RenaissanceRe Holdings Ltd. (RNR) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Melisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Fourth Quarter 2014 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. I'd now like to turn the call over to Mr. Peter Hill. You may begin your conference.

Good morning and thank you for joining our fourth quarter 2014 financial results conference call. Yesterday after the market closed, we issued our quarterly release. If you didn’t get a copy, please call me at 212-521-4800, and we’ll make sure to provide you with one. There will be an audio replay of the call available from about noon Eastern Time today through midnight on February 24. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The pass code you will need for both numbers is 63164170. Today’s call is also available through the investor information section of www.renre.com and will be archived on RenaissanceRe’s website through midnight on April 16, 2015. 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 us to discuss today’s results are Kevin O’Donnell, President and Chief Executive Officer; and Jeff Kelly, Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Kevin. Kevin? Kevin O’Donnell: Thanks, Peter, and good morning, everyone. As usual, I'll start with some high level comments on our performance and our acquisition of Platinum. Then I'll turn it over to Jeff to go over the financial results and then I'll come back on to provide some more details on our book of business. I'm pleased to report solid results for RenaissanceRe, both for the full year 2014 and for the fourth quarter. Our results reflect strong underwriting performance and favorable development and Jeff will go over these numbers in just a few minutes. The most significant news for the quarter for us was the announcement of our agreement to acquire Platinum Underwriting Holdings. The acquisition is still subject to various regulatory approvals and Platinum shareholders' approval but we are anticipating a successful close. We have therefore been busy planning for integration and we are impressed with the quality and level of engagement of the Platinum team. We are also pleased with the support we have received from both brokers and clients. This is a milestone for RenaissanceRe. Over the past five years we've been on a steady path of building out new platforms and broadening our product offering for our clients. The acquisition will accelerate the growth of our Specialty platform and our onshore U.S. Casualty and Specialty operation in particular. So we'll increase our client broker base and enhance existing relationships. In addition we'll be able to optimize the combined property reinsurance portfolios, improving efficiencies and overall returns. We believe the transaction will bring capital on operational efficiencies along with greater flexibility to match risk with different pools of capital. We know Platinum well, having supported its IPO in 2002. As we worked towards close, we're increasingly comfortable that Platinum shares are disciplined underwriting approach. Turning to the market now, another low catastrophe loss here and generally benign loss trends outside of cat added to record levels of reinsurance capacity. This combined with ongoing appetite through risk by an abundance of capital continued to put pressure on market pricing, even though we saw a slight increase in demand as buyers used cost savings to purchase more cover. We executed well none the less, targeting the most attractive business in the most attractive markets. As always, we built our portfolio to be attractive across a wide range of outcomes, exercising discipline and cutting back on business that did not meet our return hurdles. As we discussed on our last call, in this record succession of years without a major catastrophic U.S. hurricane, it's important to not become complaisant. We believe our focus on being objective about the risk we assume and the pricing we require enables us to build superior portfolios and superior client relationships over time. The performance of our Lloyds and specialty platforms rewarded the investment we have been making over the last few years. We are pleased with the growth we saw and expect that trend to continue over time. Our ventures team contributed tremendously to our franchise through 2014, working with our capital partners to bring efficient capacity to our cedings. We launched our Upsilon product for the fourth year running, returning capital to DaVinci investors and continued to make strategic investments that advanced our underwriting franchise. We added to our track record of being good stewards of capital. In addition to buying back about $500 million of our stock, we also returned over $400 million to third party shareholders. During the fourth quarter, we converted our successful Upsilon platform from a series of independent limited life vehicles into perpetual funds. Our new Upsilon funds offer an expanded product range, varying risk return profiles and improved liquidity. We raised total capital to $177 million compared to $417 million in 2014, reflecting our view of the current market conditions. We believe Upsilon's enhanced architecture provides improved flexibility for our clients and investors to access primary and retrocessional products in a uniquely aligned investment structure. While we have been steadily building out our non-catastrophe portion of our book, I want to underline here that our strategic goal to the leaders in Cat remains unchanged. We continue to believe that the property Cat business is a good one. What you will see with this acquisition is an evolution of our tactics, not a wholesale change in strategy in response to our clients' evolving expectations. At this point let me turn the call over to Jeff and then I'll be back to talk about the book. Jeff?

