Good day, ladies and gentlemen, and welcome to the Everest Regroup Limited Second Quarter twenty nineteen Earnings Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Levinson. Please go ahead, sir.
Thank you, Sinead, and welcome to the Everest Regroup Limited Second Quarter twenty nineteen Earnings Conference Call. The Everest executives leading today's call are Dom Adeso, President and Chief Executive Officer Craig Howie, EVP and Chief Financial Officer John Doucette, EVP and President and CEO of the Reinsurance Division and Jonathan Zosino, EVP and President and CEO of the Everest Insurance Division. Before we begin, I need to preface the comments on today's call by noting that our SEC filings include extensive disclosures with respect to forward looking statements. Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in Everest's SEC filings. Management may also refer to certain non GAAP financial measures.
These items are reconciled in our earnings release and financial supplement. With that, I turn the call over to Dom Adesa.
Thanks, John. Good morning and welcome to our call this morning where we are pleased to outline the excellent results we had for the quarter. As you have no doubt seen by now, our net income per share for the quarter was $8.39 resulting in an ROE of 16.1%. This combined with the first quarter equaled almost $17 per share and a 16.5% ROE. The quarter saw continued underwriting profitability in both our Reinsurance and Insurance divisions along with a very strong level of investment income.
My colleagues will give many of the details underlying our success, but let me say that we continue to execute successfully on our strategy. For reinsurance it has been a diversification effort that over time has seen growth in casualty, mortgage, and non cat property. And of course our strategic repositioning in the insurance space, which began just over four years ago, is now hitting its stride. Given our scale, ratings, global franchise, and diversification in all our businesses, we can capitalize on the rate momentum we are now seeing in the market. The rate activity we are seeing however is still spotty and in several instances not yet at levels they need to be.
Nevertheless, this certainly appears to be a market that will continue to see rate. Our observation of capacity pullbacks and an increasing flow into the facultative market and the E and S markets are encouraging signs. Perhaps not a classical hard market, but given industry reserve positions, capital levels, and frankly better analytics, the amplitude of prior pricing cycles is likely being replaced with more timely actions. I believe that is in part what we are seeing now. An element of this is also in reaction to loss trend.
There has been much discussion about loss trend over the last couple of weeks. No doubt it is evident in many classes but to varying degrees. And while everyone is looking for a pinpoint estimate, there will undoubtedly be varying numbers based on book profile, class, attachment point, etcetera. But as a general comment, our rate increases are for the most part above trend. In addition, we would expect that loss trend to continue, and accordingly rate increases will likely persist.
My colleagues will get into the many details on our results, but it is worth emphasizing that over the past several years we have continued to diversify and reduce volatility. One measure of that is our expected annual cat load, which just a few short years ago was 12 points as a percentage of premium and now stands at approximately 6.5 points. The end result is less volatility and improved profit targets. Our Reinsurance division has successfully diversified its portfolio mentioned earlier. And our Insurance segment now at over 30% of our business is growing profitably.
At its current pace, as I mentioned last quarter, the sum of the parts should prove to be quite positive. Thank you. And now to Craig for the financial
Thank you, Dom, and good morning, everyone. Everest had another solid quarter of earnings with net income of $343,000,000 in the second quarter of twenty nineteen. This compares to net income of $70,000,000 for the second quarter of twenty eighteen. On a year to date basis, net income was $692,000,000 compared to $280,000,000 for the first half of twenty eighteen. Net income included $100,000,000 of net after tax realized capital gains compared to $9,000,000 of capital losses in the first half of twenty eighteen.
The 2019 capital gains were primarily attributable to fair value adjustments on the public equity portfolio. After tax operating income for the second quarter was $321,000,000 compared to $40,000,000 in 2018. Operating income year to date was $6.00 $3,000,000 compared to $260,000,000 for the first six months of twenty eighteen. The 2019 result represents an annualized operating income return on equity of 14.4%. These results were driven by a strong underwriting performance across the group, stable core investment income, a higher contribution from private equity investments, and lower catastrophe losses compared to the first half of twenty eighteen.
The overall underwriting gain for the group was $393,000,000 for the first half compared to an underwriting gain of $20,000,000 in the same period last year. In the second quarter of twenty nineteen, the company reported $30,000,000 of net adverse catastrophe development. The catastrophe losses were primarily reported in the international reinsurance segment and related to Typhoon Jebi, which occurred in Japan during the third quarter of twenty eighteen. The industry loss estimates for this event rose significantly again this quarter. The initial estimates for Jebi were $3,000,000,000 to $7,000,000,000 and at that time we estimated a conservative estimate based on an $8,000,000,000 industry loss.
We have now re estimated our share of the Typhoon Jebi losses in line with the high end of the new industry range of 14,000,000,000 to $16,000,000,000 Although there were a number of loss events in the quarter, including U. S. Storm events, none of these events breached our $10,000,000 catastrophe threshold, and as such are included in our attritional loss estimates. On a year to date basis, the results reflected catastrophe losses of $55,000,000 compared to $597,000,000 during the first half of twenty eighteen. Partially offsetting the catastrophe losses was $22,000,000 of favorable prior year reserve development related to non catastrophe reserves.
This prior year favorable development was primarily identified through reserve studies completed in the second quarter of twenty nineteen. These reserves related to casualty and property reinsurance business, both in The United States and internationally. The redundancy determined from the reserve studies was recognized in the second quarter given the magnitude of the overall indications. These redundancies have developed over time, but we don't revise estimates until the reserve position becomes more mature. We continue to maintain our loss reserve estimates for the more recent years.
Excluding the catastrophe loss and favorable prior year reserve development, the underlying book continues to perform well. The overall attritional combined ratio through the first six months was 88% compared to 87% for the full year of 2018. The attritional loss ratio of 59.5% and the commission rate ratio of 22.8 were up slightly compared to the same period last year, primarily due to business mix in the reinsurance segment, which has been writing more casualty business over the past several quarters. The group expense ratio remains low at 5.7% for the first two quarters of twenty nineteen. This is flat compared to the same period last year.
