Buongiorno. Good afternoon. I am very happy and grateful for all of you to have come today here in Turin, also from very far away. This is an opportunity that we have really on the back of the successful re-domiciliation that occurred last year of Exor, to have a moment to spend time with our investors who have been giving us a lot of trust in the last years, really to have a moment of reflection on what we have done, also to share our direction. Today, the real big news and story is around PartnerRe. Emmanuel and Mario will really tell you more in details, which has been so far a good story, and we have been a very happy owner of PartnerRe since we closed in the spring of 2016.
It is also good to see Mario in Torino because he left us then to join Emmanuel and to become the CFO of PartnerRe. I think they have been a very good team, and they will tell you more about that. What I wanted to do today is start by sharing some of our history. We chose to be here today, which is a very symbolic place for my family. This used to be the house of my great-great-grandfather, the founder of Fiat.
We decided last year, as we celebrated his 150th anniversary and the 50th anniversary of our family foundation, who was done after him, the Agnelli Foundation, to rebuild his house, to host the family foundation, but also to create a place where we could enable innovation and entrepreneurship, which was really what he, as the founder and to some extent the disruptor then, when transportation was done with horses, really did and lived up to. The place you are here is a place where we really are hopeful that through what the foundation is involved, which is education, but also by enabling companies and with the partnership we have with Talent Garden, to really be able to start, grow, and invent new things. This will enable to have a much stronger entrepreneurial culture here, especially around technology and innovation.
Going back to history, we have over a century in business, since the foundation of Fiat. In reality, what is interesting, I learned some time ago, already the ancestors of my great-grandfather were very talented businessmen. His grandfather had already multiple interests in the region and in the country. We have had more than a century of owning many businesses. With pride I can say that we have been close to these businesses in good times and in not so good times, but all these businesses have done overall well. We have also been very clear about our responsibilities as custodians and owner of these many companies. To go back to our recent history, what I wanted to share with you is also what I know better, having been directly involved.
What we have been through in this decade has been a big exercise of simplifying our world. We used to be a very complex universe with five different holding companies, and we have worked to simplify ourselves, which has given benefits in terms of transparency, in term of governance, and also in terms of overall costs. Today, we are only one diversified holding company, which is Exor. We've also shifted very much our revenue base to what we used to be, which was a very European-centric company, and that was a combination of two factors: divestitures of local businesses.
We used to be a large shareholder of the largest commercial bank in Italy, Intesa Sanpaolo, of the largest retailer, department stores, Rinascente, largest tour operator, Alpitour, and by acquisitions of companies who are more global, like Cushman & Wakefield, PartnerRe, but also by the evolution of the businesses we owned. Finally, the extraordinary job that was done by Sergio's leadership in transforming Fiat from what it used to be, which was an Italian-centric conglomerate into what it is become, which are really free, independent, global leading companies. Today. Today, Exor is one of the leading diversified holding companies globally. These are a couple of numbers that give you an idea of the breadth and scope of what Exor is, which is a collection of different businesses, which most of you know.
The one which you know less is PartnerRe, and we will have the opportunity today to share more about PartnerRe with you. FCA, Ferrari, CNH, used to be part of what was Fiat. They are in their own rights today, very strong global companies in their fields. Juventus is one of the world-leading franchises. It is anecdotally the franchise that has belonged for the longest to a family in the whole world. There's no sports franchises in the world who have belonged to one family for such a long time, and we're very proud of owning it. Football has grown, is growing even more. I'm always amazed by when I go to the U.S. and see how much people are really interested today in soccer, and what used to be a girls game is now much more broader in terms of its interest.
I know that India still fancies cricket, which if you look at what Facebook has in terms of sports, cricket is actually number 3 in the world. Football is number 1. We're very happy about Juventus, and The Economist, which is one of the leading publication. What we underwrote in our investment of The Economist, which we already owned, was really the rarity of serious content and information, and the ability of being able to have a paying model, a subscription model, if you're able to have information, distilling that information that people really care and are interested in. What do we do at Exor? Our main function is really to allocate capital, and we do so primarily in our own businesses. We do in new businesses, and we also do it in buying back shares, which fundamentally is investing in ourselves.
We have done so since inception in 2009. This is really the main skill set and occupation that we have with our role as owners, meaning being very involved and close to our businesses in order to make sure that with the right leadership team and the right dialogue, we're able to have companies who perform well and who perform better than their competitors. Our objectives are the same that we've had and will remain the same. They're very simple. We want to make sure that our NAV per share grows more than the MSCI, which we have achieved so far. We want to make sure that we generate cash, so the cash we get from our companies, in terms of dividends, net of our costs and our interest, are superior than the dividends that we give to our shareholders.
Finally, we are committed to being conservative in our capital structure, Enrico Vellano, our CFO, will tell you more about that, and are committed to having an investment-grade rating. The results of all the hard work with my colleagues and mostly the companies that we own during this period of time has been very positive. Between the share appreciations and dividends, our shareholders and the ones who were with us in this period of time have done well, and we are very proud of that and thankful for your trust. What I'd like to do now is really to have Enrico go through some of the financial metrics that guide us. After that, the big chunk of today will be Emmanuel and Mario telling you about PartnerRe. Thank you.
Thank you, John. Good afternoon. John walked you through Exor three main objectives. I will be providing further insight in the next few slides. Our gross asset value today is $26 billion, that is substantially made up of four businesses. Our gross debt is $3.9 billion. I will elaborate more on that in a moment. Our resulting NAV is about $21.8 billion. We've been working on bringing our debt down through asset disposal and dividends received from the operating company, and the debt now stands at $3.9 billion. We very actively manage the debt we own with a mix of financial sources balancing across different maturities and amounts. As of today, our average interest cost of bonds debt is equal to 3%. I would like to highlight that all debt maturing 2018 is already covered by commitment facility currently in place.
Our third main objective is to have an investment-grade rating. We were very pleased that as a result of the work that we have done, Standard & Poor's has confirmed our rating and upgraded our outlook to stable. As of now, Exor loan-to-value ratio stands below 15%, which is substantially below the 20% target.
Just on this note, Enrico has done an incredible job where we were from on the aftermath of the acquisition of PartnerRe to get our gross debt within the parameters. That was a combination of selling some assets, of generating free cash flow from our companies, and also our overall gross asset value increasing. We are very committed to this. Our objective is really to march towards being, as year-end of 2017, improving our gross debt position. In order for us, as we enter in 2018, to be able to have resources to eventually to deploy. Buyback is one of the opportunities, especially with the trust we have in our underlying companies and discount we have. We will not, though, be looking at buybacks or new investments for the remainder of the year.
We have a lot of work to be done also on our companies and potentially new ideas. That's something my colleague Suzanne is working on. Just to clarify expectations, our goal is really to end the year by continuing to reduce our gross debt in order for us to be able, as we enter in 2018, as we have resources, to then be able to allocate them more properly. With this said, I'd like to transition to Emmanuel and Mario. It's been a pleasure to work with Emmanuel since we entered in discussions with PartnerRe and agreed on the acquisition. The company, under his leadership, has done a lot of work, and I am proud to say that since the ownership of Exor, under Emmanuel's leadership with Mario and his colleagues, the company has strengthened.
With that, I let you, Emmanuel, tell the good story about PartnerRe.
Thank you very much, John. Good afternoon, everyone. It's a pleasure to be here with you this afternoon in this historic and beautiful place. It's an honor to be given the opportunity to talk about the fascinating business of reinsurance, but also the fascinating story of PartnerRe. Together with my colleague here, Mario Bonaccorso, CFO of the company, we are going to walk you through over the next 40 minutes. We're going to walk you through our view of the industry, our view of PartnerRe's position in this industry, particularly following Exor's acquisition. We're going to walk you through how we've actually worked on improving the organization and the operation since Exor's ownership. Finally, we'll close with providing you with some outlook on what we should be able to deliver this year. The deck has been very generous in terms of information.
