濱特爾 (RNR) 2019 Q2 法說會逐字稿

Good morning. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) Thank you.

Keith McCue, Senior Vice President, Finance and Investor Relations, you may begin your conference.

Thank you. Good morning. Thank you for joining our second quarter 2019 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 (441) 239-4830, and we'll make sure to provide you with one. There will be an audio replay of the call available from about 1:00 p.m. Eastern Time today through midnight on August 24. The replay can be accessed by dialing (855) 859-2056 U.S. toll-free or 1 (404) 537-3406 internationally. The passcode you will need for both numbers is 9860689. 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 August 24, 2019.

Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed. Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings, to which we direct you.

With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.

I'd now like to turn the call over to Kevin. Kevin?

Thanks, Keith. Good morning, and thank you for joining today's call. I'll open the call with an overview of our second quarter performance. Bob will then cover our financial results. And finally, I'll come back on to the call to speak about our segments and take your questions.

We released our second quarter earnings last night, and I'm pleased to report that we had a strong quarter. We reported annualized return on average common equity of 29% and annualized operating return on average common equity of 16.7%. We grew our book value per share by 7.3% and tangible book value per common share plus accumulated dividends by 8.2%. These increases to book value represent absolute quarter-to-quarter changes and are not annualized. The strong results this quarter were driven by higher net earned premiums as a result of growth across all business lines, a low level of catastrophe activity, underwriting income from both our segments, the inclusion of the TMR portfolio and increased net investment income.

I am pleased with the growth in profitability that we achieved both in the second quarter and overall this year, as our differentiated strategy has allowed us to grow selectively into an improving market. Looking forward, I'm optimistic about the market and about the sustainability of rate increases.

In the Casualty business, we saw positive momentum on underlying rates across multiple lines of business and continued our strong engagement with clients and brokers. In our Property business, we experienced strong midyear renewals. We were strategically positioned to profit from rising rates, and we're able to deploy more capacity at better pricing and preferential terms. I will discuss the renewals and sustainability rates in more detail when I address our segments, but I'm confident that we constructed an attractive portfolio that will benefit us and our shareholders over the long term.

Moving to TMR. This was the first full quarter since our acquisition closed, and the integration of our people and portfolio is progressing extremely well. Bob will provide you more with details, from my -- but from my perspective having gone through our first major renewal as a combined entity, we are now 1 company speaking with 1 voice, operating 1 unified underwriting system with a single view of risk and executing a consistent strategy.

We've increased our flexibility by adding new locations in Zürich and Sydney and new balance sheet in Switzerland called RenRe Europe. All of the TMR business is captured in REMS and represents our view of risk. We've been able to retain the business that we find attractive, which we expect to continue. And by leveraging our integrated system, we are renewing it on the most efficient balance sheets. In short, I couldn't be happier about how the TMR integration is progressing or more confident about its contribution to long-term shareholder value.

I'll update you at the end of the call on the recent midyear renewals as well as opportunities that we're seeing in 2019. But first, I'll turn it over to Bob for a look at our financials. Bob?

Thanks, Kevin, and good morning, everyone. We had a strong second quarter, and today I would like to highlight a few of our key financial results. But first, I would like to update you on the TMR integration. And finally, I'll turn it back over to Kevin.

So starting with TMR, we continue to make good progress on the TMR integration. Among other important successes, we executed smoothly on the recent June 1 renewal as a consolidated entity, advanced the process of vendor consolidation, completed the rebranding of the TMR entities and consolidated our London offices. We remain on track to realize anticipated synergies on TMR's expense base. During the quarter, we continue to wind down of the third-party capital business, transitioning several of its risk portfolios to highly rated reinsurance counterparties. These portfolio transfers will help reduce operational complexity going forward, especially with regard to collateral management. We continue to assume that income from this business will be negligible. We recorded $14.5 million of corporate expenses this quarter related to the TMR acquisition, which breaks down into $1.9 million of transaction costs, $3.4 million of integration cost and $9.2 million of compensation cost. This is the first time that we reported a full quarter of consolidated results reflecting the TMR book. Our financial reporting now fully reflects TMR's earnings.

Contributing to our results for the quarter was approximately $90 million of net income from TMR, the majority of which was driven by mark-to-market gains on investments and foreign exchange gains as we repositioned the nondollar portfolio. Taking these and other factors into consideration, the ongoing contribution to operating income in the quarter from TMR was consistent with our projected after-tax run rate contribution of $100 million, which we remain on track to achieve.

The one aspect that the TMR transaction I would like to briefly address is the mechanics underlying the adverse development cover, or ADC. As you recall, the ADC protects the reserves we acquired from TMR, including unearned premium. The ADC is an enterprise cover protecting us on paid losses above the attachment plan of the ADC. However, we report our underwriting performance quarterly and by segment on an incurred basis. Consequently there can be some noise in our reporting. This quarter, there was no impact to the ADC. From an economic perspective, this results in 3 likely outcomes: if TMR results are as anticipated, the ADC is not impacted and our shareholders receive the originally targeted return on the TMR acquisition; if TMR results are favorable, the ADC is not impacted, and over time, this favorable development inures to the benefit of our shareholders; and finally, if TMR results are unfavorable, we recover on the ADC up to the limit of the contract, and our shareholders suffered no economic loss. To be clear, not recovering on the ADC is positive because it means we experienced overall favorable development on TMR's reserves at the holding company level, which our shareholders keep, or results were as anticipated.

