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Good morning. My name is Angela and I will be your conference operator. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2018 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.
And I would now like to turn the call over to Mr. Peter Hill. Please go ahead.
Good morning and thank you for joining our financial results conference call for the second quarter of 2018. 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 1:00 P.M. Eastern Time today through midnight on October 3rd. The replay can be accessed by dialing (855)-859-2056 or +1-(404)-537-3406. The passcode you will need for both numbers is 18690172. 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 October 3rd.
Before we begin, I am 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 Bob Qutub, Executive Vice President and Chief Financial Officer.
I would now like to turn the call over to Kevin. Kevin?
Thanks Peter. Good morning and thank you for joining today's call. I'll open with an overview of our performance for the quarter, and highlight how I think our strategy performed. Bob will discuss financial results and finally I will give you little more detail about what happened in each of our segments before taking your questions.
Last night we released our second quarter earnings, I'm proud to say that we had a very strong quarter reporting growth in book value of 4.3% and growth in tangible book value per share plus accumulated dividends of 4.9%. We also reported an annualized return on average common equity of 18.6% and an annualized operating return on average common equity of 20.3%. These returns reflect a strong performance we've delivered across all aspects of our business, as well as our continued focus on controlling expenses. This has allowed us to head into the 2018 win season just as strong financially as we were at this time last year. And with almost $350 million of operating income in the first two quarters of 2018, we have more than earned back last year's loss. We also benefited from higher investment income as well as significant prior year favorable development on the 2017 catastrophe events.
As Bob will discuss in greater detail, we grew premium in both property and casualty; I believe it is a significant complement to achieve the growth we have so far this year. This is all the more impressive because we have built the best portfolio that we have had in many years in terms of it's capital efficiency, it's profitability, and it's level of risk. Even though this portfolio is larger and more profitable due to the innovative capital structures we are able to bring to risk using our integrated system engrossed in net strategy we required no more surplus than we did last year. I will provide some more color later in the call and what happened to June 1 but I'm confident that we selected the best risks and constructed an industry leading portfolio that will generate shareholder value over the long-term.
For some however, the June 1 renewals probably did not live up to their expectations; this seems to have resulted in a fair amount of pessimism in the reinsurance marketplace. Frankly, I'm confused by the general sense of malays [ph], this is the best market we have seen in years; as I've said at the beginning of the year, it feels like the wind is at our backs again. This quarter you saw what a reasonable tailwind can do for our results. I think part of what is driving all the pessimism is too much focus on price. Long ago we recognized the changes to our market are more secular than cyclical due to the increasing efficiency of the reinsurance marketplace. Consequently we built a business model that can compete as long as prices remain above expected loss. Of course better pricing makes things easier but to succeed in this market requires just great underwriting but increasingly great portfolio construction. It also requires having great partners and the ability to deploy all forms of capital.
Oscar Wilde once said, a cynic knows the price of everything and the value of nothing; prices is where we start not where we end. Because of our gross to net strategy and integrated system we have more tools at our disposal to aid us in building efficient portfolios of risk, as a result although we seek rate increases we are not dependent upon them to produce superior returns. We recognized that the marketplace was changing and we moved ahead of the change, we were innovators of third-party capital management, we methodically drove down our expenses and our cost of capital, we increased operating and underwriting in investment leverage, we diversified and reduced volatility. By doing all these things we reconstructed the foundations of our company allowing us to become uniquely positioned to navigate the evolution of the supply chain over the next five years. Today we are leaner and more focused and have more options at our disposal.
I should also point out that our ongoing success and continued growth trajectory is at least partly due to our increasingly differentiated market position as a standalone reinsurer. During the quarter we executed on a significant volume of strategic multi-line deals for core clients. We were first calling these opportunities for many reasons and not competing with our clients was one of them. So even with all the pessimism permeating today's market, I am optimistic about our future and believe that we have the right strategy to continue to deliver shareholder value.
Before I pass off to Bob, I should mention that we celebrated our 25th anniversary as a Company last month, this happens to be my fifth year as CEO and I'm heading into my 23rd year as an employee. We made this anniversary about our people which we always credit as being our most important resource. I'm so proud of what they have accomplished not only this quarter but over the last 25 years.
Moving on, I'll discuss our business segments, some recent renewals and future opportunities in greater depth later on the call but first I'll turn it over to Bob to give an update on our financial performance.
Thanks Kevin, and good morning everyone. We had a strong quarter and today I'll focus my comments on the key financial drivers of our performance. I will also give you some additional insights into our investment portfolio and capital management.
In summary, there were several drivers of our performance this quarter including favorable prior development from the 2017 catastrophe events, higher net earned premiums standing from targeted top line growth over the past year and continued operating efficiency. Starting with the consolidated results for the second quarter, we reported net income of $192 million or $4.78 per diluted common share. Our operating income was $210 million or $5.23 per diluted common share which excludes $18 million of net realized and unrealized losses on the investments. Underwriting income for the quarter was $227 million and reported a combined ratio of 47.2%. Our gross premiums written grew 18% in the quarter to $977 million. These results drove an annualized ROE for the quarter of 18.6% and an annualized operating ROE of 20.3%, all-in-all, a very strong financial performance for the quarter.
