Executives
Costas Miranthis - Chief Executive Officer, President, Director, Member of Risk & Finance Committee, Member of Executive Committee and Chief Executive Officer of Partner Reinsurance Europe Limited
Robin Sidders - Director, IR
William Babcock - Chief Financial Officer, Executive Vice President and Member of Executive Committee
Analysts
Jay Gelb - Barclays Capital
Dan Farrell - Sterne Agee & Leach Inc.
Gregory Locraft - Morgan Stanley
Ron Bobman - Capital Returns
Cliff Gallant - Keefe, Bruyette, & Woods, Inc.
Brian Meredith - UBS Investment Bank
Matthew Heimermann - JP Morgan Chase & Co
Doug Mewhirter - RBC Capital Markets, LLC
Joshua Shanker - Deutsche Bank AG
PartnerRe (PRE) Q2 2011 Earnings Call August 2, 2011 10:00 AM ET
Operator
[Operator Instructions] If you haven't received a copy of the press release, it is posted on the company's website at www.partnerre.com, or you can call (212) 687-8080 and one will be faxed to you right away. I'll now hand over the conference to Ms. Robin Sidders, Director of Investor Relations at PartnerRe, who will begin the call.
Robin Sidders
Good morning, and welcome to PartnerRe's Second Quarter and Half-Year 2011 Results Conference Call and Webcast. As a reminder, our second quarter 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 an overview of the quarter and then hand the call over to Bill, who will provide more details on the results. Costas will come back at the end of the call to provide additional commentary on the market, and we'll open the call up for 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 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 welcome, everybody to our second quarter results. Once again, the main influence of the quarter was the level of catastrophe activity. We did not have events of the same magnitude as we saw in the first quarter, but the frequency of events caused significant losses during the quarter. As I'm sure you're all aware unusual tornado activity in the U.S., particularly during April and May, caused industry losses estimated to be well in excess of $15 billion. Consistent with our industry position in the U.S. market, we have net losses of around $89 million arising from these events. But it was also an active loss quarter outside the U.S. with wildfires in Canada and major aftershock on June 13 in Christchurch, New Zealand, and several other locally important losses impacting some of our low-layer covers in aggregate contract. We also saw net development of loss estimates relating to first quarter events, driven principally by a revision of our estimates with the New Zealand earthquake following advisors [ph] Late in the quarter from some seasons [ph] To revise their own estimates of alternate loss. These revisions were significantly in excess of their earlier indications. While disappointing, we recognize the specific issues of the claim settlement process, which is complicated due to lack of access to red zone areas and potential uncertainty regarding the extent of coverage offered by the state pool. In addition, the June aftershock, which had a very similar footprint to the February event, and therefore, impacted to a large extent already damaged properties will make apportionment of losses to events more difficult. While clearly the catastrophe activity was above our expectations for the quarter, the remainder of our portfolio continue to perform in line or above our expectations. Losses reported during the quarter remained significantly below expectations, and we saw no evidence of an uptick in loss trends during the quarter. We continue to price and reserve for significant loss trends of longer tail lines but also continue to be surprised by how benign loss experience has been. Our loss reserves in aggregate continue to develop favorably, helped by losses developing below expectations. I will come back in the end and provide some more information on the June and July renewal environment. But before I pass on to Bill, I would like to comment on the overall catastrophe limits we deploy.
It is now about a year since we've brought the underwriting teams of PartnerRe and PARIS RE together. During this period, we have worked to further ensure a smooth and transparent transition for our clients to ensure that the total limits deployed in any single zone within a maximum risk appetite and finally, to optimize the shape of the portfolio by adjusting the exposures in particular [indiscernible] zones and specific players. As a result of these actions, our deployed limits are approximately 20% lower than last year in top [ph] zones with greater reductions in some of the smaller zones. We continuously seek to optimize the distribution of the CAT exposures in our portfolio, and our risk appetite will be driven by the price relative to risk in each zone, with always within a disciplined risk management framework. With that, I'll pass it to Bill and I'll come back at the end of the call to talk about the renewal.
William Babcock
Thank you, Costas, and good morning, everyone. As Costas noted, our results for the quarter were impacted by meaningful catastrophe losses this quarter, which we preannounced last week. Reflecting and perhaps despite these events, we produced operating earnings for the quarter of $67 million or $0.98 per diluted share compared with $142 million or $1.80 per diluted share in the prior-year quarter. Our non-catastrophe exposed business continued to perform strongly across nearly all lines this quarter, and our investment portfolio performed as we expected given our current positioning and market conditions. Second quarter annualized operating ROE was 4.2% compared with 8.5% in the prior-year quarter. And diluted book value per share grew 1.5% during the quarter and stands at $83.71 at quarter end.
Second quarter Non-Life net premiums written totaled $857 million, down 13% from the prior-year quarter on a constant FX basis, while net premiums earned were $905 million, a decrease of 7% from the prior-year quarter, again, on a constant FX basis. Decreases were reported in each of our Non-Life subsegments with the exception of our North American subsegment, which benefited from increased writings in our agricultural line. The technical ratio for the quarter was 93.8%, up 12.8 points year-over-year and includes 20.2 points of losses related to current quarter catastrophes and net unfavorable development on first quarter catastrophe loss estimates. Development on the prior-quarter catastrophes was primarily related to an increase in our loss estimates of the New Zealand earthquake which occurred in February 2011 Costas previously mentioned. The higher technical ratio and a lower earned premium base resulted in technical income of $56 million, a decrease of $120 million compared to the prior-year quarter. Net favorable development on prior-year Non-Life reserves continue to contribute positively to operating earnings and totaled $161 million this quarter, up from the $121 million we recorded in the second quarter of 2010.
