Good morning, and welcome to the second quarter 2016 AXIS Capital earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Linda Ventresca. Please go ahead.
Thank you, Carrie, and good morning, ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the second quarter ended June 30th, 2016. Our earnings press release and financial supplement were issued yesterday evening after the market closed. If you would like copies, please visit the investor information section of our website, www.axiscapital.com. We set aside an hour for today's call, which is also available as an audio webcast through the investor information section of our website. A replay of the teleconference will be available by dialing 877-344-7529 in the United States, and the international number is 412-317-0088. The conference code for both replay dial-in numbers is 10088680. With me on today's call are Albert Benchimol, our President and CEO, and Joseph Henry, our CFO.
Before I turn the call over to Albert, I will remind everyone that the statements made during this call, including the question and answer session, which are not historical facts, may be forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements contained in this presentation include, but are not limited to, information regarding our estimate of losses related to catastrophe policies and other loss events, general economic capital and credit market conditions, future growth prospects, financial results and capital management initiatives, evaluation of losses and loss reserves, investment strategies, investment portfolio and market performance, impacts to the marketplace with respect to changes in pricing models, and our expectations regarding pricing and other market conditions.
These are important factors that could cause actual results, level of activity, performance, or achievements to differ materially from the results, level of activity, performance, or achievements expressed or implied by the forward-looking statements, as are further described in the risk factors set forth in AXIS's most recent report on Form 10-K and our other documents on file with the SEC. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, this presentation contains information regarding operating income, our consolidated underwriting income, and adjusted group and segment results, which are non-GAAP financial measures within the meaning of the U.S. federal securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release and financial supplement, which can be found on our website.
With that, I'd like to turn the call over to Albert.
Thanks, Linda. Good morning, everyone. Thank you for joining us today. Last night, AXIS reported second quarter net income of $119 million, or $1.29 per diluted share, and operating income of $47 million, or $0.51 per diluted share. As noted in our pre-announcement of July 18th, this quarter was impacted by 20 catastrophe and weather events, leading to $104 million of second-quarter catastrophe and weather losses. We ended the quarter with diluted book value per share of $57.62. Growth in diluted book value per share adjusted for dividends, which we believe is the best measure of value creation, was up 3% in the quarter and 14% over the last 12 months. Joe will shortly review the financial results in more detail, but before that, I'd like to put our quarter's results into context.
The insurance industry occasionally experiences quarters with unusual catastrophe frequency or severity, this was one of them with over $19 billion in estimated insured losses. Our estimated market share of the losses is consistent with our positions in the lines and geographies exposed and meaningfully lower than our average share in prior years. We're pleased that our actions in recent years positioned our portfolio to better absorb catastrophe and weather activity and deliver strong book value growth. Importantly, all relevant metrics in our second quarter and year-to-date results demonstrate clear progress along the various initiatives focused on delivering a consistent, attractive return to shareholders.
In addition to a lesser impact from catastrophes and weather than we would have experienced a few short years ago, our accident year loss ratio and combined ratio, excluding the impact of catastrophes and weather, improved over the quarter and the year-to-date, even as we and the rest of the industry experienced weaker pricing. A significant highlight of this quarter was the launch of Harrington Re, co-sponsored by AXIS Capital and Blackstone, with total capital of approximately $600 million and an AM Best rating of A-minus. This important development significantly advances our 21st-century approach to capital management, whereby we complement our own balance sheet with a broad range of third-party capital to deliver enhanced capacity, innovation, and tailored solutions to our clients and brokers.
With Harrington Re, AXIS will be able to deliver more capacity to profitable opportunities, have enhanced capital flexibility, and generate an attractive flow of fee revenue. Our commitment to intelligent capital management was further demonstrated by the repurchase of $127 million in stock during the quarter. Far this year, we've returned $332 million to our shareholders in the form of dividends and share repurchases, representing 223% of year-to-date operating income. If current conditions hold, we intend to continue repurchasing stock for the remainder of the year and into the foreseeable future. We're pleased with our progress along strategic and operational initiatives and are focused on continuing the diligent execution of our plans to position AXIS as a leader in specialty risks, delivering superior value creation to its shareholders. With that, I'll turn the call over to Joe.
