RenaissanceRe Holdings Ltd. (RNR) Q3 2008 Earnings Report, Transcript and Summary

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

Good morning. Thank you for joining our third quarter 2008 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we'll make sure to provide you with one. There will be an audio replay of the call available at 1 o'clock PM Eastern Time today through November 12 at 8 PM. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The passcode you will need for both numbers is 68124551. Today's call is also available through the Investors section of www.renre.com and will be archived on RenaissanceRe's website through midnight on January 7th, 2009. Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With me to discuss today's results are Neill Currie, Chief Executive Officer; Fred Donner, Chief Financial Officer; Kevin O'Donnell, President of RenaissanceRe Insurance Limited and Bill Ashley, President and Chief Executive Officer of Glencoe Group Holdings Limited. I would now like to turn the call over to Neill. Neill?

Thank you, David and good morning every one. While the third quarter was unusual in that we sustained losses in our investment portfolio at the same time that we had catastrophe losses, we modeled such scenarios. So a quarter like this doesn't come as a surprise to us. We managed RenRe to be able to withstand a confluence of significant events and still be able to provide consistent, reliable service to our clients and workers. So like it was in our first year of operation in 1993, and after the events of '01, '04 and '05, today it's business as usual for us at RenRe. Our team of scientists and engineers were in the field immediately after Ike and Gustav made land fall. Learning from these events to enable us to provide useful information to our customers and appropriately reward clients that are doing a great job underwriting catastrophe exposed business. With our strong balance sheet, strong ratings and history of being one of the fastest claims payers in the business, our customers and workers rest assured we will pay our claims promptly and usually within 48 hours. Our longstanding relationships and position as a market leader give us access to the business we want to write. Our experience in risk management capabilities enable us to provide alternative solutions for our clients very quickly. And we put out large lead lines that our brokers and clients can be confident will be supported by the rest of the marketplace. In addition to the capacity of RenaissanceRe, we also provide the substantial capacity of DaVinci Re and Top Layer Re... Top Layer Re is for international reinsurance. As a result of the investment in catastrophe losses coupled with our stock buybacks, tangible book value per share was down this quarter. We expect this to happen from time to time. We are willing to accept volatility over the short term and manage the company to increase tangible book value per share at an attractive rate over the long term. There have been dislocations on many fronts recently, and out of dislocation comes opportunity. We are always monitoring new opportunities as they arrives and we have made strong hires in ventures reinsurance and the individual risk over the past year that will help us to be responsive to our customers' rapidly evolving requirements. The current economic climate is likely to reapportion appetite for risk as a result of the volatility in company's investment portfolios and the difficulties companies face if they wish to raise capital. As Fred will explain shortly, we are perfectly capitalized to take advantage of opportunities as they present themselves, if they fit our business model. RenaissanceRe has a track record of being there for customers at all times. But particularly at times such as these, consistently providing solutions when fear and uncertainty prevail and when capacity seems scarce. It's at times of crisis that the value of judicious risk management becomes most clearly apparent. The risk culture underpinning our entire organization has served us and our customers well, providing consistency and stability in extremely volatile world. We enter the January 1 renewal season with a solid balance sheet and a superior underwriting talent base, ready to build on our industry leadership position, and leverage the expertise and innovation consistently exhibited by our organization. So with that, I'll turn the call over to Kevin. Kevin?

