Good day, ladies and gentlemen, and welcome to the first quarter 2010 Arch Capital Group earnings conference call. My name is Jennifer, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star followed by zero, and we'll be happy to assist you. Before the company gets started with this update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the federal securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Consequently, actual results may differ materially from those expressed or implied.
For more information on the risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements in the call to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on the company's website. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the conference over to your hosts for today, Dinos Iordanou and John Hele. Please proceed.
Thank you, Jennifer. Good morning, everyone, and thank you for joining us today. We started the year with a mild reminder that cat risk is part of our business and should not be overlooked. With multiple cats, cat losses were above long-term average in parts of the globe, with the Chilean earthquake being the most significant event. We fared reasonably well with our losses being slightly below that of industry averages. Our annualized return on average common equity was 9.8%, which in our view is not adequate over the long term. As I mentioned in our call last quarter, given the current market conditions in which we're operating in, a 10% ROE for well-capitalized companies is a realistic return for the 2010 underwriting year, even though it is not what we desire to achieve.
In our most important measure for creating shareholder value, which is our ability to increase book value per share, we had a much better result. At $76.91 per share, our book value per share increased 41% from a year ago and 5.3% sequentially from last quarter. From an underwriting point of view, we achieved a 96.4 calendar year combined ratio, which is very close to a normalized accident year combined ratio if you do the calculations. Cash flow from operations remains strong at $185 million, even though our book of business from prior years is maturing, our volume of business for more recent years has declined, and our mix of business is moving to more short tail than in the past. From a production point of view, our gross written premium was down 7%, and our net written premium was down 6.7%.
Insurance was down approximately 1% on gross and up 2.6% on net written premium. Changes in the mix of business and reinsurance structure explain the increase in the net written premium. We retain more of our low-limit small accounts business as we continue to shift that book of business in that direction. From a rate point of view, for the first quarter, rates for all lines of business were down 2% in the aggregate. The area that we saw the most competitive pressure, it was Executive Assurance, with commercial D&O being affected the most. Also, we have seen more competition in the property lines, with global property down 2% and E&S property down approximately 7% for the quarter. All other lines achieve at least flat or slightly positive rate increases for the quarter. Our reinsurance volume was down approximately 17% on both a gross and net basis.
Most of the reduction was as a result of clients retaining more business net and moving from quota share to excess of loss contracts, which although it may not affect the profitability of the business, it translates into less premium to reinsurers. Reinsurance rates and terms were generally stable, with renewal as expiring the most common outcome. In the face of rate decreases, even though small on the underlying primary business, together with claims inflation, we continue to see the deterioration in economics both for us and our cedents. In challenging markets Is the one in which we are now operating. We're always more conservative in projecting the future erosion of economics of the business we underwrite in reinsurance, and as a result, we're more cautious. In our insurance operations, we can change our underwriting posture almost immediately, while in reinsurance, we're making commitments for the entire year.
In our cat PML deployment, we have committed slightly less so far this year, but depending on how market rates move, we intend to deploy most or all of our capacity by the end of the second quarter. On capital management, our capital management philosophy, which we believe is an integral part of managing through the cycles, has not changed. We intend to continue to return excess capital to our shareholders as long as we do not see attractive opportunities to deploy it in our business. In the first quarter, we repurchased 2.5 million shares at an average price of $71.65 for a total of $181 million. At March 31, 2010, we had $810 million authorized for future share repurchases. Before I turn it over to John for more commentary on our financials, let me update you on our PML aggregates.
As of April 1st, 2010, our one in 250 PML from a single event was $719 million or 17.7% of common equity, down from $733 million at January 1st, 2010. This PML and the comparison to the prior quarter is for Northeast wind, and it was due in part to the seasonality of wind programs. Our Tri County, Florida, which is usually our highest PML area, was reduced from $750 million as of January 1st to $674 million as of April 1st. If we're successful in deploying more PML in the second quarter, we expect Tri County, Florida, to be our highest PML zone prior to the hurricane season, as it has been in prior years. With that, I'll turn it over to John for some more commentary, and when John is done, we will take your questions. John?
