Edgar Filing: RENAISSANCERE HOLDINGS LTD

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2006

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 34-0-26512

RENAISSANCERE HOLDINGS LTD.

(Exact Name Of Registrant As Specified In Its Charter)


Bermuda (State or Other Jurisdiction of Incorporation or Organization)			98-014-1974 (I.R.S. Employer Identification Number)

Renaissance House, 8-20 East Broadway, Pembroke HM 19 Bermuda
(Address of Principal Executive Offices)

(441) 295-4513
(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class			Name of each exchange on which registered
Common Shares, Par Value $1.00 per share			New York Stock Exchange, Inc.
Series B 7.30% Preference Shares, Par Value $1.00 per share			New York Stock Exchange, Inc.
Series C 6.08% Preference Shares, Par Value $1.00 per share			New York Stock Exchange, Inc.
Series D 6.60% Preference Shares, Par Value $1.00 per share			New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Act).
Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, as defined in Rule 12b-2 of the Act. Large accelerated filer , Accelerated filer , Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes No

The aggregate market value of Common Shares held by nonaffiliates of the registrant at June 30, 2006 was $3,327,291,028 based on the closing sale price of the Common Shares on the New York Stock Exchange on that date.

The number of Common Shares outstanding at February 12, 2007 was 72,162,897.

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference to the registrant’s Definitive Proxy Statement to be filed in respect of our 2007 Annual General Meeting of Shareholders.

RENAISSANCERE HOLDINGS LTD.
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		Page
PART I.			3
ITEM 1.	BUSINESS		5
ITEM 1A.	RISK FACTORS		39
ITEM 1B	UNRESOLVED STAFF COMMENTS		55
ITEM 2.	PROPERTIES		63
ITEM 3.	LEGAL PROCEEDINGS		63
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		64
PART II.			65
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES		65
ITEM 6.	SELECTED CONSOLIDATED FINANCIAL DATA		67
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		69
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		118
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		120
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		120
ITEM 9A.	CONTROLS AND PROCEDURES		120
ITEM 9B.	OTHER INFORMATION		121
PART III.			122
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		122
ITEM 11.	EXECUTIVE COMPENSATION		122
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS		122
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		122
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		122
PART IV.			123
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		123
SIGNATURES			129

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PART I

Unless the context otherwise requires, references in this Annual Report to ‘‘RenaissanceRe’’ or the ‘‘Company’’ mean RenaissanceRe Holdings Ltd. and its subsidiaries, which principally include Renaissance Reinsurance Ltd. (‘‘Renaissance Reinsurance’’), Renaissance Reinsurance of Europe (‘‘Renaissance Europe’’), Glencoe Group Holdings Ltd. (‘‘Glencoe Group’’), Glencoe Specialty Holdings Ltd. (‘‘Glencoe Holdings’’), Glencoe Insurance Ltd. (‘‘Glencoe’’), Glencoe U.S. Holdings Inc. (‘‘Glencoe U.S.’’), Stonington Insurance Company (‘‘Stonington’’), Lantana Insurance Ltd. (‘‘Lantana’’), Glencoe Group Services Inc. (‘‘Glencoe Group Services’’), Renaissance Underwriting Managers, Ltd. (‘‘RUM’’), RenaissanceRe Ventures Ltd. (‘‘Ventures’’), Timicuan Reinsurance Ltd. (‘‘Tim Re’’), RenTech U.S. Holdings Inc. (‘‘RenTech’’), RenRe Investment Managers Ltd. (‘‘RIM’’), Skyland Ltd. (‘‘Skyland’’), Weather Predict Inc. (‘‘Weather Predict’’), Weather Predict Consulting Inc. (‘‘WP Consulting’’), RenaissanceRe Capital Trust (‘‘Capital Trust’’), Renaissance Investment Management Company Ltd. (‘‘RIMCO’’), Renaissance Investment Holdings Ltd. (‘‘RIHL’’) and RenaissanceRe Services Ltd. (‘‘Renaissance Services’’). We also underwrite reinsurance on behalf of joint ventures, principally including Top Layer Reinsurance Ltd. (‘‘Top Layer Re’’) and Starbound Holdings Ltd. (‘‘Starbound’’), both recorded under the equity method of accounting, and DaVinci Reinsurance Ltd. (‘‘DaVinci’’). The financial results of DaVinci and DaVinci’s parent company, DaVinciRe Holdings Ltd. (‘‘DaVinciRe’’), are consolidated in our financial statements. Unless the context otherwise requires, references to RenaissanceRe do not include any of the joint ventures, which we account for under the equity method and for which we provide underwriting services. For your convenience, we have included a glossary beginning on page 56 of selected insurance and reinsurance terms. All dollar amounts referred to in this Form 10-K are in U.S. dollars unless otherwise indicated. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding.

NOTE ON FORWARD-LOOKING STATEMENTS

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, us.

In particular, statements using words such as ‘‘may,’’ ‘‘should,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘intends,’’ ‘‘believe,’’ ‘‘predict,’’ ‘‘potential’’ or words of similar import generally involve forward-looking statements. For example, we may include certain forward-looking statements in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ with regard to trends in results, prices, volumes, operations, investment results, margins, combined ratios, reserves, overall market trends, risk management and exchange rates. This Form 10-K also contains forward-looking statements with respect to our business and industry, such as those relating to our strategy and management objectives, trends in market conditions, prices, market standing and product volumes, investment results and pricing conditions in the reinsurance and insurance industries.

In light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be considered as a representation by us or any other person that our objectives or plans will be achieved. Numerous factors could cause our actual results to differ materially from those addressed by the forward-looking statements, including the following:


	•	we are exposed to significant losses from catastrophic events and other exposures that we cover that may cause significant volatility in our financial results;


	•	the frequency and severity of catastrophic events could exceed our estimates and cause losses greater than we expect;


	•	risks associated with implementing our business strategies and initiatives, including the risks with building the operations, controls and other infrastructure necessary in respect of our more recent, new or proposed initiatives;

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	•	risks relating to our strategy of relying on program managers, third-party administrators, and other vendors to support our Individual Risk operations;


	•	other risks of doing business with program managers, including the risk we might be bound to policyholder obligations beyond our underwriting intent, and the risk that our program managers or agents may elect not to continue or renew their programs with us;


	•	risks associated with executing our strategy in our newer specialty reinsurance and Individual Risk businesses;


	•	the risk of the lowering or loss of any of the ratings of RenaissanceRe or of one or more of our subsidiaries or changes in the policies or practices of the rating agencies;


	•	risks relating to the passage of recent legislation in Florida relating to reinsurance coverages offered by the Florida Hurricane Catastrophe Fund (‘‘FHCF’’) and insurance policies written by the State sponsored Citizens Property Insurance Corporation (‘‘Citizens’’);


	•	the inherent uncertainties in our reserving process, including those related to the 2005 catastrophes, which uncertainties we believe are increasing as we diversify into new product classes;


	•	risks associated with appropriately modeling, pricing for, and contractually addressing new or potential factors in loss emergence, such as the possible trend toward significant global warming and other aspects of climate change which have the potential to adversely affect our business, or the potential for significant industry losses from a matter such as an avian flu pandemic which could cause us to underestimate our exposures and potentially adversely impact our financial results;


	•	we may be affected by increased competition, including from new entrants formed following hurricane Katrina, or in future periods by a decrease in the level of demand for our reinsurance or insurance products, particularly as capital markets products provide alternatives and replacements for our more traditional reinsurance and insurance products;


	•	risks due to our dependence on a few insurance and reinsurance brokers for a large portion of our revenue, a risk we believe is increasing as a larger portion of our business is provided by a small number of these brokers;


	•	emerging claims and coverage issues, which could expand our obligations beyond the amount we intend to underwrite;


	•	failures of our reinsurers, brokers or program managers to honor their obligations, including their obligations to make third-party payments for which we might be liable;


	•	the risk that ongoing or future industry regulatory developments will disrupt our business, or that of our business partners, or mandate changes in industry practices in ways that increase our costs, decrease our revenues or require us to alter aspects of the way we do business;


	•	risks that the ongoing industry investigations, or the current governmental investigations and related proceedings involving former executives of the Company might impact us adversely, including as regards to our senior executive team;


	•	risks relating to the availability and collectibility of our reinsurance with respect to both our Reinsurance and Individual Risk operations;


	•	changes in economic conditions, including interest rate, currency, equity and credit conditions which could affect our investment portfolio, or declines in our investment returns for other reasons;


