Thank you. I will now turn the call over to Peter Hill from Kekst CNC. You may begin your conference.
Good morning, and thank you for joining our fourth quarter 2016 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't get a copy, please call me at 212-521-4800 and we'll make sure to provide you with one. There will be an audio replay of the call available from about 1:00 P.M. Eastern Time today through midnight on March 1st. The replay can be accessed by dialing 855-859-2056 or +1 404-537-3406. The passcode you will need for both numbers is 49123700. Today's call is also available through the investor information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on April 12th. Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed.
Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings, to which we direct you. With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer, and Bob Qutub, Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Kevin. Kevin?
Thanks, Peter. Good morning, and thank you for joining today's call. RenaissanceRe performed well in 2016 against the backdrop of a challenging market. For the year, we grew book value per share by 9.4% and tangible book value per share, plus accumulated dividends, by 11.4%. Also for the full year, our return on equity was 11% and our operating return on equity was 7.8%. Our results were driven by several factors, including the pricing environment in the reinsurance business, loss activity, reserve releases, and movement in interest rates. By focusing on our core strengths, superior risk selection, client relationships, and capital management, we executed well against a difficult and rapidly evolving market. We have strengthened our operating platforms globally, developed deeper relationships with clients, brought more efficient capital solutions to market, and exercised underwriting discipline in building a diverse and profitable portfolio of risk.
I look forward to 2017 with confidence, knowing that our teams have all the tools, relationships, and capital to successfully execute our strategy. Though we continue to face challenging market conditions, an evolving industry landscape, and heightened macroeconomic uncertainty, our platform and team are well prepared to serve our clients. Overall, I believe the challenges of 2016 will continue into 2017. The pricing in our market continues to be pressured by capital supply increasing at a faster rate than demand for reinsurance. At the most recent renewal, in general, rates in property cat were down, but the reduction was smaller than in prior renewals, driven by the same oversupply of capital and relatively flat demand. In casualty and specialty, reinsurance terms were relatively flat, but we began to see some rate competition in underlying books being ceded that required careful underwriting and monitoring.
Our advantage in such an environment has always been our ability to identify relatively well-priced individual risks and construct an attractive portfolio against the market average. Our gross portfolios are often managed and optimized as we match our risk with the most efficient sources of capital. Our ability to execute this process consistently and seamlessly has helped establish RenaissanceRe a first-call market for our clients. Most recently, we raised additional capital in Upsilon and created Fibonacci Re, which demonstrated our ability to respond to changes in the market and deliver a more optimal solution for our clients. Partially as a result of pricing trends, we have also seen a wave of consolidation in our industry in the past few years. Consequently, many of our clients have grown in size, expanded their capabilities, and demonstrated a need for broader and more sophisticated solutions from the reinsurance market.
We welcomed this trend and viewed these changes as additional opportunities to serve our clients in more ways. We acquired Platinum in 2015, integrated the company quickly, and developed new products under a unified RenaissanceRe platform early in the consolidation wave. Today, 40% of our clients are now served by all three of our underwriting platforms. For us, moving quickly and early in anticipating that larger clients would have new risk needs was a strategic imperative, marked but not limited to our acquisition of Platinum. We are also operating in a period of heightened macroeconomic and geopolitical uncertainty. The new administration in the United States has signaled several changes to economic policy that could have wide-ranging impacts on the insurance and financial services industry broadly.
Additionally, we have already seen interest rate volatility that has affected the results of insurance companies across a range of businesses, including life and property casualty. Today, our customers want to do more with us, and the growth we choose to pursue will be disciplined and built around a framework of adding value to clients through underwriting. Finally, I believe our reputation, experience, and long track record of partnership in the capital markets will continue to enable us to source the most efficient capital that earns an attractive return for our investors, but provides optimal underwriting solutions for our cedents. I will provide a few more details on the opportunities we're seeing in 2017 later in the call. First, I'll turn the call over to Bob for a look at our financials and our new segment reporting approach.
Thanks, Kevin, and good morning, everyone. As we mentioned on the third quarter earnings call, we have presented our fourth quarter results under new reportable segments, Property and Casualty and Specialty. In connection with the move to our new segments, we committed to providing transparency into our Lloyd's platform and catastrophe underwriting results for a period of time. This information is now provided in our fourth quarter financial supplement. In the 8-K we filed in early December, we provided historical underwriting results under the new segments back to 2014. We hope you found this disclosure useful, and we believe our new segment presentation will provide you better transparency into how we manage and measure the performance of our business. I'll provide you an overview of our consolidated results for the fourth quarter and full year and outline a few key themes before turning to our segment results.
For the fourth quarter ended December 31st, 2016, we reported net income of $69 million, or $1.69 per diluted common share, and operating income of $119 million, or $2.92 per diluted common share. We generated an annualized ROE for the quarter of 6.3% and an annualized operating ROE of 10.8%. Our book value per share increased 1.3%, and our tangible value per share, including accumulated dividends, increased by 1.8%. Underwriting income was $104 million, and we reported a combined ratio of 71%. For the full year, we reported net income of $481 million, or $11.43 per diluted common share, and operating income of $339 million, or $8.03 per diluted common share. As Kevin mentioned, we generated an ROE for the year of 11%, and our operating ROE for the year was 7.8%.