Thank you, Dinos. For the 2010 first quarter, premiums written by the insurance segment represented 66% of our gross volume and 59% of our net volume, about 4 points higher than the first quarter of 2009. Property and other short tail lines represented approximately 50% of our net premium volume for the first quarter 2010, about the same as a year ago. On a consolidated basis, the ratio of net to gross written premiums in the 2010 first quarter was 80%, the same as a year ago. Turning to our operating results, the consolidated combined ratio was 96.4% for the 2010 first quarter, compared to 86.7% in the 2009 period.
The 2010 first quarter loss ratio of 63.9% included 8.7 points or $58 million of current cat events, which were primarily related to the Chilean earthquake, compared to cat losses of 1.1 points or $8 million in the 2009 first quarter. The 2010 first quarter combined ratio reflected 4.4 points or $30 million of estimated favorable development, net of related adjustments, compared to 6.8 points or $48 million for the 2009 first quarter. The prior development in the 2010 first quarter primarily resulted from reductions in shorter tail property and property cat and other specialty reserves, along with continued favorable development in the reinsurance segment, medium and longer tail lines from older underwriting years.
These reductions were partially offset by an increase in the reinsurance segment for casualty in the 2008 underwriting year, along with increases in the insurance segment in a small number of high severity casualty claims from the 2003 and 2004 accident years. The 2010 first quarter loss ratio also benefited from relatively light claims activity in non-cat property classes. The 2010 first quarter underwriting expense ratio of 32.5% was 3 points higher than the 2009 first quarter, with a 0.5% decrease in the acquisition expense ratio and an increase in the other operating expense ratio of 3.5 points. The 2010 first quarter acquisition expense ratio was influenced by a change in the mix and type of business, as well as reinsurance commissions, and also reflected a +0.5 point due to net favorable development of prior year loss reserves, the same as in the 2009 first quarter.
The 2010 first quarter other operating expense ratio reflects the impact of lower earned premiums in the reinsurance segment and approximately 0.9 points of expenses in the insurance segment, which are not currently expected to impact the ratio for the balance of 2010. While the 2009 first quarter benefited from a higher earned premium base and approximately one point of reductions in compensation costs, which were non-recurring. Operating expenses also reflected costs related to the expansion of the insurance segment's presence in Executive Assurance and professional liability lines, the expansion in Canada, and the addition of the Lloyd's Syndicate. On a per share basis, pre-tax net investment income was $1.67 in the 2010 first quarter, 9% higher than the $1.53 in the 2009 first quarter, and 7% higher than the $1.56 in the 2009 fourth quarter. The growth reflects the accretive impact of share repurchase activity on per share results.
Total return of the investment portfolio was 1.58% in the 2010 first quarter. Excluding foreign exchange, it was 1.98% in the quarter. This return has been accomplished while maintaining our investment portfolio's average credit quality of double A plus. Our duration remained basically the same at 2.77 at March 31 from 2.87 at year-end. Given the significant impact on an insurance company of increasing interest rates, we continue to prefer a shorter duration versus a longer one. With our conservative investment outlook and low yields, we see new money three-year duration investments at approximately 2.5%-3.5%. We were able to increase our participation in TALF late in the first quarter, adding $153 million in assets with a corresponding increase in TALF borrowings of $128 million. Our total TALF assets are now $407 million, with a corresponding non-recourse loan balance of $347 million.
There are also additions of $90 million to other investments, reflecting new multi-asset portfolios in energy and global investments to further diversify the portfolio. The combined total of other investments and equity method funds remains at 6% of the total investment portfolio. Our balance sheet remains in excellent shape, and our financial flexibility remains strong, with total capital amounting to approximately $4.8 billion at March 31. Debt represented 8.4%, and hybrids represented less than 7% of our total capital. As of March 31st, we continue to hold approximately $600 million-$700 million over our targeted capital level based on current rating agency models with an appropriate buffer. Our liquid cash short-term investments and U.S. Treasury securities represent about 21% of our investable assets.
