Thank you. Mr. Peter Hill, you may begin your conference.
Good morning, thank you for joining this first quarter 2016 financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive 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 May 27th. The replay can be accessed by dialing 855-859-2056 U.S. toll-free or +1-404-537-3406 internationally. The passcode you will need for both numbers is 84474528. Today's call is available through the investor information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on July 6th. 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 Jeff Kelly, Executive Vice President and Chief Financial Officer. I'd now like to turn the call over to Kevin. Kevin?
Thanks, Peter, good morning, everyone. I'll open the call with a brief overview, I'll turn the call over to Jeff to go over financial results. I'll come back on and speak in more detail about our business and the market. Last night, we released our first-quarter earnings, where we reported an ROE of 11.8% and an operating ROE of 6.1%. We had positive results in our Catastrophe segment, which benefited from low loss activity, and our Lloyd's segment, which had an especially strong quarter. Our investments portfolio also performed relatively well. While our Casualty and Specialty business experienced some unusually large loss activity resulting in a break-even quarter, it delivered strong growth and otherwise performed within expectations. As discussed on the last call, the market remains difficult, and we continue to see reductions to rates.
While we cannot change this environment, we can define our strategy and execute it well, and I promise that we will continue to exercise the same levels of discipline as we have in the past. This disciplined approach to capital and risk management is why we continue to be the preferred partner for a wide range of companies on both sides of the risk transfer equation. As others are becoming more risk tolerant, we are becoming less so. For example, we shrank the size of our property cat book by eliminating underpriced business. In addition, we managed our risk profile by increasing our ceded purchase in all three of our segments, most notably in Specialty. We've also diversified our risk and improved our overall return profile by building our Casualty and Specialty business.
The break-even results for this quarter do not alter our perception of this business or the correctness of our overall strategy. Several event-specific losses affected our results, which Jeff will explain in greater detail. These low-frequency, high-severity loss events were not a surprise, but a characteristic of the portfolios from which they emanated. Assuming our customers' volatility is what we do, and from time to time will result in a bad quarter or even a bad year. The losses we experienced over the quarter are idiosyncratic and not something I expect to continue. Over the long term, our record of profitability speaks for itself. This year, we will focus our attention more than ever on building and enhancing our client relationships, recognizing the changing market dynamics where a number of our clients are centralizing their purchases of reinsurance.
While our team has been disciplined and pulled back from business that did not meet our hurdles, we have also demonstrated market leadership by bringing unique and value-added services to our clients. With that, I'll turn the call over to Jeff.
Thanks, Kevin, and good morning, everyone. I'll cover our results for the first quarter and then, as always, update you on our top-line forecast for the remainder of 2016. While the first quarter was again relatively quiet in terms of catastrophe losses, we did experience higher claims incidents in our Specialty Reinsurance segment. Alternative asset results from our private equity portfolio were also depressed during the quarter. However, the decline in interest rates and credit spreads resulted in strong mark-to-market investment performance that helped our reported net income and book value growth. Year-over-year, top-line growth comparisons are skewed by the inclusion of Platinum's results only after the close of the acquisition on March 2nd in the year-ago period.
Moving on to the financial results, we reported net income of $128 million, or $2.95 per diluted share, and operating income of $66 million, or $1.51 per share for the first quarter. The annualized operating ROE for the quarter was 6.1%, and our tangible book value per share growth, including change in accumulated dividends, was 2.6%. Let me shift to our segment results, beginning with our Lloyd's segment, followed by the Cat segment, and then followed by specialty reinsurance and Lloyd's. In our Cat segment, managed Cat gross premiums written in the first quarter declined by 9% from the year ago period, driven by price reductions and our decision to pull back from risk that no longer met our thresholds. Recall last quarter we had highlighted our decision to cut back significantly our participation in the assumed retro business at the January 1 renewals.
As a reminder, managed Cat includes the premiums written on our wholly owned balance sheets, as well as Cat premium written by joint ventures, DaVinci, Top Layer Re, and Upsilon. Net premiums written for the Cat segment decreased 15% from the prior year period, reflecting increased purchases of retro reinsurance relative to a year ago. The first quarter combined ratio for the Cat unit was 27.5%. Catastrophe losses were benign, and net favorable reserve development totaled $6 million in the quarter. In our Specialty segment, gross premiums written increased by $245 million relative to the year ago period. There were two main drivers of this growth. First, as I mentioned earlier, there was a timing difference between the year ago period only reflecting business written by Platinum during the month of March.
The other driver was significant growth in our credit book, primarily reflecting increased mortgage reinsurance opportunities that we had also highlighted on last quarter's call. Our top line in the quarter included $139 million of credit-related premiums, principally reflecting a few large mortgage reinsurance deals. While we book premiums written for the mortgage reinsurance deals at inception, they have a long duration and consequently are often earned over a period of approximately 10 years. As we've grown our specialty book, we have also increased the use of ceded purchases to enhance overall returns. Consequently, we are actively managing the net retained risk across our casualty and specialty book, and particularly in the newer credit lines where we've been growing. The specialty reinsurance combined ratio for the first quarter came in at 100%, which was essentially break even. Attritional loss trends have remained generally benign.
