Thank you, Mr. Peter Hill. You may begin your conference.
Good morning. Thank you for joining our second quarter 2011 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 17th. The replay can be accessed by dialing 800-642-1687 or 706-645-9291. The passcode you will need for both numbers is 815-48995. 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 5th, 2011. Before we begin, I would like 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 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 now like to turn the call over to Neill. Neill?
Thanks, Peter. Good morning, everyone. RenaissanceRe reported net income of $25 million and a loss on an operating basis of $10 million for the quarter. Book value per share was up slightly half of 1%. Our results were impacted by severe weather-related losses in the U.S. in what is turning out to be our costliest first six months ever. We were able to find a book of business and new opportunities that we are quite pleased with. At a time of year when people tend to focus on hurricanes, it's worth remembering what I said on our last call, that as a leading reinsurer of major catastrophic risk around the world, we have exposure to and expect to have losses from a wide variety of events.
On an aggregate basis, we anticipate and prepare for losses such as we have experienced from the recent historic series of tornadoes in the U.S. Our sympathies go out to the many people living in communities affected by the storms in April and May. We remain focused on being there for our clients when they need us and promptly paying claims. On the last call, I mentioned that I expected to see a gradual increase in demand for our product over time. We have started to see a firming of the market at the June 1 and July 1 renewals, and as the implications of continued loss activity and model changes are absorbed, we anticipate this trend will continue. In the Florida market, discussions seem to indicate that by and large, not enough time had elapsed for the impact of the new vendor models to filter through to portfolios.
However, we were able to work with our clients to assess their business risk based upon our own updated model. Our clients find this feedback to be valuable and appreciate the fact that we treat each customer as being unique, frankly, because they are. Once again, our ability to take a lead in that market through our investment in technology, our customer and broker relationships, and our strong capital position enabled us to assemble a good book of business. Our leading position in property catastrophe is very helpful in obtaining the signed lines we desire on programs in Florida and of course, other geographic areas as well. While we are comfortable with our own exposure in Florida, the environment for the Florida homeowners insurance companies remains delicate.
We see signs of improvement in comparison with a year ago, in part from the incremental positive changes that have taken place in legislation. We are hopeful that this continues over the coming years so that both private companies and the Florida insurance system as a whole will be better equipped to withstand major catastrophic events. Our international book saw considerable price increases in line with the increased perception of risk in those areas that were affected by the events of late 2010 and early 2011. We expect that the heightened awareness for the potential for large, unexpected losses, together with the gradual adoption of new vendor cat models, will add to the momentum for price firming through the renewals in 2012. Looking forward, our highly rated balance sheets, flexible capital structure, and substantial capacity position is quite well for opportunities to come.
When we take into account our joint ventures such as Top Layer Re and DaVinci, we were able to bring about $8 billion of capital to bear in the catastrophe marketplace. We decided to raise $100 million from new and existing investors to support the underwriting activities of DaVinci Re, and we continued to monitor whether there are additional opportunities to deploy third-party capital. Of course, our ventures team remains in constant dialogue with investors about potential ventures. At our Lloyd's Syndicate, we are continuing to build our book of business. We are still small but growing and have just exceeded $100 million in written premium for the year. As you know, we never push our underwriters to write business. I am proud of the team we are building there, and that team is capable of writing considerably more premium when opportunities arise.
While many people tend to think of us as a cat company, I would remind you that in addition to a great team in London, we have a gifted specialty team here in Bermuda. This team continues to write good business as opportunities come along and has the capability to write a significant amount of business over the coming years. In summary, as we look out towards the months ahead, I want to reiterate that we manage our business for the long term. Our balance sheet remains strong. Our investment portfolio is well-structured in the current environment, and we do not have a meaningful exposure to foreign sovereign debt, especially to companies viewed as being high risk of default. Our capital structure allows us the flexibility to add and withdraw capacity from the marketplace as conditions dictate.
We like where we are. We stand ready to be a stable source of capacity for our clients when they need us. Kevin is here with us to talk about the second quarter events and midyear renewals. I'll turn it over to him. Kevin?
Thanks, Neill. Good morning. Let me start with the recent June and July renewals. Overall, we saw rate increases in the Florida renewal that we estimate are in the range of 10%-15%, which is at the higher end of our expectations. These price changes were not uniform, with upper layers receiving a greater percentage increase than lower layers, but obviously off a much lower base. Interestingly, the price spread on the credit worthiness of cedent was narrower than in the last few years. This increase is appropriate for the market when considering all the dynamics at play in Florida. More than any other factor, pricing in Florida is being driven by vendor model changes. While we are being paid more for the business we are assuming and our expected profit is up, so is our view of risk.