Now moving onto consolidated results. Our annualized return on average common equity was 29%. Our results this quarter benefit from significant mark-to-market gains in the investment portfolio. We also had a strong quarter on an operating basis posting annualized operating return on average common equity of 16.7%. We reported net income for the quarter of $368 million or $8.35 per diluted common share. Year-to-date, we have grown tangible book value per share plus a change in accumulated dividends by 16%. Our operating income was $213 million or $4.78 per diluted common share, which excludes $194 million of net realized and unrealized gains on investments as well as $14.5 million of transaction, integration and compensation expenses associated with the TMR acquisition. We had underwriting income for the quarter of $171 million and reported an overall combined ratio of 81%. Net premiums earned for the quarter was $912 million, up $482 million or 112% from the comparable quarter last year.

The considerable growth this quarter is a combination of organic growth and the impact of the TMR transaction. TMR had about $1.3 billion of net premiums earned in 2018. While we expect this number to reduce as we reunderwrite the TMR business, this process will take about a year. In addition, since this premium is protected by the ADC, it is largely retained net as it is not ceded into our retro program. As the TMR business runs off, we'll have a diminished impact on premiums earned. We accrued $9.5 million of income taxes this quarter, mostly related to capital gains in our investment portfolio. We now have multiple balance sheets located in taxable jurisdictions, and as these business generate profit, including investment income under invested assets, they will be subject to income tax.

Now before moving on to our segment results, I would like to briefly update you on our operational efficiency. Our direct expenses, which are the sum of our operational and corporate expenses, totaled $84 million for the quarter, which is up 46 -- from $46 million in the same quarter last year, or an increase of $38 million. $16 million of this increase was in corporate expenses and was primarily driven by the $14.5 million in expenses associated with the TMR acquisition that I referred to earlier. Adjusting for the impact of transactional TMR costs incurred during the quarter, direct expenses would have been $69 million or an increase of $23 million or 49% from the comparable quarter. This increase is driven by our expanded global platform following the acquisition of TMR as well as ongoing expenses that will support the continuing growth of our business.

As I previously discussed, direct expenses have been increasing as we invest in the business and integrate TMR. However, the ratio of direct expenses to net premiums earned improve this quarter to 8% and reflects the significantly increased leverage the TMR business has afforded us. As TMR's net premiums earned runoff, this ratio may tick up somewhat.

Now moving on to our segments, and starting with our Property segment. The gross premiums written in the first quarter grew by $287 million or 52% over the comparative quarter to $839 million. Of the growth, about $165 million was from Property cat and about $122 million was from other Property. Similar to last quarter, we retained about 40% of the growth in Property cat gross premiums written or about $64 million. In total, our Property segment reported underwriting income of $152 million and a combined ratio of 64% in the second quarter, with Property catastrophe printing a 49% combined ratio and our other Property printing an 85% combined ratio.

Now moving on to the Casualty segment, where our gross premiums written were up $213 million or 50% in the second quarter of 2019 over the comparative quarter. The majority of this increase is from the TMR business that was enforced as of the acquisition date and is not reflective of new business this quarter. We reported underwriting income of $19 million and a combined ratio of 96% for the quarter. The current accident year loss ratio for the Casualty segment was 65%, which was flat into prior year quarter.

Now moving to fee income, where total fee income was $40 million for the quarter. We earned $26 million in management fees and $14 million in performance fees. Relative to the comparable quarter, our fee income grew 23%, which is due to the growth in the amount of third-party capital that we manage. We raised an additional $700 million in third-party capital in June, of which, our participation was about 10%.

Now turning to investments. And for the quarter, the return on our fixed maturity in short-term investments was $106 million, and overall net investment income was $116 million. Net investment income was up $44 million from the comparable quarter due to higher invested assets and increased returns on private equity investments. Of our $116 million of net investment income, $15 million was attributable to our various joint ventures, and we retained $101 million. We posted total investment results of $310 million for the quarter driven by mark-to-market gains of $194 million, of which, $143 million was from our fixed maturity investments.

We distinguish our investment results between our managed investment portfolio and our retained investment portfolio. Our retained investment portfolio is a subset of our managed investment portfolio and only includes those assets that contribute to our net income. As a reminder, our managed and retained investment portfolios include our fixed maturity and short-term investments, but exclude our equity investments and other investments as well as investments in other ventures.

In the second quarter, our managed investment portfolio reported a yield to maturity of 2.4% and duration of 2.7 years on assets of $15 billion, while our retained investment portfolio reported yield to maturity of 2.5% and duration of 3.1 years on assets of almost $11 billion. For the quarter, we grew our managed investment portfolio by almost $1.6 billion. This growth was driven mainly by $625 million of new third-party capital, which is net of our participation; $500 million of redeployed cash from the TMR portfolio; and $310 million of total investment results. As a reminder, this was the first quarter that we incorporated the impact of TMR on our net investment income and our total investment results. The TMR asset portfolio has been successfully integrated into our overall investment portfolio as we transition these assets to new investment managers, converted the non-U. S. dollar assets to dollars and sold TMR tax-exempt municipal holdings.