The segment reported net adverse development of $3.5 million in the quarter. Continued favorable reserve development on attritional losses of $17 million was more than offset in the quarter by approximately $21 million of net unfavorable development on six event-driven specialty claims. Those events included a bankruptcy surety claim, two train derailments, a dam failure, and an energy loss. Our practice for specialty events which have low frequency but high severity loss profiles like these, is to put up additional case reserves against the loss. Thus, of the total event-driven reserve strengthening this quarter, $19 million related to ACRs, which is well above the reported loss level for these events. The expense ratio of 40.9% in specialty reinsurance was five points higher than in the year ago quarter, principally due to higher acquisition costs related to the credit lines.
In our Lloyd's segment, we generated $133 million of premiums in the first quarter, an increase of 2% compared with the year-ago period. Our growth rate is lower than we had indicated in our guidance for the year and is reflective of a generally competitive marketplace. Net premiums written at our Lloyd's unit are down 19% for the quarter. If you recall, we have meaningfully increased our sessions at Lloyd's to manage the risk profile of the business as we have grown in recent years. The Lloyd's unit came in at a profitable combined ratio of 90.4% for the first quarter, reflecting generally benign loss experience. The unit reported $1 million of net adverse reserve development in the quarter. The expense ratio at 46.3% was slightly higher than a year ago, but better than in the fourth quarter.
The expense ratio continues to be impacted by the use of ceded purchases relative to our top-line growth. Turning to investments, we reported net investment income of $29 million in the first quarter. Recurring investment income from fixed maturity securities totaled $36 million for the first quarter. Our alternative investment portfolio generated a loss of $6 million in the first quarter, reflecting $9 million of negative marks on our private equity investments, which were slightly offset by positive performance on other investments. Performance in our private equity portfolio was weaker than anticipated, with a few funds posting mark-to-market losses during the quarter. The annualized total return on the overall investment portfolio was a solid 4% in the quarter. A decline in treasury yields and credit spreads for many investment classes resulted in strong unrealized gains on investments.
Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure. The duration of our investment portfolio remained relatively short at 2.2 years and is stable to where it has been in recent quarters. The yield to maturity on fixed income and short-term investments was slightly lower at 2%. Our capital and holding company liquidity positions remain very strong. During the first quarter, we bought back 769,000 shares for a total of $85 million. We have not repurchased shares since the end of the quarter. As we look forward, any decision relating to share repurchases will, as always, depend on our view of business opportunities, the profile of our risk portfolio, and evaluation of the stock. Finally, let me provide you with an update to our top-line forecast for 2016.
At this time, we are maintaining our prior top-line guidance for each of the segments. I'd remind everyone, as always, that premium estimates of this nature are subject to considerable risk and uncertainty, and our goal in providing them is to give you our best estimates at this point in time. With that, I'll turn the call back over to Kevin.
Thanks, Jeff. As Jeff just mentioned, our property cat segment performed well with a combined ratio of 27.5% for the quarter. Like everyone, we are facing a very competitive rate environment in the cat market. While we cannot control rates, we can control the amount of risk we take. As I discussed earlier, that risk is down year-on-year. The major renewal for the quarter was Japan, which was again competitive. Despite another round of price reductions, pricing for Japanese earthquake risk remains higher than prior to the Tohoku 2011 earthquake. We are quite pleased with the portfolio that we constructed and even found a few opportunities to grow with good customers and adequately priced layers. As we approach the June 1 renewals in Florida, many of the major trends from prior years continue to resonate.
Overall, while there are many moving parts, demand in Florida looks like it will be roughly flat. However, we continue to expect pricing pressure at this renewal due to ongoing abundant supply, although we anticipate the price decreases will be more muted than in prior years. We believe, however, that we can continue to construct a market-leading portfolio. As always, we will exercise discipline and ensure that we are paid adequately for the risk that we are assuming. For primary companies operating in the Florida homeowners insurance market, premiums are down, and loss ratios are up. Florida insurance companies are still profitable for the most part, but this is not a positive trend. These deteriorating conditions have implications for both the health of our clients and the post-loss social inflation environment, we're watching them closely. Turning to our casualty and specialty book.
As I discussed at the beginning of the call, we recognized some losses within the casualty specialty portfolio in the first quarter. As Jeff mentioned, these are event-specific losses, and we believe are not indicative of any underlying trend. While it's not customary to speak of events in casualty and specialty, perhaps because of our property cat roots, we sometimes discuss the book in these terms. In looking through some of our reinsurance treaties, we identified a few events that we believed needed additional ACR. What this means is that we increased our loss reserves in excess of what the clients reported, as we had thought these events were subject to greater uncertainty than generally appreciated. This is strictly a retroactive adjustment and does not inform our current book or any expectations for our reserves more broadly.
