Jul 28, 2015
Executives
Beth Farrell - VP, IR Dom Addesso - President and CEO Craig Howie - EVP and CFO John Doucette - EVP and CUO
Analysts
Sarah DeWitt - JPMorgan Kai Pan - Morgan Stanley Michael Nannizzi - Goldman Sachs Josh Shanker - Deutsche Bank Brian Meredith - UBS
Operator
Good day everyone. Welcome to the Second Quarter 2015 Earnings Call of Everest Re Group.
Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms.
Beth Farrell, Vice President of Investor Relations. Please go ahead.
Beth Farrell
Thank you Stephanie. Good morning and welcome to Everest Re Group's Second Quarter 2015 Earnings Conference Call.
On the call with me today are Dom Addesso, the Company's President and Chief Executive Officer; John Doucette, our Chief Underwriting Officer and Craig Howie, our Chief Financial Officer. Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements.
In that regard, I note that statements made during today's call which are forward-looking in nature, such as statements about projections, estimates, expectations and the like, are subject to various risks. As you know, actual results could differ materially from current projections or expectations.
Our SEC filings have a full listing of the risks that investors should consider in connection with such statements. Now let me turn the call over to Dom.
Dom Addesso
Thanks, Beth and good morning. We were pleased to report that operating earnings for the quarter were $225 million, which was primarily driven by pre-tax underwriting income of $183 million, and net investment income of $125 million.
The tax rate in the quarter jumped to 16.6%, causing some distortion relative to our first quarter numbers. Other factors affecting the first quarter comparison include a $50 million difference in foreign currency adjustments, $30 million of catastrophes, other weather related losses not recorded as Cats per say, and finally a marine loss from the Connex [ph] oil platform.
Adjusting for these items, clearly puts our results in line with last year on a quarter and a year to date basis. And while the returns are still quite favorable improvement year-over-year is affected by market conditions.
We believe than in an absolute sense we are well above our cost of capital and are near the top of industry performers. I expect that industry results will bear that out.
We achieved above market returns with strong expense controls, innovative and dynamic portfolio management and new products. In these last six months we have continued our expansion of capital market tools to leverage our capital and achieve a net return in access of the growth.
Mount Logan is growing to $830 million of assets under management and our purchase of IOWs has increased this year versus last year of this time. These tactics allows increased market capacity on attractive business without increasing net exposure, while maintaining an above average return.
Premiums were down for the quarter and flat for the year with strong growth in the insurance segment, offset by a reduction in our reinsurance premiums. The factors affecting reinsurance were less quota share premium, the impact of foreign currency translation, shift of excess capacity to higher layers, increased corporate sessions to hedge accumulations, market pricing and non-renewed deal due to terms and conditions.
Offsetting these trends have been initiatives on the new product side. We continue to modestly grow our credit and financial assurance business and agricultural lines in the reinsurance segments.
In the insurance segment, the growth has been strong, at 20 plus percent as we continue to see momentum in professional lines, excess casualty, contingency, crop and property E&S. The insurance operation is on an excellent trajectory with an attritional combined ratio of 93% excluding crop.
We continue to aggressively build out our insurance platform with the addition of underwriting talent. Market dislocation has made this a bit easier these days and a determined build is our preferred course of action here.
Despite what we all we see swirling around today in the M&A space, we are generally not inclined to take on significant dilution and then still face the generally enormous integration, cultural and legacy challenges, unless of course if it quarterly accretive in some reasonable timeframe. We have the capital, patience and discipline to build a top tier insurance operation, consistent with our pricing and risk appetite.
None of this, whether it's reinsurance or insurance will be easy. Market conditions in the reinsurance sector are challenging, but we appear to be closer to a turning point.
Capital market seems to be hitting a floor, but the traditional markets results will be a more important factor. The reality is that there is not much margin for even the small events, let alone larger inevitable catastrophes.
Based on unexpected second quarter industry results for reinsurers, we’re likely to see that a few small cats and a large risk loss will produce returns on capital below 9%. Along with declining bond values, this begins to feel as if a market turn must happen.
Of course markets are not always rational and a quick snapback would be atypical. We are not waiting however as we continue to leverage our strengths to manage our portfolio smartly and outperform.
An element of managing our portfolio will be an emphasis on insurance growth. Furthermore, we will manage capital accordingly.
In this quarter our share repurchases were $50 million. This was below our typical pace for a number of factors.
Among them were longer-term capital needs, driven by our insurance growth objectives. However, we have demonstrated over the long-term we are committed to returning excess capital when market conditions warrant.