Now before moving on to our segments I wanted to highlight again for you this quarter the changes we made to our expense allocations as well as the continued improvements in our operational efficiency. We made some minor adjustments at the beginning of the year to our allocation methodology which we discussed with you on the previous call where we shifted certain public company expenses from operational expenses in the segments to corporate expenses to be more in line with how our peers treat such expenses. This allocations realignment aside, we continue to improve our operational efficiency as we increase net premiums earned by 12% in the current quarter compared to the same period last year while keeping the sum of operational and corporate expenses relatively flat at about $46 million during the same period. But given the opportunities before us, you should expect operational expenses to increase modestly in the coming quarters as we invest in the business. However, operating expense ratio should remain relatively stable to declining overtime due to grow in net earned premium.
Now moving on to our segments and starting with the property segment where property gross premiums written in the second quarter were up $53 million or 10.7% over the comparative quarter. Gross premiums written in our catastrophe class of business increased by 6.4% but due to the favorable development we reported this quarter on the 2017 catastrophe events, were reversed out about $31.2 million of reinstatement premiums we had previously booked in the third quarter of 2017. Absent this [ph] adjustment, gross premiums written in our catastrophe class of business grew by 14%. In our other property class of business we grew gross premiums written to $115 million, a 31% increase over the comparative quarter, albeit off a relatively smaller base.
In total, our property segment generated underwriting income of $214 million and a combined ratio of negative 4.7% in the second quarter. This compares to underwriting income of $107 million and a combined ratio of 45% in the comparative quarter of last year.
You will note that our acquisition expense ratio was up in our property segment by about 5 percentage points. Two factors primarily drove this increase; first, as a result of the 2017 catastrophe event we exhausted a large portion of our profit commissions on certain ceded deals which are netted against acquisition expense. The second factor was a reduction in net premiums earned due to the reversal of the earned reinstatement premiums I discussed previously. Absent these factors our acquisition expense ratio would have been roughly flat over the comparative quarter.
Now let me spend a few minutes on the favorable development we reported this quarter on our property catastrophe class of business. The net positive impact of $77 million is the result of a deep dive review we performed on the 2017 catastrophe events. While we review our event loss reserves each quarter, we will typically also perform a deep dive around the anniversary of large catastrophe events. Now that we are approaching the first anniversary of these events and with the benefit of the ceded loss information we received during the June 1 renewals, we can begin to assign increased credibility to a lower than expected level of reported losses we have been experiencing.
In a deep dive, we take both, a top down and a bottoms up approach; we begin with a ground up review individually reviewing our current losses by cede. In addition, we perform a top down review to confirm that we are comfortable with our levels of ceded and event IVNR [ph] compared to various benchmarks. We believe our reserves appropriately reflect our best estimates based on all of the information available to us, and Kevin will talk more about the 2017 events in greater detail later.
Now moving onto our casualty segment; our gross premiums written were up close to 30% in the second quarter of 2018 over the comparative quarter. This increase was principally due to selective growth from business opportunities within the general casualty, other specialty, and financial lines of business. Much of this growth is a result of our differentiated strategies [indiscernible] customer solutions. This quarter we non-renewed a few proportional deals and also wrote several large excess of loss treaties. The distinction between the business mix is important as it impacts the timing of when the premium is written and earned in our financial statements. Generally, the majority of the premium we write in our casualty segment is proportional business which is written and earned pro-rata over the contract period as it is reported to us.
In contrast to proportional deals, with excessive loss treaties the full amount of premium is immediately reflected as gross written premium and then earned pro-rata over the contract period. The relative shift to excess of loss contracts this quarter from proportional contracts resulted in a large increase in gross premiums written in the current quarter. While the premium related to this excessive loss contract will earn out over several quarters, it will not influence gross premium in the future quarters. Absent to shift excessive loss contracts this quarter, casualty gross premiums written grew just under 13%.
Overall, the casualty segment generated underwriting income of $13 million and a combined ratio of 94% compared to underwriting income of $3 million, and a combined ratio of 98.5% over the comparative quarter. Our casualty book continues to run current accident year loss ratio of around the mid-60's trading at 66% for the quarter versus the 69% over the comparative quarter; this is both in line with our expectations and consistent with recent performance. We experienced modest favorable development in the casualty segment from prior accident years of which about half was related to the 2017 catastrophe events. Positively impacting the casualty segments combined ratio was a 6.2 percentage point decrease in the underwriting expense ratio. This decrease was due impart to improved underwriting leverage as we continue to grow net earned premiums while keeping expenses relatively flat overall.