Turning to the details of our subsegment results. Our North America subsegment reported premium increases of 17% on both the written and earned basis during the quarter. The increase in premiums was primarily due to increased agricultural premiums written in the second quarter of 2011, which totaled $55 million compared to the $4 million recorded in the prior-year quarter. As we discussed with you on our call at that time, we recorded a material downward adjustment to our expected 2010 crop year premium during the second quarter of 2010. The decline in the technical result from $38 million or an 82.9% technical ratio in the second quarter of 2010 to $8 million or a technical ratio of 96.9% in the same period of 2011 was primarily due to the net impact of $39 million from the U.S. tornadoes in April and May of 2011. Favorable prior-year reserve development was $55 million compared to the $53 million in the prior-period quarter. Net premiums written and earned in our Global P&C subsegment decreased 41% and 22%, respectively, on a constant FX basis compared to the prior-year quarter. Decreases were seen across all lines of business, most notably in property and motor. The decreases reflect competitive market conditions and nonrenewal of a material portion of the ex-PARIS RE business in prior quarters as well as a reduction in catastrophe exposed property business. To remind you, the majority of the business written in this subsegment is written on a proportional basis. The reduction in bound treaty premiums for prior quarters impacts later quarters as we record proportional premiums as written on a quarterly basis. The technical result of $13 million or 93.5% on a ratio basis is down $16 million from the prior-year quarter, reflecting on the conditions I just mentioned in addressing reduced premium levels. We also continued to experience favorable prior-year loss development in this subsegment, totaling $22 million this quarter compared to the $25 million we recorded in the prior-year quarter. Our Global Specialty subsegment was down 11% on a written basis and down 14% on an earned basis, excluding the favorable impacts of FX. The premium decreases were primarily due to the effects of our decisions in prior quarters to cancel or reduce writings across most lines of business in order to reposition the portfolio following in the integration of PARIS RE, as well as share decreases and increase retentions in engineering and Special Casualty lines. Decreases were partially offset by increased participations in credit and surety, and new facultative business written in our energy and specialty property lines. Technical profits were up to $57 million, reflecting an 83.2% technical ratio from $2 million in the prior-year quarter, driven by a lower level of large losses in the current year quarter. The current year quarter includes $15 million in losses related to the U.S. tornado activity, while the prior-year quarter included $58 million in net losses from the Deepwater Horizon Drilling Platform disaster. Favorable prior-year reserve development totaled $58 million this quarter, up from the $32 million experienced in the prior-year quarter, with favorable development coming from all lines.
Catastrophe net premiums written during the quarter totaled $161 million, down 21% on a constant FX basis. While net premiums earned were $110 million, up 1% on a constant FX basis compared to the prior-year quarter. The decrease in premium written reflects the intentional reduction in certain catastrophe limits and exposures as we have discussed with you on prior calls, as well as the delay in the renewal of catastrophe business in Japan as a result of the earthquake and tsunami during the first quarter. The delay in renewals shifted approximately $23 million in bound premium into the third quarter. Costas will provide you additional details of our 6, 1 and 7, 1 renewals later on this call. We recorded a technical loss of $22 million during the quarter, reflecting a technical ratio of 119.8%. Drivers of this result include $32 million of losses related to second quarter U.S. tornado activity, $62 million related to loss estimate revisions for first quarter catastrophe events, favorable development of prior-year reserves of $26 million and an accumulation of midsize losses, which comprises the difference, including losses impacting aggregate contracts covering risks in Australia and New Zealand and losses related to the Slave Lake wildfire in Canada. Costas mentioned earlier the revision to our prior quarter catastrophe estimates was primarily driven by materially revised cedant information received late this quarter. Our loss estimate related to the first quarter of the Japan earthquake and tsunami remains relatively unchanged from the prior-year quarter, with our overall estimate coming down in an immaterial $5 million.
Before moving on, I'd like to provide you additional information on our favorable prior-year loss development for the quarter, which totaled $161 million. This favorable development exceeded that we recorded in the first quarter of this year. However, after adjusting for changes in prior-year premiums, which you can see on Page 44 of our financial supplement, it was about $11 million less than we recorded in the first quarter. The distribution of the favorable prior-year development during this quarter was 38% on short tail lines, 24% on medium tail lines and 38% on long tail lines. The majority of the short tail favorable development is the result of our current quarter re-estimation of losses associated with prior-year catastrophes and the settlement of the U.S. agriculture 2010 crop year. The driver of our favorable medium tail development was our global trade book -- I'm sorry, trade credit book. You may recall, during and after the peak of the credit crisis, we reserved this book in our view very prudently, considering the significant uncertainty we saw related to potential outcomes. We are seeing this book develop favorably along with most of our other specialty lines, which constitute the majority of our medium tail reserves. On the long tail side, the bulk of the very favorable development is coming from accident years 2003 through 2006, with less than 5% of the favorable long tail development coming from accident years 2009 and 2010. I hope that provides more insight into our favorable reserve development this quarter. Now let's look at our first half results.
Year-to-date 2011, Non-Life net premiums written were $2.1 billion, down 17% on a constant FX basis compared to the first half of 2010. Net earned premiums of $1.8 billion were down 9% on a constant FX basis. The decreases reflect the drivers I previously covered, as well as those covered on last quarter's call. To recap the drivers, they include the integration of the PARIS RE portfolio, which we completed with a finalization of the second quarter 2011 renewals. Planned reductions in certain catastrophe exposures and continued competitive conditions in most markets. The Non-Life technical results for the first half of 2011 was a loss of $704 million compared to the technical profit of $87 million we recorded in the prior half year. Both the current and prior half-year results were driven by catastrophes so let me give you a summary of losses associated with major catastrophe events during the period. For the 6 months in 2011, we recorded net charges totaling $1,204,000,000 in our Non-Life subsegment associated with major events, broken out as follows: The Tohoku earthquake and resulting tsunami of $664 million in our Non-Life segment and an additional $53 million reported in corporate and other and Life segments; $323 million related to the February Littleton earthquake in New Zealand; $86 million related to the second quarter tornado activity in the U.S. We also recorded an additional $3 million of loss in our corporate and other subsegment related to these events. $37 million related to first quarter floods in Australia and $94 million related to an accumulation of losses in Australia and New Zealand, impacting aggregate covers. Non-Life catastrophe and large losses impacting the first half of 2010 totaled $378 million and included losses associated with the earthquake in Chile, Atlantic storm Cynthia [ph] And the Deepwater Horizon Drilling Platform loss. I'd like to remind you that we earn our catastrophe exposed premiums on a seasonal basis, which results in our earning a higher-level of earned premiums during second half of the year. Historically, we have earned more than 60% of our Catastrophe subsegments, annual net premiums written in the second half of the year. We observe favorable development on prior-year reserves of $303 million for the first half of 2011 compared to $214 million in the first half of 2010. Current period favorable development includes $61 million in favorable development related to prior-year catastrophe loss estimates. The favorable prior-year development we continue to observe is largely related to the benign loss trends, which continue in many markets and also reflects our prudent and consistent approach to reserving, which remains unchanged.
