Good day everyone, welcome to the second quarter 2014 earnings call for Everest Re Group. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations. Please go ahead.
Thank you, Jessica. Good morning, welcome to Everest Re Group's second quarter 2014 earnings call. On the call with me today are Dominic Addesso, the company's President and Chief Executive Officer, John Doucette, our Chief Underwriting Officer, and Craig Howie, our Chief Financial Officer. Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements. In that regard, I note that statements made during today's call, which are forward-looking in nature, such as statements about projections, estimates, expectations, and the like, are subject to various risks. As you know, actual results could differ materially from current projections or expectations. Our SEC filings have a full listing of the risks that investors should consider in connection with such statements. Let me turn the call over to Dom.
Thanks, Beth, good morning. We are pleased to report on favorable second quarter results this morning. Our operating income per share has improved for both the quarter and the year over the comparable prior year period. Net income per share for the quarter was up over the prior year, but the 6-month number is lower for 2014 due to lower realized gains on investments in 2014. The improvements in operating results are clearly driven by continuing and growing underwriting gains, offset, of course, by declining investment income results. The underwriting results did benefit from lower cats this year, but do reflect $45 million of losses in the second quarter, half of that reported last year. Nevertheless, our underwriting gain in the first half remained strong at $423 million, which was up slightly over the prior year due to growth in premium earned.
The growth in premium was achieved while maintaining margins, which is a reflection of our ability to navigate through this market. Yes, rates are down in many of the cat-exposed regions. However, by changing attachment points and reallocating capacity to different product types and new products, we have been able to secure additional business at rates that meet or exceed our hurdle rates. In addition, our Mt. Logan facility and other similar arrangements permit us to present more meaningful capacity to clients, which enables us to secure placements at terms which are acceptable. This trend will continue into the third quarter as we have secured capacity from the cat bond placement we sponsored, as well as some purchases of ILW capacity. We are a significant market with over $7 billion of capital, these strategies allow us to lever that up even further.
Combined with our A+ rating and a team of innovative and responsive underwriters, we are increasingly becoming a market of choice. Nevertheless, we must continue our disciplined approach, and in some segments you will note that we were forced to retreat due to pricing. John will cover this further in his report, but of particular note is the fact that essentially all of our net premium growth was in our U.S. reinsurance segment. The insurance operation continues to perform well with an underwriting profit in both the first and second quarters of this year. Growth has been constrained due to the crop book, which has actually declined year-over-year by $75 million due to lower commodity prices. That means, of course, that all of our other targeted growth areas are doing well.
Primary pricing is still increasing, although at lower rates. As such, our insurance result, excluding crop, is running in the mid-90s, which is an improvement over the prior year. The crop portfolio is expected to improve but will lag the other lines this year as we are making significant technology investments there this year. We were active this first quarter on capital management. Craig will get into the details. Given the financial flexibility gained from our sponsored cat bond, the Mt. Logan facility, ILW purchases, and our new debt offering, we continue to have the ability to maintain share repurchases within our earnings stream, while at the same time expanding the franchise. All in all, we feel that with an increase in shareholder value per share of over 10% in the first half, we have done an excellent job in a challenging underwriting and investment market.
We have the talent, resources, capital, and most importantly, discipline to continue that through the cycle. Thank you. Now, I will turn it over to Craig for the financial highlights.
Thank you, Dom. Good morning, everyone. We're pleased to report that Everest had another strong quarter of earnings, with net income of $290 million or $6.26 per diluted common share. This compares to net income of $276 million or $5.56 per share for the second quarter of 2013. Net income includes realized capital gains and losses. On a year-to-date basis, net income was $584 million, or $12.46 per share, compared to $660 million, or $13.09 per share, in 2013. The 2014 result represents an annualized return on equity of 17%. Operating income year-to-date was $532 million, or $11.35 per share. This represents a 3% increase over operating income of $10.99 per share last year.
The results reflect a stable overall current year attritional combined ratio of 80.9% on a year-to-date basis, down from 81.0% at year-end 2013. This measure excludes the impact of catastrophes, reinstatement premiums, and prior period loss development. All segments reported underwriting gains for the quarter and for the first half of 2014. Total reinsurance reported an underwriting gain of $181 million for the quarter, compared to a $134 million underwriting gain last year. For the first half of 2014, total reinsurance reported an underwriting gain of $396 million, compared to a $344 million gain last year. The insurance segment reported an underwriting gain of $4 million for the quarter, compared to a gain of $9 million last year. On a year-to-date basis, the insurance segment reported an underwriting gain of $8 million, compared to a gain of $9 million in 2013.