Our book value per share increased 9.4%, and our tangible book value per share, including accumulated dividends, increased 11.4%. Underwriting income for the year was $386 million, with a combined ratio of 73%. As noted, the fourth quarter capped off another profitable year for the company, despite a moderate level of insured catastrophe losses during the year. We also experienced a rise in interest rates in the fourth quarter, reversing some of the unrealized gains we booked earlier in the year. Our equity portfolio continued to perform well and partially offset the unrealized losses in our bond portfolio for the quarter. For the quarter and full year, we recorded a net negative impact from Hurricane Matthew of $44 million after giving effect to the redeemable non-controlling interest in DaVinci.
As a reminder, net negative impact includes the sum of estimates of net claims and claim expenses incurred, earned reinstatement premiums assumed and ceded, lost profit commissions, and the offset by the redeemable non-controlling interest in DaVinci Re. Given the magnitude and recent occurrence of Hurricane Matthew, meaningful uncertainty remains regarding losses from this event, and the actual net negative impact from this event will likely vary from this estimate. During the fourth quarter, we also recorded favorable development reserve of $87 million, with $67 million in our Property segment and $20 million in our Casualty and Specialty segment. Favorable development in our Property segment was driven by normal course reviews of large losses that reduced our estimate of expected ultimate losses on certain large events and a number of other smaller weather events in the U.S. from recent years.
In our casualty and specialty segment, actual reported losses came in better than expected on attritional net claims and claim expenses. Let's shift to our segment results, beginning with the property segment, followed by casualty and specialty. During the fourth quarter, our property segment gross premiums written were up 19% relative to the fourth quarter of 2015, driven by our other property class of business. The fourth quarter generally is light in terms of renewals for our property segment. Included in gross premiums written in the property segment for the fourth quarter of 2016 was $9 million of reinstatement premiums associated with Hurricane Matthew. For the fourth quarter, the property segment generated underwriting income of $100 million and a combined ratio of 45%. Impacting the underwriting result was a reduction in operating expenses and favorable development on prior accident years of $67 million, as I mentioned earlier.
Offsetting these items was net negative impact to the property segment underwriting result of $49 million associated with Hurricane Matthew before giving effect to the redeemable non-controlling interest in DaVinci. For the full year, our property segment gross premiums written increased 4% over the year, reflecting growth in our other property class of business, partially offset by continued soft market conditions in property catastrophe. As a result, managed cat premiums were down 5% for the year. Included in property gross premiums written and managed cat premiums for the year were $21 million of reinstatement premiums related to a number of U.S. weather events, the Fort McMurray wildfire, and Hurricane Matthew. The property segment generated underwriting income in 2016 of $363 million and a combined ratio of 50%.
Included in our year-to-date property segment underwriting results is a net negative impact of $101 million associated with losses from a number of U.S. weather events, the Fort McMurray wildfire, and Hurricane Matthew. For the fourth quarter, our casualty and specialty segment gross premiums written were down 7% relative to the fourth quarter of 2015. The main driver for the decrease in the quarter was a reduction in premiums from the credit book, which had several large multi-year deals incepting in the fourth quarter of 2015. Recall that we booked the premium on mortgage deals at inception. However, they tend to have a longer duration and are consequently earned over a period of 10 or more years. This book can be influenced by a small number of relatively large transactions.
In comparison to the decrease in gross premiums written, net earned premiums in our casualty and specialty segment were up 2% in the fourth quarter. The casualty and specialty segment generated underwriting income of $3 million with a combined ratio of 98% in the fourth quarter. For the full year, our casualty and specialty premiums are up 35% from a year ago, reflecting continued growth in the mortgage reinsurance and the inclusion of Platinum results in our financials following the close of the transaction in March of 2015. As we have grown our casualty and specialty book, we have increased the use of reinsurance to manage our assumed risk and enhance overall returns. Consequently, net premiums written in casualty and specialty were up 17% for the year compared to the larger increases in gross premiums written previously noted.
For the full year 2016, underwriting income and casualty and specialty was $21 million with a combined ratio of 97%. Turning to investments. In the fourth quarter, we reported net investment income of $47 million, comprised mainly of interest income from fixed maturity securities of $39 million and net investment income from our alternative investment portfolio of $10 million. Our strategic investment portfolio, managed by our ventures unit, recorded gains, and we continue to be satisfied with the long-term fundamentals of the companies we own. For the quarter, the annualized total return on our overall investment portfolio was about flat at negative 0.2%, due in large part to mark-to-market losses on our fixed maturity investment portfolio as interest rates rose in the fourth quarter. Strong returns in our portfolio of public equity investments partially offset the impact of rising rates.