I hope you'll appreciate this. I'm not going to walk you through each and every bullet points. I'm going to let you some time to digest some of the points, but Mario and I will be more than happy to take any questions when we close. The overall thesis here about the market and our positioning is that when we talk about the market, when I talk about the market, I like to talk about supply and demand of an industry. What's happening with the demand in reinsurance is a couple of things. We are seeing sustained demand for risk transfer. There are new forms of risk coming, like cyber. There's also the increased complexity of the world we live in and the increased connection that drives high demand for risk transfer.
It's also the fact that our clients do not want to keep volatility on their balance sheet, and they're looking for ways to transfer it. Our reinsurance clients are increasingly looking for reinsurers who are large, global, relevant, and with whom they can actually partner with for capital and solutions. That's for demand. On the supply side, it's really a two-pronged supply. There is alternative capital coming in our space. It's here to stay. It plays a meaningful role. However, it's been really confined to the property cat space. Then there's the traditional participants. On the non-life space, it's a great number of reinsurance participants. Much more than the life and health side, where the market is a lot more concentrated. We'll talk also about inefficiencies that we can actually exploit in the reinsurance business. We have cycles. This is cyclical business.
When we have cycle, we have opportunities to actually exploit, create some alpha out of the cyclicality. That's for the market, and I'll expand on some of these points. Our position is PartnerRe as a global, diversified, relevant, and agile reinsurer. I will tell you what this means and why this. Some of our distinctive value propositions is we are a pure play reinsurance player. This is a bit of a contrarian play in a world where a lot of people follow the insurance and reinsurance model. We believe this is a model that will succeed, and one of the reasons for this is we do not compete with our clients. We have a special edge in specialty lines. Specialty risks are those that require more expertise. They have higher barriers to entry, and about half of our non-life portfolio is in specialty business.
We also have a unique positioning in life and health. It's a selected approach to life and health, but with big, large potential to grow and add further diversification to our book and portfolio. Finally, we have the long-term private ownership of Exor, and I'll tell you why this is an additional competitive advantage. The priorities we are working on, we have been working, we'll be working on is continue to grow our relevance and footprint in the non-life space with selected clients and brokers. Is growing our life and health book with a targeted approach. Is focusing on agility, and what I mean by this is the speed to market. Is the ability to react very fast to opportunities created in the marketplace with local disruptions, for instance. Finally, it's continuing to develop key talent and work on a high-performance execution culture.
Last but not least, it is right-sizing our expense level to gain efficiencies and maximize returns. Our return objectives are in the 8%-10% range over the next 3-5 years period, taking into account the current environment and the current market conditions. With that, let me just dive in over the next two slides a little bit more on the market. The point I am making here is that there will continue to be a need for well-diversified relevant reinsurers. Reinsurance is a good business to be in for four reasons. One, I alluded to this on the previous slide. There is risk. Risk is on the rise. We are seeing urbanization. Greater urbanization brings concentration of values in property cat exposed places. We are seeing globalization, world globalization, increases the connectivity, for instance, pandemics or supply chain risk.
We are also seeing new forms of risk, and one of the risks that has actually risen over the last 3-5 years is really cyber risk. That is the first reason there is demand for risk. Second thing is there is high potential. You have heard about the protection gap, which is the gap between when we have an event between economic losses and insured losses. That has been the case, for instance, it has been particularly notable with Hurricane Harvey in the U.S., where we found out that the population in Houston is only 15% insured. You have massive gaps of underinsurance or non-insurance.
That is in the case of non-life, for instance, flood in the U.S., which is a major peril, but it is also the case in life and health with large, emerging, rising middle-class societies in some of the developing markets wanting to access some of the life and health products. That is the second reason. The third reason is primary insurers continue to have these days of volatility, and shareholders of primary insurance companies continue to want to pay a premium for stabilizing earnings and getting predictable dividends. Finally, we talked a lot about alternative capital. Yes, alternative capital has been a structural change for our business, but it cannot replace traditional reinsurance balance sheet, particularly for risks that are less commoditized, that have medium or long tail classes or long tail lines of business. Overall, there is a clear case to be made for a distinctive reinsurance offering.
Reinsurers who are able to offer a balance sheet that actually offers the diversification between lines and geographies, are able to offer specialist expertise in risk management and risk evaluation to our clients. Finally, who can actually take on the volatility for a price from our clients and take it on their own balance sheet. There are opportunities in this market. It is a market that has inefficiencies that could be exploited. What are those inefficiencies? First of all, within a certain class of business, within each class of business, it is really risk selection. It is about risk selection. It is about avoiding the bad apples and betting on the right horses. Second thing is between different classes. Different classes follow different loss trends. For instance, a loss trend in U.S. D&O business, casualty business, is very different to, for instance, agriculture business in Brazil.
Third, some of the classes have high barriers to entry. I briefly alluded to this when it comes to specialty, but clearly, there are some markets that are not acting as commodity markets. Specialty, a number of classes in specialty, also life and health. Finally, I believe we will continue to see cycles. With the efficiency of capital, with the fungibility of capital, with the elasticity of capital the way the alternative capital can access the business, particularly the property cat business. We're likely to see shorter cycles with less amplitude. That raises the need to have reinsurance operations that are very agile and can grab opportunities fairly quickly. All these we see are not only characteristics of the reinsurance market, but are a number of reasons for a number of ways we can actually create additional returns.
Which brings me to the PartnerRe positioning. I told you we're a global, diversified, relevant, and agile reinsurer. What do we mean by this and why does it make sense? Global is really to make sure we can access the risks wherever they are. We have 22 local offices worldwide. We have an organization that combines global and local access, and we can really there's no business in the world out there we can't access with our franchise. It's not just being local, it's also we have decades of history in the company of building portfolios of clients and broker relationships over years. We have gained, over the years, a very strong reputation. We're diversified. This is one of the core pillars of value creation and reinsurance. We're diversified across life and non-life risk.
What I explained to you in a few slides is there's also diversification that we're creating within life and within non-life risks. Relevance. We're relevant to our clients. We do matter to our clients. Why? Because we have the financial strength, not only, but we also have impactful lines that matter to our clients. We combine this with the quality of the delivery in terms of solutions. A number of our clients, a number of the larger global insurance companies, have actually shrunk their reinsurance panels over the last five years. Sometimes from 40 or 25 to a handful of reinsurers, to 5 to 10 reinsurers. Every time they've done this, they've elected PartnerRe to be one of the core reinsurance panels they wanted to deal with. Agility is critical in our business to make sure we can generate extra returns.
This is about speed of action, and this is one of the ways we can actually outperform some of the larger, slower players. It's the dynamics of the portfolio, leveraging our size, but also the financial flexibility provided by our private ownership. Finally, it sounds trivial, but we are a reinsurer. We're a reinsurer who focuses its execution on reinsurance. We're not dispersing our resources between insurance and reinsurance. We're focusing our execution on reinsurance or reinsurance-like business. Which means business that is risk driven, capital driven, expertise driven, and not distribution process driven, and certainly not competing with our clients. That's a distinctive trait of our value proposition. I will tell you that PartnerRe is very well positioned to achieve its strategic goals and to differentiate from our peers. How? We are positioned to be a core reinsurance partner.
I explained to you on the last slide why. We have the financial strength. $8 billion. We do matter. We're pure. We don't compete with our clients. For a number of our clients who play in the commercial and industrial space, it does matter. We have a global region presence with 2,000 clients in 150 countries. We have well-respected expertise in a number of classes of business with market leadership. We also have one of the best diversified underwriting portfolios. I mentioned a focus on specialty lines, which has been a segment with higher than average long-term profitability. We also have a great positioning in life and health that provides us also with potential to leverage this position to grow and find further diversification. Finally, we have low reliance on property cat earnings. Only 4% of our total net premium written in 2016 was property cat.