Turning to our Life operations. We continue to experience growth this quarter with net premiums written totaling $195 million, up 10% on a constant FX basis compared to the prior year-quarter. On an earned premium basis, premiums totaled $201 million, up 9% over the prior-year quarter again on a constant FX basis. These increases are primarily associated with the growth in our longevity book in 2010. The life allocated underwriting result, which includes allocated investment income and operating expenses, was income of $12 million this quarter as compared to a loss of $13 million in last year's comparable quarter, which was impacted by a $20 million charge we recorded associated with an impaired life annuity treaty. We recorded modest unfavorable development in the quarter of $2 million compared to unfavorable development of $28 million in the prior-year quarter, which was associated with the impaired annuity charge I mentioned and unfavorable mark-to-market impacts associated with our GMDB book. For the first half of 2011, our life premiums written and earned are up 13% and 12%, respectively, on a constant FX basis and reflect interest writings in longevity and traditional mortality offset by the restructuring of an annuity contract to a swap basis. The Life allocated underwriting results for the half year 2011 is $24 million, up $24 million from the result in the same period in 2010. The increase is primarily related to the factors I mentioned discussing our second quarter results. Under corporate and other, in our segment reporting, our investment in capital markets activities contributed $215 million to our second quarter pretax results, excluding investment income allocated to our Life segment. Of this amount, $138 million was included in pretax operating income, a net gain of $77 million and net portfolio gains and losses from equity invested companies was included in pretax net income. During the second quarter, risk free rates dropped, credit spreads widened and equity markets were relatively flat. We achieved a total return of a 1.4% on a local currency basis. For the first half of the year, our combined portfolios generated a total return of 1.8% on a local currency basis. Investment income for the quarter was $158 million, up 3% from the first quarter and down 11% from the prior-year quarter on a constant FX basis. For the half year 2011, investment income was $310 million, down 11% on a constant FX basis, largely reflecting the adverse impact of lower reinvestment rates. Barring a substantial increase in rates, we expect reinvestment rates to continue to be a drag on investment income as our portfolio yield now stands nearly 100 basis points below reinvestment rates. This gap widened some this quarter as the drop in risk-free rates more than offset the widening credit spreads. Please refer to our financial supplement for additional details on our investment portfolio. Operating expenses for the quarter were $114 million compared to $104 million and $160 million in the first quarter of 2011 and the second quarter of 2010, respectively. Lower first quarter 2011 expenses are primarily the result of adjustments to year-end 2010 personnel related accruals. The expense figure for the second quarter of 2010 as well as the first half of 2010 was significantly impacted by expenses associated with our acquisition of PARIS RE and the voluntary leaving plan. You will find details regarding integration related expenses impacting our results in our financial supplement. The effective tax rate on operating income for the quarter was 14%, while nonoperating effective rate was 44%. For the half year, our operating effective rate was negative 3%, while our nonoperating rate was negative 26%. Our operating and nonoperating effective tax rates are heavily dependent on geographies, where profits and losses emerge on both an underwriting and investment basis and are also impacted by FX. Comprehensive income for the quarter was $129 million, which was $5 million higher than net income, primarily as a result of an increase in our currency translation account during the quarter. Operating cash flow remained strong at $256 million for the quarter, up 73% from $148 million we reported in the comparative prior-year quarter, on lower taxes and FX and higher underwriting cash flows, partially offset by modestly lower net investment cash flows. On a year-to-date basis, GAAP reported cash flow is $742 million compared to $561 million recorded in the comparable prior half year. As mentioned on our first quarter call, this increase is primarily the result of the novation of certain reinsurance agreements associated with our PARIS RE acquisition, which released assets of approximately $265 million from the funds held directly managed portfolio. These novations do not diminish the protection provided under the reserve guarantee we have from AXA on certain legacy PARIS RE reinsurance exposures. Excluding the impact of this release of assets, underwriting cash flows were lower than the comparable period due to lower premium receipts across most Non-Life subsegments.
Turning to the balance sheet. Total investments, cash and the directly managed funds withheld account increased to $18.9 billion from $18.2 billion at March 31, 2011, primarily as a result of positive operating cash flows, cash inflows associated with our perpetual preferred share issuance during the quarter, an increase in the value of our investment portfolio during the quarter and FX, partially offset by quarterly dividend payments.