As Dinos mentioned, we bought back 2.5 million shares of our common stock under the share repurchase program in the first quarter at an average price of $71.65, or 96% of the average book value per common share for the period. This added $0.25 to book value in the quarter, and $2.52 on an inception-to-date basis. Since the start of the share buyback program in 2007, we have repurchased 24.5 million shares for $1.7 billion. We remain committed to efficient capital and insurance cycle management and continue to view buying back our shares when they trade below or close to book value as the best way to use excess capital. With these introductory comments, we're pleased to take your questions.
Jennifer, we're ready for questions.
Ladies and gentlemen, if you wish to ask a question, press star followed by one on your telephone. If your question has been answered or you'd like to withdraw your question, press star followed by two. Questions will be taken in order received. Please press star and one to begin. Your first question comes from the line of Jay Gelb from Barclays Capital. Please proceed.
Thanks. Good morning.
Hi, Jay.
Good morning. How are you?
I'm doing great. Thank you.
I was hoping to get a bit more color on a couple issues. First, premium volume for the second quarter. If Arch intends to deploy the majority of its reinsurance capacity in the first half, first, should we expect a decline in premium volume in the reinsurance segment, similar to what we saw in the first quarter?
Well, we don't try to project. As you saw from my prepared remarks, it will depend the rating environment, what kind of deals we believe make the cut for us. It's our intention to use our PML capacity between now and the beginning of the hurricane season. There is a big if. I don't know where the market is going to go. Right now, we're anticipating a slight reduction in rates, maybe 5%, maybe 10%. If it's 5%, we'll deploy more. If it's 10%, maybe a little less. If it's more than that, we probably won't deploy as much. I ceased to be a predictor of the future a long time ago, so.
Okay, fair enough. Next, can you give us a sense of, given where the stock's valuation is, how quickly you might finish up the remaining share buyback authorization? I believe you said $810 million.
Well, in our usual style, and you've seen our performance, usually fourth quarter, first, and second is where we do most of our purchasing. We try to ride out the hurricane season because we have significant cat exposure there and holding on to the capital to see how that happens. We have no intent of changing that. Basically, depending where the price is, if we're trading at around book value, as John said, we'll continue to buy shares and we'll try to buy the maximum that we're allowed on an average day.
Okay, great. My final question is a bit more big picture. Can you give us a sense of how you're thinking about what type of return on equity Arch can generate in the current environment, assuming maybe a bit more normalized catastrophe results?
Well, we truly believe that we're around the 10%. Part of it is not because our business is not healthy, it's a little better than that. We're carrying excess capital. In essence, the ROE might be still adequate, but the E is a little higher than what we will normally have. When I look at our numbers and our mix of business, and I think we have a good mix. I think we're more weighted to short tail than long tail, and more to small accounts than larger accounts. I truly believe that's where we are as an organization, and it's the best you can expect in this market. I don't think this market, on a policy year basis, is giving the industry the opportunity to do much better than that.
That's helpful. Thanks.
Your next question comes from the line of Joshua Shanker from Deutsche Bank. Please proceed.
Yes, thank you. I was interested in your PML disclosure and wanted to find out whether or not coming into the upcoming season, whether you're preparing that might change again, or what sort of are the drivers behind the adjustments in the PML?
Well, because it's seasonal, there is more deals that expose us into the Northeast on the January 1 renewals. You saw that our Northeast exposure jump ahead of our Florida exposure, especially Tri-County, which was always our peak zone. Because we deployed a little less PML in the first quarter. As I said, if all things being equal, we see the opportunities and what supply and demand the market might show us for the Florida season, probably we're going to increase PML in Florida and then, you know where our risk tolerance is. We will never go over 25% of common equity, but it's a big room between six of 74 and 25% of $4 billion. We got plenty of room to deploy PML. It will only depend on market conditions.
Do you think in terms of the early chatter that reinsurers might be able to extract a pound of flesh out of Chile, or that there's more respect for the risk associated with hurricanes? I'm sorry, earthquakes.