Overall, the reserves for the affected classes have developed in line with our expectations of loss emergence. The unusual aspect of this quarter is that the loss emergence appears in somewhat of a cluster. There have been other quarters where we have been fortunate to be on the other side of this volatility of loss emergence, gauged over a longer timeframe, these portfolios are performing as expected. Even though the marketplace remains competitive, there were signs that ceding commissions may have topped out, which is welcome news after several years of increasing generosity to cedents. Unfortunately, there are also signs of increased rate competition on the insurance books that we are protecting, with that, we expect to see higher loss ratios and less margin in this business over time. We continue to see select growth opportunities in casualty and specialty.
Although these were primarily in the financial and credit lines, we were reduced strongly in the mortgage reinsurance phase. Mortgage reinsurance has the type of business profile that we like, one in which the market needs our capacity and is looking to transact with only a select number of well-rated and highly respected reinsurance counterparties. In general, we always look to grow our business with core clients in areas in which we are able to generate the best returns. The characteristics of this market match well with our three competitive advantages of customer relationships, risk selection, and capital management, we are optimistic there will be more opportunities to deploy capital in this area. Moving to our Lloyd's business now. Our Lloyd's unit had a profitable quarter, delivering a 90 combined ratio.
We are seeing steady progress in the growth of this business, which continues to develop as a winning franchise with great potential. We believe that we are building an efficient portfolio in Lloyd's, and look to that segment to be a meaningful contributor to our profitability over time. Results for the quarter were substantially better than for the previous quarter. While we are very pleased with Syndicate 1458's performance, we should remain mindful that results for this business will average out over the long term. As discussed last quarter, one should not be overly focused on a good quarter or a bad quarter. On the gross to net side, we've constructed an attractive gross portfolio, and the capital efficiency of the book was improved by virtue of our ceded strategy. Finally, I'd like to briefly discuss a few of the losses that occurred after the close of the quarter.
Let me start with the earthquakes in Japan and Ecuador. While it's too early to accurately estimate the losses from either of these earthquakes, our initial expectation is that due to the way in which the personal and commercial risk is covered, and also the types of business our exposure emanates from, our losses will be limited. In Japan, the excess of loss covers purchased by Japanese companies are not likely to be materially impacted, and therefore, by extension, should not affect the retro market. While the Japanese proportional covers may result in losses to reinsurers, we are not a significant writer of this business. In Ecuador, we anticipate that our loss will be low, given the level of insurance penetration in the country. Similar to Japan, we don't see Ecuador impacting our retro book.
As you will remember, we reduced our exposure to this area significantly at the January renewal. In addition to the earthquakes, Texas is experiencing volatile weather, including significant hailstorm losses. As with any large U.S. property cat event, we will likely have some exposure. While we're in the preliminary stages of evaluating the losses, we think that the hail activity will likely result in some losses to the lower end of regional covers, but will be retained by the national primary carriers. With that, while we expect some loss to flow to us and the reinsurance market generally, but for the most part, losses will be retained by cedents. With that, I'll turn it over for questions. Operator?
At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Kai Pan with Morgan Stanley. Please go ahead.
Good morning, and thank you. I want to get more detail on the reserve addition in the specialty line. What were these clients? Was it written offshore or written in the U.S.? What's the reason behind you have to add it to it? Is that they're late reporting or you have additional information you added to it? I just wonder, will that change your reserving process and practice going forward?
Thanks, Kai. I think maybe anticipating a couple of questions around this, maybe it'd be useful to maybe expand on Kevin's description a little bit on the numbers, the process, and then any conclusions that we draw from these developments. As we said in the prepared remarks, the segment only had about $3.5 million of adverse development. It's important to bear in mind that that's relative to $1.8 billion in casualty reserves. It's relatively small. It does mask the fact that there was $17 million of favorable development on attritional losses. Then, as I think I mentioned in my remarks, is $21 million related to the specific events. To answer your first question in terms of the geography for the events, some were in the U.S., some were elsewhere in the world. I wouldn't describe them as concentrated in any one geography.
Given our process, maybe talking about our process just a minute. As Kevin said, historically, I suppose it's given our cat roots, we tend to look at these kinds of large industry losses as more as events, almost similar to a cat event. This is consistently how we've looked at events in the specialty block over time that include the subprime crisis, the Madoff fraud, LIBOR rigging scandal, the VW situation, and more recently, the Tianjin explosion in China. We look at these events and our underwriters working with our finance team and actuary make a judgment about whether or not we have more information that makes us want to or indicates that perhaps this event is larger than we anticipated it would be.
I think that's the case in the six particular events that we got new information that caused us to reevaluate the size of the event overall. Lots of times we have to make an assessment of the size of the event and our potential exposure before we get reported losses from clients, and to some degree or another, that's the case in this instance. Then I think, in terms of what conclusions do we draw from anything that happened in the quarter, I think as Kevin said, given that these six events aren't related to one another in almost any way that we can think of, geography, peril, line of business, we don't take away any trend in these, and thus don't see any need to change our process. Our process this quarter was no different than in any previous quarter.