Our year to date reported combined ratio of 88.9% was driven by the strong underwriting performance of both our Reinsurance segment and our Insurance segment. Before moving on to investment income, I'd like to point out that we included two new pages in our financial supplement, Pages six and eleven. These pages detail gross written premium by major line of business for the total reinsurance and insurance segments. This provides background detail to the business mix shift and the resulting combined ratio changes we've been referencing. For investments, pretax investment income was $179,000,000 for the quarter and $320,000,000 year to date on our $19,800,000,000 investment portfolio, a new record portfolio size for Everest.
For the year, to date investment income was up $40,000,000 or 14% from one year ago. This result is primarily driven by the increase from the investment grade fixed income portfolio, which had a higher asset base this year. Additionally, we've seen a recovery in limited partnership income, which was up $11,000,000 from the first half of twenty eighteen, as we expected and mentioned in the first quarter. The pretax yield on the overall portfolio was 3.4% compared to three point one percent one year ago, as both investment grade and alternative fixed income yields are up year over year. The duration of the portfolio remains at just over three years.
On income taxes, the 12% effective tax rate on operating income is associated with the amount and geographic region of the underwriting gains and the investment income expected to be earned for the full year. The effective tax rate is an annualized calculation and includes planned catastrophe losses for the remainder of the year. Lower than expected catastrophe losses would cause the tax rate to trend higher than the current 12% rate. Positive cash flow continues with record operating cash flows of $854,000,000 for the first half of twenty nineteen compared to $133,000,000 in 2018. The increase reflects our growth in premiums and a lower level of paid catastrophe losses in 2019 compared to 2018.
Shareholders' equity for the group was $8,900,000,000 at the end of the second quarter, another record for Everest, up almost $1,000,000,000 or 12% compared to year end 2018. The increase in shareholders' equity in the first half of twenty nineteen is primarily attributable to $692,000,000 of net income and recovery in the fair value of the investment portfolio, partially offset by capital return for $114,000,000 of dividends paid as well as $25,000,000 in share buybacks. Everest continues to maintain a very strong capital position with industry low debt leverage and high liquidity in our investment portfolio in addition to our robust cash flow. The strength of our balance sheet is critical to the success of our business. Thank you.
And now John Doucette will provide a review of the reinsurance operations.
Thank you, Craig. Good morning. We are pleased to report another strong quarter for the reinsurance division with $178,000,000 of underwriting profit in Q2 and further diversification of our portfolio, providing stability and balance to our operations. Our global franchise is well positioned for new initiatives, underwriting actions and rate increases. We are finally seeing both the property and casualty reinsurance markets move positively, reflecting a combination of recent catastrophe losses, capacity shortages, trapped capital, pockets of poor loss experience, and newfound discipline from some of the largest players in both insurance and reinsurance.
The upshot is improving original insurance rates, which John Safino will touch on later, and better reinsurance rates, terms and conditions in several parts of our portfolio. In Florida, we were pleased with our June renewals. Overall, the market was rational with pricing up. We saw more risk adjusted rate increases on loss affected treaties and increases on many others. But there was a wide range of outcomes, with some programs remaining underpriced.
I think of this not as a hard market, but as a reasonable market, finding its way back to sustainable balance between serving clients' needs and generating appropriate returns on reinsurance capital. Therefore, we continued our practice of allocating capital to long term strategic clients and the deals with the best returns. Our underwriting and modeling teams did a great job positioning Everest to capture more of the best business while shedding less attractive deals. The end result was a reduction of Everest exposure to property cat and an effort to encourage rate discipline through scarcity of our capacity. On some deals, we achieved tighter terms and conditions such as LAE caps and lower current limits on proportional treaties.
Consequently, we are encouraged with the direction of the Florida market, but more improvement is needed given several years of deterioration from rate pressure and loss cost inflation. Nevertheless, the bottom line for our Florida book is a higher ROE and a reduced model capital. We achieved portfolio rate increases that outpaced the overall market by strongly differentiating programs through disciplined underwriting. We are pleased that model profitability remains relatively flat despite meaningful reductions to our catastrophe exposures. Switching to July 1, outside of Florida, U.
Property renewals were orderly and directionally positive. Rates were up mid to high single digits on a risk adjusted basis. Property business at July 1 outside of The U. S. Was generally stable with rate increases driven by loss activity or the re underwriting mandated from some of the Lloyd's syndicates.
As mentioned previously, during the April 1 renewals for Japan, Everest did employ more capacity there given the improved rates. And the Japanese market is preparing for potentially further rate increases for upcoming renewal due to recent loss experience, particularly the industry's loss creep on Jebi. In The U. S. Casualty lines, trends remain positive Despite plentiful potential capacity, the market has grown more disciplined in both reinsurance and insurance as primary rates improve across most lines.
Casualty reinsurance terms are stable for non loss affected business. However, poor performance and increasing loss trends over the last several years are prompting reinsurers to increase rates and decrease commission. Because of Everest's forty plus year history, strong balance sheet and ratings, large market presence, robust long term client relationships and responsive underwriting, we continue to garner preferential access on casualty reinsurance business. As we had previously discussed, until about eighteen months ago, we had been reducing our casualty writings over the last several years prior to that due to the deterioration in both the insurance and reinsurance casualty markets. This has helped us avoid much of the poor loss experience that has emerged, And we are now very well positioned to deploy our underwriting expertise and capacity as the casualty markets improve.
In addition to casualty, we have significant opportunity in mortgage business, shown by the 16% growth in mortgage writings during the first half of this year. Also of note is the evolution and strong growth of our facultative book globally over the past several years. We have several very experienced fact teams worldwide who are product experts and local market specialists. We now have over four thirty million dollars of facultative reinsurance premium in force covering property, casualty, professional, specialty, and auto lines across Miami, New York, New Jersey, and several other offices in The US, as well as in Toronto, Singapore, and London. This is an all time high gross written premium for our facultative book after meaningful growth during the last few years.
And it is well diversified as our global fact book is broadly split by line approximately 60% casualty and 40% property. And it is also split geographically 60% international and 40% U. S. Meaningful improving fact opportunities emerged following dislocation in Lloyd's, the 2017 and 2018 cat losses and general decrease in D and F capacity. Fact submission flow is up significantly in all territories and lines, highlighted by the 26% year to date increase in U.