Now, I'll close with the comments on our capital management. We did not purchase any shares of our -- we did not repurchase any of our shares during the second quarter. Our priority has always been to deploy capital into the business. The midyear renewals also provided us with ample opportunities to grow organically. Moving forward, I anticipate additional opportunities to deploy capital into the business, which is consistent with our previously stated preference. That said, we are proud of our strong track record of being good stewards of capital and repurchasing shares when it makes sense, and we will always keep all options on the table.

And with that, I'll now turn the call back over to Kevin for more details on our segments.

Thanks, Bob. I will first provide comments on our Property segment and then follow-up with Casualty. Starting with our Property segment. We grew gross premiums written by 52% over the comparable quarter last year. Property cat grew by 38%, while other Property grew by 106%. The growth in both lines was a combination of organic growth rate increases in the addition of the TMR portfolio.

At the June 1 Florida renewal, the industry experienced rate increases on average of 15% to 20% with quite a spread around us. Overall demand in Florida was flat, with little change in limits purchased although there was some movement between programs due to shifts in the cat fund participations. So any improvement in rate was due to recent loss experienced as well as capital charges and costs coming through, which ultimately resulted in reduced supply.

Several factors influenced these supply dynamics: The last 2 years have seen record losses to global reinsurance markets as well as Florida-specific losses from Hurricanes Michael and Irma. There was materially less retro pressure available to take Florida risk especially on an aggregate basis, in part due to third-party capital experiencing elevated levels of trapped capital. In addition, anxiety over social inflation and ongoing loss creep added to existing concerns about providing capacity to this market.

From our perspective, these rate increases were necessary but not sufficient. On a risk-adjusted basis, rates were up only high single digits, which needs to be evaluated in light of the substantial rate reductions Florida domestic insurers have enjoyed over the last several years. Consequently, we changed the way we take Southeast hurricane exposure, once again, reducing the proportion of the Florida domestic market we write. At the same time, we increased our exposure to more diversified pools of Southeast hurricane risk, where we could capture relatively better economics for the same exposure such as retro. So while we grew Southeast exposure on an absolute basis, rates did not improve enough for us to take -- risk more equity to the peril Southeast hurricane. And the percentage terms against our increased equity base, our exposure remains about flat.

So in summary, even though we are writing a smaller percentage of our Florida -- of our book in the Florida domestic market, and our absolute Southeast hurricane exposure is up, with this peril as a percentage of our equity base remains about flat, the result is a stronger portfolio producing higher returns, which is consistent with our history of taking more risks when rates are better. Our experienced tools, access in underwriting uniquely position us to shape our portfolio to capture the best risk in the best form using the most efficient capital, which is what I believe we did this quarter.

Additionally, we're able to deploy our newest balance sheet Vermeer in the various cat renewals, including Florida at midyear, and we are pleased with the portfolio that we constructed for investor in that vehicle.

Similar to last year, the biggest market losses continued to come from adverse development, particularly on events like Jebi, Irma and Michael. In a case of déjà vu, so far the largest event for the market in 2019 was adverse development on 2018's Typhoon Jebi, just as the largest event in 2018 was adverse development on 2017's Hurricane Irma. The industry estimate for Typhoon Jebi have increased materially since the third quarter of 2018, and now we're above the high end of our estimates, which were more conservative initially than the market. Our growth loss has increased as well, although Jebi's net negative impact to our Property book is essentially unchanged from the third quarter of 2018 when we first reported it. We have successfully managed the volatility from this event due to our superior underwriting tools, integrated system and robust gross-to-net strategy. For the 2018 Large Loss Events overall, we did experience some adverse development in the quarter, primarily from our aggregate contracts, including retro. The net negative impact of this charge was approximately $25 million and was offset by favorable development in other years. As I discussed last quarter, we are paying particular attention to Typhoon Jebi and its growing impact on the retro market, and we'll continue to monitor it closely.

An important component of our portfolio construction is using retro to help us shape our risk distributions. Due to the nature of the losses over the last several years, we have made substantial recoveries from our retro programs. This is not surprising to either us or our retro partners as is evident from the fact that we were able to renew almost all of our retro programs that expired at midyear. While the profile of our retro program is different, and if we -- and we have paid an increased risk-adjusted rate, I am pleased with the results and believe that our portfolio is more efficient because of these purchases.

Even though our retro renewal was successful, we are not reliant on any 1 type of capital, including retro, but rather shift preferentially among available sources. Our strong underwriting and consistent performance with long-term partners gives us preferential access both to retro and to other potentially more efficient forms of capital, especially when supply is constrained. This year, we saw several areas of opportunity within our broader portfolio to support our customers, including as sellers in the retro market. Consequently, we raised capital June 1 in order to deploy an additional $700 million in DaVinci, Vermeer, Upsilon and Medici at returns that were attractive.