For the full year, our investment portfolio generated a total return of 3.5% compared to 0.9% in 2015. Our investment portfolio remains conservative with respect to interest rate, credit, and duration risk, with 89% allocated to fixed maturity and short-term investments with a high degree of liquidity and modest credit exposure. The duration of our investment portfolio remained relatively short at 2.4 years and is consistent with recent quarters. The yield to maturity on fixed income and short-term investments was 2.1% at December 31st compared to 1.8% at September 30th. I'd like to note that our capital position remains very strong with modest leverage and efficient access to capital through multiple sources. For the full year, we repurchased $309 million of our common shares.
In looking across the spectrum of our managed balance sheets, we kept DaVinci flat, continued to raise capital in other select areas through Upsilon, Medici, and our newest venture, Fibonacci Re. Our capital management actions reflect a quickly evolving market, and we believe we have developed a unique agility to deploy capital where it is needed most and remove it from areas where it is not earning a suitable return. In short, RenaissanceRe continues to match well-structured risk with the most efficient forms of capital across several balance sheets and capital sources. As we head into 2017, we are confident that our ventures team is actively building on relationships with high-quality, long-term investments, as well as looking for new strategic transactions that can enhance our underwriting franchise.
In closing, I would be remiss if I didn't mention that since my arrival last August, I continue to be impressed with the caliber of talent at RenaissanceRe and appreciate the ongoing support throughout the organization that has ensured a smooth transition of leadership in the finance team as we close the books on 2016. We have a deep bench, not only on the finance team, but throughout the company, with the necessary resources to continue to provide superior customer relationships, superior risk selection, and superior capital management in 2017 and beyond. With that, I'd like to turn the call back to Kevin.
Thanks, Bob. I will divide my comments between our property segment and our casualty and specialty segment, starting with the discussion of the 2016 results, then moving to the January 1 renewal and opportunities in 2017. After that, we'll open it up for questions. As we discussed last quarter, and as Bob mentioned, we revised our reporting segments to property and casualty and specialty to give you greater transparency into how we think about our business. Our property segment includes our catastrophe excess of loss business and other property. Included in other property is property written on either a proportional or per-risk basis, the property component of our regional multi-line business, and E&S property insurance written on our Lloyd's platform, all of which were previously reported as part of either specialty or our Lloyd's segment.
I should point out that our property business is also exposed to catastrophic events, although to a lesser extent than our catastrophe book. For the full year in 2016, we grew our property segment marginally in a tough market. This growth came from our other property business, which grew significantly, although from a relatively small base. Our other property business is predominantly written on our U.S. and Lloyd's platforms and demonstrates how the strategic choices we have made over the last several years have developed into increased opportunities. Our catastrophe book was down year-over-year as we either reduced or exited business that no longer met our return hurdles. Any growth in this market is an achievement.
We were able to write more business by moving from the transactional to the strategic, increasing ties with our clients, and continuing to act as a trusted advisor across multiple lines of business. We are proud to have a value proposition that extends beyond price as our clients and brokers recognize the importance of our problem-solving capabilities and our ability to match risk with capital. They also appreciated the expertise provided by our scientists at WeatherPredict and the integrated solutions we can offer through our Lloyd's platform and our various joint ventures to help them grow their business. Moving to the January 1 renewal, my comments will primarily address the catastrophe excess of loss market, as most of the renewals are in this line of business. Property rates continued to decline. In the U.S., rates were down by about 5%.
Rates in the international market were down somewhat more than the U.S., while retro prices were down somewhat less. The relative outperformance of retro was the result of several new programs being placed. Despite the price reductions, we grew our property segment at January 1st. This growth came across the board in both our catastrophe and other property business in the U.S. and internationally, and in assumed retro. This growth was driven by both new opportunities and growth on existing lines. What is particularly rewarding is the fact that we were able to identify attractive opportunities on each of our platforms. Growth in the property segment was augmented at January 1st by the expansion of Upsilon Re and the creation of Fibonacci Re, we anticipate that we will continue to help us grow over the year.
If you recall, last year we shrank Upsilon Re, which is our collateralized reinsurer, as opportunities were limited. In 2016, we saw increased client demand and heightened investor interest for retro and were consequently able to grow Upsilon. Fibonacci Re is our newest vehicle and has helped us bring additional capacity to Renaissance Reinsurance clients in the U.S. for more remote property risk. One new opportunity worth noting, both due to its size and its potential, is the NFIP flood reinsurance purchase. We were a significant participant on this program, which demonstrates the appetite of the private market for flood risk and which, going forward, could see considerable expansion. In 2017, we anticipate that our property segment will be up slightly with the growth in our property business more than offsetting the expected decline in catastrophe.
We believe we can grow our other property business as our expanded platform and strategic approach to clients will continue to provide us new opportunities. Another area targeted for growth is our regional multi-line business where there continues to be significant opportunities. We cede a significant portion of our property risk, which allows us to optimize our portfolio further, even with deterioration in rates. After adjusting for retro purchase and the use of joint venture vehicles, we retain roughly half our gross written premium in the property segment. As I have said before, this may look expensive in a low cat environment, but we believe this is the right strategy for our portfolio. Within our casualty and specialty segment, we write various classes of business.
