RenaissanceRe Holdings Ltd.
Q2 2008 Earnings Call Transcript

Published: 31 Jul 2008

[Operator:]

Good morning. My name is Jacky and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2008 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Thank you. Now, I will turn the floor over to David Lilly.

[David Lilly:]

Good morning. Thank you for joining our second quarter 2008 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we'll make sure to provide you with one. There will be an audio replay of the call available at 2 O'clock PM Eastern Time today through August May 13th at midnight. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The passcode you will need for both numbers is 54802724. 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 October 8, 2008. Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With me to discuss today's results are Neill Currie, Chief Executive Officer; Fred Donner, Chief Financial Officer; Kevin O'Donnell, President of Renaissance Reinsurance Limited and Bill Ashley, President and Chief Executive Officer of Glencoe Group Holdings Limited. I'd now like to turn the call over to Neill. Neill?

[Neill A. Currie:]

Thank you, David. Good morning everyone. Thanks for joining us. I am pleased to report another solid quarter with an annualized operating return on equity of over 23%. This was accomplished despite softening insurance and reinsurance markets in a very challenging economic environment. While part of our success is a result of favorable loss experience, the advantage of being a market leader with strong relationships and experienced, disciplined underwriters enabled us to produce the portfolio of business that generated these returns. Of course, our goal is to continue to generate attractive portfolios. And I'm pleased to say our team did a great job during the June 1 renewals. Our seasoned professionals, who have been through markets like this before, assembled an enviable portfolio of business. Our strengths from a marketing and underwriting standpoint offset lower investment results. Losses from private equity investments contributed to these lower results. In 2007, our gains from this portfolio were higher than we expected. This quarter they were lower. Over time, results from these investments have been quite attractive, and while results will be lumpy, we remain comfortable with our portfolio. We continue to exercise diligence in capital management this quarter, repurchasing stock at prices we felt to be very attractive. Over time, this method of returning capital to shareholders should maximize total returns. In our last call, I'll refer to our strategy of taking advantage of the opportunities that markets like this provide us to focus on positioning our business for the future. This involves looking at how we apply our core competencies to new opportunities, exploring how we further improve the way we run our operations and thinking creatively about how we can advance our business model. During the quarter, we took several steps in these areas. We completed the acquisition of Agro National, strengthening our operating platform in a marketplace which we believe has significant long-term appeal. And we continue to recruit talented executives to expand the depth of experience in our Individual Risk, Reinsurance and ventures teams. We continue to take a broad view of how we can best protect our clients from risks they face as well as extending the value of our franchise for our shareholders. To expand on this point a little bit, as many of you are aware, part of the franchise value of RenRe are the scientists and researchers we employee across our organization. Many of these scientists are housed in our subsidiary, WeatherPredict Consulting, which is a leader in global tropical cyclone prediction using our in-house technology. Our team of scientists provides valuable information and insight to our business units, helping them to manage risks posed by atmospheric events. A natural extension of our business is our work in risk mitigation, which we believe presents the most promise for protecting property owners and insurers from preventable loss. You've already heard about the RenaissanceRe Wall of Wind which is making meaningful contributions to wind engineering research. During the first half of '08, we also hosted Hurricane risk management forums in Florida and Rhode Island and we bought together scientists, policy makers, regulators, insurers and others to share ideas and to better understand the immense potential benefits of mitigation. We feel these efforts will make homes and commercial buildings safer and over time lead to lower insured and reinsured expected losses. So we feel this is a win-win situation. Coastal residents will be safer, property owners and insurers will benefit and we will improve our analytical skills in assuming and managing our risk. Overall, this quarter demonstrates the enduring power of the franchise we have created at RenRe. Our results reflect our ability to take the core skills and values that have been at the heart of the company's culture over the course of its history and to expand them not only in existing areas, but also into attractive new business areas. So with that, I will turn the call over to Kevin O'Donnell. Kevin?