Thanks Neill and good morning everyone. I'd like to start by spending a few minutes discussing the losses over the quarter and give some color around these events. As you know, we had several hurricanes so far in this hurricane season but I'll focus on Ike as it's the most interesting of the storms. Ike was a large and powerful storm, but had several characteristics that affected the size and types of losses we're seeing. It was a large flood event, which is not particularly well modeled and made the early reports difficult to rely on as these claimed some more complicated need to inspect to develop a robust estimate. The formation of an eye wall just before landfall helped concentrate the winds of the storm to the eastern side. So even though the storm was better structured, the path and the concentration of the wind field kept the strongest winds east of the major commercial and residential concentrations. So finally, Ike caused significant losses in the Mid West, which again was not well captured in the models. All the information we collect and learn about this event will help us calibrate our overall models. After the events of '04 and '05, we've learnt a lot about frequency, and are hopeful that with this event, we'll learn a lot about damageability and by extension the benefits of mitigation. I'm certain that whatever we learn, we'll emerge with even better technology. As far as the four more forward-looking comments, I feel optimistic about the one-on-one renewals. We're having a lot of broker and customer meetings, and it's interesting to note that the discussions are much more about the availability of capacity rather than the price of capacity. I think the mindset as the function of the general macro economic environment rather than a specific response to cat losses. I'd like to make up in terms of behavioral finance. I mean, as you ask someone the question, do you want more or less risk right now, most people will respond that they want less risk. There's more than one way to achieve less risk, but I'm hopeful that at the end of day, it will come down to our customers' buying more and if we are lucky, our competitors writing less. But even with the same supply, I think that more demand alone should be enough for us to find a new equilibrium price per risk. Additionally, I think that with all that's going in the world, there's a growing recognition of the cost of capital is rising. We will need to be careful to manage line that is more difficult to scale up capital to the overall financial market conditions. So with both the real cost and the opportunity cost of capital higher, I expect that these increased costs will need to play through the system and be reflected in the year end terms. So if you break it down, the whole bunch of issues affecting the insurance and reinsurance business, it's been a high frequency of small cats, largely retained by insurance companies, there's been one large hurricane, an increase in frequency of large risk losses, increased risk to several lines from the realization of threat of recession as they write down as investment losses and limited access to the capital markets. So if you had a company with great risk management, a strong balance sheet like RenaissanceRe, is really an exciting time to be an underwriter. So with that, I'd like to turn the call over to Bill Ashley.

Thank you, Kevin and good morning. Despite more than a fair share of challenges this quarter, there are a number of reasons to feel optimistic in individual risk segment. We are already experiencing the economical and other advantages of owning our agricultural platform versus the prior MGA company relationship. We are also beginning to see some signs of capacity leaving the market for commercial property business. These are early days, however is becoming clear that our customers will be paying closer attention to financial security stability when deciding how much capacity to place for the carrier. We're optimistic this will lead to further price strengthening and opportunities. Although we experienced hurricane loss of this quarter pronominally from Hurricane, Ike with some loss just coming from the other three U.S. landfall events. The overall impact to our combined ratio from multiple catastrophe events has improved over prior years. The change in the mix of business of our portfolio which is less exposure to national catastrophes has helped reduce the volatility in our results. Hurricane Ike impacted our commercial business in Texas as more of a flood event than a wind event. Many commercial risk purchase flood coverage either standalone or excess of the National Flood Insurance Program. Due to the hit or miss nature of flood losses, we found it necessary to go beyond modeling in individual case reserving and do a detailed estimate at the location level to arrive at our loss estimates. The 2008 multi-peril crop year has proven to be challenging for the industry. There have been many severe weather events during the years such as flood, hail and drought, plus a significant decline in commodity prices for corn and soybeans this October. In spite of this, we believe our agriculture business to be profitable and at our expected levels. In general, insurance contracts for soybeans and corn get set in February. As of close of the markets last evening, corn prices were down by approximately 28%, bean prices were down 34%. Corn yields are estimated to be up, which will mitigate some of the potential loses from the market price decline. Bean yields are estimated to be down, which will increase insurance losses. It is highly unusual to have inverse correlation of lower yields to get lower market prices. Given the average of October prices will be used for final loss settlements for beans and a portion of the corn products, and given all crops are not yet harvested, there are still some uncertainty in our loss ratio estimates for multi-peril crop this quarter. Market conditions are certainly been unsettled to say the least. But the strategic hires the last several months, our acquisition of agriculture and claims operations, our ongoing investments in system development and the continued application of our strategy and risk management approach position us well for future opportunities. I'll now turn the call over to Fred Donner.