Thank you, Albert, good morning, everyone. During the quarter, we generated good results featuring net income of $119 million and an annualized ROE of 9%. Our operating income for the quarter was $47 million, an annualized operating ROE of 3.6%. Our net income this quarter benefited from a strong performance from our investment portfolio, including realized gains, foreign exchange gains, continued favorable prior year development, a decrease in our ex-cat and weather current accident year loss ratio, and lower general and administrative expenses. These positive factors were offset by an elevated level of catastrophe and weather-related losses in the quarter.
Despite the headwinds to net income, book value per share grew 3% in the quarter, favorably impacted by an increase in unrealized gains on our available-for-sale investment portfolio, which reflected downward shifts in sovereign yield curves and tightening of credit spreads, partially offset by strengthening of the US dollar against the EUR and GBP. Before I get into specifics, I'd like to provide some context for premium growth in our reinsurance segment, both in the quarter and year-to-date. First, there were some significant transactions, which I'll explain shortly. The more moderate growth adjusting for these transactions primarily reflects expansion of our relationships with key customers. Second, we have increased retrocessions, which are reflected in the ceded premium ratio of our reinsurance segment increasing in the quarter to 10%.
Half of these cessions were to third-party capital providers, that will increase in the second half of the year and beyond with our new Harrington relationship. It is our expectation that Harrington will be writing at a net premium to capital ratio in the range of 0.25 to 0.3 to one, and this will be entirely sourced from AXIS. There will be increased impacts on our financial results prospectively as our third-party capital activities ramp up, including a growing stream of fee income. Moving into the details of the income statement, our second quarter gross written premiums increased by 11%, with growth reported by both of our reporting segments. This number is inflated by multi-year treaties and timing variations. Adjusting for these, gross premium growth would be 5%.
In the second quarter of 2016, our reinsurance segment top line was up $109 million, or 26%, compared to the same period in 2015. Treaties written on a multi-year basis, primarily in our liability line of business, had a significant impact on our premiums written with approximately $37 million of quarterly premium variance attributable to future underwriting years. A significant professional lines client changed their treaty from an excess of loss to a quota share structure, which resulted in $30 million of additional premium. Timing differences of approximately $19 million also had a favorable impact on our premium growth this quarter, primarily in our professional lines, where the restructuring of a large quota share treaty affected the timing of premium recognition.
Adjusting for these items, our gross written premium grew $23 million, or 5%, most of which was increased participations on existing treaties, as well as a small amount of growth in our property catastrophe and liability lines. Our insurance segment reported an increase in gross written premiums of $23 million, or 3% in the second quarter compared to the same period in 2015. Increased premiums from new business written in our property lines were partially offset by a reduction in our professional lines due to the recent exit from retail insurance operations in Australia. For the six-month period, gross written premiums were up 14%. Adjusting for multi-year and timing differences, we estimated that figure would have been 10%. Net premiums written increased by 6% in the second quarter of 2016 compared to the same period of 2015.
An increase in the reinsurance segment was partially offset by a slight decrease in the insurance segment. Adjusting for multi-year and timing differences, volume would be down 4%. Reinsurance net premiums were up 17% in the second quarter of 2016 compared to the same period in 2015, reflecting the increase in gross written premiums in our liability, professional, and catastrophe lines, partially offset by the increase in premiums ceded principally in the catastrophe and credit and surety lines. Insurance net premiums were down 1% in the second quarter of 2016 compared to the same period of 2015, impacted by an increase in the premiums ceded following increased reinsurance protection purchased principally in the professional lines. Net premiums earned increased by 1% in the second quarter of 2016 compared to the same period of 2015. An increase in the reinsurance segment was partially offset by a reduction in the insurance segment.
The increase in net premiums earned reported by our reinsurance segment was largely driven by growth in business written in our liability, marine and other, and catastrophe lines in recent periods, partially offset by an increase in reinsurance purchased in our catastrophe and property lines. The decrease in net premiums earned reported by our insurance segment was primarily driven by a reduction in business written in our marine lines in recent periods, as well as increases in premiums ceded in our professional lines, partially offset by growth in our accident and health lines. Our second quarter consolidated current accident year loss ratio increased by 6.5 points to 75% compared to the same period in 2015, driven by a 7.6% increase in the cat loss ratio. This was driven by an elevated level of catastrophe and weather-related losses.