As I sum up the first half of the year, despite some previously mentioned cautions, I'm quite optimistic. We finished the first six months at $554 million of operating income, up from $532 million in the prior quarter and with a 50% ROE; excellent results in such tough times, especially when compared to the industry.
We continue to be able to navigate through a difficult reinsurance market while managing risk, staying opportunistic with new products and maintaining our pricing and expense discipline. I'm most optimistic about the trajectory of our insurance operations.
Excluding crop, our year-to-date growth was 26% or $130 million and continues to produce profitable accident year underwriting results and my expectation is that this will improve over time. Thank you.
And now I will turn it over to Craig for the financial report.
Craig Howie
Thank you Dom and good morning everyone. Everest had another solid quarter of earnings, with net income up $209 million or $4.68 per diluted common share.
This compares to net income of $290 million or $6.26 per share for the second quarter of 2014. Net income includes realized capital gains and losses.
On a year-to-date basis net income was $532 million or $11.88 per share, compared to $584 million or $12.46 per share in 2014. The 2015 result represents an annualized return on equity of over 14%.
Operating income year-to-date was $554 million or $12.38 per share. This represents a 9% increase over operating income of $11.35 per share last year.
These overall results were driven by a solid underwriting result and sizable foreign exchange gains compared to the first half of 2014. The results reflect an overall current year attritional combined ratio of 83.0% on a year-to-date basis, up from 82.0% at year-end 2014.
The attritional measure includes higher than expected current year losses in the U.S. reinsurance market, including estimated losses for the marine energy market and numerous other related losses that did not meet our $10 million catastrophe threshold.
All reinsurance segments reported underwriting games for the quarter and for the first half of 2015. Total reinsurance reported an underwriting gain of $177 million for the quarter compared to $181 million underwriting gain last year.
For the first half of 2015, total reinsurance reported an underwriting gain of $382 million compared to a $396 million gain last year. The Mount Logan Re segment reported a $28 million underwriting gain for the quarter, compared to a $9 million underwriting gain for the second quarter of 2014.
On a year to date basis, Mount Logan reported an underwriting gain of $50 million, compared to a $19 million gain for the first half of 2014. Everest retains $7 million of this income and $43 million was attributable to the non-controlling interest of this entity.
The insurance segment reported an underwriting loss of $23 million for the quarter, compared to a gain of $4 million last year. On a year to date basis, the insurance segment reported an underwriting loss of $12 million, compared to a gain of $8 million in 2014.
The insurance segment loss primarily related to a claim review of Umbrella claims on a run off program that was discontinued by the Company several years ago. As a result of the review, we booked an additional $31 million of prior year losses rather than waiting for the reserve study that will be completed in the fourth quarter.
The insurance segment current year attritional combine ratio was 93.4% on a year to date basis excluding crop. This ratio has included compared to 93.9% one year ago.
The overall underwriting gain for the group was $183 million for the quarter, compared to an underwriting gain of $195 million for the same period last year. On a year to date basis, the underwriting gain was $420 million compared to a gain of $423 million in 2014.
These overall results reflect $40 million of current year catastrophe losses in the first half of 2015 all recorded in the second quarter. Of the total, $20 million related to losses from slums in Australia and $20 million came from flooding in Chile.
The 2015 cat losses were partially offset by $10 million of favorable development on prior year cat losses, primarily from the 2013 U.S storms. This compares with $45 million of catastrophes during the first half of 2014.
Our reported combined ratio was 84.1% for the first half of 2015, compared to 82.5% in 2014. Year to date commission ratio of 22.1% was slightly up from 21.9% in 2014, primarily due to higher contingent commissions.
Our overall expense ratio remains low at 4.7%. This includes our industry leading expense ratio of 2.8% for our total reinsurance segment.
As for loss reserves, in June we released our fifth annual global loss development triangles for 2014. There were no major changes since the 2013 release.
Our overall quarterly internal reserving metrics continue to be favorable. For investments, pre-tax investment income was $125 million for the quarter and $248 million year to date on our $18 billion investment portfolio.
Investment income for the first six months declined only $7 million from one year ago. The pre-tax yield on the overall portfolio was 2.9% with a duration of three years.
The first six months reflected $22 million of net after tax realized capital losses compared to $52 million of realized capital gains last year. These losses were mainly attributable to impairments on the fixed income portfolio in 2015.
Other income and expense included $44 million of foreign exchange gains in the first six months of 2015 compared to $15 million of foreign exchange losses in the first half of 2014. On income taxes, the annualized effective tax rate is primarily driven by lower than planned catastrophe losses resulting in higher than expected taxable income for the year.
The 13.9% effective tax rate on operating income is in line with our expected rate for the year, given our planned cap losses for the remainder of the year. This rate is consistent with the 14.4% tax rate at the same time last year.