These include traditional casualty lines such as general liability and professional lines, the casualty business written through our Lloyd's platform, and the casualty aspects of our regional multi-line businesses. Casualty and specialty also includes financial and credit business such as our mortgage reinsurance book and trade credit. Additionally contained in this segment are specialty lines such as marine, surety, terrorism and cyber. Previously, our specialty segment had certain proportional and per risk property business, which has been moved to the new property segment for increased transparency. The casualty segment now represents more than half of our business globally and has grown into a sustainable franchise that is core to our ability to meet client needs. For the year, we grew our casualty and specialty segment almost 35%, with growth coming across all of our platforms.
This growth broke down to be about 25% growth in casualty lines, 50% growth in our mortgage book, and 10% growth in specialty lines. There were three general drivers of growth for the year. The first driver was increased signings on existing programs where clients looked to consolidate their panels. The second driver was the writing of additional lines of business with existing customers. The third was from specific strategic initiatives, such as helping clients expand to new lines of business and developing a marine and energy book at Lloyd's. At the January 1 renewal, conditions were consistent with recent experience, with rates declining slightly and terms and conditions generally remaining stable. Overall, ceding commissions were flat.
Clients with attractive results probably got a little more ceding commission. Conversely, those with weaker results probably got a little less, which demonstrates that the market is showing discipline in response to ceding performance. In 2017, we believe there will be some opportunity for modest growth in our Casualty and Specialty segment, although we do not anticipate the same pace of growth as we experienced in 2016. For example, given our leadership position, we expect to be first call for new opportunities in the mortgage space. Much of our growth in this book, however, has come from legacy business. Future opportunities will be more constrained. It bears repeating, however, that due to the long-tail nature of our mortgage book, the premium we have already written will continue to earn over several years. Another area of potential growth will be in marine and energy reinsurance at Lloyd's.
We have been diligently building capabilities in this area. We are hopeful that we will be able to grow this book. We also anticipate growth in our commercial multi-line business run out of our Chicago office and U.S. casualty business written out of New York. On the other hand, we continue to monitor certain lines of business for signs of price competition, such as D&O and the accident and health business. Similar to our property segment, we executed our gross to net strategy in Casualty and Specialty, with ceded purchases remaining fairly consistent during the quarter and for the full year. We currently cede approximately one-third of our premiums in this segment. While we find the Casualty and Specialty business attractive overall and diversifying to our portfolio, we nonetheless make significant retro purchase on this book for three reasons.
First, it helps us maximize shareholder value by enhancing our overall risk-adjusted return profile. Second, it allows us to maintain our leadership lines, such as mortgage, as we can deploy larger limits. Finally, our gross to net strategy helps us transform risk income into fee income. We have seen significant demand for our Casualty and Specialty ceded programs, which we believe demonstrates strong market validation of our tools and capabilities in underwriting Casualty and Specialty. I was pleased with our team's performance in the fourth quarter and throughout 2016 as a whole. Across both of our segments, we continue to deepen our relationships with key clients and expand our ceded program to improve the capital efficiency of our portfolio. We also continued to leverage existing platforms and resources in order to manage expenses and optimize operational efficiency.
Going forward, we will continue to execute our strategy, maintain our underwriting discipline, and drive growth in areas we find attractive. Thanks. With that, I'll turn it over to questions.
At this time, if you would like to ask a question, please press star, then 1 from your telephone keypad. Your first question comes from the line of Kai Pan from Morgan Stanley. Your line is open.
Thank you. Good morning. First question is on the, Kevin, you mentioned last year that some of the Atlantic hurricanes might be overdue over time, we had Hurricane Hermine and Hurricane Matthew, and it seems now that loss was not big enough to really moving the pricing to the positive territory. I just wonder, in your opinion, what could turn the pricing?
What a large hurricane can do is kind of ratify the normal system of capital within our business where premiums are paid and returned to clients through losses. I think what we need is some sort of shock loss in the system, it doesn't necessarily need to be of X size or in X location. It really is something that people are surprised to be paying. It's my belief that a much smaller New Madrid Earthquake can have as profound a market impact as a very large Florida hurricane. I think it's really about just having more losses and more of our premium returned to the buyers through losses or some other mechanism.
Okay. On the capital management front, you guys didn't purchase any shares in the fourth quarter, for the full year, you actually returned more than you earned. I just wonder, is that sort of 100% payout ratio still reasonable assumption for 2017?
Thanks, Kai. That's a good question. As I've mentioned before, nothing's changed regarding our philosophy or approach to capital management. Our framework remains the same. We'll always say we're allocating capital to the businesses where the opportunities make sense and returning capital to shareholders over time when it's appropriate. It is, I think, critical to remember that this is not a quarterly or an annual event, but a long-term commitment that takes into account how our business is evolving over time. Timing will depend on a number of factors, including business opportunities, I would say the profile of our company, as well as liquidity profile. Regarding guidelines for returning capital, we don't have a set dollar or calendar or targets for returning capital, nor do we have really an operating benchmark that we would action against.
As indicated last quarter, we do take in consideration net income available to shareholders, but that's just one of many factors we got to consider. Let me close with the fact there is no single metric we use to benchmark our capital levels. As you look back over our history, you'll see that we've demonstrated that we've really been good stewards of our capital and returned over $1 billion over the last three years.