Net Non-Life reserves were $11.6 billion at quarter end, up from $11.5 billion at March 31, primarily as a result of FX as paid incurred losses were at similar levels. As previously discussed, favorable prior-year reserve development during the quarter totaled $161 million and reflects lower loss estimates in each of our Non-Life subsegments. Our reserving philosophy remains unchanged and we continue to hold reserves at the midpoint, above the midpoint of our range despite the reserve releases we have experienced over past quarters. The time value of money in our Non-Life reserves, which is discounted at the June 30, 2011, risk-free rates for each major reserving currency, stands at $969 million at quarter end, a decrease of $103 million from March 31 due to lower risk-free rates. Net reserves for policy benefits for life and annuity contracts were $1.7 billion, flat with the end of the prior quarter. The FX impact was immaterial this quarter. Total capital was up $457 million or 7% during the quarter, standing at $7.4 billion at quarter end. The increase is primarily due to our perpetual preferred share issuance, which added $374 million comprehensive income of $129 million, offset by common and preferred dividends of $49 million. Regarding our preferred share issuance, this was an opportunistic trade for us. We found it very compelling in a long-term context to issue a perpetual instrument with a 7.25% fixed dividend, which fits nicely into our capital structure and reflects our preference for permanent capital sources. In summary, it was another quarter challenged by meaningful catastrophe activities, but the fundamentals of our underwriting and investment portfolios remain strong and we remain well, remain very well capitalized. And with that, I'll hand the call back to Costas.
Costas Miranthis
Thanks, Bill. I would like to give you little bit of color in the June and July renewals. As Bill mentioned, due to the contract extensions particularly in Japan, as well as the fact that for proportional contracts, written premium is recognized on a quarterly basis, written premium comparison year-on-year derived from financials may not provide a very transparent picture of the underlying activity. So first, the June renewal, which is dominated by Florida exposures.
For PartnerRe, this is not a big renewal and represents less than 5% of the overall catastrophe portfolio premium income. We have been writing a very limited amount on Florida specialist for sometime. We did not renew some of the specialty companies in the PARIS RE portfolio. Overall, we saw prices going up with a range on a risk adjusted basis being 0% to 12%. The average increase for our own portfolio is somewhere between 6% and 7%. And while we deployed our capacity where the price adequately reflected the risk, we reduced limits substantially in programs where we felt this was not true.
Much of the Japan renewal was extended by 3 months. Prices increased by 30% to 65% with the higher end of the range being the price for loss affected programs. As I mentioned on last quarter's call, Japan was an area where we were targeting, balancing the portfolio, and we decreased our deployed catastrophe limits by approximately 45%. Due to the substantial increase in premium, this reduction in limits deployed did not imply a commensurate reduction in premium. Australia and New Zealand saw increases upward of 40% depending on program. We use these conditions to reduce exposure while maintaining or increasing premiums. Again, our actions in these regions were largely the result of a planned reduction in exposures. Rate increases allowed us to accomplish this with less impact on top line.
Overall, we did see upward pressure in the CAT markets although the full effect of motor [ph] has only partially filtered through to premiums. How much of this momentum will be maintained or even buildup for the coming January round will obviously depend on what level of losses is there over the next few months as well as how the revised model will be accepted and incorporated across the industry. My personal belief is that even with the denial of experience, it would be a question of how much pricing momentum we see as opposed to a reversal of the current trend. Outside catastrophe business, the July renewal overall was flat to moderately up. Some reductions from nonrenewal of specific programs coming from the PARIS RE portfolio was more than offset by new business opportunities or increased shares in other products. Apart from CAT, there is little pricing momentum other than in loss affected lines. For example, we see some momentum in offshore energy and to some extent in onshore energy. Rates for U.S. casualty business appear to be bouncing along the bottom with no clear sense of direction. Year-on-year, the rate change is somewhat negative but appears to have flattened out. Non-CAT exposed property is flat, although there are some signs in July that small increases may be coming through. The overall pricing for the July new business falls in 2 categories. In non-CAT exposed areas, we have pricing. And I should remind you, this is using new money rates, somewhere between 6% and 9% returns on equity, with the U.S. being towards lower end of that range and specialty towards the higher end. Average for CAT are in solid double digits, but perhaps subject to greater annual volatility. Clearly, these are not the kind of returns that we aim for the longer term, but this is what we can get from that. We will continue to optimize our net catastrophe exposures and maintain some capacity to respond to market opportunities as they arise. At the same time, we will maintain our position on casualty lines until we see a sustained turn in the market and opportunistically, expanded specialty lines as rates respond to losses in specific areas or niches. Looking at the Life portfolio, we value the diversification and stability that the Life business brings. We have achieved attractive organic growth in the portfolio over the last few years. We still see opportunities for growth, but increasingly, we see market turns becoming more competitive there too. On the asset side, we will continue to maintain a defensive stance on duration even if this means that in the short term, we have to accept lower investment income.
So where does that leave us? During a very testing year so far, our capital position and our balance sheet have suffered but remain strong. Our position with clients is as strong as it has ever been and only now we have the franchise, the financial strength and the market position, as well as internal capability to take advantage and capitalize on any opportunities that may emerge. So with that, I'm happy to take any questions that you may have.
Operator, you may open the call. We're ready for the first question.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Josh Shanker with Deutsche Bank.
Joshua Shanker - Deutsche Bank AG
I'm interested in getting a little disclosure on reserving practices, given the fact that it's always the condition that you guys are very conservative and have the reserve releases, at the same time you have this late information from cedants, which cause you to revise your 1Q '11 estimates. I'm trying to understand the role of ACR and questioning your inbound information from cedants and how you put up reserves even prior to the fact of you getting confirmation from that cedant?
Costas Miranthis
Let me describe the process. The question relates particularly to, how do we say, catastrophe reserves. We have several tools. And several indicators that we set, we use when we set catastrophe reserves. At the very early stages of the process, we rely on our own internal models and our own view about what the impact of the catastrophe will be. As time elapses, we -- and as soon as we can, we contact cedants, we'd contact people on the ground, we would like, go out and assess claims, know their own portfolio and ask for their own view about what they see in a portfolio. We compile that. We'd compare it with our own information, we look for any discrepancies and we typically put ACRs, which has somewhere above the cedant advice, as we have a level of conservatism on those reserves and in addition, within our overall CAT portfolio, there's some provision for IBNR for some of these losses to develop. So clearly the input that we get from the cedants on the ground-up loss is a major component in the process of estimating, what our own losses will be arising of out of any catastrophe. Our reserves are not based on market-share estimates. They've -- they are really bottom-up reserves. Other than at the very early stage when we look for consistency, what a share of a loss would be when it comes to recording reserves, we use the most reliable information that we can get, which is information on the ground about what the level of the damage has been. So when we get revisions of those numbers, we go back while we incorporate those revisions and we try to extrapolate and see whether we have either similar accounts in the portfolio that may have, from whom we haven't heard anything, that may have a similar experience. So that's all there is to it.