Thanks Bill and good morning everyone. Our operating results this quarter are obviously driven by the net negative impact of $276 million from Hurricanes, Ike and Gustav as well as the impact of the turmoil in our financial markets on our investment results. In lot of our results, there are five topics that I'll cover in my remarks with you today. I'll cover the impact of the hurricanes, I'll give you some insight into the positioning of our investment portfolio, have a brief overview of business results, discuss our capital position and the strength of our balance sheet and end with preliminary top line forecast for 2009. Let's begin with the hurricanes. These events impacted both of our business segments. The impact to our reinsurance unit underwriting results was $380 million, adding 166 points to the combined ratio. This is before taking into account the impact of minority interest, which reduces the bottom line effect by $144 million. The impact on our individual risk segment was $40 million, adding 30 points to the combined ratio. I caution you that it's still early days assessing these events. We applied our usual prudent reserving philosophy in estimating these losses. But as with any estimate, they will evolve these estimates and other event related estimates will likely change over time, perhaps materially. Moving on to investments. Our investment portfolio generated net investment income of $16 million, an $18 million decline from the same period last year, driven primarily by declines in returns in our alternative investment portfolio. Included in net investment income is a $30 million loss related primarily to investments in senior secured bank loan funds, and non-U.S. high yield funds and a $15 million loss related to our hedge fund and private equity portfolios. These losses are predominately mark-to-market losses that we've won through net investment income. The metric that matters most to us is total return on our investment portfolio. Our total return was a negative 1.5% this quarter, which reflects the significant mark-to-market adjustments in our fixed income portfolio, totaling $120 million. I'd like to remind you that our current process is to impair fixed income securities that have an unrealized loss. And as such, we are not carrying any securities in our balance sheet in an unrealized loss position at September 30th. One other point worth noting is our credit related exposures, which we previously announced in our press release on October 1st. Included in the mark-to-market adjustment is approximately $7 million related primarily to Lehman Brothers' debt. We did not have any other specific credit related impairments this quarter. Our other temporary impairments is primarily result of increasing yields, driven by the widening of spreads. Given the ongoing financial market turmoil, we enhanced our disclosures around our investment portfolio. We have provided you with a lot of detail in our press release, but as I see it, the takeaways are as follows. One, we have a portfolio that is being constructed to provide us with ample liquidity to meet the demands of our business, where we need to stand ready to take claims quickly after an event. The duration of that portfolio is just over two years. Second, our fixed maturity portfolio has an average yield to maturity today of around 5.6% with over 90% of portfolio related AA or higher. Third, our securitized asset portfolio is comprised of high quality AAA rated securities. We've also provided a breakdown of our corporate fixed maturity portfolio by industry and I'll provide you with the names of our largest 10 holdings across our fixed maturity and short-term investments. And lastly, as it relates to investments, a portion of our investments are in alternatives. This asset class has produced good returns in the past and we evaluate them over the long term. As we've discussed in the past, we did not view the highly attractive returns on this portfolio that we experienced last year at this time as representative of the expected long-term performance. Over time, we do expect this portfolio to perform well. But at this point, we do expect some continued volatility in the near-term as we have seen this quarter. Next, I would like to comment on the results of our business segments. Let me begin with the premium trends. And here I would focus you on the nine month data, which gives you a good indication of what to expect for the full year. Managed cat on a normalized basis is coming in with about 7% decline versus last year. And to derive normalized premiums, I'm backing out $49 million of premiums from reinstatements for this year. Specialty is running at about 48% decline from last year and our individual risk premiums are up about 3% over the last year. Let me move on to underwriting margins and here I am going to discuss the quarter rather then the nine months. Within the Reinsurance segment, our cat unit combined ratio came in at 15% excluding the hurricanes, which is lower than last year's 29%, representing a lower level of smaller cats this year versus last year, and more favorable development. Favorable loss development this quarter amounted to $30 million, primarily from accident years 2006 and 2007. Our expense ratio was up slightly, due primarily to a reduction in profit commissions on reinsurance ceded and a slightly higher run rate of underlying expenses. Our specialty unit generated a combined ratio of 72% as compared to 112% last year. Last year, we had a large number of relatively small losses that increased our current accident year losses. Expense ratio was up a little, as we have a relatively stable expense base against our declining earned premium balance. On a year-to-date basis, you can see that our combined ratio is earnings about 59%, almost 4 points better than last year. Our individual risk combined ratio is at about 110%, and if you exclude the impact of the hurricanes, it was about 80%. Expense ratio was down from 34% to 23%, which reflects the impact of the change in the mix of business this year, driven primarily by the increase in the multi-peril crop business. The crop business carries a lower net acquisition expense ratio than the other lines of business, but also carries a slightly higher expected loss ratio. For individual risk, however, I think is best served looking at the results on a year-to-date basis. There you'll notice that our combined ratio is running at about 97 points, a little higher than where we would like, given that we target this business to generate a combined ratio in the low 90s. Excluding the hurricanes, however, the combined ratio is about 86%, which is a couple of points better than last year. Moving on to our capital position. For the past 18 months, we were returning capital to our shareholders through share repurchases. During the third quarter, we acquired $76 million of stock bringing the year-to-date total to $428 million. And since March of 2007, we returned just over $628 million to our shareholders. We suspended share repurchases in the early part of the third quarter because of the changing market conditions. While our stock is trading at prices we find attractive to acquire, we believe there are far more opportunities to deploy our capital today in the market. We remain in a strong capital position. We are looking at our current risk portfolio and our internal risk tests; we are comfortable with our capital relative to risk. We have ample capital resources at our holding company and our operating subsidiaries are well capitalized. RenRe Limited has $1.6 billion in capital. DaVinci Re has just over $1.1 billion and Top Layer Re has $4 billion of capital resources available to serve our clients. We are appropriately capitalized to take advantage of the future opportunities. Our book value per share declined this quarter by 10% to $38.94. On a year-to-date basis, it has declined by approximately 5%. Several things have impacted our book value year-to-date, but the most significant since the beginning year we repurchased approximately 12% of our outstanding common stock, which contributed substantially to all of the decline in our book value per share. Looking forward into 2009, there are a lot of potential opportunities and with the expected increase in demand that we currently anticipate as Kevin and Bill described, I thought it'll be helpful if we provide you with a preliminary view through our 2009 top line forecast. Overall, we expect gross written premiums to be up around 7%. But as always, it helps to you look at the parts. From managed cat, we are estimating our top line to be up 10% on a normalized basis. That is excluding the reinstatement premiums from this quarter. Specialty is also expected to be up around 20% and for individual risk, right now we expect to be flat. Crop makes up a large part of... large portion of our individual risk book and swings in commodity prices can have a dramatic effect on our top line. We've been somewhat conservative in our forecast for our crop book for 2009. There are a lot of moving parts in terms of our 2009 top line forecast, but since we just completed an early run of our budget, I want to give you some insight to what we are currently thinking. And at this point, I will turn the call back over to Neill.

