Q2 2019 Earnings Call

All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad. Please limit yourself to one question and one follow up question. If you would like to withdraw your question press. The pound key. Thank you Keith Mchugh 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 close we issued our quarterly release, if you didnt receive a copy. Please call me at 44123, 943 zero and we'll make sure to provide you with one.

There will be an audio replay of the call available from about one PM Eastern time today through midnight on August 24.

The replay can be accessed by dialing eight fivefive 859 huge or a five cents U.S. toll free or 140, 45373 406 internationally. The pass code you will need for both numbers is 96.

0689.

Todays call is also available through the Investor information section of Www Dot Regnery dotcom and will be archived on Renaissance Reis website through midnight on August 24 2019.

Before we begin I'm obliged to caution that todays discussion may contain forward looking statements actual results may differ materially from those discussed additional information regarding the factors shaping these outcomes can be found in Renaissance read that T SEC filings to which we direct you.

With us to discuss today's results are Kevin Odonnell, 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, Steve.

Good morning, and thank you for joining todays call well 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 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 Tamar portfolio and increased net investment income.

I am pleased with the growth and 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 am optimistic.

So that 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 mid year renewals.

We were strategically positioned to profit from rising rates and were able to deploy more capacity at better pricing and preferential terms.

I will discuss the renewals and sustainability of rates in more detail when I address their segments, but I'm confident that we constructed an attractive portfolio that will benefit us and our shareholders over the long term.

Moving to Tamar. 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 buy but from my perspective haven't gone through our first major renewal as a combined entity. We're now one company speaking with one voice operating one unified underwriting system with a single view of risk and executing a consistent strategy.

We have increased our flexibility by adding new locations in Zurich in Sydney, and new balance sheet in Switzerland called render Europe .

All that the TMR business is captured in Rems and represents our view of risk.

We are now able to retain the business that we find attractive which we expect to continue.

And by leveraging our integrated system, we are renewing it and the most efficient balance sheet.

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.

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 Tamar, if we continue to make good progress on the TMR integration among other important successes, we executed smoothly on the recent June 1st renewal as a consolidated entity advanced the process of vendor consolidation.

Completed the rebranding of the Tamar entities and consolidated our London offices.

We remain on track to realize anticipated synergies on Tamar as expense base.

During the quarter, we continued 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 the 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 costs and $9.2 million of compensation costs.

This is the first time that we've reported a full quarter of consolidated results, reflecting the TMR book, our financial reporting now fully reflects TMR as earnings.

Contributing to our results for the quarter was approximately $90 million of net income from Tamar. The majority of which was driven by mark to market gains on investments and foreign exchange gains as we repositioned the non dollar portfolio.

Taking these and other factors into consideration the ongoing contribution to operating income in the quarter from Tamar was consistent with our projected after tax run rate contribution of $100 million, which remain on track to achieve.

One aspect of the TMR transaction I would like to briefly address the mechanics underline the adverse development cover or ADCC.

As you recall the AIDC protects the reserves, we acquired from TMR, including unearned premium.

The AIDC is an enterprise cover protecting us on paid losses above the attachment point of the AIDC. 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 AIDC.

From an economic perspective this results in three likely outcomes.

This TMR results are as anticipated the AIDC is not impacted and our shareholders received the originally targeted return on the Tamar acquisition.

If TMR results are favorable the AIDC is not impacted and overtime. This favorable development in numerous to the benefit of our shareholders.

And finally, it's Tamar results are unfavorable we recover on the AIDC up to the limit on one of the contract and our shareholders suffered no economic loss.

To be clear not recovering on the AIDC is positive because it means we experienced overall favorable development on T. emrs reserves at the holding company level, which our shareholders key.

Our results were as anticipated.

Now moving on to consolidated results our annualized return on average common equity was 29%.

Our results this quarter benefited 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%.

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 the change in cumulated dividends by 16%.

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.

$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 Tamar transaction.

TMR had about $1.3 billion of net premiums earned in 2018.

While we expect this number to reduce as we underwrite re underwrite the TMR business. This process will take about a year.

In addition, since this premium is protected by the AIDC. It is largely retain net as it is not ceded into our retro program.

At the TMR business runs off we will 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 businesses generate profit, including investment income under invested and 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 some 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 was 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 improved this quarter to 8% and reflects the significantly increased leverage the TMR business has afforded us.

