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PartnerRe (NYSE:PRE)

Q2 2014 Earnings Call

July 29, 2014 10:00 am ET

Executives

Robin Sidders - Investor Relations Director

Constantinos 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

Vinay Misquith - Evercore Partners Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Amit Kumar - Macquarie Research

Michael Steven Nannizzi - Goldman Sachs Group Inc., Research Division

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Kai Pan - Morgan Stanley, Research Division

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

Larry Greenberg - Janney Montgomery Scott LLC, Research Division

Brian Meredith - UBS Investment Bank, Research Division

Michael Zaremski

Charles Sebaski

Clifford H. Gallant - Nomura Holdings, Inc.

Operator

[Operator Instructions] If you haven't received a copy of the press release, it is posted to 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.

Robin Sidders

Good morning, and welcome to PartnerRe's Second Quarter and Half Year 2014 Results Conference Call and Webcast. As a reminder, our second quarter and half year quarter -- half year financial supplement can be found on our website at www.partnerre.com in the Investor Relations section by clicking on Supplementary Financial Data on the Financial Reports 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 first half and then hand over to Bill, who will provide more details on the results. Costas will provide additional commentary on the market including the midyear renewals at the close of Bill's remarks. At the conclusion of all the prepared remarks, we'll open the call up for a question-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 those measures to GAAP measures in the company's financial supplement.

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

Constantinos Miranthis

Thank you, Robin, and good morning, everybody. And thank you for joining our second quarter call. We had a good second quarter, posting an operating ROE of 9.5%, and importantly, growing dividend-adjusted tangible booked value per share by 5.2% during the quarter and 10.8% year-to-date. Bill will take you through our financial results in greater detail, so I will speak to the main highlights.

Our second quarter results are typically characterized by lower level of earned premium on a Catastrophe portfolio. That reflects the seasonal nature of the book of business, and this second quarter was no different. I am pleased that the top line we reported this quarter has grown, as we have continued to seek out new profitable opportunities in what is and remains a very difficult operating environment.

The quarter saw a low level of Catastrophe losses, but we experienced a higher-than-average level of midsized non-Catastrophe losses. These are losses in the $8 million to $35 million range. We continued to experience strong favorable development on prior year reserves, despite some adverse development of the New Zealand earthquake losses of 2011. These factors contributed to us posting a Non-life combined ratio for the second quarter of 91.5%.

Our Life and Health business continued to perform well, showing strong profitable growth as we continue to transition of the health business we acquired at the end of 2012 onto our paper by the end of this year. We produced a strong investment result this quarter, driven by both strong investment income and portfolio gains. As Bill will explain, net investment income benefited from a few items we don't expect to recur, but the result was very strong nonetheless.

We continue to have a strong balance sheet, and this, together with the strong international franchise and strong international presence, provides excellent access to new business. However, deployment of capital depends on market conditions, which, as I will comment later, remains challenging. During the quarter, we've continued to return capital through share repurchases, as we saw fewer opportunities in our traditional lines of business. I am pleased, however, with the progress of initiatives that we started over the last couple of years, such as mortgage and health, where demand for our is product strong and growing and where terms are not correlated with the broader reinsurance industry. I will now hand over the call to Bill, and we'll come back to give you a view on the current market conditions.

William R. Babcock

Thank you, Costas, and good morning, everyone. As you just heard from Costas, our second quarter result was good, but it was impacted by an elevated level of larger non-Catastrophe losses. These losses, combined with our seasonally low Catastrophe earned premium, served to somewhat offset otherwise strong underwriting earnings, fueled by continued favorable loss development and low attritional loss activity. Very good investment results also made a strong contribution to our operating and net income results.

Operating earnings for the quarter were $134 million, or $2.60 per diluted share, which translates to an annualized operating ROE of 9.5%. This compares to the $51 million or $0.90 per diluted share we reported in the prior year quarter, which was impacted by both Catastrophe loss activity and the restructuring charge we recorded. Year-to-date, operating earnings were $310 million, or $5.97 per diluted share, translating to an annualized operating ROE of 10.9%.

Net income for the quarter was $258 million or $5.02 per diluted share, and reflects a strong annualized net income ROE of 18.4%. Diluted tangible book value per share at quarter end was $107.80 and represents an all-time high for PartnerRe. Including dividends paid, diluted tangible book value per share increased 5.2% for the quarter and 10.8% since year end 2013.

We are pleased to again report increases in both net premiums written and earned this quarter compared to the prior year quarter. As the work our underwriters have done over the past year or 2 to find new and diversifying risk has served to offset the meaningful decreases we have seen in our more challenged mature lines, we reported growth in both our Life and Health and Non-life segments, with total net premiums earned up 11% over the prior year quarter. This change in premiums is on a constant FX basis as are all references to percentage premium changes for the remainder of my prepared remarks.