Each year reflected a $2 million underwriting loss for crop insurance during the second quarter, primarily due to the seasonality of crop premiums. Mt. Logan Re's financial position and operating results were consolidated into Everest Re beginning July 1st, 2013. These results are shown in a separate segment and reflected a $9 million underwriting gain for the quarter and a $19 million underwriting gain year-to-date. Everest retained $3 million of this income, and $16 million was attributable to the non-controlling interests of this entity. The overall underwriting gain for the group was $195 million for the quarter, compared to an underwriting gain of $143 million for the same period last year. On a year-to-date basis, the underwriting gain was $423 million, compared to a gain of $353 million in 2013.
These overall results reflect $45 million of current year catastrophe losses in the first half of 2014, all reported in the second quarter. Of the total, $30 million related to late reported losses from the snowstorms in Japan and $15 million related to the earthquake in Chile. This compares with $90 million of catastrophes during the first half of 2013. Our reported combined ratio was 82.5% for the first half of 2014, compared to 84.2% in 2013. The year-to-date commission ratio of 21.9% was slightly up from 21.2% in 2013, primarily due to higher contingent commissions. Our low expense ratio of 4.5% continues to be a competitive advantage. As for loss reserves, in June, we released our fourth annual global loss development triangles for 2013. There were no major changes since the 2012 release. Our overall quarterly internal reserving metrics continue to be favorable.
For investments, pre-tax investment income was $131 million for the quarter and $254 million year-to-date on our $17.6 billion investment portfolio. Investment income for the first six months declined $4 million from one year ago. This decrease was primarily driven by the decline in limited partnership income for the year, although low reinvestment rates and capital used to redeem stock and debt also contributed. Limited partnership investments resulted in a gain of $6 million for the quarter, compared to a gain of $20 million last year. On a year-to-date basis, the gain was $4 million, compared to a gain of $37 million in 2013. Our existing limited partnership portfolio is fairly mature, and as a result, we've seen a decline in current gains coming from these investments. Despite the declining rates, our investment portfolio continues to perform well.
The pre-tax yield on the overall portfolio was 3.1% with a duration of three years. The first six months reflected $52 million of net after-tax realized capital gains, compared to $106 million last year. These gains are mainly attributable to fair value adjustments on the equity portfolio. There were $2 million of derivative gains during the first half of 2014, compared to $27 million of gains last year. This is related to our equity put options and is a function of the change in interest rates and indices this year. Other income and expense included $15 million of foreign exchange losses in the first six months of 2014. This was mostly offset by foreign exchange gains on bonds reflected in other comprehensive income.
On income taxes, the increase in the effective rate is primarily driven by lower than planned catastrophe losses, resulting in higher than expected taxable income for the year. The 14.4% effective tax rate on operating income is in line with our expected rate for the year, given our planned cat losses for the remainder of the year. Strong cash flow continues, with operating cash flows of $590 million for the first half of 2014, compared to $439 million in 2013. Turning to capital management. We issued $400 million of 4.868% 30-year senior notes in June to replace our 5.4% senior notes that will mature in October. Shareholders' equity at the end of the quarter was $7.3 billion, up $355 million, or 5% over year-end 2013.
This is after taking into account almost $400 million of capital returned for $325 million of share buybacks and $69 million of dividends paid in the first half of 2014. Additionally, we repurchased another $10 million of stock after the quarter close. These purchases will be reflected in the third quarter financial statements. Book value per share increased 9% to $160.27 from $146.57 at year-end 2013. Our continued strong capital balance positions us well for potential business opportunities, as well as continuing stock repurchases. Thank you. John Doucette will provide the operations review.
Thank you, Craig. Good morning. As Dom highlighted, we continued our strong results into the second quarter of 2014. Our group gross written premium was $1.42 billion, up $155 million from Q2 of last year, with growth coming from each of our reinsurance segments. Net written premium was $1.22 billion, which was closer to flat given the various hedges. For our reinsurance segments, total reinsurance GWP, including Logan, was $1.1 billion for the quarter, up 16% from Q2 last year. We remain optimistic on our reinsurance operations despite several market headwinds. We are successfully navigating this market and growing profitably by utilizing our many competitive advantages, including our leading global market position, franchise, and reputation, our strong ratings and well-capitalized balance sheet, our expense ratio advantage over our competitors, and our culture of bottom-line execution. Our best-in-class analytics, which allows us to make informed and accretive portfolio management decisions.