Okay. Just add on to that, to follow on to that. In the past, if you look at these events more like a cat event, but your track record has shown that in your property capacities, you tend to be more conservative initially booking the losses and then gradually can be released through years. What's different here?
I wouldn't characterize. I think to your point, I think we have a very strong track record of reserving across all of our businesses, and that's certainly the case in cat. We don't look at these any differently in thinking about the industry loss than we would as if it were a cat event.
Okay.
I try not to talk in terms of conservative or anything other than that. We try and make our best judgment at the time. We put up reserves against any loss, I think over time, we've evidenced a pretty good track record in that regard.
Stepping back, if you take out this $20 million, consider one-off reserve addition, then if you normalize your private equity fund return to another $20 million, this quarter, the ROE would be probably around 10%. I just wonder, is this the new normal in the low cat quarter, like low double-digit returns?
I think that's a great question. I think you're taking a couple things out of what's actually a pretty complicated quarter. I think if we talk about what's in the quarter, we can get a sense as to the moving parts that we're experiencing. I'd say other than the fact that we are several years into a soft market and returns are down, I'm not sure there's a lot of signals in what I'm seeing in the quarterly report that we put out. Looking at cat, we've talked about it being a competitive market, as you'd expect, we are writing a good portfolio and we are de-risking it as rates are down and our risk tolerance is up.
Looking at specialty, I think I would really try to determine whether the book at the highest level, the information that we have with the losses is whether the book is adequately priced or whether the book is adequately reserved. Our view is that we've written a good book and that we're continuing to position it to where the rates are best, hence the growth in the financial lines and specifically the mortgage. I think the pressure on ceding commissions and the fact that that's beginning to abate is good news. On the other side of it, we're beginning to see some rate tension and some rate competition in the primary books that we're protecting. Our underwriters are trained to monitor that and to evaluate that, it's something that we're watching closely.
Thinking about it, I'm not sure there's a ton of signal in the way to think about our returns, only in the fact that there's a lot of moving pieces within the cat book and the specialty book. Additionally, we had the investment performance this quarter, which had both mark to market gains on the fixed income portfolio and then some marks on the private equity. Again, our strategy on that book is the same, our perception of the earning capability of that book is what it has been. I feel like what we're doing is the right things in recognition of a soft market, there's a lot of moving pieces around. It's hard to isolate and then try to extrapolate forward.
Okay. That's very helpful. If I may, last question is on the buybacks. It looks like buybacks is a little bit smaller than your net income for the quarter. Are you still committed to return more than your earnings through the year?
Thanks, Kai. Yeah, as I think I said on last quarter's call that we anticipated to buy more than we earn in the year, and at this point in the year, we don't see any reason to alter that guidance to you.
Okay. Just want to make sure, the earning you're referring to, because they're big delta this quarter, is the net income or operating income?
Yeah, I try not to focus on any. More than we earn, however you measure that, yes.
Okay. Thanks.
Your next question comes from Vinay Misquith with Sterne Agee. Please go ahead.
Hi, good morning. I just wanted to follow up on the adverse development. Would it be fair to assume that the underlying business really hasn't changed, that's the reserving on the underlying business, and that still is trending in the right direction, you said $17 million?
Yeah. On both accounts, that's correct. I think, Jeff, what we're trying to do here is provide a ton of transparency. In thinking about the $17 million with attritional loss development on our curve, and then thinking about the fact that we added additional reserve to some specific events, is really just us trying to put more transparency around the loss that we have in the quarter, which ultimately is $3.5 million. We've not changed our view of our risk, and we think that if you're looking at signals coming out of the reserves, a stronger signal comes from whether you have the frequency of your loss emergence is changing, not whether you have what I'll call an unlucky quarter with a cluster of larger events coming in.
Sure. Also just curious about whether this adverse development tells you anything about the book of business that you wrote. First of all, it would be helpful to understand whether this came from the Platinum business, number one. Number two, RenaissanceRe is growing pretty significantly in specialty, curious as to whether this reserve addition adds color to the growth that you've had before.
Again, good questions. Traditionally, the way that I think the quarter would be reported from an actuarial sample would be that we had $3.5 million of adverse development against $1.8 billion of total reserves. We are bringing in the other information to give some transparency, the reason we want to give that transparency is we believe there's not a signal in the reserve development we've had for the quarter. We do have a slightly different process than many in that we think about things from an event mentality, which allows us to put the loss up when we hear about it, similar to what we did in Madoff. Then over time, we'll determine whether it was the appropriate reserve as the rest of the curve runs out. I think the other question you have is between whether it's the Platinum book or the Renaissance book.
We're a fully integrated organization, we don't think of us as having a legacy Platinum book or a legacy Renaissance book. I would say the books of business that are most affected by this really come in to the excess casualty. We have some surety in financial lines and a little bit of general casualty stuff that comes in. It's reasonably spread, it's written across multiple platforms, it's coming in from different types of loss into different types of lines. It's hard to categorize it as one or the other.