Second quarter Non-life net premiums written and earned were up 3% and 6%, respectively, over the prior year quarter. The increase in net premiums written reflects growth across multiple lines in our North America and Global Specialty subsegments. While we reported decreases in our Catastrophe and Global P&C subsegments, the Non-life technical ratio for the quarter was 85.6%, resulting in technical income of $150 million. This compares to the Non-life technical ratio we reported in the comparable prior year quarter of 91.7%, which was impacted by floods in Europe and Canada. Year-to-date, the Non-life technical ratio was 81.6%, which compares to the 83.4% we reported during the first half of 2013. Favorable Non-life reserve development this quarter was $161 million, or 15.4 points on the loss ratio. This is up compared to the favorable development we reported in the comparable prior year quarter of $127 million or 13.0 loss ratio points. We reported favorable prior year loss development across all our Non-life subsegments with the exception of Catastrophe, where we experienced deterioration on one account related to the New Zealand earthquake events. The

unallocated 2011 Catastrophe IBNR stands at $20 million at quarter end as we used $20 million during the quarter specifically against this one account.

As we discussed last quarter, we have the remaining unallocated 2011 Catastrophe IBNR earmarked for the New Zealand earthquake events.

In our other Non-life subsegments, we continue to observe favorable development across most lines of business. The distribution of current quarter favorable prior year development was 34% from short tail lines, 27% from medium tail lines, and 39% from long tail lines. The most significant contributors to short tail development were Global Specialty and P&C property. Medium tail development was led by contributions from aviation and marine and energy offshore in our Global Specialty subsegment, while long tail lines were led by Specialty Casualty in North America. You can find the distribution of prior year reserve development by subsegment in our financial supplement.

Now I'd like to take you through our Non-life subsegment results. In our North America subsegment, net premiums written and earned were up 9% and 10%, respectively, driven primarily by new business written at January 1 in our agriculture, multiline and mortgage guarantee lines, and upper premium adjustments in casualty. These increases were partially offset by lower property writings.

The technical ratio for the quarter was 87.6% and compares to the 90.7% we reported in the prior year quarter. Favorable prior year reserve development was 17.3 points this quarter.

For the first half of 2014, the technical ratio was 90.2% compared to the 92.1% we reported in the prior period.

Before we move on to our other Non-life subsegment results, I'd like to update you on where we have our 2014 U.S. multi-peril crop portfolio booked as of quarter end. While yields appear to be on track for a good result this year, commodity prices are down. Assuming these conditions continue to prevail, we expect our earned -- we expect to earn price margins this year. Although, as we saw last year, things can change. Given the continued uncertainty around the growing season and commodity prices, we have booked the portfolio at a net breakeven result for the quarter and year-to-date.

As a reminder, our full underwriting year 2014 U.S. MPCI net premium is currently estimated to be about $380 million.

Moving on to our Global P&C subsegment, net premiums written decreased 7%, while net premiums earned increased 9% compared to the prior year quarter. The primary driver of the decrease in net premiums written was downward premium adjustments in the motor line and cancellations in property due to pricing. These decreases were partially offset by new motor business. The increase in net premiums earned was driven by the earning of motor business written in 2013.

The technical ratio for the quarter was 82.5% and includes 16.2 points of favorable prior year reserve development. The technical ratio was 82.8% in the comparable prior year quarter. Year-to-date 2014, the technical ratio is 82.5%.

In our Global Specialty subsegment, we saw a growth in net premiums written and earned of 4% and 8%, respectively, driven primarily by new business originated in prior periods in our Specialty Casualty, multiline and agriculture lines. The technical ratio for the quarter was 90.7% and includes 17.1 points of favorable prior year reserve development. As Costas mentioned, we experienced a higher level of midsized non-Catastrophe loss activity in this subsegment this quarter. Given the nature of the risks we write in these many Specialty lines, we expect this to occur from time to time. We experienced elevated, midsized loss activity in our Specialty Casualty, onshore energy, space and aviation, and marine and offshore energy lines. All in, this midsized loss activity was about $40 million to $50 million above our normal expectations. However, low attritional loss activity had a partially offsetting impact. Year-to-date 2014 net premiums earned are up 7% over the prior year period to $761 million, and the half-year technical ratio was 85.3%.

In our Catastrophe subsegment, net premiums written and earned were down 8% and 23%, respectively, compared to the prior year quarter. These decreases are primarily the result of reinstatement premiums we booked in the prior year quarter, related to the flood activity in Europe and Canada, which totaled $15 million. New business written in the quarter was nearly entirely offset by cancellations due to continued pricing pressure in nearly all regions.

As a reminder, we earned our Catastrophe premiums proportional to risk, which means there is significant seasonality due to wind premiums. The second quarter is our lowest Catastrophe earned premium of the year, and we expect third quarter earned premium will be about 2.5x that of the second quarter. The technical ratio for the quarter was 46.4%. This reflects a low level of current quarter Catastrophe loss activity, as well as the development on the prior year event I covered earlier.

