RenaissanceRe Holdings Ltd. (RNR) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe First Quarter 2016 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Peter Hill, you may begin your conference.

Good morning, and thank you for joining this first quarter 2016 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn’t receive 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 PM Eastern Time today through midnight on May 27th. The replay can be accessed by dialing 855-859-2056 U.S. Toll Free or +1-404-537-3406 internationally. The pass code you will need for both numbers is 84474528. 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 July 6th. Before we begin, I’m obliged to caution that today’s discussion may contain forward-looking statements, and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe’s SEC filings, to which we direct you. With us to discuss today’s results are Kevin ODonnell, President and Chief Executive Officer; and Jeff Kelly, Executive Vice President and Chief Financial Officer. I’d now like to turn the call over to Kevin. Kevin?

Thanks, Peter, and good morning, everyone. I’ll open the call with a brief overview, then I’ll turn the call over to Jeff to go over the financial results, then I'll come back on and speak in more detail about our business in the market. Last night, we released our first quarter earnings, where we reported an ROE of 11.8% and an operating ROE of 6.1%. We had positive results in our catastrophe segment, which benefited from low loss activity and our Lloyd segment, which had especially [ph] a strong quarter. Our investments portfolios also preformed relatively well, and while our casualty and specialty business experienced some unusually large loss activity resulting in a breakeven quarter, they delivered strong growth and otherwise performed within expectations. As discussed on the last call, the market remains difficult and we continue to see reductions to rates. While we cannot change this environment, we can define our strategy and executed well and I promise that we will continue to exercise the same levels of discipline as we have in the past. This disciplined approach to capital and risk management is why we continue to be the preferred partner for a wide range of companies on both sides of the risk transfer equation. As others are becoming more risk tolerant, we are becoming less so. For example, we shrink the size of our property cat book by eliminating underpriced business. In addition, we managed our risk profile by increasing our ceded purchases in all three of our segments, most notably in specialty. We have also diversified our risk and improved our overall return profile by building our casualty and specialty business. The breakeven results for this quarter do not alter our perception of this business or the correctness of our overall strategy. Several events specific losses affected our results, which Jeff will explain in greater detail. These low frequency high severity loss events were not a surprise for the characteristic of the portfolios from which dominated [ph]. Assuming our customers' volatility is what we do and from time-to-time will result in a bad quarter or even a bad year. The losses we experienced over the quarter are idiosyncratic and not something I expect to continue. Over the long-term, our record of profitability speaks for itself. This year, we will focus our intention more than ever on building and enhancing our client relationships. Recognizing the changing market dynamics, where a number of our clients are centralizing their purchases of reinsurance. While our team has been disciplined and pulled back from business that did not meet our hurdles, we have also demonstrated market leadership by bringing unique and value added services to our clients. And with that, I'll turn the call over to Jeff.