Now turning to investments; we reported total investment results of $54 million in the second quarter resulting in an annualized total return of 2%. This is net of $18 million of net realized and unrealized losses which is largely from the increase in interest rates this past quarter. Included in total investment results was $71 million of net investment income largely stemming from our fixed maturity and short-term investment portfolios. We benefited from higher average invested assets and the impact of interest rate increases during the recent periods. For the quarter we grow our overall investment portfolio by almost $500 million. We also see that we saw virtually all of our $500 million tax exempt municipal bond position; these assets were supporting our U.S. balance sheet. Given the reduction of U.S. corporate rate last year municipal bonds became relatively less effective versus other fixed income securities.
The yields maturity on our fixed maturity and short-term investment portfolios was 3% at June 30 which is roughly flat from the previous quarter. The duration of our fixed maturity and short-term investment portfolios is slightly shorter than last year at 2.2 years. Our duration shortened due to the increasing amount of business rewrite on a collateralized basis through consolidated [indiscernible].
There is also one more aspect to our investments I would like to provide further insight into; we have about $760 million of assets classified as non-investment grade corporate. These investments are split about 50-50 between traditional fixed coupon, high yield securities and senior secured bank loans. The senior secured bank loans are senior in the capital structure and floating rate, they are managed for us by external investment advisors with over 95% of the exposure to first lien [ph]. For these reasons we are comfortable with our exposure and believe any incremental risk is commensurate with the increased returns.
Now I want to spend a few minutes talking about our third-party capital management. As we continue to grow this business joint ventures such as Medici, DaVinci, Upsilon and Fibonacci are increasingly important in the context of our financial results. So I'd like to walk you through how to think about these entities impact on our financials, and more specifically, the investment side of our balance sheet. But we only hold minority stakes in the Medici and DaVinci; we consolidate both of these entities. Consequently 100% of their investments are represented in our investment portfolio but their assets only impact our bottom-line in proportion to our ownership percentage.
So for example, Medici holds $501 million of catastrophe bonds classified under other investments, but as we only 17% of Medici, our bottom-line is impacted by about $84 million of this exposure. On the other hand, DaVinci's portfolio is slightly more conservative than some of our other entities and only 22% of it's $1.9 billion of assets impact us. It has an investment composition of about 70% AA or higher, and 9% below investment grade with dominimus [ph] exposure to non-agency mortgage-backed securities. It's below investment grade exposure is to senior secured bank loans which I already discussed. We also consolidate Upsilon and I already pointed out it's impact on a reported duration. We currently own about 14.6% of Upsilon and it's assets tend to be cashed for very short duration, high quality treasuries or other short duration AAA sovern [ph] or super national securities. We do not consolidate [indiscernible] so their investments are not included in our portfolio, however, our investments in those joint ventures are recorded on our balance sheet as investments in other ventures.
Now moving on to our capital management activities. First, I want to point out that our approach to capital deployment has not changed. We have not repurchased any common shares thus far in 2018 because we have seen many attractive opportunities. The actions we took this quarter are reflective of this view. First, we raised over $350 million of third-party capital in Upsilon, Fibonacci and Madici. As of June 1, Upsilon has grown to over $1 billion in capital, and FibonacciRe is now about $200 million. In both cases we saw opportunities at the major renewal to match desirable risk with efficient third-party capital solutions. Next, on June 18 we raised $250 million of capital at the holding company to the issuance of New Series F preference shares yielding 5.75%. the New Series F shares allow us to lock in low fixed rate and a rising interest rate environment and also provide us with additional capital and liquidity flexibility heading into the 2018 win season. I should note that we still have outstanding $125 million of our Series C preference shares yielding 6.08% and 275 million of our Series E preference shares yielding 5X and 3X, both the Series C and Series E preference shares are now callable [ph].
In summary, we continue to believe we have the right strategy and resources to deliver superior returns to our shareholders over the long-term. And executing our strategy this quarter we were able to grow gross premiums written by 18% as we opportunistically deployed capital during the quarter, improve our operating and investment leverage, and effectively manage our capital to support both our continuing growth and the continuing market opportunities we are anticipating.
And with that, I'll turn the call back over to Kevin for more details on our segments.
Thanks, Bob. Let me start with property and then I'll move over to casualty. Overall, we grew gross premiums written in our property segment by 10.7% over the comparable quarter last year. Property cat gross premiums written grew 6.4% with the substantial portion of this growth coming from a mix of better rate and a new business.
Our strategy entering mid-year renewals was to grow opportunistically with core volumes and leverage our gross to net strategy. As a result, we're able to grow the Florida portfolio incrementally despite rates that were flat to up a few points. We also grew Upsilon which is now over $1 billion in capital and issued a new series of debt bonds to gap bonds to Fibonacci. Rate change varied by program and by layer, pricing in our overall property cat portfolio at midyear which were to reflect both the U.S. and non-U.S. renewals was up single digits, in some instances we saw rate decreases. There is still an abundance of capacity in the market and over subscription was a common theme. We were able to grow where appropriate and also exercise underwriting discipline and came off business when our return hurdles were not met.