Our state-of-the-art enterprise risk management framework, which recently got upgraded to strong by S&P. Our utilization of the capital markets convergence, both offensively and defensively, across a variety of strategies to maximize efficiencies for our clients and maximize value to our shareholders. Our long-term trading relationships with our clients as one of the longest standing and largest reinsurers. These are all advantages that provide Everest with the edge in this competitive space. We are also benefiting from strategic relationships we have been building and the new products we've been rolling out across the entire reinsurance division. All of this has enabled Everest to continue to profitably deploy its capital. This July 1st marks the one-year anniversary of Mt. Logan Re, representing the successful partnering between Everest and third-party investors to opportunistically grow and deploy capacity in the catastrophe risk market.
We believe this strategic initiative has been successful for all involved. Our unique Logan structure was validated by new investors again coming into Logan at 7/1, resulting in increased AUM even after paying out profits to our investors. We continue to believe that the Logan structure adds value to both our clients and our shareholders. Our clients and brokers benefit from Everest being able to deploy more capacity on deals and layers which are attractively priced. Having access to both rated and unrated balance sheets allows us to deploy capacity to our clients in a more efficient manner than either one by itself. Our shareholders benefit from Everest's ability to deepen client relationships, better manage our overall capital and our PMLs, while achieving higher risk-adjusted returns and improving our cost of capital.
As we mentioned last quarter, in addition to Logan, we have initiated other PML and capital management strategies. We recently obtained fully collateralized reinsurance coverage funded by the Kilimanjaro Re cat bond. We were active buyers in the ILW space. Executing these strategies helped us trim some of our peak PMLs. Currently, the price of risk around the world has decreased in many areas. With our core advantages and deployment of several capital market strategies, we can compete, win, grow, and build significant shareholder value in any market condition. Here is some color on June 1 and July 1 reinsurance renewals. For our overall global property reinsurance book at June 1 and July 1, we continued to grow our gross written premium, aided by the additional capacity provided by Mt. Logan Re.
While the expected combined ratio was up about one to two points year-over-year, the gross and the net dollar margin continued to expand in the overall book compared to the same period last year. This demonstrates the significant benefit of our longstanding, diversified global portfolio across many clients, products, and territories. Across our book, Florida cat XOL rates were down approximately 10%-15% compared to last year. Despite that, we were pleased with our 6/1 renewal by growing our gross and net premium, as well as our gross dollar margin and our net dollar margin across the Florida book. This was achieved by deploying meaningful capacity on cat XOL deals which we liked with key strategic clients, while reducing shares or declining deals which we did not find attractive, in some cases, moving up attachments on our programs where we found rates were more attractive.
In Florida and other U.S.A. regions, there were some quota share treaties on which we were unable to come to mutually acceptable terms, so we came off. We also built new pro-rata relationships, as well as increased some existing quota share relationships where we like the clients, the pricing, terms, and conditions. We are continuously rebalancing both our Cat XOL and pro-rata books in Florida and elsewhere around the globe as we seek the optimal position on the programs, which we believe provides us with the best risk-adjusted returns while maintaining our relationships with longstanding clients. Our overall net Florida PMLs are flat from 1/1 as a percentage of GAAP equity against increased dollar margins, given our portfolio management and hedging. Internationally, we found renewals a mixed bag, with some areas under rate pressure, particularly China and Australia. Correspondingly, premiums were down in those areas.
In those and other areas, we had better than market results due to our lead market position and the strength of our relationships with long-term clients and brokers. Turning to our overall casualty and longer tail reinsurance book globally, primary terms and conditions remain attractive, but reinsurance terms continue to be under pressure for commodity type treaties, and ceding commissions on casualty quota share treaties are generally moving up. Therefore, we continue to execute new products and new opportunities, and we saw some nice growth overall in our long tail book. These one-off, highly customized solutions more than offset the GWP on the traditional casualty treaties, which we declined due to pricing. Total reinsurance, including Logan, bottom line, we continued the strong underwriting results with underwriting profits in the second quarter of $190 million, up 42% compared to Q2 last year underwriting profits.