Well, we've seen a little bit of movement in the Chilean market. As a matter of fact, I have an underwriting team from our reinsurance group going down there in the next couple of weeks to get our boots on the ground, so to speak, and see exactly firsthand what's going on. So far, it hasn't translated to great opportunities for us, even though there's a lot of talk in the marketplace. We're looking at that. Unfortunately, we haven't seen the Chilean earthquake move attitudes in other parts of the world as of yet.
Understood. Well, thank you very much.
You're welcome, Josh.
Your next question comes from the line of Anay Musteed from Credit Suisse. Please proceed.
Hi, good morning.
Good morning.
Morning.
A question on the reinsurance margins. Those margins are really profitable this quarter, 49.1% accident year loss ratio ex cat. Just wondering whether that's sustainable. I believe you mentioned higher profitability on the fac business. If we just normalize that, what should be expected for the rest of the year?
Well, our book of business in the reinsurance segment is predominantly short tail. We expect to underwrite that business to an 85 combined ratio or better. Sometimes we do a little better, sometimes we do a little bit worse. It depends what happens with either regional cat activity or big cats. On a normalized basis, that's not a bad number.
Okay. An 85 combined ratio for the entire reinsurance segment, correct?
Yes. Based on the mix of business we have today. We don't see opportunities for that mix to be changing for the time being.
Can that exclude any favorable reserve development?
Yes. As we mentioned last quarter, this is going to bounce around more given we're in shorter tail businesses now. Property cat can have very low claims in a quarter, can have some higher claims in a quarter from time to time. You need to really think about this on a rolling four-quarter average or something versus any one quarter.
Attribution of losses might go up and down a bit. It's short tail, and you put some big limits out, and occasionally, in one quarter, you might have. I think the profitability we like. The smoothness is not there, but who cares? We underwrite always for the long term. That's where we focus our underwriters to be thinking about.
Okay, great. Could you give us some color on the adverse reserve development on the primary insurance segment, please?
Yeah. It's pretty simple. We had one account that we wrote a lead umbrella on $25 million in 2003, $25 million in 2004. It was a product involved that, I'll give you more detail that you want to hear, but that had phosphorus in it. It was in the market for 70 years, never had a problem, and then in, I don't know exactly, 2007, 2008, there were starting to be some claims, some allegations that it was causing bladder and kidney problems to certain individuals. There were several lawsuits. We were defending those lawsuits. We felt pretty comfortable with the outcome. Unfortunately, the outcome went against us. In essence, out of one account, we had a significant loss, a $50 million gross loss and a net of about 50% of that, around $25 million.
Having said that, instead of us trying to either reduce IBNR and all that, we took it as kind of a cat loss, and we reserved for it fully, and we let it flow through our books. The big question is, should our claims department would have put a bigger number earlier on or later? Listen, based on the facts of how we knew them, and we were very confident, both us and our client, that we had a good case. Sometimes you lose good cases, and in this particular one, we've lost it.
Just to get this right, you had a $25 million adverse reserve development from that one case?
Not entirely $25 because we had some reserves.
Yeah.
We thought we might get a settlement, but we didn't think we're going to lose the entire amount for both years, and that was the outcome.
Okay, fair enough. Looking at your primary insurance business, you've been reserving it at a very high level. I would have expected some amount of favorable reserve development. Is there any reason we've not seen that so far? Have we not looked at your prior years?
Well, we don't look at every line of business every quarter. All of our casualty is going to be reviewed at mid-year. We do the reviews at mid-year and year-end. Whatever our triangles tell us, we'll take appropriate action in due time.
Okay. Thank you.
You're welcome.
Your next question comes from the line of Matthew Herman from JP Morgan. Please proceed.
Hey, good morning, everybody.
Hi, Matt.
Hi. Couple questions, if I may. First, the conversation we've had around the accident year combine ratio and the reinsurance segment makes a lot of sense to me. I guess I'm struggling a little bit more with, given the commentary on pricing versus loss cost and primary insurance, that the ratio there is maybe not deteriorating a little bit more than it has. I guess, could you just talk to that and whether or not there are any, I don't know if maybe if economic-related reserves or losses are fading and that's influencing that, but just any color on that would be great.