Joshua Shanker - Deutsche Bank AG
So in this recent occurrence, the communication between you and the cedant, and from your own preemptive reserving -- look, you guys have certainly favorable reserves in some cases but obviously on this situation, something went wrong in the communication between you and the cedant. I'm trying to understand how this issue came to be created. I mean, sometimes you have issues, is this okay?
Costas Miranthis
No -- well, first -- I mean, we don't have any God-given right to get everything right, but in this particular case, there was nothing wrong with the communication. The communication was very clear. The cedant advised us, as they believe their losses would be a certain number. About a month and a half later, they advised us that the number was substantially in excess of the initial advice.
Joshua Shanker - Deutsche Bank AG
[indiscernible] of the peers, yes?
Costas Miranthis
No, substantially their own estimate was substantially in excess of their own estimate. Their own estimate of ground-up loss had gone up. And then they revised it again 3 weeks later.
Joshua Shanker - Deutsche Bank AG
And was their particular loss higher than the peer group? And that's why you were -- you accepted their initial assessment as well?
Costas Miranthis
It's very hard to extrapolate and look at peer groups because everybody writes different accounts. Some accounts are concentrate in commercial lines. Some accounts are concentrated in household business professional [ph] lines. So what it seems to be happening is that the commercial component of the loss proved to be higher than they expected. But there's also, every account has idiosyncrasies, they may happen to be on big risk which have big losses. So the advice, by the way, the advice was not specific to us. This was an advice to the market. It impacted us in a big way because we had meaningful exposure to that particular cedant.
Joshua Shanker - Deutsche Bank AG
Right, I mean, they only don't -- only defense though is to view it with skepticism. The question is where does your skepticism come in, I guess? And I'm not trying to correct you. I'm just trying to understand.
Costas Miranthis
Let me say something on that. If we receive the numbers that we believe are unreliable or that we cannot attach any credibility, we will supplement them with our own internal modeling. If the numbers are consistent or in the region, we use those numbers and provide a margin. However, a margin is not 100% of the original estimate. So it's -- the margins that we may put may be, 10%, 20% above -- it's not -- we don't double the numbers.
Joshua Shanker - Deutsche Bank AG
Understood. Well then, thank you for explaining it tonight. I realize it's -- it's impossible to bat 1000, I don't disagree.
Costas Miranthis
The only way to ensure that there can be no possible development in this area is to reserve everything absolutely to the limit, and while in the particular case of New Zealand, some accounts have or already reserved to the limit. This is not a practice. It has never been to reserve every exposure to have to the actual limit or contractual liability.
Operator
And our next question comes from Jay Gelb with Barclays Capital.
Jay Gelb - Barclays Capital
I wanted to just look at the overall action of your combined ratio x CATs, or you're under [ph] 100% in the second quarter of 2011 up from around 97.5% a year ago and also up from around 94% in the first quarter. So I'm trying to get a sense of, should we consider that the new run rate or do you think there was some one-time impacts from there, that might be elevating the current period?
William Babcock
Josh, it's Bill. I think it's reflective of a few things. I mean, there are some additional attritional losses, and especially if you look segment by segment, you would see our North American subsegment being impacted by things like the tornadoes and some Slave Lake losses, some lumpy losses, but I think more in general, when you look at that -- those numbers, they're indicative of a slight shift in mix, as well as continued competitive market conditions. So I can't point to anything particularly large that drives that difference other than those items.
Jay Gelb - Barclays Capital
Okay, and the pace of reserve releases, 18 points on the combined ratio in the current quarter is more than we were anticipating, but that level has been in the double-digit combined ratio range for 5 quarters. So I'm trying to get a sense of is that something we should expect to continue or has that benefit sort of peaked out here?
William Babcock
If we expect it to continue, our reserve levels would be too high. So that by definition, is not the right answer. I'd say what is probably the right answer is, if lost trends continue to be better than what we've priced and reserved for, then it will continue. But we would not be stating that our reserve position is such that you should expect to see continued reserve releases at this level continue.
Jay Gelb - Barclays Capital
I see. Okay, and the third point. I know there's a lot of moving parts on P&C gross written premium growth, when do you feel that growth might stabilize, year-over-year as opposed to being down?
William Babcock
The -- a big impact here is the composition between our proportional and non-proportional book, especially in Global P&C and our specialty lines. As you either increase or decrease writings on certain accounts, in primarily on the non-proportional side, they tend to skew that. Though what you should expect is on the proportional side now that we're through the, kind of, repositioning with the PARIS RE portfolio primarily, that proportional -- the changes in the proportional should even out and they should stabilize. Now as non-proportional accounts come on or offline, they will continue to distort that proportion, non-proportional relationship. And does that answer your question?
Jay Gelb - Barclays Capital
Almost. I mean, if you can boil it down for us just when we should -- when we think premium volume might stabilize.
William Babcock
I think what we said was the right side to our book is pretty much complete. So from here on, you're seeing any right-sizing on an already right-sized and rationalized book.
Costas Miranthis
In terms of what we do and how much we decide to write, how much limit we'll decide to deploy that will be dependent on price conditions and the trade-off between risk and returns. If we may decide to expand the portfolio, if we find the right opportunities, but it would -- cannot get the adequate returns, we will not and decide and shrink. So I think the answer that you heard from Bill reflects the what will happen, as the numbers flow through the financials. But I can't predict right now what our actions will be in January, when we come to the -- to that renewal. We will -- it will depend on what we see in the markets at that point in time. What I can say is that to a large extent, some of the rationalization of the portfolio, as a result of the incorporation of PARIS RE, is that we'll have some fine tuning to do, and that will be done later in the year. But our actions going forward will be treated mostly by our own risk appetite and decisions to deploy limits, if we feel that we can [indiscernible].