S. Fact casualty submissions. On the demand side, our FACT clients are seeking both short and long tail limit reduction and exposure management, particularly in auto due to poor experience. Increased demand is broad based across FACT including property, casualty, individual risk, auto FAC, U. S.
Placements and placements from abroad. Our growth in facultative business exemplifies our ability to capitalize on opportunity around the globe. Writing all P and C lines of fact in key centers all over the world requires a robust global infrastructure, and it's hard for competitors to replicate, which gives us a sustainable competitive advantage. Our strong growth in FAC is more evidence of an improving overall reinsurance market, as Dom mentioned earlier. Because FAC renewals happen much more often than treaty renewals, they are good leading indicators of market trends.
We are bullish that this improving trend in FAC will continue well past 2020, particularly as tough exposures meet limited capacity in the firming treaty market. During the second quarter, Everest purchased an aggregate property retro program that will help protect us from a large catastrophe loss or series of mid sized losses. This retro program was designed to refine the shape of our portfolio by further diversifying our capital structure, reducing net volatility, adding flexibility to deploy our capital for interesting and unique opportunities. This retro purchase aids us to be better positioned to capture improving opportunities in the property space, including at 01/01/2020, given the retro market dislocation and trapped capital, while managing the volatility of our property book. With the combined financial strength of our shareholders' common equity, Mount Logan Capital, Kilimanjaro cat bonds, ILWs, facultative retro protection and now this additional aggregate retro capacity, we are well capitalized and not reliant on any one capital source to finance our underwriting risks.
Moving on to our year to date results, our global reinsurance operations had growth of 3% on written and earned premium during the first half of twenty nineteen. Growth came from U. S. Operations with increased casualty and mortgage writings, offset by slightly less premium in treaty property as we push rate and in Bermuda due to some non renewal of a few large deals. We booked an 86.6% combined ratio for reinsurance operations with cat losses of $55,000,000 which included losses from the Townsville monsoon, Australian flooding and some additional loss development from Typhoon Jebi as the market loss worsened significantly, just as Craig mentioned earlier.
These cat losses mostly impacted our International segment. Excluding catastrophe losses, the underlying loss ratio of 57.4% for reinsurance operations increased by 0.4 points compared to the full year of 2018, given the greater mix of casualty and pro rata business in our portfolio. We continue to be viewed by clients and brokers all over the world as a core go to trading partner and garner increased opportunities, particularly with dislocations of capacity around the world in multiple lines of business. These dislocations and pressure on supply of risk capital include, one, dislocation due to Lloyd's large scale rationalization impact in direct and facultative capacity and many international portfolios, helping to drive improvements into E and S primary and facultative books. Two, ongoing trapped capital from 2017 and 2018 losses and the subsequent market loss deterioration are pushing ILS investors to retrench, withdraw capacity or demand better pricing and terms.
The resulting dislocation in several property reinsurance markets and global retro capacity will likely continue for the upcoming January renewal. Three, some European reinsurers have been pulling back casualty and professional reinsurance capacity, decreasing authorizations on specific programs or pushing casualty rates and terms, which is leaving potential hold in some clients' treaties and creating some upward pressure on casualty rates, both of which provide attractive opportunities. Four, some reinsurers are now bumping up against internal risk capacity limits or rating agency constraints for mortgage, causing reduced involvement on new mortgage deal. We believe this mortgage reinsurance capacity constraint for some rated carriers will continue or even grow. Each of these four taken separately and certainly together present robust prospects for profitable growth opportunities for large global reinsurers with strong capital, high ratings and dry powder.
In summary, we are pleased with not only our year to date results, but also with our strategic positioning for the future. Despite this evolving market, we remain focused on building long term value for our shareholders while being the first call for our clients and broker partners. Thank you. And now I will turn it over to John Zaffino to review our insurance operations.
Thanks, John, and good morning. Our global specialty insurance operations delivered another solid quarter of performance. We continue to experience high quality profitable growth within our many retail and wholesale underwriting divisions across North America and several international markets. Our growth remains balanced and diversified by geography, product segment and distribution channel. Our insurance operations are well positioned to continue on this path of growth and profitability as clients increasingly rely on Everest Insurance to offer solutions to help them address a growing range of complex risk issues.
Our leading balance sheet formidable global infrastructure and outstanding talent nearly 1,000 strong are increasingly in demand in this transitioning market. The second quarter brought some notable performance achievements highlighted by record reported gross and net written premiums as well as net earned premium. We also experienced the highest level of quarterly submissions across our retail and wholesale operations, coupled with the strongest renewal retention we have experienced and more than five years in our U. S. Direct operations.
This speaks to the growing role Everest Insurance plays in the global specialty market. The second quarter also continues a nearly five year trend or eighteen consecutive quarters of year over year growth in our business. This focused growth is the result of increased scale and relevance within the many underwriting divisions across our global property and casualty and accident and health operations. We believe significant additional scale can be achieved within our chosen product areas, allowing us to maintain excellent growth rates into the future, of course, conditions dependent. Most importantly, this quarter builds upon the underwriting profitability achieved in the first quarter of this year and brings our year to date underwriting profit to $38,000,000 a 72% increase over prior year first half.
Our second quarter underwriting profit was $19,000,000 a more than twofold increase over twenty eighteen second quarter and $16,000,000 more than our twenty seventeen second quarter performance. Further, nine of the last 10 quarters have now produced an underwriting profit, the lone exception being the third quarter of twenty seventeen. An area of continued focus for the insurance operation is the attraction of industry leading talent. Everest Insurance and the Greater Everest Organization remains a highly desirable home for talented professionals across a range of disciplines. In fact, hundreds of talented colleagues have chosen to join Everest Insurance over the past several years, and we are proud to welcome them into the Everest family.