Year-to-date, our Catastrophe subsegment technical ratio was 10.5%, contributing $124 million of technical income. Net premiums written and earned in our Life and Health segment for the quarter were up 29% from the prior year quarter. These increases were primarily due to increased PartnerRe Health premiums in the current year quarter. The Life and Health allocated underwriting result, which includes allocated investment income and operating expenses, was $18 million this quarter, essentially flat to the result we posted in the prior year quarter. Favorable prior year reserve development was $6 million this quarter compared to $12 million in the prior year quarter. Year-to-date, net premiums written were up 20%.

Turning to the financial markets. Longer-term risk free rates decreased slightly, equity markets rallied and credit spreads continued to tighten a bit. Against this backdrop, our investment portfolio performed very well. Overall, investments contributed $290 million to our second quarter pretax income, excluding investment income allocated to our Life segment. Of this amount, $119 million was included in pretax operating income, and net gains of $171 million were included in pretax nonoperating income.

Our total portfolio return this quarter was 2.0% on a local currency basis. Net investment income for the quarter was $130 million, up from the $117 million we reported in the first quarter of 2014. While we're pleased with this increase, it includes several one-off items we do not expect to recur, these one-off items totaled about $10 million. Our portfolio investment income rate continues to exceed our portfolio yield, so we expect investment income to decrease going forward.

Our portfolio duration was 3.4 years at quarter end, up from the 3.2 years we reported at the end of the first quarter of 2014. We remained slightly short of our neutral liability duration of 3.6 years. Operating expenses this quarter were $107 million, down slightly from the $111 million we reported in the first quarter of 2014. The current quarter includes about $2 million of restructuring charges associated with office space downsizing.

The effective tax rates this quarter were 16% on operating income and 28% on nonoperating income. These rates reflect the geographies where profits and losses emerged.

In addition, permanent adjustments added about 2 points to the effective operating rate this quarter. Comprehensive income for the quarter was $289 million reflecting our net income for the quarter of $272 million and an increase in our currency translation account due to strengthening of the Canadian dollar against the U.S. dollar.

Operating cash flow was $142 million this quarter, compared to $160 million we reported in the comparable prior year quarter, reflecting higher underwriting cash flows, partially offset by higher taxes and FX. The time value of money in our Non-life reserves was $622 million at quarter end. We calculate this using the risk-free rates for each major reserving currency. This is a slight decrease from the $665 million we reported at the end of the first quarter of 2014, reflecting slightly lower risk-free rates. Total capital at quarter end was $7.7 billion, up from the $7.6 billion we reported at the end of the first quarter. The increase was driven by comprehensive income outpacing share repurchases and dividend activity during the quarter. During the second quarter, we repurchased a total of 1.3 million shares at a total cost of $133 million during the quarter. This represents about an 8% discount to first quarter end diluted book value per share. If current valuations persist, we expect to continue to repurchase shares, albeit likely at a slower pace during win season. Now I'll hand the call back to Costas to update you on how we view current markets.

Constantinos Miranthis

Thanks, Bill. As I said in my opening remarks, market conditions continue to be challenging. I don't expect this to change in the near term. At the June-July renewals, we saw similar dynamics to those we had in the last few major renewals. So in essence, we continue long and downward trend. With excess reinsurance capacity, conditions are increasingly competitive, not on pricing, but also on terms. While the third quarter isn't a big renewal quarter for us, we renewed less than 10% of our portfolio on July 1, we see a "broad" cross-section of the business, so we can't form views and trends. Profitability is eroding broadly, although there continued to be variations by lines. We saw many treaties where we decided to not renew and even more where we reduced participations. On the other hand, while opportunities for new business still exist, principally as seen taken the opportunity of available capacity to upgrade the quality of the patents [ph], they are more limited. Overall, we wrote less premium volume on 71 [ph]. We expect premium to be down a single-digit number on the renewable base. In the U.S. for both standard and Specialty business, we have experienced increasingly aggressive request for commissions on proportional business. While the market has generally resisted the extreme terms, overall, ceding commissions are increasing.

In addition, we are increasingly seeing an erosion of terms and conditions. In many cases where we have to exit or decline business, the reason was not only, or even not mainly price, but also coverage terms. This is against the backdrop of primary rate improvement that continues to outpace trend. Although that is also moderating. For cat specifically, we saw overall risk-adjusted rate declines of 10% to 20%, which was in line with what we expected. The abundance of cat capacity is driving the way to competition. The nontraditional market, the collateralized market in particular, is influencing this. Although for the market to clear, traditional market capacity is required. I have commented before, as rates were declining, that competition was broadly responsible and driven mainly by lower targeted returns by some participants.

However, it's now increasingly apparent to me that at present, not only do we have some markets that are prepared to rank cat business at returns that we would find unattractive, but also, we are seeing increasingly a number of companies that are not interested in understanding the true underlying risk and pay little attention to such things beyond a cautionary [ph] regard to vendor model ranks.