Strong cash flow continues with operating cash flows of $683 million for the first half of 2015 compared to $590 million in 2014. Shareholders equity at the end of the quarter was $7.7 billion, up $276 million or 4% over year-end 2014.
This is after taking into account over $200 million of capital returned through $125 million of share buybacks and $84 million of dividends paid in the first half of 2015. Book value per share increased 5% to $174.84 from $166.75 at year-end 2014.
Our strong capital balance positions us well for potential business opportunities as well as continuing stock repurchases. Thank you.
And now John Doucette will provide our operations review.
John Doucette
Thank you Craig. Good morning.
As Dom, highlighted we continued our solid underwriting results into the second quarter of 2015. Our Group gross written premium for Q2 was $1.3 billion, down $157 million from Q2 last year, with decreases coming from each of our reinsurance segments which I will get into shortly.
Our U.S. insurance operation gross written premium is up meaningfully in Q2 compared to Q2 last year with growth coming from almost every insurance profit center.
Our Group net written premium for Q2 was $1.2 billion, which was down 4% compared to Q2 last year. Year-to-date our Group gross and net written premium are both essentially flat year-over-year.
Year-to-date 2015 underwriting profits for the Group are $420 million, virtually in line with 2014. For our reinsurance segment, total reinsurance gross written premium including Logan was $900 million for the quarter, down 17% from Q2 last year.
This decrease in gross premium for the quarter was driven by several items. First, exchange rate.
The strong U.S. dollar had a meaningful impact on our international operations and our Bermuda operations.
On a like-for-like exchange rate, our overall reinsurance segments would have been closer to 13% down compared to second quarter last year. Second, declining, reducing or non-renewing business that had pricing we could not support.
These occurred across all reinsurance segments of the Group. Third, in the international segment, a major deal for a strategic relationship was restructured with essentially the same economics and net premiums, but the top-line is down significantly on a gross basis.
Reinsurance net written premium including Logan was $870 million down 7% compared to Q2 last year. On a constant exchange ratio basis, our net written premium would be down roughly 4% due to increased retrocessional protections, including ILW purchases and other hedges to help us manage our peak zone PMLs.
Our reinsurance book including Mt. Logan generated $206 million of underwriting profit in Q2, an 8% increase over last Q2.
These strong underwriting results despite both in increasingly tougher market and the loss events mentioned by Craig confirm our reinsurance strategy; leveraging our core strengths, expanding our product offering and increasing our opportunity set to achieve profitable growth. In addition, our utilization of alternative capital structures allows us to conservatively manage our net risk position while generating fee income and lowering our cost of capital.
Under this strategy we have and will continue to effectively deploy our capital towards achieving some of the best risk adjusted returns in the industry. At July 1st Mount Logan celebrated its two-year anniversary.
We continue to see strong investor interest with inflows of approximately $80 million of new third-party investments this quarter, raising total funds in Logan to about $830 million. Logan remains core to our overall capital markets conversion strategy to hedge and manage risk across our overall portfolio and earned fees.
To compliment this, we also secured more IOW protection heading into this hurricane season, mostly for Southeast USA and Florida Wind. With Mount Logan our cap bonds and IOWs, we maintained our conservative risk position with peak zone PMLs at 71, close to flat compared to 11 PML as a percentage of GAAP equity on a net after tax basis.
Here is some color on June 01 and July 01 reinsurance renewals. Group-wide, our inforce property pro rata GWP is slightly down as we non renewed some treaties and some clients brought less pro rata or inverted their treaties to access of loss.
Our worldwide property cat excess of loss gross written premium went up compared to prior periods, but there was more churn compared to other renewals. We cut capacity on non-renewed underpriced business, but we also added meaningful capacity on deals we like, particularly for long standing key clients.
Our average dollar attachment on property treaties went up, as we deployed less capacity lower down and more capacity in higher layers, both in Florida and internationally. This typically consumes more capital, but has better margins.
The end result of the mid-year renewals was our expected combined ratio is essentially flat compare to our expiring portfolio’s combined ratio. On a risk adjusted basis property pricing moderated and was off mid-single digits, although there were several regions around the globe that remained extremely competitive, including China, Australia, some parts of Latin America and U.S pack [ph] business.
Other regions however provided opportunity due to a meaningful increase in demand. We therefore continue to build an attractive portfolio overall.
On a dollar basis the expected dollar margin in the overall property book increased slightly compared to the expiring portfolio. Turning to our global casualty and longer tail reinsurance books, reinsurance terms continue to be under pressure for commodity type treaties and seeding commissions on casualty pro rata treaties remains high.