Last but not least, a real distinctive component of our value proposition is this new private ownership. Why does this matter and why is it distinctive? How does it differentiate us? I would say four points. Number one is the way it lends itself extremely well with our business model. We're here to take volatility out of our clients' balance sheet for a price, and this can only be done if you take a long-term view of risk. Second, it actually enables discipline and rigor. Discipline and patience, focusing only on long-term value creation, undistracted by the optics, for instance, of premium growth. Third, for certain classes that can only be looked at in terms of economic value creation over time, like life and health. The long-term private ownership model is the perfect one. It lends itself well to our business model.
Second thing, it is also part of our value proposition to our clients. Reinsurance is a form of partnership and capital with our clients. Our clients have been extremely positively disposed to the new ownership of PartnerRe because they see this as a critical component of envisaging this partnership in capital over time. Third, it's execution focus. There's no distraction. We're only focused on our clients and on creating long-term value. Fourth, it's been clearly a plus to attract new talent. I'll mention this a little bit later in the presentation. We've been extremely successful at attracting high caliber professionals in the industry, and they've been attracted by the new story of PartnerRe and its new ownership. I mentioned diversification a number of times already. It's time to actually show you a little bit more data about what we mean by diversification.
You've got two charts here. One is on a geographic basis, and the other one on a class of business basis. On a geographic basis, you can see the overweight of North America and Europe, actually Asia and Latin America are territories we're actually growing. The interesting one is the one on the right-hand side, which is the diversification by class. You can see 22% in life and health, 41% in P&C, and 37% in specialty. What is actually striking on this chart is actually within each one of these three pies, you actually have great diversification as well. For instance, if you take the life and health one, you see longevity and mortality as two segments. They actually diversify with each other because there's a natural negative correlation between mortality and longevity.
If we were to look at this and compare it with our peers, what differences would we see? If we were to compare this diversification against the Bermuda and American peers, what it would show is that we're less U.S.-centric, more international, more global, more specialty focused, with more life and health. What it says is simply more diversification, but also lower reliance on pure cat property, cat premium. If we were to compare this diversification with our European peers, what you'll see still is more specialty than our European peers, with some clear leadership in a few classes of specialty. Also a more targeted approach to life and health. Which brings me to the life and health component of our portfolio. The simple question is, why do we actually like life and health? I'll tell you that for a number of reasons.
First is really diversification. Life and health diversifies in terms of cycles. The life and health market does not follow the same pricing trends as the P&C market. The second is simply risk diversification for our capital between non-life and life. Third, there's also, as I mentioned earlier, diversification within the life and health portfolio. The second reason why we like life and health is for its profitability. We view this as over the long run, as a double-digit return equity business because it has higher barriers to entry. I mentioned earlier, it's a much more consolidated market when it comes to the number of supply participants. The third reason we like life and health is that it has significant growth potential. By growth potential, I mean there is demand for this product.
There is opportunities for growth, that again lends itself well with our private ownership to focus on long-term economic value creation more than short-term accounting numbers. Our position in life and health is we're a focus player. That allows us to be nimble, to take profit of market situations, or to avoid challenged markets. For instance, we're not in the U.K., the very large U.K. mortality markets that's been challenged for years. For instance, also, we were not in the Australian disability market, which was very challenged. Now after a market dislocation, we saw the opportunity to get in, and we could do it quickly. Another dimension of our position here is we've been patient in terms of growth. We've been steadily growing organically, mostly organically, our life and health portfolio.
We've added this year bolt-on acquisition, which I'll mention in a minute, with the Aurigen acquisition. We have a great customer base, to whom we're seen as clearly a value add service partner. Just to conclude on all this, our strategic priorities are five. One is to continue to have, to secure, and to grow the sustained access to the business longer term. That's a combination of two things. Increase our footprint and relevance with clients and brokers, also selectively growing our life and health book. That's one thing. Second thing is we're in the business of risk. A clear success factor for us is making sure we select the right classes and we select the right risk within the right classes. Here there's a two-pronged approach.
There's a top-down allocation per class, it's also the bottom-up risk selection within each class. The success will come from the right balance in terms of shifting the capital to the right classes, but also making sure that within each class, we have the right selection. We complement these capabilities by the use of data analytics. Third is portfolio optimization. We have a framework for building a portfolio that allows us to really steer the portfolio to the classes where we see superior risk-adjusted returns. It's also finding pockets of growth or of attractive growth in the current marketplace. This is a market that's been challenged, we still see opportunities for PartnerRe to actually grow in some specific areas. For instance, I mentioned cyber earlier on, or surety.
We also see in a very fast growing universe of insurance in Asia Pacific or Latin America, we see selective opportunities, particularly on the specialty side or the life side, to continue to grow profitably. Finally, as I mentioned earlier, we will continue to see cycles. Our ability to proactively manage a reinsurance cycle is also a key success factor. To do all this, we'll continue to build and develop the talent base. We have a couple of executive team replacements that we're doing between now and the first quarter of next year, we continue to evolve our culture towards high performance. Last but not least, you'll hear more on this from Mario in a minute, we continue to put a clear emphasis on cost effectiveness, making sure we're a lean organization to maximize returns. Maximizing returns, that brings me to our objectives.
The group objectives are to reach a return equity of 8%-10% over the next three to five years period, taking into account the current market conditions. How do we get to 8%-10%? It's a combination of, first of all, return on underwriting. Return from underwriting operations on the underwriting capital. That's what we call the return on capital of greater than 8%, complemented by return on financial investments in real estate greater than 8%. Then we get a little bit of tailwind due to our financial structure. We've got some leverage, 20%-25%, with the cost of debt being lower than the overall objective. If you combine all this with the tax rate, that's how we come to this expectation objective to be in the 8%-10% return on equity range. That concludes the first part.
What I'll talk to you now about is how we've been improving the organization since the Exor acquisition last year. I'll cover the first part on underwriting operations, Mario will cover the improvements we've made in operations, capital structure, and investments. In a nutshell, that's the executive summary for what we're going to talk about, we've developed a new organization structure. We've added talent to our underwriting areas. We've refocused the business away from some of the non-strategic pockets of insurance business we used to have. We've accelerated our development in life and health through the acquisition of Aurigen, I'll give you a little bit more on this. Then we've actually continued to optimize our underwriting portfolio by dynamically managing the capital, particularly in the property cat space. Mario will tell you some of the meaningful improvements we've made on the cost side.
We've taken EUR 60 million of costs out, and we continue to work on this. We have reinvested a small portion of this in growth initiatives, and we're very proud to be the first time ever Bermudan insurance or reinsurance company to access the Eurobond market with a EUR 750 million Eurobond we issued in September a year ago, actually, at 1.34% yield. That reduced our financing cost and enhanced our capital structure. It was definitely something we could do. It was facilitated and enabled by the fact that by the European parentage of our company. Investments, three things we've been working on. We've reallocated the portfolio to improve our risk adjusted returns. Again, it's a two-pronged model with in-house management of standard fixed income, but leveraging external managers for financial investments and real estate.
Finally, we simplify the organization with a leaner operating model. So let me walk you through the points under A above, and I'll pass it on to Mario afterwards. The improvements we've made to the organization are fourfold. We've designed a better organization for our business partners, our clients and brokers on how they can access PartnerRe. We've made the organization a worldwide organization centered around business segments of P&C, specialty, and life and health. So easier, better organization for our clients, complemented by a global accounts unit that actually addresses the needs for clients who are totally approaching reinsurance needs totally globally. Second thing is a better controlled organization through the appointments of a Chief Underwriting Officer and a Chief Risk Officer. The Chief Underwriting Officer focuses on steering the portfolio, making risk decisions on the underwriting side, and it's the first line of defense.
