Executives
Costas Miranthis – President and CEO
Robin Sidders – Director, IR
William Babcock – Executive Vice President and CFO
Analysts
Jay Gelb – Barclays Capital
Mike Salinsky – Credit Suisse
Cliff Gallant – KBW
Joshua Shanker – Deutsche Bank
Gregory Locraft – Morgan Stanley
Matthew Heimermann – JP Morgan
Jay Cohen – Bank of America/Merrill Lynch
Vinay Misquith – Evercore Partners
Brian Meredith – UBS
Amit Kumar – Macquarie
Ian Gutterman – Adage Capital
PartnerRe Ltd. (PRE) Q3 2011 Earnings Conference Call November 1, 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 the conference over to Robin Sidders, Director of Investor Relations at PartnerRe, who will begin the call.
Robin Sidders
Good morning, and welcome to PartnerRe's third quarter and nine months 2011 results conference call and web cast. As a reminder, our third quarter financial supplement can be found on our website 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 year-to-date and then hand over to Bill, who will provide more details on the results. Costas will come back at the end to provide additional commentary on the market, and then 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 business 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 numbers 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 third quarter results call. Our third quarter 2011 results were solid. We generated in excess of 10% annualized operating ROE and a 2% growth in book value per share during the quarter, which given the low interest rate environment that we continue to operate within is I believe a respectable result.
We benefited from an absence of large catastrophic events, the effect of higher seasonal earned premiums that we typically experience in the third quarter, as well as the persistence of low quarterly loss trends, resulting in continued favorable development. Offsetting this however, was the negative impact of an increase in our provisions for earthquake events of the first quarter of 2011.
The production during the quarter is concentrated in July. We have commented on production trends for the July renewal in an earlier call, and indeed as you will hear from Bill, the premium trends are largely the effect of prior quarter actions filtering through the financials. So the main story for the quarter was what happened with losses. Most of our portfolio performed in line or better than expectations during the quarter.
Overall, reported losses remained significantly below expectation, and we have seen no evidence of any uptick in liability loss trends. We nevertheless continued to price for higher loss trends. Indeed our initial loss ratio selections for the current accident years include significantly higher loss trend assumptions than what we have seen in the recent quarters.
We were disappointed to record an increase in our estimates for the first quarter earthquake events. For the earthquake in Japan, the increase was driven by an advice from our largest Japanese [ph] that the previous estimate of liability was likely to be exceeded. Our revised estimate incorporates the most recent claims trend information from this event.
For New Zealand, our revised estimate is only partially due to new loss information, but reflects our increasing concern regarding the complexity of the claims that have been processed. Our life segment performed in line with expectations, despite some accounting volatility from the (inaudible) product. We saw some attractive new opportunities for business during the quarter.
Investment income was relatively flat, although FX and other one off movements masked the underlying decline, which we see as the long-term trend. On the asset side, the effect of declining risk rates on our balance sheet was largely balanced by widening credit spreads and declining equity markets. However, the declining risk rates had a negative impact on the underlying economic value of the company, as the value of investment income embedded in our reserves declined also.
I will now handle call over to Bill to walk through the results and the numbers in more detail, and I will come back at the end to provide some color on our outlook for the January renewal environment.
William Babcock
Thanks Costas, and good morning everyone. Our third quarter results reflect both continued favorable prior year reserve development across most lines, and an increase in our estimate for first half 2011 catastrophe events. Operating earnings for the quarter were $164 million or $2.41 per diluted share. This is down from $3.95 per diluted share we reported in the comparable prior-year quarter.
Third quarter annualized operating ROE was 10.3%, below our long-term target, but reasonable given the current interest rate environment. Diluted book value per share was up 2% during the quarter to $85.26 per diluted share. Third quarter Non-Life net premiums written totaled $880 million, up 3% from the prior-year quarter on a constant FX basis. The increase was driven by increased writings in our global specialty lines, and North American agricultural business.
Net earned premiums were down 11%, excluding the effects of FX. With written premiums up and earned premiums down, I would like to make a few comments. Our earned premium decrease largely reflects results coming through from our actions in prior periods to reposition our portfolio. This resulted in decreased writings in many lines.
