Thank you, Mr. Peter Hill. You may begin your presentation.
Good morning, and thank you for joining our second quarter 2012 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 approximately noon Eastern Time today through midnight on August 22nd. The replay can be accessed by dialing 855-859-2056 or 404-537-3406. The passcode you need for both numbers is 11170297. 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 October 10th, 2012. 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 factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With me to discuss today's results are Neill Currie, Chief Executive Officer, Jeff Kelly, Executive Vice President and Chief Financial Officer, and Kevin O'Donnell, Executive Vice President and Global Chief Underwriting Officer. I'd like to turn the call over to Neill. Neill?
Good. Thank you, Peter. Good morning, everyone. RenaissanceRe reported operating income of $111.5 million and net income of $142.3 million for the second quarter. This resulted in an increase in tangible book value per share plus accumulated dividends of just over 4%. Our results reflected strong underwriting performance and benefited from continued relatively low levels of catastrophe loss activity. Over the last year or so, we have been saying that we expected pricing in the property catastrophe market to improve gradually and steadily. That view generally held true through the first quarter of this year. We had anticipated additional firming at the 6-1 renewals, as it turned out, pricing was relatively flat.
We believe this was due primarily to new supply entering the market, several existing reinsurers becoming more interested in writing Southeast hurricane exposed business. The increase in demand was a little less than the market generally anticipated. We believe that the primary factors that were driving the pricing increases for over a year, that is, those learnings from the cat losses of 2010 and 2011. Companies having the time to form a view on RMS 11. We feel like both of those things have been absorbed by the marketplace now. I feel our decision to grow our property catastrophe book substantially at 1/1 was a good decision, and although pricing was generally flat at 6/1, we were able to write enough attractive business or define enough attractive business and write it to grow by 11% during the quarter and just over 20% year-to-date.
We now have a larger, more attractive book of business. We were able to produce this attractive portfolio as a result of executing well on what we call our three superiors: superior customer relationships, superior risk selection, and superior capital management. Turning to our international business, we were also able to improve the quality of that book. As we indicated last quarter, we continued to serve our clients in loss-affected markets such as Japan, Australia, and New Zealand by being a stable source of capacity, being there for them when they needed us. We integrated our expertise in science and risk modeling with our underwriting capabilities to develop an enhanced view of the risk we were assuming in those regions.
Our ventures team continued to work closely alongside the underwriting team this quarter, developing the most efficient ways for our clients to manage their risk and creating attractive opportunities for investors. In early June, we announced the formation of a new sidecar, Tim Re III, to target a portfolio of Florida-specific risks. This vehicle was formed to help our customers and brokers by bringing more capital to the Florida marketplace. It also offers the flexibility to expand and to provide more capacity should it be needed post-event. Tim Re III typifies the flexibility we've built into our capital structure, which allows us to allocate the right capital at the right time for what we consider to be the best opportunities. We were also able to bring new partners into DaVinci Re, who we feel will be valuable additions over the long term of this franchise.
Outside of property catastrophe, we have a strong specialty reinsurance team that continues to evaluate opportunities in a challenging marketplace. It's positioned to grow meaningfully when market conditions allow. We are pleased with the progress and results at our Lloyd's unit, where margins have continued to improve as the operation has scaled up. With the majority of our book now written for the year, we will remain focused on serving our clients as the rest of the hurricane season unfolds. The dynamics of the upcoming January 1st renewals can be affected by the level of losses during the Atlantic hurricane season and whether or not insurance and reinsurance companies are surprised by their losses that result from those events. From our standpoint, as we have often said, we don't wish for any particular loss scenario or outcome.
Rather, we strive to be able to play whatever hand we are dealt and to play it well. With the strength and flexibility of our capital structure, our underwriting discipline, and solid client and broker relationships, we are well positioned to continue to target attractive business opportunities as they arise. With that, I'll turn the call over to Kevin.
Thanks, Neill, and good morning, everyone. Today, I want to talk to you about each of our businesses, let's begin with cat. Last spring, we revised our models and mapped out a strategy to optimize our portfolio against what we thought would be a shifting market. Through our efforts over the last year, we constructed a significantly better portfolio than we would have achieved simply by renewing our existing book. Although we found good opportunities to grow at 6-1, we made a good call by growing by a larger amount earlier in the year when we believed that rates were best. We increased our peak exposure in Atlantic hurricanes and the geographic diversity of our book. In addition to changing our inward book of business, we completed Tim Re III, adding more vertical diversification to our Atlantic hurricane exposure.