As TMR as net premiums earned run off this ratio may tick up somewhat.

Now moving onto our segments and starting with our property segment, where 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 were 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 45% combined ratio and our other property printing and 85% combined ratio.

Now moving onto the casualty segment, where our gross premiums written are 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 in force 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 with the prior year quarter.

Now moving to fee income or total fee income was $40 million for the quarter were $26 million in management fees and $14 million in performance fees.

Relative to the comparable quarter, our fee income grew 20, 423%, 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 and 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 increase returns on private equity investments.

About $116 million of net investment income $15 million was attributable to our various joint ventures, and we retain $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 to 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 us dollar assets to dollars and sold TMR tax exempt municipal holdings.

Now I'll close with comments on our capital management, we did not purchase any shares of our shares 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 a casualty.

Starting with our property segment, we grew gross premiums written by 52% over the comparable quarter last year property tax grew by 38% while the other property grew by 106% the growth in both lines was a combination of organic growth.

Rate increases and the addition of the TMR portfolio.

At the June one, 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 MCAC on participations.

So any improvement in rate was due to recent loss experience as well as capital charges and costs coming through which resulted ultimately resulted in reduced supply.

Several factors influence we have supply dynamics. The last two years have seen record losses to global reinsurance markets as well as Florida specific losses from Hurricanes Michael in Aruba.

It was materially less retro 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, exciting over social inflation and ongoing loss create added to existing concerns about providing capacity to this market.

From our perspective, these rate increases where 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 right.

At the same time, we increased our exposure to more diversified pools of southeast hurricane risk, where we can 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 of 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.

But this apparel 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 risk when rates are better.

Our experience tools access and underwriting uniquely position us to shape, our portfolio to capture the best risk in the best form using the most efficient capital, which is which is what I believe we did this quarter.

Additionally, we were able to deploy our newest balance sheet Vermeer.

In the various cat renewals, including Florida at mid year, and we are pleased with the portfolio that we constructed for investor in that vehicle.

Similar to last year, the biggest market losses continue to come from adverse development, particularly on events like JV Arena and Michael.

In the case of days Yahoo.

So far the largest event for the market in 2019 was adverse development on 2000 eighteens typhoon JV just as the largest event in 2018 was adverse development on 2000 Seventeens Hurricane Arena.

The industry estimate for typhoon JV have increased materially since the third quarter of 2018, and now were above the high end of our estimates which were more conservative initially than the market.

Our gross loss has increased as well.

Although JV is net negative impact to our property book is essentially unchanged from the third quarter of 2018, when we first reported it.

We have successfully manage 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 JV and it's 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 program that expired at mid year.

While the profile of our retro program is different.

And if we and we have paid an increase.

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 rental was successful we are not reliant on any one 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 two other potentially more efficient forms of capital, especially when supplies constrained.

This year, we saw several offered areas of opportunity within our broader portfolio to support our customers, including a sellers in the retro market. Consequently, we raised capital at June one in order to deploy an additional $700 million in Davinci, Vermeer Upsilon and DG returns that were systems 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 Renaissance, we will be the best position to leverage improving market conditions.

In 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 seeking to increase rates and reduced line sizes.

In a similar vein due to a change in view of risk reinsurers are seeking rate and most importantly willing to reduce limits, which is a dynamic that has not existed for quite some time.

This new found willingness to reduce can be credited to two factors the reduction of wireless 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 idealist managers have less capital and are willing to write less business.

So wireless managers are now aligned with the traditional market, putting further upward pressure on rates.

Because of this I believe current freight trends will be sustained moving forward.

I also expect that the de facto regulators such as Lloyds and the rating agencies will continue to maintain pressure on carriers encouraging them to improve results.

These pressures play to our strengths we are recognized market leader in underwriting modeling and a managing partner capital of growth in premiums demonstrates it seems wants to do business with us because we have developed long term.

Strong partnerships with them.

Similarly, our growth in partner capital demonstrates the capital allocators recognize our expertise and want us to manage their cat risk portfolios.

So when I look forward I am very excited about the future.

As we are uniquely qualified and preferably 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 are up $213 million or 50% versus the comparable quarter.