[Kevin J. O'Donnell:]

Thanks Neill and good morning everyone. In the U.S., the property/cat market is continuing the trend we discussed in the last call with the supply of reinsurance capital remaining above demand, and we are seeing the rate pressures one would expect to see from this imbalance. Although market rates have fallen, we are still seeing sufficient volume, which is on our [ph] business to build an attractive portfolio. It's important to note that the regional differences in returns are quite profound. So as with any softening market, risk selection and portfolio construction are increasingly important. As you would expect, we actively manage our book and may continue to reduce our top line, but at the same time expect to increase our share of market expected profit. The main renewal over the quarter was Florida, and I would like to give you a little color around our participation in it. Overall demand for cat cover was about flat this year in Florida. Unfortunately, the legislative changes to the FHCF that were being discussed never materialized. So we didn't see any increased demand as state participation remained constant. We retained our leadership position in the market, and although we did experience some rate reductions, we have built a great portfolio, producing attractive returns. Early in the renewal process, we determined that the market capacity would be satisfied without additional vehicles and decided not to reduce Starbound at our site cost [ph]. This decision provided us with additional flexibility to retain these risks and help us construct the portfolio with better than average market returns. In general, we actively manage and adjust our book in response to the pricing we are seeing in the market. We sometimes think of our book in terms of vertical and horizontal diversification. Our horizontal or geographic diversification is reasonably consistent. Our vertical diversification or share of risk throughout the distribution has changed. We increased our market share of smaller losses in Florida compared with our portfolios over the last two years. But in fact, if you look back over history, the structure of the present portfolio is more in line with our historic portfolios than what we achieved in the last couple of years. We have a strong presence in the Florida market and bring many tools to help us manage our risks there. These include primary opportunities we see with our Individual Risk segment, our ability to bring financial solutions through ventures and of course our underwriting discipline and strong ratings in the Reinsurance group. Moving over to other markets. Outside the U.S., the only area of renewal I will touch on is Japan. For many years now, we have not been a broad participant in the Japanese market due to pricing levels. And not surprisingly, with the current pricing trends, we did not deploy additional capital in the market this year. We do have strong and longstanding relationships in Japan and feel we are well positioned should the pricing environment improve there. Moving over to specialty now. We have been surprised not to see greater dislocation and opportunity accompanying the increased risk posed to several lines of business due to the economic downturn. We constantly review lines of business and rate them as to the likelihood of dislocation to make sure we are prepared to provide capacity when needed. And certainly, we remain disciplined in our underwriting and risk selection, resulting in reduced top line, but maintain the portfolio that produces returns we are happy with. We continue to actively seek new opportunities in all market segments that ensure that we have the resources and tools available to capitalize on them as we find them. Thanks. And with that, I'd like to turn the call over to Bill.

[William J. Ashley:]

Thank you, Kevin, and good morning. We are excited that our Individual Risk business unit was able to close another acquisition during the second quarter of 2008. We acquired the assets of Agro National, a managing general underwriter of crop insurance, offering high quality products and services to the agricultural community. Earlier this year, we acquired Claims Management Services, a provider of claims administration, adjustment and consulting services. Both of these acquisitions are consistent with our strategy to build out our capabilities for the future. The integration of both is going well. We should see benefits in the future of owning these capabilities versus partnerships as third party relationships. As Fred will discuss further, our gross written premium increase this quarter is primarily due to the premiums associated with the multi-peril crop insurance program written by our new subsidiary, Agro National. This growth in premium in part is due to increasing commodity prices for both corn and soybeans. May and June are heavy renewal periods for our wind exposed commercial property book. Even though pricing in this market continues to decline, we're pleased with the pricing and returns we are able to obtain on this portion of our book. For the rest of our existing program business, due to our pricing discipline, we may see this portion of our book continue to shrink further. We incepted two new programs this quarter. The new programs that were incepted in the fourth quarter of 2007 and the first six months of 2008 will ramp up slowly and have a greater impact in the second half of 2008. We've also terminated two programs with policies expiring at various times in the future. Our results this quarter were impacted by several weather-related events that will have an effect on the crops grown in the Midwestern section of the United States. We believe our exposure and expected losses stemming from the flood events were not extensive due to the geographic location of some of the hardest hit areas. As part of our last review, we examined several data sources such as flood gates level data and soil saturation data relative to the location of our exposed crops. Although we will have a few losses from the floods, we believe our share of these losses to be below our market share. More certainty of the results will be known in the third quarter when the crops are harvested. We have also in this quarter made a few strategic hires. We believe with our existing infrastructure, the acquisitions made thus far in 2008 plus the additions of a few key individuals, we are well positioned for the future. Thanks. And I'll now turn the call over to Fred Donner.