Now that our rightsizing is largely complete, our modest increase in premiums written reflects movements from this repositioned base. I would also like to point out that our current quarter written premiums benefited from a $32 million adjustment related to our agriculture book. The technical ratio for the quarter was 86.7%. This includes 16.5 points of net adverse development on the prior quarter reserves, and relates to the catastrophe loss development Costas discussed earlier. It also includes the benefit of 16.2 points of favorable development on prior year reserves.
Before discussing our sub segment results, I would like to provide you with some additional color on our nonlife favorable prior year reserve development this quarter. This favorable development is the highest we have ever experienced at $176 million and reflects continued loss trends in most lines. First, I would like to point out that our reserving processes and practices have not changed, now has our prudent and conservative approach to reserving.
For perspective, our current quarter favorable development is about $36 million higher than the average favorable prior year development we have reported over the prior 4 quarters after adjusting for changes in premiums. The distribution of our favorable development was primarily from our long tail lines at 41%, and our short tail lines at 44%. But the balance of 15% coming from medium-tail lines, which includes most of our specialty businesses.
Looking at our long tail lines, favorable development totaled $71 million; $59 million of this came from our North American casualty book. This was driven by favorable loss trends, with actual losses well below expected, again this quarter. It also reflects the results of the annual reserve study update we perform each year during the third quarter on our North American book.
Looking at this favorable development by accident year, $61 million of this $71 million comes from accident years 2008 and prior. On short tail lines, we experienced $78 million of favorable development; catastrophe contributed $36 million, while our global P&C property book contributed $30 million. Finally $27 million in favorable development came from our medium tail lines, and was driven primarily by credit and surety and aviation and our global specialty.
Now let us discuss our nonlife sub segment results. Starting with North America, where we reported premium increases on both written and earned basis, 8% and 14% respectively. The technical ratio was up from the prior year quarter from 75.3% to 82.7%. The driver of both the premium and technical ratio changes was our agriculture book. During the quarter we increased our premium estimates for the current crop year. This was based on outdated information from (inaudible).
We also increased our technical ratio of booking on this line. It appears likely that results in particular regions will be less than we projected in prior quarters. We currently have the current crop year booked at a 95.3% technical ratio. Finally the result in both the current quarter and prior year quarter benefited from favorable prior year reserve development in excess of 20 points.
In our global P&C sub segment, constant FX premium both written and earned were down by over 20% compared to the prior year quarter. A large portion of our global P&C business is written on a proportional basis. This means the decreases were recorded in this quarter, largely reflects decisions made in prior quarters. The technical ratio for the quarter was 79.8%. This is a 22.5 point improvement over our result from the prior year quarter. The driver of the improvement was 16.4 points more favorable prior year reserve development.
We also experienced lower charges related to catastrophe events including development on prior quarter results. In our Global Specialty sub segment we saw growth in net premiums written of 15% of FX adjusted. Net premiums earned were down 11% again FX adjusted. Growth in premiums written came from increased specialty property and marine facultative writing, as well as our credit and surety lines. The decreases in premium earned is a result of the decreasing writings in prior quarters I mentioned earlier, namely the impact of reduced writings in prior periods as a result of the portfolio repositioning.
The technical ratio for the quarter was 91%, compared to 75% we reported in the prior year quarter. While favorable prior year reserve development continued this quarter, contributing $30 million to our technical result, it is down from the $66 million we reported in the prior year quarter. It is also worth noting that our prior year quarter benefited by $24 million related to a reestimation of prior quarter losses primarily in our marine, credit and surety, and engineering lines.
Catastrophe net premiums written during the quarter totaled $89 million, down 4% on a constant FX basis. FX adjusted net premiums earned were down 26% compared to the prior year quarter. Again repositioning is the driver in the differential in written and earned premium decline rates. The technical results for the quarter was $15 million. This was impacted by development in first half catastrophe events, as we discussed earlier, and detailed in our press release last week.
Favorable prior year reserve development totaled $36 million. This includes a reestimation of losses related to the 2010 earthquake in Chile, along with other smaller adjustments. Turning to year-to-date 2011, nonlife net premiums written were almost $3 billion, down 12% on a constant FX basis compared to the same period in 2010. Net premiums earned of $2.87 billion were down 10% on a constant FX basis. The decreases reflect the factors I have previously mentioned, as well as those discussed on calls earlier this year.