Thanks, Kevin, and good morning, everyone. I’ll cover our results for the first quarter and then as always update you on our top-line forecast for the remainder of 2016. Well, the first quarter was again relatively quiet and in terms of catastrophe losses, we did experience higher claims incidence in our specially reinsurance segment. Alternative asset results from our private equity portfolio were also depressed during the quarter. However, the decline in interest rates and credit spreads resulted in strong mark-to-market investment performance that helped our reported net income and book value growth. Year-over-year top-line growth comparisons are skewed by the inclusion of Platinum’s results only after the close of the acquisition on March 2nd in the year ago period. Moving on to the financial results. We reported net income of $128 million or $2.95 per diluted share, and operating income of $66 million or $1.51 per share for the first quarter. The annualized operating ROE for the quarter was 6.1% and our tangible book value per share growth, including change and accumulated dividends was 2.6%. Let me shift to our segment results, beginning with our Lloyd's segment followed by specialty reinsurance or - by the cat segment and then followed by specialty reinsurance at Lloyd's. In our cat segment, managed cat gross premiums written in the first quarter declined by 9% from the year ago period, driven by price reductions in our decision to pull back from risk that no longer met our thresholds. Recall last quarter, we had highlighted our decision to cut back significantly our participation in the assumed retro business at the January 1 renewals. As a reminder, managed cat includes the premiums written on our wholly owned balance sheets as well as cat premium written by joint ventures DaVinci, Top Layer Re, and Upsilon. Net premiums written for the cat segment decreased 15% from the prior year period, reflecting increased purchases of retro reinsurance relative to a year ago. The first quarter combined ratio for the cat unit was 27.5%, catastrophe losses were benign and that favorable reserve development totaled $6 million in the quarter. In our specialty segment, gross premiums written increased by $245 million relative to the year ago period. There were two main drivers of this growth. First, as I mentioned earlier, there was a timing difference between the year ago period only reflecting business written by Platinum during the month of March. The other driver was significant growth in our credit book, primarily reflecting increased mortgage reinsurance opportunities that we had also highlighted on last quarter’s call. Our top-line in the quarter included $139 million of credit related premiums, principally reflecting a few large mortgage reinsurance deals. While we book premiums written for the mortgage reinsurance deals at inception, they have a long duration and consequently are often earned over a period of approximately 10 years. As we've grown our specialty book, we have also increased the use of ceded purchases to enhance overall returns. Consequently, we are actively managing the net retained risk across our casualty and specialty book, and particularly in the newer credit lines, where we’ve been growing. The specialty reinsurance combined ratio for the first quarter came in at 100%, which was essentially breakeven. Attritional loss trends have remained generally benign. The segment reported net adverse development of $3.5 million in the quarter, continued favorable reserve development on attritional losses of $17 million was more than offset in the quarter by approximately $21 million of net unfavorable development on six event driven specialty claims. Those events included a bankruptcy surety claim, two train derailments, a dam failure and an energy loss. Our practice for specialty events, which have low frequency, but high severity loss profiles like these is to put up additional case reserves against the loss. Thus of the total event driven reserves strengthening this quarter, $19 million related to ACRs, which is well above the reported loss level for these events. The expense ratio of 40.9% in specialty reinsurance was five points higher than in the year ago quarter, principally due to higher acquisition costs related to the credit lines. In our Lloyd's segment, we generated a $133 million of premiums in the first quarter, an increase of 2% compared with a year ago period. Our growth rate is lower than we had indicated in our guidance for the year and is reflective of a generally competitive marketplace. Net premiums written at our Lloyd's unit are down 19% for the quarter. Recall, we have meaningfully increased our sessions at Lloyd's to manage the risk profile of the business as we have grown in recent years. The Lloyd's unit came in at a profitable combined ratio of 90.4% for the first quarter, reflecting generally benign loss experience. The unit reported $1 million of net adverse reserve development in the quarter. The expense ratio at 46.3% was slightly higher than a year ago, but better than in the fourth quarter. Expense ratio continues to be impacted by the use of ceded purchases relative to our top-line growth. Turning to investments, we reported net investment income of $29 million in the first quarter. Recurring investment income from fixed maturity securities totaled $36 million for the first quarter. Our alternative investments portfolio generated a loss of $6 million in the first quarter, reflecting $9 million of negative marks on our private equity investments, which were slightly offset by positive performance on other investments. Performance in our private equity portfolio was weaker than anticipated with a few funds posting mark-to-market losses during the quarter. The annualized total return on the overall investment portfolio was a solid 4% in the quarter, a decline in treasury yields and credit spreads for many investment classes is resulted in strong unrealized gains on investments. Our investment portfolio remains conservatively positioned, primarily on fixed maturity investments with a high degree of liquidity and modest credit exposure. The duration of our investment portfolio remained relatively short at 2.2 years and is stable where it has been in recent quarters. The yield-to-maturity on fixed income and short-term investments was slightly lower at 2%. Our capital and holding company liquidity positions remain very strong. During the first quarter, we bought back 769,000 shares for a total of $85 million. We have not repurchased shares since the end of the quarter. As we look forward, any decision relating to share repurchases will, as always, depend on our view of business opportunities, the profile of our risk portfolio and the valuation of stock. Finally, let me let me provide you with an update to our top-line forecast for 2016. At this time, we are maintaining our prior top-line guidance for each of the segments. I’d remind everyone as always the premium estimates of this nature are subject to considerable risk and uncertainty and our goal in providing them is to give you our best estimates at this point in time. With that, I'll turn the call back over to Kevin.