[Fred R. Donner:]

Thanks, Bill, and good morning everyone. Now that you have heard from our business unit leaders, I'll take you through the financial results. After the market closed last evening, we reported operating income for the quarter of $160 million or $2.50 per share, achieved a 23% annualized operating return on common equity and grew our book value per share by almost 3%, which includes the impact of our share repurchases. Our top line declined by a little over 4%. However, our underwriting profits remained strong and we generated 53.5% combined ratio. Let me move on to the segment operating results, starting with the catastrophe unit of our Reinsurance segment. Our cat unit generated gross written premiums $465 million as compared to $513 million for the same period last year. On a managed basis, our premiums are down about $47 million or 9%, which is in line with our full year forecast of down approximately 10%. Underwriting income during the quarter for our cat unit amounted to $127 million, up from $95 million from the same period last year. This period's results were favorably impacted by a lower level of current year losses compared with last year's results, which, as you may recall, included the impact of the UK flooding. Overall, we generated a combined ratio of 23% versus 44% for the same period last year. Favorable development in the quarter amounted to $18 million, principally arising from a reduction in small cat losses from the 2007 and 2006 accident years to reported losses coming in better than expected. Moving on to our specialty unit, we experienced a significant decline in top line of our specialty unit, but delivered strong underwriting results. Gross written premiums written in this unit was $23 million versus $94 million last year. Last year's results include the transfer in of a personal lines quota share contract which amounted to $75 million of written premium. The contract was renewed this quarter at a lower participation. $2.6 million of premiums written related to this contract in the quarter reflects the net impact of the change in the participation. Our regional full year forecast was to be down 25% for the full year. However, based on current market conditions, we now expect our full year top line results to be down approximately 50% over last year, which includes the impacts of the quota share contract mentioned. I would remind you, however, that since our specialty segment is impacted by a small number of large transactions, these estimates are subject to change. For the quarter, underwriting income was $31 million versus $26 million last year. This year's results reflect a lower level of current year losses and a lower level of favorable loss development. Favorable claims development in the quarter amounted to $20 million, driven by favorable claims emergence. Our Individual Risk business unit produced gross written premiums of $315 million, a strong increase over the $238 million we reported for the second quarter last year. This increase is driven by an $86 million increase in the premiums associated with the multi-peril crop insurance business, resulting primarily from an increase in commodity prices that you just heard Bill mention. This increase was partially offset by a decline in the commercial multi-line and commercial property business due to overall softening market conditions. Looking at our gross premiums written forecast. For the six months, we are approximately 9% ahead of last year. However, with a challenging market and the seasonal nature of the Individual Risk business, we are maintaining our full year forecast of down about 5% compared with last year. Our current accident year loss ratio came in at 70% versus 65% last year. The higher loss ratio stems primarily from two things. First, the change in the mix of our business. The crop business generally carries a higher loss ratio. Second, the impact from several weather-related events during the quarter that have had an impact on the crop season as Bill just mentioned. Included in this quarter's underwriting results is $12 million of favorable loss development as compared to $9 million last year. The business produced a combined ratio of 88% for the quarter compared to 91% last year. Turning to investment income, fixed income in equity markets remained choppy this quarter. With rates backing up during the period, our fixed income portfolio returns were impacted. The fixed income and short-term portfolio was roughly flat in terms of total returns, and as Neill mentioned, the results in our alternatives and investment portfolio were down. Net investment income was $39 million as compared to $118 million for the same period last year. Both the fixed income and alternative portfolio had very strong results in the second quarter of last year. So on a year-on-year basis, the returns are off meaningfully. Our realized and unrealized losses from our available for sale portfolio this quarter totaled $59 million as a result of the rising rates. And as you may recall, our policy is to realize our other than temporary impairments, that is we take the unrealized loss through net income. This quarter our impairments amounted to approximately $27 million. It was all interest rate-driven and we have no impairments related to credit. And at June 30th, we have no available for sale securities in an [ph] unrealized loss position. Our other investments generated a loss of $18 million as compared to $42 million of income for the same period last year. Including other investments, our hedge funds and private equity investments which generated a $29 million loss compared to $35 million of income last period. One other item worth mentioning is the breakdown of our agency exposure. At June 30th, we have approximately $981 million of U.S. treasury and agency debt in our available for sale portfolio. Included in that portfolio is approximately $330 million [ph] of agency debt primarily to Freddie Mac and Fannie Mae. In terms of how we are positioning our portfolio in these turbulent times, we continue to seek opportunities to add risks modestly where we believe we are getting paid appropriately for the risk. You may have noticed that we increased our investments in our agency mortgage-backed securities slightly; again, all highly rated investment grade securities. Our duration is still relatively short at around 2.1 years and the majority of our portfolio is invested in highly rated investment grade securities. And as such, we believe that the portfolio is well positioned for the current market conditions. Let me touch on the tax benefit that we have coming through this quarter. The benefit stems from losses taken from private equity investments by our U.S. operations. And lastly, during the quarter, we purchased approximately 2.2 million common shares at an aggregate cost of $113 million. And since June 30th, we repurchased an additional 1.6 million shares for approximately $75 million. Also, since we began our program in the first quarter of 2007, we have repurchased approximately 11.6 million shares, representing approximately 16% of our outstanding shares. Thanks. And with that, I will turn the call back over to Neill.

