PartnerRe Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: PartnerRe Ltd. (PRE)

PartnerRe (NYSE:PRE)

Q1 2014 Earnings Call

April 29, 2014 10:00 am ET

Executives

Robin Sidders - Investor Relations Director

Costas Miranthis - Chief Executive Officer, President, Director, Member of Risk & Finance Committee, Chief Executive Officer of PartnerRe Global and Chief Executive Officer of Partner Reinsurance Europe Limited

William R. Babcock - Chief Financial Officer and Executive Vice President

Analysts

Amit Kumar - Macquarie Research

Joshua D. Shanker - Deutsche Bank AG, Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Kai Pan - Morgan Stanley, Research Division

Brian Meredith - UBS Investment Bank, Research Division

Clifford H. Gallant - Nomura Holdings, Inc.

Operator

Good morning. [Operator Instructions] If you haven't received a copy of the press release, it is posted on the company's website, www.partnerre.com, or you can call (212) 687-8080 and one will be faxed to you right away. I will now hand the call over to Robin Sidders, Director of Investor Relations at PartnerRe, who will begin the call. Please go ahead, ma'am.

Robin Sidders

Good morning, and welcome to PartnerRe's First Quarter 2014 Results Conference Call and Webcast. As a reminder, our first quarter financial supplement can be found on our website at PartnerRe.com in the Investor Relations section by clicking on Supplementary Financial Data on the Financial Information page.

On today's call are Costas Miranthis, President and CEO of PartnerRe; and Bill Babcock, Executive Vice President and CFO of PartnerRe. Costas will start with a high-level overview of the quarter and full year results and then hand over to Bill, who'll provide more details on the results. Costas will come back at the end of the call to provide additional commentary on the market, including the 4/1 renewals. At the conclusion of the prepared remarks, we will open up the call for questions-and-answer session. I'll begin with the Safe Harbor statement.

Forward-looking statements contained in this call are based on the company's assumptions and expectations concerning future events and financial performance of the company and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

PartnerRe's forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments, such as exposure to catastrophe or other large property and casualty losses; adequacy of reserves; risks associated with implementing business strategies; levels and pricing of new and renewal business achieved; credit, interest, currency and other risks associated with the company's investment portfolio; changes in accounting policies; and other factors identified in the company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking information contained herein, listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The company disclaims any obligation to publicly update or revise any forward-looking information or statements.

In addition, during the call, management will refer to some non-GAAP measures when talking about the company's performance. You can find a reconciliation of these measures to GAAP measures in the company's financial supplement.

With that, I'll hand the call over to Costas.

Costas Miranthis

Thank you, Robin, and good morning, everybody. Thank you for joining our first quarter 2014 results conference call.

Following a very good year that we had in 2013, we had a strong start to 2014. Our first quarter results reflect solid operating performance driven by good technical underwriting, an absence of large loss activity and continued favorable reserve development. This contributed to our posting a Non-life combined ratio of 83.9% on a higher level of earned premiums compared to the comparable prior year quarter.

Our Life and Health business also contributed, showing strong profitable growth as we transitioned the Health business we acquired at the end of 2012 onto our [indiscernible] during 2014.

On the investment side of our business, we reported both strong investment income and portfolio gains during the quarter. Investment incomes held up a little bit better-than-expected this quarter, and Bill will take you through that in a minute. Equities were somewhat volatile, but overall, during the quarter, up, and long-term risk-free rates tightened and group credit spreads came, in. Our portfolio performed well both on the fixed income side and the equity side.

So all in, our operating results, combined with our solid investment results, culminated in us posting a very respectable 12.3% operating ROE and 5.4% growth in dividend adjusted tangible book value per share.

Over the past few quarters, I have talked about the operational and organizational changes we have made to better serve our clients and to more effectively position our portfolio to compete effectively in this increasingly difficult environment. Clearly, we're now beginning to see the results of these efforts, with profitable new diversifying business like health and mortgage business now being reflected in our financial results and adding balance to our portfolio.

We will continue to seek new ways to profitably expand and diversify our portfolio, whether it's in markets or alliance where we currently have no foothold, or in expanding our writings with existing clients.

At the same time, we remain firmly focused on creating value for our shareholders over the medium term, and we will not hesitate to reduce our writings if returns in particular alliance do not make economic sense.

I will now hand over the call to Bill to take you through the numbers, and I will come back with more specifics on the market and the 4/1 renewals.