This growth came predominantly from traditional casualty business and to a somewhat lesser extend our credit and other specialty portfolios.

Of the $213 million of topline growth about two thirds comes from the legacy Tamar 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.

The positive momentum on underlying rates across multiple lines of business and an increasingly favorable rate environment for our clients.

Generally.

We benefited from an underlying rate increases, which are further enhanced by our focus on risk selection.

These rate increases appear to be outpacing 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 Lloyds as well as increased discipline from larger carriers falling interest rates should further encourage discipline.

Most of the rate sustainability and 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 ensures 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 rate being sought by insurers as 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 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 mid year renewals raising considerable.

The 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 will turn it over to questions.

At this time I would like to remind everyone in order to ask a question simply press Star then the number one on your telephone keypad.

Please limit yourself to one question and one follow up we will pause for just a moment to compile the kuni roster.

Your first question comes from the line of Josh Shanker from Deutsche Bank. Your line is open.

Yes. Thank you.

First a quick numbers question, maybe or the I guess, that's what it is.

If we think about the TMR expenses that they added to your PML into queue are there any expenses that you incurred immediately.

Not related to the integration that will not recur in the quarters to follow.

Hey, Josh this is Bob.

We had recorded basically a couple of different categories. We have our ongoing run rate, which I talked about is the increase in the $23 million centre half of that is helping out on the growth of the platform. The other nonrecurring costs in the 14.5, there is a mixture of ongoing compensation costs and one time costs, we'll expect to see those going forward, but they'll non linear but it will decline.

Catco situation left and just give us an idea of where you're playing and I know you want to give too much away, but can you can you give us some details a little bit there.

Sure.

So up to 700 million about half of it was allocated to GB.

That was based on opportunities we are seeing from organic growth.

Also the pro forma roll on of the TMR portfolio.

And if you remember d. These appetite is very similar to run Reis cat appetite, where there is no business in TV that is not in a run rate, but there's lots of business and run rate thats not in TV.

The other vehicles. We also were seeing good opportunity and just to remind you of the strategies Vermeers writing.

Hi level us exposed risk. So we have top layer re with Reits high level non U.S. exposed risk.

We have mcgeachy, which is more focused on 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're not writing the catco product, but the capco withdrawal capacity from the market has allowed us to provide more traditional retrocessional products to some customers that were using other forms of retrocessional previously.

So is that helpful.

Okay. That's helpful and I guess 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 ran reached just broadening appetite in that in that area.

Hey, Josh this is Bob the growth in the other property.

About half would have come from the acquisition of TMR. They brought in the rest would be and that would be generally what was in the in force at the purchase date, the remainder weighted inorganic 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 Thats assumed in other property, but in other property. There is also other perils that can come in more traditional type.

Property losses as well so just as a reminder, there is cat risk and other property or appetite hasn't changed and we are seeing opportunities, particularly as underlying rates are increasing particularly in the space.

Thank you and congratulations.

Thanks.

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

Thanks, and good morning.

The first question I have is actually on the casualty book.

On the last conference call you had talked about key homeowners book being more casualty and 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 is quite a bit in there the.

The TMR casual seek.

Portfolio that will form part of our casualty and specialty segment is more heavily weighted to general casualty then the in force legacy run Rebook and general casualty has a higher loss ratio than credit in specialty and some of the other lines that are in that in that segment. So there will be an uptick my belief is in that loss ratio.

However.

The.

Book that we retain within the general casualty section of the casualty book of TMR will be re underwritten and Thats one of the reasons, we're seeing the substantial reduction in premium that will be kept on a run rate basis for rent re Ltd.

Weve 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 to materially renew.

So I would look to say that we will.

Rationalize the casualty book against the book that we have in force will grow where it makes sense and hopefully.

Overtime will begin to enjoy the better rates that we're beginning to observe in that market.

Got it that's 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 you know the losses, the adverse development et cetera.

And what I was actually wondering is if you're going to have an active hurricane season.

Doesn't eat a lot lot of these points become moved in at that point as we head into in a 2020 renewals.

Do you still have confidence that.

Not even having an active hurricane season, we'll still a predicate future improvement in the marketplace.