During the quarter, we incurred $109 million, or 11.7 points on our current accident year loss ratio in catastrophe and weather-related losses, net of reinstatement premiums, compared to $39 million, or 4.1 points of such losses in the same period of 2015. In our pre-announcement last week, we reported losses of $104 million for Q2 2016 events, including $41 million for our insurance segment and $63 million for our reinsurance segment related to events that occurred in the second quarter, including the Fort McMurray wildfires, U.S. weather events, Japanese and Ecuadorian earthquakes, and European floods. In addition, for the current quarter, we reported $5 million of losses attributable to development of first quarter U.S. weather events. Our ex-cat and weather current accident year loss ratios improved to 63.3% compared to 64.4% in 2015, with decreases in both segments.
The insurance segment's current accident year loss ratio, ex-cat and weather, improved by 1.3 points to 63.2% compared to the same period in 2015, primarily due to a decrease in midsize loss experience in both our marine and property lines. Our reinsurance segment current accident year loss ratio, ex-cat and weather, decreased by 1% to 63.4% compared to Q2 2015, primarily due to the recognition of better-than-expected recent attritional loss experience and business mix changes across various lines of business. Year to date, our current accident year loss ratio increased by 3.5 points to 69.2% compared to the same period in 2015, driven by a 4.3 point increase in the cat loss ratio. We reported $124 million of cat and weather-related losses, compared to $47 million in the same period of 2015.
After adjusting for these events, our current accident year loss ratio improved to 62.4% compared to 63.2% in 2015. The decrease was due to an improvement in midsize loss experience in our insurance, marine, and property lines, together with the recognition of better-than-expected recent attritional loss experience across various lines of business, partially offset by the adverse impact of rate and loss trends. Turning to loss reserves established in prior years, our results continue to benefit from net favorable loss reserve development, which amounted to $78 million during the second quarter. Short tail classes in both segments contributed $27 million of this balance. In addition, our professional insurance and reinsurance reserve classes reported $15 million. Our motor reserve class contributed $17 million, and our liability reinsurance reserve class contributed $15 million of net favorable prior year development during the quarter.
Our year-to-date favorable loss reserve development was $148 million compared to $121 million recognized during the first six months of 2015. During the three and six months ended June 30, 2016, our acquisition cost ratio increased modestly by five tenths of a point and eight tenths of a point respectively, compared to the same periods in 2015, driven by increases in our reinsurance segment. Our reinsurance segment ratio was 25.1%. However, after adjusting for the impact of loss-sensitive features due to favorable prior year development reported in the quarter, the ratio would be 23.9% and is comparable to 2015. It is important to understand trends in our results when it comes to the treatment of prior year business that includes adjustable sliding scale commissions based upon loss experience.
In the periods that loss experience is favorable, our results will show an increase in favorable prior year development and the current year acquisition cost ratio. For Q2 2016, this primarily relates to our professional and motor lines of business. Decreased acquisition costs in our insurance segment were driven by higher ceding commissions following the expansion of our reinsurance programs, which were partially offset by higher commissions in certain lines of business. Our G&A expense ratio in the second quarter was 15.4% compared to 15.8% in the same period of 2015. On a year-to-date basis, our G&A expense ratio was 16% compared to 16.9% in the same period of 2015. Removing the effects of some one-time items in both periods, expenses declined due to lower direct and performance-based compensation. Overall, we reported underwriting income of $10 million and a combined ratio of 102.2 for the second quarter.
On a year-to-date basis, our underwriting income was $109 million, with a combined ratio of 97.2. Net investment income was $92 million for the quarter, an increase of $43 million from the previous quarter, and is comparable to the second quarter of 2015. The improvement from the first quarter reflects a return to hedge fund performance to more normal levels. In aggregate, the total return on our cash and investment portfolio for the quarter was 1.2%, 1.4% excluding the impact of foreign exchange. The total return in the current quarter benefited from a downward shift in the sovereign yield curves and tightening of credit spreads on investment-grade and high-yield corporate debt, partially offset by the decline in the British pound and euro FX rates.