William R. Babcock

Thanks, Costas, and good morning, everyone. We had a strong start to 2014, posting operating income for the quarter of $177 million, or $3.36 per diluted share. This is nearly flat compared to the operating EPS we reported in the first quarter of 2013 of $3.39.

Our results translate through our first quarter 2014 annualized operating ROE of 12.3%. Strong operating performance, combined with improved financial markets, drove our tangible book value growth, which grew 5.4% during the quarter after adjusting for dividends. We closed the quarter with record highs for diluted book value per share of $114.13 and tangible booked value per share of $103.10.

Our first quarter premiums reflect strong 1/1 renewal, which we discussed with you on last quarter's call. As a reminder, the growth we achieved was the result, largely, of new business initiatives as we saw contraction in many of our more mature markets.

Non-life net premiums written and earned totaled $1.5 billion and $1.0 billion, respectively. These figures represent increases from the comparable prior year quarter of 5% and 8.8%, respectively. These changes are on a constant FX basis, as are all references to percentage premium changes for the remainder of my prepared remarks. The increase in net premiums written was driven primarily by our North America and Global Specialty subsegments, which offset decreases in our Catastrophe and Global P&C subsegments, where competitive pressures have been the most pronounced. Loss activity this quarter was light, and we produced a Non-life technical ratio of 77.4%, resulting in $225 million of technical income.

We continued to experience favorable development on prior year Non-life reserves, which contributed $164 million to technical income.

We experienced favorable prior year development in each of our Non-life subsegments this quarter. Favorable development by tail this quarter was 34% from long-tail lines, 19% from medium-tail lines, and 47% from short-tail lines. The most significant contributors to favorable development this quarter were catastrophe and Global P&C property in our short-tailed lines, and North America, Specialty Casualty in our long-tail lines.

Now I'll take you through our Non-life subsegment results, starting with North America. In this subsegment, net premiums written and earned were up 19% and 14%, respectively. This growth was driven, primarily, by new mortgage business in our credit and surety line, totaling $23 million on a written basis, and the restructuring of a significant treaty in our agriculture line.

Regarding this treaty restructuring, it resulted in our recording a full year 2014 premium, totaling $75 million, as written in the first quarter of 2014, rather than recording it ratably over 4 quarters, as we had last year. This restructuring had only a marginal impact on net premiums earned.

Estimated full year 2014 U.S. crop year premium is $450 million, compared to the $480 million we currently estimate for the 2013 crop year. As a reminder, during the first quarter of 2013, our initial estimate for 2013 U.S. crop year premium was $400 million.

The technical ratio for the quarter was 92.9%, producing technical income of $27 million. Net prior year favorable loss development was $24 million this quarter. The largest single line contributing to this favorable development was our Specialty Casualty line, which primarily resulted from continued benign loss trends.

In our Global P&C subsegment, net premiums written decreased 3% while net premiums earned were up 10% compared to the prior year quarter. The decrease in net premiums written was driven by the property line, while the increase in net premiums earned was driven by business originated in prior quarters in the motor line. The technical result for the quarter was $31 million, reflecting a technical ratio of 82.5%. Favorable prior year development contributed $47 million to this result. Favorable development was recorded in all lines, with the largest amount coming from Property.

Turning to our Global Specialty subsegment. Net premiums written and earned were up by 8% and 6%, respectively. New business and increased renewal premiums in our Lloyd's specialist relationships and increases in international Ag offset decreases in most other lines due to increased retentions and cancellations due to pricing.

The technical ratio for the quarter was 79%, producing $75 million of technical income. Favorable prior year reserve development was $59 million this quarter, essentially flat with the number we reported in the comparable prior year quarter. Most lines contributed to reported favorable development, with the exception of credit and surety.

In our Catastrophe subsegment, net premiums written and earned were down 14% and 16 -- I'm sorry, and 6%, respectively. Pricing pressure in nearly all regions was the driving factor.

The technical ratio for the quarter was negative 16.4%, producing $92 million of technical income. This result reflects the lack of major catastrophes and very light loss activity during the quarter, and favorable adjustments to reserves for prior year events. The favorable prior year development totaled $34 million and was comprised of release of attritional IBNR and a single-digit adjustment on a number of prior year events.

Turning to our Life and Health segment. Net premiums written and earned were up 12% and 15%, respectively. The increases are primarily attributable to PartnerRe Health, which contribute $14 million to the increases, as well as increases in our mortality and longevity lines.