In general, our partners choose to trust us with their capital given our long-term track record, superior underwriting and modeling capabilities, aligned approach and their belief that RenaissanceRe will be the best position to leverage improving market conditions. An important concern of the market is the sustainability of recent rate increases. Rate increases are often classified as being driven by either insurance changes or reinsurance changes. In the Property market, I believe rates have strong support from both. Primary carriers are simultaneously sticking to increased rates and reduced line sizes. In a similar vein, due to a changing view of risk, reinsurers are seeking Re, and most importantly, willing to reduce limits, which is the dynamic that has not existed for quite some time. This newfound willingness to reduce can be credited to 2 factors: the reduction of ILS capacity; and increased discipline resulting from the realization that risk returns have been below long-term acceptable levels. Due to their losses over the last few years and an ability to raise funds to replace those losses, ILS managers have less capital and are willing to write less business. So ILS managers are now aligned with the traditional market, putting further upward pressure on rates. Because of this, I believe current rate trends will be sustained moving forward. I also expect that the de facto regulator, such as Lloyd's and the rating agencies will continue to maintain pressure on carriers, encouraging them to improve results.

These pressures play to our strengths. We are a recognized market leader in underwriting, modeling and managing partner capital. Our growth in premiums demonstrates that Stevens want to do business with us because we have developed long-term strong partnerships with them. Similarly, our growth in partner capital demonstrates that capital allocators recognize our expertise and want us to manage their cat risk portfolios. So when I look forward, I'm very excited about the future as we are uniquely qualified and preferentially poised to take advantage of the many opportunities that should continue over the next few years.

Moving to our casualty segment. Gross written premiums were up $213 million or 50% versus the comparable quarter. This growth came predominantly from traditional casualty business, and to a somewhat lesser extent, our credit and other specialty portfolios. Of the $213 million of top line growth, about 2/3 comes from the legacy TMR book, and the remainder is organic. We continue to experience satisfactory results within the casualty segment in terms of overall profitability and the stability of the core business. In addition, we are seeing positive momentum of underlying rates across multiple lines of business and an increasingly favorable rate environment for our clients. Generally, we benefit from an underlying rate increases, which are further enhanced by our focus on risk selection. These rate increases appear to be outfacing loss trends in general, and similar to the Property business, we believe that these premium trends are likely to persist going forward. The casualty market is being positively impacted by reform efforts at Lloyd's as well as increased discipline from larger carriers. Falling interest rates should further encourage discipline. Most of the rate sustainability in casualty is dependent on current underlying insurance market trends. Similar to the Property market, we are seeing primary rates rising due to capacity withdrawals and decreases in line size. As much of this market is placed on a proportional basis, insurers rate improvements directly benefit reinsurers.

On the reinsurance side, we can improve our economics through better terms and conditions, but that is not occurring as of yet. I believe the rates being sought by insurers is needed, and that they are committed to improving rate adequacy. So I remain optimistic that we have a degree of sustainability for rate in this market as well.

I'm pleased with our market position in Casualty and Specialty lines. Both through our organic initiatives and acquisition, we have built a leading franchise in the business, with great access to risk. With the recent addition of the TMR portfolio, we have increased scale and added new capabilities, platforms and balance sheets that strongly position us to access more risk in an improving environment. Moving forward, we are focused on developing new products and markets as well as sourcing new forms of efficient capital.

In conclusion, the diligent execution of our differentiated strategy resulted in back-to-back strong quarters so far this year. I am pleased with our underwriting profits. Increased net investment income and significant bank gains in both our fixed income and equity positions. The TMR integration continues to progress smoothly and we remain on target for realizing our run rate and synergy targets. We executed well at the midyear renewals, raising considerable amounts of partner capital to provide needed capacity to constrained markets. Both our Property and casualty segments realized rate increases that we believe are sustainable. Going forward, we remain optimistic regarding our opportunities, confident in our strategy and focused on maximizing shareholder value.

And with that, I'll turn it over to questions

(Operator Instructions) Your first question comes from the line of Josh Shanker from Deutsche Bank.

First, a quick numbers question maybe, or I guess, that's what it is. If we think about the TMR expenses that they added to your P&L in 2Q, are there any expenses that you incurred immediately, not related to the integration, that will not recur in the quarters to follow?

Josh, this is Bob. We had it recorded basically a couple different categories. We have our ongoing run rate, which I talked about, it's the increase in the $23 million. The center half of that is helping out in the growth of the platform. The other nonrecurring cost in the $14.5 million is a mixture of ongoing compensation cost and onetime cost. We'll expect to see those going forward, but -- they're nonlinear, but it will decline.

Okay. And can you talk a little about Vermeer and Medici and some of the newer vehicles? What area of the markets they're targeting? And how that maybe relates to some of the -- whole of the market that the CATCo situation left? And just can you give us an idea of like where you're playing. And I know you don't want to give too much away, but can you give us some details a little bit there?