An increased perception of risk, all things being equal, should result in a commensurate increase in rates. We have worked hard to understand the model changes and develop an independent view of risk. This understanding and the independence it affords us allows us to better optimize our portfolio as the market changes. Overall, we are pleased with the portfolio it's constructed and believe we are well-positioned going forward. Most Florida companies are paying about the same percentage of premium as they did last year, meaning that the premium increases they realized over the year were proportionally shared with reinsurers, which is a relatively good outcome for both reinsurers and insurers. Vendor model changes have been a popular topic lately. The market does not seem to have fully embraced these changes.
Due to the increased perception of risk, especially in Florida, adoption of the revised model would likely substantially increase the demand for reinsurance. Further, brokers and customers faced a much greater disparity among their reinsurance quotes, making it difficult to set market clearing prices. This suggests that reinsurers are at different points in the process of adopting an updated view of risk. Looking forward, I expect the new model to become more a part of the dialogue between reinsurers and insurers. The impact of the new models on customers with greater geographic diversification should be muted, making their implementation easier to manage. On the international side, the major renewals included those in Australia, New Zealand, and Japan. For the Japanese covers that were extended seven-one, reinsurance pricing was up significantly.
Pricing for New Zealand only covers was up greater than 100% in most cases, and Australian covers also received healthy price increases. There was substantial support for clients from the reinsurance marketplace. Although we have had the New European Windstorm Model for only a short period of time, we have begun our analysis of the changes. As with the U.S. model, the changes are substantial and will take time to fully evaluate. Some early findings are that the historical footprints were recreated using new techniques. The size and frequency of modeled storms were adjusted, which has been an area of discrepancy among the North European models. The vulnerability curves were adjusted by class and by region. Improvements were also made to the storm clustering methodology. Clustering is the phenomenon where meteorological conditions are conducive to multiple storm formations and landfall.
We developed our own cluster model many years ago and are pleased to see the models adopting this feature. There is more to learn about this model, but based on our preliminary review, the revised model will likely increase the expected losses for some of our cedents. We will evaluate the new model and incorporate all appropriate enhancements in time for the European renewal. Unlike the release of the revised U.S. model, we are hopeful that the market will also have time to digest these changes, which, if adopted, should increase demand as loss curves will be higher. Looking at retro, we were surprised by the low level of activity in this market and would have expected greater demand, given the substantial level of cat losses and limit eroded by the first and second quarter events.
The retro market can change quickly, however, in the event of a meaningful hurricane loss, and we are a market of first call. As far as our ceded program, we think of ourselves as portfolio managers and will buy or sell at any time if we see an opportunity to enhance the returns of the portfolio. Over the quarter, we did purchase more cover, which improved the efficiency of our portfolios. As we all know, loss experienced during the second quarter remained elevated, particularly in the U.S., and continued the trend of significant large loss activity seen in recent quarters. While the brunt of the tornado losses were borne by the primary insurers, exposure for reinsurance companies in many cases arose from regional covers which tend. The U.S. experienced five distinct convective storm events in April and May, each producing substantial industry insured losses.
Interestingly, April had over 600 tornadoes, which is the most on record for any month, and this included the largest tornado outbreak in history from April 22nd to the 28th. There are many meteorological factors that we believe played a role in this activity. Our long-term view of tornado risk continues to evolve. However, at this time, it's our view that the last 30 years of strong to violent tornadoes in the U.S. shows no significant trend. We believe the most recent New Zealand earthquake in June will not be meaningful to the reinsurance industry overall, with much of the losses being retained by primary clients. Moving on to specialty, we are seeing a steady flow of new business. We remain disciplined and have been slow to add risk as many of the deals are still offering insufficient returns.
The large loss activity of recent quarters does not appear to have an impact so far on the specialty classes we are targeting. We enjoyed low loss emergence in this book of business. We remain happy with the progress being made at our Lloyd's operation, where we continue to expand modestly in property, casualty, and specialty classes. As some of our recent initiatives have gained increased traction in the marketplace, top-line growth has picked up. Our Lloyd's platform represents a long-term strategy to access profitable business written in the London and U.S. market. Thanks, I'll turn the call over to Jeff.
Thanks, Kevin, good morning, everyone. On today's call, I'd like to go over the second quarter and first half results and update our 2011 top-line forecast. The second quarter was another challenging one for RenaissanceRe as it was for the rest of the industry. Our results were hurt by the high frequency of moderate to large tornado and storm losses across the South and Central United States. The total net negative impact of major tornado and storm losses on second quarter financial results was $71 million. The net negative impact is the net loss amount after accounting for reinstatement premiums assumed and ceded, lost profit commissions, and non-controlling interests in joint ventures. We've provided a detailed table in the press release relating to the calculation of net negative impact.