We also improved the portfolio through additional ceded purchases, leaving our net exposure reasonably flat compared with last year. The unique combination of our experienced team, strong ratings, and superior access to business allowed us to execute this strategy and construct a portfolio that we feel is an attractive one. Moving on to Florida, there was a lot of speculation prior to the renewal that significantly more limit would be purchased. At the time, we thought that this view was optimistic, and the corresponding hope for significantly better pricing was unlikely. As it turned out, supply was greater than demand, with there being more capacity available than there was new limit purchased. Even though the net result was that market prices were about flat, we are nonetheless pleased with the portfolio we constructed.
Over the last year, we spent a lot of time talking with our customers about the impact of the RMS model revision. With the market having completed a full renewal cycle with the new model, we believe its impact on supply and demand is fully reflected. However, our customers remain concerned about the potential effects of future model changes, and I believe that the most enduring impact of the new model will be the increased focus on developing an independent view of risk. With our extensive in-house modeling capabilities, we believe we are well positioned to assist customers in developing this independent view, which will allow us to further differentiate ourselves from our competitors. That covers my main points on U.S. cat. The international primary cat and retro markets were pretty quiet over the quarter.
We increased our international exposure during the first half of the year through better pricing in loss-affected regions and improved opportunities to cede risk, including through our sidecar, Upsilon Re. I am pleased with the expanded profile of our book and happy that we had success in growing some historically difficult perils, such as Japanese typhoon. Our specialty business is doing well, and while opportunities for growth are somewhat limited right now, loss emergence remains favorable. Persistent low yields should make cash flow casualty underwriting increasingly less attractive, thereby increasing the likelihood of better market pricing at some point in the future. This trend has been going on for a while, and it still may be some time before prices increase. I'm hopeful that conditions will improve, and we will continue to monitor these markets closely.
With all the attention on the U.S. drought, it's worth noting that we have about $8 million of agriculture-related premium, of which $3 million is exposed to U.S. MPCI excess of loss reinsurance, mostly written through Lloyd's. Our premium is relatively small, keep in mind that this business is low rate on line, and consequently, we remain exposed to the ongoing drought. Looking forward, if losses do materialize, we believe we are well positioned to grow if the market improves in 2013. Our Lloyd's business continues to improve, driven partly by our growth into existing infrastructure. The book is pretty close to our original forecast for this point in time. I'm optimistic that due to our relatively small size within the Lloyd's market, we will continue to have good opportunities to grow, which should further improve our combined ratio.
I'm pleased to report our ventures team has been successful over the quarter in adding to our franchise with the structuring and funding of Tim Re III and raising new capital for DaVinci. REAL is having a good summer. To remind everyone, REAL provides risk mitigation products against weather-related events such as temperature and precipitation for corporate clients worldwide. In general, the summer season tends to be a lot smaller than the winter season. During summer, we are generally protecting customers from unusually cold weather, so we are benefiting from the high temperatures across the U.S. Thanks. I'll now turn the call over to Jeff.
Thanks, Kevin. Good morning, everyone. I'll cover our results for the second quarter and year to date and then give you an update to our 2012 top-line forecast. The second quarter was again a profitable one for RenaissanceRe, driven primarily by a relatively low level of insured losses, the higher level of earned price increases, and favorable reserve development. Weak alternative asset performance hurt net investment income in the quarter, although the total investment return was strong due to realized and unrealized appreciation in the value of some fixed maturity investments. Adjusting for reinstatement premiums, top-line growth was strong in the quarter and on a year-to-date basis. We reported net income of $142 million, or $2.75 per diluted share, and operating income of $111 million, or $2.14 per diluted share for the second quarter.
Net realized and unrealized gains, which account for the difference between the two measures, totaled $31 million. The annualized operating ROE was 13.7% for the second quarter and 16.7% for the first six months of the year. Our tangible book value per share, including change in accumulated dividends, increased by 4.3% in the second quarter and was up 10.8% year to date. Let me shift to the segment results, beginning with our reinsurance segment, which includes cat and specialty, followed by our Lloyd's segment. In the reinsurance segment, managed cat gross premiums written in the second quarter totaled $628 million, compared with $619 million in the year ago period. Adjusted for $23 million of reinstatement premiums in the prior year and $31 million of negative reinstatement premiums in the current year, managed cat premium growth was 10.6% in the second quarter.