Thanks, Jeff. As Jeff just mentioned, our property cat segment performed well with a combined of 27.5% for the quarter. Like everyone, we are facing a very competitive rate environment in the cat market. So, while we cannot control rates, we can control the amount of risk we take, as I disused earlier that risk is down year-on-year. The major renewal for the quarter was Japan, which was again competitive. But despite another round of price reductions, pricing for Japanese earthquake risk remains higher than prior to the Tōhoku 2011 earthquake. So, we are quite pleased with the portfolio that we constructed and even found a few opportunities to grow with good customers and adequately [ph] price layers. As we approach the June 1 renewals in Florida, many of the major trends from prior years continue to resonate. Overall, while there are many moving parts, demands in Florida looks like it will be roughly flat. However, we continue to expect pricing pressure of this renewal due to ongoing abundant supply, although we anticipate the price decreases will be more muted than in prior years. We believe however, that we can continue to construct a market leading portfolio as always, we will exercise discipline and ensure that we are paid adequately for the risk that we are assuming. For primary cat companies operating in the Florida homeowner’s insurance market, premiums are down and loss ratios are up. Florida insurance companies are still profitable for the most part, but this is not a positive trend. These deteriorating conditions have implications for both the health of our clients and the post-loss social inflation environment. So, we’re watching them closely. Turning to our casualty and specialty book, as I discussed at the beginning of the call, we recognized some losses within the casualty and specialty portfolio in the first quarter. As Jeff mentioned, these are event-specific losses and we believe are non-indicative of any underlying trend. While it’s not customary to speak of events in casualty and specialty, perhaps because of our property cat roots [ph], we sometimes discuss the book in these terms. And looking through some of our reinsurance streams, we identified a few events that we believe made an additional ACR. What this means is that we increased our loss reserves in excess of what the clients reported as we have thought these events were subject to greater uncertainty than generally appreciated. This is strictly a retroactive adjustment and does not inform our current book or any expectations for our reserves more broadly. Overall, the reserves for the effective classes have developed in line with our expectations of loss emergence. The unusual aspect of this quarter is that the loss emergence appears in somewhat of a cluster. There have been other quarters where we have been fortunate in the other side of this volatility of loss emergence with gates over a longer timeframe, these portfolios are performing as expected. Even though the marketplace remains competitive, there were signs that ceding commissions may have topped out, which is welcome news after several years of increasing generosity to cedents. Unfortunately, there are also signs of increased rate competition on the insurance books that we are protecting and with that, we expect to see higher loss ratios and less margin in this business overtime. We continue to see select growth opportunities in casualty and specialty. Although these were primarily in the financial and credit lines, we reduced strongly in the mortgage reinsurance space, mortgage reinsurance as the type of business profile that we like, one in which the market needs our capacity and is looking to transact with only a select number of well-rated and highly expected reinsurance counterparties. In general, we always look to grow our business with core client scenarios in which we are able to generate the best returns. The characteristics of this market match well with our three competitive advantages of customer relationships with selection and capital management and we are optimistic there will be more opportunities to deploy capital in this area. Moving to our Lloyd's business now. Our Lloyd's unit had a profitable quarter, delivering a 90 combined ratio. We’re seeing steady progress in the growth of this business, which continues to develop as a winning franchise with great potential. We believe that we are building an efficient portfolio in Lloyd's and look to that segment to be a meaningful contributor to our profitability overtime. Results for the quarter was substantially better than for the previous quarters. While we are very pleased with Syndicate 1458's performance, we should remain mindful that results for this business will average out over the long-term. And as discussed last quarter, one should not be overly focused on a good quarter or a bad quarter. On the gross to net side, we had constructed an attractive gross portfolio, having capital efficiency of the book was improved by virtue of our ceded strategy. Finally, I’d like to briefly discuss few of the losses that occurred after the close of the quarter. Let me start with the earthquakes in Japan and Ecuador. While it’s too early to accurately estimate the losses from either of these earthquakes. Our initial expectation is that due to the way in which the personal and commercial risk is covered and also the types of business our exposure emanates from; our losses will be limited. In Japan, the excess of loss covers purchased by Japanese companies are not likely to be materially impacted and therefore by extension should not affect the retro market. While the Japanese proportional covers may result in losses to reinsurance, we are not a significant writer of this business. In Ecuador, we anticipate that our loss will be low given the level of insurance penetration in the country. Similar to Japan, we don’t see Ecuador impacting our retro book and as we will remember, we reduced our exposure to this area significantly at the January renewal. In addition to the earthquake, Texas is experiencing volatile weather, including significant hailstorm losses. As with any large U.S. property cat event, we will likely have some exposure. While we are in the preliminary stages of evaluating the losses, we think that the hail activity will likely result in some losses to the lower end of regional covers that will be retained by the national primary carriers. With that, while we expect some loss and to blow to us in the reinsurance market generally, but for the most part, losses will be retained by cedes. And with that, I’ll turn it over for questions. Operator?

[Operator Instructions]. Your first question comes from Kai Pan with Morgan Stanley. Please go ahead.

Good morning. Thank you. First question, I want to get a more detail on the reserve addition in the specialty line. What is like those clients, was a REIT in offshore or REIT in the U.S. and also what sort of reason behind you have to added to SEZ as they are late reporting or you have additional information you added to it. And I just wonder what that change your reserving process and practice going forward?

Thanks, Kai. So, I think and - I think may be anticipating a couple of questions around this may be it'd be useful to provide, may be expand on Kevin’s description a little bit on the numbers, the processes and then any conclusions that we draw from these developments. So, as we said in the prepared remarks, the segment only had about $3.5 million of adverse development and it's important to bear in mind that that's relative to $1.8 billion in casually reserve. So, it's relatively small, it does mask the fact that there was $17 million of favorable development on our attritional losses and then as I think I mentioned in my remarks is $21 million related to the specific of that. To answer your first question in terms of the geography for the events, somewhere in the U.S. somewhere elsewhere in the world. So, I wouldn’t describe them as concentrated in any one geography. Given our process may be talking about our process just I mean as Kevin said, historically and I suppose it's given our cat roots [ph], we tend to look at these clients of large industry losses as more as events, almost similar to a cat event and this is consistently how we've looked at events in the specialty book overtime that include the subprime crisis the made off for our LIBOR rigging scandal, the VW situation more recently, the Tianjin explosion at China. So we look at these events and our underwriters working with our finance team and actually make a judgment about whether or not, we have more information that makes us want to or indicates that we perhaps this event is larger than we anticipated, it would be and I think that's the case in these six particular events that we got new information that caused us to reevaluate the size of the event overall. So lots of times we have to make an assessment of the size of the event, our potential exposure, before we have reported losses from clients and to some degree or another that’s the case in this instance. And then I think in terms of what conclusions do we draw from anything that happen in the quarter, I think as Kevin said, given that these six events are related to one another in almost any way that we can think of, geography parallel line of business. We don’t take away any trend in these and thus, don’t see any need to change our process and our process this quarter was no different than in any previous quarter.