Let me touch briefly on the deep dive of the 2017 catastrophe events Bob already discussed with you. We disclosed that we will perform this around mid-year and believed that we had sufficiently credible data this quarter to make better informed decisions about the necessary quantum of our reserves. When we initially set these reserves we had to make a number of assumptions around the many variables that can potentially influence an event, and our estimates were dependent on the validity of these assumptions. Since making these estimates however, more information has become available and many of the variables are developing more favorably than originally assumed.
One example of this is the low emergence of risk losses from Hurricane Harvey. In Sandy, we saw a number of large risk losses due to extensive flooding, it was reasonable to assume that we would experience similar risk loses in Hurricane Harvey due to the heavy flooding. With the passage of time this has not proven to be the case. The continuing lack of reported losses in our property segment gave us sufficient comfort to recognize favorable development just as we did last quarter. There is always a significant amount of judgment in any reserving decision which is often done in a relative vacuum of information making the reserving process even more difficult where the estimates around the impact of multiple events on our shared retro program.
I believe we made the right call on our reserves last year. I am pleased to recognize favorable development events that could have been much worse for the industry than originally projected. While we do not break out the individual losses from the 2017 cabinets, our reserves for each hurricane were down on a net basis and the wildfires were essentially flat. As I've said in the past, each of these events is unique and I would like to provide you some additional insight into how each is developing.
Recently we've seen [indiscernible] losses from Hurricane Irma move up substantially. Because of it's highly dangerous environment and the omnipresence of public adjusters, claim settlement in Florida has always been difficult. Due to our decades of experience and deep expertise in the Florida marketplace however, we were able to anticipate that material adverse development would be likely than we reserved accordingly. As you may recall last quarter I said to you, we were not surprised by the large number of reopened claims, insurers are experiencing with relatively high levels of loss adjustment expense. For this reason we are comfortable with our current position, in addition, many losses are now at a point for us where they will develop into the CAD fund which should mitigate the impact of further adverse development.
For Hurricane Harvey, a lot of our seasons incurred losses are at/or below their retentions. Based on recent patterns, many of them may not breach these retentions on a paid basis; because of this we're able to revisit many of our assumptions around Harvey with our new lower loss estimates reflecting better information. More so than the other two storms of 2017, Maria still has a fair amount of uncertainty associated with it's development. Insurance companies were overwhelmed by the sheer volume of claims and struggle to access the personnel necessary as many contingency plans revolved around bringing in U.S. based adjusters after our large event. These adjusters however were occupied with Hurricanes Harvey and Irma, the filing of claims was further delayed due to the extensive infrastructure damage on the island. As a result, Maria claims are taking longer to close than those in Harvey or Irma.
In addition, public adjusters have found their way to Puerto Rico and appear to be targeting retail and condos. These considerations weigh heavily on the commercial market but had been anticipated by us which is why we continue to be comfortable with our reserves for Maria. With regards to the California wildfires, we are hearing reports of increasing demand surge due to lack of licensed contractors. As I previously discussed, wildfire claims tend to settle much quicker than wind claims which gives them a shorter sale and we remain comfortable with our reserves against the information we have.
Moving from property cat to our other property portfolio; there was fairly substantial growth in our other property portfolios this quarter as gross premiums written increased 31%. This growth is the culmination of many years of hard work building leadership positions in other property. The many seeds we have planted and diligently cultivated are now bearing the fruit of both new business and increased shares on existing programs. The consistent application of our three superiors and integrated system is allowing us to enjoy the same advantages in other property as we have for decades in the property cat market.
The growth in other property came across various lines of business and platforms, this includes property per risk, proportional business, delegated authorities and our direct and facultative business, both in the U.S. and Europe. I should note that we are keeping our eye on several large losses in the per risk portfolio. We're comfortable with our reserve position on these losses but they are young, and the full magnitude of the events may not yet be properly dealt [ph].
Moving over to casualty; we grew our casualty segment gross written premium almost 30% year-on-year in the second quarter. I feel this is an outstanding result and wanted to give you some context to better understand this growth and why it occurred in the second quarter. As I've said in the past, the casualty business is often influenced by a small number of large deals. In this quarter we saw several unique opportunities where we're able to write material participations on large programs which were open to only a few select markets. We achieved this outcome through the diligent application over three superiors in the casualty segment this quarter. We worked closely with our customers and we're able to bring better understanding of risk to their underwriting.
Due to our gross/net strategy and our superior access to efficient capital we were able to take large participations on the most attractive deals, our results this quarter confirm our strategy and our leadership role in the casualty market. As an example of this leadership, we had a first call opportunity to write an event based access casualty deal for the dislocated California wildfire liability market. This large transaction accounted for a material portion of the casualty segments growth in the quarter. As always, we increased on the best and decreased on the worst and in several instances we were non-renew [ph] deals that did not meet our return hurdles.
In general, the trends we saw at January 1 continued into the second quarter. We experienced improving terms and conditions on the more troubled accounts, and unlike January 1, however, stable accounts tended to renew as expiring as there was less hardening. Underlying rates continue to increase across casualty and liability lines but loss trends are also up. We think these two trends probably cancel each other out and are keeping a close eye on further development in the underlying businesses.