It's probably worth spending a minute or so on the negative reinstatement amount. During the second quarter of 2012, our remaining IBNR for the 2011 New Zealand and Tohoku earthquakes of approximately $130 million was allocated to the contract level. In so doing, we re-estimated our allocation of losses from higher rate on line retro contracts to lower rate on line primary reinsurance contracts, resulting in a $30.7 million downward adjustment to our estimate of ultimate reinstatement premiums from these two large events. In addition, the reinstatement premiums were also impacted by changes to the ultimate losses for these two events. The net impact from the $30.7 million movement in ultimate reinstatement premiums and $4.7 million of favorable movement in reserves in these losses for these two events was $19.8 million after considering DaVinci non-controlling interests, profit commissions, and other items.
Premiums in the quarter included $38 million of gross premiums written by our new sidecar adventure, Tim Re III, which targeted a defined portfolio of Florida-specific contracts. On a year-to-date basis, managed cat gross premiums written increased approximately 20% compared with a year ago after adjusting for reinstatement premiums in the prior and current year periods. This compares with our top-line guidance for managed cat growth of 20% excluding reinstatement premiums for the full year. The top line growth during the quarter and on a year-to-date basis was driven by favorable market conditions as well as growth in the book. As a reminder, managed cat includes the business written on our wholly owned balance sheets, as well as cat premium written by our joint ventures, DaVinci and Top Layer Re, and our sidecars, Upsilon Re and Tim Re III.
The second quarter combined ratio for the cat unit came in at a profitable 33.8%. The results included $21 million in estimated losses from the derecho storm system that hit the mid-Atlantic states in late June. We experienced net favorable reserve development of $33 million for the cat unit. Some of the major drivers of the net favorable reserve development included reductions to our net loss estimates for the Tohoku earthquake of $11 million, the Thai floods of $4 million, and a $24 million reduction related to a number of smaller prior year events. Partially offsetting these was $6 million of reserve strengthening for the February 2011 New Zealand earthquake. For the first six months of the year, the cat unit generated a 24.4% combined ratio driven by generally benign catastrophe losses and favorable reserve development.
Specialty reinsurance gross premiums written totaled $37 million in the second quarter, which was up meaningfully compared with $24 million in the prior year quarter. The top line growth was primarily due to the inception of several new quota share programs and some loss related premiums. For the first six months of the year, gross premiums written totaled $138 million, which was up 39% compared with the year ago period. This compares with our full year forecast for top line growth of over 20%. Percentage growth rates for this segment can be a little uneven on a quarterly basis given the relatively small premium base. The specialty combined ratio for the second quarter came in at 64.7%. There was no meaningful large loss activity for our book during the quarter, and the combined ratio included $8 million of prior year net favorable reserve development.
On a year-to-date basis, our combined ratio was a profitable 62.7% and included $20 million of favorable reserve development. In our Lloyd's segment, we generated $50 million of premiums in the second quarter, compared with $34 million in the year ago period. For the first six months of the year, gross premiums written increased 49% to $105 million. Growth in this segment was consistent with our full year top-line guidance of up 50%. Specialty premiums accounted for most of this amount. The Lloyd's unit came in at a combined ratio of 103% for the second quarter. The results of this segment included $3 million of net favorable reserve development, which helped the loss ratio by 11 points. The expense ratio remained high at 53.7%, but has been declining sequentially as business volume in this segment has increased.
For the first half of the year, the combined ratio was a profitable 99.7%, with a loss ratio of 43.4% and an expense ratio of 56.3%. Moving away from our underwriting results, other income was a profit of $11 million second quarter, and a breakdown of that is provided in the financial supplement. Our weather and energy unit, REAL, reported a $6 million profit for the quarter, and we also booked a $4 million gain for assumed and ceded reinsurance contracts accounted for at fair value. The profit at REAL was a result of summer positions we took on in the U.S. and in the U.K., which benefited from unseasonably warm temperatures. For the first six months of the year, other income was a loss of $28 million, primarily related to losses at REAL. Equity and earnings of other ventures was a gain of $7 million.
This was driven primarily by a $5 million gain recorded for our share of Top Layer Re's results. We also booked a $2 million gain related to our stake in Tower Hill Companies. Turning to investments, we reported net investment income of $15 million, which was driven by a few factors. Our alternative investments portfolio, principally private equity, generated a loss of $10 million in the second quarter. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio and totaled $22 million for the second quarter. The total investment result on the overall portfolio was 0.7% for the second quarter. Net realized and unrealized gains included in income totaled $31 million during the quarter.