	•	a contention by the U.S. Internal Revenue Service that our Bermuda subsidiaries, including Renaissance Reinsurance, DaVinciRe, Glencoe and RIHL, are subject to U.S. taxation;


	•	the passage of federal or state legislation subjecting Renaissance Reinsurance or our other Bermuda subsidiaries to supervision, regulation or taxation in the U.S. or other jurisdictions in which we operate;

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	•	loss of services of any one of our key executive officers, or difficulties associated with the transition of new members of our senior management team;


	•	risks that we may require additional capital in the future, in particular after a catastrophic event, which may not be available or may be available only on unfavorable terms;


	•	changes in the distribution or placement of risks due to increased consolidation of clients, or insurance and reinsurance brokers, or program managers, or from potential changes in their business practices which may be required by future regulatory changes;


	•	extraordinary events affecting our clients or brokers, such as bankruptcies and liquidations, and the risk that we may not retain or replace our large clients;


	•	sanctions against us, as a Bermuda-based company, by multinational organizations;


	•	changes in insurance regulations in the U.S. or other jurisdictions in which we operate, including the risks that U.S. federal or state governments will take actions to diminish the size of the private markets in respect of the coverages we offer, the risk of potential challenges to the Company’s claim of exemption from insurance regulation under current laws, the risk of increased global regulation of the insurance and reinsurance industry, and the risk that the Terrorism Risk Insurance Act of 2002 (‘‘TRIA’’) will not be renewed after 2007;


	•	acts of terrorism, war or political unrest;


	•	possible challenges in maintaining our fee-based operations, including risks associated with retaining our existing partners and attracting potential new partners; and


	•	operational risks, including system or human failures.

The factors listed above should not be construed as exhaustive. Certain of these factors are described in more detail in ‘‘Risk Factors’’ below. We undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

ITEM 1. BUSINESS

GENERAL

RenaissanceRe, established in Bermuda in 1993 to write principally property catastrophe reinsurance, is today a leading global provider of reinsurance and insurance. Through our operating subsidiaries, we seek to obtain a portfolio of reinsurance, insurance and financial risks in each of our businesses that are significantly better than the market average and produce an attractive return on equity. Overall, our strategy focuses on superior risk selection, active capital management, superior utilization of risk management and information systems, the development and enhancement of a high performance and ethical culture and our commitment to our clients and joint venture partners. We provide value to our clients in the form of financial security, innovative products, and responsive service. We are known as a leader in paying valid reinsurance claims promptly. We measure our financial success through long-term growth in tangible book value per common share plus accumulated dividends, which we believe is the most appropriate measure of our Company’s performance, and believe we have delivered superior performance in respect of this measure in the past.

Our core products include property catastrophe reinsurance, which we write through our principal operating subsidiary Renaissance Reinsurance and joint ventures, principally DaVinci, Top Layer Re and Starbound Reinsurance Ltd. (‘‘Starbound Re’’); specialty reinsurance risks through Renaissance Reinsurance and DaVinci; and primary insurance and quota share reinsurance, which we write through the operating subsidiaries of the Glencoe Group. We believe that we are one of the world’s leading providers of property catastrophe reinsurance. We also believe we have a strong position in certain specialty reinsurance lines of business and are building a unique franchise in the U.S. program business. Our reinsurance and insurance products are principally distributed through intermediaries, with whom we seek to cultivate strong relationships.

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We conduct our business through two reportable segments, Reinsurance and Individual Risk. For the year ended December 31, 2006, our Reinsurance and Individual Risk segments accounted for approximately 64.5% and 35.5%, respectively, of our total consolidated gross premiums written. Our segments are more fully described in ‘‘Business Segments’’ below.

Underwriting and Risk Management

A principal focus of RenaissanceRe is to develop and effectively utilize sophisticated computer models and other analytical tools to assess the risks that we underwrite and attempt to optimize our portfolio of reinsurance and insurance contracts and other financial risks. These efforts are managed across our organization by a team of professionals led by our chief underwriting officer.

With respect to our Reinsurance operations, since 1993 we have developed a proprietary, computer-based pricing and exposure management system, Renaissance Exposure Management System (REMS^©). As described in more detail below, we believe that REMS^©is a more robust underwriting and risk management system than is currently commercially available elsewhere in the reinsurance industry and offers us a significant competitive advantage amongst our competitors. REMS^© was developed to analyze catastrophe risks, and is being developed to analyze other classes of risk.

In addition to using REMS^©, within our Individual Risk operations we have developed a proprietary information management and analytical database (Program Analysis Central Repository or ‘‘PACeR’’), within which data related to substantially all our U.S. program business is maintained. With the use and development of PACeR, we are seeking to develop statistical and analytical techniques to evaluate our U.S. program lines of business. We provide our clients with access to PACeR and believe it helps them understand their business and make better underwriting decisions, thus creating value for them and for us. Our objective is to have PACeR create an advantage for our Individual Risk operations by assisting us in building and maintaining a well-priced portfolio of specialty insurance risks.

New Business

In addition to the potential growth of our existing reinsurance and insurance businesses, from time to time we consider opportunistic diversification into new ventures, either through organic growth, the formation of new joint ventures, or the acquisition of other companies or books of business of other companies. This potential diversification includes opportunities to write targeted, additional classes of risk-exposed business, both directly for our own account and through possible new joint venture opportunities. We also regularly evaluate opportunities to grow our business by utilizing our skills, capabilities, proprietary technology and relationships to expand into other risk-related coverages, services and products. Generally we focus on underwriting or trading risks where reasonably sufficient data may be available, and where our analytical abilities may provide us a competitive advantage, in order for us to seek to model estimated probabilities of losses and returns in accordance with our approach in respect of our current portfolio of risks.

In evaluating such new ventures, we seek an attractive return on equity, the ability to develop or capitalize on a competitive advantage, and opportunities that will not detract from our core Reinsurance and Individual Risk operations. Accordingly, we regularly review strategic opportunities and periodically engage in discussions regarding possible transactions, although there can be no assurance that we will complete any such transactions or that any such transaction would contribute materially to our results of operations or financial condition.

CORPORATE STRATEGY

We seek to generate long-term growth in tangible book value per common share plus accumulated dividends for our shareholders by pursuing the following strategic objectives:


	•	Superior Risk Selection. We seek to underwrite our reinsurance, insurance and financial risks through the use of sophisticated risk selection techniques, including computer models. We pursue a disciplined approach to underwriting and only select those risks that we believe will produce an attractive return on equity, subject to prudent risk constraints.

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	•	Marketing. We believe our modeling and technical expertise, and the risk management advice that we provide to our clients, has enabled us to become a provider of first choice in many lines of business to our customers worldwide. We market our reinsurance products worldwide exclusively through reinsurance brokers. We seek to offer stable, predictable and consistent risk-based pricing. We seek to achieve a prompt turnaround on our claims.


	•	Active Capital Management. We aim to write as much attractively priced business as is available to us and then manage our capital accordingly. We typically seek to raise capital when we expect an increase in attractively priced business, and seek to return capital to our shareholders or joint venture investors when the amount of attractively priced business declines, and we believe a return of capital would be beneficial to our shareholders or joint venture investors.


	•	Joint Ventures. Building upon our relationships and expertise in risk selection, marketing and capital management, we seek to pursue and execute on joint venture and investment opportunities, which include new partners and diversifying classes of business. We believe our focus on our joint ventures allows us to leverage our access to business and our underwriting capabilities on an efficient capital base, develop fee income, and diversify our portfolio. We intend to pursue additional joint venture opportunities and strategic investments.

We believe we are positioned to fulfill these objectives by virtue of the experience and skill of our management team, our significant financial strength, and our strong relationships with brokers and clients. In addition, we believe our superior service, our proprietary modeling technology, and our extensive business relationships which have enabled us to become a leader in the property catastrophe reinsurance market will be instrumental in allowing us to achieve our strategic objectives. In particular, we believe our responsive, flexible strategy and capabilities permit us to differentiate ourselves by offering specialized services and products at times and in markets where capacity and alternatives are limited.

BUSINESS SEGMENTS

We conduct our business through two reportable segments, Reinsurance and Individual Risk. Financial data relating to our two segments is included in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and in our Financial Statements and Supplementary Data presented under Item 8.