Therefore, we deploy capacity to new products and new opportunities, to current and new distribution sources. We continue to receive preferential signing on attractive deal across both long tail and short tail business, and across geographies including the U.S, Latin America, Canada, London, Europe, Singapore and Bermuda markets.
Due to our lead market position, financial strength, ratings and longstanding trading relationships with clients and brokers. Moving to our insurance operations our premium was $344 million in Q2, up 9% from Q2 last year.
However, excluding Heartland, which was impacted by changes that delayed timing on premium recognition for 2015, insurance gross written premium is up approximately 20% for the second quarter and up 26% on a year to date basis. This growth is very diversified originating from over 10 separate insurance profit centers including newly launched product line resulting in a very balanced portfolio of both short and long tail lines.
Year to date we are up 41% on what we describe as direct brokerage business which is underwritten internally by Everest underwriters. Program business is up 9% year to date.
We expect these trends to continue as we focus on building out our retail books. Also noteworthy, the direct brokerage business has run to about 8 or 9 combined ratio points better than the program business over the last three years.
As Dom indicated, and you’ve seen from our recent press releases, we have been hiring key leaders in our insurance operations to build out this platform. We are also in the process of establishing a Lloyd syndicate.
If approved by the Lloyd's franchise board, we will target an early 2016 launch. Lloyd's will provide access to international business and new products, diversifying our insurance portfolio.
We expect that growth in our domestic and international insurance operations will accelerate over the next several quarters, as our new initiatives gain traction. Insurance rates are mixed with most long tail lines of business up expect financial institutions and management liability due to increased capacity and competition, and similar to reinsurance property rates are down in several segments.
Bottom line our overall calendar quarter insurance results were disappointing in Q2, with a loss of $23 million driven by prior year development on the terminated Umbrella program mentioned by Craig. However, the underlying accident year results of our insurance book are profitable and improving both for the quarter and year to date, compared to the same period last year.
Now with some detail on what we are seeing in each insurance market. For California workers comp, the gross written premium was about $80 million in Q2, relatively flat to last year with a mid-90s combined ratio and still getting positive rate.
But that has slowed down with increased competition from a few players. Professional liability premium with financial institution is largest contributor was $55 million for Q2, up 23% compared to last Q2 with some attractive new opportunities.
However, we see excess capacity and rate pressure here. Other cash related business is up approximately 22% driven by new initiatives.
In the short tail business, including property, DIC, non-standard auto and contingency business, written premium was $84 million for the quarter, an increase over 26% from last Q2, as we've deployed more property insurance capacity. We remain bullish on the property facility in contingency businesses, but we see increased competition in the DIC book with lower rates and looser terms.
Accident and health premium was up over 35% in Q2, compared to last Q2 to approximately $30 million, benefiting from several new initiatives. Regarding Heartland, crop conditions are favorable and commodity prices are stable.
To date it is running at a slight underwriting loss, partly due to the delayed recognition of earned premium. However, we anticipate positive results for the year if prices and weather hold.
In summary, we believe that our market position, core strengths, and sustainable competitive advantages, coupled with the new growth initiatives for the insurance book will propel bottom-line returns that are superior to most in our industry. We continue to execute successfully in this environment for both reinsurance and insurance.
Thank you. And now back to Beth for Q&A.
Beth Farrell
Jess, we’re open for questions at this time.
Operator
[Operator Instructions]. It looks like we’ll take our first question from Sarah DeWitt from JPMorgan.
Please go ahead.
Sarah DeWitt
On the M&A that we've seen in the industry, could you just talk about what the implications are for Everest Re from a competitive standpoint as well as on the primary side, does that mean that insurers could perhaps purchase less reinsurance and what that would mean?
Dom Addesso
Sarah this is Dom. We answer that question basically in two sectors.
First of on the reinsurance side, we don't necessarily see any major impacts from the M&A activity that are occurring today in that space due to us. As I’ve mentioned in previous call, we certainly feel we’re of sufficient scale and size to maintain a relevance in the market and with approximately $8 billion of capital we feel we’re operating in this market with $10 billion of capital and we managed to get the signings and operate with our clients in the areas that we would prefer to sale.
So no meaningful impact that we can see from that. On the primary side, the trend of acquisitions there and what that means to the reinsurance purchase, I think that’s just a continuing trend of as capital grows, the larger players in the marketplace have purchased less reinsurance over time.
But frankly there are many participants in the market that certainly need reinsurance. And in addition to that, as these entities get larger, they generally look to larger partners and base partners I mean reinsurance partners.
They will still continue to buy reinsurance but they’re more likely to look to partner up with larger and stable and meaningful companies. So that’s how we feel the impact of that.
Does that answer your question?