The Life allocated underwriting result, which includes allocated investment income and operating expenses, was $14 million this quarter, down slightly compared to the $16 million we reported in the comparable prior year quarter. Favorable results in Health and GMDB were partially offset by an increase in claims activity in our short-term mortality book.

On the investment front, U.S. equity markets continued a moderate rally, credit spreads narrowed some, and longer-term risk-free yields decreased slightly. Overall, investments contributed $247 million to first quarter pretax income, excluding investment income allocated to our Life segment. Of this amount, $99 million was included in operating income, and $148 million in non-operating income.

During the quarter, we achieved a total return of 1.7% on a local currency basis. Net investment income for the quarter was $117 million, up slightly from the $114 million we recorded in the fourth quarter of 2013. The results for the quarter includes a one-time termination fee received related to a private market deal, and a decline in prepayments on MBS securities. These factors serve to prop up investment income this quarter, while we continue to expect investment income to decline in coming quarters, based on currently available reinvestment rates.

The gap between book yield and reinvestment rates stood at 49 basis points at quarter end.

Our portfolio duration was 3.2 years at quarter end, which is just short of our neutral duration of 3.3 years. We have been increasing duration slightly over the past several quarters, as shorter-term interest rates have risen.

Operating expenses this quarter were $111 million, and include approximately $8 million of expenses related to higher bonuses for 2013, and an adjustment to French profit-sharing expense for a prior year. The expense figure is down from the $131 million we reported in the fourth quarter of 2013, which included a restructuring charge related to an office lease. The effective tax rates this quarter were 14.5% on operating income, and 19.9% on non-operating income. These rates reflect the geographies where profits and losses emerged. There is nothing exceptional about these figures that warrants specific comments.

Net income of $310 million for the quarter drove our comprehensive income result of $294 million. Change in the value of our currency translation account represents nearly all the difference, as the U.S. dollar strengthened against the Canadian dollar during the quarter.

Operating cash flow was $79 million this quarter, down from the $115 million we reported in the comparable prior year quarter. Higher taxes and lower investment income impact the comparison.

The time value of money in our Non-life reserves was $665 million at quarter end, down slightly from the $734 million we reported at year end 2013, on lower longer term risk-free rates. We calculate this using the risk-free rates for each major reserve and currency.

You may have noticed that we included disclosure of our Life value in-force in our financials supplement this quarter. This is a figure we previously provided annually through a separate financial release. We plan to include disclosure of this amount in our quarterly financial supplement in each subsequent quarter and hope you find this useful.

Turning to capital. Total capital at quarter end was $7.6 billion, up slightly from the $7.5 billion at year end 2013. Comprehensive income for the quarter more than offset the impact of share repurchases and dividend payments during the quarter. We were active repurchasing shares again this quarter. We bought 1.8 million shares during the quarter at a total cost of $180 million. Since quarter end, we have repurchased an additional $46 million. Given current market opportunities and current trading levels, we plan to continue to repurchase shares in the near-term. We currently have 2.7 million shares under our existing share repurchase authorization.

Now I'll hand the call back to Costas to update you on the market.

Costas Miranthis

Thanks, Bill. Turning to market conditions, April is not a major renewal period for us, with about $300 million or so Non-life premium on Q4 renewal on April 1. We expect written premium to remain relatively stable overall. Renewal conditions are clearly more competitive across the board, with technical ratios showing some deterioration when compared to 2013. Every line in the market is different, so there is wide variation in taking up profitability, and I expect this to continue through 2014.

In international markets, Japanese catastrophe renewals experienced price declines from the historically high risk-adjusted rates achieved in the aftermath of the 2011 quake, with declines in the range of 10% to 15%. Standard International P&C terms and conditions also deteriorated.

Capacity remains abundant and in the face of good loss experience over the last few years, commissions on proportional business are increasing. This picture is broadly true for most Global P&C business in both mature and emerging markets.

In Global Specialty lines, where we write multiple lines of business, we also experienced general deterioration in reinsurance terms, although the picture is a little bit more variable. The lines that have performed well in the recent past, which means most of the lines and are coming up for renewal, experienced the same competitive pressures as standard P&C lines. Lines that experienced losses in the recent past have seen some increases in pricing. An example of that is Marine liability. In addition, due to the specialty nature of the underlying products, we see some opportunities to write new business in selected segments, for example, international agriculture.