Sure. So of the $700 million, about half of it was allocated to DB. That was based on opportunities we're seeing from organic growth. Also, the pro forma roll-on of the TMR portfolio. And if you remember, DB's appetite is very similar to RenRe's cat appetite, where there's no business in DB, that is not in RenRe but there's lots of business in RenRe that's not in DB. The other vehicles we also were seeing good opportunity, and just to remind you of the strategies, Vermeer is writing high-level U.S.-exposed risk, so we have Top Layer Re, which writes high-level non-U. S.-exposed risk. We have Medici, which is more focused on the cat bonds. And then Upsilon, which is a worldwide vehicle, but that's also where when we find retro opportunities that don't fit our balance sheet, we put it on the Upsilon vehicle. And that is the one that probably has the most parallel to the CATCo appetite. We are not writing the CATCo product, but the CATCo withdrawal of capacity from the market has allowed us to provide more traditional retro sessional products to some customers that were using other forms of retro session previously. Is that helpful?

Yes, that's helpful. And let me get one more in. On the other Property segment, the growth was significant. Can you divide that between TMR premium, the growth in the third-party vehicles and RenRe's just broadening appetite in that area?

Josh, this is Bob. The growth in the other Property, about half would have come from the acquisition of TMR they brought in and the rest would be -- and that would be generally what was in the in-force at the purchase date, the remainder would have been organic growth year-over-year.

And as far as the appetite for other Property, I think it's always helpful to remind everybody that, within Property, we think about the world within Property cat and other Property, there is cat risk that's assumed in other Property. But in other Property, there's also other perils that can come in, more attritional-type property losses as well. So just as a reminder, there is cat risk in other Property. Our appetite hasn't changed and we're seeing opportunities, particularly as underlying rates are increasing, particularly in the United States.

Your next question comes from the line of Amit Kumar from Buckingham Research.

The first question I have is actually on the casualty book. On the last conference call, you had talked about TMR's book being more casualty than Specialty and running at a higher loss ratio. I was curious if there was a way to talk about how we should think about, I guess, what's a good run rate for the blended book? And based on your comments regarding the underlying rate improvement, is it time to start thinking about improving profitability in that book?

So let me take a stab at answering that. There's quite a bit in there. The TMR casualty portfolio, that will form part of our Casualty and Specialty segment, is more heavily weighted to general casualty than the in-force legacy RenRe book. And general casualty has a higher loss ratio than credit and specialty and some of the other lines that are in that segment. So there will be an uptick, I believe, is in that loss ratio. However the book that we retained within the general casualty section of the casualty book of TMR will be reunderwritten, and that's one of the reasons we're seeing the substantial reduction in premium that will be kept on a run rate basis for RenRe Limited. We've talked before about the auto book being a large component of the casualty segment within the legacy TMR. That has been the component of the book that is running at the highest loss ratio, and it's not a book we intend to materially renew. So I would look to say that we will rationalize the casualty book against the book that we have in force. We'll grow where it makes sense and hopefully, over time, we'll begin to enjoy the better rates that we're beginning to observe in that market.

Got it. That's a fair comment. The only other question and I will requeue is in your opening remarks, you talked about optimism, sustainability, and you're talking about the losses, the adverse developments, et cetera. And what I was actually wondering is, if you don't have an active hurricane season, doesn't a lot of these points become moot at that point as we head into it into 2020 renewals. Do you still have confidence that not even having an active hurricane season will still predicate future improvement in the marketplace?

So I think it -- everything can change depending on what happens in wind season. But in it being a normal wind season, I feel optimistic that the trends that are pushing rate, a lot of them coming from the primary insurance side, will persist. I think there's a general realization within the reinsurance market that, particularly markets like Florida, it's been a buyers’ market for a long time. There's been a small shift tidally to rates improving, but that needs to go further. And at 1/1, much of the business in late in the third and fourth quarter, much of the business that was loss affected in prior years, either renewed after the losses occurred -- I'm sorry, before the losses occurred, or in a multiyear basis, so I think there's still sustainability of rates coming through.

Our next question comes from the line of Meyer Shields from KBW.

Kevin, when you're talking about the Casualty and Specialty segment, you made a comment about pursuing other forms of capital. I assume that means third-party capital. I was hoping you could update us on where the investor appetite is for nonproperty or non-cat lines is?

I think there is appetite for non-cat lines. And I think we talked last year, that we put some third-party capital to work in event-based casualty business in the third quarter of last year. There are substantial issues with bringing third party capital to the market, which have to do with the tail and how to think about rolling the tail into either future vehicles or truncating the tail through a runoff. I believe that the appetite is further along than the structures are there to support it. And what we've seen is more vertical integration of third-party capital trying to get lower in the stack and closer to insurance risk. And that is beginning to gain some traction. And I remain optimistic that some lines of business, probably more in the specialty area like cyber and others, may ultimately find a way to get more access to third-party capital. The one thing I'll say is many of these lines are not constrained from a capital perspective, and there is good reinsurance support available. So part of it is whether the customer needs it and whether it can be cheaper.

Okay. That's very helpful. And then shifting gears. I guess last quarter, you talked about -- I may be paraphrasing this, a higher likely ratio of net-to-growth relative to the book in 2018. Does that still hold following midyear renewals?

So a reduced session rate, is that what you're asking?

Yes. Particularly for tails losses.

Yes. I think when we think about structure in our portfolio, retro is a component of it, and we don't have specific targets. So I wanted to comment that we renewed our retro program because there was a lot visibility to us purchasing it this year. But it is only a single component of what we do, and not something that is a required element of the portfolio. So I feel good about the risk that we put together from a portfolio perspective.