You saw us how conservative on the reinsurance side. We rather lose volume than really reduce margin significantly. Not that we're not trying to maintain volume. We try as hard as we can, but sometimes we have a disagreement between what we believe the profitability of the underlying book is versus what our cedents believe it is. You see us walking away from some business, and of course, sometimes and usually some of our clients, when their book of business is profitable, they retain more net themselves. That's been our approach on the reinsurance. Having said that, you've seen a mix starting to change. We're writing a lot less quota share. Not that we're growing the excess of loss that much, but in essence, as a ratio, that has been changing because we don't write as much quota share.
We believe that we're maintaining margins, and we keep looking at the accident year loss ratio in what we do by segmenting the reinsurance, and we feel comfortable with the numbers that we have.
Okay. With respect to the primary segment, though, the reinsurance makes sense. If I look at the percentage of
Right
property and other
Well, I mean-
it's gone up, almost doubled. In primary, if I look relative to the last three years, it hasn't changed all that much.
Well, don't forget, the mix has changed significantly, right? If you go in a supplement and you look where we're writing business, you will see that there is more property, E&S, there is more professional liability. All these segments, professional liability, small accounts, they have a much lower loss ratio. They do have a higher expense ratio, and that's why you see our expense ratio going up. It's the same thing with the property. Property and E&S business has a higher expense ratio because most of the business come from wholesalers. The commission cost is higher. You have to go and analyze the book and the shift in mix that we have before you can see that our accident year loss ratio.
As a matter of fact, our accident year loss ratio improvement this quarter versus maybe a year ago or a quarter ago, which is slight, is mostly because of the change in the mix.
Okay. I just wanted to clarify something in reinsurance and with the quota share in XOL or the less quota share. Is that primarily affecting the casualty writings or is there some impact on property as well?
Well, property CAT is always XOL. Property other than CAT, sometimes we write it XOL, sometimes on a quota share. A lot of the casualty lines, especially excess casualty lines, we always like to write on a quota share. When cedents try to move it to XOL, we usually don't find an agreement what is the proper rate. For that reason, I think, we write a lot less than most reinsurers.
Okay, that's fair. Then, just if I could sneak one other in. I think the increase in the privately held securities that was addressed in the quarter, what is it about those assets that you put them in privately held versus the equity method accounting?
Well, John will give you an explanation.
Sure. As opposed to holding them in a mutual fund or something, we actually create a separate account. We can then own the assets in our own account, and we have an outside manager manage it for us, and these sort of specialty funds. With the book value accounting, we get the full investment income flowing through.
Yeah. You see, it's our preference not to be a participant in a fund. If we like the manager and they're willing to do a segregated account for us, that's our preferred way of investing. We're not always successful, but we always look for those opportunities. Where we find them, we do it in that fashion.
Am I right to assume that even though it's in that account for balance sheet presentation, it'll get mark-to-market treatment on the income statement?
No, it get mark-to-market on the balance sheet.
Will that change in value flow through the income statement?
No, only when assets are sold or certain assets might if they bought a derivative, because it's a multi-asset, there won't be much of that. The domination of it will be book value.
What you realize.
P&L. Right.
Okay. Is it actually private investment in private companies, or is it broad PE portfolios or-
No, it's a broad range of some energy assets and also some multi-asset categories with another manager that can also be a bit global in nature.
On a segregated account that is only for us.
Yeah.
Yeah. Okay. Are any of the underlying investments in publicly traded securities or?
Yes.
Oh, yes.
Yeah, absolutely. Yeah.
Okay. All right. Thanks.
Your next question comes from the line of Mark Dwelle from RBC Capital Markets. Please proceed.
Yeah, good morning. A lot of my questions have been asked and answered, a couple more still. I know on the acquisition costs, a lot of that moves around as a result of mix. Are you seeing any significant changes just in the underlying rates that you're paying in terms of the different places?