These talent acquisition efforts continue to fuel our growth, enable our capabilities, and differentiate us by ensuring we have the right people in place to support our strategic initiatives, our ever expanding books of business, and most importantly, our growing client base. The evolution of Everest Insurance is a long term effort and there is always room for further improvement, yet we are certainly encouraged by our trajectory to date and are optimistic about our opportunities in the market ahead. Turning to the financial results for the quarter and year to date period. For the second quarter of twenty nineteen, the Global Insurance operations produced $757,000,000 in gross written premium, an increase of $111,000,000 or 17% over second quarter of twenty eighteen. Year to date, written premium rose to 1,400,000,000.0 a $2.00 $1,000,000 or 17% increase over the same period of 2018.
Our net written premium growth matched our top line growth at 17% year over year, increasing by $80,000,000 to $549,000,000 Net earned premium in the quarter was $474,000,000 an increase of $65,000,000 or 16%. For the year to date period, net earned premium increased to $899,000,000 an increase of $97,000,000 or 12% over the prior year period. The growth in earned premium has been anticipated as various business ventures and accepted over the past several years begin to earn through the P and L at a greater rate. Turning to the combined ratio for the quarter, the GAAP combined ratio was 96%, a 170 basis point improvement from the second quarter of twenty eighteen and a three ten basis point improvement over the same period in 2017. Year to date, the GAAP combined ratio was 95.8%, a 150 basis point improvement over the comparable prior year period and a 300 basis point improve over the first half of twenty seventeen.
The attritional combined ratios for the quarter and year to date period are 9695.8% respectively. On the year to date basis, we see an 80 basis point improvement over twenty eighteen's year to date result of 96.6%. The quarter's loss and loss adjustment expense ratio improved two ninety basis points from the prior year period to 65.8% from 68.7%. This includes the benefit of no cat losses in the current quarter, a result of thoughtful positioning of our various property portfolios. On a year to date basis, the 2019 attritional loss ratio of 65.4% is 80 basis points improved over last year's 66.2%.
Our expense ratio was stable in the quarter and consistent with the full year 2018 performance. We continue to take advantage of our improved scale to invest in people, technology and new locations in key markets across the globe. For the year to date period, the expense ratio was 30.4%, down slightly from the 30.5% in the comparable period of 2018. As we expected, we are seeing the stabilization of our expense ratio year over year and quarter over quarter as earned premium continues to come through as our businesses mature. Turning to the operating environment, I would echo the sentiment you have heard from other companies, namely that the trading environment and trading conditions globally continue to improve.
As respects pricing, I would break this down into three areas. First, we are seeing improved underlying pricing across all lines except workers' compensation. Second, we see accelerating price improvement in several areas across property, liability and professional lines. And third, for the first time in many quarters, our aggregate renewal price change, which includes exposure change, has moved into positive territory registering 2.9% for the quarter inclusive of workers' compensation. Excluding workers' compensation, Everest Insurance produced an aggregate renewal price change of 8.1% in the quarter, which is the strongest we have seen in seven years.
Year to date, the renewal price change is a likewise excellent 6.3%. Further, this continues the upward trend in non workers' compensation rate change that began in the beginning of twenty seventeen. And in fact, the underlying rate change increased to 7% in the second quarter. In general, I would say the same themes we have discussed in prior calls are continuing to play out. However, the notable change is the increased momentum.
Property lines, cat and non cat exposure like continue to gain meaningful rate as does commercial auto. Both were up in the low to mid teens this quarter. The liability lines primary and excess are also beginning to achieve more significant rates, generally in the low to mid single digit range as are the professional and financial lines. The financial lines initially lagged other areas in terms of rate achievement, but are quickly beginning to adjust to the new reality of much needed rate to absorb increased loss costs. So overall, we see a much more constructive environment.
And as our renewal premium changes indicate, we are optimistic that this trend will continue in the quarters ahead. In conclusion, stated simply, this is another quarter of strong growth, increased profitability and meaningful advancements toward our strategic objectives. We look forward to reporting back to you next quarter. And with that, I'll now turn the call back over to Sinead for Q and A.
Thank We'll now take our first question from Yaron Kinar from Goldman Sachs. Please go ahead. Your line is open.
Thank you. Good morning, everybody. My first question goes to the underlying or the accident year loss ratio in reinsurance. I guess we're seeing about 5.5 points of deterioration year over year. You called out business mix, loss trend and non cat weather.
Can you maybe help us think about the magnitude of each of those drivers? And then maybe as a follow-up to that, how should we think about the 87% underlying combined ratio that you had talked about in the past given that I think it was a little bit in excess of that this quarter?
Yaron, this is Dom. I will start and then ask Mr. Doucette to, and or Craig to complement whatever I say. But first of all I think the comparison against the year ago quarter is a little bit difficult because of the number of adjustments that we made in the second quarter of last year. So we think the more appropriate comparison is to look at the full year December of 'eighteen against the six months of 'eighteen.
So the gap that you described is much narrower. Again it's business mix shift. It's certainly conservative loss picks. Less of a factor is any loss cost trend. But those are the main drivers of the movement.
And the other thing to keep in mind is that through six months we still carry fairly good sized non CAT CAT loads, so that's also reflected in those six months of numbers. Whereas in the full year that tends to get equalized out. So those are some of the factors. I don't know if Craig or John want to add anything anything to that. Yaron, it's John.
Good morning. Just one thing, I think we had about $32,000,000 of reinstatement premiums in last year's Q2, which also skews the comparison of just isolating the quarter over quarter comparison.
Okay. That's helpful. I appreciate it. And then my other question is just with regards to premium growth in reinsurance. So I appreciate the color and the opening statements and I realize that there are a bunch of offsets there.
But and this may be Monday morning quarterbacking here, but I guess I'm looking at the prior year, and what 30 some percent growth in gross premiums, about 40 some percent growth in net premiums. Definitely saw a slowdown here even as rates have improved. I guess how should we think about the rate the premium momentum here? And I guess in hindsight, was the capital deployment in 2018 maybe too aggressive leading to some need to slow down growth in 2019?
Yes, Erin, this is Craig. Just to kick this off and then I'll let John jump in as well. But this is something that I think you have to look at. So you mentioned the growth in the prior year. I would say to you is the growth this year on a year to date basis is actually 5% if you exclude foreign exchange.
So you're actually growing on top of that growth from prior year. So that's certainly something I'd ask you to look at.