Our net income reflected a large increase in foreign exchange gains, driven by the impact of the appreciation of the US dollar on our foreign-denominated liabilities, as well as realized gains on our investment portfolio. During the quarter, we repurchased an additional $127 million worth of common shares, comprised of $125 million purchased pursuant to our board-authorized share repurchase program and $2 million relating to shares purchased in connection with the vesting of restricted stock awards. At July 22nd, 2016, the remaining authorization under the repurchase program approved by our board of directors was $500 million. We continue to make strong progress on the strategic goals and expansion opportunities with our $100 million investment in Harrington Reinsurance Holdings Limited, the parent of Harrington Re Limited. As I'm sure you're all aware, a subsidiary of AXIS Capital has been appointed exclusive liability manager for Harrington Re.
This role will involve responsibility for negotiating and sourcing reinsurance business for recommendation to the management of Harrington Re. We noted previously that the impact of third-party capital activities will ramp up through the balance of the year-end. Commencing with the next quarter, we will provide disclosure with respect to premiums ceded to Harrington and other capital providers, as well as the fee income generated. With that, I'll turn the call back over to Albert.
Thank you, Joe. Turning to industry conditions as we look forward, notwithstanding the high loss quarter we just experienced, we expect market conditions to remain generally challenging, with localized firming where there is no escaping the need for improvement. In our insurance business, renewal rates were down 4% on average, as compared to down 3% in the earlier quarter. Casualty lines in the U.S. are strongest with positive rate change, while professional lines are flat to down modestly and property-related lines down the most. The London market is the most competitive, with international property and energy lines still down double digits. We're managing our activities accordingly, emphasizing service, responsiveness, and claims management as our differentiators. In the reinsurance market, we are encouraged by increasing signs of discipline, at least in North America. You'll recall we expected this in the most recent renewals, and we have observed that.
Most Florida renewals were completed flat to -5%, and some accounts renewed at better terms. Following the June 1st renewals, there was strong demand for capacity that was generally only provided at higher terms. In professional and liability lines, cedents and brokers were pushing for better terms and ceding commissions, generally faced strong pushback, especially from established industry leaders, a number of placements were not completed even at flat ceding commissions. While we are not expecting across-the-board reinsurance price increases in the immediate future, we believe we are close to a floor, especially in North America. We expect Europe to be a bit more competitive and smaller international markets the most challenging of all as capacity continues to exceed demand. Approximately 10% of AXIS Re's 2015 expiring premium was renewable in July.
For us, volume and price technical ratios were essentially flat with expiring as we managed our book to protect balance and profitability. Through these renewals, we continue to see an encouraging contraction of reinsurer panels as cedents position themselves to retain high-quality capacity to support their strategic positioning and growth. AXIS Re does very well in that environment as we provide outstanding product expertise, service, capacity, and cooperative claims management. As Joe noted, much of our reported growth in reinsurance gross premiums written for the second quarter and year to date was related to multiyear deals and timing, such that our growth in estimated gross annual premium was close to 10%. You'll also observe, however, that we are ceding more of our reinsurance premiums, leading to mid-single-digit growth in net reinsurance premium.
This increase in cessions will accelerate in the second half of the year as we start sharing some of the risk with Harrington Re. That will happen through quota shares of business that we write for ourselves to ensure the right kind of alignment between ourselves and our capital partners. Increasing our cessions in both insurance and reinsurance is consistent with our 21st-century capital management philosophy. We intend to respond constructively to our clients and brokers when terms and conditions make sense. All the while, expanding our risk funding flexibility and matching risk with the best source and form of capital. We fully intend to leverage our intellectual capital and relationships to do more for our clients and brokers on the one hand Provide attractive risk return opportunities to investors across the globe and enhance our ROE in the process.
Our path to leadership in specialty risks rests on a customer-centric front end characterized by expertise and responsive service, an efficient operating structure that delivers decision-enhancing analytics and multiple sources of risk funding to maximize capital flexibility and operational leverage. We've made great progress along these three pillars, and we remain committed to executing on this strategy for the benefit of our clients and brokers, shareholders, and employees. With that, let's open the call for questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Kai Pan of Morgan Stanley. Please go ahead.