To recap these for you, they include the integration of the PARIS RE portfolio, which we completed with the finalization of the second quarter 2011 renewals, plan reductions in certain catastrophe exposures, and continued competitive market conditions in most markets. The year-to-date nonlife technical result was the loss of $560 million. This reflects 119.5% technical ratio. These results were driven by the $1.35 billion of large catastrophe related losses we experienced in our nonlife sub segment during the period.
To recap these events for you, they include the Tohoku earthquake and tsunami of $766 million, the Littleton earthquake in New Zealand at $358 million, the US tornado activity during April and May at $91 million, the Australian floods at $38 million, and losses to aggregate contracts exposed to catastrophe events in Australia and New Zealand at $93 million.
Year-to-date 2011 favorable prior year development totaled $479 million. This improved the technical ratio by 16.7 points. During the same period in 2010, favorable prior year development was also significant at $350 million. This resulted in 11.5 point benefit on the technical ratio.
Turning to our life operations, net premiums written for the quarter totaled $194 million, this was down 4% and net premiums earned were up 1%, both excluding the impact of FX. The slight decrease in net premiums written is the result of restructuring our longevity treaty earlier this year to a slot basis. This restructuring partially offset growth in our mortality book.
In the life allocated underwriting result, which includes allocated investment income and operating expenses was $9 million. This compares to $10 million we reported in the prior year quarter. On a year to date basis, net premiums written increased 7% from the comparable prior year period, FX adjusted. This reflects the growth we have experienced in our life business over the past several years. The life allocated underwriting result for year-to-date 2011 was $32 million. This is an improvement from the $10 million loss we reported in the same period in 2010.
Our prior period result reflects the impact of a charge we took with respect to impaired annuity treaty, which we discussed with you on prior calls. Looking at the financial markets, risk-free rates dropped again this quarter, while credit spreads widened, and equity markets were down sharply. On this backdrop, our investment activities, which are reported in our corporate and other segment, contributed $160 million to our third quarter pre-tax results. This excludes investment income allocated to our life segment.
Of this total, $146 million was included in pre-tax operating income and $21 million in pre-tax non-operating income. Regarding performance, we achieved a total return of 1% on a local currency basis during the quarter. Year-to-date 2011, our combined portfolios generated a total return of 2.8% on a local currency basis.
Investment income for the quarter was $164 million, which is up 3% compared to the second quarter of 2011 FX adjusted. Year-to-date investment income was $474 million, down 8% on a constant FX basis from the comparable period in 2010. This year-over-year decrease illustrates a trend we have discussed with you on prior calls, mainly continued downward pressure on investment income.
That spread between our current portfolio yields and current reinvestment rates widened again this quarter, and now stands at 131 basis points. This widening reflects the net impact of lower interest rates, partially offset by the widening spreads I referenced earlier. We will caution you again, if rates stay where they are you should expect to see continued decreases in our investment income.
We maintained our short of mutual duration position again this quarter as we continue to remain defensive against the increase in rates. Before moving on, I would like to take a minute to update you on certain European holdings we carried in our investment portfolio at quarter end. I thrust you will find this topical and helpful. We hold less than $1 million in securities of troubled EU sovereign governments having removed these exposures in the beginning of 2010.
We hold $2.2 billion in other EU sovereign governments comprised of $1 billion of French bonds, $820 million of German bonds, $190 million Belgium bonds, $80 million Austrian bonds, and $50 million in Dutch bonds. Of the remaining balance no single EU nation comprises more than $3 million of exposure. Our fixed income exposure to non-government guaranteed banks and finance companies in the EU totals $271 million, consisting primarily of $80 million of French, $73 million of British and $29 million of Dutch corporate bonds.
We have less than $51 million in corporate bonds issued by various financial institutions in troubled EU countries. We have no exposure to equity of any financial institutions based in Portugal, Italy, Ireland, Greece or Spain. Our financial institution equity exposure in other EU countries is less than $1 million in any one country. You will find enhanced disclosures related to this holding in our third-quarter 10 Q which we expect to file later this week.