Operator
And our next question comes from Ron Bobman with Capital Returns.
Ron Bobman - Capital Returns
Two questions. The first was I don't know if Costas or someone else in the team in the prepared remarks, mentioned the 45% reduction in the Japanese limits, and I recognize some portion of that is the reflection of the related PARIS RE book integration. But it's obviously a staggering -- it's quite a large number, 45%. Could you talk about sort of the elements that resulted in that size reduction? Was it in effect entirely the size of the integrated book that you could have done a year ago but obviously chose not to do? Is it only partially that and the balance of a new view on Japan and the rating level or otherwise? That was my first question.
Costas Miranthis
It's principally the result of bringing the 2 groups, PARIS RE and PartnerRe together as I mentioned in our previous call. The renewal in April 2010 was carried out separately. Both companies had relatively large exposures in Japan. Historically, exposures, which in dollar terms became bigger as the dollar depreciated against the Japanese yen. So reduction in Japan was something that we always planned to carry out and execute, and it's -- the plan was to have reductions roughly around the level that you see.
Ron Bobman - Capital Returns
Okay, thanks. And my second question relates to the Australian, New Zealand late notice and the company in the market received. And sort of simply put, what's the reinsurance market to do when you get a -- such a dramatic increase from a ceding company so soon after the ceding company's renewal program is negotiated inbound? It just sort of reeks, a sort of disingenuous and sort of not fair dealing, what are you -- what thoughts do you have on that --
Costas Miranthis
Yes, I wouldn't like to comment on that. We trust that our clients try to give us the most accurate information, that they can and they have at that moment, we go back and whenever we get things like that, you can understand we have a dialogue with them. The trend is downward, actually across those numbers. But it's not a section I would like to go into.
Ron Bobman - Capital Returns
Do you feel that the feedback that they gave you is credible?
Costas Miranthis
Yes, I have no reason to believe it's not.
Operator
And our next question comes from Dan Farrell with Sterne Agee.
Dan Farrell - Sterne Agee & Leach Inc.
Could you talk a little bit about your book going forward and exposure that you would be able to take on it. If we look at the past year, you're obviously saying that the rationalization, the re-underwriting of the combined book for PARIS RE is largely done. But I'm trying to think about some of the other reduced exposures that you've taken in CAT. And obviously, if we think about the January 1 renewal, if you look at the year ago, that was before some large losses that have been taken by the company and also before any of the model changes. I'm trying to think over the next 6 months, is there other exposure management that's going to have to take place? And obviously, that decision probably rests on what happens with pricing as well, so may be related to that?
Costas Miranthis
Yes, I'll try not to, as best as I can, because as you noted some of that some of that will be dependent on what happens in the market. If you recall at the -- back in January, we give you some estimates of how our capital is distributed and you would have seen there that we deployed more than 40% of our capital in CAT line, somewhere, I think the number was, 43%, 44%. Our target is not to be in that range. Our target is to be somewhere in the mid-30s. And we have been working through the year to bring that limit down. Some of that will impact the peak territories. Other will impact -- other actions will impact perhaps maybe [ph] a bigger proportion, some of the smaller zones. But in general, you should expect to see that CAT exposure as we move into next year is somewhat lower than it was a year ago. That was not as a result of the losses that we had this year, although they were painful. It's not as a result of revisioning of RMS or anything. We don't rely on RMS. We use our own internal models. It's a result of how we see the balance in a portfolio and recognition that at least in my mind, be -- having something in the mid-40s as the CAT component of the portfolio, it doesn't fit very well with a diversified reinsurance company.
Operator
And we'll now move on to our next question from Cliff Gallant with KBW.
Cliff Gallant - Keefe, Bruyette, & Woods, Inc.
I just have one question. The overhead expense ratio is now running in the mid-7% range. The -- I know '09 and prior was always well under 7%. As you do the rightsizing, is there any thought to any cost-reduction efforts at Partner?
William Babcock
Yes, hey, Cliff, it's Bill. I think what you see on the -- from a ratio's standpoint, is as much about top line as it is about expense levels. But that said, we are focused on expenses. We are looking at how we're organized and how we operate in seeing where we can and if we can make improvements there. So it's an area of focus for us unless you have any additional specific questions on it, I'll leave it at that.
Cliff Gallant - Keefe, Bruyette, & Woods, Inc.
Generally, in terms of staffing levels and all, do you feel like this is the -- you feel like you're at the right size?
Costas Miranthis
I think we have the capabilities to write any business that we want to write. And we have the right skills. We have experienced underwriters who've been with us for a long time. So I don't -- we don't think we need to go out and get new skills out there. I mean if we can drive some efficiencies out of that process, that will be welcome but in terms of being out in the market, we are in the right place.
Operator
And we'll now move on to Doug Mewhirter with RBC Cap Markets.
Doug Mewhirter - RBC Capital Markets, LLC
I had 2 questions. First that the new General contract, or the new general exposure where you had your adverse development, was that a standard reinsurance contract? Or was that a retro contract?
Costas Miranthis
It's a standard reinsurance contract, which is widely placed in the market And I should say this is -- the New Zealand adverse development was not the result of one contract. The big numbers came out of one contract but we extrapolated that, some of those numbers to other cedants.
Doug Mewhirter - RBC Capital Markets, LLC
Okay, thanks. And my second question's more of a -- I got a broader question. You've noted and some of your competitors have noted significant rate increases in Asia or I guess, the Far East in general, particularly on loss affected accounts. Do you feel, or I guess, have you gone back and recalibrated any models or now that you've taken a look at the losses, that the rate increases are in excess of I guess, a new, long-term view of risk or do you think that they're outstripping the higher, revised higher view of risk and the risk-adjusted returns are actually better proportional to the price increases in that region?