We did not make any adjustments to our ultimate loss estimates for the first quarter catastrophic events or have any exposure to the June New Zealand earthquake. Favorable reserve development in our specialty and cat segments was lower than in recent quarters, but was a slight offset to the catastrophe losses. Investment income remained under pressure as a result of the continued low interest rate environment and weaker returns on our other investments than in recent quarters. We reported net income of $25 million, or $0.48 per diluted share, and a slight operating loss of $10 million, or $0.21 per diluted share for the second quarter. Net realized and unrealized gains, which accounts for the difference between the two measures, totaled $35 million.
Our annualized operating return on equity was -1.4% for the second quarter, and our tangible book value per share, including change in accumulated dividends, increased by 1%. For the first half of the year, we reported a net loss of $223 million, or $4.39 per share, and an operating loss of $253 million, or $4.97 per share. For the first six months, tangible book value per share plus changes in accumulated dividends declined 6%, largely a result of the severe catastrophe losses in the first quarter. Let me shift to the segment operating 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 $619 million, compared with $516 million in the year ago period.
Managed cat gross premiums written in the current second quarter included $22 million of reinstatement premiums related to the loss activity. Adjusting for reinstatement premiums, the managed cat growth rate was 16% in the quarter. The top line growth during the quarter was primarily a result of improved market conditions at the mid-year renewals and some increased demand for limit. For the first half of the year, managed cat gross premiums written increased 7% from a year ago, adjusted for $136 million of reinstatement premiums in the current year and $27 million of reinstatement premiums in the prior year period. This compares with our full year guidance of modest growth provided in the first quarter. As a reminder, managed cat includes the business written on RenaissanceRe Limited's balance sheet, as well as cat premium written by DaVinci, Top Layer Re, and our Lloyd's units.
The second quarter combined ratio for the cat unit came in at 94.8%. This included a net negative underwriting impact of $97 million for the major tornado and storm losses during the quarter. The cat combined ratio benefited from $12 million of favorable reserve development. For the first half of the year, the cat combined ratio was 187.8%, including net negative underwriting impact of $602 million related primarily to the first quarter international catastrophic events. Favorable reserve development for the cat unit came in at $32 million for the first half of the year. Specialty reinsurance gross premiums written totaled $24 million in the second quarter, which was up compared with $7 million in the prior year quarter. For the first six months of the year, specialty gross premiums written increased 22% compared with a year ago to a total of $99 million.
This compares with our full year guidance for top line growth of 10%. The growth rate for this segment can be lumpy given the relatively small premium base. The specialty combined ratio for the second quarter came in at 87.1%. There was no meaningful large loss activity during the quarter, and the combined ratio included $7 million of favorable reserve development. For the first half of the year, the specialty combined ratio was 76% and benefited from $60 million of favorable reserve development. In our Lloyd's segment, we generated $34 million of premiums in the second quarter, compared with $35 million in the year ago period. Specialty premiums accounted for most of this amount. For the first six months of the year, Lloyd's gross premiums written increased 45% to $71 million compared with the year ago period.
The Lloyd's unit came in at a combined ratio of 119.3% during the second quarter. Claims related to tornado losses in the U.S. accounted for $3 million of net negative impact to the underwriting results of this segment. The expense ratio for the segment was 69.3%, although we expect it to decline over time from this level as we continue to expand the business volume written on this platform. For the first half of the year, the combined ratio for the Lloyd's unit was 190%, largely a result of the severe catastrophe losses from the first quarter. Moving away from our underwriting results, other income was a loss of $5 million in the second quarter.
The major driver of other income was a $4 million pre-tax loss at RenRe Energy Advisors Ltd., our weather risk management business, and a $1 million loss related to assumed and ceded reinsurance contracts that are accounted for at fair value. Equity and earnings of other ventures was a gain of $5 million, driven largely by a $4 million gain for Top Layer Re. Results also included a $10 million loss for discontinued operations. This relates to the recognition of a $10 million liability to QBE for adverse development on reserves at our U.S. insurance operations that were sold earlier this year. As part of our agreement with QBE, the purchase agreement for the insurance operation provided for a $10 million reserve collar to reflect the potential for favorable or adverse reserve development.
Reserves may develop positively or negatively from this point forward, this adjustment exhausts our maximum liability for negative reserve development under the terms of the sale agreement. Turning to investments, we reported net investment income of $33 million, with our other investments portfolio contributing $11 million of that amount. Recurring investment income from fixed maturity investments remained under pressure due to low yields on our bond portfolio. Private equity had a reasonably solid quarter, although returns were lower here than in recent quarters. The total return on the overall portfolio was 1.1% for the second quarter. Net realized and unrealized gains totaled $35 million during the quarter. Our investment portfolio remains conservatively positioned with a high degree of liquidity and modest credit exposure. During the second quarter, we continued to reduce our allocation to U.S. Treasuries and increased our allocation to corporate bonds.