Okay, that's great. Lastly, if I may, it's a macro question on U.S. tax reforms. Some argue that U.S. insurers' tax rate could go lower, but some of the global offshore insurance companies' tax rate could go higher. What's the potential implication for RenaissanceRe?
Look, as Kevin mentioned, there's a lot going on in the legislation in the U.S. There's much discussion, and I would have to say there's a lot of uncertainty, but we've been watching this very close, keeping an eye on what's happening with the Ryan bill, the Neal, all those things. There are moving parts and as you've seen, there's a lot of volatility. What we will say is we have comfort in our platform that gives us a lot of flexibility, and we'll react accordingly as we see that.
Great. Well, thank you so much.
Thanks, Kai.
Your next question comes from Amit Kumar of Macquarie. Your line is open.
Thanks. Good morning and congrats. Maybe a couple of quick follow-ups, then I'll re-queue. Just going back to the broader discussion on cross-border taxation. Yes, it's too early days in terms of what's going to happen. If you were to think this through and talk about the planning, do you think that RenaissanceRe is, obviously the company has morphed, would be able to address any potential changes in terms of re-domiciling operations? Do you think you'll be taking pricing action at that point if some sort of tax reform does go through?
There's a lot of broad things to consider. I hear what you're saying.
We're looking at all of these different perspectives that we continue to hear in the market. We do have a flexible platform. We do have the ability to make adjustments to react accordingly. Yeah, in some scenarios, you do see that there could be significant impact to the end consumer, these are all things that are being drawn out in the scenarios that are out there, and it is too early to make a call. There are a lot of things being circulated that could have, in some cases, a significant impact. In other cases, not as much.
Just to amplify Bob's comments, I feel really good about the investments we've made over the last several years, which have been strategically important for our business. Investing in a U.S. platform, continuing to grow the Lloyd's platform, Singapore and other things, provide additional flexibility to the platform, which will serve us well going forward.
Got it. Yeah, that's what I was looking for. The second and final question also goes back to the broader discussion on capital management. Assuming the tax discussion heats up over the next few months, could there be a likelihood that you'd probably take your foot off the gas pedal at that time and say, "Let's see how this situation evolves"? Is that a separate discussion based on your excellent capital strength? Thanks.
Going back to what I said, I'll give Kevin an opportunity to say a couple of comments here, but it really looks at our framework hasn't changed. We still are looking at buybacks as our means of returning capital. You're right, there's a lot changing in Washington, and the U.S. administration has a lot of volatility. Where it lands could have an impact or not have an impact on how we look at our deployment of capital. Too early to tell. Again, we're going to sit back and watch and still proceed to return capital over time, not really set against any benchmarks. I don't know, Kevin, if you want to add anything.
No, I think that's exactly right, Bob. I think you're focusing on, and a very important variable, which is what the legislative changes may be and how they can affect us. That's a singular component of how we think about deploying capital and managing capital, and it may inform how we ultimately invest in our business. The process that we have of first deploying into our business and then thinking about ways in which we can return excess capital to shareholders is exactly the way we'll approach it. An important component of that will be legislative changes with the new administration.
Got it. That's helpful. I'll stop here. Thanks for the answers, and good luck for the future.
Thanks.
Thanks.
Your next question comes from Elyse Greenspan of Wells Fargo. Your line is open.
Hi. Thank you. A few questions. First off, Kevin, in your remarks, you mentioned when you were talking about the January 1 renewals that you guys found opportunities to grow in cat and other property. You also, in your full year comments, you talked about a decline in catastrophe. Am I not tying those two thoughts together, or did you grow at January 1, and you expect the cat business to decline as we move throughout the year?
I think that's exactly right. We did see a couple of opportunities which allowed us to expand our catastrophe writing at 1/1. I think that the guidance I'd point to is our belief is over the course of 2017, our cat book will be down, but less than the 5% it was down from last year. That means that going forward, we do anticipate continued rate pressure and possibly some reduction by us. Offsetting that, though, is we think we have increasing opportunity in our other property business. I think our property segment will be up marginally, but it'll be kind of a yin and yang with property cat down and other property being up slightly.
Okay. Thank you. In terms of share repurchase, just another question. Is there a certain valuation where you guys take a pass on repurchasing stock? Also, as you guys have slowed down on the share repurchases, we haven't seen any repurchase since the summer. Do you think in a way, are you also holding onto capital for potential M&A? How do you balance where your stock is trading versus holding onto capital for M&A opportunities down the road?
Yeah. No. Thanks, Elyse. It's a good question. I'll go back to my response to Kai here and looking at really nothing's changed in our framework on how we look at allocating our capital. The first order of allocation is going to be to the development and growth of our businesses. We'll look at that. We'll return excess capital, but we've got many things to consider out there. We don't look at a metric. The share price is important, but also a lot of other things are important, and what we're being able to deploy into the business, what's our risk portfolio. Just a lot of factors, Elyse, that we look at. Again, no set benchmark. We feel that over time, we've been a good steward of our capital. As I mentioned to Kai, we've returned over $1 billion over the last three years.
