Nov 7, 2013
Executives
Arturo Raschbaum – President, Chief Executive Officer John Marshalek – Chief Financial Officer Noah Fields – Vice President, Investor Relations
Analysts
Randy Binner – FBR Capital Markets Matt Carletti – JMP Securities Bijan Moazami – Guggenheim Alex Lopez – Portales Partners Ken Billingsley – Compass Point Bob Farnam – KBW Dan Farrell – Sterne Agee
Operator
Good day ladies and gentlemen and welcome to the Maiden Holdings Third Quarter 2013 Earnings call. At this time, all participants are in a listen-only mode.
Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
I would now like to turn the call over to your host, Noah Fields. Please go ahead.
Noah Fields
Good morning and thank you for joining us today for Maiden’s third quarter 2013 earnings conference call. Presenting on the call today we have Art Raschbaum, Maiden’s Chief Executive Officer, along with John Marshalek, our Chief Financial Officer.
Also in attendance is Pat Haveron, Executive Vice President. Before we begin, I would like to note that the information presented here today contains projections or other forward-looking statements regarding future events or the future financial performance of the company.
These statements are based on current expectations and future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from these expectations. We refer you to the documents the company files from time to time with the Securities and Exchange Commission, specifically to the company’s annual report on Form 10-K and our quarterly reports on Form 10-Q.
Some of our discussions about the company’s performance will include reference to both non-GAAP financial measures and information that reconciles these measures to GAAP, as well as certain operating metrics that may be found in our filings with the SEC and in our news release located on Maiden’s investor relations website. Please also note that unless otherwise stated, all references to common share data in today’s discussion are on a diluted share basis.
I will now turn the call over to Art.
Arturo Raschbaum
Thank you, Noah. Good morning.
We’re pleased to report solid operating performance in the third quarter. With our differentiated reinsurance strategy, we continued to see strong core premium growth, primarily in our Amtrust quota share reinsurance segment, increased investment income, a significant increase in investable assets which should translate to increased earnings power, improved expense relativities, continued pricing strength in the U.S.
primary insurance market led by workers’ compensation, and an increased client count in our diversified segment which should lead to enhanced revenue and earnings in subsequent quarters. Annualized operating return on common equity for the third quarter was 11.1%, up from 9.1% in the third quarter last year, while diluted operating earnings per common share increased to $0.31 in the third quarter of 2013 compared to $0.27 in the same quarter last year.
Our combined ratio improved to 97.6% during the quarter. That’s an improvement from 98.2% achieved in the third quarter of 2012, and book value per common share increased 2% to $11.34 per share during the quarter.
Growth in net premiums written during the third quarter of 2013 appear to be modest when you compare to the same period last year, increasing 1.7% to $463.4 million. However, if we exclude the NGHC quota share segment, which was terminated as of August 1, and the loss of premiums following the April sale of our excess and surplus lines property business in the diversified segment, our net premiums written were up approximately 20% for the quarter compared to the same period last year.
As I’ll discuss shortly, it’s this growth rate and the expectation for future growth that motivated us to augment our capital position by issuing the mandatory convertible preference shares at beginning of October. During the first nine months of 2013, Maiden’s total net premium written has grown 13% or a core growth rate of 22% excluding NGHC and the E&S property business.
The diversified segment, which includes both our U.S.-based subsidiary, Maiden Re, and the non-Amtrust NGHC business of our Bermuda-based reinsurer, Maiden Insurance, which also includes the business developed by our U.K. business development platform, Maiden IES, premiums have decreased 6% year-to-date in 2013 compared to last year.
A significant portion of this reduction resulted from the renewal rights sale of our E&S property insurance business which represents $19 million less premium year-to-date in 2013 compared to 2012. It’s important to note that since the divestiture of this segment, Maiden’s exposure to extreme catastrophic events has declined significantly despite an overall growth in premiums.
In fact, Maiden’s one-in-250 year extreme event modeled probably maximum loss as at October 1 is approximately $32 million, which is a reduction of 40% from year-end 2012. As we have commented previously, a portion of the written premium reduction in our U.S.
business in 2013 is due to increased retentions as a few clients have opted to keep more risk on their books as they’ve grown, and 2012 non-renewal activity. Importantly, we’ve remained extremely disciplined and focused on achieving targeted performance.