You mean commissions that we're paying, right?
Correct. Yes.
Yeah. Probably it's costing us about, forget about the mix change, probably it's costing us about one point higher year-over-year. I think we're compensating our producers a little better this year than we did a year ago.
Is that both on the reinsurance side as well as the insurance or?
Yes, I think there is pressure on both sides. Ceding commissions ask and what we pay in reinsurance have inch up, also commissions have move up on the insurance side, too.
Okay. The other question is, I'm sure you probably don't know amounts yet, but do you have any exposure on the Deepwater Horizon rig failure?
Yeah. We have some exposure, is minimal. I think between insurance and reinsurance on the first-party covers, if it's a total loss, like $800+ million for the industry, it probably will cost us around $13 million. On the liability side, we have exposure excess of half a billion dollars. Too early to tell. First of all, it's a lot of issues as to is the owner responsible or the operator, and how those contracts go, et cetera. Also is the third-party liability, which is mostly depending if they will plug the well or not and how much oil they'd be losing, and will it get to the shore. Too early to tell about if that is going to be a significant loss. The limits we have excess a half a billion, not significant to really be a big event for us.
That's what we have, and that's what we know so far about that platform.
Okay. Thank you very much. That's all my questions.
You're welcome.
The next question comes from the line of Brian Meredith from UBS. Please proceed.
Hey, good morning.
Hi, Brian.
Two quick questions here for you. First one, Dinos, can you talk about how you protect yourself in Florida in the reinsurance business from credit issues from the cedents?
Well-
Is it a problem, right?
Yes and no. It depends whom you underwrite and what you do. We don't have a significant number of these, what we call monoline subs that might not be able to pay you reinstatement premium, et cetera. When you're going to price or you're going to structure the deal, you got to take that into consideration that, excuse me, are you writing the business with the probability that if you have that event, if you're going to try to reinstate limits, you might not get the reinstatement premium. That's where most of your exposure is going to be. Of course, you might get exposure if you're trying to write it with installments, which we don't like to do.
There is a little bit of risk, but it's part of the underwriting process, understanding what credit risk you have in a particular deal and how to deal with it. We don't write a lot of these small monolines. A lot of what we write in Florida comes from the bigger companies and national programs.
Okay, good. The second question, Dinos, can you talk about any changes you've seen in the marketplace in terms and conditions in the first quarter? Heard some from other carriers that things started to weaken up a little bit more.
No, I just came from a nationwide trip. I visited a lot of our branch offices just to stop being bored in Bermuda. I visited the U.S. I'm scheduled to go to Europe in a week. The flavor of what I got, there's been more ask and more request for broadening terms. At least the E&S market is resisting it. They're losing business because of it. We've seen a more rapid movement of either classes of business that in our view, of course, it's a biased view, being an E&S writer belonging the E&S market moving into the standard markets. Also we see standard markets writing a broader contract with less exclusions on it. It hasn't affected our book other than volume. Basically I think it might affect some that the standard markets are writing.
Only time will tell if they're making the right calls or the wrong calls. It's not just price, it's ease of doing business, getting admitted paper and not having to collect surplus lines tax and remit it, having a broader contract. Some of that business is moving to the standard markets. I don't like it, but I know that the market won't turn until that happens. It's always in my view, a predictor that we getting on totally the bottom of the market. I think we have probably reached close to the bottom of the market. At some point in time, it's got to go the other way because we've seen these kind of things. It hasn't got as crazy as it was in 1999, for example. This is not 1999 yet.
We got a little more room to go before we get crazy, but not a good market to operate in.
Thank you.
You're welcome.
Your next question comes from the line of Dean Evans from KBW. Please proceed.
Yeah, thanks. Most of my questions, I guess at this point, have been answered. I just wanted to tie back a little bit to the discussion we had on the accident year loss ratio. We covered a lot on the reinsurance side. Could you give a little bit of color maybe on the insurance side? That also seems sort of a bit lower than what we've seen for recent trend. Is there anything one-off in there driving it or anything else?