Okay. Just add on to that, a follow on to that. In the past, if you look at this events more like a cat events. But your track record showing that in your property CapEx as you tend to be more historically initially booking their losses and fairly gradually can be released through years. What's different here?

I wouldn't characterize the - I think to your point; I think we have a very strong track record of reserving across all of our businesses. And that certainly the case in cat. We don't look at these any differently and thinking about the industry loss than we would as if it were a cat event.

Okay.

So, not just talk in terms of conservative or anything other than that. It's we try and make our best judgment at the time we put out reserves against any loss. And I think overtime we've evidenced a pretty good track record in that regard.

Okay. That's fair. If we're stepping back, if you take out these $20 million, consider one-off reserve addition. And then, if you normalize your private equity [ph] return to like another $20 million. And this quarter, the ROE would be probably around 10%, I just wonder is this the new normal in the low cat quarter like the low double-digit returns?

I think that's a great question. I think you're taking a couple things out of what's actually a pretty complicated quarter. So, I think we'll be talking about what's in the quarter, we can get a sense as to the moving parts that we're experiencing. I'd say other than the fact that we are several years into a soft markets and the returns are down. I'm not sure there is a lot of signals and what I'm seeing in the quarterly report that we put out. Looking at cat, we've talked about it being a competitive market. And as it expects, we are running a good portfolio and we are derisking it as rates are down and our risk tolerance is up. Moving in specialty, I think I would really try to determine whether to book at the highest level, the information that we have with the losses is whether the book is adequately priced, or whether the book is adequately reserved. Our view is that we've written a good book and that we're continuing to position it to where the rates are best, hence the growth in the financial lines on specifically the mortgage. I think the pressure on ceding commissions and the fact that that's beginning to abate is good news on the other side of it, we're beginning to see some rate tension and some rate competition in the primary books that we're protecting. Our underwriters are trained to monitor that and to evaluate that and something that we're working and we're watching closely. I think with - and so thinking about it, I'm not sure that there is ton of signal in the way to think about our returns only in the fact that there is a lot of moving pieces within the cat book and the specialty book. Additionally, we had the investment performance this quarter, which had both mark-to-market gains on the fixed income portfolio and then some marks on the private equity. And again, our strategy on that book is the same and our perception of the ability or the earning capability of that book is what it has been. So, I feel like what we're doing is the right things in recognition of the soft market. And there is a lot of moving pieces around it. It's hard to isolate and then try to extrapolate forward.

Okay. That's very helpful. If I may, last question is that on the buybacks. Looks like buyback is a little bit smaller than your net income for the quarter. Are you still committed to return more than your earnings through the year?

Thanks, Kai. Yes, I think I said on last quarter's call that we anticipated to buy more than we earned in the year. And that's at our point - at this point in the year, we don't see any reason to alter that guidance to you.

Okay. And just want to make sure, the earning you're referring to because there is big doubt in this quarter is the net income or operating income.

Yeah, I try not to focus on any - more than we are now, however you measure that, yes.

Okay. Thanks.

Your next question comes from Vinay Misquith with Stern Agee. Please go ahead.

Hi. Good morning. So, just wanted to follow-up on the adverse development. So would it be fair to assume that the underlying business really hasn’t changed that’s the reserving on the line business and that still is trending in the right direction, you said $17 million?

Yeah, on both accounts, that’s correct. I think Jeff what we're trying to do here is provide a ton of transparency and in thinking about the 17 million with attritional loss development on our curve and then thinking about the fact that we added additional reserve to some specific event is really just us trying to put more transparency around the loss that we have in the quarter which ultimately is $3.5 million. We have not changed our view of our risk and we think that if you are looking at signals coming out of the reserves, a stronger signal comes from whether you have the frequency of your loss emergency is changing not whether you have what I call among key quarter with a cluster of larger events coming in.

Sure. And also just curious about whether this adverse development tells you anything about the book of business that you wrote. So first of all, it would be helpful to understand whether this came from the Platinum business, number one. Number two, RenaissanceRe is growing pretty significantly in specialty and so curious as to whether this reserve addition adds color to the growth that you've had before?

Again, good question. I think the - traditionally the way that I think the quarter would be reported from an actual standpoint would be that we have $3.5 million of adverse development against $1.8 billion of total reserves. We are bringing in the other information to get some transparency and the reason we want to give that transparency as we believe there is not a signal in the reserve development we had for the quarter. So we do have a slightly different process than many and that we think about things from an event mentality, which allows us to put the loss up, when we hear about it similar to what we did mid-half [ph] and then overtime, we will determine whether it was the appropriate reserve as the rest of the curve growing. I think the other question between whether it’s the Platinum book or the Renaissance book. We are a fully integrated organization and we don’t think of us having a legacy Platinum book or legacy Renaissance book. I would say the books of business that are most affected by this really come in to the excess causality, we have some surety in financial lines and a little bit of a general casualty stuff that comes in. So it’s a reasonably spread, it’s written across multiple platforms and it’s coming in from different types of loss and into different types of lines, so it’s hard to categorize it as one or the other.