Thanks Kevin and good afternoon everyone. In my prepared remarks I'll begin with providing a quick update on the planned integration with Platinum toward which both our companies have been working hard. Then I'll cover our results for the fourth quarter and full year 2014 and I'll give you an update to our 2015 top line forecast. With respect to our proposed acquisition of Platinum, our conversations and work with regulators since the announcement of the transaction in November have been going smoothly and at this point we anticipate that the deal could close as soon as early March. Both our organizations continue to target March 2 as a potential closing day. A number of folks across both organizations have been hard at work developing plans to successfully integrate the companies. We are excited about the opportunities that the combination of the enterprises brings to our underwriters in both organizations. As we have had a chance to review the operations of the combined entities in more detail, we are comfortable with the $30 million figure we provided for you in annual expense savings. Our expectation is for one time cost to be roughly in line with a $30 million figure we had originally provided and I believe much of these upfront expenses will be borne in the next two quarters. So let me now shift to the financial results. We reported solid fourth quarter results, which capped off a profitable year for the Company. The trend of low catastrophe losses and generally strong investment performance played out throughout the year. The results also benefitted from favorable reserve development. For the fourth quarter, we reported strong net income of $171 million or $4.42 per diluted share and operating income of $140 million or $3.62 per diluted share. The annualized operating ROE was 16.5% for the fourth quarter. For the full year 2014 we reported operating income of $469 million and an operating ROE of 13.7%. Our tangible book value per share including change in accumulated dividends increased 5.5% in the fourth quarter and was up 13.9% for the full year 2014. Overall we believe this was a solid year in terms of financial results in the context of the challenging market environment and our decision to pull back from some business that did not meet our return thresholds. Turning to the Cat segment, for the full year 2014 managed Cat gross premiums written totaled $1 billion. Adjusting for prior year negative reinstatement premiums and a $27 million multiyear contract written and booked in the year ago period, managed Cat premiums declined approximately 15.6% for 2014. As we had highlighted in recent quarters, the top line decline for cat premiums during 2014 was largely driven by increased pricing competition and repositioning of our portfolio from the year ago period. Net premiums written for the Cat segment declined 28% from a year ago during 2014, reflected increased ceded purchase to manage risk as prices declined. The fourth quarter combined ratio for the Cat segment was a negative 2% with favorable reserve releases totaling $47 million in the quarter. Overall favorable development related in some part to recent large catastrophe loss events including Storm Sandy, the Thai floods and Hurricane Irene. We also lowered our reserve estimates for a number of smaller or attritional loss events. Offsetting these to some extent was a $17 million adverse development for the 2010 New Zealand earthquake where industry loss estimates and changing allocation of losses between events resulted in greater retro exposure for us. For the full year 2014, the Cat segment generated an underwriting profit of $450 million and a 23.8% combined ratio, again reflecting generally benign loss activity and $66 million of favorable reserve development. Specialty gross premiums written increased 34% for the full year 2014 to $347 million when compared with a year ago period. Percentage growth rates for this segment, can be uneven on a quarterly basis given the size of many of the individual transactions. Premium growth during the year was driven primarily by the inception of some large casualty and financial lines transactions, as growth initiatives that we have put into place in recent years began to come online. The Specialty segment generated a $27 million underwriting profit and 59.8% combined ratio for the fourth quarter as loss activity was generally benign. Favorable reserve development totaled $20 million in the quarter with a reduction in our ultimate estimate for a LIBOR related losses of approximately $11 million being a primary contributor. For the full year, the Specialty Reinsurance segment generated an underwriting profit of $61 million and a combined ratio of 76%, also reflecting low loss experience and $56 million of favorable reserve development. In our Lloyd segment, gross premiums written increased 19% to $270 million for the full year 2014, as we have continue to expand our franchise there in profitable diversifying classes of business. The Lloyd segment generated an underwriting profit of $8 million and a combined ratio of 85.9% for the fourth quarter. Loss activity for this segment was also generally light and favorable reserve development totaled $12 million. The expense ratio remained relatively elevated at 46.2% but has been generally trending downwards as business volume has increased there. For the full year, the segment generated an underwriting profit of $6 million and a combined ratio of 97.3%. Turning to investments, our investment portfolio was steady contributor to operating and net income during the quarter. We reported net investment income of $26 million in the fourth quarter. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio and totaled $26 million in the fourth quarter. Our alternative investment portfolio generated a slight gain of $1 million in the quarter. Private equity returns in our portfolio will relatively mix as gains in some areas were offset by declining values and energy related investments. Finally while not included in investment income, the appreciation and the value of our common equity portfolio resulted in approximately $35 million of realized and unrealized gains. The increase in the share price for accent [ph] contributed $20 million toward overall equity returns. The total investment return on the overall portfolio was a healthy 3.3% for the fourth quarter and 2.4% for the full year. Our corporate expenses for the quarter included approximately $7 million of cost related to the Platinum acquisition. I expect the next couple of quarters to be a little bit noisy in this regard. So we will do our best to dissect changes in the outlined item for you. Our ventures team and had an active fourth quarter and early this year announced the formation of the fourth iteration of UpsilonRe targeting primarily structured, aggregate, re-insurance and retro deals on a worldwide basis. We did choose to reduce the size of the vehicle to some extent as Kevin mentioned relative to a year ago, reflecting overall competitive market conditions and our decision to decline risk that did not meet our return hurdles. In January we also made the decision to return $225 million of capital to shareholders of DaVinci in the form of an annual dividend bringing the capital of that vehicle to roughly the same size it was year ago. We will continue to right size the overall capacity that we bring to the marketplace given current opportunities. Early during the fourth quarter we repurchased 358,000 shares for a total of $36 million. For the full year 2014 we repurchased 5.4 million shares for an aggregate cost of $514 million, making this a record year for us in terms of capital management in dollar returns. As we stated on our Merger Announcement Investor Call in late November, we do not anticipate repurchasing any additional shares until after the close of the Platinum deal. Our share repurchase authorization remains at $5 million. Finally let me turn to update our top line forecast for 2015. We are currently maintaining our prior guidance for each of our three segments. And just to remind you, for Cat that was down 10%, Specialty up 10%, and Lloyds up 10%. We'll look to provide an additional update to that guidance following the close of the Platinum transaction hopefully on our first quarter earnings conference call most likely in late April or early May. Thanks. And with that I'll turn the call back over to Kevin. Kevin O’Donnell: Thanks, Jeff. So I'll give some color on our book of business going the Cat reinsurance book. As I mentioned in my opening comments, our underwriting team performed extremely well in the fourth quarter and for the year despite challenging market conditions. We were able to leverage our long standing relationships and our expanded platforms. We often describe the Cat reinsurance market in terms of three buckets; attractive returns, low return and negative return. As always we focus on targeting and growing business in the attractive category. With ongoing price reductions, we are seeing more U.S business shift over the low return bucket, but generally speaking most of the business in the U.S. Cat market is still producing an expected profit. Outside of the U.S., the price reductions have been such that we are seeing some business with negative returns, meaning it is unprofitable. Terms and conditions did weaken in line with our expectations, but we were encouraged to see some push back from the markets. We continue to benefit from the trend towards tearing of the market between core partners and capacity providers, with more established players receiving preferred signings. Through the balance sheet flexibility, service and underwriting expertise we offer, we were able to customize solutions for our clients lines, bringing them capacity they desire in the most efficient way. This allows us to gain preferred positions on deals. The retro market was extremely competitive with alternative capital playing a dominant role, and we continue to cut back on our retro book. The silver lining to a competitive retro market is that our own outwards retro protections are even more efficient and we are continuing to find opportunities, resulting in improved portfolio returns. Turning to Specialty, we were able to grow our Casualty and Specialty book across each of our major platforms. In general most classes of business continue to feel pressure of clients pushing for more attractive reinsurance terms or retaining the business. With less differentiation on terms, the importance of risk selection was more important than ever. We're very pleased with the portfolio we constructed in our first full year of operation in the U.S., both in terms of clients and business mix. Our ability to offer capacity and classes outside of catastrophe reinsurance has enhanced our relationships with key clients. The acquisition of Platinum will give us the opportunity to accelerate the growth of our Specialty business even further. Our Lloyds unit continues to make steady progress and our team delivered a profitable quarter and year. By leveraging strong relationships across the group, we're able to achieve stronger signings and greater participation on group wide offerings. Here as well, we were pleased with the construction of the book and the growth we were able to achieve in 2014, and Property Cat contributed meaningful to our results. We have invested considerably in building out our Lloyd's franchise over the past few years. We are increasingly a first call market, both within Lloyd's and globally with Lloyds as part of our overall product offering and platforms. Our expectations is that the unit will continue to grow in 2015. Looking ahead, I believe that reinsurers will need to respond more quickly and more creatively than ever, both to the evolving needs of clients and the accelerating pace of things. RenaissanceRe continues to bring value to clients through a unique flexible structure and innovative risk and capital solutions. This along with our expanded product range and platforms positions us well for the months and years ahead. Operator with that, we're ready to take some questions. Thanks.