Reinsurance Segment

Our Reinsurance operations are comprised of three units: 1) property catastrophe reinsurance, primarily written through Renaissance Reinsurance and DaVinci; 2) specialty reinsurance, primarily written through Renaissance Reinsurance and DaVinci; and 3) certain other activities of Ventures as described herein. Our Reinsurance operations are managed by the President of Renaissance Reinsurance, who leads a team of underwriters, risk modelers and other industry professionals, who have access to our proprietary risk management, underwriting and modeling resources and tools. We believe the expertise of our underwriting and modeling team and our proprietary analytic tools, together with superior customer service, provide us with a significant competitive advantage.

Our portfolio of business has continued to be increasingly characterized by relatively large transactions with ceding companies with whom we do business, although no current relationship exceeds 10% of our gross premiums written. Accordingly, our gross premiums written are subject to significant fluctuations depending on our success in maintaining or expanding our relationships with these large customers. We believe that recent market dynamics, and trends in our industry in respect of potential future consolidation, have increased our exposure to the risks of client and counterparty concentration.

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The following table shows our total managed catastrophe and specialty reinsurance gross premiums written:


Year ended December 31,	2006				2005				2004
(in thousands)

Renaissance catastrophe premiums		$	773,638			$	573,393			$	527,418
Renaissance specialty premiums			198,111				402,207				351,261
Total Renaissance premiums			971,749				975,600				878,679
DaVinci catastrophe premiums			325,476				202,180				174,592
DaVinci specialty premiums			23,938				25,195				31,625
Total DaVinci premiums			349,414				227,375				206,217
Total Reinsurance premiums		$	1,321,163			$	1,202,975			$	1,084,896
Total specialty premiums (1)		$	222,049			$	427,402			$	382,886
Total catastrophe premiums		$	1,099,114			$	775,573			$	702,010
Catastrophe premiums written on behalf of our joint venture, Top Layer Re (2)			51,244				59,908				70,242
Catastrophe premiums assumed from our Individual Risk segment			(64,573	)			(43,594	)			(18,831	)
Total managed catastrophe premiums (3)			1,085,785				791,887				753,421
Managed catastrophe premiums assumed on behalf of fully-collateralized joint ventures			(113,977	)			—				—
Total managed catastrophe premiums, net of fully-collateralized joint ventures (3)		$	971,808			$	791,887			$	753,421


(1)	Total specialty premiums written includes $2.3 million, $1.7 million and $nil of premiums assumed from our Individual Risk segment for the years ended December 31, 2006, 2005 and 2004, respectively.


(2)	Top Layer Re is accounted for under the equity method of accounting.

(3)

In addition to the GAAP financial measures set forth in this Form 10-K, we have included certain non-GAAP financial measures in this Form 10-K within the meaning of Regulation G. We have consistently provided these financial measurements in previous filings and we believe that these measurements are important to investors and other interested parties, and that investors and other such persons benefit from having a consistent basis for comparison with other companies within the industry. These measures may not, however, be comparable to similarly titled measures used by companies outside the insurance industry. Investors are cautioned not to place undue reliance on these non-GAAP measures in assessing our overall financial performance.

We have included in this Form 10-K ‘‘managed catastrophe premiums’’ and ‘‘managed catastrophe premiums, net of fully-collateralized joint ventures.’’ ‘‘Managed catastrophe premiums’’ is defined as gross catastrophe premiums written by Renaissance Reinsurance and its related joint ventures, excluding catastrophe premiums assumed from the Company’s Individual Risk segment. ‘‘Managed catastrophe premiums’’ differ from total catastrophe premiums, which the Company believes is the most directly comparable GAAP measure, due to the inclusion of catastrophe premiums written on behalf of the Company’s joint venture Top Layer Re, which is accounted for under the equity method of accounting and the exclusion of catastrophe premiums assumed from the Company’s Individual Risk segment. ‘‘Managed catastrophe premiums, net of fully-collateralized joint ventures’’ differ from total catastrophe premiums, which the Company believes is the most directly comparable GAAP measure, due to: 1) the inclusion of catastrophe

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premiums written on behalf of the Company’s joint venture Top Layer Re, which is accounted for under the equity method of accounting; 2) the exclusion of catastrophe premiums assumed from the Company’s Individual Risk segment; and 3) the deduction of catastrophe premiums that are written by the Company and ceded directly to the Company’s fully-collateralized joint ventures which include Starbound Re and Tim Re. The Company’s management believes ‘‘managed catastrophe premiums’’ is useful to investors and other interested parties because it provides a measure of total catastrophe reinsurance premiums assumed by the Company through its consolidated subsidiaries and related joint ventures. The Company believes ‘‘managed catastrophe premiums, net of fully-collateralized joint ventures’’ is also a useful measure to investors and other interested parties because it provides a measure of total catastrophe reinsurance premiums assumed by the Company through its consolidated subsidiaries and related joint ventures, net of catastrophe premiums assumed from the Company’s Individual Risk segment and net of catastrophe premiums written directly on behalf of the Company’s fully-collateralized joint ventures.

Property Catastrophe Reinsurance

We believe we are one of the largest providers of property catastrophe reinsurance in the world, based on our total managed catastrophe premium. Our principal property catastrophe reinsurance products include catastrophe excess of loss reinsurance and excess of loss retrocessional reinsurance as described below:

Catastrophe Excess of Loss Reinsurance. We principally write catastrophe reinsurance on an excess of loss basis, which means we provide coverage to our insureds when aggregate claims and claim expenses from a single occurrence of a covered peril exceed the attachment point specified in a particular contract. Under these contracts we indemnify an insurer for a portion of the losses on insurance policies in excess of a specified loss amount, and up to an amount per loss specified in the contract. The coverage provided under excess of loss reinsurance contracts may be on a worldwide basis or limited in scope to selected geographic areas. Coverage can also vary from ‘‘all property’’ perils to limited coverage on selected perils, such as ‘‘earthquake only’’ coverage.

Excess of Loss Retrocessional Reinsurance. We also write retrocessional reinsurance contracts that provide property catastrophe coverage to other reinsurers or retrocedants. In providing retrocessional reinsurance, we focus on property catastrophe retrocessional reinsurance which covers the retrocedant on an excess of loss basis when aggregate claims and claim expenses from a single occurrence of a covered peril and from a multiple number of reinsureds exceed a specified attachment point. The coverage provided under excess of loss retrocessional contracts may be on a worldwide basis or limited in scope to selected geographic areas. Coverage can also vary from ‘‘all property’’ perils to limited coverage on selected perils, such as ‘‘earthquake only’’ coverage. In addition, the information available to retrocessional underwriters concerning the original primary risk can be less precise than the information received from primary companies directly. Moreover, exposures from retrocessional business can change within a contract term as the underwriters of a retrocedant alter their book of business after retrocessional coverage has been bound.

Our property catastrophe reinsurance contracts are generally ‘‘all risk’’ in nature. Our most significant exposure is to losses from earthquakes and hurricanes and other windstorms, although we are also exposed to claims arising from other catastrophes, such as tsunamis, freezes, floods, fires, tornadoes, explosions and acts of terrorism in connection with the coverages we provide. Our predominant exposure under such coverage is to property damage. However, other risks, including business interruption and other non-property losses, may also be covered under our property reinsurance contracts when arising from a covered peril. We offer our coverages on a worldwide basis.

Because of the wide range of possible catastrophic events to which we are exposed, including the size of such events and because of the potential for multiple events to occur in the same time period, our catastrophe reinsurance business is volatile and our results of operations reflect this volatility. Further, our financial condition may be impacted by this volatility over time or at any point in time. The effects of claims from one or a number of severe catastrophic events could have a material adverse

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effect on us. We expect that increases in the values and concentrations of insured property and the effects of inflation will increase the severity of such occurrences in the future.

We seek to moderate the volatility described in the preceding paragraph through superior risk selection and portfolio diversification. We may opportunistically increase or decrease our presence in the catastrophe reinsurance business based on market conditions and our assessment of risk-adjusted pricing adequacy. Also, we may seek to purchase reinsurance or other protection for our own account to further reduce the financial impact that a large catastrophe or a series of catastrophes could have on our results.

As a result of our position in the market and reputation for superior customer service, we believe we have above average access to desirable business compared to the market as a whole. As described above, we use our proprietary underwriting tools and guidelines to attempt to construct an attractive portfolio from these opportunities. We dynamically model policy submissions against our current in-force portfolio, comparing the expected profit of the contract against the amount of capital that we allocate to the contract based on our estimate of its marginal impact on our overall portfolio risk. At times, our approach to portfolio management may result in our having a relatively large market share of catastrophe reinsurance exposure in a particular geographic region or to a particular peril, where we believe pricing is attractive, or, in contrast, a disproportionately low market share in regions or perils where we believe pricing is inadequate.