Costas Miranthis
Yes, it depends on how long term your view is, I guess. I think on a very term view, I think the answer is yes, the real question is where -- whether you're going to see, particularly for earthquake, where these increases are happening increased levels of activity over the next few years.
Operator
And our next question comes from Greg Locraft with Morgan Stanley.
Gregory Locraft - Morgan Stanley
I just wanted to get the update on capital deployment. And in the quarter, you took a dividend increase of, curious how you think about that or set that policy? Obviously, you raise the preferreds at a level that's kind of near the midpoint of the ROE that you're getting from all the parts of the book that you're not shrinking aggressively it seems? So I'm just thinking about, how do we think about capital allocation from here going forward?
William Babcock
Related to your first question on dividend. Again it's our stated policy to try to increase that dividend every year. We think it's important to shareholders, and to the extent, we can afford to do that from a capital and earnings standpoint, we're going to do it. So that's a pretty simple answer. I think the comments on the preferreds was in a long-term context, we think a 7.25 permanent equity is attractive. In the current environment with the current ROEs, maybe it's not as attractive as it was 5 years ago or will be in 3 years from now but we need to take a longer-term view on the capital structure and take advantage of opportunities when we see them and that's what we did.
Costas Miranthis
Greg, just to say, it's not a goal to make a 7% ROE. I mean this is what we can get for now. At this rate of the cycle, we say this high single-digit is all we can do. But -- and with the current interest rates, but over longer term over the cycle, we expect to make a double-digit ROE. If we can't, we will review that situation and we don't have to keep that instrument there. So it will stand for long-term capital structure reasons. We have the option, if we can, to have it there. And it was available. That was the reason, that a window to raise that capital is not always offered.
Gregory Locraft - Morgan Stanley
Okay, so just -- I mean, because some of the competition has said that was more of a defensive raise rather than an offensive raise. What you're saying is really this is just part of the general long-term philosophy of where you want the capital structure. And I mean, I think because many of us identify you guys as having excess capital on the balance sheet. And so it was just curious timing with the first quarter results.
William Babcock
Yes, I meant -- I'm not sure as to how else to say it other then we viewed it opportunistically. We think it fits into our long-term capital structure and from an absolute capital level, we continually assess. Generally not in -- when wind [ph] season. We continually assess whether we have to -- whether we have excess capital and what we'll do with that, and we'll do that just like we always do throughout the year.
Gregory Locraft - Morgan Stanley
Okay, and then just last one on buybacks. Any shift in your philosophy there? I imagine wind [ph] Season, sort of, how do you think about buybacks maybe after wind [ph] Season?
William Babcock
We will, as I said, we'll assess our capital position and just like we always do, we would be -- you should be surprised if we do, are very active in share repurchases during wind [ph] season, but after wind [ph] season then we'll give you an update on our thinking on capital.
Costas Miranthis
With Greg, I would add that will be linked with the decision of how much we choose to deploy in terms of risk. Say, we don't find attractive opportunities and we end up with more capital than we need, that will clearly influence our decision.
Gregory Locraft - Morgan Stanley
Okay, well, actually, maybe as a follow-on question, my impression is that you're actually shrinking from the most volatile capital-consuming parts of the market which is property CAT. Is my reading correct? Are you now moving back into that?
Costas Miranthis
Well, I said earlier that we have reduced the CAT exposure and we'll continue to reduce it to bring it within a desired range where we have not more than 40% of our capital, somewhere in the 30s range but exactly where in the range we will be, will depend in the market conditions at the time. We want to leave ourselves the opportunity to grow in a hardening market as opposed to being at the top of what we can write at any point in the cycle.
Operator
And our next question comes from Matthew Heimermann with JPMorgan.
Matthew Heimermann - JP Morgan Chase & Co
I guess the first question would be just with respect to PARIS RE. If we just -- it's about 2 years ago that now that I think a little over that you announced the transaction. If I look at volumes and not that, that's the best measure of anything. But volumes are about -- ex foreign exchange are basically were they were, pre-deal, intangible capital or tangible common equity within arms length of where it was pre-deal. So I guess, for those of us on the outside, I guess, what do you think is the fair way to think about how that transaction has shaped up relative to expectations? And what it really means to you at this point?
William Babcock
Let me start, and then Costas will fill in here. I think if you look at this from a broadest perspective, did we get the premium volume that we anticipated when we entered into the transaction? Probably not. Was it as the result of a lack of understanding of the portfolio or any surprises there? Absolutely not, primarily due to market conditions. We saw our -- we would've seen our own books shrink. So I think from what we get out of it, we got additional underwriting capabilities. We got very good skilled talent in certain markets especially facultative. And from a financial standpoint, what we ended up with was buying back these shares at a discount to the issuance price and a balance sheet that's given us only positive surprises. So we wouldn't characterize it from an operational perspective as a home run. We would characterize it as a good addition to the portfolio. It financially worked out very well. And I'd ask Costas will add to that.
Costas Miranthis
Not a lot to add there. The analogy that I will make, Matt, is we put an option when we -- we've got back PARIS RE. We had the capital, if you recall at the time when we did the deal, it was a very turbulent time. We didn't know exactly where the market was going to be, balance sheets were strained and we had the depth of the resources to put our foot down if there was a change in the market. It didn't happen that way. We ended up repurchasing capital back. We did get some benefits, something that came for free. We started our fine tuning [ph], we got some good people and as Bill pointed out, that option did not have any significant cost for us. We didn't overpay it. We, in fact, we bought back the alleged [indiscernible], we did the transactions. So the fact that we didn't -- the world didn't pan out as we thought might have done, that's why you get the options for. I mean, it's security, it's not a guarantee.
William Babcock
And thinking about it from a buybacks standpoint, effectively, we issued a book value where we repurchased at -- on average, about a 12% to 13% discount from book.