The only thing I would add, Vinay, related to that, is that our reserving processes across both the legacy Platinum organization prior to, or what would've been prior to close, and RenRe have been synced up since the day of the close. We've been operating our reserving processes, they've been synced up since the close. Then the only other thing that you touched on, I don't know whether Kevin mentioned, just to close it off, we don't think these reserve additions at all inform any view of the profitability of the in-force book or the areas in which we've grown over the last year or two.
Okay, that's helpful. The second question is on the profitability, actually, the reported profitability within specialty and Lloyd's. The accident year loss ratio actually was significantly better than the prior three quarters. Was there something special this quarter or should we expect this level of profitability for the future?
I think from an accident year perspective, it was just a relatively benign loss experience.
Okay, one last thing, if I may. The ceded reinsurance increased significantly both in specialty and Lloyd's. Should we be thinking about that moving forward too, or was it just a one-quarter issue?
I think in looking at the Lloyd's, we had a bigger increase, and we talked more about it probably in the fourth quarter than we did in the first quarter for the Lloyd's increase in specialty. The ceded specialty is one where we're doing that to enhance the returns of the portfolio. For instance, one of the places that we're continuing to see a lot of opportunity to grow is in the financial lines and credit lines, most specifically in the mortgage. We're buying more ceded in that area because it allows us to construct a better portfolio as we continue to grow it. It allows others to leverage off our expertise and access the business because of our strong ratings. We're exchanging risk premium for fee income.
The opportunity, we will continue to increase our cessions in that matched up against the opportunity we have to write that business. To give you some sense of scale at this point, we're ceding and representing other capital for about 50% of the business that we're writing right now.
Okay, that's helpful. Thank you.
Thanks.
Your next question comes from Michael Nannizzi with Goldman Sachs. Please go ahead.
Quick numbers on this first. The guidance then based on 1Q results would seem to imply that you would expect specialty to shrink for the rest of the year and Lloyd's to grow to sort of make up for 1Q, so somewhere in the neighborhood of 30% a year. Is that directionally effectively what you're saying?
Starting with the cat, I think our guidance of down 10% seems reasonable. On the Lloyd's, some of the things that we anticipated growing were lightly represented in the first quarter. I think we will see, or we hope and anticipate that we'll see better growth as we go through the year. Specialty, I think specialty still continues to be on the lumpier side. I think we are seeing better opportunities, and there's a very good pipeline of mortgage deals, particularly from the GSEs, coming down the pipe. We won't stop accepting specialty business because we have guidance out. If our ability to write profitable business is greater than our guidance, we'll revise it over time.
Okay. Got it. The items, sort of loss items you mentioned in the quarter, did that impact Tower Hill in the quarter as well?
The Tower Hill from the reinsurance that we write for Tower Hill, that's predominantly property cat stuff. The type of AOB loss that is coming in is not something that would affect those reinsurance. The piece that it would affect is that we're an owner of Tower Hill, and Tower Hill's profitability has been affected by the assignment of benefits claims in Florida. I think they are increasingly sophisticated in the way that they're handling those claims, and I hope that over time it'll become a lesser story than it is right now.
Okay. Got it. Just one other quick one. On the specialty then, the expense ratio that ticked up in the first quarter, just given the mix of the business and how you're growing, is that where we should think about that? On the operating expense side, should we be thinking about that in terms of notional dollars or a percentage?
Yeah, I think on the specialty expenses, the operational expenses and the acquisition expense, the expense ratio overall. For the operational expenses, I think what you're seeing there is really 3 full months in this quarter versus last quarter and the increased headcount in that segment. It is the largest part of the Platinum integration that got integrated, moved into the specialty platform. That's not surprising. I think on the acquisition expense, that's a function of both the increase in the level of premium and the change in business mix from a little more proportional business and the increase in the mortgage business, which carries higher acquisition costs. To the extent that that business mix is roughly consistent going forward, I think that's a fair assessment.
Got it. Just one last one, if I could sneak it. Picking up on Kai's question, I guess looking at your historical results, you're in light cat quarters like this one, ROEs were those are your best ROEs. Just because even though with soft pricing, a lack of activity to sort of move together, and those were the years where book value grew the most and margins were your best and ROEs were the best. I guess, in this market, is it right to compare what we got today to your average historical, or is it right to compare this to, again, and this is adjusting for investment, the shortfall in investment income, I'd get to about that same sort of 10% ROE number if we sort of normalize those items.
Is it better to compare this to your average historical or to kind of those peak years when you've benefited from a lack of cats?
It's a good question, and it's a hard one to answer. I think looking at the book of business, I think our cat portfolio performed well, but I also think we're a different company today than we were before, where we do have the diversity coming in in most quarters from the specialty business. I think the other thing to think about is just, or what I'd like to convey is the way that we think about the business, which is we're not trying to build the best portfolio in a low cat quarter. We're trying to build the best portfolio against all outcomes. If we wanted to optimize our returns in a no cat quarter, we would just write more, we'd expose more capital, we'd buy less. Everything that we're doing is trying to come up with the most efficient portfolio.