Specialty Reinsurance

We write a number of lines of reinsurance other than property catastrophe, such as catastrophe exposed workers’ compensation, surety, terrorism, medical malpractice, casualty clash, certain other casualty lines and other specialty lines of reinsurance, which we collectively refer to as specialty reinsurance. As with our catastrophe business, our team of experienced professionals seeks to underwrite these lines using a disciplined underwriting approach and sophisticated analytical tools.

We believe that our underwriting and analytical capabilities have positioned us well to manage this business. We generally target lines of business where we believe we can adequately quantify the risks assumed and where potential losses could be characterized as low frequency and high severity, similar to our catastrophe reinsurance coverages. We also seek to identify market dislocations and will opportunistically write new lines of business whose risk and return characteristics are estimated to exceed our hurdle rates. We also seek to manage the correlations of this business with our overall portfolio, including our aggregate exposure to single and aggregated catastrophe events.

We offer our specialty reinsurance products principally on an excess of loss basis, as described above with respect to our catastrophe reinsurance products, and also provide some proportional coverage. In a proportional reinsurance arrangement (also referred to as quota share reinsurance and pro rata reinsurance); the reinsurer shares a proportional part of the original premiums and losses of the reinsured. The reinsurer pays the cedant a commission which is generally based on the cedant’s cost of acquiring the business being reinsured (including commissions, premium taxes, assessments and miscellaneous administrative expenses) and may also include a profit factor. Our products generally include tailored features such as limits or sub-limits which we believe help us manage our exposures. Any liability exceeding or otherwise not subject to such limits reverts to the cedant. As with our catastrophe reinsurance business, our specialty reinsurance frequently provides coverage for relatively large limits or exposures, and thus we are subject to potential significant claims volatility.

We generally seek to write significant lines on our specialty reinsurance treaties. As a result of our financial strength, we have the ability to offer significant capacity and, for select risks, we have made available limits of up to $150.0 million per program. We believe these capabilities, the strength of our specialty reinsurance underwriting team, and our demonstrated ability and willingness to pay valid claims are competitive advantages of our specialty reinsurance business.

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Ventures

We pursue a number of other opportunities through our Ventures unit, which has responsibility for managing our joint venture relationships, executing customized reinsurance transactions to assume or cede risk and managing certain investments directed at classes of risk other than catastrophe reinsurance.

Property Catastrophe Managed Joint Ventures. We actively manage property catastrophe-oriented joint ventures, which provide us with an additional presence in the market as well as fee income. They allow us to leverage our access to business and our underwriting capabilities on a larger capital base. During 2006, we participated in two new joint ventures, Starbound and Tim Re. These two new joint ventures were utilized to provide capacity to the U.S. property catastrophe market, primarily for the 2006 U.S. hurricane season. Currently, our joint ventures include Top Layer Re, DaVinci, Starbound and Tim Re. We are the exclusive underwriting manager for each of these joint ventures.

DaVinci writes global reinsurance. In general, we seek to construct for DaVinci a property catastrophe reinsurance portfolio with risk characteristics similar to those of Renaissance Reinsurance’s property catastrophe reinsurance portfolio. We also write certain lines of specialty reinsurance for DaVinci. Currently these lines include terrorism and catastrophe exposed workers’ compensation. We maintain majority voting control of DaVinciRe and, accordingly, consolidate the results of DaVinciRe into our consolidated results of operations and financial position. We seek to manage DaVinci’s capital efficiently over time in light of the market opportunities and needs we perceive and believe we are able to serve. Our ownership in DaVinciRe was 20.5% and 19.7% at December 31, 2006 and 2005, respectively.

Top Layer Re writes high excess non-U.S. property catastrophe reinsurance. Top Layer Re is owned 50% by State Farm Mutual Automobile Insurance Company (‘‘State Farm’’) and 50% by Renaissance Reinsurance. State Farm provides $3.9 billion of stop loss reinsurance coverage to Top Layer Re. We account for Top Layer Re under the equity method and our proportionate share of its results is reflected in equity in earnings of other ventures in our consolidated statements of operations.

Starbound Re was formed in May 2006 to provide excess of loss property catastrophe reinsurance capacity, primarily for the 2006 U.S. hurricane season. Starbound was capitalized on May 31, 2006 with $126.5 million of equity capital. The equity, net of capital raising costs, was contributed to Starbound Re. Starbound Re issued $184.0 million of debt on May 31, 2006. Our Ventures unit invested $28.8 million in Starbound during 2006 (May 2006 – $7.5 million, December 2006 – $21.3 million), which represents an equity interest in the earnings of Starbound of approximately 17.8% at December 31, 2006. We account for our investment in Starbound under the equity method of accounting. During 2006, Renaissance Reinsurance and DaVinci ceded a defined portfolio of property catastrophe excess of loss reinsurance contracts incepting between June 1, 2006 and July 1, 2006 to Starbound Re in accordance with a fully-collateralized quota share agreement in return for an underwriting profit commission and an expense override. The Company manages the administration of Starbound for an annual fee.

Tim Re writes U.S. excess of loss property catastrophe reinsurance. In May 2006, Tim Re, currently a wholly owned subsidiary of the Company, sold $49.5 million of non-voting Class B shares to external investors to provide Tim Re with additional capacity to accept property catastrophe excess of loss reinsurance business for the 2006 U.S. hurricane season. Renaissance Reinsurance ceded a defined portfolio of property catastrophe excess of loss reinsurance contracts incepting June 1, 2006 to Tim Re under a fully-collateralized reinsurance contract in return for an underwriting profit commission. In January 2007, the Company purchased all of the issued and outstanding Class B shares of Tim Re.

Customized Reinsurance Transactions. Ventures works on a range of other customized reinsurance transactions. For example, we have participated in the market for catastrophe-linked securities. We also offer products through which we cede participations in the performance of our catastrophe reinsurance portfolio. We believe our products contain a number of customized features designed to fit the needs of our partners, as well as our risk management objectives.

Business Development Joint Ventures and Other Investments. Ventures also pursues other types of investments where, rather than assuming exclusive management responsibilities ourselves, we instead

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partner with other market participants. These investments are directed at classes of risk other than catastrophe, and at times may also be directed at non-insurance risks. We find these investments attractive both for their expected returns, and also because they provide us diversification benefits and information and exposure to other aspects of the market.

Examples of these investments include:


	•	ChannelRe Holdings Ltd. (‘‘Channel Re’’) – a Bermuda-based financial guaranty reinsurer. We are a founding investor in Channel Re and contributed $119.7 million, or 32.7% as part of the initial capitalization of Channel Re on February 12, 2004. Channel Re assumed an approximate $27.0 billion (par amount) portfolio of in-force business from MBIA Inc., and certain of its affiliates, and participates in its reinsurance treaty and provides facultative reinsurance support. Channel Re has total claims-paying resources of approximately $924.0 million.


	•	Platinum Underwriters Holdings Ltd. (‘‘Platinum’’) – a Bermuda-based diversified reinsurance company. In 2002, we invested $84.2 million in exchange for 4.0 million common shares of Platinum, we obtained a warrant to purchase an additional 2.5 million common shares of Platinum at a strike price of $27.00, and entered into a variety of commercial relationships with Platinum. We sold our common shares in Platinum in December 2005. We are currently involved with and expect to continue to be involved with Platinum on a variety of commercial relationships. We also continue to own the warrant.


	•	Other investments and initiatives including ventures focused on trading weather-sensitive commodities, securities and derivatives.

Only business activities that appear in our consolidated underwriting results, such as DaVinci and certain reinsurance transactions, are included in our Reinsurance segment results; the results of our investments in Top Layer Re, Channel Re, Starbound, Platinum and other ventures are included in the Other category of our segment results.

Competition

The reinsurance industry is highly competitive. We believe that our principal competitors in our Reinsurance segment include other companies active in the Bermuda market, including Ace Limited, Allied World Assurance Company, Arch Capital Group (‘‘Arch’’), Axis Capital Holdings, Endurance Specialty Holdings Ltd., Everest Re Group Ltd., IPC Holdings, Ltd., Montpelier Re Holdings, PartnerRe Ltd., Platinum and XL Capital Ltd. We also compete with certain Lloyd’s syndicates active in the London market, as well as with a number of other industry participants, such as American International Group, Inc. (‘‘AIG’’), Berkshire Hathaway (‘‘Berkshire’’), Munich Re Group and Swiss Re. As our business evolves over time we expect our competitors to change as well. Following hurricane Katrina in August 2005, a significant trend of new company formation focused in Bermuda commenced, which resulted in substantial new competition for 2006 and subsequent periods. Hedge funds have also shown increasing interest in entering the reinsurance market, either through the formation of reinsurance companies, or through the use of other financial products. Increased competition could cause, both on an industry-wide basis and for our book of business, a decrease in premium rates, less favorable policy terms, and a decrease in the percentage or absolute amount of attractive business we are able to write, the occurrence of any of which could adversely impact our growth and profitability.