As I've discussed in the past, our ceded strategy is critical to maximizing the efficiency of all our lines of business but I wanted to focus on our property ceded program for this call. Most of the ceded protections for our property segment are aligned with the mid-year renewals. This year we purchased significant additional limit spending an additional $92 million to purchase retro-cover. This may seem like a lot but our goal was to main relatively flat exposure to southeast hurricane, our peak risk relative to 2017 hurricane season.
Several factors were at play in our increased spend. As you remember, we rode significantly more property business at January 1 when rates were up. We also ceded a little less on a quarter share basis. So our increased purchase at mid-year was partly us truing up the portfolio for prior growth. Having to flexibility to know how, what and when to buy retro is an important differentiator of our gross to net strategy. The majority of our retro capacity we purchased was provided by third-party capital funds and is fully collateralized. Overall, the ceded placement was a notable success within our gross to net strategy and is an important component in building one of our best net portfolios in recent years.
By purchasing retro and thanks to Precise Analytics and a deep sense of the market I'm pleased to report that we were able to construct a portfolio with risk characteristics for Atlantic hurricane similar to the prior year.
In conclusion, we had a strong quarter; we successfully managed expenses, grew broadly across our business, kept our catastrophe exposure relatively flat and managed our capital effectively. For these and many other reasons I'm confident that we continue to have the right strategy regardless of market cycles to deliver shareholder value going forward.
With that, I'll turn it over for questions.
[Operator Instructions] Your first question comes from the line of Kai Pan with Morgan Stanley.
Thank you and good morning. Thank you so much for all the detail about the reserve leases, I just want to follow-up on that to see -- is that -- [indiscernible] said at anniversary day which means we would now see sort of big reserve movements is related to these hurricanes were 2017 cat events until the second quarter of next year?
Kai, you came across a little broken out there. Can you actually just repeat the question?
Sure. And you said you typically do these -- like deep dives, reserve study at anniversary of low cede events, and that's the time you decided to either add it to these reserves. So which study -- imply [ph] would now see significant movements on the reserve related to 2017 catastrophes like another year from now, basically second quarter of 2019?
I think what we announced earlier was that we would do a mid-year review of these events and part of the reason we used the term mid-year is because we were aggressively collecting as much data as we possibly could, so we weren't sure whether we would be able to do in the second quarter or the third quarter. The combination of our work and then the reports we received for the June and July renewals put us in a position to feel comfortable to do it in the second quarter not at the anniversary which would be the third quarter. So I wouldn't read too much into it other than we're responding to the information that we have and we felt comfortable that in the second quarter we were in a strong position to be able to make the judgments that we made. I wouldn't read that forward that we would do the same second quarter next year.
But in fact looking back your 2004-2005 hurricane losses; we have -- we didn't see sort of meaningful reserve releases from those events until you probably 2007-2008. I just wonder is that correct or not? And what has changed here -- that to why you released so slow [ph]?
I don't have the information to hand as to what happened with the 2004 and 2005 events. What I would say here is interference [ph] is different, when we try to point out as the California wildfires pay more quickly but I think the important thing to focus on is that we identified I think the important variables that would control the loss or control our assessment of the loss and we collected more information of that. So thinking of Irma where there is an increasing industry dialogue around the growth in several onus as the loss, if you look back over the things we talked to you about since the loss, I think we have correctly identified that we expected to see elevated loss adjustment expense, we expected to see more real authentic claims, we talked about the impact of not only Irma but all of the events on the aggregate covers and we all recognized [indiscernible] environment.
So the fact that we sort of highlighted what we thought the important variables allowed us to focus in narrowly as to what was the important information for us to provide an update on our -- with the quantum of our reserves against each of these and that's what we did, we were able to achieve at the second quarter. I think it would have been the same process, we applied after of the events which is that this event became transparent in the second quarter and not the third.
My next question is on the underlying combined ratio in the property cat segments; it looks like it's kind of adequate comparing either 49% versus like low 40s for the prior years. I just wondered is there are any sort of one-off items which is not including the cats?
The cat is favorable development on the prior year 2017 catastrophe represents. I did point out some anomalies in the acquisition expense ratio related to the events that actually drove it up but absent that they were fairly normal. Really nothing that was other than the cat events was the big driver.
You said so it's just one-off for this quarter.
Then the large item for the 2017.
If you're stepping back, Kevin you could look at first quarter operating ROE about 13.5%, the second quarter is about all the reserve release is coming from 2017 event; still 13%. So I wonder is that 13% ROE sustainable in year-over-year going forward?
Our strategy is the same in the way we're looking at the business, we're thinking about targeting the line of the business that best serve our customers and I'm thinking about the most efficient capital to match with it. So without giving guidance as to what the return expectations are I think our strategy is working well in this market, and we hope that it continues to work well as we move into the third and fourth quarters.