In international markets, standard international P&C is somewhat more stable, although we are seeing negative trends in terms and conditions there, too. Capacity is abundant and with a relative benign loss experience, commissions on proportional business are also increasing. In some cases, this can be accommodated as loss trends internationally have been well below expectations, but that is not always the case. In addition, with growth in mature markets outside the U.S. relatively anemic, cedants are often choosing to retain more business. This is the case for most standard P&C lines in mature markets. Emerging markets are more mixed and present some opportunities, but are also competitive. In both mature and emerging markets, selection of risk is key in this environment.

Global Specialty lines. In Global Specialty lines, we write -- this is where we write most -- a lot of lines of business. Margins overall continue to be positive and acceptable, but the pace of deterioration is picking up, and I would not be surprised that at the current pace by December, we'll see terms that are difficult to accept in some lines. There are some bright spots: aviation, where I expect the spate of recent high-profile losses to lead to affirming the market; credit, where loss experience is good, and where cedants tend to take a longer-term view; and agriculture, where we're seeing increasing demand for the specialty skills we can bring to cedants. Overall, though, for most lines, I expect continued price declines. Specialty Lines continue to remain healthier and provide more opportunities than standard P&C, and ceder franchise in our long-standing relationships with clients continue to differentiate us. Also, this is an area of a portfolio where we can improve risk-adjusted returns through reselection and practical capital allocation, given the very diverse nature and cyclicality of the lines of business in this portfolio.

Our Life and Health business continues to grow, driven mainly by the health business we acquired through Presidio, but also by increasing share of existing mortality and longevity clients. Health is having an excellent year so far, and the niche specialty skills of our team are an asset in this fast-changing environment.

In summary, reinsurance market conditions are tough. Having said that, in many areas, the PartnerRe franchise has strong balance sheet and our expertise differentiate us. We continue to be a preferred market for many of our clients, and this provides us with opportunities for growth, both in new product areas and by taking shares as clients consolidate the patents. While we have always taken a somewhat longer-term view than others on what profitability means, the present rate environment is limiting opportunities on traditional lines. However, I'm confident of our ability to find avenues us to redeploy capital and leverage considerable skill sets for accessing and evaluating risks in other ways. This, together with active capital management, will allow us to fulfill our goal of generating a lot of value for our shareholders. We're now happy to take questions you may have. And operator, we're ready for our first question.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Vinay Misquith with Evercore Partners.

Vinay Misquith - Evercore Partners Inc., Research Division

The first question is just a numbers one on the net investment income. I believe you said it was a $10 million benefit, so that's of the $130 million, correct? If you could help me understand so was that in equities or fixed income, what is the source of that?

William R. Babcock

We had about -- this is Bill. We had roughly $4 million, $5 million related to a tips adjustment that we don't expect to recur. That was in fixed income. We had about $3 million or so in equities related to a nonrecurring dividend. And the other adjustment, the balance of that is in fixed income as well.

Vinay Misquith - Evercore Partners Inc., Research Division

Sure. Now for the dividends, isn't the second quarter usually a quarter where you get higher dividends on a normalized basis? So should we expect that go down maybe in the third, fourth quarter, but again have high dividends again in the second quarter for next year?

William R. Babcock

Yes, most of our dividend fluctuation comes from emerging market funds that we're in. Those are typically semiannual distributions, and they're hard to predict what those numbers are going to be.

Vinay Misquith - Evercore Partners Inc., Research Division

Sure, fair enough. All right. That's helpful. The second question, for Costas, I don't think I heard you said what the priced ROE for the business was this year.

Constantinos Miranthis

It's a range. Currently, the cat business is pricing close to a double digit return. And the rest of our business in aggregate is mid-single digit return.

Vinay Misquith - Evercore Partners Inc., Research Division

So on an aggregate basis, around -- and because in the past you said about 8% to 9%. Is it sort of heading towards the lower end of the range, you would think?

Constantinos Miranthis

Yes.

Vinay Misquith - Evercore Partners Inc., Research Division

Okay, that's helpful. All right. And the last question on the MPCI business, you said that you recorded it at breakeven this quarter, and I believe year-to-date. Could you remind me what do you normally book it as on a normalized basis?

William R. Babcock

Last year, year-to-date, we had it booked on a net basis at a 96 technical.

Vinay Misquith - Evercore Partners Inc., Research Division

So was last year a normal year, you would think?

William R. Babcock

Well, no. Actually, we took a different reserving approach this year, which is to not record net profits on that book until later in the year, just given the uncertainty.

Constantinos Miranthis

And obviously, this is a reflection of how well the year is going or otherwise, it's just a different approach on when we will recognize profits on that business. What Bill is saying is we've shifted the recognition of profit and loss towards the second half of the year in this business.

William R. Babcock

I should also clarify, when we did that, most of that adjustment is actually is sitting in commissions. So the acquisition ratio is being impacted by that booking, less so than the loss ratio. So you may have noticed the acquisition ratio North America is up quite a bit, and actually, even shows up in the overall. Some of that's due to the way we've tempered that ag profit coming in through the commission line.

Vinay Misquith - Evercore Partners Inc., Research Division

So fair enough. So is all that adjustment just down in the second quarter?