Yeah, and I don't think this has anything to do with capital in terms of our deployment. It really is opportunity set and where we see it. And there's our core renewal portfolio. There are some large one off deals. This year, there were a couple of those deals that we didn't come the renewal terms with the clients.
And so that again skews the numbers, which is one of the reasons we think it's better to look at the year to date numbers as opposed to the quarterly numbers. And we're actively talking to some clients about some large complicated deals now, and so it could move the other way as well. But it's absolutely not capital related.
Okay.
And one other thing I'd add to that, Yaron, is that reinsurance by its very nature can be a little lumpy. So I wouldn't necessarily look at any year over year increases in premium as some kind of a forecasting tool. If you look at our property pro rata for example, that moves around a fair bit. And to John's point, if you can't come to terms with a client on a particular deal then you've got to slug a premium that pro rata can be lumpy, but you can have a slug a premium that can be here one year and gone the next. That's not particularly troubling for us.
Again, our franchise is one in which each and every year we gain momentum in the marketplace across many different product sets. So the momentum is still quite favorable.
Got it. Appreciate the color and good luck with the rest of the year.
Thank you. Thank you.
Thank you. We'll now take our next question from Mike Phillips from Morgan Stanley. Please go ahead.
Thank you. Good morning, everybody. I wanted to touch on the insurance side. I appreciate all the color there at the end with the conditions are improving. You mentioned three reasons why.
I mean, you said liability and professional lines, low to mid single digit rates, but much needed in loss costs are still rising. So I guess all that in, if you look at the past, I don't know, seven, eight, nine quarters, your core loss ratio or your core combined ratio is around 96 or so and really hasn't moved much from there. I guess how do you think about, given the rate and loss trend environment in insurance, when do you expect any kind of movement and improvement in that core loss or in that core combined ratio?
I will start and then ask Mr. Safina to add to it. But our combined ratio and loss ratio is here again also driven by mix. So in the insurance operation, which by the way is a great result, we're quite proud of it, but we've got this additional rate activity, rate increases coming into the market. We have not pulled down our loss ratios to account for any of that.
We tend to be more conservative in our loss picks. We continue to pick the same loss ratio on a higher premium base. On the other hand, again to reflect some level of conservatism, work comp with rate decreases, we've actually increased our loss PIK and work comp given the fact that there were rate decreases that we were facing. So we've kind of shortsighted ourselves in a way there. And then I guess the last point to mention, or I mentioned already, but mix.
So we have a bit more risk management business in our portfolio than we anticipated, and accident and health business, which by its very nature books at a higher combined ratio, still very profitable, consistently profitable business. So that's some of the reasons why perhaps we're not seeing as much movement as you would otherwise have expected in the combined. But nevertheless, we are still anticipating continued improvements over the quarters and years ahead. Jonathan, do have anything
to add? I think that's well said. And I would add to that, Remember, if you look at our strong growth rates from quarter over quarter, year over year, to Don's point, this can create mix changes that are hard to read from any specific quarter. And Don mentioned our risk management business, which is an excellent business, which tends to run-in that sort of mid-90s level. So that was a bit of a bigger contribution this quarter.
As I also mentioned in my prepared remarks, the earned premium from various new products, new underwriting divisions over the past few years are beginning to earn in and some of the dissipation, if you will, of some areas that we had identified as a runoff or those that we were deemphasizing are earning out, you're starting to see that intersection happen. And we expect that to continue to happen in a beneficial way as we move forward here. So we're focused on delivering on earning profit. We're going to be conservative in our views of how we recognize, to Dom's point, some of the rate changes that are earning through. But I think those variety of factors are what you're seeing as the reason for the mid-ninety.
Okay, perfect. Thank you for all the detail. I appreciate it. I guess more generally then there's been some concerns affecting the overall industry and kind of rising toward activity and litigation activity. And I guess anything you've seen there affecting any of your businesses?
And if so anything that we would see from maybe the paid activity that we can look at from your low strangles?
No, I know we're look, we're this is John again. We're obviously looking at the same dynamics that are being discussed across the industry. It's very difficult to broad brush any one line, one area. Each portfolio is a
bit
different. How companies address sort of where they hold certain accident years is a bit different. I would say as a general tone, we are keeping a close eye on this. It's often discussed in the general liability area. We write general liabilities, for instance, across many different areas, many different industry segments, each with different dynamics.
You know, when we talk about loss trend, remember there's two parts of that. There's frequency and severity. So they're going to differ from area to area. We're keeping an eye on it. We're encouraged by the rate levels that we're starting to see.
Net trend is a little bit more muted with some of the exposure growth going on. But whether it's financial lines, that's going be a bit of a different mix, whether you're in primary or excess areas. Same with GL, auto has been talked about for quite some time. So overall, we take a look at the portfolio every quarter, really every day, trying to learn from what we're seeing out there. But I would say we feel pretty comfortable about where we are and even more comfortable as rate starts to build over the ensuing months here.
And it's fair to say we do not see any explosion in trend. And as I mentioned in my opening comments, what we see in our portfolio and differs by company, but what we see in our portfolio is trend is well within our rate increases.
Perfect. Thank you, guys.
Thank you.
Thank you. We'll now take our next question from Elyse Greenspan from Wells Fargo. Please go ahead. Your line is open.
Hi, thank you. Good morning.
Good morning, Leigh.
My first question is going back to the margin conversation and really this is on the reinsurance side of things. So I know it's reflective of your business mix and Dom, I think you said we should look at the full year 2018 and kind of compare the second quarter there. But I guess I'm thinking more about going forward. Do you expect the mix to continue to tilt more towards casualty and away from property? And should we think about the reinsurance that 86 attritional combined ratio is how we should think about modeling going forward or the half year just kind of margin expectations on a forward basis?
All right so for the first half it's 85.4, not 86, not to get precise but on the attritional side. Look in the reinsurance business it's difficult to predict where the mix will go because as we've talked about many times over many, many quarters, we'll put our capital to where we think the best opportunities are. And what emerges next year as the better opportunity, who knows. But you know I would say that where we are mix wise today is probably balanced, where we would expect to be over the remaining quarters. Certainly we would expect more writings in mortgage, which as you know carries a lower combined ratio.