The only thing I would add Vinay is that related to that is that our reserving process is across both the legacy Platinum organization prior to or what would have been prior to close and RenRe have been synced up since the day of the close. So we've been operating our reserving processes and they have been synced up since the close. So, and then the only other thing that you touched on it, I don’t know whether Kevin mentioned just to close it off. We don’t think this reserve addition at all inform any view of the profitability, the enforce book or the areas in which we've grown over the last year or two.

Okay, that’s helpful. The second question is on the profitability actually, the reported profitability within specialty and Lloyd's. The accident year loss ratio actually was significantly better than the past three quarters, was there something special this quarter or should we expect this level of profitability for the future?

I think from an accident year perspective is just relatively benign loss experience.

Okay. And then one last if I may, the ceded reinsurance increased significantly both in specialty and Lloyd's, should we be thinking about that moving forward to or was it just a one quarter issue?

I think looking at the Lloyd's, we had a bigger increase and we talk more about it probably in the fourth quarter than we did in the first quarter for the Lloyd's increase in specialty. The ceded specialty is one where - we’re doing that to enhance the returns of the portfolio, so for instance one of the places that we’re continuing to see a lot of opportunity to grow is in the financial lines and credit lines most specifically in the mortgage. So we’re buying more ceded in that area, because it allows us to construct a better portfolio as we continue to grow it. It allows others to leverage authorized expertise and access the business because of strong ratings, so we’re exchanging risk, premium for fee income. So the opportunity, we will continue to increase our sessions in that matched up against the opportunity we have to write that business. To give you some sense of scale at this point, we’re ceding and representing other capital for about 50% of the business that we’re writing right now.

Okay. That’s helpful. Thank you.

Your next question comes from Michael Nannizzi with Goldman Sachs. Please go ahead.

The guidance that based on 1Q results, would seem to imply that you would expect specialty to shrink for the rest of the year and Lloyd's to grow to sort of make up for 1Q, so somewhere in the neighborhood of like 30% a year, I mean, is that directionally effectively what you're saying?

So starting on the cat, you know, the cat I think we're - our guidance downtime seems reasonable and the Lloyd's, some of the thing that we anticipated growing were likely represented in the first quarter. So, I think we will see and we hope and anticipate that we'll see a better growth as we go through the year. With specialty, I think specialty still continues to be on the lumpier side. I think we are seeing better opportunity than there is a very good pipeline of mortgage deals, particular from the GSEs coming down the pipe. So if we are - we won’t stop accepting specialty business, because we have guidance out, if our ability to write-off little business credit, the guidance will revise it overtime.

Okay. Got it. And then the items that was sort of loss as you mentioned in the quarter, did that impact on Tower Hill in the quarter as well?

The Tower Hill from the reinsurance that we write for Tower Hill that’s predominantly property cats that's the type of AOB loss that is coming in is not something that would affect those reinsurances. Those reinsurances that it would affect if that were an owner of Tower Hill and Tower Hill’s profitability has been affected by the assignment of benefits claims in Florida. I think, there are increasingly sophisticated in the way that they’re handling those claims then I hope that overtime it will become lesser story than it is right now.

Okay. Got it. And then just and rather quick one on the specialty then the expense ratio that ticked up in the first quarter, is that just given the mix of the business and how you’re growing, you know, is that what we should think about that then on the operating expense side, should we be thinking about that in terms of notional dollars or percentage?

I think on the specialty expenses, the operational expenses than the acquisition expense, the expense ratio overall for the operational expenses I think what you’re seeing there is really three, four months in this quarter versus last quarter and the increased headcount in that segment, it is the large part of the Platinum integration, they’re integrated moved into the specialty platform, so that’s not surprising. I think on the acquisition expense, that’s a function of both the increase in the level of premium and the change in the business mix from a little more proportional business and the increase in the mortgage business, which carries higher acquisition costs. So to the extent that the business mix is roughly consisting going forward, I think that’s a fair assessment.

Got it. And then just one last if I could think, I mean, sort of picking up Kai's question. I guess, looking at, your historical results, you’re in the light cat quarters like this one. ROEs were those are your best ROEs just because even though with soft pricing a lack of activities to sort of move together and those are the years where book value grew the most and margins were your best and ROEs were the best I mean I guess in this market is it right to compare what we got today to your average historical or is it right to compare this to again and this is adjusting for investment the shortfall in investment can I get to about that same store 10% ROE number if we sort of normalize those out? Is it better to compare this to your average historical or to kind of those peak years when you’ve benefited from lack of cats?