William R. Babcock

No, we didn't book any net profit in the first quarter either.

Operator

Next, we'll move to Josh Shanker with Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

I want to talk a little about the attritional loss activity. In general, it seems like primaries are keeping more risk, but obviously, you would get a hold of that risk in a quota share arrangements. Is it possible that some of the increased loss activity is related to the changing habits of how primaries are buying reinsurance?

Constantinos Miranthis

Josh, this is Costas. Not at all. I think, the, first of all, attritional losses, what we call attritional losses were actually very favorable during the quarter. When we look at losses, we look at it broadly in 3 packets. One is attritional losses, these are run-of-the-mill losses we expect every quarter and they make up the bulk of our loss ratios. Second is large losses. These are losses that display some volatility. They can be anywhere from $8 million to $35 million, or even high at $50 million each. We don't expect -- they don't happen frequently, but we expect some every quarter. And third, Catastrophe losses, which are typically weather-related events, it could be other events, but you tend to hear about them because they get picked up by the news. We should know that often we have some of these midsized losses, which are bigger than Catastrophe losses in our portfolio. And this quarter, it was a -- the middle section, the non-Catastrophe large losses that were above expectations, we didn't have any cat losses or we have a very modest cat losses. We have some cat loss, but it was a relatively modest cat loss quarter. Our attritional losses, the underlying rate of portfolio was actually quite good. But we had a spate of somewhat unrelated large losses. We had an energy loss. In Russia, a refinery exploded, and it was about $25 million. We've had a pharma loss and satellite loss. They came -- they were unrelated losses, and they just happened this quarter. There is some volatility here quarter-to-quarters. Some quarters we have none. And typically, we have something every quarter, and this was above average by about $40 million to $50 million, which a little bit on the unusual side. But I don't see anything particularly systematic here. And certainly, nothing to do with cedant behavior.

Joshua D. Shanker - Deutsche Bank AG, Research Division

And so just to close the loop, you're confident that if you replayed this quarter through a prior year's book of business, the loss activity will look similar whether it was in '12 or '13.

Constantinos Miranthis

It depends what activity you mean. I mean, the attritional loss activity, as I said, looks actually...

Joshua D. Shanker - Deutsche Bank AG, Research Division

The unique events, I guess,

which would seem low to me and you're not the only one who's seen them, so I'm just understand how the industry's evolving?

Constantinos Miranthis

Yes. I don't see it would have been any different. Could have been higher in some cases. The size of this glide activity is, as I said, reflects the line sizes that you write. So I don't think there's anything particular there.

Operator

Next we'll move to Amit Kumar with Macquarie.

Amit Kumar - Macquarie Research

I guess, one quick follow-up going back to the previous question. You talked about it was $40 million to $50 million above normal expectations, I think what would be helpful is if you could expand on what exactly are normal expectations?

Constantinos Miranthis

Think about it, if we add everything, I mean, it depends on where you have the catalyst point about half whether you determine large. But if we

think about large, somewhere around the $8 million to $10 million, you should expect that in a normal quarter, we could have $25 million, $30 million losses, maybe a little more. But on most quarters we'd be below that, and punctured by 1 or 2 quarters, that could come above that. So the average will be a little bit higher than the median.

Amit Kumar - Macquarie Research

That's helpful. So if you x out all the noise this quarter versus Q2 2013, what would you say your AYLR looks like?

Constantinos Miranthis

I'm sorry, what will we -- say what?

Amit Kumar - Macquarie Research

Your accident to your loss ratio, if you x out the non-notable losses for Q2 2014, as well as Q2 2013, would you say that it's remained the same or has it deteriorated a bit?

William R. Babcock

I have done the math. I can give you a few numbers for you to do it. On our quarter call a year ago, we said that our Specialty subsegment, which is the majority of the -- this large loss activity that we're seeing, was about $20 million to $25 million higher than what we normally expect. And now we're telling you that number's probably in Specialty somewhere around $40 million. So you can do the math and back, and figure out the delta.

Constantinos Miranthis

So the last quarter -- it so happened last quarter the second quarter was high instance of large losses, but not as high as this year. And there's nothing particular to it, I mean, the first quarter, both this year and last year, the was second quarter and third year -- third quarter last quarter was very good again. So within a quarter, you should expect some volatility in those losses.

Amit Kumar - Macquarie Research

I guess, most of us are grappling if this is actually the new normal, but I guess, we'll find out down the road. The only other question I have is on the Q3 events to date. Can you sort of talk about what exposure you might have to the recent Malaysian Airlines' loss, as well as some other larger losses Q3 to date?

Constantinos Miranthis

Sure. The first quarter, we told you, I believe, that the -- our exposure to the aircraft that went down there was $7 million to $8 million net to us. And we expect that this current event would be of approximately the same size. I say that because much of our -- we buy retrocessional accounts that would have a reasonable amount of confidence on what the net loss would be, even if there is variation on the growth side. There's been a number of other smaller losses. I don't have precise details from every one of them, but currently, my expectations for the ones I have some information are low-single digit numbers.