Overall, despite similar general trends, Specialty Lines as a whole remain more attractive than standard lines as the positive opportunity helps to maintain returns at a somewhat higher level. And of course, due to the diverse nature of Specialty Lines, the ability to improve returns through risk election and tactical capital allocation is greater.

The picture is not drastically different in the U.S. For the limited number of catastrophe treaties that we saw renewing in the period, risk-adjusted rates were down in line with declines seen for the January 1 renewals, generally in the 10% to 20% range. There is excess cat capacity in the market, and this is clearly having an impact on terms.

Looking ahead, as we approach the June, July renewal period, I expect that the trends that we saw in January and April will continue. We are not a heavy Florida specialist writer, these accounts for only around 4% on overall cat premium, but we expect this market to face risk-adjusted rate declines of around 15%.

Other lines in the U.S. are also experiencing competitive pressures. Incidents are often able to obtain highest information, although this is at least partially offset by improvements in underlying primary rates and benign loss trends.

As Bill mentioned, our Life and Health business continues to grow. The Life business has written relatively evenly throughout the year and many of the contracts are continuous without explicit renewal days. Existing contracts are providing modest growth, and in addition, we see a number of opportunities for future growth in segments where recently there has been market dislocation. For example, Life group business.

Health, on the other hand, has a very important first quarter, and there, we saw meaningful increases in premium, particularly in the Specialty and managed care segments of our portfolio. The long track record and experience of our team is a great advantage in a market that is undergoing change.

In summary then, overall conditions remained tough in most lines and markets. While market conditions are what they are, I'm very pleased with our ability to maintain or improve our positioning in this competitive market. Due to our long-standing relationships and market line expertise, we are a preferred market for many of our clients. And in an oversubscribed market, we are able to obtain our desired writings. We do have to decline business for economic reasons, but by and large, we are successful in obtaining our targeted business.

Further, our long track record and experience allow us to not only select a more profitable business, but also to work with our clients to develop new business opportunities for the future. I am confident that this strong franchise, together with prudent management of our assets and capital base, puts us in a good position to continue to create value for our shareholders for years to come.

We're now happy to take any questions that you may have. And operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take the first question from Amit Kumar from Macquarie.

Amit Kumar - Macquarie Research

Two quick questions, I guess. The first question is on the discussion on pricing, where you were talking about the 4/1 renewals and 6/1 renewals. Broadly speaking, what is your sense the earned ROE will be at 6/1?

Costas Miranthis

It's gone up like -- [indiscernible] gave earlier the pricing is going to be variable, so it's going to be a range of prices depending on our portfolio. But the range of cat prices, the way we count capital at least, in the high-single digits, low-teens right now.

Amit Kumar - Macquarie Research

Got it, and that's actually helpful. The other question I had was, I think, Bill, and this is somewhat switching gears, mentioned some losses, and I know that you have a reporting threshold. If I were to x out the non-notable losses and, I guess, the attritional losses, could you give us some sense as to what the underlying loss ratios would have been by segment? Would that be possible?

William R. Babcock

I said there's really no significant cat activity or really attritional losses, I mean the normal level of loss activity in most lines. So do you have a specific segment question that I can address?

Amit Kumar - Macquarie Research

No, it was just added. Usually, there are some attritional losses which are not in the press release. And I was just wondering, if you strip all the noise out, what would be the improvement in loss ratio for, let's say, North America Global and Global Specialty? What would be the clean fully adjusted number?

Costas Miranthis

Amit, look, all losses -- losses are losses, whether you calculate them large or small, and we choose to notify you of individual losses, which are greater of a threshold. In every quarter, there's a whole host of losses, whether it be $3 million, $4 million, $5 million, or $15 million, $20 million that go into the remainder of the loss ratio. And we don't aggregate or provide information for those. So it's -- and of course, there are some of such losses this quarter. So if I -- if your threshold is $1 million or $100,000 it's every loss that you've seen. If your threshold is $15 million, it will be different. But we don't provide information at every different threshold.

William R. Babcock

Amit, I will tell you that in our Global P&C line, we have some prior period development that's due to change in exposure, change in premium. And that accounted for something about 3 points of additional loss, if the math you're doing is adding prior year development back to the current period result. Other than that, Costas' comment is right. It's really -- there's losses in all lines. That's the only one that I can say that I'd point out to you as a real adjustment item.