We've got guidance out at down 10%. We're writing less. We're reducing risk and exposing less capital, and we're buying more ceded. I think it is hard to compare exactly what we've done in the past, but it's 100% rational to think that rates are down significantly after several years of a soft market. It's a little bit of a mixed bag as to how to think about it, I'd say.
Yeah, the only thing I'd add to what Kevin said is I think it is difficult to compare because the facts and circumstances in prior years don't compare well with these. The way we run the business at any point in time might not compare with that in terms of the level. Is it a risk on, risk off here? As Kevin mentioned, we've been buying a lot of ceded protection and reduced risk in really all three of our segments. There's the interest rate environment, which is historically low by any comparison.
Right.
There's our capital position. I think we're probably in one of the stronger capital positions I can certainly remember since I've been here.
Got it. Okay. Thank you so much.
Yep.
Your next question comes from Sarah DeWitt with J.P. Morgan. Please go ahead.
Hi, good morning.
Good morning, Sarah.
Following up on the capital position, your premium to equity of 35% is near all-time lows, even though your book is less CAT dependent. Is it correct to think that you could probably double your operating leverage and you have nearly $2 billion of excess capital, and if so, why hold so much capital?
I don't think premium to equity in our business is probably a terribly useful metric, just because there's a lot of different ways that we take on economic risk, so I wouldn't necessarily use that term. That said, even based on what I said, I think we have a very strong capital position. I think we've tried to say in previous calls, we always look to return what we don't think we can use after we've looked at the risk in the book, and admittedly, I think the risk in the book, relatively speaking, is lower. We also look at potential opportunities and other ways to deploy the capital and hold some amount of capital for that. That said, as I noted earlier, I think we're in an extremely strong capital position.
We look at the share price in terms of a consideration as well as to when and how much we buy back shares. I think as we said at the beginning of the call, we intend to buy back more stock this year than we earn.
Okay, great. Just on the net investment income, what's the right run rate to be thinking about there, and have the private equity investments rebounded so far in the second quarter?
Well, putting a pause on the second part of the question. I think that if you look at the recurring net investment income in the quarter of about $36 million, that's actually pretty consistent through time. We've been earning roughly that on the fixed income portfolio. That's reflective of the duration, the yield on the book at its current size. I think that run rate is likely to hold for some time. We've had a rather sharp rebound in the equity markets since the end of or during the last couple of months. I'm certainly hopeful that the private equity returns are higher, but that's one that we don't get a lot of intra-quarter information about. We make our best estimate of the value of those funds on a real-time basis at the end of the quarter. We'll see how it develops.
I'm optimistic based on where the public equity markets are that those are in for a better quarter this quarter.
Okay, thank you.
Your next question comes from Brian Meredith with UBS. Please go ahead.
Hi. Yeah, a couple of quick questions. Jeff, I just want to clarify, the guidance in specialty, that is on an apples-to-apples basis, or does that include the extra two months that you're going to get this year from Platinum?
It includes the extra two months that we'll get from Platinum.
Okay.
I think as I said in my prepared remarks, there's two parts of it. It's big growth on a dollar basis. It's two parts. It's the credit related deals that we've been doing and the Platinum growth.
Gotcha. Makes sense. Then just another quick, just accounting, where does this fee income hit that you get on those mortgage reinsurance deals? Is that going to be a credit to your acquisition costs or hit somewhere else?
It'll be a credit to the acquisition cost.
That should offset some of the higher acquisition costs associated with that business?
To some degree.
I think it'll take some time because it'll be based in some degrees on the profitability of the portfolios.
Got you. Okay, great. Last question, just Kevin, you mentioned in looking at the specialty business that you said competition increasing some of the primary lines that you're seeing, and you expected maybe some margin compression going forward. Just curious, could you be more specific on what lines you're seeing the increased competition?
Yeah. I think if we were looking at it, I would say it's probably more in the specialty lines than in some of the more traditional casualty lines. An extreme example would be we have a very small airline account. There's been a lot of aviation competition. On the positive side, we're seeing good opportunities in the mortgage as we discussed. I think the general casualty is more of a mixed bag, where we're seeing it's more of an account specific. I think it's hard to draw that conclusion for the market at this point. When you see some price deterioration on some accounts, it's not crazy to begin to think that the whole market will begin to become more competitive.
I would sit on in the highest. Let's say it's more specialty than the traditional casualty lines. Within the casualty lines, it's more on specific accounts, which again, we're watching closely to see if it becomes more of a market-level competition. Actually, I want to point out some of the professional lines we're seeing increased competition, I'd say more broadly as well.
Professional lines. Great. Thank you.
Your next question comes from Josh Shanker with Deutsche Bank. Please go ahead.
Thank you. Repeating some of the points earlier, but just trying to clarify, the loss events seen this quarter, the higher frequency than normal, are these widely distributed throughout the industry? We've only had a few reporters, but it doesn't seem like those companies that have reported so far have the same amount of concern that you guys do. Do you think that these were one-offs that you took a large piece of? Do you think that as more reporters report their numbers, we'll see that this is a bigger issue for the industry in general?