I don't know that we necessarily see any explosion in casualty from here relative to our other lines of business. So I think the mix is kind of fairly stabilized in terms of where it is today. And I will I'd like to emphasize, and I know this isn't the point you were quite making here, but certainly what we've seen in many of the write ups is, you know, the headline of margin deterioration. And again what I'd like to point out is with the growth in premium it might be a deterioration in the ratio, but the overall absolute dollars of underwriting margins have increased over time. And in combination with a lowering cat load, frankly that gives us and also think about the investment income flow.
We've had over $800,000,000 of positive cash flow in the first half of the year. All of those things are we think improving our profit targets, overall profit targets. And with a decreased level of volatility. Know that isn't quite more than perhaps you asked, but I think worthy of note. And Elyse, it's John, just to add a little more color.
We're close to done within the treaty world of what we're gonna put on the books for this year. They'll still be facultative throughout the year and they'll be the odd treaty deal. But obviously not that far along is January 1. And so we'll be watching closely obviously what happens in wind season, as well as what we think the capital situation is, the supply demand balance. And that will dictate how much capital we deploy going forward.
And there continues to seem to be some dislocation and capacity shortages and trapped capital and related events as I talked about earlier. So we'll watch that and that will influence mix as well as we head into the New Year.
Okay, that's helpful. And then my second question, if we look at your premiums writings across the property lines and that was helpful disclosure that you guys added to the supplement. They've gone down. And if we think about what happened, obviously, we had two successive years of high cat losses. In your John, in your remarks, you mentioned some pretty good rate that you guys did see in Florida, but then we don't see that running through the premium written line.
Was it that there were some accounts that were still underpriced that you had to come off? Like how do we reconcile, I guess, the fact that there was some pretty good rate in Florida and even in other areas of the world and your property rating property writing, sorry, have come down?
You're absolutely right. I mean, pushed rate. And one of the ways that the market is going to get hard is unless people are willing to walk away from things. And we pushed, and we pushed, and in some cases we came off. We also did move up, particularly in Florida, moved up the tower, which again we thought that was a better place, a better risk adjusted place to play.
And net that could mean less premium, but it doesn't mean that it's less profit or risk adjusted profit. So we were pleased with how we repositioned that book. And then there's certainly been a couple of pro rata deals where we pushed for certain ceding commissions and occurrence limits and things like that and we didn't get there. But again, we're bullish. We're not retreating from property at all.
We thought after $200,000,000,000 2 50 billion dollars in losses, maybe we had a view on what the right rate was to deploy capacity. And something we talked about before is we're also looking at it not in isolation of just property, we're also looking at it as the opportunity set for us to deploy capital, whether that's into the casualty space where we see in an emerging situation, Obviously the insurance, the facultative both casualty and international property, as well as the mortgage which we remain very bullish on. So we're looking at it beyond just a property comment, we're looking at it across the whole global portfolio. And as far as the shift that John was talking about generally, and this is mainly a Florida comment, the layers down low, lower taxing limits were frankly underpriced in our view. And the increases there were nowhere near appropriate.
And also emphasize that we have increased some of our cat book outside The US. John mentioned specifically Japan as one example so. Particularly on the Florida part Elyse, it's John again. Particularly on the Florida part where the view of the increased risk from some of the social inflation aspects we thought were more prevalent on the lower layers.
Okay. That's helpful. And then lastly on the tax side, Craig, I think you said if cats are lower, the tax rate should trend higher. I thought the expectation was for 13% for the year. It was a little bit lighter than that in the Q2 with low cats.
Was there something impacting that in the current quarter?
Yes, in the current quarter we actually had more income and more foreign source income that came through. So we were able to use more foreign tax credits against that income, Elyse. So that's the reason it dropped to 12% for the first half of the year.
Okay. That's helpful. Thank you very much.
Thank you. We'll now take our next question from Josh Shanker from Deutsche Bank. Please go ahead. Your line is open.
Yes, thank you. I guess this is for John Spino. You mentioned that your rate overall, your renewal rate pricing was up 2.9%. And I think you said it was up 8.1% excluding workers' comp. Workers' comp is about 20% of your portfolio.
I'm trying to reconcile those numbers. Did I understand you correctly?
Yes, it's a little more than that, Josh. Work comp is probably closer to 30%.
And I guess the number so everything except for workers' comp is up eight point I mean, I don't know, just can't make the math wrong with numbers
like
here's what you have happening. Number one, there is a lot of rate being had now in the property and auto lines. Some of our auto writings are up year over year. We're seeing again increased rates in a number of other areas from financial lines to other liability. Comp, you're getting some exposure lift at an increased rate than to what you are in other areas as well.
So some of that shows up in renewal price change versus pure rate. So there's a number and you get mixed differences in the quarter as well. So the weightings could be a little different based on timing. So for instance, in the second quarter, we write a few large risk management deals. You might see more of the impact from the work comp book than might mitigate some of the other areas.
And the opposite happens as well. So all those things kind of moving together.
Okay. And you're still growing in comp. I think comp probably is pretty healthy. But what is your flexibility if comp margins begin to change? How quickly can you move in and out of the comp markets?
Yes, that's a good question. Look, I mean, we see still very favorable underlying dynamics in workers' compensation. We are watching more closely the of course the rate pressure and the impact that has to overall profitability. Some of our growth in work comp has come from, again, some of the areas that we underwrite loss sensitive programs. So you're getting the benefit of the installation of deductibles in different areas.
If we see work comp starting to get to the point where it's not meeting our profitability objectives, we will turn the dial. We will move out of some of those particularly some of those monoline areas where we're constantly adjusting rates regularly across the various different statutory companies we have and so on and so forth. Comp is a smaller part of our book than it's been in a while. Some of that is the relative growth rate of other areas. So we will watch it closely.
We feel comfortable with where it is today. But if the economic scenario dips further, we will selectively start to move out of different pockets, but feel comfortable there's other pockets where we will be able to maintain some insulation from underlying loss cost and trend.
And can you give any color on where margins are year over year in comp on an accident year and calendar year basis? You don't have numbers, but I guess can we talk about has there been a difference in where the initial marks are on comp business?