With respect to our insurance operations, our premium was $316 million in Q2, essentially flat from Q2 last year. As mentioned, this is due to a decrease in crop premium at Heartland from lower commodity prices. Stripping out Heartland premium, our Q2 insurance GWP is up 12% this year compared to Q2 last year. Rates are generally up in the insurance operation, including casualty and workers' comp. Property insurance rates were mixed, depending on the type of risk and the territory. We continue to see profitable growth opportunities in many areas in our insurance book, including areas that we have targeted, such as non-program workers' comp, casualty, specialty and contingency lines, property E&S and DIC, accident and health, and our Canadian insurance operations. We remain cautious in the professional lines with more capacity coming into that space.
Bottom line, our insurance results were profitable year-to-date and for the quarter, with the year-to-date results coming in at a 98.1% attritional combined ratio and a 93.9% attritional combined ratio excluding crop, which is better than the same result last year.
We continue to be pleased with the underlying trends in our insurance book. We are seeing encouraging results of our insurance growth initiatives over the last several years, with noted improvements in both loss ratios and expense ratios, as well as premium growth in all areas of our insurance book, except for Heartland this year. We expect these trends to continue with both top-line and bottom-line growth in our insurance book. In summary, the world of insurance and reinsurance is a rapidly changing world, and while there may ultimately be a structural shift in the market, we are as well-positioned as anyone to benefit from these changes. We remain confident in our ability to achieve profitable growth for our shareholders, and we remain bullish on our future. Thank you. Now back to Beth for Q&A.
Jessica, we're open for questions now.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one for questions, and we'll go first to Amit Kumar with Macquarie.
Thanks. Thanks, and good morning. Just two quick questions. The first question relates to your underlying loss ratio ex cats for reinsurance. I'm looking at the numbers, and I'm wondering, you're talking about pricing declines. Why wouldn't that number go up? Is that more a business mix shift issue, or is there more to it?
Amit, this is Dom.
Hey.
There's a number of factors. One is mix of business. Another would be some of it's pro rata, to the extent that primary pricing is increasing, that impacts it. I think your question was just related to the reinsurance book.
Yes.
Then new products, in particular, is what would be driving that in different lines of business that we are getting into.
That is nearly offsetting the double-digit declines in pricing?
Correct.
Got it. The other question I had is just going back to your discussion on the crop. How should we think about the future with the prices being down, with the yields being up? How do you feel? How does this play out? I know it's a bit early. Would just love to get your thoughts for the future on the crop.
We've already given part of my answer, which is, it is a bit early. For now, weather is looking favorable. We're anticipating decent yields. Certainly, commodity prices are down for now. There's still a lot of room to go on where that market settles out. You've got the issue of retentions or deductibles that the clients have retaining a portion of the risk. We're not anticipating at this point that the downward turn in commodity prices would be a factor. There's still plenty of room to go here.
What percent of your I'm sorry?
You have a follow-up?
Yeah. What % of your book is revenue-based?
Amit, this is John.
Hey.
Most of it.
Got it.
A vast majority of it is revenue-based.
Got it. I'll stop here and let you continue. Thanks for all the answers.
Amit, I want to come back also to.
Yes
your first question, which is the decline in property cat pricing. You have to also remember that property cat premium only represents about 25% of our total premium. You can have a decline in pricing there, but other new products and other things, it's highly levered. The impact of that is highly levered.
Got it. Fair enough.
Okay.
We'll go next to Joshua Shanker with Deutsche Bank.
Hi. Good morning, everyone.
Good morning, Josh.
Good morning. I wanted to talk a little bit about the premium cede in the international segment as it relates to pricing and as it relates to Mount Logan's participation.
Well, some of the premium in the international is a result of some strategic relationships that we have with some large global clients. That's dominating that. It's heavily reinsured as well. That's dominating the session there. Of course, you do have the Mount Logan impact as well.
The Mount Logan portion of that would be the minority of the cede?
That's correct.
Correct. Yes.
These relationships, I guess you did not have them one year ago?
That is correct.
How does that work?
Excuse me. Let me just clarify that. These were clients we had one year ago, these particular transactions were not in place one year ago.
Yes.