It’s a good question and it’s a hard one to answer. Looking at the book of business I think our cat portfolio performed well I think we’re a different company today than we were before we do have the diversity coming in in last quarters from the specialty business. I think the other thing to think about just what I’d like to convey is we think about the business which is we’re not trying to build the best portfolio in a low quarter, we’re trying to build the best portfolio against all outcomes. If we wanted to optimize our returns in a no cat quarter we were just right more, we disclosed more capital we buy less, and everything that we’re doing is trying to come up with the most efficient portfolio so we’ve got guidance out of downtime, we’re writing less, we’re reducing risk and exposing less capital or buying more ceded. So, I think it is hard to compare exactly what we’ve done in the past, but it’s a 100% rational to think that waves are down significantly after several years of the soft market so it’s a little bit of a mixed bag to think about it I would say.

The only thing I’d add to what Kevin said is, I think it is difficult to compare because the facts and circumstances in prior years don’t compare well with these and the way we run the business at any point in time might not compare with that in terms of the level is it a risk on, risk off here. As Kevin mentioned, we’ve done buying a lot ceded protection and reduced risk and really in all three of our segments and then there’s the interest rate environment, which is historically low by any comparison and then there’s our capital position and I think we’re probably in one of the stronger capital positions I can certainly remember since I've been there.

Got it. Okay. Thank you so much.

Yes.

Your next question comes from Sarah Dewitt with JP Morgan. Please go ahead.

Hi, good morning. Following up on the capital position your premium to equity of 35% is near all-time low even though your book is less cat dependent so is it correct to think that you could probably double your operating leverage and you have nearly $2 billion of excess capital and if so why hold so much capital?

I don’t think premium to equity in our business is probably a terribly useful metric, just because there is a lot different ways that we take on economic risk so I wouldn’t necessarily use that that term, that said, even based on what I said I think we have a very strong capital position and as I think we try to say in previous calls, we always look to return what we don’t think we can use after we’ve looked at the risk in the book and admittedly I think the risk in the book relatively speaking is lower. But we also look at potential opportunities and other ways to deploy the capital and hold some amount of capital for that. That said as I noted earlier I think we’re in an extremely strong capital position. We look at the share price in terms of a consideration as well as to when and how much we buy back shares, but yeah, I think as we said at the beginning of the call, it’s we intend to buyback more stock this year then we earned.

Okay, great. And then just on the net investment income what’s right way to be thinking about there and how the private equity investment redundant so far in the second quarter?

Putting a pause on the second part of the question I mean I think if you look at the recurring net investment income in the quarter about $36 million that’s actually pretty consistent through the time we have been earning roughly that on the fixed income portfolio that’s reflecting the duration the yield on the block at its current size, so I think that run rate is likely to hold for some time. We have a whether short to rebound in the equity markets since the end of the or during the last couple of months I certainly hopeful that private equity returns are higher but that’s we don’t get a lot of intra-quarter information so we make our best estimate to value those funds on a real time basis at the end of the quarter we will see how develops, but I'm optimistic based on where the public equity markets are that those are in for better quarter this quarter.

Okay. Thank you.

Your next question comes from Brian Meredith with UBS.

Hi. Couple of quick questions, Jeff I just want to clarify so the guidance in specialty that is on an apples-to-apples basis or is that include the extra two months that you are going to get this year from Platinum?

It includes after two months that we get from Platinum.

Okay.

I think as I said in my prepared remarks there are two parts of that it’s big growth on a dollar basis it’s two parts the credit related deals that we have been doing and the Platinum growth.

That make sense. And then just quick accounting where does the fee income hit that you get on those mortgage insurance deals is that going to be a credit to acquisition cost or fit somewhere else?

It will be a credit to acquisition cost.

Okay. So that should offset some of the higher acquisition cost through that business?

To some degree.

I think it will take some time, because it'll be based in some degrees and the profitability of the portfolios.

Got you. Okay, great. And then last question just Kevin you mentioned and looking at the specialty business that you said competition increasing some of the primary lines that you are seeing and expect to maybe margin compression going forward just curious could you be more specific what lines are you seeing the increased competition?

I think looking at that I would say it’s probably more in the specialty lines that in some of the more traditional casualty lines. Like an extreme example would be like we were very small airline account there has been lot of aviation competition the positive side we are seeing good opportunity and mortgage as we discussed. I think the general casualty is more of a mixed bag, it’s more of an account specific. I think it’s hard to draw conclusion for the market at this point when you see some price deterioration in some accounts it’s not crazy to begin to think that the whole market will begin to feel more competitive. I would - since in high - more specialty than the traditional casualty lines and within the casualty lines it’s more on the specific accounts which again we are watching closely to see if it becomes more of a market level competition. Actually one of the point that are some professional lines we are seeing increased competition I'd say more broadly as well.

Great, thank you.

Your next question comes from Josh Shanker with Deutsche Bank. Please go ahead.

Thank you. Repeating some of the points earlier but just trying to clarify the loss seen this quarter higher seems to be normal. Are these widely distributed throughout the industry few quarters but it doesn’t seem those reported so far have the same amount of concern that you guys do. Do you think this will one off that you took a large piece of or do you think that as more reports the numbers we will see this is a bigger issue for the industry and channel?