I think that's a good way to think about it. We are a very small percent of the insured loss on this, and it's coming through a lot of our different books of business. I think these are industry events. I think most of these events have been on the cover of the paper when they occurred. I do believe it's affecting people more broadly. I think the unique thing about us is just the way that we talk about these losses, where, going back to the previous comment, I think net, a traditional way to talk about this is you have three and a half million of adverse development and wouldn't get into the specifics of the moving parts. We're trying to give you a little bit more clarity as to how we're thinking about it.
Secondly, I think our cat-biased background naturally pushes us to think of these in terms of events where the rest of the market will think of them as already in current reserves.
Okay. That's a perfect answer. One thing which has probably been asked six ways since Sunday for years, following up on what Sarah had asked about capital, is there a way to think about how much less risk your balance sheet might be bearing for catastrophe than it might have been doing so four years ago?
I think that's a great question, it's one that it's different by region and it's different by loss level, which always makes it complicated. I know we've talked about that before. I would look potentially at what our session is and look at our gross cat premium to our net cat premium, and you'll see that there's a lot of premium that we're representing on behalf of other capital. The most specific example I can give on that is thinking of the FHCF line that we put out last year. At the end of the day, we brought 19 sources of capital to that. It's hard to be really specific as to how risk is represented on our balance sheet today as compared to how it was represented years ago.
I'd say that we are being very thoughtful and aggressive in thinking about constructing our net portfolios using traditional and non-traditional sources.
All right. Well, if you ever decide that you want to give people a better understanding of how to think about that, I'll be first in line to listen.
Appreciate that. I think it's one of those that the way we think about it is in such an integrated way across the risk that we're taking, that it's difficult for us to come up with a simple metric that represents the risk in a material way and in a helpful way.
It makes complete sense. It's just hard for yokels like me, as you probably imagine.
Well, I don't think you're a yokel, and I know it's difficult, and I wish we had a better way to communicate about it that didn't push out too much information to our competitors.
No, I completely understand. Thank you very much.
Yeah.
Your next question comes from Jay Cohen with Bank of America Merrill Lynch. Please go ahead.
Yes, thank you. Just a couple of other questions. Outside of the main thing we've been talking about, your corporate expenses, those obviously have jumped around as you had some integration expenses in there. Are they still inflated because of the integration with Platinum, and where would that settle out, do you think?
Thanks, Jay. We had corporate expenses in the quarter of about $8.2. Of that amount, roughly $1 million related to severance for one of our employees, and then we had an additional $1.6 million related to continued integration expense in the quarter. If you think of the $8.2 less those two amounts, that would have been about $5.6 million. We're going to incur about $3 million, I think, in integration expenses over the remainder of 2016, and then only about $300,000 in 2017. Net-net, the way I think about corporate expenses kind of landing in a range is probably somewhere between $5 million and $5.5 million on a quarterly basis.
That's really helpful, Jeff. Thank you. The second question, on the Lloyd's business, I think, Kevin, you said that your increase in ceded premiums there impacted your expense ratio, but you really didn't describe exactly how it's impacted it. Can you talk about that?
It was lower earned premium from the cessions that we had coming through.
It inflated it?
It inflated the expense ratio, yes.
I just didn't know if it was a ceding commission that might have even offset it more. Now I get it. That's helpful.
Yeah.
Thanks a lot.
Okay. Yep.
Your next question comes from Meyer Shields with KBW. Please go ahead.
Thanks. I know this is unanswerable, but you mentioned in the specialty reinsurance that there was sort of attritional reserve development that was favorable, and I'm wondering why we're not seeing that sort of trend in the Lloyd's segment as well.
I guess your first part of the question was operative as it's unanswerable. The way I think about it, they're different businesses that we're building up. It's a smaller book within Lloyd's, and it's a book that includes both property and specialty. I think there's a couple pieces to it, but we do have a traditional within the casualty that we write and within the specialty that we write, in particular the casualty and specialty that's on more than one of our platforms, they're reserved the same way.
Okay. Understood. Again, here in specialty reinsurance, with regard to the mortgage insurance, I understand that the acquisition expense ratio is heightened because of the expenses associated with that. Are there any startup expenses that are associated with building out this book of business? Or is this a good run rate, assuming that this mix of earned premium and DAC amortization continues?
I don't think there's material startup costs associated with us moving into that business. It's a few underwriters writing on behalf of our existing balance sheets, it's not a material aspect.
Okay. Thanks very much.
Yep.
Your next question comes from Bill Wilt with Gordon Haskett. Please go ahead.
Hi. Good morning. Thanks for taking my call. My question, do you anticipate the changes to AM Best's BCAR, their Best's Capital Adequacy Ratio, to that methodology? Do you think that those changes will drive an increased demand for property catastrophe reinsurance?
Yeah, I think looking back, the last time AM Best changed a model, it created a big opportunity for us to sell additional cover. I think this time the conversations we've had with AM Best are much more measured in that in their analysis of the change in the model, it doesn't materially change people's capital requirements. My guess is there'll be some exceptions to that, but at this point in time, we don't have enough information to have real clarity as to what it means to our portfolio. If what we're hearing is accurate, unfortunately, it probably won't create much of an opportunity for us, but fortunately, it won't change our capital requirements.