I commented in the last quarter about an increase in our in-force premium levels. This metric reflects the ultimate premium that we expect to realize on all in-force accounts, and it’s typically a leading indicator of written premium trends.
We saw continuing in-force premium growth during the quarter. This trend is driven by new client growth during the third quarter as well as stronger than anticipated writings from existing customers.
Together, these factors should result in a fairly strong written premium growth rate in the fourth quarter for the diversified segment. Our underwriting teams are currently focused on the January renewal season.
We’re seeing a significant amount of new opportunities as well as opportunities to expand current client relationships. In our auto-related international insurance services business, efforts to grow that business through increased auto OEM partnerships are continuing, and new opportunities are under development.
During 2013, profitability has improved across the diversified segment with a combined ratio of 97.7% year-to-date compared to 98.5% in the comparable period in 2012. Underwriting performance has improved following the re-underwriting of certain non-profitable accounts in both the U.S.
and Europe, and we continue to focus on profitability and are working on ways to further improve our margins. In the Amtrust quota share segment, net premiums written increased 47.2% in the nine months ended September 30 compared to the same period in 2012.
Much of the growth in this segment is coming from price increases in line such as workers’ compensation. Additionally, we’re starting to see some new premium growth come online from recently completed acquisitions, and we expect the pace of premium growth to remain robust.
In addition to strong volume, the margins on the Amtrust business have been solid with a combined ratio of 95.6% for the first nine months of 2013. We continue to maintain active dialogue with regular audits and business reviews conducted by our underwriting, actuarial and financial staff.
These audits confirm our comfort with the quality of the business and their underwriting claim processes, and while we don’t always expect the Amtrust segment to be the dominant driver of premium growth and we do anticipate seeing increased business opportunities in the diversified segment, today this segment is allowing us to significantly benefit from the strong U.S. primary pricing environment.
The decline in the NGHC quota share segment net premiums written of 26% compared to the same period in 2012 was, as previously reported, due to the cancellation of the contract with NGHC on August 1, following their successful share offering. The combined ratio for NGHC was 98.9% for the first nine months of 2013, and as we’ve commented previously, continues to reflect the challenges that NGHC encountered entering new markets in 2011 and ’12.
As I mentioned earlier, despite the relatively modest year-on-year growth in the quarter, the termination of the NGHC quota share belies significant growth in Amtrust as well as expectations for continued growth and development in the diversified segment in the fourth quarter and beyond. Importantly as the NGHC earned premium drops, this should have a favorable impact on our combined ratio for the balance of the business going forward.
Before I hand the call over to John, I’d like to comment on the $165 million 7.25% Series B mandatory convertible preference shares that Maiden issued at the beginning of October to support the continued development of our reinsurance business in both our diversified and Amtrust quota share segments. As we look forward over the next three years and we consider our capital needs along with our commitment to raise capital in the most shareholder-friendly manner possible, we believe that the offering satisfies this objective while proactively ensuring that the company maintains a strong balance sheet.
Given our historical growth and our future prospects, along with the desire to maintain appropriate debt coverage ratios, we concluded that there was a reasonable likelihood of the need for additional equity capital within the next three years. Given strong market demand and favorable terms, we believe that we’ve addressed this likelihood in a prudent and cost-effective manner.
We also believe that market opportunities, along with continued profitable performance of our business, will enable us to put that capital to work in an effective manner that benefits current as well as future shareholders. This transaction was intended to support continued profitable growth.
Beyond this transaction, we remain committed to implementing an accretive solution to replace our 14% coupon trust preferred securities with a more cost-effective option following the expiration of the call provisions of that contract in January of 2014. I’d now like to turn the call over to John Marshalek, our Chief Financial Officer, to review the third quarter financial results in a bit more detail.
John?
John Marshalek
Thanks Art, and good morning. Unless otherwise stated, my comments this morning will compare Maiden’s results in the third quarter of 2013 to the third quarter of 2012.
Net operating earnings for the third quarter of 2013 were $22.7 million or $0.31 per share compared with $19.5 million or $0.27 per share. Net income was $21.9 million or $0.30 per share in the third quarter of 2013, the same as the comparative period.
In the third quarter of 2013, net premiums written totaled $463 million, an increase of approximately 2%. The diversified reinsurance segment net premiums written were down 4% to $186 million as a result of the actions taken in 2012 to improve profitability took hold, and some cedents increased their retentions.