Thank you, Fred. I believe we gave you all some valuable information there. We are happy to answer additional questions. Operator, we're open for questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of Tom Cholnoky with Goldman Sachs.

Can you hear me?

We can now Tom.

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

Sure. Let me... Tom, it's Fred, let me discuss how we book our results in our alternative portfolio. Hedge funds, if you look back to prior year, we run a one month lag. Early this year, we changed the process and we're now reporting on a current basis. So what you see coming through in our hedge funds is the current results. On our private equity funds, generally we are in a quarter lag. Due to the turmoil in the market this quarter, we reached out and obtained a current information where we could. I would say, we captured about half of the portfolio. And as a result, we brought the... that portion of portfolio current and realized some additional negative returns for the quarter. So I think going forward, there's still a portion of the private equity portfolio that we haven't been able to capture in the third quarter results. And I would presume that those results for those funds are going to be negative like the rest of the book. But I really don't know for sure. So that's how we address our alternative portfolio.

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

That is correct.

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

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

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

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

That's helpful. Thank you.

Sure.

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

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

Why don't I start off with that Vinay. I think we are expecting a little bit more broad dislocation than in 2006. So I think we'll see opportunities in the property cat area, but we also envision opportunities in specialty reinsurance and individual risk programs. So it'll be a little bit more broad-based in '06. Kevin, would you or Bill like to...?

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

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

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

All right. Fair enough. In terms of sidecar activity, do you think there will be any demand from hedge funds in sidecars at all this year?