And your next question is from the line of Amit Kumar with Buckingham Research.
The first question, you know, going back to Kai's question on ROE; if I flip the question, do you think that the better way to look at RenaissanceRe is looking at the value creation overtime? Do you think is that better or should we continue to focus on near-term ROE moves?
Our primary metric that we look at is value creation. Our both tangible book value per share plus accumulating dividends, and that's the one we really look at and what we focus on ROE and operating ROE is a relative measure off of that. Kevin, if you want to add anything else to that?
No, that's exactly right. I think if we do our job and grow tangible book value plus gave away [ph] the dividends, I think that's our best task comparing long-term shareholder value.
But the second question and maybe I might hope for a bit more color on the reserve releases. If I understand correctly, the majority of the release came from Harvey but Irma Maria were sort of unchanged -- maybe just go a bit deeper and also talk about the LAE issue which is probably running materially higher versus the past storms?
Let me start with the loss adjustment expense which is -- within the Florida market, the way the market is structured we've always anticipated a higher loss adjustment expenses for Florida related losses and I think we've talked about that consistently on each of the calls since the Q3 event reserves reverse split up. So I don't think that's something that we are particularly surprised at, let's begin we've got 25 years of deep experience within Florida. With regard to the events, what I said in my comments is that on a net basis each of the events are down, so what I try to do is to give a little color from a market perspective as to what's driving the events but from our perspective when we look across the board each of the hurricanes are down on a net basis and when I said as the wildfires are about the same as what they were when we put them up in the fourth quarter.
I guess what I was trying to ask is, is Harvey like 80%, 75% -- like is there some sort of proportion which would help us sort of do some sort of a comparative analysis with other companies?
I think we look at it as a portfolio and we manage it as a portfolio, adding to the complicating factor is that how the retro which supports all of the events with a single program response. So I don't think it would provide the insight that you're hoping for us to guide more deeply because the net changes to us are unique to us. And a lot of it depends on the assumptions you've made with the original loss estimates that use for reserving.
On the investment income side you alluded to the higher invested assets with the new business etcetera; the investment income this quarter is the materially higher than the last -- I guess couple of quarters run rate. Should we use this sort of as the guide or going forward in terms of our modeling purposes?
I think there is three things driving the growth and that is -- one is, obviously we're seeing interest rates increase over the last year, that's driving probably the majority of the increase. You can see that in the fixed maturity where that's up several million dollars. Now there is some balance growth as well but principally interest rates are the biggest catalyst. Short-term which is up significantly, terms of lot on the Upsilon side that's helped part of the growth when you think about it in volumes and then you can look at the -- the interest rates have been the biggest factor and as we move forward, we expect to see benefits from that as the rates go up. New money yield is 3%, quite a little bit higher than that with the rates going up, so that's how it's all the time.
And your next question is from the line of Yarn Kanar [ph] with Goldman Sachs.
Just given where pricing is today and all the benign starts of the wind season this year, if the wind season proves to be benign this year at the end of '18 -- of the structuring of our portfolio and to have one renewals, are you going to be shifting into quarter share from ex-loss [ph], or are you going to be using more of trail, I mean maybe any thoughts on that would be appreciated.
I think when think about any renewal or anytime we're going to engage with our customers is we try to think the best way which we can serve them. What's the right capital to bring to them and what's the right level of risk for us to accept for them. So I think when I look at what's going to happen at 11, I don't think there is a lot of information in the system right now and we are going through [indiscernible] hurricane season. So I say that I don't have any meaningful comments about what we expect for January 1 at this point but I can say that our strategy to go in thinking about serving our clients and bringing the right capital to their needs will be unchanged.
In terms of your partners with the perspective of a year after the storms have the conversations changed -- are the issues that they are focused on changing at all or is it pretty much consistent from relative to where it was a year ago?
I'll divide my comments between our customers and then those for whom we share risk. Our customer conversations are -- I think increasingly about how we can provide more protections more broadly to them, and I think that's been benefiting us not just in the property cat portfolio but other properties across the casualty and specialty as well. From our capital providers, I think they are appreciative of the transparency that we bring to them and understanding the risk from which they accept to us. So those conversations have been very robust, so we feel like we're in a great spot which way the market is and with our access both to desirable risk and efficient capital.
And your next question is from the line of Elyse Greenspan with Wells Fargo.
My first question; you gave some color on your growth connect strategy within your property book this year. I guess we have a repeat of last year events, not specifically the same events but meaning more of a frequency events that a severity event. Do you think that the level of loss that went to the reinsurance market would be materially different than the share of the loss that they saw from the three hurricanes that we saw last year? I guess I'm trying to see like were there more aggregate coverage purchased or the way reinsurance was purchased this year are different than how it had been purchased last year.