Sarah DeWitt
And then if you were to look at acquisitions, what lines of businesses or geographies would you be interested in? Would it be more on the insurance side or in Lloyd’s to accelerate your growth strategy there?
Dom Addesso
The only thing that we tend to pay more attention to in the M&A space when presented with a variety of opportunities tends to be on the insurance side. But again as I've mentioned in my comments, our natural preference is to build our own organization, that matches our risk appetite, avoiding the cultural and any legacy issues that could from an acquisition.
We don't ignore them. But frankly given some of the premiums that are involved in some of these transactions relative to building our own platform, we don't see the value in the acquisition at this point.
Doesn't mean it won't exist in the future but currently that’s not our focus. And we can't rely on that strategy.
We can't rely on an acquisition strategy to further our insurance objective, or strategic objective in that space I should say.
Operator
And we’ll take our next question from Kai Pan of Morgan Stanley. Please go ahead.
Kai Pan
Just first wanted to follow-up on Sarah's question on the industry consolidation. You sort of like Greenfield in the [indiscernible] and there is some news there is a large syndicate waiting to open to merger partners.
Just can you talk little bit more about build versus acquire, and if you build out, would we expect at least initially higher expense as the teams run up?
Dom Addesso
Well, certainly there would be higher expense, but even in an acquisition with any amortizations of intangibles that you’d have to bare, we tend to feel that the expenses frankly would be more economical to build. And as we build and as we’ve been adding resources, we have been growing the top-line as well.
So I don’t think you will see any meaningful degradation in our expense ratio. That’s really where we’re going.
Kai Pan
Okay. Would you just follow up or would you be interested in large scale acquisition in Lloyd’s syndicates or you prefer that goes through like a…
Dom Addesso
No, not at some of the prices that certainly have been bantered around in the press, no.
Kai Pan
Okay. That’s great.
Then on the sort of large non-cat losses, could you quantify what is the impact for this quarter?
Craig Howie
Overall, Kai, this is Craig Howie. The overall losses are coming through our attritional loss pick and what we’ve had were losses that took place in April, May and June through Texas and the Mid-West.
Also that’s coming through for the first half of the year are winter storms that took place in the North East. None of those storms rose to our $10 million Cat threshold but we have totaled those numbers to be almost $90 million to $100 million of losses.
Kai Pan
Is that including the Panamax or the offshore energy losses as well?
Craig Howie
That’s correct.
Kai Pan
Okay. That’s great.
And lastly if I may ask on the capital management, it looks like the pace of buyback have been very slow compared with the earning stream. Your total payout ratio is less than 50%.
Given that reinsurance space is slowing down in terms of capital needs, I just wonder, are you saving by capital for potential acquisitions or is it over the long run we’re expecting like a 50% like payout ratio.
Craig Howie
No, Kai as you know we don’t give guidance on our share repurchase program. I think what we tend to do is look this over the very long term, and we have returned a substantive amount of capital over the last 10 years to shareholders through dividends and share repurchases.
We’d look at certainly the long-term objectives in terms of growth, and over the long-term we think clearly insurance and frankly for that matter reinsurance again over the very long term we feel that we can succeed in this space So we have to balance that up against our objectives in terms of what we’d like to bring stock in at, and this is a long-term gain. So this past quarter based on what we saw as our future growth objectives balanced up against what the opportunities were to bring additional shares in, we opted to give $50 million this quarter and clearly over the long-term we remain committed to buying shares, consistent with whatever growth objectives that we might have.
Operator
We’ll take our next question from Michael Nannizzi of Goldman Sachs. Please go ahead.
Michael Nannizzi
Quick question on just the reinsurance premiums, maybe [indiscernible], just the stuff that’s purely on your balance sheet. Do you have the constant dollar year-over-year change in net written premiums there?
Craig Howie
Just give us a second.
Michael Nannizzi
Sure, no problem.
Craig Howie
Year-to-date right, is you’re asking?
Michael Nannizzi
Just in the second quarter, if that okay.
John Doucette
Michael, its John. It’s a 5% decrease quarter-over-quarter.
Michael Nannizzi
Great. Thank you.
And then I guess first quarter I think we were sort of looking for a little bit more growth. Should we be thinking about this sort of as the level and just given the sort of challenges that you outlined in reinsurance, is there still an opportunity to grow your sort of piece of the pie here, or would you expect to continue to see areas where you will cut as a result of not meeting your profitability standards or the like.
Just trying to get an idea of how we should be thinking about premium production on the reinsurance side here.
John Doucette
Yes, to all of it. And it’s interesting, because some are looking for growth, others are not looking for growth.
Some are critical of growth. Some are critical of lack of growth.