The Chief Risk Officer, Chief Risk and Actuarial Officer, focuses on risk, capital, and reserving. I see this as a second line of defense. Third, it's a better organization because we've refocused our scope on reinsurance purely. So we've actually exited a couple of segments that were no longer strategic. That's the SME insurance business in Europe, but it's also the E&S insurance in the U.S. These models were completely subscale for us, and they didn't fit our pure reinsurance model any longer. Fourth, we've actually made the organization stronger in terms of talent addition. We've hired a new CEO for Life & Health, who joined us in April from SCOR. What I didn't mention here is we had this week a new Chief Corporate and People Officer coming from Google. Who joined us very recently.
A number of people ask me, "So how do you attract all this talent in the industry?" It's been a consistent experience of being successful at attracting high caliber people by the quality of the PartnerRe story under Exor's ownership, but also the long-term view of risk, the long-term focus on value creation. I mentioned the Aurigen reacquisition a couple of times. It's time to give you a little bit more information on this bolt-on acquisition. So it is a bolt-on acquisition. We closed it earlier this year in April. Clearly the message here is, it's been good for PartnerRe. It's been a good acquisition for PartnerRe for two reasons. Number one, it was done in a way that was financially attractive to the group. Why was it so?
We were uniquely positioned, given our long-term horizon, our focus on long-term economics rather than short-term accounting, to actually bid at a fairly attractive price. Second thing is, it's strategically attractive. PartnerRe in life and health, we were not present in North America. As you can see on the two charts on this page, Aurigen has a comfortable position of 9% in the Canadian life reinsurance market and a foot in the door in the U.S. life reinsurance market. We see this as a great position that we can further leverage, particularly as we add PartnerRe's reputation and financial security to the business access provided by Aurigen. I'll finish with this one before I pass it on to Mario. This is the way we've been dynamically managing our portfolio over the last few years.
It's a disciplined and rigorous approach to risk and return, we've taken here the example of our deployed capital in property cat. If you just focus for a second on the chart on your right, the one that has that green diagonal. You can see here is that over the last six years, we've continuously reduced our risk appetite or capital deployment in cat as a function of the return expectations we were seeing in the property cat space. As returns were compressing, we were compressing the amount of capacity we were deploying. The other way to look at it is with the four charts on the left with the PML, so probable maximum losses, for four of our main perils and showing you the decrease from 2011 to 2017. The way we've done this is through retrocession purchasing.
We've kept our footprint, our gross writing with the clients intact, we've bought more and more retrocession to cover ourselves. Just to give you a couple of numbers to illustrate this, in 2012, we were buying $130 million of limit of retrocession, this year we were buying $1 billion of limit. With that, I'll pass it on to Mario to talk to us about cost and financial structure.
Thank you, Emmanuel, and good afternoon, everyone. Other lever we decide to use to create value in PartnerRe were the optimization of the operating cost and also the optimization of our capital structure. Operating costs are an important lever over insurance profitability. In general insurance, our industry on average runs in the mid-90s combined ratio, between 90% and 95%. Our industry expense ratio is in the 7%-10% range. Every point of expense reduction is a 10%-20% impact on the underwriting profitability. Having kept this in mind, we try to optimize our cost structure, being able to reduce by 15%, which is $60 million, what was our operating expense compared to the 2015 baseline, which is the year before Exor acquisition was completed. This year, costs are on track with budget. We are 4% below budget.
We are implementing during this year other action that will see their impact in 2018 and potentially 2019. We are not also cutting costs. It's important also we optimize the expense and we focus these operating expense on where they can create long-term value. We reinvested approximately EUR 10 million in grow initiative, life and health, and global account are two of this. The second part, the capital structure. As Emmanuel showed you, PartnerRe is really a global diversified company in term of geography, and we have 36% of our business, of our premium that comes from Europe. If you look at our cost structure, the majority of our costs are in Swiss franc because our headquarter in Europe is Zurich, and in USD because the majority of the other office are based in Stamford, Connecticut and in Bermuda.
There is a cash flow mismatch between the technical profit of the business written in EUR and our cost structure. We generate a positive EUR cash flow. PartnerRe capital structure was entirely based in US dollar. This created a currency mismatch. Taking opportunity of very favorable market condition last year in September, we were able to issue a 10-year Eurobond, EUR 750 million. Which at a yield of 1.34%, there is an element of luck. We really were able to issue at the trough of the interest rate in the market. That's the first time a Bermuda reinsurer has had access to the Eurobond market, and that's a very important achievement we were able to do. In addition to that, the PartnerRe had preferred capital, which could be replaced by this senior debt.
We redeem approximately $400 million of preferred share, whose yield was between 6.8%-7.2%, replacing effectively this capital with 1.3% yield in capital. That has contributed to reduce our cost of capital. In addition to that, the delta between the capital issue and the capital that we redeem was positive, actually we strengthen our capital base in addition to reducing EUR 19 million of pre-tax financing costs. The other important lever in value creation for reinsurance company is investment. What we did in investment, we changed the operating model of PartnerRe, and we optimized the investment portfolio. Before the Exor acquisition, PartnerRe used to manage in-house all investment, all asset class. There was a team of 60 people with a yearly cost of approximately $50 million.
The conclusion we came is that PartnerRe has really critical mass and product excellence in what we call standard fixed income, which are government bond, investment-grade, corporate credit, and agency MBS. This class, our portfolio, as you can see, is approximately EUR 13 billion-EUR 14 billion. There is critical mass, and this asset class can be managed in-house with above-market performance. Historically, PartnerRe had done that. The other asset class, as you can see, the volume are more niche. To have that skill in-house is expensive but also is not optimal because there are larger third-party asset manager that have better sourcing, better market access to that niche financial investment opportunity. The conclusion we came was that what we define financial investment, which are public equity, alternative credit, third-party private equity fund, high yield, emerging market should be outsourced to third-party manager.
As a consequence of this, we changed operating model. We were able to save EUR 22.5 million in expense. At the same time, we introduced a new asset class in the PartnerRe investment portfolio, which is real estate, which was not present before. Real estate is an important asset class within our insurance balance sheet because one of the biggest risk we do have in our balance sheet is inflation. Because our liability, the reserve, are tightly linked to inflation. So an inflation increase may create potentially an increase in the reserve of the company, negatively impact our balance sheet. At the same time, real estate is a good inflation hedge because in an inflationary environment, real estate usually tend to appreciate. In addition, real estate enjoy very favorable capital charge from regulator and rating agency.
So for all these reason, we introduced real estate as a new asset class to be able to optimize the risk-adjusted return. As you can see, compared to we put here September 15, which was a quarter before the Exor acquisition. Now, actually we have decreased the risk in the portfolio. As you can see, the standard fixed income has gone up from 82% of the portfolio to approximately 87%, and the financial investment are gone down from 18% to 10%. Actually, the yield, the return that you can expect from this portfolio is comparable to what PartnerRe was getting before, having reduced the amount of risk. You should expect this portfolio under current market condition to deliver EUR 500 million on net total return a year, approximately 2.9%. EUR 390 million, EUR 400 million from net investment income, pretty predictable.
EUR 100 million, EUR 110 million from mark-to-market gain coming from financial investment and real estate. So this shows that through the different action, we have been able to reduce the risk, optimize risk-adjusted return, and taking also strategic action on the best operating model of the portfolio. This gives you an idea on where we are positioned in the risk curve for investment. As you can see, we are in the lower limit for most asset class: equity, alternative credit, real estate. We are in the upper limit in third-party private equity fund. As an outlook, you should expect third-party private equity fund to gradually decrease as the funds run off. An increase in alternative credit and a mild increase in equity real estate under the appropriate market condition. In general, today we are deployed at approximately EUR 1.9 billion, EUR 2 billion if you include commitment to real estate.