(Operator Instructions) Your first question comes from the line of Josh Stirling from Bernstein. Your line is open.

So Kevin, I appreciate you guys -- the color you gave during the commentary. I think people like me sort of struggle with this question you sort of alluded, which was I think you said Property Cat business remains a good one. Premiums are down relatively materially and you guys delivered -- I think it was a 13%, 14% ROE this past year and a pretty low cat year. So I'm kind of wondering, what do you think the normalized return should be with sort of a fair Cat load for your core business? And then I'm wondering if you can kind of compare and contrast the ROE prospects for that business against the ROE for the underlying business that you're acquiring at Platinum, which has obviously just got very different risk return characteristics. Kevin O’Donnell: So, there's two questions there. The first one is the normalized returns for cat. I think that's a difficult question to answer on a macro perspective. I think peak capacity yields higher returns than non-peak capacity because it's efficient for your portfolio. I believe that the portfolios that we're building continue to offer acceptable returns for the capital that we're exposing. I also believe it's increasingly important to have a diverse set of capital to match those risks against. If you go back 20 years, having an equity balance sheet and finding good risk was adequate to provide acceptable returns from the Cat business. I think under the current pricing dynamics and the current demands from clients, one needs not only to be a great selector of risk on the front end, but one needs to be a prudent manager of capital to make sure that you're capturing all the diversification that's available within the cat book and the cat market generally. Looking at Specialty I think and thinking about the returns in Specialty compared to the Cat book, I think one needs to look -- particularly for us as what the overall portfolio looks like. And even under today's profile and including Platinum going forward, the capital that we have is dominated the Cat risk that we're taking. Over the last five years we have invested heavily in building our Specialty and Casualty and have grown that and the most recent expression of that is our acquisition of Platinum. That growth has not required us to add equity to support it because our capital is still greater. The capital that we have allocated to Cat is still greater. So I think in order to think about the returns in Specialty it's important to think about how much capital is required to support it. So in overall I would say until we start meaning to add equity to support the Casualty and Specialty, the Casualty and Specialty is actually increasing the overall returns of the organization.