Just what lines of business is this? In order to get it, you have to have a cede. I mean, if it's a fairly high cede, I'm just sort of interested in what lines or I don't know what you're willing to say about it.
It's across all lines of business. It's a multi-line approach, quota share.
Okay. You're willing to say as much as you're willing to say about it, I guess. That was my only question.
Well, it's essentially the ability for these clients that need Everest in that marketplace with our rating and our capital, and it enables them to increase their participation in the markets that they operate in by partnering up with Everest on these particular transactions.
Okay. These are reinsurance companies who probably couldn't get the business on their own.
No. They're primary companies.
I guess you're retroceding back to the client. I don't understand why there's a high cede, I guess.
That is correct.
Okay. Very good. Thank you.
We'll go next to Jay Gelb with Barclays.
Thank you. On the international reinsurance segment, with the retention, the net to gross going down to 70%, do you feel that's just something we should see this quarter, or will that affect the cessions going forward, where the net to gross is typically much closer to 100% in international reinsurance?
Jay, this is Craig. I think this is something that we would expect to see going forward as well.
This is John. We would also, as Logan, we continue to cede business from all of the segments, we would see an impact to that at least somewhat within the international segment as well.
Okay. Have you said before what portion of Everest Re's business is ceded to Logan?
You can see that in the segment report in terms of what the gross written premiums that are ceded to Logan in the Logan segment at the back of the analyst report.
Okay. That's just direct from the Everest Re book.
Correct.
Correct.
Okay. Then on share buybacks, the pace slowed in Q2 relative to Q1. Why was that?
Basically, the price of the stock kept going up and exceeding our target in terms of what we gave, instructions that we gave to our broker. We just couldn't keep pace with it.
All right. I guess that's a good problem to have. Thank you very much.
We'll go next to Kai Pan with Morgan Stanley.
Good morning. Thank you for taking my call. The first question is just follow up on Josh's question on the retro buying. If you step back and think about strategically, do you think it's a defensive move that you want to retain, maintain, and grow the relationship, or it could be an arbitrage that actually can enhance your margin offensively?
This is John. Good morning. Lots of times around the world, we have opportunities to partner and build strategic relationships with clients, there's a variety of reasons why they do that. Sometimes it's to get access to their business or our business or as Don said earlier, to give them an opportunity to enhance their writings. As we've been saying for many quarters now, we've been building strategic relationships with this, which gives us access to what we believe is profitable business and helps strengthen relationships with some of our longstanding clients around the globe.
Okay. You mentioned on your global reinsurance book, with the pricing decline at media renewals, you expect the expected combined ratio to deteriorate about one to two points. Could you give more color on that? It seems small compared with some of the pricing commentary you have said about the pricing decline, especially in Florida, pretty big, but it looks like the combined ratio deterioration relatively moderate. Anything behind that?
Well, in part, it was what I mentioned before, and I will ask John to comment as well, but again, recollect that the cat premium, particularly the Cat XOL premium, our total cat premium is 25% of our total premium volume. If that pricing is down 10%-15%, it's not going to be dollar for dollar impact to the combined ratio across the entire book. There is that leverage impact.
Right. The 10-15% was a comment on Florida rates. We also talked about how we move up in programs where the rates weren't, we move within programs so that the impact to us may not be 10%-15%, but then the comment on the 1-2 combined ratio points, that was on our global property book. I think that just highlights the strength of a diversified portfolio trading in 80 countries around the world, where we write property reinsurance with clients that we've been trading with for a very long time. It helps insulate our portfolio, and we look to grow areas around the globe where we think we're getting paid to take the risk. That helps insulate our portfolio for various rate decreases that are happening in different areas.
Remember in the first quarter, you might remember in the first quarter that we referenced some areas of the world rates were going up, in particular Canada. That's something that helps offset declines that we see in other territories.
Great. Last question maybe for Craig. I saw that you mentioned the tax rate is going to be 14% run rate, or am I missed that?
That's correct, Kai. Let me just explain a little bit. The tax is operating tax, specifically. Operating tax rate is based on the geographic region where the income's earned, right? Then it's also based on the tax rate in that country. What we had is an annualized rate of 14.4%. That's higher than where we were after the first quarter at 13.8%. It's primarily due to the fact that we had lower than planned cat losses. With a full cat load for the year, we would expect our tax rate to be somewhere between 13% and 14%. With the remaining cat load for the rest of this year, we expect it to be at about 14.5%.