Now moving on, operating expenses for the quarter were $104 million. This compares to $114 million in the second quarter of 2011. On an FX adjusted basis, this represents an 11% reduction and is principally the result of lower personnel expenses, including lower salary, bonus and stock compensation expense. The effective tax rate on operating income for the quarter was 6%. The non operating effective rate was 96%.
Year-to-date, our operating effective rate was negative 6%, while our non-operating rate was 522%. As we caution you each quarter, our operating and non-operating effective tax rates are heavily dependent on several factors, including the geographies where profits and losses emerge on both an underwriting and investment basis and FX. This is certainly true this quarter, and this year.
Comprehensive income for the quarter was $126 million. It is comprised primarily of $180 million of net income, somewhat offset by a $55 million decrease in our foreign currency translation account. This decrease reflects the strengthening of the US dollar against the Canadian dollar and the Euro during the quarter. Operating cash flow was negative this quarter, at $159 million. This result reflects the payment of losses associated with a significant catastrophe activity we have witnessed over the past number of quarters. Operating cash flow in the comparative prior year quarter was positive $351 million.
On a year-to-date basis, GAAP reported operating cash flow is $584 million compared to $912 million in the comparable prior year period. Higher loss payments and lower premium receipts in our nonlife segment were the primary drivers. Also as we mentioned on our previous two calls the 2011 year-to-date operating cash flow includes $358 million of positive operating cash flows related to the renovation of certain reinsurance contracts associated with our PARIS RE acquisition.
Our balance sheet and capitalization remained very strong. Total capital is up 1% this quarter. It now stands at $7.5 billion. The increase was primarily driven by our comprehensive income for the quarter of $126 million, offset by the payment of common and preferred dividends totaling $55 million. The time value of money in our nonlife reserves a $615 million at quarter end. We calculate this using the risk free rates for each major reserving currency. This is down from the $969 million we reported at the end of the second quarter of 2011, and reflects the impact of the decrease in risk free rates during the quarter.
Finally, we did not repurchase any common share this quarter. Our existing authorization stands at 3.7 million shares. Given the substantial discount in our current share price, and our strong capital position we expect to resume our repurchase activity in the near term. As always, we prefer to put our capital to work in our businesses, provided we can generate superior risk-adjusted returns.
Now I will handle call back to Costas to update you on how he sees things developing in our markets.
Costas Miranthis
Thank you Bill. We have recently returned from the (inaudible) renewal conference rounds. While conversations continue to highlight concerns about potential economic slowdown and recession, as well as the impact of the European sovereign crisis on the insurance markets, I got the sense that for every insurance conditions are slowly beginning to improve both in the US and in the international markets.
Perhaps the US is slightly ahead in the trend, and certainly there is more momentum for the short tail lines, but I believe there is an underlying change in market sentiment and psychology that is more pervasive. There is clear recognition that rates should rise, implications of the lower interest rate environment understood, and the recent spate of catastrophe losses has lead for greater respect for risk. In some instances, this dynamic has resulted in increased premium rates, whereas in others it has resulted in reduced coverage for the same premium.
Reinsurance demand, particularly for peak exposures remain strong, and while there is no capital crunch, I believe capital will be deployed only if the risk adjusted returns on offer are appropriate. As we discussed with you on previous calls, we price all business new and renewal using our attributed capital methodology, new money risk free rates, and full reflecting all expected loss and expense loss, including loss trend.
So our expectation for the January renewal, which represents roughly 55% to 60% of our nonlife portfolio, is to price the order of portfolio at high single digits with borderline double-digit ROE levels. Although within that there will be significant variations by line and geography. The overall ROE level is expected to broadly in line with that we saw for the January 1, 2011 renewal. Improved technical pricing, which is where we expect to see it and premium rate increases will be offset in terms of ROE, by significantly lower risk free interest rates.
On a relative basis, shorter tail lines are likely to appear more attractive as the impact of interest rates is likely to be more muted. While these levels of return are not ideal over longer term, they reflect the reality of the low interest rate operating environment that we are seeing to date as well as the state of the reinsurance cycle. On the life side, we continue to see interesting opportunities in both mortality and longevity reinsurance business, and we will evaluate these opportunities against our overall risk appetite for this risk.