The duration of our investment portfolio increased slightly to 2.7 years. The yield to maturity on fixed income and short-term investments had a slight uptick to 2.4%. The credit quality of our fixed income portfolio remains high with 54% of our fixed maturity securities rated Triple-A. Our capital position remains strong despite the high loss activity of recent quarters, we have ample capital and liquidity at the holding company to meet market opportunities that we see. Our ventures team did consider various options to raise third-party capital for new joint ventures. Given the strong capitalization of our own balance sheet and that of our existing joint ventures, we elected not to raise capital from new joint ventures. We did, however, choose to augment DaVinci Re's balance sheet with $100 million of capital raised from new and existing investors.
To some degree, the capital raised at DaVinci was to partially replace approximately $175 million that we had returned to shareholders earlier during the year. We will continue to accordion the level of capital of DaVinci Re to optimize its portfolio based on market conditions. Our ownership stake in DaVinci is currently 42.8% following the capital raise. During the second quarter, we did not repurchase any of our shares. Recall that we had stated on the first quarter earnings conference call that we did not expect to buy back shares in the near term as we assess market opportunities and the upcoming wind season. At this time, I'd say it is unlikely that we would buy back any shares until after wind season.
Given that the majority of our managed cat premiums are written in the first half of the year, we are not updating our top-line guidance at this point. For specialty and Lloyd's, we are maintaining our prior guidance. With that, I'll turn the call back over to Neill.
Thanks, Jeff. Operator, happy to take any questions now.
At this time, ladies and gentlemen, if you would like to ask a question, please press star and the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Keith Walsh with Citigroup.
Hey, good morning, guys. First question for Neill or Kevin. You mentioned premium growth within reinsurance ex the reinstatement premiums, you talked about rate, are you also seeing more swings at bat for new business with competitors suffering large year-to-date losses?
Yeah, I think we are seeing a little bit of movement among some of our competitors in the way they're competing with us. I wouldn't say that it's any one company making material changes. We've seen some companies, like take the recent Florida renewal, where a few companies that we normally compete with below the hurricane fund no longer were participating there, were moving their participations higher. Some companies with very large participations on a small number of accounts were reduced. We also saw an increase in different types of products where there's a little bit more quota share purchased for some of the Florida accounts. It's a little bit of a mixed bag, it's not something that I would put out as a theme for the renewal. It was just normal appetite changes among a pretty wide range of our competitors.
Okay. Kevin, within the model changes you mentioned did have an impact on price, you also, if I'm interpreting you correctly, said the rate of adoption was sort of slow. Maybe if you could talk about price and demand impact as the rate of adoption increases as we head into 2012.
Yep. I think what we've seen right now is a very localized view of the market being concentrated on the Florida renewals, the Florida renewals were some of the more heavily impacted by the changes to the updated models. It was a little bit of a too-big-a-change-to-adopt-in-one-sitting mentality. From a buyer's perspective, a lot of the information was presented on the old models, the discussions were trying to be geared on that. From a competitor standpoint, we saw that there was a much wider dispersion of quotes, which to us led that the full view of the change in perceived risk hasn't fully been adopted, people are making some kind of post-model calculations to estimate the change. I think going forward, there's a couple things that'll happen.
It's going to be adopted by more geographically dispersed books of business, which will mute the impact of the change. I think it'll be a little easier for them to move and discuss the business on the new model. I think there's still more to be determined as to how the rating agencies and others will view risk based on the new or old model. I think our competitors will be in a position where they've more holistically adopted the changes and firmed up their view on risk.
Great. Just last question for Neill. Maybe if you could just talk to the philosophy behind not updating cat losses in the quarter like your peers do. Thanks.
Sure. That's a tough one. One of the things when we look at that, Keith, is setting precedent. When will people take a view of when is there a signal when we do or when we don't? We run the company for shareholders. It's to give them information to help them decide whether they want to hold the stock over a long period of time. Our view is more long-term versus quarterly focused. It makes y'all's job harder as you're trying to come up with the quarterly numbers. We want the focus to be on the long term, and if we're going to pre-release, we want it to be of a material nature, something that's meaningful. By the same token, I would say that our increased premium volume is material and helpful. It's a trend towards the future, but we don't pre-announce that.
A large part of it is just trying to be consistent with our approach over a long period of time. You asked me, so I wanted to give you my view, but Jeffrey, do you have further views on that?
Nothing materially different. I think, Keith, it's a good question. It's one that we discuss frequently around here. I think we're always looking at our disclosures and our disclosure policies, and this is one we'll continue to evaluate.
Thanks a lot, guys.
Thank you.
Your next question comes from the line of Joshua Shanker with Deutsche Bank.