If we look at this with no more cats for the rest of the year, I would expect that rate to even rise further to about a 15%-16% rate. Currently, it's primarily based on the amount of catastrophes that we have or don't have during the year.
Okay, great. Well, thanks so much for all the answers.
Thank you.
We'll go next to Michael Nannizzi with Goldman Sachs.
Thanks. Dom, just had a question on, I think it was an answer to Amit's question about mix change. Just what lines of business are you growing in? Are you mixing towards where margins are kind of similar to or better than the cat business?
Most of it would be in the credit space, John.
We're seeing some, we've talked about that the last several quarters. We also are one-off highly customized products that we think have better. It's not commodity. They're not just a plain vanilla product that everybody can do. Again, some of these are very complicated products. We have the underwriting talent, the actuarial, the contract wording, tax, et cetera, to bring to bear. We're seeing a lot of traction in that.
Got it. From a capital intensive perspective, how do those products sort of compare to the cat business?
The way we think of capital is, areas where we're full attract, either fullness or volatility attracts more capital. In a lot of cases, we're not that full and a lot of these products have more structure to them so that they don't have the volatility that cat books have. In general, they attract less capital.
Got it. This is an area it sounds like that you'll continue to move towards. There's good margins. You're getting paid for technical expertise that others can't replicate. That seems like an area that you'll look to continue to grow.
That's our job, to find the areas like that and others.
It's not just technical expertise, it's also size, capital base, rating. These are all things that give us a unique advantage.
Got it. Okay. Can you give an example, just like in the mortgage guarantee space, or is this something different?
I mean, there's a whole array of deals, as Dom said, we've done a lot of different things in the credit space, some in the mortgage space, too.
Got it. Okay. One question about Mt. Logan Re. The Cat load there was higher than the legacy business. Is that kind of what you would expect, that Mt. Logan Re will run at a higher Cat load than the sort of on-balance sheet business? Was that somewhat anomalistic as we're trying to figure out how the relationship between that and your on-balance sheet business moves?
This is John. If I understand your question correctly, what is the embedded Cat load as a percentage of premium? Mt. Logan Re is taking all and only property catastrophe XOL business, where Everest on the reinsurance book and the Cat load as a percentage of premium is applied to all lines of business. You would see.
A more concentrated. Okay.
Yes.
That makes sense. Okay. Then just last question, Dom, I think a numbers question. You mentioned 25% cat as a percentage of premiums. Do you have any, what is that in terms of as a percentage of underlying or underwriting profitability? Just trying to right size those two.
Well, our underwriting, expected underwriting profit on a cat book would be running to a 50%-60% combined ratio. That would be kind of what we would expect.
Somewhere in there. Depends on territory, depends on attachment point. There are a lot of variables there, that would be kind of the expected outcome over time.
Right
from the catastrophe book. Does that answer your question?
Maybe I didn't phrase it right, but I guess if cat premiums are 25% of total premiums, is there an equivalent percentage or can we know what the equivalent percentage is of just profitability of total kind of Everest profitability represented by your cat business?
Well, it's a significant portion, no question, because you've got the cats that you earn the premium, and you've got commission and brokerage that gets charged against that. It's a significant percentage of profits, no question. Given the volatility, we would certainly expect it to run to a higher percentage of underwriting profits for us to assume the volatility tied to the cat book. Likewise, we would assume it to run to a lower combined ratio.
Right. Got it. Okay. Thank you.
We'll go next to Meyer Shields of KBW.
Thanks. Good morning, everyone.
Morning.
One quick question. I was a little surprised that you said that you're moving up in attachment points in Florida because my understanding was that the higher the attachment point, the more competitive things were. Am I misreading the situation?
I think the situation is dynamic, I was trying to give a couple of examples, and there's other examples that would be counter to that. One thing that I think we saw was some of the Florida companies moved up partially because of not having had cats over the last couple of years, had moved up their retentions. Again, our view of risk may be different than other people's view of risk, but there were definitely cases where we thought the pressure on rates was less higher up in people's programs than otherwise.
Okay, that's helpful. Two quick numbers questions, if I can, I guess for Craig. One, the tax rate specifically on net investment income also went up in the quarter. Is that likely to persist?
That's really based on where that investment income is. So when you say likely to persist, if it's in the U.S., it's taxed at a 35% rate. That's really what it comes down to.