I think from a market perspective demand has been pretty stable and the dose on the aggregate was about the same level of risk being transferred roughly. And the types of product that are being sold is not materially shifted from last year to this year, so I think from those two perspectives we should see a reasonably consistent risk transfer from insurers to reinsurance. I'd also say that retentions have been reasonably stable. So an aggregation of small-ish type events, even it's a heavy aggregate year I'd say is comparable to what we saw last year. The one thing I will mention for us is -- as I've commented in my prepared remarks is, if there are more wildfires we saw an opportunity in a dislocated liability market for public utilities in California, so we could have more exposure to something like that but I don't think that's an industry trend.
And then in terms of as we think about the take down for the 2007 losses that you guys had this quarter, could you provide some color in terms of the IBNR that you guys have up for the events and that will compare to past events; I guess just as we think about the IBNR I guess still there following the peak down that you saw this quarter?
I think it's different by events. As I mentioned, the California wildfires pay you more quickly than something like an earthquake and then the hurricanes are a little bit of a mixed bag with Maria being the slowest of the hurricanes. I think that's an indication that as things are slower one should expect there to be reserves associated with the claim. But I don't think at this point we're going to provide a breakdown of pay to case IBNR but we recognize that each of these have a unique development pattern and I think we were thoughtful in thinking about those and have set the original reserves and also have set the current reserves.
And then in terms of the expense ratio this quarter -- I know you guys pointed out a few factors for hurricanes that impacted that number; if I kind of adjust for the reinstatements and the profit commission impact, I get an expense ratio and this is for the entire company -- about 29.6%, and then it is comes out a little bit lower than where you have been trending. Bob, I know you mentioned I think expenses might go up but earned premium offsets that; so is that about the right expense ratio to assume going forward or was there something kind of one-off when we back out the impact of the 2017 loss adjustments?
I think we tried to highlight in my prepared comments the factors that were driving the costs that were outside where you would see normal growth, the [indiscernible] correspond to premium growth like acquisition expense cost. We will invest in the business, we will do it modestly as we see, the need to expand the platform for growth. But again at the same time maintaining that discipline, trying to point you that the ratio should remain at/or around if not below whether currently have right now and did point to levers that we've built into the system across all of our expense base as well.
You guys mentioned that the surplus required for your block [ph] this year was about the same as last year, did you carry a bit more capital because you had the preferred that you issued this quarter. So I guess as we were thinking about getting to a point of capital return depending upon opportunities, would your process be to wait I guess until later on in the year after wind season?
In my comment around are deploying the same level of surplus with the growth they would achieve was to give a little bit of color on the efficiency we're building into our risk portfolios. As far as our buyback positioning, it's not exchanged, we continue to look to deploy into the business first and I'd prefer mandated capital return remains share buybacks which have been accretive overtime.
And your next question is from Ryan Ponus [ph] with Autonomous Research.
Following up on Elyse's question I think you guys did a really good job giving us the kind of the bottom's up view on when you get comfortable with the big reserve release, but just looking for something more from a top down perspective, if you'll give us I guess pay to incur that would be helpful. But if not that is there anything you can give us that we can see in publicly available data that you think kind of adequately says that -- like this is one reason why you should be comfortable with where we're having our reserves at this point.
I think there a couple of things; as Kevin pointed out the complexity of the business model makes it difficult just the way we manage the risk. Yes, through the individual storms you layer that with the retro-session or across the portfolio and then you have the aggregates. In the supplemental we do lay out on one of the pages -- I think it's 13, we do have shown the changes in the reserves that breaks it down a little bit more detail. You can see how it spikes up, that's probably where you will get the lost information on the detail. But again, we look at on an aggregate basis and the negative basis just given the level of complexity.
And then I just thought actual versus expected, thinking about Irma, so it sounds like you guys got it right and being pretty conservative around the L.A. yield out of the litigation stuff. So just to say that relatively to your estimates -- I think the PCS estimates are like $20 billion [ph] as of June. I mean where you guys have it versus where the PCS is coming in, do you guys -- is your assumption there is still more creep in your leasing off of that or do you think that kind of what you're seeing now paints a pretty good picture?
I think when we first set up a reserve we do look both top down and bottom up; top down being market share venture event as -- again, which we can begin to zero -in on the appropriate level of loss when there is -- when uncertainty is significantly higher. As the loss matures, we increasingly rely on more observed information on specific programs so we're more from a bottoms up approach that we do less reconciliation as to where the industry loss is. Specific to Irma, I think the things that are being discussed is adverse development are things that we identified and thought would continue -- we thought would deteriorate, it would be difficult for us to comment whether the market believes there will be more or less deterioration in it. We think we have a robust process to assess it and we feel comfortable with the level reserves were carrying [ph].
And then I just had a couple thinking about -- I guess retro in Upsilon, if that is right so there is a pretty big capital raise in Upsilon, and -- I mean correct me if I'm wrong here, that's a lot of business that you've written because you raised capital on Upsilon that you would have otherwise written, is that right on a gross basis?