Our limit for financial investment real estate is EUR 3.4 billion, so there is additional one and a half billion room compared to the risk limit our balance sheet can manage. Financial outlook. We want to give you. It's very difficult, some of you have asked, why you don't provide an outlook. It's very difficult in our industry to provide an outlook because as you have seen in Q3, event are unexpected. So what we are trying to make here to give an idea of the loss we will have from the hurricane and the event in Q3. An overview of the profitability we expect in Q3, but also the profitability we expect over the course of the entire 2017 financial year. As a reminder, during the first half of the year, we reported a net income ROE of 8%, approximately EUR 243 million.
This figure is net, excluding the severance and transaction costs, which are related mainly to the Aurigen acquisition. The drivers were annual life, a combined ratio of 91.7% and investment total return of EUR 363 million. Q3, there has been an unusually high frequency and high severity, I have to say, unfortunately, of losses, due to Hurricane Harvey, Irma, Maria. There have been also two earthquakes in Mexico, not related. We estimated that the materiality for us of this event for PartnerRe is related to the three hurricanes, Harvey, Irma, Maria. Today we estimate a reinsurance loss combined for this event at a midpoint of EUR 475 million. This figure is pre-tax. It is net of retrocession and reinstatement premium. The range is still pretty wide. The nature of this event is very complex, particularly Harvey and Maria, they are not standard hurricanes.
The caution is that there is a high variability on this figure and on assumed insured loss. To the information received today, our midpoint of estimate is EUR 475 million. Other important elements of the quarter is that as Emmanuel mentioned to you, our portfolio is very well diversified in our life. We don't have a heavy reliance on property cat. Notwithstanding this EUR 470 million pre-tax loss, in Q3, we expect a pre-tax loss in the EUR 60 million-EUR 90 million range, which is going to impact our book value of common equity in the range of 1%-1.5%. Again, these are preliminary estimates. We are five days after the quarter close, so there is of course uncertainty around this number, but that's the range we are comfortable sharing with you today. The rest of the non-life book performed extremely well, excluding, of course, this cat event.
This contributed to reduce the EUR 470 million loss. Reserve development, we had favorable actual versus expected loss on the old book. This contributed to continued favorable reserve development. PartnerRe has had a history in the past quarter of favorable reserve development. This is expected to continue this quarter. We had certain profitability issues in our health book. We had one mid-size loss. It was not the first quarter we had a mid-size loss in health book, so we decided to what is called an a priori adjustment. We decided to adjust the profitability expected of future business to reflect this event, and this will negatively impact the quarter. We had a relatively solid investment return, with a return expected in the range of EUR 150 million in the quarter.
All of this leads to pre-tax loss of EUR 60 million-EUR 90 million range in the third quarter. For the full year, we have to make certain assumptions given the nature of our business. If we assume that there are no additional material cat or large losses, I caution you that we are still in the cat season, until early November is considered to be the cat season, the hurricane season in the U.S. Assuming that there is no mark to market of the government bond and investment-grade corporate bond in our P&L. Differently from our peers, we have the mark to market of standard fixed income in the P&L, not as available for sale in the balance sheet. This creates an accounting volatility effectively.
Assuming there are no impact from this event, we expect to report for the full year 2017 a net income in the $220 million-$300 million range, which is a 4%-5% ROE. Really this shows you that even in a year which has reported insured loss in excess of $100 billion, and I think there have been only three years in the past 100 years that have seen insured loss in excess of $100 billion. We should be able, with this assumption and cautioning that the estimate on the Hurricane are still subject to change to report a positive profitability. Last but not least, our capital position is very solid. We expect to remain with a capitalization at year-end, which is in excess of triple-A Standard & Poor's capitalization, allowing us to exploit market opportunity there on the underwriting, on the investment side should this arise.
This also shows you that all the work Emmanuel has explained to you in building a very well-diversified portfolio in managing our capital deployment in cat which has decreased, as Emmanuel show you. In taking out EUR 60 million of cost and EUR 19 million of financing cost, they're showing a result in term of bottom line profitability, in a very tough cat year. I leave to Emmanuel for the final remarks.
I would just like to add a couple of comments on the Hurricane activity. It's been an unprecedented series of events this year. Before we actually think about the impact on the business, our first thoughts go to all the victims of these events. The population has been displaced, who've lost families. Second point on this one is that, it's for events like this that our industry exists. It demonstrates the value of our product. Because of reinsurance, economies and populations can respond and rebuild faster. Second point, which is extremely important to mention, is that, as Mario alluded to, this loss is actually well within our model expectations, it's well within our risk limits, it's well within the risk framework or property cat framework I've shared with you a few slides ago.
Third thing is, it demonstrates in this quarter the fact how much the non-life profitability can offset of the losses is a clear demonstration of the power of the diversification of our earnings. Finally, going forward, our cat appetite will be a function of the magnitude of the price increases or corrections we'll see in the market. Also what we learn, the key takeaways in terms of cat modeling and what happened with these events. Before I pass it on to John, I would actually just like to reciprocate some of the nice comments John made in the beginning, that for us it's been also a pleasure to work under the wing of Exor and with John, and it's been a pleasure working with the whole team.
It's been the right combination of support, of commitment, but also in a demanding way. We look forward to contributing to the success of Exor for a long time.
Thank you, Emmanuel. I also would like to mention Andrea Casarotti, a former colleague of Exor, who is the Chief Investment Officer of PartnerRe, who's here. A lot of what's going to be done on the investment side, which Mario discussed, will be under his responsibilities. Also my colleague, Matteo Scolari from Exor, who will be running a concentrated portfolio of equities and will be starting, and has started investing. They also will be part of what PartnerRe will be doing and going forward. I thank Emmanuel, Mario for what they told you today, which is, I think, important for our shareholders to know that PartnerRe so far has been a positive contributor to Exor, and that the company is stronger than it was when we acquired it. I'd like to close with a couple of remarks.
We've been looking at our peer group. We try to assess. We have an analysis on this that you can find attached to the documentation you have today, which will be on our website. If we take the diversified holding companies globally with a market cap above $10 billion, there are 14 of them. What we observe is that they have overperformed the market over a long time period. The reality is, if you look five, 10, 15 and 20, it's quite consistent. It's amazing to say that these diversified holding companies have actually, if you look on an annual base, they've actually returned 12% per year, versus a market who's returned 6%. As a category, diversified holding companies is actually a good category.
This is reassuring for us working in a diversified holding companies, but also reassuring for our shareholders. The second interesting, which is less intuitive element is that actually if you track the companies these diversified holding companies own, there are 60 of them, actually 66 to be precise. The diversified holding companies have actually outperformed. There is a thesis which says that a diversified holding company is an overhead layer on a replicable portfolio. Hence it requires a discount because there's not really much value to them. Now, empirically, what this analysis says is that there is actually value, that in effect, they have over time, created more value than the underlying. The reason why they've created more value is fundamentally linked to ultimately two aspects.
The first one is that if one is able to, and disciplined in the capital allocation, which we discussed before, you actually create value. You're able to buy companies you own as you know them well, you're able to buy new companies, and you're able to buy your shares. Secondly, if you are a good owner, and I thank Emmanuel for what he said before, and you do work in a close and constructive relationship with the leadership of the businesses you're involved with, there is actually value to it. The interesting element of this, which we haven't attached in the analysis, if you track the actual businesses owned by these diversified holding companies and you look at how they have performed vis-à-vis their peer group, they actually outperformed them.