For the first six months of the year, we reported net investment income of $82 million, which benefited from strong performance of the alternative asset portfolio in the first quarter. The year-to-date investment return on the overall portfolio was 2.5%. Our investment portfolio remains conservatively positioned, primarily in fixed maturity investments with a high degree of liquidity and modest credit exposure. During the second quarter, we added some credit risk to our investment portfolio by increasing our allocation to corporate bonds while reducing our exposure to U.S. Treasuries and short-term investments. The duration of our investment portfolio remained short at 2.2 years, which was roughly flat compared with the first quarter. The yield to maturity on fixed income and short-term investments increased slightly to 1.8%. Despite having deployed more capital to our underwriting activities earlier this year, we believe we have capital in excess of our requirements.
During the second quarter, we resumed active share repurchases, buying back 1.2 million shares at a cost of approximately $88 million. Subsequent to quarter end, we've repurchased an additional 71,000 shares for a total of $5.3 million through this past Monday. Our ventures team remains active in meeting with potential long-term investment partners about joint venture opportunities. Our stake in DaVinci declined again to 31.5% as we have continued bringing on new investors. We view DaVinci as a long-term vehicle that offers clients a parallel risk profile to that of our cat unit. Finally, let me give you an update to our top-line forecast for 2012. Given that we have already written the bulk of our full-year premium during the first half of the year, we are maintaining our prior top-line forecast for each of our segments.
As a reminder, that guidance is up 20% for managed cat, up over 20% for specialty, and up 50% for Lloyd's. Thanks. With that, I'll turn the call back to Neill.
Okay. Thank you, Jeff and Kevin. I'll impart a little bit more information for the folks on the call. I broke our FRIP principles or values. You may not know what those are, but they're focus, respect, integrity, precision, and passion, and I failed number 4. I referred to Peter as David, his predecessor. With that, we'll open the call up for questions.
Operator? Hello?
At this time, if you would like to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Mike Zaremski from Credit Suisse.
Hey, it's Mike Zaremski. Thanks. In layman's terms, I'm hoping to clarify what exactly triggered the changes in reinstatement premiums and how that ties in with reserve changes. Was that triggered by downward loss estimates on 2011 cat events? Was there a contract misinterpretation? If you could help with that.
Yeah, sure. Let me give it a try and perhaps spend just a couple of minutes on this because it is a bit of a unique situation in that we rarely see significant movements in reinstatement premiums unless there's a large movement in the underlying loss estimate for the events. In this case, there really wasn't. The two events that contributed to the negative reinstatement premiums were the 2011 New Zealand quake and the Tohoku quake. Just in explaining the dynamics at work here, when we initially estimate our ultimate loss after an event, that estimate is a ground-up assessment of the event and contracts we believe could be exposed. In some instances, we have reported claims and can attach some of the reserves at the contract level, that is ACRs. Frequently, early on, a significant portion of that loss estimate is classified as IBNR.
Most of the contracts in the property cat market contain a reinstatement feature, so we also have to estimate the level of reinstatement premiums resulting from the event. For IBNR, since we don't know which contracts will attach to those premium, those premiums are estimated based on an estimate of the underlying business mix. The relative mix of whether, in this case, it was retro or primary reinsurance. As we get more information, we can begin, and indeed in this instance, did move event IBNR down to the contract level or down into ACRs. During that process, we're better able to judge the level of reinstatement premiums, what they'll be, and that was the case with our exposures to the Japanese and New Zealand quakes this quarter.
As I said in my prepared remarks, we moved about $130 million of event IBNR for these two events down to ACRs, and in the process, obviously had to make a call on which contracts were attaching and which were not. For both events, more of the loss ended up being allocated to lower rate on line primary contracts than higher rate on line retro contracts than we had originally estimated. As a result, our estimate of the reinstatement premium came down. The difference in rate on line between the retro contracts and the primary reinsurance contracts can be significant and as an example could be as much as, say, 25 percentage points. That was really the primary driver of the change, not a significant change in the ultimate losses for either event.