Over the last several years capital markets participants, including exchanges and financial intermediaries, have developed financial products intended to compete with traditional reinsurance. Although the impact of these financial products to date has been limited, it could grow in the future. In addition, the tax policies of the countries where our clients operate as well as government sponsored or backed catastrophe funds can affect demand for reinsurance. We are unable to predict the extent to which the foregoing new, proposed or potential initiatives may affect the demand for our products or the risks which may be available for us when considering to offer coverage.

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Individual Risk Segment

Since 2003, we have significantly increased the amount of capital and resources devoted to our Individual Risk segment. Our gross premiums written in this segment have grown from $282.6 million in 2002 to $689.4 million in 2006.

We define our Individual Risk segment to include underwriting that involves understanding the characteristics of the original underlying insurance policy. Our Individual Risk segment is managed by the Chief Executive Officer of the Glencoe Group. Our Individual Risk operations seek on an opportunistic basis to identify and write classes of business which are attractively priced relative to the risk exposure and, particularly in the case of catastrophe-exposed risks, where our expertise in modeling, analytical tools and information systems may provide a competitive advantage.

The following table shows our Individual Risk gross premiums written by major type of business:


Year ended December 31,	2006			2005			2004
(in thousands)
Individual Risk gross premiums written
Commercial multi-line		$	358,987		$	316,553		$	213,591
Commercial property			226,205			123,236			118,975
Personal lines property			104,200			211,641			145,526
Total Individual Risk gross premiums written		$	689,392		$	651,430		$	478,092

Our Individual Risk business is written by the Glencoe Group through its operating subsidiaries Glencoe and Lantana, on an excess and surplus lines basis, and by Stonington and Stonington Lloyds Insurance Company (‘‘Stonington Lloyds’’), on an admitted basis. Our principal contracts include insurance contracts and quota share reinsurance with respect to risks including: 1) commercial multi-line, which includes commercial property and liability coverage, such as general liability, automobile liability and physical damage, building and contents, professional liability and various specialty products, and multi-peril crop insurance; 2) commercial property, which principally includes catastrophe-exposed commercial property products; and 3) personal lines property, which principally includes homeowners personal lines property coverage and catastrophe exposed personal lines property coverage.

Our Individual Risk business is produced primarily through three distribution channels:


	1)	Program managers – We write specialty lines primary insurance through specialized program managers, who produce business pursuant to agreed-upon underwriting guidelines and provide related back-office functions;


	2)	Quota share reinsurance – We write quota share reinsurance with primary insurers who, similar to our program managers, provide most of the back-office functions. Business is written pursuant to agreed-upon guidelines; and


	3)	Broker-produced business – We write primary insurance produced through brokers on a risk-by-risk basis; underwriting and back office functions for this business are based in our offices in Bermuda while claims handling is outsourced.

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The following table shows the percentage of our Individual Risk gross premiums written by distribution channel:


Year ended December 31,	2006						2005						2004
(in thousands)
	Gross Premiums Written			Percentage of Gross Premiums Written			Gross Premiums Written			Percentage of Gross Premiums Written			Gross Premiums Written			Percentage of Gross Premiums Written
Individual Risk gross premiums written
Program managers		$	435,207		63.2	%		$	343,419		52.7	%		$	174,902		36.6	%
Quota share reinsurance			238,066		34.5				273,734		42.0				243,294		50.9
Broker-produced business			16,119		2.3				34,277		5.3				59,896		12.5
Total Individual Risk gross premiums written		$	689,392		100.0	%		$	651,430		100.0	%		$	478,092		100.0	%

We seek to identify and do business with program managers and quota share reinsurance cedants whom we believe utilize superior underwriting methodologies. We rely on these third parties for services including policy issuance, premium collection, claims processing, and compliance with various state laws and regulations including licensing. We seek to work closely with these partners, attempting to employ our analytical methodologies and, where appropriate, our expertise in catastrophe risk, to arrive at adequate pricing for the risks being underwritten. We seek to structure these relationships to provide value to both parties and meaningful protections to us. Our strategy is to pursue a relatively small number of relatively large relationships.

We actively oversee our third-party relationships through an operations review team at Glencoe Group Services and through the use of our proprietary program analytical central repository, PACeR. The operations review team utilizes professionals in the disciplines of actuarial science, accounting, claims management, law, regulatory compliance and underwriting. This group assists with the initial due diligence as well as the ongoing monitoring of these third parties. The ongoing monitoring includes periodic audits of our program managers and third-party administrators. In addition, for our large program managers we maintain an employee in an underwriting capacity on-site at the program manager to oversee the program manager’s compliance with our prescribed underwriting guidelines. We generally seek to have contractual performance standards for each of our programs and third-party claims administrators whose compensation is subject to adjustment based on meeting these standards. The program operations team audits compliance with our underwriting guidelines and contractually agreed operating guidelines and performance standards. The program operations team actively works with our third parties to ensure corrective action is taken quickly to resolve issues identified during the audit process.

We operate through the Glencoe Group of companies, whose principal operating subsidiaries are Glencoe, Stonington, Lantana and Stonington Lloyds. Glencoe is a Bermuda-domiciled excess and surplus lines insurance company and is currently eligible to do business on an excess and surplus lines basis in 51 U.S. jurisdictions. Stonington, a Texas domiciled insurance company, is licensed on an admitted basis in all 50 states and the District of Columbia. Lantana is a Bermuda-domiciled insurance company currently eligible as an excess and surplus lines carrier in 49 U.S. jurisdictions.

Competition

In our Individual Risk business, we face competition from independent insurance companies, subsidiaries or affiliates of major worldwide companies and others, some of which have greater financial and other resources than we do. Primary insurers compete on the basis of various factors including distribution channels, product, price, service, financial strength and reputation. Many of our Reinsurance segment competitors listed above also compete for the program business and quota share reinsurance we write within our Individual Risk segment. We believe that our principal competitors in the program business of our Individual Risk segment include operating subsidiaries of AIG, Arch,

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WR Berkley Corp. (‘‘Berkley’’), Berkshire, Hannover Re and Zurich Financial Services Group (‘‘Zurich’’). In our Individual Risk business, we compete not only in respect of the insurance and reinsurance products we offer, but in respect of the contractual relationships with the program managers with whom we seek to partner. Increased competition in respect of our products could result in decreased premium rates, less attractive terms and conditions, and a decrease in our share of attractive programs. Increased competition in respect of our program manager partners, as to whom we are extremely selective and whose relationship we seek to tightly manage in a disciplined, consistent fashion, could result in less favorable terms and conditions in respect of our contractual arrangements with our partners, the loss of existing program manager relationships, or constrain our ability to add new relationships to our operations. Any of the foregoing could adversely impact the growth and profitability of our Individual Risk segment.

Other Activities

During the third quarter of 2006, we established a unit focused on weather-related activities, having as its principal operating companies Weather Predict, WP Consulting and RIM. Weather Predict and WP Consulting provide fee-based consulting services, sell weather-related information and forecasts, and engage in research and development activities, such as the RenaissanceRe Wall of Wind facility in southern Florida. RIM sells certain financial products primarily to address weather risks, and engages in certain derivatives trading activities. Through RIM, we expect that our participation in the trading markets for securities and derivatives linked to weather, other natural phenomena, or products or indices linked in part to such phenomena will increase. We do not currently expect the activities of this unit to impact materially our financial results in the near term. As this unit grows, we are seeking to develop client and customer relationships, build operating and control environment systems and procedures, hire staff and develop and install management information and other systems. We are also taking numerous other steps to implement our strategies. To a degree, success in executing our strategies in respect of this unit requires us to develop new expertise in certain areas. If we fail to continue to develop the necessary infrastructure, or otherwise fail to execute our strategy, our results from these new lines of business will likely suffer, perhaps substantially.