Operator

Next we'll move to Michael Nannizzi with Goldman Sachs.

Michael Steven Nannizzi - Goldman Sachs Group Inc., Research Division

Costas, you mentioned ceding commissions. I was just curious, where might we see that sort of flow through your model? And then, I guess, for Bill, is there anything other than the crop items that you talked about that impacted the expense ratio.

Constantinos Miranthis

Do you want to take it?

William R. Babcock

You mean the acquisition expense ratio? Yes, I mean, no one-off items I can think of that are material that impacted it other than crop. Yes, I'd say, in general, if you're looking at this quarter over a year ago, you will see an uptick really related to some of the pricing pressure that you heard Costas talk about. But no other distorting item that I can -- that comes to mind.

Michael Steven Nannizzi - Goldman Sachs Group Inc., Research Division

And is that manifesting through just sort of numerator denominator? Just somewhat, it's fixed cost? Or is that through ceding commissions or other variable costs?

William R. Babcock

Well, the only thing we have in the acquisition cost is really commissions and brokerage. And it's really ceding commissions that are driving that delta other than the ag adjustment.

Michael Steven Nannizzi - Goldman Sachs Group Inc., Research Division

Okay, got it. Okay, that answers my questions then. And then was there -- in terms of the Global Specialty business, was there anything in there -- I mean, it seems like it might have been some of those large losses you mentioned or unusual losses might have been in there, just a technical lift it a bit. Just trying to understand what kind of what happened there after something went off?

William R. Babcock

Yes, it's that large loss activity. And as I said, something like close to $40 million of the $40 million to $50 million that we said, above average is in that segment.

Constantinos Miranthis

When we talk about large individual losses, the vast majority of them would tend to be in the Specialty Lines.

Michael Steven Nannizzi - Goldman Sachs Group Inc., Research Division

Got it. Okay, great. And then, I mean, I guess, kind of looking out here in terms of whether it's expense ratio or the loss ratio, do you see -- what levers do you see to be able -- that you can pull to sort of offset the impact of lower pricing in cat and other areas? I mean, I think in the past, we've talked about credit reinsurance. I mean, is that an area where you see an opportunity to offset margin pressure or earnings pressure? Or are there other businesses specifically that you're looking to, to kind of release some of that pressure?

Constantinos Miranthis

We continue to see some opportunities in the financial lines and no mortgage business. As I said, some of the Specialty Lines, it feels that this cycle may have bottomed out, and we would make--we may get some increases there. But overall, there's more pressure particularly on the property and cat rates and opportunities. We also see opportunities on the health side, where I think that's, as I mentioned earlier, we've had very good growth this year and we're getting good margins and margins that are not correlated with the rest of our business. So we'll be focusing attention on those lines of business and to try and expand that. While if we find terms unacceptable in the standard lines, we'll redeploy capital. And then if we cannot deploy all of it, return it.

Operator

Next we'll move to Jay Cohen with Bank of America.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Two questions. The first is just to follow up on this -- on the acquisition expense ratio. And you mentioned, Bill, that the way you're booking the crop business changes that. Does that suggest that assuming the business is profitable for the year, that in the second half of the year that acquisition expense ratio would normalize to some extent?

William R. Babcock

Yes. Again, what ends up happening is when the loss ratio changes because of the -- when we finally true this up, what I'd point you to on the ag, and we'll give the numbers each quarter, it's really about the technical ratio. We've got some geography differences year-to-year on this and loss versus commission. So it's really the technical ratio and ag that we'll keep you updated on.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Okay. Just when we model both lines, I'm just -- the acquisition number should come down, loss ratio should get better as well, assuming the business stays is profitable as you expect.

William R. Babcock

Likely. If it gets very profitable, obviously, it drives a higher ceding commission, and maybe it ends up being at the commission level we booked at. So it's a little hard to tell at this point.

Jay Adam Cohen - BofA Merrill Lynch, Research Division

Got it. I got it. Secondly, it doesn't look like your ceded reinsurance strategy has changed all that dramatically despite the fact that there is more capacity if you wanted to lay off some risk. I'm wondering what you're thinking about as you look at outward reinsurance.

Constantinos Miranthis

Jay, this is Costas. We told you in the first quarter that we had bought some additional cover on Catastrophe business. And going forward -- so that covers us for this year as we're thinking and planning for next year, we will look at opportunities and we may cede more business. You don't necessarily see it in the premium because the nature of this cover, especially when it's not proportional, it doesn't have a huge impact on premium. We will also review retrocession purchases on other lines of business and see if there are any opportunities there for us, too. But we are increasingly looking at what is available for us to protect the capital asset tail.

Operator

Next we'll move to Kai Pan with Morgan Stanley.

Kai Pan - Morgan Stanley, Research Division

First, a quick quite like a number of questions. You mentioned there were some modest cat losses in the quarter. Could you quantify that by segment?