So it’s an interesting dynamic. And as each of us kind of mentioned in our prepared comments, there’s a number of things going on.
So you’ve got FX, you’ve got less proportional business that met our pricing guidelines, you’ve got us moving up an attachment point, which lowers rate online. You’ve got more retrocessional protection that we purchased, which is up significantly year-over-year, all of that kind of leading to a lower net written premium growth.
Interestingly on XOL basis we actually did have some growth in our portfolio, gross exit well premium. But again that was offset by some of the retrocessional protections we broker, all with an eye towards improving our net returns on capital as compared with our gross returns on capital.
So we believe that we continue to make headway in being a larger presence in the marketplace and winning and gaining share from other market participants. But that doesn’t mean that we're also not paying attention to things that don’t need our return over hurdles.
And I think I mentioned in last quarter's call that there are some things in Florida that will be backed away from, some writings, where others have put down large lines. It doesn’t mean that they are right and they’re wrong and we’re right.
It just means that they didn’t quite meet our pricing objectives. So again we still continue to make headway in terms of growing our book, our margin.
Our net margin is up year-over-year. It doesn’t mean there aren’t some headwinds in the marketplace, but we think we're doing quite well and we will continue to manage that way going forward, and at some point we certainly believe that there will be a turn in this market and we'll be well positioned to even take greater revenge of that than we are right now.
Michael Nannizzi
Craig, you mentioned about nine points of underlying losses. So if I take that into consideration, does that mean that the sort of true underline actually improved year-over-year?
So profitability is improving in reinsurance? The 90 million of non-cat large losses.
Craig Howie
On an overall basis I would say on a net basis we think that it's improving and that is the reason if you back out those $90 million to $100 million of losses yes.
John Doucette
Essentially our operating income on a year to date basis year-over-year is up. Yes, this quarter we had a number of things happen, some of which frankly were losses that we weren’t aware of that were winter losses for example that came from the first quarter that got reported to us in the second quarter.
So to look at reinsurers results just on quarter by quarter sometimes could be a little bit misleading and so on a year to date basis we are up year-over-year. We think it's a quite a solid year to date so far.
Michael Nannizzi
I guess one question would be, the great results, is there a need then for the market to change it all? Because it seems like at these profitability levels, that I don’t know how the conversations happen between insurers and reinsurers but it seems like these levels of profitability are pretty attractive.
Dom Addesso
Well, remember that it depends on scale, it depends on your expense ratio, and we've argued for a long, long time that we have a distinct advantage in the marketplace, given our not only our size and the signing that we can obtain, but also our expense ratio advantage, and our global diversified platform. So compared to many other market participants that don’t enjoy some of those advantages, you’ve seen already I believe and will probably continue to see some return drifting below as I mentioned again my comments below 9%.
That doesn’t sound like a completely terribly robust market. And at the same time you see a few losses that come through hit the industry here in this quarter take a pretty good bite out of the apple.
So it suggests that there isn’t much margin to handle the larger catastrophe. But notwithstanding all of that, we think we clearly have unique advantages which enable us to continue to expand our offerings.
Michael Nannizzi
And then just one numbers question, the negative seeded premium in the international, I'm just trying to think about, should we be looking like the net written line as sort of a good base or starting point? Should we be looking at the gross written line and then assume like normal sessions occur from here.
Just trying to sort of square that maybe if just there is some context in terms of what drove that negative number. And thank you all for all your answers.
John Doucette
That was really driven by one large strategic deal that we had done. It's better to look at the net written premium on the international book for that reason.
That deal was restructured. So going forward it's at the same margin but the premium will be booked differently going forward.
So more appropriate to look at the net written premium.
Dom Addesso
The growth though is still important in the sense of how we're utilizing the capital market opportunity. We have Tampa, Mount Logan, IOW.
So again gross is you can't ignore it because that’s also indicating what our reach is into the marketplace. It just that this particular quarter given the adjustments made in some of those transactions that we talked about earlier, that distorted that historical relationship for just this quarter.
Operator
And we'll take our next question from Amit Kumar from Macquarie. Please go ahead.
Amit Kumar
Two quick follow up questions on the discussion on capital. Number one, one question we were getting last night as it pretends to Everest Re is how does -- I guess the forthcoming changes or the upcoming changes to the ARR model, how does that impact your view on capital PMLs and how much of that is actually connected to the capital management pullback.
Dom Addesso
None of that actually. We’re -- we don't expect any major change to the PMLs.
No question there will be some change, there is ups and downs depending on the territories that you write in. And I’ll ask John if he has any additional thoughts but remember that our view of -- the risk positions that we talk about is essentially our view of risk.