Life is an uncorrelated risk that offers growth opportunities, but we apply the same rigorous risk management approach as we do for our nonlife business. The market then is clearly in the early stages of transition and there may be a number of opportunities arising. For us deployment of capital to these opportunities will be weighed against capital management alternatives, although I don’t see these two options as necessarily as mutually exclusive.
At PartnerRe we have a first-class underwriting platform with deep technical expertise, and underpinned by an integrated risk management culture. In this transitioning market, we will continue to fine tune our portfolio to maintain a balanced risk profile and optimize our returns. Our franchise, geographical reach and strong capital leave us in prime position to take advantage of any opportunities as and when they arrive, with the end goal as always to generate growth and economic value per share.
And with that we are ready to take any questions that you may have. Operator, you may open the call.
Question-and-Answer Session
Operator
(Operator instructions) And we will take our first question from Jay Gelb with Barclays Capital. Please go ahead, your line is open.
Jay Gelb - Barclays Capital
Thanks and good morning. Costas on the outlook for reinsurance rates for January 1, when you said high single digit, almost double-digit rate increases is that a blended average of both short and long tail lines and if it is can you break out potently what the difference might be between short tail and long tail?
Costas Miranthis
There is a correction, Jay when I said high single digits, low double digits; this is what we expect to price the portfolio, the overall portfolio for the January 1 renewal. It is not rate increases that we expect to see for January 1. And yes it is a blended rate over the whole portfolio and there is a range within that with catastrophe exposed lines being at the higher end of the range, and liability lines being at the bottom end of the range.
Jay Gelb - Barclays Capital
So, what is the embedded assumption there on exposure or shift in mix versus rate?
Costas Miranthis
I expect the overall first of all in terms of volume, the overall volume for January 1 to be relatively stable. In terms of exposure that will be some fine tuning going on in the portfolio. But no significant changes in overall exposure. As I said on prior calls during the year we have been looking at the exposures of the portfolio and the CAT component of the portfolio is slightly less than it was a year ago that may be a little more fine tuning to do in this respect, but I don’t expect radical shifts in the portfolio during the renewal.
But much of that will depend on where we see opportunities. In a transitioning market opportunities arise sometimes when you don’t expect them, and we have the capital, and we have the ability to take these opportunities when they are right. But we are not planning for any major shift.
Jay Gelb - Barclays Capital
So, should the level of rate increases then be widely less than that high single digit, low double-digit, am I getting it the right way?
Costas Miranthis
I expect in terms of rate increases some of the trends that you saw in the July renewal to repeat themselves in January. In the underlying market we are seeing surely high single digit increases in property, particularly in the US right now. I think that is beginning to come true. It is not the same everywhere in the world, but when I talked about psychology earlier on, it is perhaps the most attractive I mean, when we sat down with our renewals, virtually none of the negotiations with about how price should decrease, but while price increases should be limited. So that gives you a flavor about the situation we are in.
Jay Gelb - Barclays Capital
It does. Okay and then on a separate issue, the companies had to deal with increased loss estimates for Japan and New Zealand, most of Japan for a couple of quarters now, can you clarify for us whether there is any chance of further adverse development?
Costas Miranthis
For me to say there is absolutely no chance of further development, it means that any policy that we have that could potentially be exposed to these events have been fully reserved and exhausted. So clearly we are not in that situation. All I can say is that based on the evidence that we have now, I believe that our reserves are prudent, prudent includes a mild conservatism and that generally pitched above the levels that they see themselves (inaudible) as well as what they see their losses will be.
Jay Gelb - Barclays Capital
And I don’t mean to press on this, but what is the risk of dollar amount of that risk potential development?
Costas Miranthis
As I said I can’t quantify this. I mean there may be a risk of adverse, there may be improvement. But I can’t quantify this. Even where we are today, we believe we are prudently reserved.
Jay Gelb - Barclays Capital
Okay. Thank you.
Operator
And we will take our next question from Mike Salinsky with Credit Suisse. Please go ahead. Your line is open.
Mike Salinsky - Credit Suisse
Hi thanks. I believe in the past you have talked about reducing CAT exposure to roughly I think 35% of the total capital versus something above 40 today. Can you update us on those measures?
William Babcock
Yes, we have been in the process of doing that since the beginning of the year, and we believe now I think the range is somewhere in the 30% to 40% range, and we will be within that range.