This is just to say, and it's reassuring for us, that the actual category is a good category historically, and that there is value in diversified holding companies. The other good news for our investors is that if you look at our market cap, you actually today are buying Exor and getting PartnerRe for free. If you are pleased with what you heard today by Emmanuel and Mario, you actually are in a good place. With that, I'd like to thank you all and close with this quote from my great great grandfather, also honoring him as we are in his house, which I used in my shareholders' letter for 2016.
I think this quote is very telling of our business family history, but also of the last decade, and that a lot of things that we could have been afraid of or that seemed impossible, luckily, were actually achieved. I really look at this as an encouragement to the years ahead. With this, we're going to open up for Q&A. We have approximately 100 people also who are with us, not physically, but virtually. We will make sure also if they have questions, to make sure to answer to those. Thank you very much to all of you.
Thank you very much. This is my first time in front of the Exor board, and it's extremely impressive. It's impressive to see somebody who's an owner of businesses rather than just a buyer of shares. One of the big reasons for the outperformance of Berkshire Hathaway and Markel has been their ability to allocate more than other insurance companies to their equities portfolio. Could you maybe address if there are any regulatory restrictions? I think you're based in Bermuda. Can you just give a sense, I know that you're all students of Berkshire Hathaway, what can we expect to see in terms of concentrated equity investing in the PartnerRe portfolio going forward?
In terms of a restriction, we have a capital constraint. Capital constraint comes to three different sources. First is regulator that you mentioned, second are rating agency, and third is our internal capital model because we have our own views of risk, which hopefully is more accurate than regulator and rating agency because we know our underwriting investment portfolio better. We have a risk guideline which say that all our liability needs to be backed by standard fixed income. This is not our money, this is not shareholders' money. This is money that belongs to policyholder. We have our risk guidance that say that only government bond or investment-grade bond or agency MBS, which are effectively U.S. government-backed security, can back our liability, which is the concept of float. Having said that, our capital, which is $8 billion, we can take a risk.
As you can see what we believe is, according to our risk limit, we can invest up to $3.4 billion of what we call financial investment real estate out of our $8 billion. Then we like also diversification as you saw. I think being diversified is good not only in underwriting but also in investment. You saw in every asset class what's our limit and where we can go based on current. Having said that, if excess capital grows, which is, you mentioned Berkshire Hathaway and Markel, they have massive excess capital. The amount of capital grows from $8 billion to a larger amount, this limit can be increased and the amount of capital allocated to equity can effectively go up. That's effectively the first framework, which is the internal capital model on how we manage risk internal to PartnerRe.
If you are comfortable with that, Bermuda is pretty a good regulatory environment for investment. Of course, they need to check we are within their parameter. Constraint are not more material than the one we will impose ourself with our own risk limit. Rating agency capital as well, they charge you capital for concentration risk or for equity compared to other asset class. As of now, we are in excess of AAA capital, that's not a constraint at the moment. If we are able to build excess capital, this may give room for more equity investment. That's to give you a framework on how we think and how we approach the investment side of the balance sheet.
Maybe concentration if you want to.
There is a charge for concentration on our top 10 position, equity capital charge is in the range. Depending on the different parameters, it's up to 50%. Even if you add a concentration charge, which is 20%, you still are able to benefit significantly from investment leverage, which is 2 to 1. This means that if you have a public equity performance of 8%, the return on equity is going to be 16% for the effect of this leverage, even if you take into account concentration. We do have concentrated position. As you are aware, Almacantar has been sold by Exor to a partner. That's a EUR 500 million position, which is concentrated. It sits in Bermuda. Real estate has even lower capital charge. That's another example of what we have done.
For the moment, you saw our risk appetite on the investment side is pretty on the low end of the range unless market condition change or we build even more excess capital.
Yeah.
Thank you very much. Stephen Wood from Greenwood Investors. Emmanuel, I'd like to go through some of your customer satisfaction sort of KPIs. What's been your renewal rate in 2017? If you can unpack that, what is your voluntary sort of like you're not renewing the contract versus the customer? Take it from there.
I don't have the exact numbers in mind, but over the last 3 years, it's been a stable, I would say 90%-95% renewal rate. Out of the 5%-10% cancellation, it's been half designed by the company and half retained by the clients. There's no business lost to competitors that we would have liked to retain. It's more the result sometimes of consolidation in the insurance market space, where people then stop ceding some of the business that was reinsured by a company that's been bought.
On your actuarial assumptions, how many of your contracts that you write are break-even or unprofitable, or are there none?
I think the way we look at it is we look at clients, we look at profitability of a client, and we make sure that every client we write is profitable. That's just it.
Okay. Thank you. I noticed your premiums outstanding under the specialty lines has actually shrunken faster than the rest of the book. Can you kind of talk about, especially with the lower OpEx at the group, the trend with technology basically obsoleting specialty lines? Where do you think some of your lines are most at risk from becoming commoditized? What you're doing to prevent that?
You say some of the specialty premium has shrunk?
Yeah. The premium in specialty has shrunk faster than the rest of the premiums written. Can you talk about, I mean, the industry trend with these specialties no longer specialty after 2, 3 years because of the technological progress. Can you talk about what you're doing to prevent that obsolescence of the specialty lines?
Actually, our access to specialty lines has remained excellent. We still see a lots of opportunities in the various specialty classes. It's a business where we do manage the cycle. There might be some classes where we've actually taken some steps to manage the cycle. To give you an example, for instance, in the energy business, the energy offshore and onshore business, we've actually taken steps over the last 3 to 5 years to actually accelerate the contraction of the book in terms of risk management. That's really done by design more than by accident. I can't think of any specialty class where we've actually lost business due to some technology trends that you're referring to. Actually, on the contrary, we actually see that we can add technology to help developing solutions to clients.
One example for this is in the agricultural space, for instance, is what we call precision farming. We're partnering with companies to actually help insurance penetration of agriculture through the use of technology for farmers.
Yeah. One, to address your point, there is a reason why you see a bigger decline is because we lost one large client in agriculture. Because of M&A, this client was acquired by a large insurer, and that account for more than EUR 100 million of premium lost. The combined ratio of this business was in the high, mid 90s. The profitability lost. In fact, as you see, the profitability of specialty has been higher than last year, notwithstanding the premium decline. If you offset by this contract, the decline in specialty has been less than the decline in P&C, where we have taken action in book, in certain part of unprofitable book, where we have shrunk the underwriters.
Thank you. Just lastly, with the three storms, what was actually the gross impact, adding back the retrocession benefit?
We don't disclose this figure.
Thank you very much.
Good afternoon. Martino Ambrogi, Equita. In your initial remarks, you talked about the focus remains in the short term, at least on gross debt reduction. If I look at your portfolio, I would say that everything is core apart from smaller assets. It is just a matter of dividends, cash inflow, cash outflows, or is there anything else that could accelerate the debt reduction? Connected to this question, what's the level of loan-to-value you are comfortable with in order to restart the diversification? Also you mentioned the buyback. Nothing is envisaged despite the discount widened over the past few months, and also what's the timeframe or discount or loan-to-value you would consider the threshold to restart? Thank you.
As I mentioned, our objective is really to be able to close 2017 by having reduced our gross debt. There's a couple of actions that remain. Some are related to smaller assets that we have, as you mentioned, and we're looking at those disposals. Secondly, by generating some cash float through dividends to be yet taken.
In terms of entering 2018, we will then evaluate by then the alternatives for us to deploy capital, and if things would stay at the levels where we hope to be, and our LTV being around 15%, we have comfort between 15%-20%, also assuming a good generation of free cash float for 2018 to be able to think at allocating capital in buying back our shares if the discount continues to be the one it is, as we have a lot of faith in the potential of our companies. An alternative, looking at possible investments, which by definition will be smaller investments, which is also what I hinted in my shareholders letter on 2016.