It is looking at all the markets, whether it's ARR RMS and frankly our own internal model. So to the extent that ARR is changing some of their calculations, it will have some impact but we do not expect it to be a meaningful impact.
John, if there’s anything to add to that.
John Doucette
Yes, just to follow-on that. So net, net we view this as a positive as this will be potentially an increase in demand, a push on demand for some of our clients and that would be good, but just following what Dom said, first we create our own view of risk.
We've been spending a substantial amount of time and resources over the last six years or seven years building out Everest Re risk for all zones around the world, all perils, all return periods, and we use many, many things to input this and we’re continually enhancing our views of this and have it very smart capable team of people that are analyzing this around the group. And we think this is one of our core competitive advantages.
And it allows us to take all the different inputs, not just the ARR but the other vendors as well as we've been trading for over 40 years in a lot of countries around the globe and so we look at our own results and look at the damageability against losses, we look at external, we look at academic studies that are done around the globe and all that rolls up to our view of risk. So our view of risk is we’ll try to enhance it all the time, whether it's tied to ARR changing its results or somebody else or internal studies that we do and we’re always looking to enhance that, but net, net, we think this is a positive for us and positive upward on rating going forward.
Amit Kumar
The other question for Dom, and this is sort of a follow-up to Sarah's and Kai's question. It seems that the market is more forgiving in terms of doing dilutive tangible book value deals and I'm curious, looking at that, has that changed your view in terms of how you might look at things going forward or not?
Dom Addesso
Not a bit. Market is more forgiving today.
We’ll see would that turns out to be two years from now.
Amit Kumar
Got it. And final question…
Dom Addesso
We have to pay attention to here is how we feel we can best an economically and also given our strategies are, how we can best out our insurance platform. It doesn't mean that we’re -- we turned a blind eye to any kind of a transaction that might be presented to us.
It’s just to date, as we look at the alternatives, our alternative looks a little better.
Amit Kumar
The final question is on reserve adjustment. I think it was $31 million in run off book.
Can you maybe give us a bit more color? How should we view the $31 versus against the size of that book?
Can you put some ranges around it which give us comfort that there is not going to be possibly more noise or maybe just talk a bit more about this?
Craig Howie
This is Craig. This is was a claim review that was done on a run off program book of business for Umbrella.
The company discontinued this book several years ago but the program has been running hot if you will. We've had reserve adjustments over the last two reserve study cycles.
There were over 300 open claims reviewed. About 195 claims had adjustments.
Some of them were down, most of them were up, obviously with respect to add any additional $31 million of prior year losses. We took into account some things like other cases and local and state labor laws when we were going through these claims.
But relatively speaking this is $31 million. What we wanted to do was take this charge.
The company reacts very quickly to unfavorable type development like this. But keep in mind this is $31 million on a $10 billion book of reserves.
So it's a very small number. The rest of our reserves I'm very comfortable with the overall book and that continues around very favorably against our internal reserving monitoring metrics?
Dom Addesso
I would ask that everyone consider, as Craig emphasized it as part of $10 billion of reserves, and look at our track record of calendar year results or reserve development, it's quite strong. And again, as I said many times before, we have some 200 different reserve groups that we analyzed.
This half we want subset of one of those and we’re going to get blips in any one of those different reserve groups from time-to-time. What’s most important is the integrity of the balance sheet, and I think we’ve demonstrated that our reserve position is quite strong.
Our reserve triangles have been out. We’ve obviously released those over the couple of years.
All the analysis on that indicates that it’s very positive and clearly our own internal metric suggests that as well. So I recognize that you certainly want to understand each segment of our business to properly project but I also ask that you consider the overall.
Operator
We’ll take our next question from Josh Shanker of Deutsche Bank. Please go ahead.
Josh Shanker
Could we talk a little bit about fronting arrangements and changes in those and how we should think about seeding commissions going forward? Or I should say commission ratios?
Dom Addesso
Sure. Let’s talk about it, what is --
Josh Shanker
I see a big drop off in international premium and the uptick in acquisition expense ratio. I’m wondering if that’s one time in nature, how should we think about that going forward?
Dom Addesso
I’ll let Craig take that one.
Craig Howie
In the international book, as we’ve mentioned a couple of times, what’s driving that this quarter Josh is one strategic deal that we have done that changed this quarter for the year and going forward. So while the margin is the same, the premium has been booked differently on a gross basis.
So therefore it’s probably more appropriate to look at it on a net basis for this quarter anyway. That will give you a better indication of how that is driving the current result.
Josh Shanker
And so if I think about going forward for the remainder of the year, is year-over-year the expense ratio higher it was a year ago.