Good morning, everyone.
Hi.
Morning. I was wondering if you could maybe give some color on the managed cat premium by geography. To the extent we know that the rate environment for June 1 Florida was up 10% to 15%, is that equivalent with what your Florida experience was, and is the remainder increases from New Zealand and whatnot?
Yeah. I think, let me first talk about the rate increased that I mentioned and then I'll talk a little bit about how net s plit in our book. The 10% to 15%, I think is our best estimate of where the bulk of the changes are. We saw accounts that had much higher increases and layers that had much smaller increases. I think in kind of generalizing the market for Florida, 10% to 15% is a good generalization. Outside of that, accounts with losses had very substantial, sometimes over 100% rate increases, a lot of those were single territory, low-rated deals to begin with. When you look at it against the book of business that we have, it'll be a little different than the numbers, because I'll think about this on an in-force basis.
About two-thirds of our premium change comes from the Florida renewal, and about a third of it, ballpark, comes from really the stuff outside of Florida, the bulk of which of that is a little bit of new cover in the U.S., also the Australia and New Zealand renewals, and then including the 7/1 extensions for Japan.
Do you think your risk footprint looks dramatically different right now than it did 12 months ago?
No, I don't. I think there's a couple things that have changed, but the footprint I think of as relative across the regions. We've changed our model, so we've increased the expected losses against the book. Looking at it relative to the overall balance of the portfolio, it's pretty similar to what we had on the books last year. A few changes here and there where we're always rebalancing a bit, but it's not materially different.
Thank you. A quick question on the QBE collar. Have you preemptively taken that charge and so it may not actually go through, or have you received claims from QBE?
We have received claims notification from them. As I said, Josh, claims could develop positively or negatively from this point forward. When that reserve collar is trued up and paid out will be the first quarter of next year.
Right. Just so to be clear, we put up the maximum amount of our liability of $10 million on that. We'll see how it evolves over the coming months.
Right. That's what I'm trying. Are you just putting it up as a preparation, but it may or may not be that amount is actually what has actually happened?
That's right. It's our best guess now for accounting purposes, and it is the maximum.
Thank you.
Thank you.
Our next question comes from the line of Doug Mewhirter with RBC Capital Markets.
Hi, good morning. I just had two questions. The first maybe for Jeff. I noticed you had an increase in the proportion of bank loan funds in your other investments. Does that represent some new investments? I'm assuming that mark to market, it doesn't account for all of it. If you did make new investments, I guess, what are the appeal of those funds right now?
We did make a few new investments. The appeal of those is just a way to essentially take an exposure to the high yield market in a very diversified and granular way and further up the subordinated structure in most or in the capital structure in most instances. It's kind of our preferred way of taking high yield risk.
Okay, thanks for that. My second question for Kevin. I know for a long time, you and your colleagues have said that rates in the Far East were not generally adequate. Obviously there's some increases, but obviously there's also some increase in actual losses. Judging by the fact that you haven't appreciably changed your risk footprint based on the earlier question, I'm assuming that rates are catching up, but because maybe the expected risk has gone up, that they maybe are approaching overall adequacy but still aren't quite there. To maybe oversimplify a very complicated subject.
I think it's a good question. I think it's probably good to talk a little bit more granularly about the places with losses and then the Far East generally. I think if you're looking at New Zealand, we like the construct the way the New Zealand market and particularly the large purchasers there bought cover. We've been a long-time participant in that market. It's a good way for us to build up our risk there. In some of these regions, it tends to be if there's a very large program with a significant drop of capacity, that might be a good place for us to allocate, and we've seen that in New Zealand and Japan. I think the Japan, I would also split between wind and quake. We've generally, going back many years, we wrote some fire insurance, earthquake-related expense covers, which we always liked.
Second, beneath that, we liked the quake, and thirdly, we've always thought the wind was a very difficult ride. We haven't participated in the open market but have been able to get the risk in other ways there. I think looking at Australia is an interesting one because Australia had losses. We haven't really changed our view on Australia because of the losses that occurred, but rates did move. Unfortunately, rates are still probably about 10%-15% lower than where we would need them to be, but getting much closer. Looking at the different regions, I think it is a different story by location, but it's one in which certainly in loss-affected areas, we like the business more, but not always up to the level in which we want to participate to a greater degree.
Thanks a lot for your answers. That's all my questions.
Sure.
Your next question comes from the line of Gregory Locraft with Morgan Stanley.
Hi, good morning. I wanted to follow up on, or not follow up, but actually understand more on the reserving side of things. Obviously, the corporation's had a great track record, the IBNR and additional case sits at near all-time highs. Has there been a change in philosophy with regards to the reserving methodology, can you comment on the go forward there at all?