I'm sorry. It's a difficult question, I know to answer, but I think that from our perspective we're all sort of sitting out here and I think the intuition used to be you guys were like a 20% plus sort of normalized return company, and then capital returns rose after Katrina and maybe it became more like '15, and I think people -- at the end of the day we all have to do relatively simple math, trying to figure out is it around 10% or some number like that? So appreciate if you can't tell us exactly, but that's -- I’ll try and figure out. If I could just ask one other question and then I'll let you guys move on. The reinsurance business you acquired at Platinum is dramatically different I think than the attritional core focus of the firm and you guys have always built -- always had a great reputation as sort of a dominant, sort of smallest guys and the room around Cat modeling and Cat pricing and under vary -- in sort of aggregation management, and obviously Platinum is a very different business, more of a traditional reinsurer. I'm wondering if you can walk us through what you're doing sort of culturally as well as thinking through about like of business and underwriting authorities and infrastructure and modeling systems and how you're basically going to make the new Platinum or new Platinum RenRe sort be run with the same degree of analytical rigor and sort of disciplined and historically RenRe has -- for so many years has been known by. Kevin O’Donnell: Sure. Let me divide my comments between Property Cat, and Casualty and Specialty. So the Property Cat book is that Platinum rights will be incorporated fully on to our system and our technology; and people really be -- there is a driving force behind it. So the question is really more relevant to the Casualty and Specialty. And thinking about platinum, firstly let me say that our Casualty and Specialty was larger than Platinum's, even before we bought Platinum. So we have a lot of expertise. We have a lot of technology supporting our Casualty and Specialty. Part of what we were doing in our due diligence is to confirm whether -- how much we like this Casualty and Specialty that Platinum was writing and whether the book was really reduced from 1.7 to the size that it currently is based on decisions that were making or decisions forced upon them from the market. We became very comfortable as the book is well underwritten and the size of the book is based on the decisions that they've made. There're in both lines that we are currently in, and new lines such as A&H; but we believe that as we began to integrate Platinum, we will take our technology, offer it to their, underwriters. We'll have a better ratings and then we will work to extend our culture to them, which is a very entrepreneurial culture, a very collaborative culture, extend that to them to make sure that we can grow on the lines that they're currently in and also with new lines. The other benefit that will bring is our ability to manage capital. So in this case specifically I'll talk about our ceded strategies. We are increasingly looking at putting in and building ceded strategies behind our Specialty book and we believe the ceded strategies we can put behind Platinum will further enhance the overall book of business as well.

Your next question comes from the line of Josh Shanker from Deutsche Bank. Your line is open.

In terms of thinking about your 2011, 2012 IBNR for catastrophe losses, given the big reserve release this quarter, where do think that stands? If you can give some color on this. Kevin O’Donnell: Okay. On the some of the large and more recent Cat -- so I think even in recent quarters I think I've said that probably the two largest events we have had in terms of IBNR and ACR outstanding was when Storm Sandy and the Thai floods. Where we stand with those currently is about 30% ACR and IBNR for Storm Sandy and in dollar terms that’s about $44 million. And the Thai floods is similarly about 33% and in dollar terms that’s about $25 million.

And in Tohoko, generally -- Kevin O’Donnell: The rest of the events Josh would probably be in most cases less than 15% IBNR and ACR.

Okay that’s perfect. And then on the merger, obviously there's going to be some upfront cost that you've been great at addressing. To what except are 2015's numbers potentially going to be depressed due to the inability to deploy as a whole company all the capital on January 1? Historically we know that Platinum has been very, very conservative in their amount of capital deployment. To what accent is there incremental ROE that you hope to mine out that just if you would have had chance to guide their 1/1 renewal process.

I'll let Kevin talk about a little bit -- I guess related to the 1/1 book. I think for me, we are infusing a fair amount of cash into the deal. And so the deal structure itself I think actually makes the combined company more capital efficient, both in terms of just reducing combined excess capital in the system, and then as well as we said on the Investor call back in November, we think that the combination also creates some capital efficiencies, which would allow us to mine some further capital deployment. So I don’t really see it as -- actually I see the deal itself as having freed up and deployed capital that would have otherwise sat as excess on both balance sheets.

Your next question comes from the line of Vinay Misquith from Evercore ISI. Your line is open.

The first question is on Jan 1 renewals for Platinum. I don't know whether you can speak about it but curious from your perspective and speaking with clients, how are they reacting to it? Do you expect some breakage or as we had discussed before, do you expect some more opportunities because you have a larger balance sheet on Platinum and RenaissanceRe? Kevin O’Donnell: The first part of your question, Platinum is an independent company. They renew their book of business. The second part of the question, I can spend a little bit more time on is to what it looks like after integration. I think we absolutely believe that Platinum has done a great job managing the book of business that they have. We believe the combined entity provides a very strong platform for us to continue, not only because we're going to have great ratings, not only because we've great relationships and not only because we've great technology. It's really the combination of all of those things, and bringing them to market, trying to solve our customers' problems. So I feel very confident that in both the existing lines that we share together, we'll have new opportunities but then also in some of the new lines that Platinum brings to us, we'll have enhanced opportunities because of those things as well.