Fair to say that at this point comp is still very profitable. We don't give specific ratios, disclose that anywhere, Greg,
We have not. We've said that it's running the low 90s in
the past. I think it's frankly better. That's where it's being booked. But we think it's better than that.
And just to echo Dom's comment earlier, we did take a little bit more of a conservative view this year in the comp line in relation to some of the increased rate reductions that we were seeing. Feel pretty confident we're sort of
in that range today.
Okay. Thanks for all the answers.
Thank you. Thanks, Josh.
Thank you.
You. We'll now take our next question from Mike Zaremski from Credit Suisse. Please go ahead.
Hey, good afternoon. First question, in terms of the cat load coming down over time, is there a dynamic of increasing reinsurance retro purchase, which is flowing through the financials and causing the underlying combined ratio to increase a little bit? Or is it simply diversification and kind of shifting up the tower and whatnot?
I'll ask Mr. Doucette to comment as well, but it's mostly about diversifying into other lines of businesses, growing those more quickly. In this particular six month period, Certainly as John has pointed out, we've come off a number of programs that didn't hit our pricing targets. That had an impact. John made reference to the retro we did purchase in his opening comments.
In part, that's part of our typical risk management of our book. We have in the past purchased ILWs and we have cat bonds and Mt. Logan. So that has been part of the equation. And as you point out, moving up the tower certainly decreases premium but gives us similar or better risk adjusted returns.
Anything you want to add to that, John? Yeah, good morning Mike. Just on the margin, the hedging, we have a very holistic broad brushed hedging strategy and structure. On the margin, that can change the attritional combined ratio. But really what's driving it is mix shift and growth in certain areas and growth in non cat areas is driving it more than the hedging.
Okay, great. Next on the expense ratio, just clarification. I think it was up 140 basis points year over year. And I know, I think Craig cited and multiple people cited kind of moving into more casualty. Is so were there any onetime items there?
Or kind of this is was a clean quarter when we think
about a mix shift and ceding commissions on pro rata casualty. Okay.
And lastly, any update, do you expect the Board to make a succession decision in near term?
Yes. And by the way, appreciate everyone's restraint. It took, you know, four or five callers to get to that question. But the simple answer to that is yes. And of course I can't expound on that any further.
Thank you.
Thanks Mike.
Thank you. We'll now take our next question from Amit Kumar from the Buckingham Research Group. Please go ahead. Your line is open.
Thanks and good morning. Just a few quick follow ups. The first question goes back to the growth in casualty reinsurance segment. I was just trying to better understand if I look at casualty reinsurance pro rata and I guess look at the definition in the K, can you maybe even just talk about some of the sub segments the growth is coming from? I guess I'm just trying to get some comfort that it's not skewed towards lines such as other liability etcetera where there could be potential slippage in the tort climate?
John, do have anything on that? Certainly casualty and the reinsurance side, I'll ask John to comment. I don't know if he has the specifics at hand this morning, but clearly casualty includes what comp, includes professional lines, liability, businesses, it's all included. Don't know if we have a mix handy. We don't have the specific number, but at a 1,000 foot view I would say that the heavier casualty is really about 20% of the portfolio, recognizing that more of we write this in kind of The US and the London markets, etcetera.
But then we also do write it all over the world and in a lot of those other areas. It's a lot more of the softer casualty as well, and we are seeing opportunities there. And we're seeing opportunities, as I mentioned before, in the back of which our book is 60% casualty and 60% international. So also kind of diversifying away from the really heavier casualty book. But we do write a fair bit of comp in there embedded in some of the programs, environmental and there is a pretty diversified portfolio that we have both in territory and sub lines.
And maybe just related to that, this might be for Dahmer or you, do you have a view on the discussion on social inflation right now?
Look, we recognize that, and we primarily see this, you know, what we're seeing in the inflation area or the loss cost trend is mainly coming from our insurance book. The reinsurance book, given the varieties of treaties that we write, it's hard to call a trend because it can vary by the type of business that you're in, the class of business, the territory, etcetera. So we frankly rely on what we're seeing on the insurance side, at least in the early days. And clearly we see a loss cost trend. Hard to determine whether that's what you're calling social inflation or just traditional severity and frequency.
Got it. I
don't know that we see any, necessarily any huge jury awards, if that's what you're getting at, coming through our insurance book and or coming through our reinsurance side.
Yes, that's what I
was looking And this is I would just add that also within reinsurance, mean, we have a lot more flexibility in terms of our ability to respond. So first of all, we have been writing long tail business since the '70s in all over the world. And we have a lot of experience, a lot of experienced underwriters, a lot of people that understand the market, and we have a lot of data. And we've seen things move, and we've seen looking at inflation and social inflation and different loss cost trends and things like that all over the world.
And we also have the ability to then move by product, by attachment point, move in and out of classes that gives us a lot of comfort that we're able to, with our data, our expertise, our underwriting capabilities, to be able to recognize that and respond to it. And we do that all over the world. And so we feel it's something that we need to on and we do focus on it, but we feel we have the right capability to be able to respond appropriately and timely to it. So to sum that up, I would say that we don't necessarily see any quote unquote shock to the system coming from what everyone is identifying as loss cost trend. But it is something that we and the rest of the industry frankly are addressing and are dealing with and recognizing that it's a factor in reshaping portfolios, taking a look at rates, etcetera.
And I think everyone is being very deliberate about that.
Got it. The only other question I had was on Mount Logan. The AUM fell and there's obviously talk about in the past regarding Stone Ridge's redemptions. How are you thinking about the future of this entity?
Yes, this is John. So it's one of Mount Logan is a core strategic vehicle for us as we manage our catastrophe risks, but it's one of them. And we look at, we have the cap bonds, we buy traditional reinsurance, we buy traditional retro for facultative for treaty. We now have the new aggregate retro. So we'll turn dials up and down based on that.
We have continued to add and look to add investors into the mix. And normal course of business, we would continue to do that. But we're not trying to grow for the sake of growing. It's one of the strategic dials that has very specific values to Everest, but so do some of the other ones. And so we look across all of these as part of the holistic hedging strategy and structure that we have.