Good morning, and thank you. First question, Albert, you mentioned in the past few years you have been optimizing the portfolio for lower volatility business, and the second quarter cat is kind of a real-life test of that strategy. Can you expand a little bit more on the performance of portfolio versus expectations? If the 3.6% operating ROE is still not ideal, do you see further reduction in the cat's volatility?
Thanks for that question, Kai. I would separate that question into two, which is how do we feel about the changes in our cat book volatility, and secondly, what are we doing to improve our overall ROE? We'll take a look at this quarter, and this quarter is really every event in every quarter is a single data point. Of course, you don't want to generalize just from one quarter. If you take a look at where we were in the 2010 to the 2012, '13 period, and you look at the various cat quarters and cat events that we had, our average market share of loss in that period was a little above 1.1%. Our share of loss in this quarter is 0.5%.
If you look at the second quarter of 2013, which was another second quarter with multiple events, that was a quarter with approximately $12 billion-$13 billion of cat events across the industry. In that quarter, we reported $140 million of cat losses or 1.1% share of the reported losses in that quarter. If you then turn around and by the way, that was also about 15 points of cat losses in the second quarter of 2013. If you look at the 2016 second quarter, this is a quarter where people are estimating $18 billion-$20 billion. We're using a $19 billion number. With that $19 billion, our market share of loss is not 1.1 like it was in 2013, but 0.5. The combined ratio impact of those events was not 15, but 10.7, and the book value loss was lower.
I feel good that we have had significant change in our sensitivity to catastrophe events across the world. Does that mean that we're happy with where the portfolio is now? Of course not. We can always improve it, and we will continue to do so. But I think that in this one event, and again, it's a single event, we want to see more quarters to demonstrate that. But certainly, if you look at the second quarter of 2016 compared to what our cat book did in the 2010-2013 period, I would say that the exposure is about half of what it was then. Now, with regards to the overall profitability, you're absolutely correct. We are not happy with the overall ROE, and we will continue to work on our portfolio to improve the profitability of our portfolio as we go forward.
There, I'm very encouraged by what we're seeing in 2016. As we mentioned in our prepared remarks, our loss ratio is down over a point in the second quarter and six months, notwithstanding the fact that over the last 12 months, we in the industry have experienced, I'm going to say approximately 1.5-2 points of adverse rate and trend. We're continuing to work on the portfolio, and we will continue to improve on that area. We are continuing to make decisive actions with regards to non-performing portfolios. You've seen us get out of Australia. You've seen us get out of global excess casualty. We are continuing to monitor our portfolios to determine if further action might be necessary in one or the other lines of business. We're growing our subscale businesses.
We're making intelligent use of reinsurance, and we're optimizing our capital efficiency, and you can certainly expect us to do more as we go forward. Finally, a good chunk of that disappointment continues to be with regard to investment volatility. What we have done with regard to that is we have shifted our investment portfolio to what we believe to be lesser volatile investments as we've moved away from hedge funds and moved over to more illiquid long-term assets like private equity, real estate debt, and so on. We have a full slate in front of us. I think the progress to date is good, but we certainly are anticipating to continue on that path and deliver not simply satisfactory, but superior ROEs.
Thank you. That's very comprehensive. Follow up on the insurance segment. You saw a core loss ratio improvement year-over-year for both first quarter and second quarter. You can see the second quarter, actually, the underlying loss ratio is higher than the first quarter. I just wonder if the 6 months view is probably a better indication of the current trend. Also, any other opportunity to improve the core loss ratio in the current pricing environment?
The reasons for the second quarter over the first quarter is we had more mid-size losses in the second quarter than the first. You're always going to have some volatility. Overall, again, I feel good about the fact that the loss ratio has come down for the 6 months and the second quarter. With regards to ongoing improvement, I'll go back to my earlier answer. We're continuing to apply analytics to guide our underwriting activities. We expect to continue to see results from those portfolio improvement activities.
Okay. Lastly, on the expense side, are we still on track to achieve the $50 million expense savings by 2017? Beyond that, any other sort of potential opportunities?
Yes. Kai, it's Joe. We're very pleased with the progress that we've made on the expense side. If you compare our year-to-date expense ratio drop, you can see it's down about $20 million. We're well on our way to achieving the $50 million that we outlined in prior periods. Frankly, we're taking some additional actions to continue to improve upon that. We're very comfortable with progress made on the expense side.