RATINGS

Financial strength ratings have become an increasingly important factor in respect of the competitive position of reinsurance and insurance companies. Rating organizations continually review the financial positions of reinsurers and insurers, including Renaissance Reinsurance, Top Layer, DaVinci and the Glencoe Group. Over the last five years, we have received high claims-paying and financial strength ratings from Standard & Poor’s Rating Agency (‘‘S&P’’), A.M. Best Co. (‘‘A.M. Best’’) and Moody’s. These ratings represent independent opinions of an insurer’s financial strength, operating performance and ability to meet policyholder obligations, and are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold any of our securities.

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Presented below are the ratings of our principal operating subsidiaries and joint ventures by segment and the senior debt ratings of RenaissanceRe as of February 12, 2007. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources – Credit Ratings’’ for information about recent ratings actions.

At February 12, 2007

S&P

A.M. Best

A.M. Best
Financial Size
Category

Moody’s

REINSURANCE SEGMENT⁽¹⁾

Renaissance Reinsurance

A+

XIII

DaVinci

—

Top Layer Re

A+

VII

—

Renaissance Europe

—

XIII

—

INDIVIDUAL RISK SEGMENT⁽¹⁾

Glencoe

—

A−

—

Stonington

—

A−

—

Stonington Lloyds

—

A−

—

Lantana

—

A−

—

RENAISSANCERE⁽²⁾

A−

bbb+

—

Baa1


(1)	The A.M. Best, S&P and Moody’s ratings for the companies in the Reinsurance and Individual Risk segments reflect the insurer’s financial strength rating (see explanation of the rating levels below).


(2)	The S&P and Moody’s ratings for RenaissanceRe represent the credit ratings on its senior unsecured debt.

S&P. The ‘‘AA’’ range (‘‘AA+’’, ‘‘AA’’, ‘‘AA−’’), which has been assigned by S&P to Top Layer Re, is the second highest rating assigned by S&P, and indicates that S&P believes the insurer’s capacity to meet its financial commitment on the obligation is very strong, differing only slightly from those rated higher. The ‘‘A’’ range (‘‘A+’’, ‘‘A’’ and ‘‘A−’’) is the third highest of four ratings ranges within what S&P considers the ‘‘secure’’ category. An insurer rated ‘‘A’’ is believed by S&P to have strong financial security characteristics, but to be somewhat more likely to be affected by business conditions than are insurers with higher ratings.

A.M. Best. ‘‘A+’’ is the second highest designation of A.M. Best’s sixteen rating levels. ‘‘A+’’ rated insurance companies are defined as ‘‘Superior’’ companies and are considered by A.M. Best to have a very strong ability to meet their obligations to policyholders. ‘‘A’’ and ‘‘A−’’ are the third and fourth highest designations, respectively, assigned by A.M. Best, representing A.M. Best’s opinion that the insurer has an excellent ability to meet its ongoing obligations to policyholders.

A.M. Best also assigns a financial size category to each of the insurance companies rated. ‘‘VII’’ represents a company with $50-$100 million in capital, ‘‘X’’ represents a company with $500-$750 million in capital and ‘‘XIII’’ represents a company with $1.25 – $1.5 billion in capital.

Moody’s. Moody’s Insurance Financial Strength Ratings and Moody’s Credit Ratings represent its opinions of the ability of insurance companies to repay punctually policyholder claims and obligations and senior unsecured debt instruments. Moody’s believes that insurance companies rated A2, such as Renaissance Reinsurance, and companies rated Baa1, such as RenaissanceRe, offer good financial security. However, Moody’s believes that elements may be present which suggest a susceptibility to impairment sometime in the future.

While the ratings of our principal operating subsidiaries and joint ventures within our Reinsurance segment remain among the highest in our business, adverse ratings actions could have a negative effect on our ability to fully realize current or future market opportunities. In addition, it is common

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for our reinsurance contracts to contain provisions permitting our clients to cancel coverage pro-rata if our relevant operating subsidiary is downgraded below a certain rating level. Whether a client would exercise this right would depend, among other factors, on the reason for such a downgrade, the extent of the downgrade, the prevailing market conditions and the pricing and availability of replacement reinsurance coverage. Therefore, in the event of a downgrade, it is not possible to predict in advance the extent to which this cancellation right would be exercised, if at all, or what effect such cancellations would have on the financial condition or future operations, but such effect potentially could be material. To date we are not aware that we have experienced such a cancellation. Our ratings are subject to periodic review and may be revised or revoked by the agencies which issue them.

UNDERWRITING AND RISK MANAGEMENT

Our primary underwriting goal is to construct a portfolio of reinsurance and insurance contracts and other financial risks that maximizes our return on shareholders’ equity, subject to prudent risk constraints, and to generate long-term growth in tangible book value per common share plus accumulated dividends. We assess each new contract on the basis of the expected incremental return relative to the incremental contribution to portfolio risk.

Reinsurance

We have developed a proprietary, computer-based pricing and exposure management system, REMS^©. REMS^© was initially developed with consulting assistance from Tillinghast, an actuarial consulting unit of Towers, Perrin, Forster & Crosby, and Applied Insurance Research, Inc., the developer of the CATMAP™ system. Since inception, we have continued to invest in and improve REMS^©, incorporating our underwriting experience, additional proprietary software and a significant amount of new industry data. REMS^© has analytic and modeling capabilities that help us to assess the risk and return of each incremental reinsurance contract in relation to our overall portfolio of reinsurance contracts. We combine the analyses generated by REMS^© with other information available to us, including our own knowledge of the client submitting the proposed program, to assess the premium offered against the risk of loss which the program presents. We have licensed and integrated into REMS^© a number of third-party catastrophe computer models in addition to our base model, which we use to validate and stress test our base REMS^© results. REMS^© is most developed in analyzing catastrophe risks. Our tools for assessing non-catastrophe risks are much less sophisticated and much less well developed than those for catastrophe risks. We are working to better develop our analytical techniques relating to non-catastrophe risks.

We believe that REMS^© is a more robust underwriting and risk management system than is currently commercially available elsewhere in the reinsurance industry. Before we bind a reinsurance risk, a significant amount of exposure data is typically gathered from clients and this exposure data is input into the REMS^© modeling system. The REMS^© modeling system enables the Company to measure each policy on a consistent basis and provides the Company with a measurement of an appropriate price to charge for each policy based upon the risk that is assumed. REMS^© combines computer-generated statistical simulations that estimate event probabilities with exposure and coverage information on each client’s reinsurance contract to produce expected claims for reinsurance programs submitted to us. Our models employ simulation techniques to generate 40,000 years of activity, including events causing in excess of $300 billion in insured industry losses. From this simulation, we generate estimates of expected claims, expected profits and a probability distribution of potential outcomes for each program in our portfolio and for our total portfolio. REMS^©allows us to score the contracts that we write by comparing the expected profit of a contract with the amount of capital that we allocate to the contract based on its marginal impact on the risk of our portfolio. We have also customized REMS^© by including additional perils, risks and geographic areas that are not captured in the commercially available models.

We periodically review our catastrophe assumptions in REMS^©. In the second half of 2005 we revised our assumptions around Atlantic basin hurricane frequency and severity. Most commercial catastrophe models base their frequency and severity distributions on the last 100 years of hurricane activity.

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These commercial models assume that a long term view of hurricane risk is appropriate for the insurance industry. Based on our review of the scientific literature, private research, and discussions with some of the leading climatologists and meteorologists, we do not currently believe the past 100 years of data is reflective of current activity. In particular, we believe there has been an increase in the frequency and severity of hurricanes that have the potential to make landfall in the U.S., potentially as a result of decadal ocean water temperature cyclical trends, a longer-term trend towards global warming, or both or other factors. We started using these revised assumptions in REMS^© to model and evaluate our portfolio of risk in the latter part of 2005. Recently, we introduced a further revised version of our internal models. These assumptions involve significant judgment on our part, and further experience or scientific research may lead us to further adjust these assumptions. Changes in our modeled assumptions may impact from time to time the amount of capacity we are prepared to offer.

Our catastrophe reinsurance underwriters use REMS^© in their pricing decisions, which we believe provides them with several competitive advantages. These include the ability:


	•	to simulate a greater number of years of catastrophic event activity compared to a much smaller sample in generally available models, allowing us to analyze exposure to a greater number and combination of potential events;


	•	to analyze the incremental impact of an individual reinsurance contract on our overall portfolio;


	•	to better assess the underlying exposures associated with assumed retrocessional business;


	•	to price contracts within a short time frame;


	•	to capture various classes of risk, including catastrophe and other insurance risks;


	•	to assess risk across multiple entities (including our various joint ventures) and across different components of our capital structure; and


	•	to provide consistent pricing information.