In the Amtrust quota share reinsurance segment, net premiums written grew by 39% in the third quarter of 2013 to $260 million. The growth of the Amtrust quota share segment was driven by rate increases as well as growth from acquisitions and organic growth.
Net premiums written from the NGHC quota share were 76% lower at $18 million due to the previously announced August 1 termination of the quota share contract. The third quarter NGHC net premiums written represent premiums written in the month of July 2013 only.
Net premiums earned of $508 million increased 13% or $59 million. Net premiums decreased half a percent in the diversified reinsurance segment to $199 million.
The Amtrust quota share reinsurance segment was up 37% and the NGHC quota share segment was down 8%. The combined ratio for the third quarter of 2013 improved to 97.6% compared with 98.2%.
The components of the combined ratio are as follows: loss and loss expense ratio for the quarter was 66.8% as compared to 68.5%, a decrease of 1.7 percentage points; there was a 1.4 percentage point increase in the commission and acquisition expense ratio in the third quarter of 2013; general and administrative expense ratio improved to 2.6% compared to 2.9%. The movements in the ratios have shifted as a result of the changing business mix over the past year.
Net investment income of $23 million in the third quarter of 2013 increased 8%. Total investments increased $58 million or 2% to $2.7 billion versus December 31, 2012.
The average yield as of September 30, 2013 on the fixed income portfolio, excluding cash, is 3.54% with an average duration of 4.47 years. This compares to an average yield of 3.54% and a duration of 4.37 years at the end of the second quarter of 2013.
The new money yield on fixed maturities was 2.59%, the same as the second quarter of 2013. At the end of September, our cash position was just over $400 million.
Following the issuance of the mandatory convertible preferred shares at the beginning of October, our cash position increased an additional $160 million. We have been very active putting the cash to work and have seen some good opportunities in investment-grade corporate debt.
Importantly, we have invested more than $250 million since the end of the quarter. This increased level of investable and ultimately invested assets should continue to drive our solid growth in investment income.
Total assets increased 8% to $4.4 billion at September 30, 2013 compared to $4.1 billion at the end of 2012. Shareholders equity was $974 million, a decrease of 4% compared to December 31, 2012.
The decrease in shareholders equity is a result of lower values in our fixed income portfolio, which are mark-to-market, and as a result of higher interest rates in 2013. I would also like to note that we are preparing to file a refreshed shelf registration statement which will give us the flexibility to access the capital markets as we look to lower our cost of capital by taking out the 14% trust preferred securities.
We believe current market conditions will provide us with the opportunity to lower our cost of capital and to do so in a shareholder-friendly manner. At this point, we view the mostly likely option to be issuance of debt.
We view this as a very positive step in the development of the company and look forward to the benefits to our earnings run rate of lowering our interest expense. Given the significant growth we are seeing and more importantly expecting, it is in our shareholders’ interest for us to continue to be adequately capitalized to take advantage of the strong market for our products and services.
Each quarter, the board of directors reviews our common share dividend to ensure that shareholders are directly rewarded for the increased returns that Maiden’s business can generate. In light of our improved earnings run rate and confidence in the business, yesterday the board approved a 22% increase in the quarterly dividend to $0.11 per common share.
Now I’ll turn it back over to Art for some additional comments.
Arturo Raschbaum
Thank you, John. I’d like to end our prepared remarks with some commentary on the market.
We attended the PCI annual meeting in Boston several weeks ago. This gathering is one of several opportunities for the Maiden Re team in the U.S.
to get a pulse on market conditions and opportunities from clients, prospects and brokers. It’s also a good bellwether for our January 1 renewal season prospects.
Generally, we’re quite optimistic at the level of deal flow and opportunities discussed at the convention. Of course, we’ll have to see how many of these opportunities will translate into new accounts, and we will of course maintain our disciplined underwriting integrity, but we’re optimistic about our prospects.
In the U.S., we continue to see primary insurer rates strengthening for many lines of business, although the pace of rate increase seems to be slowing. Most of the clients that we spoke with spoke of continued price strengthening in their local markets.
While rate changes vary by line and geography, we continue to be optimistic that rates are still generally increasing. We believe that U.S.
primary insurance market pricing strength will continue to benefit both from the growth and profitability of Amtrust, as well as our diversified clients. While there has been market commentary reflecting a developing concern that the pressure on cap prices will drive some increased reinsurance competition in our target market, we’re confident that our competitive advantages, including our operating and capital efficiency, our dedicated financial trust, and our client-centric operating platform position us well to deliver value to customers and prospects.