As we noted, the premium came down $30.7 million and the net favorable reserve development between the two events was $4.7 million for overall a $26 million impact. The other thing that's probably worth noting at this point as well is that for quakes, these events are still relatively recent, and with the passage of time, more information is going to become known to us and our estimates about the ultimate loss, and therefore, most likely, the allocation of reinstatement premiums among these contracts will continue to change. As soon as we have any new information or better estimates for those, they'll be reflected in that period. It was mostly a function of the allocation among contracts rather than a change in the overall loss for the events themselves.
To clarify then was there adverse development on New Zealand and positive development or lower development on Tohoku and the Thai events, or is that noise related to the reinstatements?
No, there was, I think, a little over $10 million of favorable development on the Tohoku quake, and I think it was just under $6 million adverse on the New Zealand quake.
Okay. Switching gears, would you be able to comment on the limits on your XOL U.S. MPCI? I know some peers have said that the limits are fairly high relative to the premiums.
Hi, this is Neill. Maybe I'll take a crack at that. As Kevin indicated, some of that business is relatively low rate on line business, you have more exposure. There are higher layers. To put it in context, that's a $3 million premium item. We have over 100 $3 million or greater premium items on the reinsurance assumed book. I wouldn't want to focus too much attention on this particular area.
Okay. Thank you. I'll go back in the queue.
Your next question comes from the line of Sarah DeWitt from Barclays.
Hi, good morning. Given your comments that property catastrophe reinsurance prices are flat, to what extent do you think you can continue to grow managed cat premiums further in the current environment?
Thanks, Sarah. The next opportunity to have meaningful growth in the property cat book is really 1/1. Thinking about that, I think the way to think about the world is what's driven price increases over the last 12-18 months. I think we need to split the world into just very simple U.S. and non-U.S. The primary driver in the U.S. has really been an updated view of risk, primarily driven by the RMS model release. Outside the U.S. was really a response to some large losses in specific territories. Most of those elements have been built into pricing. Going forward, I think we're going to have a different set of dynamics that can play into how prices change, but a lot of that will be determined over the next several months.
I think where prices are generally, particularly in the U.S., is there's ample opportunity to build good portfolios. Outside the U.S., it's a little bit more difficult, but we've certainly seen a lot of rate increase, moving many deals to what we would call the attractive bucket. I think there's still good opportunities to grow. As far as where pricing goes, I think there's a lot of that story that'll be told over the next couple of months.
Right. Sarah, it's Neill. Add a couple of things to what Kevin said. I think we'll see how the financial crisis in Europe plays out. We saw over the last year, one very meaningful client decide to purchase more reinsurance because of the effect on their assets. As some people with exposure in that area, if things change there or people may decide to buy more, which would create opportunities. Even though I said the RMS 11 was pretty well digested by the marketplace, there might be a few people that want to top up their program. Those are other influences that may create opportunities.
Okay, could you be a bit more specific about what opportunities you're seeing in the U.S.?
No, ma'am. Not to be trite, but we just do see additional opportunity, and there may be people that want to top up their programs. Kevin, do you want to add anything?
No, I think Neill pretty much summed it up.
Okay.
Your next question comes from the line of Joshua Shanker of Deutsche Bank.
Yeah. Good morning, everyone.
Hi, Josh.
Sorry to ask two more questions about the negative reinstatement, would it be wrong to say that you had favorable development in areas of the business where you get a reinstatement premium, and you had unfavorable development in areas of the business where you do not receive a reinstatement premium?
No, I don't think it would be right to say that, Josh. It's specifically on the two events that I mentioned. Although the one event, the New Zealand quake from February of 2011, actually had adverse development and negative reinstatement premiums. If you had adverse development, you'd actually expect positive reinstatement premiums. The other things being equal, the issue there was as we allocated the IBNR down to ACRs, the change in mix there between retro contracts and primary had such an effect on the re-estimation of the reinstatement premiums that it was negative as well as even seeing a small increase in the loss estimate for that.
Right.
For the Japan quake, we had favorable development there, you'd expect to see negative reinstatement premiums there. Again, the reallocation of the IBNR to ACRs resulted in mostly, again, a mix effect there on the reinstatement premiums.
Right. Josh, this is Neill. I can't resist to weigh in. I think Jeff has done a very eloquent job of explaining this. Picture this scenario. If some of these losses were in remote regions, say New Zealand, therefore a lot of the primary business is relatively low rate on line, whereas the retrocession business covers many territories. You might have a rate on line on the primary book of business of, say, four rate on line, and on a retro book, it could be 18% to 22%-ish. This is a highly unusual situation where you've got the differences in the rate on line. Typically, what would happen is you'd have one client go down, another client go up, roughly the same exposure limits, and we wouldn't be talking about this.