The one thing I think I would like to highlight from the retro that we purchased this year from last year is we purchased ballpark the same amount of limit. All that said, the portfolio is bigger. But the change in the construction of the purchases are such that we have more occurrence limit and less aggregate limit. And what that would mean is if '17 which is -- in '18, actually, where a series of medium-sized catastrophes, I think we would recover less under the structure we built in 2019 than we did in '17 and '18. But if it's a single shop loss, we should recover about the same in '19 as we would've in '17 and '18. So again, it's not any one element that is changing in a point in time. It's how we orchestrate all the elements of our portfolios together to come up with what we think is the most beneficial net portfolio that we can construct.

Your next question comes from the line of Elyse Greenspan from Wells Fargo.

My first question is going back to the conversation on Jebi, could you guys give us a sense of where you think the insured losses for the industry sits today? And then the $25 million, Kevin, that you said you guys added in the quarter, I'm assuming that's all for Jebi. I know you said it was an aggregate in retro covers, and that all shows up in cat, right? So then if you could also give some color on what drove the other Property adverse development.

Okay. So Jebi, actually, Jebi has been an interesting event. If you go back to when it was originally reported, I think the modeling firms and others were reporting it in the $2 billion to $5 billion range. And we came out initially thinking it was in the $8 million to $10 billion range. I believe the loss is in the $15 billion-range currently. And there's been a lot of reasons for that growth, including slow reporting of the claims, but it's something that we continue to monitor. We -- as we mentioned on the previous call, we have more protections for our reinsurance portfolio than we do for our retro portfolio, which is one of the reasons we are so closely attuned to how this is flowing into the retro portfolios. With regard to the $25 million that I mentioned, I can turn it over to Bob to talk a little bit about the geography on it, and I'll provide any color that I can.

Yes. Elyse, that's a good question. That $25 million that Kevin referred to is a net negative impact, which is consistent on how we disclose. You'll see that in the Q that we file tonight, and that was mostly Jebi, is what -- that one came from. But it's a mixture of a number of events that came through in 2018.

And what about -- that was in cat, right? So then what drove the other Property adverse development?

There's nothing significant. Most all the losses that we're talking about on these events in '17 and '18 are driven in the Property cat.

Okay. And then my other question, you guys, this is obviously the first quarter with TMR on your books. And I know you gave a couple figures kind of the net income contribution and then what you viewed as kind of the core ongoing. And then you did say I think both of you that you guys remain on track relative to that $100 million target. It does feel like given the moving parts that I would think it seems like you guys got more than $25 million of earnings this quarter. Is there seasonality to that? Am I missing something? It just seems like you guys are already at that $100 million target.

Thanks for the question, Elyse. Look, I did point out in my prepared comments, and you'll see it in the Q that gets filed later today, that we did have about $90 million that came in from TMR. But again, TMR is a big company. The integration is going very well. And as I pointed out in my prepared comments, a lot of that was mark-to-market gains that we had on the acquired investment portfolio and onetime foreign exchange gains that we received from the ongoing positioning of the portfolio. In our comments about giving sort of commentary on the $100 million run rate, and that was on an ongoing run rate and would have excluded the onetime items out there. And so going through the integration right now, we've not seen any surprises, and we still feel very comfortable with the $100 million, and we're hoping for more. So we'll keep you posted.

Your next question comes from the line of Yaron Kinar from Goldman Sachs.

Maybe just another follow-up on TMR. So on the investment portfolio, I saw that the yields came down a bit, duration went up a bit. I'm assuming that's somewhat attributable to the TMR assets coming on. And as you reallocate those, how should we think about yields and duration? And I guess now we have another on-goal with interest rates coming in probably more than what was expected at the time of the acquisition.

Yes. We brought in just over $2 billion of assets. And in my prepared comments, I did talk about the repositioning. You can see in the supplemental, just a number of different changes like selling down the municipals and moving out of the nondollar agencies that were out there. So there was a lot of moving parts. But yes, the yield came -- moved slightly. We reported on a managed as well as a risk. No substantial change. I mean the new money rate probably came down, obviously that was reflected in the mark-to-market, so we did inure that benefit to our shareholders through tangible book value. The duration remained relatively unchanged. It was 3.0 last quarter, it's 3.1 this quarter, and we're keeping an eye on it, and the market is moving around, so we feel very comfortable. I will point out that I did make an additional disclosure in my prepared comments about the amount of income on the investment portfolio of $115 million or $116 million, of which about $15 million is coming from our managed portfolio. So the core was around $101 million, and that's driven largely by our fixed maturity. The short-term adds on to that, but that some of it is coming from the managed vehicles.

And do you think that the yield on the core portfolio will improve from here as you reallocate? Or is the interest rate pressure such that we're not going to really see much improvement?

We feel comfortable with the position -- where the portfolio is positioned right now. We're not stretching for yield.

Okay. And then my second question is just around the California utilities, Wildfire Fund. Do you see that impacting supply/demand or pricing?

So that's reasonably recent as an instruction in California. The way it's positioned and the way we've looked at our portfolio, we don't think it's going to materially impact the demand for the product that we're selling.