Sure. Greg, I'll start off then turn over to Jeff. There has not been a change in philosophy. Our philosophy is always to get it right. We're prudent reservers. It's difficult in our business to reserve exactly right each time. We have the same methodology, we try to get it right. I wouldn't, if I were you guys, try to build in reserve releases. It is what it is. We try to, once again, be correct. Jeff?
Thanks, Neill. I guess what I'd add to that, Greg, is that apart from the periodic deep dives we view on, or we review or deep dive reviews we go into on specific areas of the portfolio, as Neill said, our reserving methodology hasn't really changed. I think in terms of the pace of releases, because I have seen some written comments on that in various analysts' review, I think as a general statement, what's been occurring is, if you went back a couple of years ago, our reserves, particularly the case reserves and IBNR, were dominated by the 2004 and 2005 hurricanes. Over the last two and a half years, as those storms or those losses have matured, our uncertainty around the ultimate loss of those storms diminishes, to the extent that we have excess reserves held against those, we tend to release those.
What's been transpiring, at least over the last couple of years, is the nature of the reserves has changed, and now to the point where over $900 million of our ACRS and IBNR held against the CAT events of the last five quarters. It's still very early on in the maturity of those events to come to a conclusion that our losses are materially different than what we initially reserved at. As I said earlier, we did not make a change in our view of the ultimate loss associated with any of those events in the last five quarters.
Okay. That's helpful. As a follow-on, however, to that, is there anything in these particular events of, let's say, the last two quarters, because again, additional case plus IBNR sits actually well above Ike and Gustav as well as Katrina. If there's been no change in philosophy, that bucket has filled up considerably given the year-to-date events. Why would we be booking more additional case and more IBNR with these events given-- is there something endemic to them in particular that makes them different than Ike, Gustav, and Katrina?
Yeah. Some of that, Greg, is just the timing of when cedents report losses to us.
Okay. You're saying that your clients in the foreign markets don't report as rapidly as perhaps the clients in the U.S. markets?
Yeah. If I could add a little bit to that. I think one of the things is also is we talked a little bit about on the losses that happened over the last couple of quarters. A big piece of it is from our retrocessional book, and the retro book does tend to report a little bit more slowly. The other piece is on the primary side, at least for Japan and New Zealand, on the portion that's primary, a big percent of it comes from one cedent. If you look back over the other events, we've had many cedents. We're able to build up a view based on information from lots of different points. On the primary side, we're reliant in a very real way on one very large cedent in New Zealand and one very large cedent in Japan, and then a big component of retro.
A big piece of the retro component is also reliant on those two large covers, it kind of snowballs a little bit. That's kind of, I would say, the biggest difference between what was predominantly the U.S. events and what we're seeing on the international side.
Okay, that's great. Just shifting gears to next year, Neill actually mentioned that the trend should be continuing, the recent trend on the top line into 2012. Neill, were your comments specific to the June, I'm sorry, to the January 1, 2012 renewals, or were you actually thinking this thing goes through all of next year? In other words, we're lapping June and July next year as well and things are looking okay.
Sure. Greg, you know I have probably the best crystal ball in the business. It's always difficult to predict what's going to happen in the future. I look at various vectors of what can change things, I see all the pressures towards continual firming. After the loss activity, greater learning from the loss activity, the model changes, I see those things vectoring in that it should not just be for one-offs. Unless they're retro purchases or unless there's a lot of hurricane activity with backup purchases January 1 is going to be the first real test, it should continue on into the other renewal periods during that year and perhaps beyond.
Okay, thanks.
Sure.
Our next question comes from the line of Brian Meredith with UBS.
Good morning. A couple questions here for you. First, Kevin, I'm curious on the RMS 11 hurricane model, what pieces of the model had the most impact on your pricing and capital models? Was it the increased frequency of hurricanes? Was it storm surge? Can you give us a perspective on what areas you thought were the most meaningful?
Let me split my comments a little bit between what's affecting the market and what's affecting us.
I think the biggest component affecting the market is, there's certainly a surge element, but I think it's more to do with the wind attenuation functions as to how deeply the losses go inland. It changed from a coastal, if you were more of an inland writer, your losses had a greater percentage increase than if you were more coastal. I think that was the biggest component for the market. For us, I think we had several things that were adopted into the new model, were already in our model. It's difficult for me to kind of extrapolate what the component pieces are for us in pricing the risk. The one thing I'd say is the percent change in what we did to our model from our, I'll call it version A to version B.
Version B had the benefit of the learnings from the RMS model and some other learnings. The percentage increase between our two models is significantly less than the percentage increase that RMS version 10 to 11 would require.