Do you expect any breakage from this deal? Kevin O’Donnell: To date the conversations we have had with our brokers and clients have been very, very supportive. So I don't anticipate that there will be -- this is the scenario for where one plus one equals something less than two.

Sure, okay. And then in terms of your capital position, you've had very strong earnings fourth quarter and the book value has gone up. How does it change your capital position pre and post the deal? Would you be able to buyback a lot more stock after the deal closes because your capital position is better than what you thought before?

Vinay, this is Jeff. So I think it's important to remember that in 2014, we repurchased over $500 million worth of shares and we're infusing $600 million in cash into the purchase of Platinum. Having said that, as we related on the call, we believe that after the close, the Company pro-forma will have a very strong capital and liquidity position. So we still feel very good about that. In terms of -- just thinking about the share repurchases, if that's where you're headed -- our methodology for thinking about when and how many of those we will do remains the same. So if we have excess capital, we'll return it to our shareholders as soon as practical. We do need to close the transaction though and there are some balance sheets that we need to probably reconfigure a bit over time, and make sure they're capitalized in a way that we think is appropriate and that will play into that calculus as well.

Okay, that’s helpful. And just a numbers question on the net investment income for fixed maturities, that increased sequentially by about $1.6 million. Was there something happening in that number?

No, I wouldn't make anything of that, Vinay.

Your next question comes from the line of Sarah Dewitt from JPMorgan. Your line is open.

I wanted to get your perspective on consolidation in the industry and what does that mean for you from a competitive standpoint and do you feel the need to increase your scale further or diversify more away from Property Casualty reinsurance?

I think looking at the consolidation it's something that we are not surprised to see but it's not something that we think changes our strategy. We over the last several years have invested in increasing our diversification. We purchased Platinum obviously which is both diversification and scale, but it's not something that from -- everything that we're currently doing we see as a driver for us, needing to change the things that we offer to our clients. I think in some instances the acquisitions and some of the discussion around size is really a proxy for a discussion around being relevant and we don't rely on relevance because we manage X billions of dollars for third parties or we have our own rated balance sheets at this amount. We draw being relevant in the market really on providing underwriting excellence and independent viewer risk and ratings and service, but most importantly by servicing our clients and making sure that we're solving their problems. So as long as we continue to focus on the customer and solving their issues, we'll be a first call market. We'll end up with better portfolios than the market and I feel as if we can continue to execute our strategy.

And then just following up on your operating ROE, it was 14% for the year and there were no Cat losses. Is that the right way to think about the return profile in a no Cat year or were there higher attritional losses that we should be thinking about that dragged down that result and specifically it seems like maybe Specialty reinsurance, there might have been some.

Within Cat I would think that – Cat was a good year and I don’t think we were plagued particularly by attritional losses within the Cat book. In the Specialty book, I think the Specialty book ran more or less as expected. We had some kind of individual losses within the aviation book and things like that, but there's nothing that systemically I would point to there. The other thing I'd point out is in a year of no losses if you take a lot of risk, you're going have a great return. I think it's important to reflect that we increased our ceded, we brought in additional capital through Upsilon and we managed the books so that not only in a no loss situation we had what is an acceptable return but across the full distribution we understood what our return profile was. And we were happy with the full distribution of potential outcomes where in this specific instance taking more risk would have provided a higher return. But that’s not our strategy.

Okay that makes sense. And you can you give us any sense in terms of the belly of the curve, what that means in terms of catastrophe losses versus where you are prior? Because it sounds like what you're saying is that the return in a low Cat year maybe lower but in a high Cat year it will be higher as well.

I think -- thinking about the full curve is firstly the right way to position the question. And we’ll structure our book in a way that against the full set of outcomes we have returns that we're most happy with. That's what we talk about when we say we have attractive portfolio, we've optimized returns. I think looking at things that we did last year, we bought that specific Florida ceded which was a big stand, changed the profile of the book. As we go into the Florida renewal this year I'll make a determination as whether we're going to write that. Another thing I would point out is we had a very large position within Upsilon last year, because we still saw significant returns offered within the structured retro market. We reduced that substantially this year because we thought it moved to a point where for any type of capital the returns weren’t adequate. So I think it's hard to say in one fell swoop as to what the book will look like. But it is fair to say that our strategy of looking at all outcomes and making sure we have acceptable returns against the full distribution is our strategy and will remain our strategy. Sometimes in low Cat years that will mean lower returns. In high Cat years hopefully we have better protections.