Mike Salinsky - Credit Suisse
Okay. So you wouldn’t be looking to if you were since you are constructive on one-on-one renewals, would you be willing to go over that range?
William Babcock
It will depend on the price environment that we experience, and the other alternatives available to us. As I said before, that is my target range to be 30% to 40%, going a little bit over may happen occasionally in exceptional pricing environments. Frankly I don’t expect the environment to be exceptional, but whenever we look at opportunities we weigh them against all other alternatives, including capital management alternatives.
So for us to be willing to push the envelope on the categories, it will have to be an exceptional environment. It would compare with all other options available to us to increase book value per share.
Mike Salinsky - Credit Suisse
Okay. And the last follow up, something I was hoping you can clarify, on different data sources it shows different figures, can you clarify your private equity ownership currently?
Costas Miranthis
Bill.
William Babcock
I believe that percentage is roughly 16% to 17%.
Mike Salinsky - Credit Suisse
Okay. I will get back in the queue. Thank you.
Operator
And our next question comes from Cliff Gallant with KBW. Please go ahead. Your line is open.
Cliff Gallant - KBW
Good morning. Two questions, one, just a clarification, the agricultural growth, you mentioned there was a $32 million adjustment. Was that the main driver of the premiums there, or was there underlying organic growth as well?
William Babcock
Hi Cliff, it is Bill. It was really related to an EPI adjustment for a single contract. And as you know these are – they are annual periods, and we are in the third quarter. So the adjustment that you see reflected this year, this quarter reflects an adjustment for kind of the three quarters to date and that is the entire amount of the increase of this adjustment.
Cliff Gallant - KBW
Okay. Secondly, just in terms of just capital position I know you guys have said that you feel comfortable in your position but generally one and all, but how about in terms of generating excess capital and returning to capital management?
Costas Miranthis
I said before the capital management is one of the options that we have and buying back our own stock especially at the current valuations appears to be an attractive option. So you should expect to see over the coming weeks, months some action.
Cliff Gallant - KBW
Okay. Thank you.
Operator
And we will take our next question from Joshua Shanker with Deutsche Bank. Please go ahead. Your line is open.
Joshua Shanker - Deutsche Bank
Yes, thank you. I don’t mean to be difficult, but listening to your answer to Jay’s question about rates, inclined to our – are really not trying to bring rates down, you also seem very optimistic that we’re the foothills of some kind of turn. But yet I don’t get the sense listening to your commentary that you think that the loss adjusted rates are going to be up much at January 1. So I was wondering if you can talk a little further about the timing of when you think you will get that rate and what not.
Costas Miranthis
Sorry about that. I do expect rates to be up at January 1. I didn’t, I said in some cases that the overall premium may not be up, but it will be the same dollar amount for less coverage. That means the premium rates are up, and I expect overall premium rates to be up. What I did point out is that even with the increases in rates, and if that is affecting our profitability, which we are likely to experience in many areas, particularly shorter tail lines, that the effect to a significant extent will be negated by the movement in risk-free interest rate. The fact that we make very little money or the cash flow that we earn through the insurance process is something that we take into account, when we look at the attractiveness of what are the opportunities available to us.
Joshua Shanker - Deutsche Bank
And so the tactical rate, including investment income won’t necessarily be up, but even if you do get a premium in the underwriting gain?
Costas Miranthis
When I talk about tactical rate, I mean premium rates. So the losses plus commissions, divided by premiums.
Joshua Shanker - Deutsche Bank
Okay.
Costas Miranthis
When I talk about ROEs, I look at what it means in terms of risk and CAT results, factoring in the risk-free interest rates.
Joshua Shanker - Deutsche Bank
That clarifies it. Thank you, and the other question, I am sorry you may have mentioned this, but I was on another call right at the beginning, the press release from four days ago had $136 million in first half 2011 event increases, and yet the press release from last night about $42 million more, was there something besides New Zealand and Japan in that number?
William Babcock
Yes, Josh, what we disclosed was movement on our material losses during the quarter. We did not disclose in our press release every piece of prior quarter development that we had. That accounts for the difference between those two numbers.
Joshua Shanker - Deutsche Bank
And so the 42 million, does it relate to non-named events or where they casualty events?