I think that is a good explanation. Given the new allocation in the reserves, a number of your competitors have started using something maybe called an RDE, which is a general pool for future losses. Are these losses that you've reallocated to, are you comfortable that they'll evolve into case? Or is this sort of unallocated losses for multiple events that could develop and therefore you have the reserve up?
No, Josh. This is not what others might call an RDE or what you might call an RDE. We reserve specifically for and separately for each event. This is simply a process of moving event IBNR. When the event occurs, we establish both ACRs and IBNR for each event. This is just the process over time of moving, as we get more information about that event, moving that out of event IBNR down to the contract level.
Okay. Thank you. I just want to say, I always appreciate the high level of disclosure, especially telling us where your losses remain for those events. If you can do that in the future, it's always appreciated.
Okay. Thanks, Josh.
Your next question comes from the line of Josh Sterling of Sanford Bernstein.
Good morning. I just wanted to follow up on, I think two, if I heard them correctly, comments that Kevin made. One, both around sort of your risk-taking and risk management posture. One that I think I heard you say, Tim Re adds vertical diversification. Separately that you've increased your top line obviously pretty substantially, but you've kept your net exposures relatively flat. I'm wondering if you can walk us through how the different pieces are moving, whether you're buying more retro, you're getting better terms, or just sort of restructuring in a clever way to be able to improve returns for shareholders without taking much more risk. Thanks.
Sure. Let me start with Tim Re III. What I mean by saying we're more vertical diversification is historically we've commented that we're hot down low in Florida, meaning we have a larger market share of smaller losses than larger losses. What Tim Re III really focused on is taking some of the high rate on line or the lower layers in Florida. We changed the risk profile throughout the distribution for Atlantic hurricane. The second piece is just what I was commenting on our net book, where exposures last Atlantic hurricane or last wind season to this wind season for Atlantic hurricane are about the same. That's really a combination of how we wrote our inwards book of business over the last 12 months. The bigger piece really is the amount of ceded and the way in which we purchased our ceded for the year.
It's kind of a combination of things where Tim Re III played a role in that ceded but very much focused on the low end. The rest of the ceded was a blend of things across the distribution as well as specific spots within the distribution.
Right. To add to Kevin's comment, we would have written the business we put in Tim Re III ourselves. By ceding that off to other investors, it de facto gave us more vertical distribution in the Florida market than we had before. I do think it's worth pointing out that the team's done a very good job purchasing a retrocession to make an attractive book even more attractive and efficient.
Yeah, I'll ask the follow-up. Given what you just said, this is almost a softball, but investors spend a lot of time talking about the impact of the capital markets, new capacity coming in, taking the edge off pricing. Yet you guys are big retro buyers, and I suspect you're probably buying reinsurance from a lot of these new entrants. I'm wondering if you could comment on how you think the net net, with perhaps lower peaks but more counterparties with which to spread the risk, how we as shareholders should be thinking about the net benefit for RenRe. Thanks.
Well, Josh, if there are any softballs being tossed, I get first crack. I appreciate you raising that. That's quite true. Sometimes people say, "Oh my goodness, there's competition out there." There's always competition out there, and we're in a very fortunate position to control so much business coming in that we have the opportunities on the incoming, and then we avail ourselves of new capacity to make our portfolio more efficient. That's the good side of additional capital coming to the market. It can help us out. Kevin, would you like to add to that?
I think Neill's absolutely right. There has been a lot of discussion about the collateralized markets, and I think we're uniquely positioned where we can sell across the spectrum of products that people want to buy. We have partner balance sheets. We have the ability to provide collateralized products and the ability to provide traditional reinsurance on rated balance sheets. From a competition standpoint, I think we're uniquely well-positioned. You're absolutely right on the capital side. We're also, I think, very well integrated to know when there's opportunities for us to purchase ceded from collateralized markets and manage the basis risk that might exist between reinsurance and those collateralized products. I see that, yeah, there is a degree of competition that's introduced, but it also creates an opportunity for us.
Great. Thanks, guys. Good luck this summer.
Thanks.
Thanks.
Your next question comes from the line of Michael Nannizzi of Goldman Sachs.