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

Kevin I was hoping you could talk a little bit about third party capital and just what that looked like at 1/1? I noticed that you increased your position in DaVinci. But it sounds like you have decreased at an Upsilon. Is there a more focus on third party capital, getting some collateralized vehicles? What's going on behind all those movements? Kevin O’Donnell: So for us, I think the move in DaVinci was actually relatively small and a reduction in Upsilon. So I wouldn’t pay much attention. There's no signaling at DaVinci. I think the reduction in Upsilon really is a statement that we think that segment of the retro market has become extremely competitive and most of the competition we saw there was from non-rated capital. I think as far as -- capital has been the big driver, the big story around what's been affecting rates. We did see a small uptick in demand at year end but it still was not at the same pace as capital was coming in. So I would anticipate that capital will remain interested. It will continue to drive the equilibrium in pricing or rate reductions and unless there's some sort of catalyst, I'm not sure whether that’s -- the capital finds better options outside of Cat and events -- even substantially demand. Without some sort of catalyst I don’t anticipate that the rate trend that we're currently seeing will reverse.

Okay great. And then secondly and it may be too early comment on this. But I'm just curious -- your initial thoughts on what potentially could happen with the Florida renewals? I know there's been some conferences and stuff that already have happened and some people were expecting some -- another kind of significant rate decrease there. Kevin O’Donnell: I think as I mentioned at 1/1, we did the some new demand. Part of the reason for that demand I think was because they were getting additional rate reductions and they were deploying the rate reduction to purchase better protections. Some of the things we've heard talked about in Florida is about additional purchasing, both from the state facilities, but also from the private market. I hope that there will be continued depop [ph] from Citizen, which as we've said before each dollar of insurance premium in a private sector has more reinsurance spend associated with it and each dollar of insurance premium in the state facilities? So I'm optimistic that we'll see an uptick in demand going into 6/1. I'm also reasonably certain that there is capacity and capital eager and willing to support it. So what that means on rates is it is early but we're certainly on top of it.

And I'm just curious with respect to Florida. How much room from your perspective is there for incremental rate reduction before it just becomes unprofitable? Or a rate you're just not willing to make? Kevin O’Donnell: Right. It's a long way from unprofitable. That doesn't mean it's a long way from a risk that you want to write. I think in thinking about it there's -- let's divide the world just between rated capital and unrated capital for simplicity. The rated capital largely and certainly for us -- our capital is largely driven around supporting Atlantic Hurricane. So we're still getting adequate returns for us to deploy our own capital, and that's in contemplation of us having a balance sheet that's built around supporting Atlantic Hurricane risk. And I think third party capital continues to be interested because there's an element of diversification for peak capacity that's beneficial for them. So I think we're still aways from that market moving to a point where it's no longer attractive but the types of capital that find it most attractive may shift over time.

(Operator Instructions) Your next question comes from the line of Ian Gutterman with Balyasny. Your line is open.

I guess first Kevin, or for Jeff -- maybe I'm reading too much into this but on -- no change to the managed Cat guidance but you've cut Upsilon by about half. Obviously you've retroed your entire market but I guess I would have thought if you are seeing that much clear pressure on the retro side, some of that would translate over and we'd see more pressure on the overall book. Is it just truly here to make a change or am I reading too much into the Upsilon change? Kevin O’Donnell: I think Upsilon had a retro I should say -- had a bigger rate reduction than the market generally. So there is just more competition in that sector. The other thing I would say is if you look back over our history, we have very aggressively grown and exited retro, because we think that the way the retro market changes can be very substantial from year-to-year and our decision to exit pretty materially this year is one that over our history we've done several times. So from that perspective it's not one that I would say that what we're seeing in retro is permeating the rest of the book. I think -- I mentioned that there was some increased demand and we had some expectation for increased demand at 6/1. So we're optimistic of that as that demand comes to market, will be a first call market for those seeking to have additional capacity. So I think it is good to look at the retro market and kind of look what's changing there but I wouldn't necessarily say that what happened there is a contingent affecting the rest of the Cat market. It was kind of uniquely targeted there.

