cost perspective, because they've gotten a rate increase. The other components of their book have moved, which adds complications to that. We look at this on each account that we renew, because being with the dynamics in Florida, we give each company a credit rating, so we can manage the credit risk we're taking for premium, but it is a pretty complicated analysis.

Thank you very much. Appreciate the help, and best of luck.

Well, operator, it looks like we've gone over our time slot by a measurable amount and I don't believe there are any other questions in the queue. So with that, I would just like to thank everyone for being with us this morning, and look forward to updating you next quarter on how things went in June and July. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.