And we have the ability to turn up and down other dials as well.
What's the investor percentage, if you could just remind me? That's the last question I have. The percentage, I think previously you've given that number.
I don't recall ever giving that number.
I think it was 85%. I'll follow-up offline. Thanks for the answers and good luck for the future.
Thank you Amit. Thank you.
Thank you. We'll now take our next question from Ryan Tunis from Autonomous Research. Please go ahead.
Hey, thanks. I guess my first question is just on you said that the PML exposures are down June 1. Just curious if you could give us an order of magnitude around that?
Good morning Ryan, it's John. So I mean look it varies. We track 75 zones. It varies a lot by territory and by return period. And based on what products that we offer and where the attachments are, you get very different answers to that along the way.
Is it the property cat premium, it showed down on a gross basis. Is it fair to assume that on a net basis it was down a similar amount or a steeper decline?
Can't look at premium. You're trying to look across the premium to determine a PML decrease that
No, no, no.
I'm just curious in terms of I can see the gross reduction in property cat premiums. I'm just trying to think about what profitability looks like in lighter cat type season. So just trying to get a figure a sense of how much net premium came down.
So I think we don't have that split out. But I think across the entire reinsurance, I mean, I think they're directionally moving about the same.
Okay. And then my last question is just on I couldn't help but notice that there were no Kilimanjaro cat bond deals in the first half of the year. I think we've seen those in the past few. And I think that there's about 5,000,000,000 of limit maturing at year end. I guess kind of the same thing that Amit asked on Mount Logan, how are you thinking about the affordability of those programs in this environment?
How are you thinking about those upcoming maturities?
So I think the answer is it's too soon to tell what we would want to do as we head to the expiration, which happened in November and December. And it will depend on pricing, it will depend on the wind season and things like that. We do track the cat bond market and the pricing spreads widened for a while and then they came in a little bit. So it'll be one there'll be a lot of factors that we look at. What does our gross book look like?
What do the alternative hedges look like? But right now we're not in a position to know whether what we would do for that or any of the other hedges.
Understood, thanks. Thank
you.
Thank you. We'll now take our next question from Meyer Shields from KBW. Please go ahead. Your line is open.
Great. Thanks and I appreciate your patience on this call. I don't know I'm guessing this is question for Craig. I was hoping you could walk us through the earnings impact of the decline in Mt. Logan assets under management?
So the earnings impact from the fee income that we receive that shows up in our books and records is relatively immaterial. And what I mean by that is for the quarter, it was down about $1,000,000 Overall for the year we are up about $2,000,000 So relatively immaterial and that comes through other income, other expense.
Okay. That's helpful. And then second, guess, I'm trying to balance the year to date decline in interest rates with the growing presence of longer term lines of business in gross written premiums. Should we anticipate net investment income going up or going down as we consider those factors?
Or into next year? Or are you talking for the remainder of this year?
I was thinking next year, but I'll have it here however you're thinking about it.
With strong cash flow as I pointed out in one of my previous answers for the first half of the year, certainly increased asset base will be a bigger driver we think, depending on maybe what the Fed does, we think than what interest rates do. So to that degree then we would anticipate a growing investment income number.
Okay excellent, thank you very much.
Thank you.
Thank you. We'll now take our final question from Please go ahead. Your line is open.
Great. Thanks for having me. Just a couple of quick ones hopefully here. First one, Craig, what does new money yields look like right now versus kind of your book yield?
On an overall basis, it's about 3.5%, Brian. But it really depends on what you're investing in. Investment grade is probably slightly below that. But any bank loans or high yield investments that we have, alternative investments would be higher than that.
Right. Obviously, yes. So okay, so still pretty positive. Good. Second question, I'm just curious, thoughts on kind of the crop environment outlook here given kind of what's been going on with crops in the Midwest late planting, Yes, good
morning, Brian, it's John. So it was obviously a late start to the season given the weather conditions and then there was some preventive planning. And I know there's been some talk of that, the preventive planning claims, that there are likely some there which will potentially have an upward pressure on the loss ratio. But it's still early days. That can recover.
We don't know what's going to happen. It's both yield and revenue. And so the yield part can recover. It's maybe a little bit more focused on or dependent on what happens late in the year in terms of the temperatures on what's going to impact the harvest. And in terms of what the crop prices are, we don't know.
I mean that, you know, if we knew that we wouldn't be in reinsurance.
Yes. And then one last one for you, John. Just curious, you made a comment that you thought that the, I guess, alternative capacity or alternative capital in the reinsurance would continue to be somewhat constrained going into one more renewals. Curious why you think that is?
So I think it's a combination of things. I think both some trapped capital that still exists and that we think will. But it's also I think the development that the market saw on Irma, the development now that the market saw on Jebi. And then you have whether it was a surprise or not maybe would depend on who's looking at it, but the situation with a couple of the alternative cat managers and what's happened to them. So I think the sentiment among investors has been strained over the last couple of years, having had five years of no cats basically, or very low cats, below average cats, and then to have the two years with the losses and then also have the development, I think has really focused a lot of the alternative investors, particularly ones that we call tourists that are really just, they're just in it because it sounds different and interesting, I think are really focusing on whether this is something they want to do.
And I think all of that will map to a healthier reinsurance market and a healthier retro market as the alternative investment managers are going to be held to higher standards on transparency, rate change, collateral release and things like that. All that points to us to a healthier property market in 2020 at January 1 and beyond.
Thank you.
Okay, I think we have no further questions I guess. Everyone for your dialogue this morning and patience. I went a little over, but that's fine. And I can't help but wanted to emphasize that the strategic journey that we've been on is proving successful. And I just caution us all to sometimes not to focus on one individual metric.
And for us I think to focus on the fact that our increased diversification has increased our absolute dollar margin, you know, even though our combined ratios may increase due to a low proportion of cat business. But the advantage is less volatility along but along with an overall improved profit target. And by the way I include investment income in that. We are a unique franchise, global franchise, that is delivering returns at the highest levels of the industry right now and exceedingly well positioned for the future. So again, thank you for your interest And look forward to your dialogue and questions in the weeks ahead.
Take care. Have a good day. Thank you.
Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.