Hi, Adam Wyden from ADW Capital. I'm going to stand up. First off, I want to say thank you. It feels amazing to be in the presence of wonderful capital allocators and people that have an ownership mentality, and I just want to say thank you that I've been able to be part of this journey. My question is: a lot of guys have alluded to Berkshire Hathaway, and I think that there's a lot of similarities here, and God willing, I'll be able to do this for the next 30 years, and this will be the next one. Part of Berkshire Hathaway's strategy, instead of selling companies, they've invested their capital to build companies. You obviously have Ferrari. That doesn't require capital, but CNH Industrial was an opportunity to merge companies.
How do you feel about deploying future capital into platform companies like Magneti Marelli or Alfa Romeo, Maserati to build high return on invested capital, compounding vehicles that you can own for the next 20, 30, 40 years?
Thank you, Adam. Very comfortable. As I said in my presentation, that's really number 1 in terms of where we would look at allocating capital. It's much easier to be able to invest in what you know. If we had the opportunity of being able to provide our companies with capital for them to grow, that would definitely be a priority. That has been the case. We have invested in FCA. We have a very clear understanding with PartnerRe, where we have an understanding of retaining earnings, and Aurigen is an example of an acquisition that Emmanuel spoke about. Our objective is really to be able to have companies which would require the possibility of investing that capital at superior rates. If that were the case, we definitely would be very pleased with that happening.
Alberto Villa from Intermonte. Good afternoon to everyone. A few questions from my side as well. First of all, as Mr. Marchionne recently has hinted to the opportunity of spinning off Magneti Marelli and connecting to the previous question, is that a business that if spun off, would be part of the Exor portfolio for a long time? Is that something that you would consider as a long-term investment as it has been the case for CNH and Ferrari, or it's not something that you would consider? Secondly, some investors ask me about the opportunity or the possibility that in the mid, long term, you would consider floating back PartnerRe in the future. It doesn't seem from the presentation it's something on the table, but if you just can comment on it. Finally, thank you for the slide in which you say you get PartnerRe for free.
It seems taken from an equity research. I would wonder to know why you think the discount on NAV on Exor is so large compared to the peer group you mentioned, and given the performance and what we have seen, it seems today it's shrinking. The stock is performing very well after this presentation. Maybe it's more about having these opportunities to get an update on the strategy of the company. Are you planning anything on that side? Finally, if I can, on PartnerRe, you mentioned a combined ratio in the region of 90%-95% as an average. I wonder if the changing world and the risk changing will shift this through the cycle combined ratio range in the future, or if you feel comfortable this is the level you think is doable in the mid to long term. Thank you.
Thank you for the very good questions. As Sergio Marchionne has said publicly, the possibility of spinning of Magneti Marelli and Comau is something which the board will review, especially as FCA is achieving the ambitious objective it had set for itself in 2014. If these companies were to be spun off, Exor would result being its largest controlling shareholder, definitely we would look at these companies and try to see how we could build them. On Magneti Marelli, actually, that was the first company I actually worked for when I was an engineering student, so I know it from a long time, and I worked actually in the lighting division, and the lighting division is one of the very good businesses Magneti Marelli has, which is world leader in its category.
Despite all the changes cars will have, I think lighting will still be a very important feature in it. For the question around why do we have such a big discount, I think that PartnerRe is somehow not known, or at least what PartnerRe has done in this time period is not known by the market. On the other hand, we feel that it's much better to communicate when we actually achieve something rather than try and communicate on aspirations. We felt that we needed some time and a lot of work that Emmanuel and his leadership team have done in order for them to be able to communicate that.
I'm hopeful that the fact that today you get PartnerRe for free, as one feels comfortable about the way PartnerRe is performing, will give the opportunity to our existing shareholders and potentially new shareholders to be interested. I also think that on the back of very strong appreciation that we had this year of FCA and Ferrari, we have some lag between the underlying companies and Exor. In terms of communication to the market, I do think it's healthy to have one moment a year where we can have a communication and tell about the business.
I don't think that going on road shows probably can be helpful at some point. If you look at a longer period of time, I do think that a proper session and interaction with our shareholders and who really are interested about our company is ultimately more helpful and more conducive to have also the right shareholder base. On the technical ratio, I will let Emmanuel and Mario answer to that.
The question on combined ratio and whether the 90%-95% is sustainable, I would respond to you in twofold. First of all, the combined ratio is not the only metric. It's just one of the metrics we use to steer the business. It's not a perfect metric because it doesn't reflect the time value of money. Just to give you an example, the way we price casualty business is with higher combined ratio than the cat business, for instance, because there's duration risk, and so a similar return on equity for cat and casualty means a much higher combined ratio on casualty than cat. It's really about the mix of business. I showed you how much we've contracted. We've compressed the cat business, but we actually continued to write casualty business.
As you write less cat business, more casualty business, your combined ratio as a result of the mix goes up. The combined ratio is a function of two things. One is a function of the mix of business, and it's also, as you probably point out too, it's also a function of the pricing level in the marketplace. The current market is a soft market, and also we look forward to, and we believe there will be times with price increases at some stage, where the combined ratios at the equal mix will actually improve. Anything you want to add?
There's a couple of questions on PartnerRe, so we can continue. I think this is very good because it shows that the actual presentation that Emmanuel and Mario had is gaining a lot of interest. You said you expect to have enough capital at year-end to exploit any markets hardening opportunities. You think the market will harden. Related to this, does your ROE target 8%-10% include any uplift from increasing cat exposure?
It's always difficult to make crystal ball predictions about what the market will do. The market is a result of supply and demand, and we'll see where the market clears. It's not for me to say where the market's going to clear. Having said that, our expectation is that given the amplitude of the insured losses in the market, that we will see price corrections. We'll see price corrections starting from primary business, actually. We're seeing U.S. primary players increasing property prices. That has a compounding effect on the prices we get, because we get a price on their own price. We will see price increases in the cat space, in the retrocession space. The question the market will have to answer is, how localized or how globalized is the price increase or the price correction? There's no doubt there will be price correction for loss-affected treaties.
There will be price corrections for U.S. cat business. There will be price corrections for retrocession. My assumption is we will see, at minimum for the other territories or the other classes, we will see minimum stabilization of the conditions. I do believe, actually, we will see minor price increases in other regions of the world. The question was, there was a question about the Oh, sorry, the question is here. Do you think the market will handle it? I just answered this one. Related to this, does your ROE target of 8%-10% include any uplift from increasing cat exposure? No, it is a Yes, I will cover those two. Our ROE target is a three to five year, so it contemplates any years of price corrections or cat losses. There is a comment about some senior executive departures.
Can you comment on recent press reports that there were some senior executive departures at PartnerRe recently? We have announced earlier this year, I think in July, that two of the members of my executive team, Tad Walker, who manages P&C, and Marvin Pestcoe, who is the Chief Risk and Actuarial Officer, will both retire at the end of the first quarter of next year. This is not a surprise. This was well discussed and planned ahead, we are working on replacements for both of them. What was the gross loss? I think we already answered this one. What are your prediction for possibility of rate increases? I think that is the same question as do you think the market will harden. Thank you.
Question over there.
Thank you very much for the invitation. We are students from University of Turin, we want to ask you a couple of questions. Which are the advantages of investing in a family business rather than investing in a non-family one? Which are the strategies that Exor should adopt to invest in Italy again? Thank you very much.