Right. Is the mix shifting away or towards the U.S.?
For the gains that happened this period, yes.
Okay. We talked about higher commission expense on contingent commissions. Is that both U.S. reinsurance and the insurance segment?
It's mostly the reinsurance segment. On the insurance side, most of our contingents arrangements would have been with MGAs. Of course, as you know, we've been shrinking our participation in that segment of the market. While we still have some reserves out there for profit sharing, contingent payouts, the impact of that is much smaller. It's mostly the reinsurance book.
Okay, fantastic. Thanks very much.
Our next question comes from Brian Meredith with UBS.
Good morning. A couple of just quick questions here for you. First one, with respect to some of the quota share stuff business you got off of in the quarter, did that impact the second quarter results, or are we going to see that hit the third quarter? Because I know in the past you've had some ups and downs in your North American business because of some big quota shares you've gotten off of.
There was an impact to the book this period. It's based on the amount of premium that was leaving and being returned, a small impact to the book this period.
It wasn't big unearned going out. Okay.
Over time, our mix between pro-rata and XOL really has not changed dramatically. In fact, the reference quota share that we're now off of, in particular in Florida, we've replaced with some other Florida quota shares as well as some quota shares in the Northeast. Again, the book is constantly fluid.
Got you.
We would not expect any significant impact. When the complete year unfolds, the year-over-year numbers will not be that dramatically different.
Great. Thanks. Then the second question, I'm just curious, Don and John, can you chat a little bit about what you're seeing with respect to demand for casualty reinsurance out there right now? Has it increased at all?
If you're willing to pay a high cede, yes, the demand is going up. In our particular case, we are not playing in many of those high ceding commission transactions. John, if you have anything further there. Yeah. There certainly have been some cases of people coming into the market that hadn't been in in the past. Yeah, I think there's been a long-term trend of kind of tepid demand on casualty business. Again, it varies a lot around the globe.
Okay. You haven't really seen a change necessarily this quarter where primaries are trying to buy more casualty?
Not in any strong trend that we could identify at this point, Brian.
Great. Thank you.
Thank you. Thank you.
We'll go next to Vinay Misquith with Evercore.
Hi, good morning. Just a follow-up on the international retro that was purchased. I believe you said that that should continue in the future. This quarter, we saw about a 30% increase in gross written premiums. Should that continue into the future? Higher gross written premiums and higher retro in the future?
Let's maybe clarify something. It's retrocessional absolutely in the way it's booked or what it's called, but it's not really retro in the way you're implying.
Okay.
These are transactions where we're participating with some global clients on deals where we're taking the premium in the front end, and they're participating to a significant degree as a reinsurer of that incoming portfolio. Don't think of it in the terms of as we're out there buying retro in the retro market. It's not that. We have increased our "retro buying" just from the mere fact that we have the Mt. Logan facility and various ILWs that we're buying, but it's dwarfed by the strategic transactions that we've been talking about earlier. That percentage that you saw in terms of sessions is likely to persist, but it's not necessarily going to grow dramatically from here unless we find other strategic relationships and transactions to enter into with clients.
That's the best I can do about telling you what's out there in the future with respect to that number.
Sure. Just on the gross and premium lines, they are also taking in more on the front end and then giving it out sort of on the back, correct? I mean, that's the way to look at it?
Right. It's part of a complete transaction that took with a few clients.
Sure. That's helpful. The second is with respect to the primary insurance. I see the expense ratio also going up. Was it a one-time item in that?
That was really more of a function of the fact that our Heartland crop premium was down dramatically this year, as I mentioned, because of commodity prices. The commission ratio in the crop book is less than our standard, the other primary lines of business.
Sure, fair enough. The last one, the share purchases, I think you answered that question. If I heard you correctly, you said you can sort of give back all the capital from earnings despite growing your business. I just wanted to understand that correctly. Can you sort of buy back?
I don't know that I quite said it that way. I basically said that our share repurchase program looks to be contained within earnings. That does not necessarily mean that we're saying or predicting that we would buy in up to our actual earnings. It all depends on the price of the stock. It depends on what opportunities we see out in front of us and what our needs for capital are. Certainly we got a little bit behind our targets in the second quarter, again, due to price movement in the stock.
Okay. That's helpful. Thank you.
Thank you.
Our last question comes from Ian Gutterman with BofA.