If I look at the total casualty and specialty current accident year combined ratio backing out the reserve releases, you guys are running above 100%, again, about 110% for the fourth quarter, 105% for the full year. We think going forward, that book will grow some more, but how do you think about the margin profile and what kind of combined ratio do you envision that book running at either in 2017 or just over time?
Well, thanks for the question. It's a good opportunity to get some comments out there on this. The casualty and specialty is, you look at it as a longer tail business that's out there that takes longer. Looking at it in a quarter or a single year timeframe is probably not the best perspective to look at it. What we look at it is the longer tail aspect, the attritional nature of it. Some of these pan out over years. Obviously, we feel good about the book. On a current accident year, you can see on a full year basis, what you want to look at on a relative basis is it's down about one point, when you think about it in that context. Again, this is something that takes time to develop, and we really haven't seen any trends at this point.
One last question, if I may. We think about just higher interest rates, what's the delta between the new money yield and your portfolio yield? Do you think we can see, given the recent rise we've seen in interest rates, a little bit stronger investment income in 2017?
That's a great question, Elyse. Here's how I look at it when I think about the investment portfolio, and some of my comments just reflecting back on what I said. Couple of data points is that we ended the year 2.1% yield. It was 1.8% in the third quarter, so that started ticking up. You got to remember, we do really have a very liquid portfolio duration of 2.4 years. Nearly 90% is in shorter fixed maturity and liquid security. It gives us a lot of flexibility that we have out there. With that being said, I feel good about our prospects for 2017 and our ability to adapt to where the market may take us. We also have a strong equity portfolio as well too.
Okay. Thank you very much.
Your next question comes from Quentin McMillan of KBW. Your line is open.
Thanks very much, guys. I just wanted to touch on the overall underwriting. It looks like the accident year combined ratio to the core margin was down about 450 basis points, that's coming obviously from the two factors of both price declines as well as the mix shift of the portfolio towards the specialty and casualty. I was wondering if you could help us in 2016, how much of that maybe came from one bucket versus the other on a broad brush statement. Secondarily, and kind of connected with that, how far along are we for that drag for casualty and specialty before that starts to normalize?
Can I just ask to clarify? I'm not sure what you mean by the drag on casualty specialty and normalizing.
Sorry, what I mean is the combined ratio of that business is naturally going to be higher than the run rate expected combined ratio is naturally higher than your property cat portfolio. I'm talking about the drag as the mix shift moves more towards specialty and casualty. Are we at a steady state now with the portfolio being 50/50, or could there be some more drag in the first half or even through 2017?
Okay. Let me just frame how I think about our combined ratio, and then I'll try to zero in a little bit on the questions that you have. Starting with property. Our property segment loss ratio or combined ratio will increase. That is our property cat as it's normally been, and that's going to be really reflective as to whether there's events or not. On the other property line, there'll be attritional losses which will come in as a component of the overall segment, and it'll be transparent, but it'll be something that will change the combined ratio on that side. Going over to casualty specialty, again, breaking it down for the combined ratio between our underwriting expense and our loss ratios. I look at our loss ratios as being reasonably consistent over time. I'm pleased with the way the triangles are developing.
I'm not seeing any trends that are alarming. On the acquisition cost, acquisition costs are relatively elevated but reasonably flat. Looking at it from that side, I think it's reasonably stable. The second question you're asking is to an optimal combination between how much property and how much casualty and specialty. We don't have an optimal target for that. We're constantly looking at how to change the profile of our business. An important component of that balancing is our ceded. For many years, we've been active in capital management on our property cat business, and increasingly we're active in capital management through ceded and other protections on our casualty and specialty business. It's a little bit more of a convoluted way to think about it, but we think it's the appropriate way for us to structure our portfolios. There is no target mix.
Our combined ratio will rise for the reasons I talked about, and it's an outcome, but we feel good about that book knowing the fundamentals beneath it are different than property cat.
Okay, that's really helpful. Thank you. Secondly, just for clarification, in terms of your reporting structure, you guys are going to continue to report both property cat and property other going forward, or will property other sort of disappear eventually, and it'll just be sort of the property versus casualty and specialty segment reporting?
No, I think that's a good question. As we laid out earlier when we talked about this, right now we've got our property, which includes property other and catastrophe. If you go back to the third quarter call when we talked about this, we committed to showing catastrophe as a separate standalone, given the significance of it. We also committed to, for a period of time, showing the Lloyd's platform, and that's in the supplemental disclosures that you can see in what we distributed yesterday.
It will be one bucket eventually.
No, that's not what I said. I said we committed to showing catastrophe separately from other property, as part of the segment.
Just sort of in the other property, it looks like the loss ratio and just the loss cost was elevated, obviously part of that, I think, was probably coming from Hurricane Matthew. Could you help us, how much of Matthew of the $50 million was bucketed into property cat versus property other? The loss number looks fairly elevated in Q4 just on a modeling question.
Yeah. As you would expect, most of our losses on Matthew would've been reflected in the catastrophe side of the property aspect. There's a little bit I talked about that spills over into property and then casualty and specialty, we're talking about the majority, 90%+ was in the catastrophe side.