On the first question, without being self-serving, being analytical on the answer, we have done a lot of analysis, there's also many research who track family-controlled businesses. What they tend to say is that if you look at how these companies have performed, also transgenerational companies, that have been in families through multiple generations, they've tended to outperform the market. Generally, this is linked to them being more conservative, going through hard times without having problems then. It also tends to be driven by a stronger presence in terms of the company and who works in the company, of being more accountable, of feeling more ownership of the results. Also being able to have a long-term view.
One has to be careful with long-term view, because if you only think about the long term, you might be bankrupt in the short term. The reality is that it's more about the right balance between how you can plan for tomorrow, but also make sure that you meet payroll today. You could argue that the ones that survive are, by definition, good companies. You end up having a number of companies that have performed better than the markets, because these are the ones who, by being good companies, they end up surviving. I think that what the reality is that if you look at good companies with a good ownership, that combination is a very good combination. If you're able to do that, you will outperform the market.
One of the things as we look at how increasing the equity exposure of PartnerRe is we have done and are doing a lot of work on our Global Family Business Index. Index investing is very fashionable these days, we also want to participate in that trend. We have now different models that are proving that, in effect, we would have an index which would by far, in many different conditions, outperform the market. Which is also a way to preparing ourselves in case we did have some market dislocation or correction to be able to invest in equities in a way where we'd feel very comfortable. In terms of Italy as an investable universe, I think there are many opportunities in Italy, there's no preclusion in investing in those.
As I said before, we're not in the conditions at looking at investments in general, but we would definitely look at companies. If we were to invest in Italy, it will be in companies which are not big companies, but are companies that have a lot of potential growth. I do think that the universe of investable companies there is pretty large and the Italian entrepreneurs have proved over the years to have been very successful in starting, building, and growing these companies. Associating ourselves with those would definitely be something that we'd look into very seriously.
Elizabeth Miliatis from Bank of America Merrill Lynch. I just had some questions on the hurricanes again. For the estimate of EUR 475 million, what's the underlying market insured loss which supports that? What is the catastrophe budget for it as well? Furthermore, if we were to see pricing increase across U.S. cat or more broadly across all insured products, would you look to increase exposure to catastrophe? Thank you.
The EUR 475 million loss is based on an aggregate insured loss of EUR 85 million. That's our market share.
Yeah. These figures exclude the insured loss covered by NFIP, which are sizable. Because if you compare with some of our peers, they include this figure in. It's in excess of the, if you add the EUR 20 million-EUR 25 million of NFIP, you get to EUR 105 million-EUR 110 million.
You should read your report.
Who hasn't read your report? I think you did a very good job in it. Thank you.
The second part of the question is, if we see price increases, what would be our approach? Is that your question? As I mentioned earlier, our approach to I think we are well positioned if we want to leverage opportunities. We'll have to make sure that first of all, the price increases are worth it. Second, that we take all the learnings from what we've seen with the hurricanes in terms of what we learn for our cat models, for instance.
The cat load for
Oh, yeah
full year financial 2017 is EUR 195 million.
Thank you. Second bite at the apple. John, many of the people here, almost all of us are Europeans. There are some Americans. The action in the world is in China, India, emerging markets, and to the extent that it's in Europe and North America, it's in the tech sector. That's not an area that I personally am exposed to. It's not an area that Exor is exposed to. I'm sure you get questions. What is an old European family to say to the fact that we're not where the action is, and how does one prepare oneself for that?
I'm happy that Prashant is here, who came from India, Prashant used to run the Goldman Sachs Indian fund and has now started his own investment fund, of which we will be one of the first capital providers with others. That's a concrete example of how we are looking not only at Europe and the U.S., but looking at other markets. We think that India is an interesting opportunity. We've been studying it, and as we increase our equity exposure, we'll be doing it with professional investments like Prashant, and again, with the same principle of having a view, which is a concentrated view on those markets. In terms of tech, I think that we view it in two ways.
One way is that the companies in which we are involved will benefit or be threatened by technology. We are in the camp of the ones who think that if you are agile, like Emmanuel described, which it's a very fashionable word today, but it is important to be agile and to pivot. If you're able to do so, you actually will benefit too in existing businesses and in existing markets by how technology can be utilized. In terms of pure tech, how do you invest in pure tech? We have a lot of exposure, because there's a lot of interest from new companies, startups, about some of our industries. We haven't yet really, apart from learning from each other, and that benefits the point I was making, really to see if we would contemplate investing directly.
The reality is, unless you invest with the best investors in tech and the best founders, which by the way, choose who they want to have as investors, you're not going to be able to really create big returns. Unless we're able to be appreciated by strong founders and to co-invest with strong investors, I think it would be not the best usage of capital for Exor.
In terms of innovation, technology, and how this plays out here in Europe, you are here today in a physical place where, as a family and through our foundation, which has nothing to do with Exor, we've put a lot of our resources to really try and create and be part of a ecosystem, which I'm sure will breed to some of that innovation you mentioned.
Stephen Wood here. One more time, sorry. Suzanne, I'd love to hear from you, if you don't mind. We have an unparalleled network here. Since you've come on, have you been looking to systematize your pipeline, your flow of things coming to you? If so, what have you been doing on that regard? Where else are you focused right now on the privates?
No, it's very interesting, actually, because I think as we know, as a whole in the market, there's a lot of capital around, a lot of people are saying there's not that many opportunities. What's been very interesting for me coming into Exor, as John says, one part of my role is to look at potential future investments, is through a combination of the network that we have, which is very well established, particularly in Europe and in the U.S. Those are the two geographies that we know very well, where we have very well-established networks, including in particular Italy, where we obviously have a very deep base and a very deep network. We actually find a lot of opportunities, a lot of opportunities come to us very proactively. I think we are choosing, as John says, at the moment, not to invest.
We may well start to invest from next year. I'm not finding a shortage of opportunities, which is very interesting. When I go and talk to, say, for example, private equity firms and so on, a lot of them are finding the opposite. I think, which is, they have a fair amount of capital, and they're looking for opportunities. We're actually in the opposite situation of finding opportunities but waiting until we deploy capital. I think we're quite excited about what we will be able to do. We're very excited about Italy. There's quite a number of very interesting companies where we may well do something. Not this year. In future times.
One more question from me. Are you happy with the CNH Industrial group structure? I mean, three different businesses. Okay, it was inherited, so you cannot do anything right now. Over the next two years, if there is an opportunity to have, on one side, an asset, maybe Iveco, and on the other hand, the remaining businesses, or just the agricultural business, knowing you know very well the meaning of the spin-off and how it works, would you be happy with this solution? If I may, one more maybe small question on Formula 1. I remember many years ago, you were interested in Formula 1. Is it conceivable, the co-investment or the investment at Exor level? I don't know if there is the opportunity with Liberty Media and so on. Maybe not. In the future, would it be feasible?
On Formula 1, one of the learnings we had when we had an interest in buying it, by feeling we had an edge, and we were looking at this with News Corp, who also had an edge, us through Ferrari, and then as broadcasters. We ended up understanding that that edge was actually not really an edge, but it was a problem because we were too much part of the Formula 1 construct. Based on that experience, we would not have any interest in participating directly as investors in Formula 1 because we feel that would be not productive. Ultimately, that is something which Ferrari is a participant, and an important one, and that's where the relation exists.
In terms of your question on CNH has gone through a very hard time with the ag cycle, which they've managed well, if you look also at its competition. The premises of having a capital goods business like CNH is that you have an engine, which is really the largest investment for the different applications, agriculture equipment, construction equipment, trucks, commercial vehicles. Within that frame, and if you look at comparables like Volvo, or if you look at recently John Deere, who's acquired construction equipment, it shows that there is a validity of having within the scope of activities of a capital good business, this combination. On this note, I want to really thank you all for coming. If you have time, we wanted to take the opportunity also of mingling and having some drinks. Thank you.
Thank you very much, and thank you to everyone who's been listening.