Thanks. Just to follow up on that different slice here, can you just talk about these collateralized vehicles? Where are you seeing the most competition to your own preferred slice of the market head-to-head? How do you differentiate the capacity and service that you provide from these other collateralized vehicles? Just one follow-up. Thanks.
Sure. I think the collateralized markets are increasingly playing across the distribution where going back historically, cat bonds came in traditionally at the high end of the reinsurance pillar. As different funds form with different strategies, they participate at different levels within the reinsurance tower. I think we look at them as just competition, whether it's a reinsurance company we're competing with or collateralized market, and I don't think that it's been a particular disruption at any one point in the distribution. Again, it does create some opportunity in that we can buy from the collateralized markets and manage the basis risk, and secondly, because of our flexibility, I'm thinking of how cedents want to transfer risk and how we want to match that against our capital. We can start an Upsilon Re.
We can do lots of different things to play in if we think there's a certain tranche of the market that is providing attractive returns.
Michael, it's Neill. One additional comment that several of our clients have mentioned to us is, collateralized reinsurance is great. You've got high probability of collection, et cetera, but they don't know the long-term viability of that collateralized market necessarily. We've been around about 20 years. We're known for paying claims and being there after a loss, where sometimes people are a little more hesitant to cede business to somebody that may be there for the short term. I think that's an advantage to us by having multiple capital resources and having a track record of being there for our clients for the long term.
Great. Thank you for those answers. Then one, on DaVinci, obviously the stake moved lower as you had some outside investors get involved. I'm guessing you sold a piece of your interest and didn't increase the total size of DaVinci's capital base. How do you anticipate that moves from here? I think you've mentioned a range of what you'd like your stake to be or where you'd like it not to be outside of. How should we think about that and whether or not you would choose to issue new paper or continue to sell down your own stake? Thanks.
Sure. Good question. I won't answer it too specifically, but what we do as we have opportunities to introduce new partners into DaVinci, if we think they are good long-term partners, we'll try to make room for them, and that's what happened in this case. We would've been happy keeping our own stake, but we had some good long-term guys come in, so it was reduced. I think we have said historically that we typically like to keep our ownership between 25 and 50. It could go a little under that or a little over that, but we think that's the strike zone.
Great. Thank you.
Your next question comes from the line of Ian Gutterman of Adage Capital.
Hi. Thanks. First, that was a very helpful, thorough discussion on the reinstatement. I just have one clarification left on it. The fact that as you allocate the IBNR, that there was less retro than you thought, does that imply then there's still unused retro limit that could develop adversely in the future?
Yeah. This is Jeff. I think the answer to that is probably, but I think what we're saying here is that our assessment at this point is some of those contracts are not being hit or are not attaching related to this specific event. I wouldn't say that they have the potential to develop adversely because of the way we allocate it. As I did say, though, the one thing you should remember is that this allocation that we just made this quarter is based on what we know today, and we could learn more going forward that, I guess theoretically, we could reallocate some of the loss back to the retro accounts. Our allocation this time is based on what we know right now.
Okay. That's kind of what I was getting at. Okay. Yeah.
Let me just add to that just briefly to make sure there's not any misunderstanding because once again, Jeff did a good job and he's technically correct as a good CFO he should be. But when we take down the reserves on an account, we're not going to take those reserves down unless we're pretty confident that we've got the good data from the clients. That's what happens. We start off putting up the loss, then we get additional information. As that information comes in, if we feel confident we can take that down, then we'll do it.
The reason I ask, you can probably guess, is obviously one of the big New Zealand cedents, and I can't remember if you're on them or not, but they raised your estimate substantially again here. I didn't know if that sort of thing would pose a risk if we saw that or more of those.
The way our book is written, those large adjustments by some of the big primary writers in these regions actually affect the retro as well. We try to map it through the whole exposure set that we have, not just look at primaries up. And we look at if the primary's up, what impact is that likely to have on our retro writings as well.
Okay, great. Then one other, and this, Jeff, might be a little complicated too, I'm focused on page 19 and 20 of the supplement where you sort of do the reserve roll forwards. I know I've asked this before, I continue to be surprised at how little paid cat there has been. I guess what I was looking at, I looked at those disclosures as of year-end first, it looks like last year you had about $1 billion of 2011 accident year cat losses, you paid about $300 million in 2011, about $700 million left on a gross basis. I see you only paid $32 million from prior year losses year to date so far. I'm on page 20. That just seems incredibly slow.