[Neill A. Currie:]

Thanks Fred. I like to hear that we own more of the company now than we used to. Happy to take questions, operator. Question And Answer

[Operator:]

Thank you. [Operator Instructions]. Your first question is from Vinay Misquith of Credit Suisse. Please go ahead.

[Vinay Misquith:]

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

[Neill A. Currie:]

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

[Vinay Misquith:]

Sure.

[Neill A. Currie:]

Yes, go ahead, Fred.

[Fred R. Donner:]

Vinay, this is Fred. The only other thing I would ask, if you are comparing it to the same period last year --

[Vinay Misquith:]

Yes.

[Fred R. Donner:]

Last year's results included the impact of a terminated program, which we were ceding 100% of. So you have to take that into consideration too.

[Vinay Misquith:]

Sure, fair enough. And on the Reinsurance side, it seems that you purchased more reinsurance if it excludes Starbound. Would that be... once again, you find more opportunities to buy more retro this quarter.

[Kevin J. O'Donnell:]

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

[Vinay Misquith:]

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

[Kevin J. O'Donnell:]

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

[Vinay Misquith:]

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

[Fred R. Donner:]

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

[Vinay Misquith:]

Yes. Not the alternatives, but the fixed income portfolio. Yes, that's correct.

[Fred R. Donner:]

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

[Operator:]

Does that answer your question?

[Vinay Misquith:]

Yes, thank you very much.

[Operator:]

Thank you. Your next question is from Brian Meredith with UBS. Please go ahead.

[Brian Meredith:]

Yes, good morning. Couple of questions here. First, Kevin, just to clarify. You are writing more below the FHCF. Is that excess business or is that quota share?

[Kevin J. O'Donnell:]

Below there, it tends to be excess or lost business.

[Brian Meredith:]

Okay, okay. So it's not like you are going to get the attritional losses, your pure cat cover. Okay. That makes sense. Second one, could you walk through what's going through the other income line this quarter?

[Fred R. Donner:]

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

[Brian Meredith:]

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

[Kevin J. O'Donnell:]

Yes. Actually, it wasn't that much different than what we saw I think in June 1. One of the things we do is when we look at any deal, we would pro forma what's likely to happen. So we are just going after [ph] changes between June and July have less of an impact because we've already built in what our expectations are of the changes. So from the standpoint of the business that we have written, it didn't really have that big of an effect on our portfolio.

[Brian Meredith:]

Okay. And then lastly, Kevin, maybe you can give us a sense of what do you think has to occur here to get rates maybe stabilizing at 1/1 since there is so much capacity out there that we need a massive, massive storm. What do you think?