Hi, good morning, guys.
Good morning.
I guess my first question is sort of big picture. I guess, Don, I'm sort of puzzled why we're not shrinking in the reinsurance book. What I mean by that is, if we had this conversation a year ago, or even in January, frankly, it seemed like the pressure was mostly on cap. When you talk to people, you made the reference and others have too, casualty ceding commissions, it seems like the Lloyd's guy is trying to cause trouble in the other non-cap property lines. I mean, why aren't we shrinking the book instead of growing the book?
Our margins are expanding, and in many cases, the premium or the transactions that we're seeing exceed, and I don't mean by a slight margin, exceed our hurdle rates for business. If we're able to put additional business on the books and still generate double-digit returns on equity to our shareholders, we're going to continue to do that. Also remember that we've increased, as we've mentioned, we've had our sponsored cat bond, we've had ILW purchases. Our net return on capital on transactions is higher than the gross cost. In other words, we're improving our ROE by bringing on business and then taking advantage of the capital markets to lay off a significant portion of that risk, if not in some cases, all of it. That's the reason why.
Okay. I guess the reason I ask is, are other reinsurance executives saying we're starting to have behavior that is starting to, I guess, maybe not be the late '90s, maybe rhymes with the late '90s. You don't agree with that statement then?
We've got other forms of capital and we can hedge the exposure that we didn't have in the late '90s. If we're able to utilize the capital markets and improve our ROEs while at the same time maintaining, and John mentioned this, but it's worth re-emphasizing, our net PMLs from the beginning of the year have not really changed materially as a percentage of capital. We're expanding margins with basically the same PML exposure.
I'd like to add a different dimension response to your question. We also are seeing opportunities. There's been a lot of talk about the haves and the have-nots in the reinsurance world. I can't respond specifically to, you say other reinsurance executives are saying these things, but our opportunity set is not the same as the opportunity set in front of a lot of other reinsurance companies. We see deals around the globe that are shown to
Three or four reinsurance companies. We're creating new distribution sources through these new products we've been talking about now for several quarters. We have significant clients, we have global clients that want to do more business with companies like Everest and less business with other people. There's a lot of other dimensions to the landscape, and we think we're navigating it pretty well.
That's a very good point. Just to follow up, I normally wouldn't ask about a specific contract, but I think it's in the public domain whose Citizens reinsures with. You guys took a very large line, I believe, on that new Citizens program. I don't think you were on it much or at all the year before. Can you just maybe talk a little bit about why that was a good place to deploy capacity?
Yep. We did take a larger line this year. We liked it. We liked where it attached, and frankly, there was some improvements in the contract wording. That was one of the reasons we didn't put up a bigger line last year. We were happier with that, and it met our returns. Therefore, as we looked and headed into our June renewals, we thought it was accretive to the portfolio that we're trying to build, and it made sense, particularly it fit well, and given the way we managed our net PMLs, we thought it was the right thing to do.
Got it. If I looked, obviously you had a big up there, a big down on Universal. Outside of those two, would you say your cat book grew in the quarter, or was it really just those were the two big swings and the rest was maybe flat to down?
It grew in the quarter. Gross. You remember what I was saying earlier. Yeah.
Right. I'm saying ex the Citizens growth, I meant. What I'm trying to get is, was Citizens all of the growth, or was there other growth even if you didn't do that to Citizens?
One way I would describe this renewal was very volatile.
Got it.
There was lots of new structures. We played at different levels of attachments. Our line sizes moved up and down more than it had in the past.
Got it. Then just lastly, a numbers question. In the U.S. reinsurance segment, the acquisition expense ratio historically has been around maybe a 22, and it went up to 25 this quarter. Was that a mixing? Was that higher ceding commissions? Any color on that?
That's the higher contingent commissions in the commission ratio.
Okay, it's more contingent than the base ceding commissions going up?
That's correct.
Got it. Perfect. Thank you.
You got it.
At this time, I would like to turn the conference back to Dominic Addesso for closing remarks.
Well, thanks for all your questions this morning. In summary, I'd like to just reemphasize that despite the many challenges that are out there in the marketplace that we've discussed this morning, we remain optimistic about continuing to deliver double-digit ROEs due to our size and ability to navigate through this market. Again, thank you for participating on the call this morning.
This does conclude today's conference. Thank you for your participation.