So, I think that’s a good way to think about it. We are a very small percent of the insured loss on this. And it's coming through a lot of books of business. So I think these are industry events. I think most of these events have been on the cover of the paper when they occurred. So I do believe it's affecting people more broadly. I think the unique thing about us is just the way that we talked about these losses were going back to the previous comment. I think someone may a traditional way to talk about this is just $3.5 million of adverse developments and wouldn't get into the specifics of the moving parts. We're trying to give you a little more clarity as to how we're thinking about it. And then secondly I think our cat biased background naturally pushes us to think of these in terms of events where the rest of the market will think of them is already in current reserves.

Okay that's perfect answer. And one think which has probably been asked six ways in Sunday for years I following up on what Sara had asked about capital. is there a way to think about how much less risk your balance sheet might be barring for catastrophe than it might have been doing so four years ago?

Again, I think that's a great question. And it's one that it's different by region and it's different by loss level which always makes a complicated I know we've talked about that before. I would look potentially of what our session is and look at our gross cat premium to our net cat premium. And you will see that there a lot of premium that's where we're representing on behalf of other capital. The most specific example I can give on that is thinking of be FEC outline that we put out last year. At the end of that we brought 19 sources of capital to that. So it's hard to be really specific as to how risk is represented on our balance sheet as compared to how it's represented years ago. But I'd say that we are being very thoughtful and aggressive and thinking about constructing our net portfolios using traditional or non-traditional sources.

Well and I mean if you ever decide that you want to give you will better understand how to think about that. I would out be first in line to listen.

Appreciate that. I think the part of that the way we think about it is in such an integrated way across the risk that we're taking. That is difficult for us to come up with a simple metric that represents the risk in a material way and in appropriate way.

It makes complete sense just hard for Yoko it's like me as you probably imagine.

I hope it's already Yoko. I think it's I know it's difficult and I wish we had a better way to communicate at that. And that didn't push out too much information to our competitors.

No, I completely understand. Thank you very much.

Yeah.

Your next question comes from Jay Cowen with Bank of America Merrill Lynch. Please go ahead.

Yes, thank you. I just have a couple of other questions. Outside of what and it was many things we've been talking about, your corporate expenses, that was obviously have jumped around as you have some integration expenses in there. Are they still insulated because of the integration with Platinum? And where would that settle out do you think?

Thanks Jay. It's so we had corporate expenses in the quarter of about 8.2. Of that amount roughly $1 million related to servants for one of our employees and then we have an additional $1.6 million related to continued integration expense in the quarter. So if you think of the 8.2 will less those two amounts that would have been about $5.6 million. We're going to incur about $1.3 million I think in integration expenses over the remainder of 2016. And then only about $300,000 in 2017. So that I the way I think about the corporate expenses kind of landing in the ranges probably somewhere between $5 million and $5.5 million on a quarterly basis.

That’s really helpful, Jeff. Thank you. The second question on the Lloyd's business. I think Kevin you said that your increase in ceded premiums there impacted your expense ratio. But you really didn’t describe exactly how it's impacted it. Can you talk about that?

It was lower earned premiums from this section that we had coming through.

So, it inflated it?

Yes, inflated in the expense ratio, yes.

As you did up with the ceding commission and might have even offset more, but now I get it that’s helpful. Thanks a lot.

Yes. OK. Yes.

Your next question comes from Meyer Shields with KBW. Please go ahead.

Thanks. I know this is unanswerable, but you mentioned in the specialty reinsurance that there was a sort of attritional reserve development that was favorable and I'm wondering why we’re not seeing that sort of trend in the Lloyd's segment as well?

So, I guess your first part of your question was operative, unanswerable. I think the way I think there are different businesses that we’re building up, it's a smaller book within Lloyd's and it’s a book that includes both property and specialty. So, I think there is a couple of thesis to it. But we do have a traditional within the casualty that we write in within the specialty that we write in particular the casualty and specialty that’s on more than one of our platforms, their reserves are the same one.

Okay. Understood. With regard to the, and again in specialty reinsurance with regard to mortgage reinsurance I understand the acquisition of expense ratio is heightened because of the expenses associated with that, are there any startup expenses that are associated with building up this book or is this is a good run rate, assuming that this mix of earned premium and that asset conversation continues?

I don’t think there is material startup cost associated with us moving into that business. It’s a few underwriters writing on behalf of our existing balance sheets so it’s not a material aspect.

Okay. Thanks very much.

Your next question comes from Bill Wilde [ph] with Gordon Haskew [ph]. Please go ahead.

Hi, good morning. Thanks for taking my call. My question, do you anticipate the changes to AM Best ECAR, their best capital adequacy ratio to that methodology do you think that those changes will drive and increase demand for property catastrophe reinsurance?