Is there a reason that the $36.5 million of losses in property other, it just seems like a higher number versus the run rate of that segment for what you gave us in the 8-K.
I believe most of that's actually the attritional. The other thing to look at is what we're writing in that other property book is exposed to per risk losses, so there's some activity there. Also with the regional book we're writing out of the Chicago offices, it's not necessarily Matthew, it could be the Southeast tornado outbreaks or the Oklahoma earthquake. It could be smaller Midwestern events that are probably more likely to impact that than some of the Florida events. The per risk and the proportional books written elsewhere might have more Florida, the Chicago book will be more Midwestern.
Great. Thank you very much, guys.
Your next question comes from Joshua Shanker of Deutsche Bank. Your line is open.
Good morning, everyone.
Hey, Josh.
Hi there. I'm just trying to understand the preferred share issuance in Upsilon, is that a netting out of capital or a netting in of capital?
There's a lot of movement in the disclosure about capital coming in and out of Upsilon. The net result for us going into 2017 is Upsilon is bigger than it was in 2016, but not as big as we've had it at different times in the past.
The combination of Upsilon plus Fibonacci, are you materially larger than you were one year ago, or you're in the same zip code? Can you sort of frame how much capital you're working with compared to a year ago?
Yeah. One, let me comment. I think there's more opportunity over the course of the year for both Upsilon and Fibonacci. Right now, I would say we're between 200 and 250 up on those two vehicles in a ballpark range of committed capital to the vehicles.
Can you describe a little bit the different appetites of each of those vehicles?
Sure. Upsilon is a vehicle we've had for several years. It was originally targeted to write capital-intensive retro at reasonably exposed levels. It has morphed in size, and it's morphed in appetite. It is still more directed towards retro, but it participates higher up in the capital stack, hence the reason for our shift in appetite. Fibonacci Re is something when we were speaking to our clients, we realized that they had increased appetite for high-quality top-end cover. We were able to put together a vehicle to bring that capacity to them, mostly in contemplation or in complement to large participations within RenRe Limited. Actually, importantly, Upsilon Re is worldwide and Fibonacci is U.S. only.
Fibonacci, I guess, is publicly traded as well?
No, it's not. That's a private placement behind it.
Okay, because it says it's on the Bermuda Stock Exchange. I was trying to understand exactly how that capital works there.
It's 144A notes.
144A notes. Okay. All right. Well, thank you for all the detail. Appreciate it.
Sure. Thanks.
Thanks, Josh.
Your next question comes from Brian Meredith of UBS. Your line is open.
Thanks. A couple questions here for you. Kevin, does any of the kind of M&A that's happening recently, has that had any impact on your ability to kind of get additional share on programs, that was it a contributing factor at all?
It's hard to point to specific wins from that, what I would say is, as our customers consolidate, I think they've become a lot more sophisticated in thinking about the synergies with their books and how they're managing their placements. With that, it leads to two things. One, they want to consolidate their panels with people who can add value beyond capital. Secondly, they want to trade with people on a more composite basis. With the changes that we've made, I think we're in better position to continue to serve them. Net-net, I think it's probably a benefit. We do obviously look for opportunities to take advantage of the fact that we're only a reinsurer and not competing with them, because many of these are around the insurance businesses. It's hard to point specifically to wins.
Okay, great. Next question, I'm just curious, you mentioned opportunities in the marine and energy market, kind of getting some growth there in the marine energy reinsurance market. My understanding is pricing's probably stabilized in that market, but still at pretty low levels. Why the attractiveness at this point? There's plenty of capacity there, too.
I agree with all your observations. I think we are not looking to write an index of the marine and energy market. We're built good tools. We have good relationships. We're looking to come in in a pretty targeted way, and we're coming in with our eyes wide open. There's full recognition that particularly on the insurance side, it's a very competitive market and a lot of that translates to the reinsurance side. I do think there's some opportunities there and we're going to leverage into it slowly.
Okay, great. Just this last question. Historically, you actually provided what the credit part of the specialty casualty business is. Are you going to provide that going forward, or you would not just because it's easier from modeling purposes to do that?
That's a good question, it kind of stems back to how we manage the company and the segments. While there's several classes of product lines like credit, we really don't manage them separately, the fact of the matter is they have similar characteristics. In separating them kind of from a fully loaded basis would be inconsistent with how we look at it. Now having said that, we are planning to have a further premium breakdown in our K that gets filed later this month.
Great. Just because the earned premium part of that can make it a little complicated, just lump it all in. Thanks.
Yep.
Your next question comes from Ian Gutterman of Balyasny. Your line is open.
Hi. Thank you. I guess first, if I could just follow up on the Fibonacci question. For financial reporting, will it look similar to Upsilon in that we'll see a sort of managed cat, if you will, gross and most of it comes out net other than I or will it look different than Upsilon does and maybe look more like DaVinci?
My understanding is Fibonacci is not consolidated.
No.
I think it'll look a little different.
It's a variable interest, but we don't have a controlling interest, so we'll not be consolidated.
Therefore, like Upsilon, where we'll see the managed cat or not even there?