In Europe, the market situation is a bit more mixed. In our largest European market, Germany, motor and homeowners rates are expected to rise following widespread hailstorms and flooding earlier this year.
For Maiden, the rate increase for auto business in Germany is expected to be in the range of 5 to 8%. In conclusion, we’re very pleased with the results for the quarter and we believe that our focus on providing reinsurance products and services to the regional and specialty property and casualty markets, along with our strategic reinsurance relationship with Amtrust, continues to differentiate Maiden within the sector.
Maiden’s annualized operating return on common equity of 11.1% and our enhanced net operating income demonstrate the growing earnings power of our lower volatility business model, driven by both enhanced investment income and importantly increased underwriting earnings in the third quarter of 2013. Significantly, we believe that we’re well positioned to continue to strengthen both absolute earnings and operating ROE with an anticipated reduced cost of capital following the repayment and replacement of the 14% coupon trust preferred securities in the not-too-distant future.
In recognition of this broader trend, the board’s decision to increase Maiden’s quarterly dividend by 22% reflects our continued commitment to enhancing shareholder value. In addition, we anticipate continued profitable growth as we see continued balanced growth in our two key operating segments.
We’re thankful for the opportunity to serve our clients and of course for the continued efforts of the Maiden team. We believe we’re well positioned for continued success.
This concludes our prepared remarks. Operator, could you please open the lines for Q&A?
Operator
[Operator instructions] Our first question comes from Randy Binner with FBR Capital Markets. Your line is open.
Randy Binner – FBR Capital Markets
Hey, good morning. Thank you.
A couple just kind of quick ones on the quarter. The net investment income came in at least better than we had expected at $23.3 million, and so was there anything kind of one-time in there, like prepayment on bonds or anything that we wouldn’t kind of think of run rating as we model investment income going forward?
John Marshalek
Randy, this is John Marshalek. No, there wasn’t.
I think it’s a result of the increased portfolio – we’re growing the portfolio, so there’s no one-time items.
Randy Binner – FBR Capital Markets
That’s great, so that kind of goes into the capital question. So could you give us an updated—estimated statutory surplus number, and I’ll open that question up more.
How should we think about that, because there’s this $159.5 million net from the convert on top of other debt raises and capital freed up from the E&S business. So if you can bifurcate what the capital is at the insurance companies versus what’s at the holding company, that would be helpful just to think about where the capital sits.
And then the follow-up to that is going to be how much of this float of capital that you have can be invested until it’s put to work in the underwriting business?
John Marshalek
Well, all the money that we have available is invested right away, so from an investment income standpoint it really doesn’t matter where it’s sitting on which company, so we do invest it right away and we’re in the process of doing that for the quarter. Our statutory capital overall is about $1.3 billion, and that’s spread between the U.S.
and the Bermuda companies. I think we’re effectively using that.
Obviously we had significant growth this year throughout the year, and we had it last year as well, so we’ll continue to use the capital. But I think from an investment standpoint, from an overall income standpoint, it’s fully invested right away.
Randy Binner – FBR Capital Markets
Okay, so two follow-ups there. It’s fully invested at your normal portfolio yield?
And the 1.3 number, that does not include—I mean, if it’s 1.3 downstairs at the insurance companies, how much cash is at the holdco right now?
John Marshalek
Well, there is a significant amount of cash at the holding company, but really that’s—it’s sitting there, it’s invested as soon as we get it. We will push that down to the insurance companies as needed, but there isn’t excess capital sitting at the holding company at this point, Randy.
Really, the 1.3 includes—it’s a combination of both of the insurance entities.
Arturo Raschbaum
Randy, this is Art. We’ve commented before that we really try to put our cash to work in invested assets, and that continues to be our focus.
I think we’ve said historically that we target somewhere around $100 million of cash on hand. We’re not a catastrophe writer where we’re going to expect big cash calls on our business, so we do definitely try to put it to work quickly and effectively.
Randy Binner – FBR Capital Markets
And that would be assuming a normal portfolio yield on that putting it to work?
Arturo Raschbaum
That’s correct.
Randy Binner – FBR Capital Markets
Okay.
John Marshalek
(Talkover) invested as of today, but we’re working towards that pretty quickly.