Your next question comes from the line of Brian Meredith from UBS.

I have a couple of questions here. I'm just curious, Kevin, given what's going on with the pricing environment, rating environment, do you think you're more likely to keep more of the TM Re business than you'd originally anticipated?

I don't think it will change our perspective on the auto book. And then remember that about $200 million of the premium ballpark, it was their fronted business, which is a business that we said from the very beginning we would provide an orderly exit for their partners there. For the rest of it, I think we will underwrite each account individually. And yes, if there is an opportunity to keep it, we will. So I hope that we can do at least -- I feel comfortable we'll get this 700, and I hope that as rates improve, we can do a little bit better than that.

Got you. And where is that fronting business coming through? Just the fee income and if any premiums coming through.

It comes through the Property side.

So the other Property. So that's part of the big increase we saw this quarter and the other Property coming from TM Re. And we should assume that, that necessarily won't continue going forward.

No. It comes through the Property cat, and it's on a runoff basis. So what you're seeing is some movements in the loss ratios, but those are all passed back and forth. So they're net neutral to us.

Something -- well, one thing that comes to us is the fees associated with the business, which it's something that we -- from an original estimate for the $100 million, we never included the fees because it's not part of our run rate as we intend to run this business off. But we are earning the money in thinking about -- in our transition of that book to others willing to provide the fronting.

Got you. Okay. And is that -- you're saying that's an offset to the loss ratios?

Yes. The loss ratio has been neutral because it's passed right through. It comes in and out. So there's no impact, and you can see it right in the cash flows supplemental. You can follow up with Keith, and we can...

Yes. I'll follow. We'll go through that. That would be helpful. That would be great. And then just quickly, on the increase in the cat business you have, just a similar question that I think Josh asked about, what percentage of that was TM Re versus just organic your kind of growth?

In terms of the -- if I understand your question, what...

The Property cat business. Was much of the cat increase year-over-year TM Re?

A very small piece of it. Not significant.

Your next question comes from the line of Michael Phillips from Morgan Stanley.

A couple more on TMR. It sounds like most of the impact from TMR was as you said the mark-to-market gains. And I apologize if I missed this, was there any impact from a consolidated loss ratio from TMR?

The loss ratio, there was noise here or there, but nothing significant that stood out that would be worthy of getting into. I mean there's going to be a little bit of movement. I did point out in my prepared comments that there was no activation of the ADC. So in other words, we're in a favorable position with that respect. But there will be noise across the segments as we go through time. But no.

Okay. And can you just remind us of, I guess, TMR's kind of global exposure to cats relative to kind of your historical book?

So there's 2 elements with our cat book. One is which Bob talked about is they have the fronting business. We retain 0 risk on the fronting business. So that is probably more U.S.-focused, but is not a business that we have retained any risk on. The second piece is they wrote a diversified portfolio and a diversified cat portfolio with the exclusion of Japan because as the subsidiary in Tokio Fire Marine, they didn't want to add to the risk there. So it's a reasonably diversified portfolio with a not uncommon spread for traditional cat book with the exclusion of Japan.

Your next question comes from the line of Ryan Tunis from Autonomous Research.

Not trying to beat a dead horse on this, but Bob, you said that $90 million came in this quarter from TMR in operating earnings?

Yes. It came from GAAP earnings. And a lot of that I pointed to the mark-to-market and the FX, which would outside of the GAAP earnings. And so we remain confident with the $100 million run rate that we have out there. And we don't feel that we've seen any surprises that would change that. Now, we're hoping for upside, Ryan. Go ahead.

I'm just trying to understand looking at the operating income line, how much of that might have been obscured by some mark-to-market or the FX within TMR.

Actually, yes, I was going to clarify that some of the FX did come through in the operating income, which is consistent with how we report all of our FX. Again those are onetime, and we're really pulling you towards the core. In fact, the $90 million has -- is still -- it's becoming more and more difficult as you go through time as we consolidate these entities because they are reinsurance on reinsurance. And we will choose to reunderwrite on different balance sheets, which makes it difficult to track. So I wouldn't see this as a continuing disclosure, but we'll continue to talk about it.

Understood. I'm just trying to understand how much more than the -- if you just flat -- co-annualize the $100 million you're on pace for, that's $25 million a quarter. How much more than $25 million was in operating earnings this 2Q?

It's not an easy question to answer because we've already started integrating people that are running the business, so we've got a lot of movements in it. So it's a very difficult (inaudible) FX did come into operating earnings, but we did have some of the increase of the $23 million in cost I talked about. Some of that -- half of that increase was a result of TMR, and a good chunk of it was booked outside of the AG as we move people into our services unit.

Okay. And then my follow-up was just thinking about with the midyear renewals in no-cat year, is it -- should we be thinking about the profitability being kind of similar with the magnitude of rate increases, the 15% to 20% up? Or was there a lot of premium growth on top of that just in terms of new business that would make it more significant than that in the Property cat?

I'm not sure I fully understood your question. Can you repeat it for me?

Yes, look, I'm just trying to understand the -- obviously you had to wait, but then there's the comment about -- I was just a little bit confused on the comment about the P&L as the percentage of equity, and how you'd expect -- taking all that together, how you'd expect the profitability of your book to be this year relative to last year if you do not have an active wind season.