Constantinos Miranthis

Cat losses, we did -- we had some storms in Germany. Although, there were about $10 million some -- a little bit of noise in Japan for some snow and rain events. So there's about $5 million, $6 million. There was nothing really notable, but when you add up these little pieces, they probably add up to somewhere north of $20 million.

Kai Pan - Morgan Stanley, Research Division

Those are mostly in the Catastrophe segments?

Constantinos Miranthis

It's spread across different segments. In fact, some of it in the Catastrophe, some in other segments. There's nothing that's worth mentioning individually, but you should realize those events are there that you don't get to hear in the national press, but cause losses.

Kai Pan - Morgan Stanley, Research Division

Sure. Secondly, you mentioned there were some -- I mean, so-called naive competitor in the probably cat areas. And so are those from the traditional markets or from -- more from the sort of [indiscernible] capital market, and if you can offer any sort of insight going into sort of some of next year at January renewal, what the pricing could look like if we don't have some major catastrophe in the second half?

Constantinos Miranthis

To the first part of your question, I think the things are got in common, people that are writing business to those for their own account or for someone else, whether it's a traditional market that's writing for -- to sit to a vehicle or whether it's a collateralized market-wide in directory, in general, and that is not true of everybody. And again, I will, caveat that there were some very responsible players there. There's a number of players that's just right with a "take them all out of the box," write business and fees. And that's what I was referring that some of what we see is just get the business without paying too much attention to the rates. When you're writing for fees, there's always that incentive. Pricing, I don't know. My expectation is if you don't have a catalyst, you may see additional pressure. Although, I'm beginning to feel that there were a number of deals where they asked was not met. This time, they may had come back to complete the slips. So I don't know how far away we are from the bottom of this market. We're certainly getting to the level where returns are being -- are facing more pressure makes that business unattractive to us. We will -- we're not here to write business -- a cat business at low single-digit returns. And if some markets want to write that, so be it. That's why I said I don't believe that we're far away from finding the bottom, maybe a soft bottom. And I have limited data on this on the basis that some feels that and some asks in the market did not get done.

Kai Pan - Morgan Stanley, Research Division

That's great. My last question, is really a little bit longer term, if you step back, do you feel look at the reinsurance market -- sorry, in the long run, now you're facing pricing pressure and also your clients are ceding less to the reinsurance market. I just wonder, are you thinking about somehow getting closer to the end user, essentially becoming more insurance player? I guess, your procedure acquisition is part of that, but do you see that you can expand into the primary reinsurance market in your sort of traditional market or competing with your clients?

Constantinos Miranthis

We have a number of initiatives that are already getting us a little closer to the primary market, mainly through initiating things like programs operation, at health, as I said, [indiscernible] primary, a lot of the facultative business is primary business. But we tend to stay away from the primary layers, where a number of our clients compete. We do have primary papers, so we have the capacity to write business especially to the extent that it comes on a wholesale basis. And that is something that we're constantly reviewing.

Kai Pan - Morgan Stanley, Research Division

Great. Are you considering sort of, like, grow the business through acquisitions?

Constantinos Miranthis

That's always on the table, but I'm not going to make any comments on that.

Operator

Next we'll move to Meyer Shields with Keefe, Bruyette, & Woods.

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

Costas, do you have any thoughts on why the attritional loss ratio was low in the quarter? Is there anything broad going on there?

Constantinos Miranthis

Sorry, why the attritional ratio was what?

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

Was low.

Constantinos Miranthis

Low? No, it wasn't much lower, it was lower this quarter. There's a -- there's no reason. I mean, one thing that is happening and I have noticed and this is outside the U.S., loss transacting very low. And that may be related to economic activity. So when we price for loss through an outside of the U.S., on standard P&C lines, to a lesser extent, on Specialty Lines, they have been lower than what we expected. But I don't have any particular reason. It may change next quarter. The same way I have no explanation for you why 3 events happen in the same quarter and they're not evenly spread throughout the year.

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

Okay. Now that's helpful. The -- I know you touched on this before with the acquisition ratio, but I'm trying to understand if it's all ceding commission-driven, why Global P&C rose 800 basis points year-over-year in the second quarter after not moving much in the first quarter?

William R. Babcock

Yes. Well, part of it, we had favorable adjustments in the second quarter of last year that drove that ratio down. So while it's true that there's a pretty big delta part of that because last -- the prior quarter was lower than normal.

Larry Greenberg - Janney Montgomery Scott LLC, Research Division

Okay. But for -- as long the current state persists, second quarter '14 is a good reflection of reality?

William R. Babcock

I think -- so I think it is. I can't think of any large distorting items in it.

Operator

Next we'll move to Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank, Research Division

On the Life insurance segment, the A&H transaction you had in the quarter, you mentioned though, was that a onetime in nature? Is that something that's kind of a continuing transaction and the principal reason for the big growth?

Constantinos Miranthis

It's not -- we did have a transaction in the quarter. This is the purchase that was made at the end of 2012. That was managing agent and we said at that time that this business will convert to our own paper. And that's what you gradually seeing.