Randy Binner – FBR Capital Markets
Okay, got you. I’ll drop back in the queue.
Thank you.
Operator
Our next question comes from Matt Carletti with JMP Securities. Your line is open.
Matt Carletti – JMP Securities
Thanks, good morning. I just wanted to follow up on Randy’s investment income question and make sure I’m triangulating a couple things correctly.
So you said the $23 million was kind of a clean number, and then the capital raise was quite late in the quarter – I think it priced on the 20th of September. John, you mentioned in your comments—I think I caught that you’ve invested more than $250 million since the end of the quarter, which at the new money rate would imply $1.5 million or so of additional quarterly investment income.
Am I thinking about that right, that there’s that sort of upside to that 23 number, or am I missing something?
John Marshalek
I think that’s basically correct, Matt. We did get the money – it was actually the first part of early October, so really there was no impact of that in the third quarter.
It obviously will impact the fourth quarter and as we invest it, and we’re working really hard to get that invested quickly. So yeah, the impact, you should see that in the fourth quarter.
Matt Carletti – JMP Securities
Okay, great. And then my other question relates to the diversified reinsurance segment; and Art, you had mentioned kind of the ongoing increase in in-force premium as well as some increased client count in the quarter leading to—I think you termed it as a fairly strong expectation for growth in Q4.
Can you put some numbers around that, even if it’s just kind of quantifying in-force premium growth and client count growth, and then we can draw our conclusions from there?
Arturo Raschbaum
Sure. Well, beyond increased client count, I think in the quarter we’ve added a couple of additional clients in the diversified segment.
In addition to that, we’ve increased our participation in a number of client opportunities. At this point, coming up with an exact number, I’d say it would be fair to say that it will be in the double digits, the growth rate.
Matt Carletti – JMP Securities
Got you. That’s very helpful.
All right, thanks very much for the answers and congrats on the quarter.
Arturo Raschbaum
Thank you very much.
Operator
Our next question comes from Bijan Moazami with Guggenheim. Your line is open.
Bijan Moazami – Guggenheim
Good morning everyone. A quick question for John with a follow-up for Art.
What kind of a premium to surplus ratios you guys can be writing your premium volume going forward, and that $1.3 billion of statutory surplus, how much would it decrease by the time that you pay off your expensive debt? And then the follow-up for Art, the Amtrust business is now 2.5 points more profitable than the diversified reinsurance segment, and that margin is in fact expanding.
Should we have any kind of worries that (indiscernible) could come back and try to renegotiate the ceding commission, or we should be pretty confident that those numbers are here to stay given the rapid growth rate and the increased profitability at Amtrust? Thank you.
John Marshalek
Bijan, I’ll take the first question on the writing to surplus. We’ve talked about a 1.5 to 1 ratio there, but again a lot of that is going to be dependent on the business mix.
I think if you assume a normal business mix, that’s a fairly good ratio to use; but that could increase if there is a change in the portfolio as well, so that’s kind of a benchmark. We don’t use an exact benchmark to measure that on a quarter-to-quarter basis, but we look at that over a longer period of time.
I think there was another part of the question you had?
Bijan Moazami – Guggenheim
Yes, when would the surplus end up when you pay off the debt?
John Marshalek
Well, it won’t affect our surplus because if we issue new debt and just pay off the old, it will keep basically the surplus at the same level.
Bijan Moazami – Guggenheim
Okay, and the debt that you’re going to be issuing is going to have the same treatment in the (indiscernible) calculation that the old one?
John Marshalek
Yes, we would expect that. Obviously we haven’t issued the new debt yet, so we can’t comment fully on it, but we would expect that to be the case.
Arturo Raschbaum
Bijan, I’ll continue on, if that’s all right, with the questions regarding the diversified portfolio.
Bijan Moazami – Guggenheim
Ceding commission back from Amtrust.
Arturo Raschbaum
Yes, well I think the first question was the relative performance of the diversified segment versus the Amtrust segment. We’ve commented before that the combined ratio in the diversified segment is a bit higher than the Amtrust, and that’s been historically the case.
There’s a bit of different economics in that segment. We have more investable assets, longer tenured investable assets in the diversified segment than we do in the Amtrust portfolio, so they are somewhat offsetting.