As part of our risk management process, we also use REMS^© to assist us with the purchase of reinsurance coverage for our own account.

We have developed underwriting guidelines, to be used in conjunction with REMS^©, that seek to limit the exposure to claims from any single catastrophic event and the exposure to losses from a series of catastrophic events. As part of our pricing and underwriting process, we also assess a variety of other factors, including:


	•	the reputation of the proposed cedant and the likelihood of establishing a long-term relationship with the cedant;


	•	the geographic area in which the cedant does business and its market share;


	•	historical loss data for the cedant and, where available, for the industry as a whole in the relevant regions, in order to compare the cedant’s historical catastrophe loss experience to industry averages;


	•	the cedant’s pricing strategies; and


	•	the perceived financial strength of the cedant.

In order to define the risk profile of each line of specialty reinsurance, we establish probability distributions and assess the correlations with the rest of our portfolio. In lines with catastrophe risk, such as excess workers’ compensation, we are leveraging directly off our skill in modeling for our property catastrophe reinsurance risks, and it is important to understand the correlations between these specialty lines and our catastrophe reinsurance portfolio. For other classes of business, which have little or no natural catastrophe exposure, and hence have significantly less correlation with our property catastrophe reinsurance coverages, probability distributions are derived from a variety of underlying information, including recent historical experience, but with the application of judgment as

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appropriate. The nature of some of these businesses lends itself less to the analysis that we use for our property catastrophe reinsurance coverages, reflecting both the nature of available exposure information, and the impact of human factors such as tort exposure. We produce probability distributions to represent our underlying risks, which we believe helps us to make consistent underwriting decisions and manage our total risk portfolio. Overall we undertake to construct conservative representations of the risks within our models, although there can be no assurance that this has occurred.

Individual Risk

For our catastrophe exposed business in our Individual Risk segment, we utilize proprietary modeling tools that have been developed in conjunction with the modeling and other resources utilized in our Reinsurance operations, as described above. We also combine these analyses with those of our Reinsurance segment to monitor our aggregate group catastrophic exposures. In general, we believe our techniques for evaluating catastrophe risk are better developed than those for other classes of risk.

For the business produced through program managers, we seek to carefully identify and evaluate potential program managers. When evaluating a potential new program manager, we consider numerous factors including: (i) whether the program manager can provide and help us analyze historic loss and other business data; (ii) whether the program manager will agree to accept a portion of their compensation based on the underwriting performance of their program and provide us with the other terms and conditions we require; (iii) our assessment of the integrity and experience of the program manager’s management team; (iv) the potential profitability of the program to us; and (v) the availability of our internal resources to appropriately conduct due diligence, negotiate and execute transaction terms, and provide the ongoing monitoring we require. In considering pricing for the products to be offered by the program manager, we evaluate the expected frequency and severity of losses, the costs of providing the necessary coverage (including the cost of administering policy benefits, sales and other administrative and overhead costs), the necessity of third party reinsurance, the estimated costs thereof and an anticipated margin for profit.

In addition to utilizing REMS^©, within our Individual Risk operations we have developed a proprietary program analytical repository, PACeR, within which we intend to maintain all of our program business. We are developing statistical and analytical techniques to help evaluate the lines of business we write within this segment and which over time we hope will create a competitive advantage. We believe that PACeR helps our clients better understand their business, thus creating value for them and us. For example, we believe that PACeR enables us to better identify and estimate the expected loss experience of particular products and is employed in the design of our products and the establishment of rates. We also seek to monitor pricing adequacy on our products by region, risk and producer. Subject to regulatory considerations, we seek to make timely premium and coverage modifications where we determine them to be appropriate.

We provide our program managers with written underwriting guidelines and monitor their compliance with our guidelines on a regular basis. Also, our contracts generally provide that a portion of the commission payable to our program managers will be on a retrospective basis, which is intended to permit us to adjust commissions based on our profitability and claims experience once an underwriting year is reasonably mature. We rely on our program managers to perform underwriting pursuant to these contractual guidelines, and believe we benefit from their superior local information and expertise in niche areas.

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GEOGRAPHIC BREAKDOWN

Our exposures are generally diversified across geographic zones, but are also a function of market conditions and opportunities. The following table sets forth the percentage of our gross insurance and reinsurance premiums written allocated to the territory of coverage exposure:


Year ended December 31,	2006						2005						2004
(in thousands)
	Gross Premiums Written			Percentage of Gross Premiums Written			Gross Premiums Written			Percentage of Gross Premiums Written			Gross Premiums Written			Percentage of Gross Premiums Written
Property catastrophe reinsurance
United States and Caribbean		$	792,311		40.8	%		$	458,193		25.4	%		$	338,315		21.9	%
Europe			73,500		3.8				105,796		5.8				141,385		9.1
Worldwide (excluding U.S) (1)			71,116		3.7				59,076		3.3				63,529		4.1
Worldwide			68,575		3.5				54,493		3.0				90,607		5.9
Australia and New Zealand			2,732		0.1				33,266		1.8				28,614		1.9
Other			23,972		1.2				19,472		1.1				20,729		1.3
Specialty reinsurance (2)			222,049		11.4				427,402		23.6				382,886		24.8
Total reinsurance (3)			1,254,255		64.5				1,157,698		64.0				1,066,065		69.0
Individual Risk (4)			689,392		35.5				651,430		36.0				478,092		31.0
Total gross premiums written		$	1,943,647		100.0	%		$	1,809,128		100.0	%		$	1,544,157		100.0	%


(1)	The category ‘‘Worldwide (excluding U.S.)’’ consists of contracts that cover more than one geographic region (other than the U.S.). The exposure in this category for gross premiums written to date is predominantly from Europe and Japan.


(2)	The category Specialty reinsurance consists of contracts that are predominantly exposed to U.S. and worldwide risks.


(3)	Excludes $66.9 million, $45.3 million and $18.8 million of premium assumed from our Individual Risk segment in 2006, 2005 and 2004, respectively.


(4)	The category Individual Risk consists of contracts that are primarily exposed to U.S. risks.

RESERVES FOR CLAIMS AND CLAIM EXPENSES

Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts we sell. We establish our claims and claim expense reserves by taking claims reported to us by insureds and ceding companies, but which have not yet been paid (‘‘case reserves’’), adding the costs for additional case reserves (‘‘additional case reserves’’) which represent our estimates for claims previously reported to us which we believe may not be adequately reserved as of that date, and adding estimates for the anticipated cost of claims incurred but not yet reported to us (‘‘IBNR’’).

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The following table summarizes our claims and claim expense reserves by line of business and split between case reserves, additional case reserves and IBNR at December 31, 2006 and 2005:


At December 31, 2006	Case Reserves			Additional Case Reserves			IBNR			Total
(in thousands)
Property catastrophe reinsurance		$	366,337		$	282,544		$	226,579		$	875,460
Specialty reinsurance			104,010			77,315			412,466			593,791
Total Reinsurance			470,347			359,859			639,045			1,469,251
Individual Risk			272,119			15,611			341,174			628,904
Total		$	742,466		$	375,470		$	980,219		$	2,098,155
At December 31, 2005
(in thousands)
Property catastrophe reinsurance		$	544,750		$	576,992		$	207,087		$	1,328,829
Specialty reinsurance			180,868			95,312			414,445			690,625
Total Reinsurance			725,618			672,304			621,532			2,019,454
Individual Risk			194,016			—			401,081			595,097
Total		$	919,634		$	672,304		$	1,022,613		$	2,614,551

The decrease in the total amount of claims and claim expense reserves from December 31, 2005 to December 31, 2006, as shown in the table above, was principally a result of the payment of claims in respect of prior year losses, in particular the large hurricanes of 2004 and 2005.

Our estimates of claims and claim expense reserves are not precise in that, among other matters, they are based on predictions of future developments and estimates of future trends and other variable factors. Some, but not all, of our reserves are further subject to the uncertainty inherent in actuarial methodologies and estimates. Because a reserve estimate is simply an insurer’s estimate at a point in time of its ultimate liability, and because there are numerous factors which affect reserves and claims payments but cannot be determined with certainty in advance, our ultimate payments will vary, perhaps materially, from our estimates of reserves. If we determine in a subsequent period that adjustments to our previously established reserves are appropriate, such adjustments are recorded in the period in which they are identified. During the twelve months ended December 31, 2006, 2005 and 2004, changes to prior year estimated claims reserves increased our net income by $136.6 million, reduced our net loss by $241.5 million and increased our net income by $140.3 million, respectively.