So I think it everything can change depending on what happens in wind season, but in 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 buyer's market for a long time, there's been a small ships tightly to rates improving but that needs to go further and at one one much of the business in late in the third and fourth quarter much of the business that was lost it back in prior years either renewed it after the losses occurred we started before the losses occurred or have been on a multiyear basis, I think theres still sustainability of rates coming through.

Got it that's very helpful. I will stop here, thanks for the answers and good luck in the future.

This is a thing.

Your next question comes from the line of Meyer Shields from KBW. Your line is open.

Thanks, Kevin when you're talking about the casualty and specialty segment I think 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 non property or non cat lines.

So I think the the there is appetite for not 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.

Through run off.

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.

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, maybe paraphrasing it.

Higher like the ratio of net to gross [laughter] relative to the book in 2018 does that still hold following me do renewals.

So a reduced session rate and so what you're asking.

Yes, particularly for tail losses.

Yes, I think.

When we think about structuring our portfolio a wreck retro as a component of it and we don't have specific target. So I wanted to comment that we renewed our retro program because there is a lot of.

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 from a portfolio perspective. The one thing I think I would like to highlight on the retro that we purchased this year from last year as we purchased ballpark the same amount of limit all that said the portfolios bigger.

The 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 it 17, which is which is a an 18 actually were a series of medium size 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 shock loss, we should recover about the same in 19 as we would have in 17 and 18. So again, it's not any one element of it that is changing at a point in time, it's how we orchestrate all the elements of our portfolios together to come up or do we think is the most beneficial.

Net portfolio that we can construct.

Okay. Thank you very much.

Sure.

Your next question comes from the line of a lease Greenspan from Wells Fargo. Your line is open.

Hi. Thank you. Good morning. My first question is I'm going back to the conversation on tabby.

Could you guys give us a sense, where here do you think the insured losses for the industry sits today and then the 25 million and Kevin that you said you guys added in the quarter I'm, assuming that's all for JV I know you said it was an aggregate in retro coverage and that all shows up in cap rates and then if you could also give some color how much of the other property adverse development.

Okay.

Students, who JV actually Terry has been an interesting.

And if you go back to what it was.

Originally reported I think the modeling firms and others are reporting it in the $2 billion to $5 billion range.

And we came out initially thinking it was in the $8 billion to $10 billion range.

I believe the losses in the $15 billion range currently and.

It's been a lot of reasons for that growth, including slow reporting.

The claims, but it's something that can we continue to monitor we as I mentioned on the previous call. We have more protections for our reinsurance portfolio than we do for a 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.

Got it maybe I can turn it over to Bob to talk a little bit about the geography other not provide any color that I can yes late it's good question that 25 million.

Kevin referred to.

Negative impact, which is consistent on how we disclose.

You will see that in the Q that we file Tonight and that was mostly gebbie's wonder if that what came from but it's a mixture of a number of events that came through in 2000.

18.

And then what about.

That was in cat bites of that much of the other property adverse development.

There is nothing significant most of all the losses that were talking about on these events in 17 18 are driven in the property cat.

Okay. Thank you and then my other question on you guys is obviously the first quarter with Tamar on your book and I know you gave a couple of figure is on kind of the net income contribution and then where do you guys kind of the core ongoing and 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 hundred million dollar target.

Thanks for the question Lisa I did point out in my prepared comments and we will see a few 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 one time 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 dollar 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.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your line is open.

Good morning, everybody.

Maybe another follow up on TMR, so on the investment portfolio.

I saw the yields came down a bit duration went up a bit I'm assuming but.

Thats somewhat attributable to the TMR assets coming on and as you reallocate those how should we think about yields in duration.

And I guess now we have another where EMCORE with interest rates coming in.

Probably more than what was expected at the time of the acquisition.

We brought in just over $2 billion of assets and I prepare in my prepared comments I did talk about the repositioning and you can see in the supplemental just a number of different changes like selling down the municipals.

And moving out of the non dollar.

Agencies that were out there. So there was a lot of moving parts, but yes. The yield came moved slightly we've reported on a managed as well as a risk.

No substantial changes in the new money rate probably came down obviously that was reflected in the mark to market. So we didnt hear that benefit to our shareholders through a 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 it an additional disclosure in my prepared comments.

About the amount of income on the investment portfolio of $115 million 116 million of which about 15 million is coming from our our managed portfolio. So the core was around 101, and that's driven largely by our fixed maturity.