Amit Kumar - Macquarie Research

Got it. That was actually what I was looking for. I should have phrased the question better. The only other question I have right now and I will re-queue after this, is, if you sort of -- and this is a broader question, if you sort of look back at the franchise, and obviously, you have been an acquirer at some point of time, meaning, the franchises has changed, so you've pulled back in prop cat, you've grown in M&I and crop and other segments. If you sort of look forward and thought of keeping the pricing commentary in the backdrop, how do you feel about consolidation? Do you foresee the need to do any acquisition or look at any entities? Or is organic growth the right route to pursue right now?

Costas Miranthis

We will let you know when we see the need to do an acquisition, Amit. The one thing that I will say, whatever we do is going to be for the right strategic reasons for the company. It's got to improve the fundamentals of the company, and that's a priority. Of course, price and all other considerations are important, but whenever we look at these things, the first question is, how does that improve the company.

Operator

And we'll take the next question from Josh Shanker with Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

I'm wondering if you can talk about what's happening right now, given pricing with your gross PML as opposed to your net PML?

Costas Miranthis

Both have come down, and we took the opportunity, as we told you before, to purchase some retrocessional cover at the tail of our portfolio. So you should expect to see our PML numbers being reduced as we go forward.

Joshua D. Shanker - Deutsche Bank AG, Research Division

So net PML is coming down faster than gross PML, that's correct?

Costas Miranthis

Yes, but both are coming down.

Joshua D. Shanker - Deutsche Bank AG, Research Division

What would be the moral hazard, given all the collateralized retro in the markets today, of increasing your growth PML while decreasing your net PML?

Costas Miranthis

You mean, what would be the probability we wrote business and seeded it outside? I think that's something...

Joshua D. Shanker - Deutsche Bank AG, Research Division

Right. It seems like it's a buyers' market for retro here, maybe.

Costas Miranthis

Two things, we have something that we are prepared to do. But we're also -- we see things, we look to it do for a -- on a longer-term basis as we've done with Lorenz Re investors. This is not something that we look to do one year and then abandon the next year. So if the market conditions, as such, would not provide an attractive return for those investors, we're not prepared to actually go and write the business just to offload it and just make some fees.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Well, depending on how mid-year renewals go, would you consider buying more collateralized protection if it's cheap enough to return stock faster to shareholders?

Costas Miranthis

Yes. That's an option.

Operator

And we'll take the next question from Vinay Misquith with Evercore.

Vinay Misquith - Evercore Partners Inc., Research Division

Just a follow-up on Joshua's question on cat exposures, that was done meaningfully this quarter. Curious as to your logic behind reducing it. I mean, in some cases, 10% to 15%, in some cases, north of 20%.

Costas Miranthis

I didn't understand. Sorry, I'm not sure I quite got the question.

Vinay Misquith - Evercore Partners Inc., Research Division

Yes, so are you pulling back on the PMLs because you think pricing is weak or because you managed to get sort of cheap retro?

Costas Miranthis

I think if you go back to my previous question, it's both. I think pricing is weaker and I think the opportunity to seed that is attractive in some cases, compared to funding the PML for our own capital.

Vinay Misquith - Evercore Partners Inc., Research Division

Okay. Second question is just a numbers question. I believe you mentioned for the net investment income, there was a one-time item in that. If you could give us the number for that? And should we just take it out net investment income for this quarter?

William R. Babcock

Yes. It was about $3 million.

Vinay Misquith - Evercore Partners Inc., Research Division

Okay, so the normalized run rate is $117 million minus $3 million, correct?

William R. Babcock

Yes. And I would caution you, 2 weeks -- quarter-to-quarter, we do have some balancing around related to dividend receipts, so it's a number that's going to have a little pluses and minuses to it, but that -- the one-time payment, it was about $3 million.

Vinay Misquith - Evercore Partners Inc., Research Division

Sure, that's helpful. And then finally, Costas, regarding the M&A comment, we already have a transaction that's out on the market right now. And I guess the big question that all of us are wondering is, would PartnerRe be interested in that.

Costas Miranthis

I think you're in the wrong call. I mean, our results and my comments on M&A, you heard earlier. I mean, if we do anything, we do it for the right strategic reasons for the company. And I'm not in this call to comment about what else is going on in the M&A market.