Okay, great. Thank you so much.
Our next question comes from Charles Sebaski of BMO Capital. Please go ahead.
Thank you. Good morning. First question, just a little more clarity on Harrington Re and how the flow through is going to be. I think, Joe, you said they expect to write it 0.25-0.3, so that would be a little under $200 million. Should we think that your reinsurance book is going to grow by $200 million and then that would be ceded off? Is that conceptually how that's going to work?
I think you have to separate the front end from the back end. I think the front end will grow or shrink based on the opportunities available to us. We will turn around and cede business to Harrington in the scale that both Joe and you have estimated. I think whether we grow or not on the reinsurance side, it still makes sense to cede premium to Harrington Re. We get the opportunity of leveraging our front end, we get the opportunity of earning fees, and we have the opportunity of establishing multiple sources of risk funding, which are, I believe, critical to the success of the company going forward.
Okay. It'll all come out of the reinsurance section then, as opposed to your primary book, where you might have a reinsurance program with Harrington Re? Will they be getting any access to the primary or is it all on the reinsurance side?
Charles, that's a very good question. Predominantly, they will see the bulk of their business coming in from AXIS Re's book, but Harrington will also be given an opportunity to participate in our established reinsurance panels. That will also be a source of revenues to Harrington Re.
Okay. Just a little follow-up. I appreciate the clarity on the share of loss in the back years versus this. You mentioned you felt your $19 billion loss estimate was in the middle of the industry estimates. I guess I thought it seemed a bit high. It seemed that a lot of the competitors that were announcing industry losses were more in the $14 billion-$16 billion range. I guess I'm just curious on what your overall sensitivity of your loss pick is, the $104 million, to that end industry loss as it develops over time.
Charles, I haven't gone through every report in detail, my understanding is that many of the other companies were giving you the total of the cats that they were reporting for. Their geographic expansion, the business that they're in, may have caused them to include or exclude a cat, whether it's in Ecuador or in Japan or Europe. That, I think, is the basis for the difference. We have been for as long as I recall, a global company, we do participate in Japan, we do participate in Latin America, in Europe, in America, we like the spread that we get as a result of this, it also means that when there are global catastrophe events, we will include them in our book.
What you see in the $18 billion-$20 billion that we are telling you is the total for all of the events that we've named. We continue to believe that those are reasonable numbers. Joe?
Charles, the only thing I'll add to that is that we've taken a very close look at each of these events, and if for some reason the events deteriorate, in other words, the loss estimates go up, we will not participate on a proportional basis to how others might be affected in the industry.
Excellent. Thank you very much for the answers, guys.
Thank you.
Our next question comes from Christopher Campbell of KBW. Please go ahead.
Hi. Good morning, and congrats on a great quarter.
Thank you.
Okay. My first question is just with Harrington now in the market, is this going to change AXIS's reinsurance underwriting appetite?
No, it's exactly the same underwriting appetite. I think a clear feature of Harrington for us is we only share business with Harrington that we are writing and retaining the majority of that business. If it's not good for us, it's not good for Harrington. If it's good for us, we believe it'll be good for Harrington. We will continue to size our portfolio appropriately. We will continue to underwrite with the underwriting discipline that is core to our strategy. We also do recognize that today we have the equivalent of $600 million of extra capacity. Where the risks are appropriate, we will be happy to take a larger share knowing that Harrington will share in that.
Okay. You have $600 million funded currently. Will you continue additional fundraising in that vehicle? How should we think about the premiums written to fee income for modeling?
Right. I think that part of our strategy is to expand our sources of third-party capital. We may, certainly at some point in the future, do a second round for Harrington. We may look for other sources of capital for different risks than those that are currently targeted by Harrington. As Joe mentioned earlier, in our third quarter supplement, we will introduce information with regards to managed premium. You'll see exactly how much we write gross and net, and we will also disclose on that sheet the fees that we are collecting as part of our third-party capital initiative.
Okay, thanks. That's very helpful. Just two more minor questions. Just a little surprised by the reinsurance property cat and the insurance commercial property growth. Can you give a little bit more details behind those opportunities and what you're seeing?