The short term as onto that but that's some of it's 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 where 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 DC that impacting supply demand.

Pricing.

So that's reasonably recent as an introduction in California.

The way it's positioned in the way Weve looked at our portfolio. We don't think it's going to materially impact the demand for the product that were selling.

Okay.

Thank you.

Yes. Thanks.

Your next question comes from the line of Brian Meredith from you. Yes. Your line is open.

Hi, 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 Tam 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.

We we would provide an orderly exit for their partners there.

For the rest of it I think.

We will underwrite each account individually and 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 the 700 and I hope that as rates improve we can do a little bit better than that.

Where's that fronting business coming through just.

In common and.

And if any premiums coming through.

It comes through the properties on.

So the other property so thats part of the Big increase we saw this quarter in other property coming from Tim Reagan and we should assume that that Nestle one can you going forward.

No it comes to property cat and it's on a run off basis. So what you're seeing is some movements in the loss ratios, but those are all passed back and forth so that net neutral to us.

Tom its something that well one thing that comes to us as the fees associated with the business.

Which which.

It's something that we've brought from an original estimate for the 100 million. We never included the fees because it's not part of our run rate and we intend to run this business, but we are earning the money in thinking about it in our transition of that book to two others willing to provide the fronting.

Gotcha, Okay and is it that you're saying, that's an offset to the loss ratios.

Yes.

No loss ratio to be neutral because its past brightroll comes in.

It comes in and out so there is no impact and you can see that right and the cash flows supplemental you can follow up with Keith and we can now follow if they go through that Debbie.

That would be helpful. If that'd be great and then just quickly on the increase in the Cat business. You have similar question I think Josh that's about what what percentage of that was with Tim Murray versus just organic you're kind of growth.

In terms of the founders any question what percentage of the property cat because the cat business, which was much when much of the cost increase year over year, Tim Murray.

Very very small piece of it.

Great.

Thank you for not signal.

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

Thanks, Good morning.

A couple of more on TMR.

It sounds like most impact anymore. It was as you said the mark to market gains Yeah, I apologize if I missed this was there any impact on the consolidated loss ratio from Tamar.

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

Okay. Thanks, and can you just remind remind us of I guess, Tim ours kind of global exposure to cats relative to kind of your historical book.

So.

There's two elements of their cat, one is which Bob talked about is they have the fronting business, we retain zero risk on the hunting business. So that is.

Probably more U.S. focused but it's not a business that we have retained any risk on.

The second piece is they wrote a diversified portfolio in a diversified cat portfolio with the exclusion of Japan, because as as a subsidiary of Tokyo Foreign Marine They didnt want to add to the risks there. So it's a reasonably diversified portfolio with a with a not uncommon spread for traditional cat book.

With the exclusion of Japan.

Okay no. Thank you very much.

Good.

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

Hey, thanks.

Beat the dead horse on this but Bob you said that 90 million came in this quarter from TMR.

Yeah, that's a good operating earnings.

Okay, sorry gaffer.

GAAP earnings and a lot of that I pointed to the mark to market in the FX, which would be outside of the GAAP earnings.

And so we remain confident with a 100 million dollar 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.

Right.

I call. Okay go ahead.

Oh, no I was 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 DMR.

Actually I was going to clarify that the some of the FX did come through in the operating income, which is which is consistent with how we record all of our FX.

Again, those are one time and we are really pulling you towards the core in fact, the $90 million has is still you know, it's becoming more and more difficult as we go through time as we consolidate these entities because they are reinsurance on reinsurance and we will choose to re underwrite 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.

Understood I guess I'm, just trying to understand how much more than that if you just.

Quarter annualized 100 mill, you're on pace for that's 25 mill a quarter.

How much more than 25 million was in operating earnings.

You know this to Q.

It's not a it's not an easy question to answer because we already started integrating people that are running the business. So we've got a lot of movements and insurance are very different the FX income into operating earnings.

But we did have some of the increase of the $23 million in costs I talked about some of that increase and made a lot of half of that increase was a result of TMR that and a good chunk of that was booked outside of the AG as we move people into our services unit.

Okay.

And then my follow up was just.

[laughter].

Thinking about.

Oh, well familiar with.