Craig Howie
I don’t think the expense ratio will be significantly higher for acquisition costs even on an international book.
Josh Shanker
Okay. And so and thinking about 2Q, ’16, not that I’m asking for guidance or anything, but more interested in this deal, just one time in nature how it was booked this year and we think about next year we’ll be doing that again or have you discontinued the relationship or how does that all play in?
Craig Howie
We have not discontinued the relationship. There have been some law changes in Latin America with respect to how to treat these transactions going forward.
So over the next five years we would expect these transactions to decline going forward but that will be over a longer period of time, over five years.
Josh Shanker
And just next question, very subjective. You can answer it anyway you want.
It’s about the industry. If you were prohibited from writing cat business for some reason just hypothetically, what do you think the combined ratio is in the reinsurance market for non-cat business today?
Craig Howie
Was an option there not to answer your question?
Josh Shanker
Whatever you want? I trying to tease out, still you had a higher loss ratio, still very attractive in a non-cat quarter always hard to deduce what the real numbers are?
Dom Addesso
It’s -- I’m going to take a guess at it more than anything at this point, because part of the answer to that question, if that were the case, the whole marketplace will be within the different dynamic. So a transaction that you might do with clients might be done on a different basis but I think the answer to that question would be somewhere in the low 90s kind of a guess.
Obviously you’ve got casualty business, you’ve got all of our facultative writings. You’ve got property per risk, you’ve got professional launch treaties, it’s a multitude of things.
But the whole mix of the business would change, but I think what you’re really asking is what’s the rest of the portfolio kind of running at.
John Doucette
Josh, this is John. Just to add some more color to Dom’s answer, it very much would depend on book of business that we have and one of things that Everest has built very intentionally over the last 40 plus years is a very, very diversified book of business and we’re not a one trick pony type of property cat.
We keep talking about these 200 plus IVNR [ph] deals. That means we had 200 different segments of business around the group, different lines of business and different geographies.
So we’re always looking for profitable business and based on a combined ratio, ROE and other metrics that we look at. So I think it very much depends on what the opportunity set is.
We feel very good about our opportunity set and we have for many, many years been a reinsurer in the Casualty market and we are capable to deploy as much capacity there as market conditions dictate place and we desire to given the market condition. We can flip from reinsurance to insurance.
We have a lot of dials that we’ve talked about to the earnings call. But we trade in many, many different classes of business that there is margin and not just in the property cat space.
Josh Shanker
Well thank you for all the answers and let’s hope for quiet hurricane season. Take care.
Dom Addesso
I think we’re probably going go to go over a little bit because I think we do have time for at least for one more anyway.
Operator
We'll take our last question from Brian Meredith of UBS. Please go ahead.
Brian Meredith
Two questions here. First one, Craig, can you give us a sense of where new money yields are right now versus your current portfolio in new fixed income.
We’re getting close to a bottom with respect to book yields.
Craig Howie
I would love to say that we are – but our new money is just over 2%. We don’t see a bottoming out until probably mid-2016.
Brian Meredith
And then the last question, on the Lloyd’s starts up here, a couple of Lloyd's -- guys in Lloyd's have kind of commented that the price competition at Lloyd's right now is equivalent to where we were back in 1999. So pretty darn competitive.
I’m curious, why from a timing perspective now going into Lloyd given the competition.
Craig Howie
First of all, I think some of those comments were related to some very, very specific classes. And that’s number one.
Those are not classes that we necessarily have on our radar screen, at least not in the near term. So -- and frankly, just like in our reinsurance lines, if the market is not giving us return, it meets our pricing metrics, then we won't write the business.
We don’t necessarily will have the choice is to when we start these projects literally months and at least a year in advance, you have to kind of start thinking about how to get these things running. So you don’t have a choice in terms of timing sometimes.
But you do have a choice in terms of what kind of business you put on the books and we will continue to maintain our underwriting discipline and underwriting culture, which will dictate the kind of business we write. And frankly the business plan that we have put forth we believe can generate a very nice underwriting margin for us.
Operator
I will now turn it back over to the speakers for any closing remarks.
Dom Addesso
I will close it out just to say thanks for your interest. We went a little over today, but my apologies for that and thank you for your interest.
Clearly within the industry there is certainly lots of headwinds. We think Everest has demonstrated that we have the scale and the talent to manage through that as I mentioned before, a positive underwriting result, positive operating results for the first half of the year and it’s really – it’s a long term business and we think we have to look at it on a six-month basis.
And we think we've performed very, very well with a 15% return on capital. So thank you for your interest and we look forward to talking with you in the weeks and months ahead.
Operator
And this does conclude your teleconference for today. Thank you for your participation.
You may disconnect at any time.