Well, no, it's the change in mix. When you add the components, as a matter of fact, we have in-shop accident year anywhere from one to three points, depending on the line of business based on what we see from our rate monitoring systems. The mix is changing by what I said before. We're writing a little more professional liability. We write a little more of A&H business. We're writing a little more of even Executive Assurance, both in the U.S. concentration in the non-for-profit or small account D&O. Most of what we do in Europe is all in the SME, which has a lower loss ratio. I think it's the mix that is causing it.
It's almost the same as it was in the fourth quarter, I think, if you look at the trend.
Yep.
A year ago, there were some just one time current year losses in there. I think there's an aviation loss a year ago that lifted up a little bit.
Right.
There's no material difference really between what we've been doing.
You saw we're booking it at about 72% or so, or thereabout, which is what we believe our mix on an accident year is.
Perfect. That's very helpful. I guess also wanted to touch on an item that's a little bit less exciting now than it was maybe a year ago, but the bank loan pools. Can you just sort of give us an update on those, where they're marked and kind of how those are playing out so far? Have you been active at all in the business?
They have been performing extremely well in the quarter. We have still on our supplement on page 16, the $439 million, and I believe they returned about 5% in the quarter. They really had a solid return. These are senior loans, and as the global economy stabilizes, then these are going to be in continuing better shape.
At this point, I guess I'm just trying to get at how much upside is there really left in them, or do you know where they're currently marked for?
Yes. We didn't print it in this supplement. It's around slightly over 80%, 85%. We'll see how the global economy goes.
They're not at par yet. They're very close to where we actually bought them.
Yeah.
We were buying these things at about $0.85 on a dollar before even we delever some of them. When we delever actually our cost even went below that. I don't know if there is a lot more upside to it, but they're performing very well. Don't forget, we're clipping a pretty good coupon on these.
Yeah. I'm personally not counting a lot of upside from this, but it's a good coupon, as Dino said, and gives us some solid investment income.
Okay, perfect. Thank you very much.
You're welcome.
Your next question comes from the line of Jay Cohen from Bank of America Merrill Lynch. Please proceed.
Good morning, guys.
Hi, Jay.
Question is on the claims side. You look at your accident year numbers ex cats, and again, as the business mix shift, because there's no disturbing trend there, you're still seeing, at least on the reinsurance side, the favorable development. You take this data, it appears as if the claims trends really haven't escalated yet. Is that an accurate assessment?
Yeah. The trend is positive, so you got to account for it. When we see frequency and/or severity, and listen, forget about the one account that we slip on a banana peel. Occasionally it happens, and it happened to us on that account 2003, 2004 writing. Other than that, I'm not seeing anything in the data that tells me that I ought to worry a lot about frequency. Severity is going up, but it's part of the trend. Basically, we try to adjust our accident year projections in that combination, where we see trends going from a claims trend and also trying to factor in rate increases or reductions that we're getting. In a lot of our business right now, we're flattish, a little bit plus, at least for our book.
Of course, as I said, Executive Assurance in the second quarter and property brought the overall aggregate to a minus two. That's not a good number in a soft market to be still losing a little bit of rate. Then you have to make up for claims inflation for the trend. Things are getting slightly worse. The margins are getting slightly worse. That's the environment that we live in.
Clearly, you guys are obviously, as evidenced by the declining premiums, you're allowing business to go and instead buying back stock.
It's-
rational approach at this point.
No easy to do, Jay. Sometimes, when I go home, my wife beats me up.
All right. Thank you.
Your next question comes from the line of Ian Gutterman from Adage Capital. Please proceed.
Hi, Dino.
I thought you're going to be quiet, it never happens, right?
First, can I get you to clarify, it sounded like you said that you have $500 million of liability on the oil rig. I assume you meant the market does?
Yeah. If the first-party losses, which is over $800 million or so, goes, which we believe is probably a good outcome, our net exposure to that is $13 million.
Right. On the liability, you said something about a $500 million. It sounded like you said that was your line.
No, no. $500 million were excess of an attachment point of $500 million.
Excess of 5. Okay. What's your line size on that?