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

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

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

All right. That's great. Thank you.

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

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

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

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

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

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

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

Okay. And let's see it one other... with respect to your alternative investment portfolio, do you have any other or additional commitments to that portfolio?

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

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

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

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

Great. Thanks to all.

And your next question comes from the line of Alain Karaoglan with Bank of America.

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

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

Yes. I think there's been a lot of things being discussed as to what can change in the cat fund, but there is a lot of time between now and 6/1. This does get renewing at 1/1 is what happens to the CapEx [ph] here is a little bit less relevant just because of the bigger commercial book and more of a national book, so six months stuff will be the stuff that's most heavily impacted by what changes there. So I think we have time to respond to whatever ultimately changes. As far as our willingness to accept more hurricane risk, I think it's not a surprise that for most property cat writers U.S. Atlantic hurricane is a peak exposure. It's a peak exposure for us, but we certainly have more capacity to write that peril. But part of it will be a function as to where the FHCF, if it does change, where the new limit becomes available and secondly price.

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

I think it's something that we look at everyday on a marginal basis. So we're looking at it against the overall portfolio of risks that we have, so we can measure the amount of additional capital in new line base. Secondly, we pro forma our book to reflect what we think will happen. So we're scoring against not our in-force portfolio necessarily, but what we think we're likely to have when we settle our book down. So we are actively looking at it. And we do... we are cognizant of the difficulties to potentially accessing the capital markets. But it's not something that... it's not a change in our process. It's just another variable that we're putting in and perhaps waiting a little bit differently and how we're looking at the risk of share.

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

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

Great. Thanks for the answers.

[Operator Instructions]. Your next question comes from the line of Terry Shu [ph] with Pioneer Investments.

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

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

Sure. I think I commented before and earlier when Kevin talked about it before, it's not anyone single event that we see driving this market. It's a multitude of events that are coming together. I don't know, if you can label it as the perfect storm over time. That's how it appears from this end. And typical of a hardening market like this, you would see the reinsurance commercial market react first and you would see the primary market react many months later, which is our thoughts here as well. But in terms of what we are seeing already as in my opening comments, no question that the lack of some of the capacity that used to be in the market without naming names of carriers involved that are either having their minds reduced by customers or themselves reducing their line sizes that are out, is causing a little bit of flurry in the market is causing a change in the submission activity there and over time I do believe the consumers ultimately buying insurance. Again they are more cautious about how much takes place with any one single carrier that comes across, that the size of the capacity that's coming out of market might be without questions are going to cause firming of the market. Its question of time how much and how long it's going to take to get there?

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

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

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

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

Sure. In brief, the insurance products that are constructed around multi-peril crop business are both a factor of yield and many of the products are a factor of combination of yield and price. So there is a locked in price in the contracts in February for called a strike price, if you would, better way to think about it for commodity prices. So an example would be one of the products, when the products... when the crops are harvested in the fall, the commodity prices drop significantly from what that price was set in the contracts in February then that losses actually covered by insurance profits. However if there are some of the products that the yields are actually higher in the fall, that's a mitigating factor, can be depending on the stress crop that's written. So certainly natural perils are factored in the crops which actually drives some of the commodity prices up or down, but as mentioned in my opening comments, in the case of soybeans, yields are actually expected to be down, somewhere I've been reading as much as 20%, and yet commodity prices are going down same time, which is counterintuitive or inverse like you would expect. So built into these products that we do, multi-peril crop inherent is just fluctuation risk of commodity prices throughout there.

Okay. Thank you.

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

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

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

Okay. So you do offer some products and it sounds like where you could be on the hook if just if pricing goes down even if yield goes up?

That's right.

Okay.

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

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

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

Of anything, so even if it's down 2%?

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

Okay. And the impairment means obviously you can't write that up as the price goes back. So then you might have something where in your balance down 2% in the quarter, and is up 10% the next quarter, and is that 1.08 then you have it apparently impaired them?

That's correct.

Okay. And does that mean then the investment income or does that, I am sorry that the... discount I think is accreted to your investment income over time?

Yes.

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

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

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

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

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

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