No cat year is it we should we be thinking about the profitability being.

<unk> kind of similar magnitude of rate increases the 15% to 20% up.

You don't know.

Was there a lot of big premium growth on top of that.

Just in terms of new business, so that would make it more significant than that in property cat.

HM.

I am not sure fully understood. Your question can you can you repeat plenty.

Yeah, I mean, I'm just trying to understand.

The.

Obviously, you had the rate, but then there was the comment about I was just a little bit confused on the comment about.

Well the PML as a percentage of equity and how you expect [laughter].

Taking all that together, how you'd expect the profitability of your books to be this year relative to last year. If you do not have an active wind season.

Okay.

Let me try to clarify that the first part of your question, which is kind of what happened to our southeast wind risk, which seems to be a component of that.

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 portfolio as we think about the apparel and then Howard constructing a portfolio apparel southeast hurricane of which the Florida domestic is a component, but it's a smaller component of the risk that we're taking.

And thats, because we saw better opportunities to take that risk outside of the Florida domestic market sort of Florida domestic market did not drive 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 increase 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 up more absolute risk in Florida.

So is that more clear, yes, no I think I.

I think thats helpful. I guess, my one follow up would be on the regional business.

Yes, the domestic stuff I think you said is up 15 to 20, what are the type of rate increases if you're.

I guess, if you're writing more broadly in the southeast.

So risk adjusted we said they were high single digits in it in the domestic Florida. So we will not 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.

Uh huh.

Fourth our exposure in other lines, such as retro than that so we didnt disclose what the other markets are producing but it's higher than what we're getting in the domestic Florida market because if it was higher in the domestic Florida market, we would have grown that as a percentage of our book.

Understood. Thank you.

Yeah. Thanks.

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

Hi, Thanks, Good morning, Kevin I, just want to circle back to your JV Your JV comments.

You know I would I would think that you know you guys and your position do a lot of work on this and probably yeah.

I 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 and give us at least some of your thoughts on kind of what 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 his hands around.

Yeah, So what I touched on before is I think there's I think there's a couple of issues and in 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 there's probably an optimistic representation of Japanese wind within the model.

Which is certainly a component of it I think underwriters.

Overtime in regions with out.

Recently spoke about severity, even they have a tendency to under estimate the risks that they're taking so I think there was 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 lower than usual, which probably added to this being something that is burned.

For longer than what would have been expected. So miffed mischaracterization of the event from time zero 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 eight to 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 port folio. 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 a CR or have you in our but I do have concern that if this loss continues to develop that it can adversely affect us, particularly through retro and retro we purchased fewer protections that we do on our reinsurance book.

Mhm.

Okay, and then just helpful.

Yeah, maybe just a couple follow ups, but specifically I mean, there's been some talk in the market of.

The demand surged along the lines of you know a lot of World Cup construction a lot of Olympic construction <unk> do you see that contributing at all there's also been some talk of kind of let's call it social inflation and the Osaka area I'm not to Florida extremes, but I'm kind of a little atypical for Japan <unk> have you seen any evidence of that and then and then lastly, you know what would your expectation be as we approach for one you know next year a in terms of the follow through from from that kind of two years of revisions with that.

Yeah, I read all that stuff as well.

You know I'm not to be perfectly honest I'm not sure. The Guy building an Olympic Stadium to same got fixed in somebody's garage door.

I agree but.

Yes, probably some element of contractors being pulled on too.

More mark can you jobs than doing doing the residential stuff.

It probably is social inflation.

Within within Utica area, I think it's one that I mentioned on the previous call we are.

I'm 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 is what's driving this loss to be as substantial as it is I think the rate increases at four one certainly were helpful. In Japan has traditionally been great partners from a reinsurance perspective, but as the loss has grown substantially even after the four one renewal I would hope that we go in with an expectation of rate increases in 2020.

Great. Thanks, very much for the color.

Sure.

Yeah, just one thing further questions at this time I turn the call to Kevin O'donnell for closing remarks.

One thing this is Bob I'd like to go back to Ryans question on the $90 million just to clarify that other 90 million less than half was in operating income and that would be consistent with the underwriting income that we would normally get off the full in force book yield we get on the investment portfolio.

That goes with that so I just wanted to clarify that question for you.

Thank you 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 Oh [noise].

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