Vinay Misquith - Evercore Partners Inc., Research Division

Sure, sure, fair enough. I mean, I just was curious as to whether you're interested in that, and it seems, right now at least, you're not that interested, okay. One last question, if I may. Just on the restructuring charges, you had them in the last few quarters. This quarter you didn't have any. Are we done with the restructuring expenses?

William R. Babcock

No. There'll be some more coming through this year. I don't have the number offhand, but it's less than $10 million. I think it's more closer to $5 million, actually.

Operator

And we'll take the next question from Meyer Shields with KBW.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

With regards to declining net PML, can you give us a rough guidance in terms of what that implies for capital requirements?

William R. Babcock

Yes, I would say capital is consumed primarily by cat, or predominantly by cat, I should say. So it does have capital implications on it. And I think the PML reductions that you see, they're largely, because we purchased a different form of cover this year, which is at cat aggregate, which helps us in -- across a number of zones. So it has a fairly meaningful impact. I'm not sure how to answer the question differently.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

No, no, that's helpful, I'm just wondering whether it's roughly quantifiable or if there are any rules of thumb that we could use.

Costas Miranthis

I think you could. The reduction in the limit is not translatable one-to-one to reduction in capital, but it's not far off from that.

Meyer Shields - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And Bill, when you're going to the reserve, you mentioned that credit and surety it sounded like -- did not contribute to reserve releases. Was there any reserve strengthening in that line?

Costas Miranthis

Yes. Let me tell you that back in the third and fourth quarter of last year, we became aware of an adverse court decision in Spain for surety and other time we evaluated in IBNR requirements overall for the specialty line. And this quarter, we began to see some of the claims being paid and reported, and that's why payment reported development was above expectations and we've most explicitly put the overall IBNR into that line. But, overall, for the Specialty line, that doesn't have a major impact. The way we do the IBNR, we just do it line by line, and there's an overlay for the segment overall, and so it's more an allocation issue as opposed to a major impact for the line.

Operator

And we'll take the next question from Kai Pan with Morgan Stanley.

Kai Pan - Morgan Stanley, Research Division

First, on the -- actually, in your loss ratio improvements in the North American business, it's more like 600 basis point. At the same time, your Global P&C, which is under similar pricing backdrop, the accident and loss ratio after deterioration is 350. I'm just trying to reconcile these 2 different segments. Is that a business mix issue?

William R. Babcock

Yes, on the Global P&C, I think I explained that earlier that we had about 3 points of prior period development that was exposure related, so that's the adjustment there. In North America, you're mostly looking at a portfolio mix differences. We did add some mortgage earnings to the group, to the portfolio this year. And then we also had a low level of mid-sized losses in that segment. Again, there's -- but mix is the major reason.

Costas Miranthis

Mix, I would add, the other issue is reserving. We're trying to do this back out gain, take the prior year development, as I cautioned you before, it doesn't give you a true underlying picture of the accident year loss ratio, because it depends on the reserving, which is rules based. As I said many times before, we reserve an initial year accidental ratios [indiscernible] heavier. So depending on the type of business, the reserving strength might be different.

Kai Pan - Morgan Stanley, Research Division

And then, just to follow on the reserve. And if you look back for the past, like 7, 8 years, you have double-digit, like, reserve releases in terms of the combined ratio, ace grade because you've -- you've proven you're being conservative, but on the other hand, do you have any sort of discussions with actuaries, like what was -- in a sense, what was wrong with the initial pack?

William R. Babcock

Sure. I mean, obviously, we do have discussions about our reserve range. It's the largest, most subjective number on the balance sheet. What we pride ourselves in is conservatism is fine. It adds to the strength of your balance sheet. You just need to be consistent in the way you apply that. And we've been very consistent, as you actually noticed, in your comments, so we're comfortable with our reserving philosophy.

Costas Miranthis

I guess the point I'll take issue is that, what was wrong. I think, often -- I'm sure some things were wrong, and so our actuaries missed some of that. But by-and-large, a large part of this is by design. So there was nothing wrong with it. I mean, we told you that we want to be conservative. So to see that release is something that is by design.

Kai Pan - Morgan Stanley, Research Division

That's great. If you step back, my last question is if you look at the quarter results, your combined ratio is in low 80s, a pretty good combined ratio, all in and including reserve releases. And -- but the ROE at 12% is still short of your long-term targets of 13%. So I just wonder, what it takes for you to get to your long-term target in the current interest rate environments? Or is it sort of like not feasible?