No, we won't be reflecting it as a managed cat.
Okay, it'll show up like other income as a fee income or something? How will we see how you make money, I guess, is what I'm asking.
Yeah.
Well, we'll be getting fees for servicing it and providing the management fee.
Okay, that'll be outside of underwriting income, then it'll be in this fee income line.
Yeah.
Okay, got it. Okay, you mentioned you took a big share in the NFIP program. I was hoping you could talk a little bit more about that. I guess the very little bit I've read about that sounded like, frankly, the rate on line wasn't that great because it was sort of the first time out and it's maybe more about putting something down the road, but it didn't sound like the returns on that were so hot. Is there anything you can clarify on that?
I think, firstly, I'd like to just point out that I think it's thematically good for risk to reside in the private market because the conversation we're having now is a really important conversation, which is: Is it priced appropriately for the risk being ceded? I think for that type of risk against the capital that we have, it was appropriately priced. I do believe it'll grow over time, and I believe the input and the exchange between the private market, the FEMA, and the NFIP will be extremely valuable in how to think about setting appropriate actuarial rates going forward.
Okay. Is it fair to say it's probably a higher combined ratio than typical cat?
I think there's two pieces to that question, is what is the standalone return and what's the marginal return? Marginally within our portfolio, I can say it looks great.
Sure, that makes sense. Okay. Then my other one's on the tax. Hypothetically, as you said, there's a lot of different ways this can play out, but if there were an outcome that made it worth your while to write more business on your U.S. paper, how difficult is that? I mean, obviously, I assume you probably keep as little capital in the U.S. today as you can and keep more of it in Bermuda. How easy would it be to restructure that to put more capital into the U.S., and are there any costs to doing that?
There's a couple questions there. Firstly, we've got a fully functioning platform in New York, and we're proud of the fact that we recently were upgraded with our U.S.-based balance sheet. We have a lot of flexibility as to how to underwrite business there. Your second question is how do we put together a capital structure that's optimal? I think a lot of that's going to need to be determined depending on what is changing within the tax codes in the U.S. over the next several months. I think we're in a very good spot to be able to think about it, and I'm delighted on the investments we've made over the last 12 to 18 months about building out the U.S. platform.
Got it. Do you have handy or if not will it be in an 8-K how much capital is in the U.S. at your end?
No. We don't tend to carve that out separately.
Okay.
It's in the Yellow Book. It's in our marketing materials. We've got about $500 million on our main balance sheet in the U.S.
Perfect. Okay. Thank you.
Your next question comes from-
Sure, thanks.
Your next question comes from Jay Cohen from Merrill Lynch. Your line is open.
Yeah, most of my questions were answered. Just to follow up on an earlier question on the rise in interest rates, can you guys specify what new money yields look like relative to your portfolio yield right now?
Yeah, thanks. Thanks, Jay. I think that's something I can get back to you on. I've seen that written up before, and just given the newness, I want to get comfortable before I say anything. Let me get back to you on that one. I do feel good about where the portfolio is positioned to take advantage of rates and where they're at right now. We're short duration 2.4. We got very liquid, short maturity portfolio. I see it as a pretty good ability to adapt into 2017.
Great. I'd love those numbers when you get a chance later. Thank you.
Sure.
Your next question comes from Sarah DeWitt of J.P. Morgan. Your line is open.
Hi, good morning.
Good morning.
I wanted to ask a question about the demand for reinsurance longer term. If U.S. corporate tax rates were cut, the spread between a primary insurer's tax rate and a Bermuda reinsurer's tax rate would be more narrow. Would that make reinsurance a relatively less efficient vehicle and less attractive on the margin?
I think there's a lot of speculation that we'd have to make to kind of map out a full scenario. In general, I don't think that's the case. I think reinsurance provides a lot of advantages beyond just tax and earnings. I think the way I would look at it is, something we're going to have to solve over time, but I don't look at the tax rate between insurance and reinsurance as a gating issue as to whether the demand will rise or fall.
Okay. You wouldn't expect any incrementally less demand on the margin?
I think a lot of it's going to depend really on what happens, but I don't think tax rate, when people are looking at their top five reasons to buy, I'm not sure that they're looking at the relative spread between the tax rates as one of the important elements of it. I do think there potentially, if there's more tax generally in the system, there's more expense in the system, but that will be uniformly applied, whether it's insurance or reinsurance.
Right. Okay, great. Thank you.
Sure. Thanks.
This concludes today's Q&A portion of the call. I now turn it back over to Mr. O'Donnell for some brief closing remarks.
Thank you, everybody, for participating in today's call. Before I close, I'm sure many of you have seen the news that Todd Fonner will be leaving us on March 31st. Todd joined us shortly before the September 11th terrorist attacks. He's been a great contributor from the very beginning. He's advanced our thinking beyond just investments in the treasury function, where he's mostly dedicated his time and has always been willing to help in areas around the company. I will miss Todd, and I wish him nothing but continued success and future happiness. With that, I'd like to say thanks again and look forward to speaking to you in a couple of months.
This concludes today's conference call. You may now disconnect.