Okay. Let me try to clarify the first part of your question, which is kind of what happened to our Southeast wind risk, which seems to be a component of it. So from a portfolio perspective, we did not grow limit in the Florida domestic market year-over-year. However, we are taking more Southeast hurricane risk, which includes Florida. So when we think about building our portfolios, we think about the peril and then how we're constructing the portfolio. The peril, Southeast hurricane, of which the Florida domestic is a component, but it's a smaller component of the risk that we're taking. And that's because we saw better opportunities to take that risk outside of the Florida domestic market, so the Florida domestic market did not draw our capacity as much as other lines such as retro. And the final piece is as a percentage of equity, at different points on our risk distribution we did not increased the percent of equity we are exposing. However, our equity is higher for the 2019 wind season than it was for the 2018 wind season, which again supports that we're taking more absolute risk in Florida. Is that more clear?

Yes. I think that's helpful. I guess my one follow-up would be, on the regional business, the domestic stuff, I think you said it's about 15% to 20%. What are the type of rate increases this year, I guess, if you're writing more broadly in the Southeast?

Risk-adjusted we said there were high single digits in the domestic Florida. So that is netting out the change in the view of risk from what we learned about the steepness of the social inflation curve. We are getting better rate adjusted for exposure in other lines, such as retro than that. So we didn't disclose what the other markets are producing. But it's higher than what we're getting in the domestic Florida market. If it was higher in the domestic Florida market, we would have grown that as a percentage of our book.

Your next question comes from the line of Matthew Carletti from JMP.

Kevin, I just want to circle back to your Jebi comments. I would think that you guys in your position do a lot of work on this and probably have a better view than most. You mentioned a little bit on late reporting, but I was hoping that you could just dive a little deeper and give us at least some of your thoughts on kind of why this one missed the mark so much and has turned out to be kind of a tough one for the industry to get [fins] around.

Yes. So what I said some before is I think there was a couple of issues. And my early comments were specific to the fact that it's a much bigger industry event than what was initially forecast. And I think that has to do with -- it's probably be an optimistic representation of Japanese wind within the models, which is certainly a component of it. I think underwriters over time, in regions without frequency or without severity even, they have a tendency to underestimate the risk that they're taking. So I think there's a degree of underwriting optimism in the market. And I think there's been all of that exasperated by there being slow reporting. So in Japan, one tends to expect slow reporting, this was slower than usual, which probably added to this being something that is burned for longer than what would've been expected. So mischaracterization of the event from time 0, optimism with underwriters representing the risk and slow reporting, all contributed. When I think about our book, what I said in my comments is our net negative impact has not changed from when we first reported in Q3 2018. However, our gross is up, so as I mentioned, we started at 8-10, we think it's now at least 15. That is also had some growth in our gross loss. But because of the way we structured our portfolio, we have managed to maintain the same ultimate impact to our shareholders, which is the net negative impact. So when I look at our reserves, I feel good about where we are, with about half our loss in either ACR or IBNR. But I do have concern that if this loss continues to develop that it can adversely affect us particularly through retro, and in retro, we purchase fewer protections than we do in our reinsurance book. Hopefully, that was helpful.

Yes. And maybe just a couple of follow-ups, specifically there's been some talk in the market of demand surge along the lines of a lot of World Cup construction, a lot of Olympic construction. And do you see that contributing at all? There's also been some talk of kind of let's call it, social inflation in the Osaka area, not to Florida extremes, but kind of a little atypical for Japan. Have you seen any evidence of that? And then lastly, what would your expectation be as we approach 401 next year in terms of follow-through from the kind of tiers of revisions we've had?

Yes. I've read all that stuff as well. To be perfectly honest, I'm not sure the guy building the Olympic stadium is the same guys fixing somebody's garage door. But there's probably some element of contractors being pulled onto more marquee jobs than doing the residential stuff. There probably is social inflation within the Osaka area. I think it's one that I mentioned on the previous call. We are still learning about how to improve this event. I tried to represent a few things that I think occurred. But we don't have full transparency as what's driving this loss to be as substantial as it is. I think the rate increases at 401 certainly were helpful and Japan has traditionally been great partners from an reinsurance perspective. But as the loss has grown substantially even after the 401 renewal, I would hope that we go in with an expectation of rate increases in 2020.

Yes. Just one thing...

There are no further questions at this time. I'll turn the call to Kevin O'Donnell for closing remarks.

Well, one thing -- this is Bob. I'd like to go back to Ryan's question on the $90 million. Just to clarify that, of the $90 million, less than half was in operating income, and that was being consistent with the underwriting income that we would normally get off the full in-force book, the yield we would get under the investment portfolio that goes with that. So I just wanted to clarify that question for you. But I'll turn it back over to Kevin.

Thanks, Bob. Thanks, everybody, for joining the call. I feel great about where we are and what we've achieved so far this year. I think we've got the right people in the right place doing the right thing. The TMR integration is going very well, and I have a high degree of optimism as to our opportunities going forward. So with that, I would like to say thank you, and I look forward to speaking to you next quarter.

That concludes today's conference call. You may now disconnect.