Brian Meredith - UBS Investment Bank, Research Division

So it's [indiscernible]...

Constantinos Miranthis

We expect that it would be largely complete by the year end. And so the growth that you see comes from 2 sources. One is converting business to our own paper, and second, that business is growing. I mean, we're experiencing healthy demand for health coverage for our products.

Brian Meredith - UBS Investment Bank, Research Division

Got you. And then I'm just curious, I mean you talked about kind of where business is from a return perspective in the P&C side, on your Life business, what was the return on allocated capital looking like?

Constantinos Miranthis

It depends how much capital you allocate to the Life business. But based on where we look at it, it's about 8% Life. And its shelf is looking better right now, although with some uncertainty about the future.

Operator

Next we'll move to Mike Zaremski with Balyasny.

Michael Zaremski

Two quick ones. One, I think there was mention of adverse prior quarter development in Specialty, if you can touch on that. And Bill, on the tax rate, you talked about some permanent adjustments this quarter. Does that mean, going forward, we should also think about the tax rate being a little higher? Or that was just permanent for this quarter?

William R. Babcock

The -- I'll start with the tax one. No, the permanent adjustment is just -- you shouldn't expect that to recur. They are just onetime items that affect our expected tax rate. The other thing on tax I'd point out is, because of the seasonality of our cat premium, there is some seasonality on an expected basis to the tax rate as well. I mean, I've mentioned that our premium in the third quarter is 2.5x -- cat premium is 2.5x in the third quarter as what it was in the second quarter. So that adds a little bit of seasonality to the taxes as well. On the prior quarter development, it's really related to a number of adjustments on engineering losses that we had from the first quarter where we saw some things going up at engineering, energy and marine. So -- and again, none of the numbers are really large, but a few small ones aggregate to something that it's a couple million.

Operator

Next we'll move to Charles Sebaski with BMO Capital Markets.

Charles Sebaski

I have a follow-up on the Life and the health business, I guess, specifically you're transitioning over. And then, I guess, I would've thought that the technical ratio and the technical result would have moved up a bit in accordance with some of the growth, and it seems to be line with the year ago and just wondering how that Presidio acquisition and transition should earn in and think about that?

William R. Babcock

Part of the answer, I think, is the easy part is, the prior year development when you compare it quarter-to-quarter, I believe it's about $6 million lower this quarter than it was in the comparable prior year quarter. And then from a profitability standpoint, there were some small adjustments in our short-term mortality book, but nothing large.

Constantinos Miranthis

And specifically on the health profitability and margins are dependent, to some extent, on product mix and the way the portfolio is evolving, the profitability is relatively constant.

Charles Sebaski

Okay. And Costas, I guess, a question about the agriculture. I know earlier in the call, you mentioned agriculture is one of the opportunities you saw where there's some demand from clients, wanting some expertise. But yet, you discussed it being booked at a net even result. And I guess, how does the -- how do those 2 things work out?

Constantinos Miranthis

Thanks for asking that question because I may have answered might have misled you. When I was telling you about agriculture earlier an opportunity, I was referring out to agriculture outside the U.S. When Bill was referring to and quoting numbers on agriculture, he was referring specifically to U.S. and specifically the MPCI line. So what are the opportunities outside the U.S.? We've seen a number of countries, some of them developing countries, where we have number of cedants that are thinking about schemes to provide agricultural coverage. We have the expertise, and we have the know-how to structure such a scheme. In return of which, we get to assume part of the rates, but not all of the rates, but significant portion of the rates as we want. So the opportunities that I was referring to, were principally non-U.S.

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

That makes sense. If I could just have one more. I know you mentioned terms and conditions being one of the real factors in the marketplace today outside of just price. And curious, if any of the terms besides ceding commission that you'd point to and curious what the push is for multi-period, multi-year transactions going on in the marketplace today.

Constantinos Miranthis

There is a push for multi-period, multi-year transactions then. Per se, if something is multi-year, it's 2 or 3 years. It's not necessarily [indiscernible] but especially we do expect terms to deteriorate from there on. The thing that gives me more worry is expansion in coverage terms, and language that allows aggregation of losses or inclusion of losses within the 3 days. Those are the things that we find more difficult to deal with as opposed to differences on how reinstatement premiums get priced. We can price that. Things that can be modeled easily can be priced, and we'll kind of adjust the risk prices. And when we quote terms to you a price variation, that's included in. The thing that's more difficult to include is erosion in the scope of coverage.

Operator

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

Clifford H. Gallant - Nomura Holdings, Inc.

I'm sorry. My questions have been answered.

Operator

At this time, we have no further questions.

Constantinos Miranthis

Well, thank you, everybody, and if there's no more questions, that's been -- concludes our second quarter call. Thank you for joining us today and for your continued interest in PartnerRe. We look forward to speaking with you again next quarter.

Operator

Thank you. This does conclude today's conference. You may disconnect at any time, and have a great day.

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