It's difficult. The reason I'm hesitating is because on the reinsurance, I don't know how many of our clients they have a position yet. Very hard for me to count. Our limits of our line size of when we participate in these treaties, they're small, so it's not going to be a significant event for us.
Got it. Just checking. Okay.
Yeah.
Just following up on the whole accident year topic, and I guess on the reinsurance. That 85% sort of normalized you talked about. What's the cat load involved in that?
The cat load is about 18, 20 points. Normalized cat load.
Okay. I guess what I'm looking at, when I'm looking at your accident year ex-cat for the last several years, it's been in the 83%-85% range.
Yeah.
You're saying with cats it's an 85, no?
Yeah, with normalized cat. That's what we expect. That's what we're pricing that business, yes.
Right. I'm saying when I look at it ex-cats. If I look at your reported accident year ex-cats.
In the reinsurance side?
Yeah, for the last four years, 83 in 2006, 83 in 2007, 85 2008, 84 2009.
I don't get to those numbers unless you're looking at the total book, including the casualty book.
Okay. Well, I'm looking at the reinsurance segment. You were just talking about the property segment.
That's correct.
Okay. I thought that 85 was-
No. I hope we're that good, but I don't think we are.
Okay. That's why I wanted to clarify that.
Yeah. Just the property, right.
That makes more sense. When I look at the accident year ex-cat this quarter, I think it's the lowest you've ever had almost. I understand there were a lack of attritional losses. What's a normal attritional loss load?
We have a normal attritional, depending by class and all that we underwrite to. When we report numbers, it's whatever happens, some quarters is a little less and some quarter is a little more. We don't publish our numbers based on expectancy.
Sure.
We base our numbers on actuals, right?
Right.
I'm not trying to avoid your question, if I'm writing, let's say, a homeowner's quota share with a cat load, maybe the attritional, it might be in the 30, 35, sometimes 40%, depending on what part of the country. I have a cat load that it might be maybe as low as 15 or as high as 20, depending if it is wind cat, or it might be middle of the country and it's more tornado hail cats. There is a lot of determinations that goes into our pricing when we price a particular line. When you aggregate all these deals, you come up with your annual expected attritional for that year. It might change on you the following year because the deals change.
Right. Okay. The reason I'm asking is
I know why you're asking. You want to build your model, right?
Well, no. What's interesting is pretty much everyone who's reported so far has shown improved accident years. A lot of the argument for most companies has been the attritional loss. There's been other quarters where there's been light losses, and we don't see this kind of improvement. Given what's gone on in pricing over time, you would think accident years would be getting worse.
Right. Don't forget, a year ago, you're comparing me to, and we mentioned in our call, if you go back and look at the transcripts
Right
We had unusually high attritional losses a year ago.
Right. Agreed. I'm looking at the trend, to be honest, not just a pure year-over-year. I'm just looking at where it is now versus the past four to six quarters.
Right.
It seems everyone's doing better than that, which you was thinking where pricing has gone, you would think everyone would be taking ticks up. I guess I'm just wondering-
There is probably everybody, we agree with that assessment. Let's face it, the Executive Assurance, the D&O world probably had worse years in 2007, 2008 because of the financial crisis. 2009 and 2010, they're going to be better numbers. We might have disagreements, some they're more optimistic than others. I think that has improved, even though we're competing so hard with it, maybe whatever improvement we might be giving it back because of rate reductions. We try to see where that's going. Other than that, I-
The shift from long tail to short tail in reinsurance is quite a big shift over the last three years.
Right.
Right.
If you think of the mix, that's going to affect the current accident year loss pick.
Okay. No, that all makes sense. It's just I want to make sure that we're not just attributing everything just to a light attritional quarter.
Just the mix.
Yeah. Okay. That makes sense. I think that's all I had. Thanks.
Thank you.
There are no further questions at this time. I would like to turn the call over to Mr. O'Donnell for closing remarks.
Thank you, Jennifer. Thanks everybody for listening to us. We're looking forward to talking to you quarter from today. Have a good day.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.