Really what Upsilon is -- it's portfolio which on it rated balance sheet is heavily captive to capital consumptive. So we like the business that is Upsilon. We simply put it into that vehicle because it fits better on the non-rated collateralized structure that it does on the rated balance sheets that we write the rest of our book on. And as Bob had mentioned, we do own a portion of the capital that's deployed within Upsilon, so it's a gross portfolio we like, we just recognized that we can bring more efficient capital like moving it off the rated balance sheets and delivering that product to our customers.
I guess I was trying to maybe get at is -- if you think about -- I mean, I guess it's tricky, so all you're doing is moving it from your balance sheet over to Upsilon but just trying to think about if you're having a no loss year, your decision to raise all this capital in Upsilon -- how can you quantify what the earnings pickup would look like to shareholders for having done all that. I mean is there any way to really think about it like that?
The way I think about it is, that business is best suited to that source of capital. So thinking of it what the return could be if we retain that risk is a but flawed because it doesn't belong on our rate of balance sheet because that's not the best way for us to serve our customer. So I look at it as the opportunity over the long-term to earn appropriate margins for our capital -- for our partner capital and for the fees which we charge to administrative vehicle is through that and it serves our client best, so I think over 10 years regardless of whether there is losses or not it's the best structure that we can -- and it's the best way in which we can participate and support our customers with that capital.
Your next question is from the line of Josh Shankar [ph] with Deutsche Bank.
You guys have been growing fantastically in non-cat lines and I'm trying to understand the picture of the pie getting bigger or you getting better, and it might be a combination of both. You discussed the California wildfire liability transaction what I think is an example of the pie getting bigger. But my question is, when you're winning business from business held by competitors what types of competitors or what type of capital structures are losing business in the market to RenRe's offering?
What we've talked about before is that a lot of our casualty and specialty clients are heavily overlapped with our property cat lines. So I think we've done a very good job getting out the most desirable accounts that are difficult for others to access because we've had long relationships and other lines with them. So I wouldn't point to there being -- we're targeting a specific competitor; what we're doing is targeting what we think are the best accounts and then working hard by bringing our expertise not only in property cat but increasingly in other lines of business to the sessions that they are making outside of property cat. So it's more about it's access for us more than competitive [ph].
Is that a conversation that begins with a broker or begins with a client?
It's increasingly -- we are broker market but increasingly as we write more diverse lines for large counterparties, many of those lines are written through different brokers; so we find it increasingly important for us to directly engage with the ultimate buyer so that we can talk broadly across the portfolio of coverages that we're providing. I think we do a good job balancing the important role that the broker plays and bringing our expertise directly to the client, so we can have the most robust conversations.
So ultimately this sounds a bit like a cross-sale to me. I'm wondering if you have an idea of a possible market for yourself and how well penetrated you are in those goals that you have and whether we can look at 2019 and say, well, this is just the beginning, we should have another great year of getting on those accounts that we've been targeting. I mean do you have sort of a multi-year plan about where you want to be?
We have lots of different plans, included in that is we have development plans for each of our core clients, those include the types of deals in which they are ceding the lines in which we have on their most desirable programs and added target for growth. So it's something that -- it's pretty tactical and how we attack each of these opportunities but it's something that is highly coordinated. And we empower the underwriter to make the decision but we make sure that every underwriter is fully informed about the quantum of the overall relationship.
And your next question is from Meyer Shields with KBW.
Kevin, you mentioned that the standalone reinsurance business model is attractive to clients; is that changing -- in other words, is it becoming more attractive than it was a year or two ago?
We've always found it to be attractive, so I think there is fewer others, so this scarcity value having the ability to have a conversation with somebody who doesn't compete with them I think might be increasingly important but it's something that we always thought was important.
Also within casualty and specialty, so you talked about rates and loss trends basically offsetting each other from a local and margin perspective; when you see loss trends accelerate does that itself catalyze more demand for reinsurance solutions?
There is a lag between what you're observing and then what's happening in the current market. I'd said that it's not always as cleanly connected as that.
When you look at -- I guess so you correctly anticipated for example, the LAE inflation or aggregate coverage; on the LAE side, do current 2017 catastrophe reserves include any potential acceleration of 2018 as a difficult year?
Let me rephrase your question and see if this is what you're asking. Are we anticipating that if there is losses in 2018 loss adjustment, expenses would be yielding higher because some of the adjustors are deployed on 2017 events?
I'm at the other way around, in other words since these claims take a little bit longer to settle if there are events this year then loss adjustment expenses related to claims incurred last year would go up even more.
The scarcity of adjustors could impact either this years or last year's loss adjustment expense. I think from our perspective I think what we have within our -- particularly for property cat we have a demand surge which is a component of how we think about pricing; so I think we do consider that there is inflation associated with events. I think what you're pointing to is what about the specific element and it's something that I think what we were to set reserves for events that could occur in the third or fourth quarter for 2018, we would certainly consider the availability of adjusters to make sure we understand the impact on loss adjustment expense.
And we have no further questions.
Thank you everybody for participating on today's call, and we look forward to speaking with you next quarter. Thank you.
This does conclude today's conference. You may now disconnect.