[Kevin J. O'Donnell:]

That tends to do it. That's one way I guess. I think there is a lot of capacity in the market right now. So the thing that I would focus more on is rates... there is rating competition, but we've seen pretty good discipline in the market. One of the things we look at is to see how many deals are short placed or come back into the market for repricing. And we've seen a fair amount of that, which demonstrates that the market is being somewhat disciplined. The other thing I would say is we are still trading at... in a universe that has a pretty healthy supply of attractively priced business. So even though rates are coming down, it's not a market that is producing... where a broad segment of the market is producing negative returns. It's still a pretty good universe, producing good returns. So as far as the need for it, it's not as strong as it's been in other cycles. But I don't have a specific answer as to what could possibly... a million things could turn the market around. But it could be a loss, it could be adverse [ph] in peoples casualty reserves, any number of things.

[Brian Meredith:]

Okay. Thanks.

[Operator:]

Thank you. Your next question is from Alain Karaoglan with Banc of America. Please go ahead.

[Alain Karaoglan:]

Good morning. Kevin, just following up on your comment. In terms of the cat market, could you give us an indication of either price decreases or if you have put the business into the various buckets of attractive, low return or negative return, or maybe how is your portfolio this year relative to last year in terms of quality? Because even though pricing are going down, it sounds like the environment is still providing you with very good opportunities. So maybe if you could expand on that. And then the next... the other question related to crop insurance exposure, could you talk to... is there any pattern to the premiums written and to the losses, if there are any losses, how would they come about?

[Kevin J. O'Donnell:]

Goingback to kind of the first question on the cat market, the cat market right now is actually pretty... from a regional perspective, the market is very different, where, if you look at Atlantic hurricane, there is very little business in the Atlantic hurricane market that is negative returns. There is some low return, but there is quite a bit of interactive return. If you flip that into some areas in Asia, we're seeing large volumes of the business in... according to our modeling to be in the negative return bucket. So it's very much a regional play. The other thing I would mention is if you... going back to Atlantic hurricane again, if you go back several years before the models changed, there is a lot more dollar per dollar of TIV for reinsurance than there used to be, which is a lot more expected loss running in from the old model... in the new model compared to what the old model had. So there is a little bit of a different comparison there as well because, depending on your view as to the old model compared to the new model, there is more reinsurance dollars per dollar of TIV. As far as specifically let's say the market is still for the bulk of the way, we are building the portfolio and we look reasonably renewed at Atlantic hurricane. The bulk of that again is in adequate or attractive returns or low return. There is a little migration between the two, but it wasn't all that significant and there was no migration from low to negative.

[Neill A. Currie:]

So Bill, if you would like to address the crop question.

[William J. Ashley:]

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

[Alain Karaoglan:]

That's correct.

[William J. Ashley:]

Okay, sure. Well there is two main seasons. Let's talk about premium first in the crop space if you would. There is a winter crop season and there is a spring crop season. The winter crops obviously start planting in September for 2008 an example, and those premiums then are recognized as they become known throughout the end of '07 and the early part of 2008. The spring crops, we have a pretty good estimate of what those premiums look like now. The spring crop closing was just a month or so ago. And so those premiums are recorded as they become good estimates, or known to us. So as you can see it was pretty lumpy every quarter, this and a pretty big lump from a written premium standpoint. The earnings of both of those are not your typical one to 12 earning that you would see in the P&C business, their earn throughout the crop cycle, as example the spring crops harvested in starting in August, September and October and still there is an earnings pattern that relates to the premium all cross from our ground. In terms of losses, the losses on the spring crops which is what we are dealing with now. We certainly know where losses have occurred. We have some loss notices that have been reported, but here are some of the variables to think about all those losses. The farmers have a replant option. We don't know how those replanted crops has worked out, or what options they have actually selected. If it's a hail loss for an example, some of the crops could recover, and we don't know what that looks like. Market prices are actually determined when the crops come out of the ground. And as you've seen in the last few weeks, market prices have actually come down from their heights. That's based on higher estimates now of what corn and beans yields are actually looking like versus what they ware just a few weeks ago. Higher or lower market prices can work for or against you depending on the options that the farmers select. So very difficult to determine exactly what those losses look like until we harvest the crops and the market prices are actually known later in the year. So we have done our best estimate at what we think that looks like with the information that we have at hand today as I mentioned on the call.