Matthew Heimermann - JP Morgan Chase & Co
That's fair, I guess, these -- it wasn't either of you guys speaking at the time, but I mean, when the deal was announced, there was also may be a bigger strategic rationale rolled into it. And I guess -- and to your comment on market conditions that, that's kind of what undercut the ability to kind of from a portfolio standpoint, make some of the big strides you thought you might from product mix or geographic perspective?
Costas Miranthis
We retained that capability but the market doesn't -- is not the right market to try and take those strides. So we're not going to try and do it just for the sake of it. It's for the market where I feel comfortable in trying to expand right now. It could have been a very different market and if you were seating here at the beginning of 2009, with the stock market and the credit market being where they were, as they said, the natural conclusion should see that the likelihood of being a very different market was relatively high.
Matthew Heimermann - JP Morgan Chase & Co
All right, I appreciate your comments there. And then I guess the -- the other -- the big issue I'm struggling with I guess, is you've talked about how the risk tranches are changing. But it's really hard to put what down 20% really means in the context given we don't have a lot of externally information to kind of, whether it's single event, PML or annual aggregate by zone to really put that in the context. Have you given any thought to perhaps expanding the disclosure around that area?
Costas Miranthis
The answer is yes. That's something that we always think. We already gave you some information. We gave you the maximum limit that we deploy in any single zone and that is limit. That's not relying on models and then the reason that we prefer to give limit because it has -- it moves a large extent away from some of the judgments as to how much of that limit may go. But going forward, this is something that we will consider. We have to expand some of the disclosures that we give to you. We just want to take our time and do it in a way that it's meaningful and we're comfortable with the numbers that you get.
Operator
And we'll now move on to Brian Meredith with UBS.
Brian Meredith - UBS Investment Bank
Two questions here for you. The first one, I'm curious, what do you think the potential impact is and are you doing anything to proactively potential downgrade of the U.S. credit rating?
William Babcock
Sure. Yes, I guess it's a worry across the market now. We've not taken proactive measures at this point with -- based on our view of the likelihood of that downgrade and how that might be baked into, or not baked into this kind of current market. But no active reallocation at this point.
Brian Meredith - UBS Investment Bank
Okay, and no active -- what do you think the potential impact could be?
William Babcock
We give you our duration if you can tell us what the impact would be on -- I mean, I guess you have to extrapolate across your entire portfolio. It's not just the risk-free rate, this would have a dramatic impact across all risk classes. So it's very hard to tell and I think with the information that you have on in the financial supplement from the fixed income and the duration and then the equity portfolio, you can probably extrapolate whatever scenario you think might be reasonable.
Brian Meredith - UBS Investment Bank
Great, and then second question, Costas, I'm curious the other, or one of the few remaining sole reinsurance companies out there. It looks like it's going to be combining with somebody here in the next couple of months. I'm curious, your thoughts about continuing your strategy going forward a bit being just a pure reinsurance company.
Costas Miranthis
That's a good question. That's something that we look at, the one thing I got to say is that some of the boundaries between what's reinsurance and what's direct or what's primary, is -- they're a little fuzzy, you could argue we do some of the business by writing facultative contracts, indeed for some of the facultative contracts, we have the capacity to provide primary paper, [indiscernible]. So that's something that we will consider but the one thing that you'll never see us do is to move into the mass market. We don't want to move to have an operation that relies on process systems, as [ph] really at evaluating risk. So to the extent that the form is primary but the risk is very similar to what we do right now, especially for my part, it's something that I will put on the table and look on its merits, but I've no desire to expand into businesses that are substantially different from what we do today.
Operator
We'll now take a follow-up from Jay Gelb of Barclays.
Jay Gelb - Barclays Capital
I just wanted to follow-up on one point with the rating agencies. They seemed to have raised operating leverage in terms of premiums relative to equity capital as a metric they might be focusing on. Where do you think that should fall out?
William Babcock
Jay, I don't really have a view. I mean, each rating agency has a different view of what they consider important, and to try to speculate, we listen to -- we understand the rating agency -- the different rating agencies' concerns, and we're going to manage the businesses as we see appropriate. So whether one is focused on leverage, and one is focused on volatility, we need to manage the book the way that we think is best for our shareholders and our clients.
Operator
And our next question comes from Vinay Misquith with Evercore Partners.
Vinay Misquith
Just want to get a sense for the capital position. Last quarter I believe you said that you're just about adequately capitalized and since then, I believe then you had reduced your peaks on exposure by 13%, and now it's 20%. So you arguably freed up about 7% more, plus you've raised the $374 million of preferreds. Should we consider that as excess or is that part of your required capital? How should we look at that?
William Babcock
Vinay, it's Bill. I think adequately capitalized is a statement. It's not saying that we don't have excess. It's saying that we have adequate capital for our business. So to extrapolate that decrease in writings is freeing up capital. I think directionally, that's correct, but I wouldn't use any statements of adequately capitalized as being anything other than saying that we are in excess of a minimum of what we consider a minimum to be. But directionally, your assumption is correct if you reduce capital consuming writings in catastrophe and we don't see writings increasing in other lines of business, the general direction is freeing capital.
Vinay Misquith
Sure. How about the $374 million, would that also be accretive to your capital, should there not be any hurricane events? Can that be used for repurchasing stock later on?
William Babcock
Sure. It's part of our capital structure. We can consider it part of overall capital, yes.
Operator
And gentlemen, it appears there are no further questions.
Costas Miranthis
Okay. Well, thank you very much. Well that is, as I said, we've -- the year's so far has been marked by catastrophes we're going into the period that is, historically, active in the front and, we're hoping we have a little bit better luck but whatever happens, we're in a good position to take it on and we'll respond to the market, which I'm sure should it be a very active season will happen very significantly. Thank you very much.
Operator
And that does conclude today's conference. We thank you for your participation.
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