Yeah I think looking back the last time AM Best changed a model that created a big opportunity for us to sell additional color. I think this time the conversations we’ve had with AM Best are much more measured and that they're in their analysis of the change in the model, it doesn't materially change people’s capital requirements. My guess is there’ll be some exceptions to that. But at this point in time, we don’t have enough information to have real clarity as to what it means to our portfolio, but if what we’re hearing is accurate it shouldn't be - unfortunately and probably won’t create much of an opportunity for us before - it won’t change our capital requirements.

Okay. Thanks very much.

Sure.

Your next question comes from the line of Ian Gutterman with Balyasny. Your line is open.

All right. Thank you. I guess my first question is these Texas events, I am guessing with the spread of aggregate covers over the past few years, a number of these local regionals and mutual by aggregates, is there a risk between the Q1 and Q2 events open at the aggregates max out maybe even blow out on the top to these companies?

Yeah, I think that's a great question and it’s something that we’re looking at. Now they’re definitely going to be impacted, so now the question is by how much. So even if the aggregates are only eroded and changes the profile of your risk exposure going into win season so we’re looking at now. The other thing is it’s been volatile, there’s activity last night actually. So, I think we’re kind of and it sounds like a live cam right now but the point you're raising is really important point to focus on not only as to whether we’ll have losses from these events, but how it changes your exposure profile with the aggregates are materially eroded.

Got it, that’s what I was wondering. Okay, great. And then not to beat the dead horse but I thought of ask - things - don’t think it kind of get on the specialty losses. And first, given their ‘15 events it's all Q4 events that you just don't have enough information or where they spread out throughout ‘15?

So, it’s a mix of things actually, it's actually fixed events, I think with some of the numbers, it's hard to keep track, but it’s a mix of things. I will give you specific one of which is being on track loss that would happen between New York and Philadelphia and one of the things we have seen is the cat that was applied has been increased so we are adjusting our reserve based on the fact that there is retroactive increase in the liability cat associated with that event. So it can be that specific on this sort of stuff, other stuff is more difficult to access but we are making an assessment that is martially more volatile and what the market is assuming.

Got it, okay. And then the other aspect I think in [indiscernible] most of it if not all where non-property I think there is a number of casualties mentioned to surety. Does that suggest any - I guess I think what's surprising to people right is we're kind of used to you guys always having the small events be releasing down the road, but those are all properties, there is something I suggest casualty is just a little bit harder as you go into casualty we might see more of this sort of the volatility make both directions as opposed the industry is going one direction because casualty is different than property reserving.

I wouldn’t read into it being a more volatility certainly that’s not my expectation. I think some of these losses have a property component to it. So, there is a property element, but we think there is liability associated with either the company is involved, an example of combined like that will be something like deep water horizon, it's not one of the ones we're talking about today.

Okay.

But as in general, we're writing an excess casualty book. I think excess casualty in particular is exposed to large events and some volatility, I think the real question then comes back to have one reserves for it. We have more than cat mentality, we think of it as an event for many other say I have got an expected loss ratio against this book and what I am saying as even though it might be a short cost it's contained within the normal reserves. So, it could be simply just a fundamental difference in the way people think about the same losses. None of these losses were the only one exposed to.

No, of course, I just was wondering if there was something where I mean I think you mentioned most of this was ACR. So, I think of say a tornado event or a hail event whatever you guys are obviously pretty have such robust data that you kind of, I think probably know what the right ACR should be before the ceded does, right I don’t know if it's just a little harder to get that right and I want to ask you is it feels like may be interpreting this wrong, but that these increases sort of surprised you, whatever you thought the initial exposure was turned out to be more we're on prop I guess it seems you guys tend to have information edge almost and not get caught off-guard, is that fair or am I interpreting what you are saying?

It is an interesting way to think about it. Let me explain what we do on property. On property we do a top down bottom of analysis, top down we take a very, we take a view on the industry, we run data and then take a view on individual accounts based on market sharing some other non-specific elements. Then we look at the individual account and running from the bottom up and determine what that losses and then we can factor to the right number using those inputs. Within casualty I think the loss is different where overtime you learn more and the loss can spread among scenes and it can spread to new lines. So it can go from a property loss to a D&O loss and kind of across different categories. So I think there are differences in the way we think about it. We can’t bring a market share approach to it. So, we do take a more traditional actuarial overview, which I think is a healthy way to think about it and then we take more of an event view, which is more unique to us and probably again an extension of our cat. So I don’t think I would point to it as being more volatile, but I think I would point to as us just having a different process and how to think about it. If you go back like we put up an event loss for LIBOR. Again we're certainly not the only one exposed to LIBOR, but I would imagine that others are looking to see how that develops overtime and determining, whether it's in attrition, we looked at it and say, we think this is more of an event, we will put it up and overtime hopefully come to the same place.

Got it, got it, it makes sense. I'll cut off there, we're running long. So, thank you.

That’s okay. Thank you.

There are no further questions at this time, I would like to turn the call back to Mr. ODonnell.

Thank you, everybody I know there is a lot of moving pieces. This quarter we try to give you as much as transparency as we can and we hope that it was helpful. Thanks again for tuning in and looking forward to talking to you next quarter. Bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.