[Alain Karaoglan:]

Thank you very much.

[Operator:]

Thank you. Your next question is from Bill Wilt with Morgan Stanley. Please go ahead.

[William Wilt:]

Hi, good morning. Thanks. A question on the catastrophe premiums. Just for the quarter, the Renaissance cat premiums were down about 15%, DaVinci premiums flat. I know that you use your discretion and balance those two portfolios. But I guess the discrepancy was wider than... I believe wider than it's typically been and wide enough for the warranted question and perhaps some color.

[Kevin J. O'Donnell:]

Sure.We allocate lines based on the returns that the individual portfolio is achieving on a marginal basis for each risk we are looking at. So with the... and what we are seeing this year is balancing out the DV portfolio a little bit by putting a little bit more business in there than the normal mix between RenRe and DaVinci. I guess the important thing is we look at each portfolio independently marginally, look at how much capital each deal is using within the specific portfolio and then allocate based on the returns we are seeing. So although we have some basic benchmarks that we look at, we do optimize depending on the return. So you will see some movement like that from time to time.

[William Wilt:]

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

[Neill A. Currie:]

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

[Unidentified Company Representative:]

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

[William Wilt:]

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

[William J. Ashley:]

The comment on the politics would see just pure speculation. But as you're probably aware, the Federal Crop bill did get signed into law earlier this year and was within our expected range of what we thought the outcome of that bill would be. And it's predominant the change in that bill at this point are some reduction in A&O, and we are very well positioned to deal with that. It was in the expectations when we acquired Agro is a very low-cost operator. So we are actually pleased with the change in the outcome of how they came about and frankly think that presents some marketing opportunities for us. What happens in the future? My only comment would be that the food program is very important to the U.S. economy, and I will leave it that and let the politician decide where to take it from there.

[Neill A. Currie:]

Bill, it's Neill. I am in charge of political prognostication. And ...which makes it probably the most difficult job we have and it's very hard to ascertain. But speaking of the tax situation, we have found historically to be taught [ph] there and then at the end of the day not to have action because it increased cost to consumers et cetera. So it's hard to say what will happen on that standpoint. But we feel that if something does happen, we are very well positioned. We have a reinsurance company here with 130 people in Bermuda. We like the Bermuda location, and for the business that we have in the States, we do pay tax in the States and just have a reasonable quote share that's in place for capital reasons.

[William Wilt:]

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

[Neill A. Currie:]

Sure. It works its way up.

[William Wilt:]

Got it. Thanks very much.

[Operator:]

Thank you. Your next question is from Jay Cohen with Merrill Lynch. Please go ahead.

[Jay Cohen:]

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

[Kevin J. O'Donnell:]

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

[Jay Cohen:]

Yes.

[Kevin J. O'Donnell:]

It's been pretty stable actually this year. I wouldn't say that the trend that we saw are the renewals. It didn't really exist this year for most of the [ph] Florida renewals were.

[Jay Cohen:]

Great, thanks.

[Kevin J. O'Donnell:]

Yes.

[Operator:]

Thank you. Your next question is from Josh Shankar with Citi. Please go ahead.

[Joshua Shankar:]

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

[Kevin J. O'Donnell:]

Be happy to. Long Island hurricane is... tends not to be purchased as a standalone peril. So when we think about the risk that we're taking in that, it's traditionally within broader programs, I would say one risk within a larger group of risks that are being purchased. We have... I think there is... there are certainly commercially available models that will give you an indication as to what the risk is there. We have our internal model as far as what the potential for Northeast hurricanes can be, Long Island being a large component of it. There is some complications with how Long Island's model well as to in wind and what is not, which I think adds to some of the expected loss. But to get more specific than that, I don't want to move too far into it, because it's not something that is specifically purchased in the market. And then you are talking more about New Madrid earthquake as well?

[Joshua Shankar:]

Yes.