My understanding is they're both up on a gross basis and both down on a net basis. What we're doing is optimizing the net portfolio, of course.
Okay, perfect. That makes sense. Just the final question is with the more competitive pricing environment and reserve releases were up about 140 basis points year-over-year. Just for the more significant lines driving that, what accident years are those releases coming from?
On the reinsurance side, the releases are coming from virtually all accident years with the exception of 2015. We had some development on a property loss there. For the most part, on the insurance side, it's the same story. We had one or two earlier accident years in which there were adverse development, but it relates to an unusual transaction. It has nothing to do with actual development. For the most part, favorable development is coming from all accident years in both cycles.
Okay. Thanks for all the answers and good luck in 3Q.
Thank you.
Thank you.
Once again, if you have a question, please press star then one. Our next question comes from Ryan Tunis of Janney. Please go ahead.
Great. Thanks. Good morning, everybody.
Morning.
Wanted to follow up a little bit on the prop cat, I guess, gross growth but net declines. Just want to understand the strategy there and maybe what kind of retro purchases you're buying there. Just trying to get a little further understanding of that strategy.
I think the strategy on the cat reinsurance business is, again, a combination of not gross and retro, but gross, retro, and third-party capital. Part of our premiums are not simply shared in the retro market, but through third-party capital. As you know, there is appetite in the investment community for catastrophe risk, and we share it with them also. I go back to the point that I made earlier, which is that it's important for us to make sure that we are responsive to attractive opportunities in the market. The front end really needs to be about serving our clients and brokers and making sense and writing business when it makes sense. Secondly, on the back end, having diversified sources of risk funding.
We are certainly going to continue to look for opportunities to serve our clients and brokers on the front end, but in many cases, we don't expect that that will result in a net increase because we will be sharing those risks with capital partners. Joe, you want to add to that?
Yes. Ryan, just to comment on the insurance property growth, which was about 7% in the quarter. It's really due to three reasons. One, as you know, we participated in some new facilities as of the first of the year. Those two broker portfolios have a property element to them. Secondly, in renewable energy, we actually rewrote a major account, which gave the impression of creating more growth than maybe we actually did. Third, on the Lloyd's side, with our new Lloyd's capability, we're actually seeing a lot more smaller accounts, which are helping to diversify our portfolio. On the ceded side, we've actually changed our reinsurance program to the point where we're now excess of $5 million as opposed to excess of $10 million as we've been in the past.
There's been some growth, but as Albert pointed out, we're ceding that back out on the reinsurance side. I hope that helps.
Okay. Yep, that does. Quickly just moving back to Harrington as well. How long should that take to get it to scale? Again, of that 0.25 or 0.3 to one. Could that be done in the next 12 months? I imagine it could be possible. Secondly, I just also want to just understand what their kind of prop cat kind of PML tolerance would be.
One of the values of creating a company like Harrington is that in fact, you can ramp up the volume immediately, simply by sizing the quota share that we have with them. You're absolutely correct that we expect Harrington to reach their premium to capital leverage in the first year. We will grow that as they grow their capital. The second question related to their PML appetite, Harrington is substantially focused on mid to long tail lines. The cat book is not a large part of that book. They will have some small cat exposure for diversification purposes, but Harrington needs to be considered really as a mid to long tail line reinsurer.
Okay, great. Joe, just one quick little nitpick one. Corporate expenses kind of, they were running mid-20s. They bumped up a little above $30 million this quarter. Was that something to do with Harrington ramp up or just other one-timers?
It's actually more due to reallocation between our segments and corporate. The total expenses really have gone down, as I mentioned before, but we decided to keep certain expenses at a corporate level as opposed to allocate them to the businesses. If you look at the business expense line, it's actually down offset by the increase on the corporate expenses.
Sure. That relationship should continue though, so I guess a little bit more into corporate, a little bit less into the segments?
Yeah, I think the run rate you're seeing for corporate expenses should hold.
Okay, great. No, thanks for that.
Yeah.
This concludes our question and answer session. I would now like to turn the conference back over to Albert Benchimol for any closing remarks.
Thank you very much for participating in our conference call, and we look forward to speaking with you again later. Have a good summer. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.