And Ian, I guess the way I'd maybe phrase that just to add to it is, I think to some extent the guidance that we gave last fall probably incorporated some element of that decline, whether or not it was fully predicted at -- I don't know off the top of my head but I'd say there was some element of that in the original guidance. And then the other part really is -- and I think relates what Kevin said, we think it's just a little bit early in the year to adjust guidance by not any significant amount.

Perfect, that makes perfect sense. And on the retro market, when you're buying retro, are you buying primarily from collateralized players or are you also buying uncollateralized? Kevin O’Donnell: Actually we're buying both frankly. I would say at this point we have several different retro strategies that we have. We have a long term partner strategy which is all with rated carriers at this point in time and then we have different levels below that, but the vast majority is on rated paper, what we do trade with collateralized markets, particular potential to make sure we understand the collateral -- agreements on the collateral, release agreements.

Okay, got it. I was wondering -- so the long term partners, it's tough to make sense. I guess I was thinking to the extent that there is -- rated providers sort of maybe aren't as long term partners, do you have concerns? It just seems the terms on retro areso aggressive that maybe some of the smaller weaker rated balance sheet selling these -- do you have confidence or there have been deals where you've been proposing to trend them down? So you don’t have confidence in how those companies perform in a stressed event? Kevin O’Donnell: It's a great question. When we look at counter parties for people we're sharing risk with, we explicitly take into account the creditworthiness of the counter party. In many instances we model the clash of their exposure to ours to help us better understand the kind of specific risk that we're seeing to them and what the credit risk associated with that risk is? So it's incredibly important I believe because when -- particularly in retro when you need them most is probably when they are most under stress. So understanding the profile of the book and the rating that you're being offered is extraordinarily important. If you [indiscernible] even delays in payment are important. So you may believe that we're going to be paid but it may be that you have an anticipation of going through a protracted process to have the money released to you. Again that period of liquidity, if you're relying on a retro is extremely important to understand as well.

Okay, I guess part of what I was wondering is given the term seem almost too good to be true. Maybe in some cases, if that makes you feel the [indiscernible], because their current balance sheet might look okay, but if they're selling what they offering to everyone else that -- on terms that aren’t so good, maybe that says something about their credit worthiness. Kevin O’Donnell: And I think -- you're absolutely hitting on an important point and it's one that we spend a turn to time on. And it not always simply if it cheap enough you should buy it. It can be even -- no matter at what price, it's a credit that you are too uncertain about in the time what you expect to meet it.

Got it and then just lastly on terms and conditions. I know there's a lot of headline stuff about reinstatements now with clauses. But below that -- and this I guess applies to Specialty as well as Cat, are you seeing other things -- waiving of sub limits -- broader definition of covered losses, ancillary stuff being thrown in for free. Are we getting to that stage or is it really mostly sort of the big headlines up like the hours and the reinstatement and so forth. Kevin O’Donnell: I think at 1/1 I would add terror to that. There was a lot of discussion as to how terror was going to be covered. And the Specialty side -- one of the areas that it's pretty transparent but it been an important part of the analysis is there's been a lot of pressure on ceding commissions. I think understanding how people are changing their -- a lot of that is on quota share business. So understanding what's happening on the primary policies is important. We have seen expansion of coverage beyond the headline ones that you've mentioned. But I think we certainly look at our book of business. We've been effective at managing the changes and pricing from where it's come through but it's a trend that I absolutely think will continue and I think we'll see it in expanded areas beyond the ones that you mentioned.

Okay so we're not seeing though at least like pre-Katrina where sub-limits are being waived or floating barges are consider properties that are covered, that shouldn’t be covered, that kind of stuff, that has not come back. Kevin O’Donnell: At this point it's been more disciplined than what we've seen in the past but it's all trending. I anticipate that those conversations are coming.

And there are no further questions in queue at this time. Kevin O’Donnell: Thank you everybody. We appreciate you dialing in, and look forward to talking to you next quarter.