The other thing I noticed was that 32 is net and your gross was 257, so you had a huge recoverable paid this quarter of 225. I'm just kind of trying to understand, is that something that can continue? Is that $700 million of losses works down? Or is this kind of upfront and going forward, gross will sort of be net on your paid? It just surprised me how much of your gross paid was recovered net this quarter.
Well, Ian, you're right. There were a lot of paid losses combined with a lot of recoveries. Off the top of my head, I can't predict how those recoveries will flow through. Except that I think if you look at the net recoverable on our balance sheet, it has declined significantly over the course of the year. It can't fall below zero, obviously.
Yeah. If I can add just a couple of comments to Jeff. We do have some quota share, which will participate proportionally through our loss. The other thing that can happen is for the international events sigma reports, which is the trigger for many ILWs in the second quarter, which will trigger some payments for the excess of loss index-based contracts.
Your next question comes from the line of Vinay Misquith of Evercore.
Hi. The first question is on the investment income. You usually have a derivative adjustment in that. Can you help me understand what that is for the fixed income securities, please?
Vinay, are you talking about the fact that sometimes we have derivative mark-to-market or realized gains and losses?
Yes.
Yeah. If you look at that, page 15 of our supplement and the top line. Actually, if you look at fixed maturity investments from the first quarter to the second quarter, there's about a $4 million decline.
Okay.
Virtually all of that difference is related to derivative gains and losses in those two quarters. The $26 million in the first quarter contained about $1 million of derivative gains, and the $22 million in the second quarter contained about $3 million of derivative losses. It's basically absent the derivative gains and losses, which are primarily offset in unrealized gains and losses in the investment portfolio. That number was really pretty constant over the two quarters.
Okay, that's fair. What's the normal number that we should use for these derivative gains? Are they zero or are they +$1 million, -$1 million? Just trying to get a sense for the run rate.
I really don't think you can take a run rate, Vinay. It depends on what happens in the market. In this instance, interest rates fell. I think some of those derivatives are hedging duration in some of the investment mandates we give our managers. When interest rates fall as they did during the quarter, we experience derivative losses that are marked against that fixed maturity income number. I wouldn't say there's a run rate number you can use. I think if you think about it, though, Vinay, just in terms of thinking about if you went back to the beginning of the second quarter and just say we ended with a portfolio of about $5.5 billion worth of fixed maturity investments, the yield on the portfolio was about 1.6%.
That's about $24, $25 million of income, which is right around what the derivative, absent the derivative number, the number would have been. Then the hedge fund number has been kind of tracking, not the hedge fund, the private equity and hedge fund number has been tracking recently pretty close in line with movements in the S&P 500. I think the S&P 500 was down 3.3% in the second quarter. If you multiplied that times our $360 million private equity portfolio, you would have come up with about a $12 million decline, which is pretty close to the $10 million we posted. You can't always think of the private equity exactly mapping to the S&P 500, but I think the last few quarters it's been pretty close.
That's one way to think about if you want to think about how to look at that investment income number going forward. With the derivative income or losses really just offset in unrealized gains and losses on the investment securities.
Okay, that's great. You guys have some great disclosure. It also would be helpful if you just threw that line in somewhere so that we can have a sense for the run rate. The second question was on Tim Re and Upsilon. Curious about what your plans are for next year. Will you be more willing to keep those premiums net for yourself? How much were you re-insuring that this year?
Sure. Okay. It's really a question of what happens with pricing as to whether we decide to renew these vehicles or not. I think from the Tim Re perspective, as Neill had mentioned, that's business we are happy to keep. It depends on really how we structure the portfolio, but it's more of a portfolio-shaping vehicle than it is one in which it's pure risk transfer. I think from the Upsilon one, that one's a little bit more difficult. If pricing moves down substantially, I think we would exit some of that business, and we would non-renew Upsilon Re. If the market's about flat, I would anticipate that we'd be very comfortable with the vehicle going forward.
If you could remind me how much you kept net from both these vehicles, please, this year?
Tim, I'm trying to remember just with off the top of my head. Tim was just under 20%, I think, is how much of that we kept net. Then Upsilon, we added a little bit more to the quarter, and we're at, I think, about 55% of that ballpark. Those numbers are rough, but we're about 20% just under for Tim and just over half for Upsilon.
At this time, there are no further questions.
Well, terrific. Good questions today. We'll look forward to speaking to everyone after hurricane season. Thank you very much.