Unquestionably we’re benefiting from very strong performance at Amtrust, and we’re pleased to be in that position. As far as the question about the ceding commission, obviously as our current arrangement, we are under the same terms until 2016.
The contract renews automatically. I think—we believe that there is mutual benefit in this relationship, benefit received from our client Amtrust and obviously benefit received from us, and we certainly don’t anticipate any changes in the ceding commission.
But we’ll manage the relationship over time for mutual benefit.
Bijan Moazami – Guggenheim
Just to clarify – obviously because Amtrust is getting a lot of increases, the dynamic of their business is improving in a dramatic way, and if the loss ratio on their book of business dropped below a certain level, you don’t have those metrics anymore to change the ceding commission, right? It’s just flat ceding commission at this point, and that’s the concern to whether or not there is going to be any kind of pressure to be adjusting that.
Arturo Raschbaum
No, we don’t think so. Actually the previous ceding commission adjustment that we had was really in response to our concern, the fact that there was a shift in the business mix to a higher expense relativity segment, and they very responsibly agreed to that adjustment.
We’ve terminated that adjustment because, as you correctly point out, the business mix has shifted back. So we don’t envision that that’s penalizing them in any way; on the contrary, we think the quota share continues to create value for them, both in terms of providing steady capital but also providing a level of support in their net result.
Bijan Moazami – Guggenheim
Thank you.
Arturo Raschbaum
You’re welcome.
Operator
Our next question comes from Alex Lopez with Portales Partners. Your line is open.
Alex Lopez – Portales Partners
Good morning guys. Pretty much all of my questions have already been answered.
I’m just noticing an uptick in the acquisition expense ratio in the diversified platform. Exactly what has been the primary driver of this uptick, and do you foresee it kind of moderating over the next couple quarters?
Arturo Raschbaum
Yes, mostly that’s coming from a business mix change, so for instance if we write excess business, that’s going to have a higher kind of brokerage fee. If you write quota share there’s higher ceding commission.
And so it’s really kind of balancing the mix between pro rata excess business and what the associated ceding commission and acquisition costs are. No real story there other than business mix change.
Alex Lopez – Portales Partners
Okay. That being said, do you have any color on, I guess, the pipeline in diversified as we head into 2014 and beyond?
Arturo Raschbaum
Well, we’re very happy with the deal flow that we’re seeing right now. We’ve got a lot of—the team in the U.S.
is extremely busy right now looking at new opportunities. I think it’s one of the more solid January 1 renewal seasons we’ve seen in quite some time, so demand certainly seems to be high and it is really the same sort of characteristic business focus – regional companies that are either looking to remarket their programs or might have new financing needs.
So we’re cautiously optimistic. We’ll see how many of those fall in where we can deliver the right solution for them, but we feel pretty good about the deal flow, and in terms of lines of business it’s pretty nicely diversified.
We have a number of multi-line opportunities we’re looking at in addition to we’ve had growth in a significant personal auto account as well. So it’s a good balanced opportunity set right now.
Alex Lopez – Portales Partners
Great. That’s all I have.
Thank you.
Operator
Our next question comes from Ken Billingsley with Compass Point. Your line is open.
Ken Billingsley – Compass Point
Good morning. I just wanted to ask a question about comments from Amtrust’s call and how that impacts you.
They had said that in the third quarter that they tend to retain more business in the third quarter, and that seems to be increasing. Is that—could you talk about any lines that maybe you are passing on that you’re not insuring out of their small commercial risk and warranty business?
Arturo Raschbaum
All commercial risk and warranty, we reinsure everything. There are—I think even Ron, the CFO, alluded to the fact that some of the program business they write, we do not support, and it’s mostly in sort of that program specialty area.
Ken Billingsley – Compass Point
Okay, so it’s only on a program basis that you’re not participating as much?
Arturo Raschbaum
For the most part, yes.
Ken Billingsley – Compass Point
For the most part. Now on a blended basis, the loss ratio probably runs a little bit higher then.
Can you just talk about maybe the differences in what you’re booking for the loss ratio and then what they’re booking when you add the—
Arturo Raschbaum
Yes, we’ve always sort of said—you know, we do our actuarial studies and evaluation of the business independently, as we do with every client that we underwrite, so we don’t really kind of do a check between one and the other. It’s also important to note that, as you correctly point out, we don’t necessarily write the exact same portfolio, nor do we have the exact same years or body of outstanding reserves that they do.