A 10% change to our reserves at December 31, 2006 would equate to a $209.8 million adjustment to net claims and claim expenses incurred, which represents 27.5% of our net income available to common shareholders for the year ended December 31, 2006, and 6.4% of shareholders’ equity at December 31, 2006. During 2007, we intend to develop an analytical approach to quantifying reasonably likely changes to the variability of our key reserving assumptions embedded in our reserving estimation techniques. We will include the results of this analysis in our Annual Report on Form 10-K for the year ended December 31, 2007.

Our reserving methodology for each line of business uses a loss reserving process that calculates a point estimate for the Company’s ultimate settlement and administration costs for claims and claim expenses. We do not calculate a range of estimates. We use this point estimate, along with paid claims and case reserves, to record our best estimate of additional case reserves and IBNR in our financial statements. Under GAAP, we are not permitted to establish estimates for catastrophe claims and claim expense reserves until an event occurs that gives rise to a loss.

Our claims and claim expense reserves are reviewed annually by an independent actuarial firm. The actuarial firm performs this work for the purpose of issuing an actuarial opinion on the reasonableness of the claims and claim expense reserves for each of the Company’s insurance subsidiaries. The

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actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm discusses its conclusions with management and presents its findings to the Audit Committee of our Board of Directors of the Company. Although we do not explicitly rely on the work performed by the actuarial firm for estimating our reserves for claims and claim expenses, we compare our recorded claims and claim expense reserves to those estimated by the actuarial firm to determine whether our estimates are within the actuarial firm’s reasonable range of estimates. To date, our estimates of claims and claim expense reserves have been within the actuarial firm’s reasonable range of estimates.

Reserving for our reinsurance claims involves other uncertainties, such as the dependence on information from ceding companies, which among other matters, includes the time lag inherent in reporting information from the primary insurer to us or to our ceding companies and differing reserving practices among ceding companies. The information received from ceding companies is typically in the form of bordereaux, broker notifications of loss and/or discussions with ceding companies or their brokers. This information can be received on a monthly, quarterly or transactional basis and normally includes estimates of paid claims and case reserves. We sometimes also receive an estimate or provision for IBNR. This information is often updated and adjusted from time-to-time during the loss settlement period as new data or facts in respect of initial claims, client accounts, industry or event trends may be reported or emerge in addition to changes in applicable statutory and case laws.

During 2005, we incurred significant losses from hurricanes Katrina, Rita and Wilma. Our estimates of these losses are based on factors including currently available information derived from claims information from our clients and brokers, industry assessments of losses from the events, proprietary models and the terms and conditions of our contracts. In particular, due to the size and unusual complexity of the issues relating to hurricane Katrina, meaningful uncertainty remains regarding total covered losses for the insurance industry and, accordingly, our loss estimates. Our actual losses from these events will likely vary, perhaps materially, from our current estimates due to the inherent uncertainties in reserving for such losses, the potential inaccuracies and inadequacies in the data provided by clients and brokers, the inherent uncertainty of modeling techniques and the application of such techniques, and complex coverage and other legal issues.

Because of the inherent uncertainties discussed above, we have developed a reserving philosophy which attempts to incorporate prudent assumptions and estimates, and we have generally experienced favorable development on prior year reserves in the last several years. However, there is no assurance that this will occur in future periods.

Our reserving techniques, assumptions and processes differ between our Reinsurance and Individual Risk segments, as well as between our property catastrophe reinsurance and specialty reinsurance businesses within our Reinsurance segment. Refer to our ‘‘Claims and Claim Expense Reserves Critical Accounting Estimates’’ discussion in ‘‘Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ for more information on the risks we insure and reinsure, the reserving techniques, assumptions and processes we follow to estimate our claims and claim expense reserves, and our current estimates versus our initial estimates of our claims reserves, for each of these units.

The following table represents the development of our U.S. generally accepted accounting principles (‘‘GAAP’’) balance sheet reserves for 1996 through December 31, 2006. This table does not present accident or policy year development data. The top line of the table shows the gross reserves for claims and claim expenses at the balance sheet date for each of the indicated years. This represents the estimated amounts of claims and claim expenses arising in the current year and all prior years that are unpaid at the balance sheet date, including additional case reserves and IBNR reserves. The table also shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The ‘‘cumulative redundancy (deficiency) on net reserves’’ represents the aggregate change to date from the indicated estimate of the gross reserve for claims and claim expenses, net of losses recoverable on the second line of the table. The table also shows the cumulative net paid amounts as of successive years with respect to the net reserve liability.

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At the bottom of the table is a reconciliation of the gross reserve for claims and claim expenses to the net reserve for claims and claim expenses, the gross re-estimated liability to the net re-estimated liability for claims and claim expenses, and the cumulative redundancy (deficiency) on gross reserves.

With respect to the information in the table below, it should be noted that each amount includes the effects of all changes in amounts for prior periods, including the effect of foreign exchange rates.


Years ended December 31,	1996			1997			1998			1999				2000				2001			2002			2003			2004			2005			2006
(in millions)
Gross reserve for claims and claim expenses		$	105.4		$	110.0		$	298.8		$	478.6			$	403.6			$	572.9		$	804.8		$	977.9		$	1,459.4		$	2,614.6		$	2,098.2
Reserve for claims and claim expenses, net of losses recoverable		$	105.4		$	110.0		$	197.5		$	174.9			$	237.0			$	355.3		$	605.3		$	828.7		$	1,241.6		$	1,941.4		$	1,796.3
1 Year Later			105.4			95.1			149.5			196.8				221.0				378.3			511.6			688.4			1,000.2			1,804.8			—
2 Years Later			109.4			61.8			149.9			168.4				168.4				344.7			470.5			403.5			963.6			—			—
3 Years Later			87.3			58.2			141.3			121.7				138.6				308.0			294.4			384.6			—			—			—
4 Years Later			90.0			56.8			118.6			111.1				107.7				214.1			282.1			—			—			—			—
5 Years Later			89.5			51.1			117.8			81.9				54.4				209.2			—			—			—			—			—
6 Years Later			83.8			48.2			111.4			38.7				52.3				—			—			—			—			—			—
7 Years Later			81.9			45.6			99.0			36.8				—				—			—			—			—			—			—
8 Years Later			80.1			37.0			97.1			—				—				—			—			—			—			—			—
9 Years Later			72.4			35.8			—			—				—				—			—			—			—			—			—
10 Years Later			71.2			—			—			—				—				—			—			—			—			—			—
Cumulative redundancy (deficiency) on net reserves		$	34.2		$	74.2		$	100.4		$	138.1			$	184.7			$	146.1		$	323.2		$	444.1		$	278.0		$	136.6		$	—
Cumulative Net Paid Losses
1 Year Later		$	40.7		$	16.9		$	54.8		$	24.6			$	11.1			$	88.1		$	81.9		$	64.1		$	338.9		$	452.0		$	—
2 Years Later			54.7			24.7			80.1			16.0				0.3				152.0			90.2			119.1			437.2			—			—
3 Years Later			60.6			28.4			69.6			1.2				3.2				111.6			122.6			134.0			—			—			—
4 Years Later			64.1			29.8			69.1			2.7				(7.9	)			128.0			101.6			—			—			—			—
5 Years Later			65.3			31.0			69.5			(9.0	)			(0.6	)			107.0			—			—			—			—			—
6 Years Later			66.3			31.9			72.5			3.3				2.6				—			—			—			—			—			—
7 Years Later			67.1			32.3			78.4			4.7				—				—			—			—			—			—			—
8 Years Later			67.4			31.8			78.5			—				—				—			—			—			—			—			—
9 Years Later			67.0			31.9			—			—				—				—			—			—			—			—			—
10 Years Later			67.1			—			—			—				—				—			—			—			—			—			—
Gross reserve for claims and claim expenses		$	105.4		$	110.0		$	298.8		$	478.6			$	403.6			$	572.9		$	804.8		$	977.9		$	1,459.4		$	2,614.6		$	2,098.2
Reinsurance recoverable on unpaid losses			—			—			101.3			303.7				166.6				217.6			199.5			149.2			217.8			673.2			301.9
Net reserve for claims and claim expenses		$	105.4		$	110.0		$	197.5		$	174.9			$	237.0			$	355.3		$	605.3		$	828.7		$	1,241.6		$	1,941.4		$	1,796.3

Gross liability re-estimated		$	71.2		$	35.8		$	290.0		$	390.9			$	243.9			$	396.0		$	457.5		$	536.2		$	1,182.7		$	2,449.7