A component of that is the way we have historically evaluated the risk, and then also some of the features that RMS adopted were things that we already had. Some of it is are things that we don't think are necessarily appropriate to adopt in the model. Sorry it's not more clear on ours, but I think the important thing is we didn't need to change our model nearly as much on our updated view of risk as compared to what the market needed to change their view if they were strictly an RMS user.
Gotcha. Your comment on the degradation, I assume that's more for the Florida renewals, not so much countrywide, because I've seen some presentation stuff that show that the actual increase in frequency of hurricanes is actually the biggest component of the kind of overall PML increase of the RMS 11.
I think that's true. I think there's some big changes along the East Coast as well. Particularly, one thing that kind of just springs to mind is the way the transitioning storms move into the Northeast.
Depending on the construct of the book, you'll have very different by season changes. The biggest single season changes we expect to see over the course of the next 12 months is specifically for the Florida ones.
Okay, great. Then one other just quick question on the Florida renewals, were there any changes or material changes in terms and conditions, i.e., maybe payment terms and stuff that happened with this last renewal?
No, not really. I think much of the things that needed to be addressed on that or could be addressed on that were addressed last year. A lot of what came through was much more consistent with prior years than what it was '10 to '9, 2010 to 2009.
Great. Thank you.
Our next question comes from the line of Jay Cohen with Bank of America.
Yes. Thank you. Two questions. The first is on the investment income, the fixed income side specifically was quite a bit of a drop off from the last quarter. I know in the past you have had some hedges flowing through there, and it did distort the numbers. Did that affect the numbers, or was this simply just rates that continue to pressure the fixed income investments?
No, Jay, you have it exactly right. Some of our managers do employ interest rate and foreign exchange derivatives, and I think had we not had the mark-to-market losses on those derivative positions, our accrual income would have been roughly the same as it was last quarter.
There was a negative impact?
Yes. Roughly $7 million, I think.
Okay. That's helpful. Then secondly, did any of the growth in the cat book come from you simply changing which layers you play on? In other words, going down to lower layers where the rate on line just happens to be bigger. Or was your mix of business relative to these layers roughly the same as last year?
Let me start off. You need to bear in mind that our book constantly evolves, you'll have some programs we come off of, other programs we go on to. With that overview, Kevin?
Yeah, I think Neill's absolutely right. We're constantly looking at finding the best inwards and outwards that improves the portfolio. One comment we've made historically is that we are hot down low, and what that means is we have a greater % market share below the hurricane Cat Fund than above. That remains true. I think the biggest changes in our portfolios this quarter from just a business mix is really what we did on the ceded side. Overall, I think it's fair to say our portfolios, we haven't biased the book lower or higher. It's roughly in connection with Neill's comments, things are always moving around, but there's nothing that I would put out as saying that it's a materially different book than what we had previously.
That's helpful. Thank you.
Our next question comes from the line of Vinay Misquith with Evercore Partners.
Hi, good morning. What portion of your 16% growth in the managed CAT premium was from rate versus just organic growth?
I'll reflect back on Neill's comment. It's sometimes harder for us to talk about because we get off a program or get off a layer and write a new one. It's hard to give exact numbers on that, but it's fair to say that being that our construct of our book is largely similar, and looking kind of at all the ways we measure risk, it's fair to say that most of the change is really coming from increased premium. The increased premium is coming from mostly the international accounts that have been loss exposed and from the change in perceived risk in the Florida renewals. Additionally, there was a couple new purchases, but among all that mix, some deals coming out, some going in. I think that's a reasonable summary.
Just rolling forward to next year, just thinking about this proactively. It's likely that you'll have more demand also kicking in, correct? The rate of increase will be lower because you'll have less international covers that have high rate increases sort of coming through. Would that be the right way to think about it?
Let's break it into you have demand, I think with the changes that we're seeing, and if people are adopting the changes just as presented by the vendor models, we should see an increased demand. On the other side of that, you'd have a reduced supply because reinsurers putting out the same limit need to apply more capital to it. I think going forward, we've talked about the effect of that being less on renewals outside of Florida. Your comment about the percentage increase is lower against that in Florida is true. The one exception to that is retro, I think. A large portion of our international book comes from our non-U.S. retro writings. A lot of the retro stuff really has been impaired this year but has not been renewed or backed up. I think we'll hopefully have pretty good opportunities there as well.
I think largely you're correct, but I think adding the retro component is important.
Yeah, that's great. The second question was on capital. I understand that that's increased slightly because your perception of risk has increased. Could you give us a sense for how much, and has that sort of negatively impacted your ability to repurchase stock?
Good question, Vinay. This, I think, question came up on last quarter's call. There are two key components you have to think about with us. One is going back to Kevin's comment about there was less impact on us than perhaps the market as a whole or in particular primary companies. There wasn't as much change in our own model. Secondly, being primarily an Excess of Loss writer, that takes away some of the impact versus an unlimited, if you will, primary writer. It did chew up a little bit more capital. Frankly, not as much as I thought. We have plenty of capital to address new opportunities. Jeff, do you want to add anything to that?