So it’s rarely a match, and there are some quarters where we’re lower, some quarters where we’re higher, but there’s no real story there that we’re seeing that’s causing us any undue concern right now.
Ken Billingsley – Compass Point
Back to the investment yield, with the new money yield being much lower, I would estimate that your overall yield should continue to, I guess, trickle down for the next few quarters. Would that be a safe assumptions despite—even though invested assets may be going up, that the overall blended yield should still continue to come down?
John Marshalek
It’s fairly stable, Ken. Yes, it’s tending towards to go down slightly, but we’ve been able to, because of some of our investments in some of the corporate bonds, we’ve been able to stabilize that, so it’s not going to change significantly, or should not change significantly.
Ken Billingsley – Compass Point
So the run rate and what we see for the last quarter should be relatively consistent based on adjustments that you’re making on a quarterly basis?
John Marshalek
Yes, and then our portfolio has been increasing and certainly will increase this quarter as well, so that should improve the investment income, ultimate investment income.
Arturo Raschbaum
That’s right, Ken. We still, as John alluded to in his prepared remarks, we have a reasonable amount of cash that we’re investing right now which will, even at the same relative yield, will improve the investment income run rate.
Ken Billingsley – Compass Point
Great. Last question I had is on the dividend, do you have a target or a limit on the payout ratio as you guys are analyzing what you’re going to do with your dividend going forward as growth continues?
Arturo Raschbaum
This is something, as we’ve commented before, that the board looks at really every quarter, and their general view is that as they see kind of strength in the business and forward opportunity to continue to see expanded strength, based on that review they raise the dividend. I think they felt pretty good about what they saw in terms of not just our current business but our outlook, and also obviously we see some improvements in our cost of capital, and the combination of those factors really drove them.
I think our payout ratio has run about 30% fairly consistently, and that’s probably where we’d generally end up over time.
Ken Billingsley – Compass Point
Great. Thank you for taking my questions.
Arturo Raschbaum
Thank you.
Operator
Our next question comes from Bob Farnam with KBW. Your line is open.
Bob Farnam – KBW
Hey there, good morning. Actually just a couple numbers questions.
The $19 million of E&S business that you mentioned before, was that on a gross or net basis?
Arturo Raschbaum
That was the net.
Bob Farnam – KBW
That was net – okay. And operating cash flow for the quarter?
John Marshalek
It was positive, approximately $125 million.
Bob Farnam – KBW
Okay. And last one – was there any reserve development during the quarter?
John Marshalek
Very small amount of reserve development when we look at the prior years, but it was partially offset by some property losses in the quarter, so very insignificant amount.
Bob Farnam – KBW
Was that in diversified?
John Marshalek
Yes.
Bob Farnam – KBW
Okay, great. Thanks.
Operator
The next question comes from Dan Farrell with Sterne Agee. Your line is open.
Dan Farrell – Sterne Agee
Hey, good morning. So the first few quarters of this year, you had declining premium, and a large part of that I think has been because of some specific underwriting actions that you were taking to try and improve profitability.
With the outlook for premium now improving, is it fair to say that some of those major changes that you were trying to implement on the underwriting side are largely completed, and are you comfort with trend in profitability within the diversified segment now?
Arturo Raschbaum
The short answer is yes. I mean, there has been a lot of hard work undertaken, and I don’t want to create the impression that this was a one-time event.
It’s an ongoing event that occurs in all segments of our business where we’re kind of always culling and evaluating the opportunity. In the best circumstance, if we have a profitability issue, we work with clients and come up with structures that make sense for both of us, but there are always circumstances where that may not be the case.
We feel pretty good about kind of the underwriting run rate of the business. The other thing we’ve talked about before, Dan, is that there has definitely been strength in the primary pricing environment, and I think that to the extent that pricing is exceeding our assumptions for rate level movement, that could also have beneficial effects on our forward run rate as well.
So we feel pretty good about what underwriting looks like in diversified going forward.
Dan Farrell – Sterne Agee
Okay, thank you very much.
Arturo Raschbaum
Thank you.
Operator
This ends our Q&A session. I’ll turn it back to Noah Fields for closing remarks.
Noah Fields
Thank you everyone for joining us today. We look forward to speaking with you soon.
Have a great day.
Operator
Ladies and gentlemen, thanks for participating in today’s program. This concludes the program.
You may all disconnect.