Costas Miranthis

Yes. I said before, that is the current interest rate environment, getting to long-term 13%, 14% ROE would be very difficult. It would take a fair month of good loss experience. And we can get there. As we demonstrated the last couple of years with a rather benign cat season, and you should recall that we earned most of our cat premium during the third and fourth quarter of the year. So this benign cat experience doesn't impact our results in the first and second quarter to the same extent as you may see with other companies. So with a really good cat experience, we could get there, but it's going to be very difficult to get mid-teens ROEs within the current interest rate environment.

William R. Babcock

And Kai, I'd remind you that our stated goal isn't to generate a 13% ROE over the long term. Our goal is to generate a compound tangible book value per share plus dividends that's greater than 750 over risk-free. And that is -- we're clearly beating that by posting over a 12% ROE.

Operator

And we'll take our next question with Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank, Research Division

A couple of questions for you. First, Costas, I'm wondering if you could talk a little bit about the competitive threat the [indiscernible] Re's, and I guess there's a couple of others that seem to be potentially popping up there, post to the casualty reinsurance business, your casualty reinsurance business. And as a kind of a follow-on to that, does that kind of make you think about having to maybe actively go more after Direct business?

Costas Miranthis

Thanks, Brian. First, on the competitive threat. I don't -- we don't see there's a major competitive threat for the business that we write. On the second part of your question, is that is assumption that we will be prepared to do ourselves, so is there an opportunity for us? I think the answer to that is yes. And we're exploring some of these opportunities, but we -- if we do anything, we have to pick both the right structure and the right partner. And so there's probably a gestation time if we're going to do anything in that area. But for by-and-large, for the business that we write on the reinsurance, we don't think this as a competitive threat, but it may enable us to access some other business that we currently don't find attractive ourselves, but perhaps, with a higher, more aggressive investment philosophy could remain attractive in management.

Brian Meredith - UBS Investment Bank, Research Division

Is that because your businesses is more short tail-focused right now? I'm curious why is that?

Costas Miranthis

No. It's not -- I think a lot of our clients, first of all, are very ratings sensitive, are sort of more long-term clients. And we don't believe they will be particularly attracted to that type of business. On the other hand, there's a lot of business that we see and we don't write and could potentially be attractive for somebody who's prepared to count on much higher investment returns.

Operator

And we'll take our last question from Cliff Gallant with Nomura.

Clifford H. Gallant - Nomura Holdings, Inc.

Kind of a simple question, but can you talk a little bit about just the value that PartnerRe adds to, say, the traditional property catastrophe reinsurance transaction? We know the industry is going through a lot of change and competitive threats, and I think, we are thinking out of the alternative capacities offering cheaper alternatives. So I think the customer must be paying something to be able to do that traditional transaction with you, sort of a going over what we know, but I'd like to hear it again.

Costas Miranthis

Yes, first of all, we offer track record and continuity, something which is -- and you've got to remember that the new capacity is new. A lot of the clients are not prepared to have all their eggs in one basket. And a lot has been written about the new capacity, increasing this new capacity is morphing into the traditional capacity under a -- with new owners with different returns. It's not the product itself that's different, but a lot of that goes through a transforming vehicle. So not a lot of our clients want to have all the cat exposure for a bond or through a single show collateralized cover. So there is demand for traditional reinsurance. Now the challenge that we face is because there are a number of alternative products out there, it's pricing, for pricing is the marginal capacity that makes the difference, and that's why we see the cat reinsurance product as being challenged. It's not because there isn't demand for the traditional product. It's because the alternative is influencing pricing on the margin.

Let me finish. Adding to what we had, because I answered the question in respect to the market. As PartnerRe, we've been a market leader in this business since our inception. We've invested a lot in cat from our own research staff models, and a lot of our clients come to us because they want something which is more than just a vender model, out-of-the-box, give you an answer, here's the number. We get a lot of business just because just people want us to quote. We don't always want to write that business, but people want to have a quote, and invariably we get the opportunity to choose something that we like.

Operator

And it appears we have no further questions at this time, so I'll turn the program back over to our presenters for any closing remarks.

Costas Miranthis

Thank you, everybody. This concludes our first quarter call. Thank you for joining us today and for your interest in PartnerRe, and we look forward to seeing you next quarter.

Operator

This concludes today's program. Thank you for your participation. You may disconnect at any time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!