Yes. To be perhaps a little bit more specific on where we stand at the end of the second quarter. At the end of the second quarter at the holding company, we had just over $600 million in cash and liquid securities and $400 million in undrawn revolvers, including the $250 million synthetic revolver, which is on our balance sheet. To Neill's point, I think we have a lot of capital to address the opportunities we need, and we feel we're really well-positioned from a liquidity standpoint as well to take advantage of those opportunities.
Okay, that's great. Thank you.
Our next question comes from the line of Ian Gutterman with Adage Capital.
Hi. A question on the specialty book. If I pull out the reserve development, it looks like the combined ratio is about a 110. Similarly, last quarter, ex the cats, the accident year was over 100. Why is that book running over 100 on an accident year ex CAT basis?
Yeah, I think breaking it down, there's a lot of the things that we do, we don't have an internal historical record, we use more industry data to develop our reserve methodologies and curves. I think that's a component of it. I also think the way we allocate expenses to that book is another component of it. It's our belief that if you look at it from the underwriter's view, we would expect that that book is profitable. The underwriter's view is one in which doesn't always account for the other elements that are attributed to a book of business and how it ultimately play out over time.
Okay. Is there a reason it's getting worse? It seems it's running higher than it used to as well.
The one thing I'd say is we had two lines that were pretty dominant within the portfolio going several years back were terrorism and workers' comp cat, both of which had significantly lower-
Sure
reserve loss ratios than what is the mix currently.
Okay. That makes a lot of sense. My second question is, can you help me on paid losses? I keep expecting there to be a spike up due to all the events over the last year and a half, and I'm not seeing it. Can you give me some sort of sense of, I guess, starting with last year's event and the first half of this year, it looks like there's about $1 billion in cat claims. How much of that's paid out, or what would you expect to pay out over the next year, however you want to address it? I guess it surprised me. It seems like very little has come through so far.
Yeah, I think the answer is that the nature of the events that we've seen over the last 15 months or so is such that we'd expect them to take longer to develop into actual and paid claims. The distinct difference is the U.S. tornadoes in the second quarter, in which we've already paid a significant amount in the second quarter. Quakes generally do tend to pay out much more slowly than hurricanes or other types of storms.
Okay, understood. Can you give me some sort of sense of maybe what's a normal attritional or however you want to think about it, I guess sort of the specialty payout plus an attritional cat? If there were no cats in a year and there are no cats in inventory, what's the base paid loss number for the company?
I'll come back to that.
Okay. Yeah, Jeff will get back on that one.
Okay.
We don't have that number in front of us.
Okay, great. If I could sneak one last one in for Kevin. Kevin, can you just comment on sort of the great debate between Carpenter and Benfield about how much rates really went up and this whole exposure-adjusted issue? The reason I ask is, my understanding is you guys are pretty heavily weighted to Benfield and less to Carpenter, yet your commentary is much more in line with Carpenter. How do I reconcile? Is there an exposure adjustment I need to make, or is there something else?
We don't have perfect transparency to how each of the other groups are calculating their rate increase or rate change. I think from our perspective, I'm comfortable with the way we've presented it and what we're seeing as a rate change. I think there is an element where loss ratios are up as well because on exposure adjusted, the rate increase is lower because we changed our perception of risk. I think having different views on the market is healthy. One of the things I've always loved about this business is that it's inefficient, and having different views on the market allows us at least to play in what we perceive as an inefficient market. I think it's healthy that Carpenter, Aon, Willis, everybody has a different view, and it's just a matter of each to kind of reconcile it on a deal-by-deal basis.
That makes sense. Very good. Thanks, guys. That's all I had.
Ian, hold on just a minute.
Oh, okay.
Let's see if we got the answer for you on the attritional.
Well, I have a response. How about that? I think the answer to the question is that there's really no typical base case paid loss ratio you can look at it. It really does depend on the nature of the event and how losses get reported to us. As I said, earthquake losses tend to pay out much more slowly than hurricane losses, but even hurricane losses develop differently. As an example, the 2008 hurricanes have developed much more slowly than the '04 and the '05 hurricanes did. It depends on the clients and the nature of the event, and I think we really can't get any more specific than that.
Okay, fair enough. Thanks, guys.
Thanks. Operator, if we have any more, we can take one more question if there's one.
At this time, there are no further questions, sir.
Well, that's perfect timing. Very astute analyst and investor group to hold it to exactly one hour. Good questions today, everyone. Thanks for joining us, and we'll speak with you again in three months.
This concludes today's conference call. You may now disconnect.