[Kevin J. O'Donnell:]

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

[Joshua Shankar:]

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

[Kevin J. O'Donnell:]

There is a couple of things that I think the models are good for. It's a consistent platform to compare deal to deal. So that even if the models are wrong, you can pick the best deals against a objective framework. As far as whether the models are right or wrong. I think we believed internally, certainly that all the models are wrong that's why we model on that, we new the answer we didn't [ph] use the models. But we think we take very prudent measures. As Neill mentioned, we have weather updates to help us calibrate the models internally and use the best lines available to come up with our view of the risk, not relying on someone else to do it for us.

[Joshua Shankar:]

And in terms of what are the inputs to the data. I know, and obviously it's proprietary for you, but how do you go build the model when you don't have a lot of inputs?

[Kevin J. O'Donnell:]

There are inputs to the model, some of which are historic events, but then there is also just the physics of the event. So you can think about it as looking at the historical record and building a model off that. We are taking the physics of the underlying either geography... geology or the physics of what's going on in the atmosphere and trying to build a model with that. I think historically, there has been a heavy reliance on the historical catalogue to build models. Moving forward, I think there is an increase in volumes [ph] looking at the physics for building models. And one of the things Neill mentioned is with WeatherPredict, we are building that capability very strongly on the wind side and there is a lot more data of the geology available from the earthquake side.

[William J. Ashley:]

Josh, one thing to remember is that we are out on the tail of possible outcomes here. And most of our exposure in areas like this are on the reinsurance side where it reflects as a loss [ph] so we can calculate our maximum loss. So we've got a little bit easier time of it than some of the large primary companies.

[Joshua Shankar:]

I appreciate the color. Thank you very much.

[William J. Ashley:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. Your next question is from Chuck Hilton with FTS. Please go ahead.

[Chuck Hamilton:]

Good morning. Thank you. The name is Chuck Hamilton [ph]. A couple of quick questions. Just wondering, one for Kevin firstly. Given the fact that we had a trembler in California, a 5.4 earthquake, could you remind us once again what your 1 in 250 year PML for California quake might be?

[Kevin J. O'Donnell:]

You are right. We did have a quake yesterday. I don't think it's a 1 in 250. It's something that happens from time to time. But we... to remind you if something we would be... indicating that we have told you before. And we don't think that thinking about the risk within a single point of the distribution is that helpful. We try and talk about the way we manage risk, which is across the distribution. So we are not looking at optimizing our risk to a 1 in 250. We are looking at building a portfolio of risks throughout the distribution for each peril that overall rolls into an efficient portfolio for the cat book that we are writing.

[Chuck Hamilton:]

All right. Let me follow up on that Kevin. In terms of risk management and for the investors to be able to assess risk company against company, so you have information you can provide us in the talks about the maximum exposure perhaps zonal limits by up here specifically two California quakes.

[Kevin J. O'Donnell:]

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

[Chuck Hamilton:]

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

[Fred R. Donner:]

Sure. The hedge funds pretty much were flat this quarter. What you are seeing in the losses coming through, or coming from our PE funds, we had one... of the $29 million coming through, there was one significant loss, $23 million related to one investment. So our strategy hasn't changed. If you go back a couple of quarters, you go back to last year, the results exceeded our expectation to the good. This quarter, the results were quite honestly, less than we had hoped for, seeing our expectations are for the bad [ph]. I think overall, long term, we still feel pretty comfortable with our portfolio. Returns over the long term have been pretty good and we are going to stay and we feel... we basically feel comfortable with our position and where we are going with it.

[Chuck Hamilton:]

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

[Fred R. Donner:]

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

[Chuck Hamilton:]

Okay. Have you taken that specific investment down to zero at this point or there is further room to fall for it?

[Fred R. Donner:]

It is down to zero.

[Chuck Hamilton:]

Okay. Great, thank you very much for your answers. I appreciate it.

[Operator:]

Thank you. Your final question is from Gary Ransom with Fox-Pitt, Kelton. Please go ahead.

[Gary Ransom:]

Yes, most of my questions have been answered. But one more on the reserve development. I was wondering if you could give us an idea of what accident year that was coming from and perhaps how that... if that's different at all from what you saw in terms of reserve releases in the first quarter.

[Fred R. Donner:]

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

[Gary Ransom:]

Okay. Great. That's all I wanted. Thank you very much.

[Operator:]

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

[Neill A. Currie:]

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

[Operator:]

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