Okay. Thanks very much.
Sure.
Your next question comes from the line of Ian Gutterman with Balyasny. Your line is open.
Hi. Thank you. I guess my first question is on these Texas events. I'm guessing with the spread of aggregate coverage over the past few years, a number of these local regionals and mutuals by aggregates, is there risk between the Q1 and Q2 events that we're going to see aggregates max out, maybe even blow out on the top to these companies?
Yeah, I think that's a great question, and it's something that we're looking at now. They're definitely going to be impacted. Now the question is by how much? Even if the aggregates are only eroded, it changes the profile of your risk exposure going into wind season.
Right.
It's something we're looking at now. The other thing is, it's been volatile. There was activity last night, actually. I think it's almost like a live cat right now.
Right.
The point you're raising is a really important point to focus on, not only as to whether we'll have losses from these events, but how it changes your exposure profile if the aggregates are materially eroded.
Got it. That's what I was wondering. Okay, great. Not to beat the dead horse, but I thought I'd ask things I don't think have come up yet on the specialty losses. First, given there are 15 events, were these all Q4 events that you just didn't have enough information on, or were they spread out throughout 2015?
It's a mix of things, actually. It's actually six events. I think we've thrown so many numbers at you, it's hard to keep track.
Right
It's a mix of things. I'll give you a specific, one of which is the Amtrak loss that happened between New York and Philadelphia. One of the things we've seen is the cap that was applied has been increased, so we're adjusting our reserve based on the fact that there's a retroactive increase in the liability cap associated with that event. It can be that specific on this sort of stuff. Other stuff is more difficult to assess, but we're making an assessment that is materially more volatile than what the market is assuming.
Got it. Okay. The other aspect, I think in going through the list, most of these, if not all of them, were non-property. I think there's a number of casualties. Mentioned the surety. I guess I think what's surprising to people, right, is we're kind of used to you guys always having the small events be releasing down the road. Those are all property. Is there something that suggests casualty is just a little bit harder? As you go into casualty, we might see more of this sort of the volatility might go both directions as opposed to usually it's going one direction because casualty is different than property reserving?
I wouldn't read into it being more volatile. Certainly, that's not my expectation. I think some of these losses have a property component to it. There's a property element, but we think there's liability associated with either the companies involved. An example of a combined event like that could be something like Deepwater or Horizon. It's not one of the ones we're talking about today.
Okay.
In general, we're writing an excess casualty book. I think excess casualty, in particular, is exposed to large events and some volatility. I think the real question then comes back as to how one reserves for it. We have more of that cat mentality. We think of it as an event. For many others say, "I've got an expected loss ratio against this book, and what I'm seeing as even though it might be a shock loss, it's contained within the normal reserves." It could be simply just a fundamental difference in the way people think about the same losses. None of these losses were the only one exposed to.
No, of course. I just was wondering if it was something where, I think you mentioned most of this was ACR. If I think of, say, a tornado event or a hail event or whatever, you guys are obviously have such robust data that you kind of, I think, probably know what the right ACR should be before the cedent does, right? I just didn't know if it's just a little harder to get that right and that maybe what I'm trying to ask is it feels like, and maybe I'm interpreting this wrong, but that these increases sort of surprised you, right? That whatever you thought the initial exposure was turned out to be more. Where on prop, I guess it seems you guys tend to have an information edge almost and not get caught off guard. Is that fair? Am I interpreting what you're saying wrong?
It's an interesting way to think about it. Let me explain what we do on Property. Property, we do a top-down, bottom-up analysis. Top-down, we take a view on the industry, we run data, then take a view on individual accounts based on market share and some other non-specific elements. We look at the individual account and run it from the bottom up and determine what that loss is, we can vector to the right number using those inputs. Within casualty, I think the loss is different, where over time you learn more, and the loss can spread among cedents, and it can spread to new lines. It can go from a property loss to a D&O loss, kind of across different categories. I think there are differences in the way we think about it.
We can't bring a market share approach to it. We do take a more traditional actuarial view, which I think is a healthy way to think about it. Then we take more of an event view, which is more unique to us and probably, again, an extension of our cat roots. I don't think I would point to it as being more volatile, but I think I would point to it as us just having a different process on how to think about it. If you go back, like we put up an event loss for LIBOR. Again, we're certainly not the only one exposed to LIBOR. I would imagine that others are looking to see how that develops over time and determining whether it's in attrition. We looked at it and said, "We think this is more of an event.
We'll put it up, Over time, hopefully come to the same place.
Got it. Makes sense. I'll cut it off there because I know we're running long. Thank you.
No, that's okay. Thank you.
There are no further questions at this time. I'd like to turn the call back over to Mr. O'Donnell.
Thank you, everybody. I know there's a lot of moving pieces this quarter. We tried to give you as much transparency as we can, and we hope that it was helpful. Thanks again for tuning in, and looking forward to talking to you next quarter. Bye.
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.