William Babcock
Yes, primarily related to non-large, what we define as non-large losses. Some of it is CAT, some of it is non-CAT.
Joshua Shanker - Deutsche Bank
And are there events you are familiar with or quite small and just high frequency event?
William Babcock
If they were material, we would tell you about them separately.
Costas Miranthis
For the last company, we get the number of events below the threshold where we report events to you, some of them you hear about, a lot of them you have never heard about. We operate internationally. For us to have a 7, 10 million loss in a factory, a 50 million loss, it is something that happens every quarter.
William Babcock
Yes, Josh, I understand your point here, and this is where we have difficulty in drawing that line. What we have done is we have drawn that line at roughly $35 million, and we will tell you about things that are more than that, and if we have a lot of smaller things that aggregate to a big number, we will talk about those as well.
Joshua Shanker - Deutsche Bank
Right, right. I’m not trying to disco, but $2 million, you threshold is 35, that is a big move?
William Babcock
No, it is not comprised of one item.
Joshua Shanker - Deutsche Bank
It is not comprised of one item. Okay thank you.
Operator
And we will take our next question from Gregory Locraft with Morgan Stanley. Please go ahead. Your line is open.
Gregory Locraft - Morgan Stanley
Hi thanks. I want to just pursue capital deployment because the buybacks is obviously back on the table as you mentioned, how should we be thinking about that. I mean obviously the stock has traded off, and so therefore I imagine that the ROE accretion et cetera is incredibly compelling relative to other opportunities. So thinking of the Governor [ph] there, operating income earned in the quarter, should we be looking back to the preferred of 375 in June. I mean what is your appetite in the next few quarters to get in there and really buyback your stock?
Costas Miranthis
Yes, obviously at these valuations as you point out it is a very compelling investment. You know, we need to balance the opportunities we see to grow the business, and support clients with buying back shares. I think in our prepared remarks we did say that they expect to be back in the near term, and we gave you the size of the existing authorization. So to go beyond that I think probably it is premature at this point. I will tell you if we decide – if we decide to increase our authorization, we will put a press release out on that.
Gregory Locraft - Morgan Stanley
Okay that is very helpful. Secondly with regards to and just shifting, have you guys given out a PML constraint other than what is in the K, or is that the only disclosure around PMLs, and specifically I am looking for kind of an (inaudible) world?
Costas Miranthis
Let me say a couple of words to put this in context, our risk management framework calls for limit constraints, the maximum limits that we will deploy in any one zone around the world, and we give you that information in the K. limit is not PML, and it is the maxim that we will deploy in any zone. So we will give you the maximum information in the highest zone around the world.
In prior calls, I said that we are looking how to improve the disclosures and the information that we provide for you and you should expect to see early next year in the first half of next year information of PMLs that we run in particular zones of the world. But this is not, we don’t have a constrained, they have not been constrained on what the PML or our government is over the limit, which is deployed. I hope you understand the risk we run we will disclose some of the PMLs going forward.
Gregory Locraft - Morgan Stanley
Got it. That is great. And then last is very specifically on the Thai, the flooding that is going on. I’m sure it is premature, but any thoughts on what sort of losses could emanate, this is going to be an insurable event?
Costas Miranthis
I am sure this will generate insurance and reinsurance losses. I think there will be a substantial amount of reinsurance losses. For us we have a very small market share in Thailand. So, although we expect that there will be some impact, at this stage there is no indication that I have them, that this will be a reportable number. So clearly the event is unfolding. There is a lot more information, but think about us having somewhere about 0.5% and 1% on market share on that area. So, it is not an area where we have a very material exposure.
Gregory Locraft - Morgan Stanley
Okay. Thank you very much.
Operator
And we will take our next question from Matthew Heimermann with JP Morgan. Please go ahead. Your line is open.
Matthew Heimermann - JP Morgan
Hi good morning. A couple of questions. First, just last quarter you mentioned that you expect to have $23 million of premium that normally renewed in 2Q renew in 3Q, just wanted to double-check that in fact happened and if you could remind me what segment that was in?
Costas Miranthis
I think you were referring to some of the Japanese extension, and that happened in the CAT segment.
Matthew Heimermann - JP Morgan
Okay, and then just given that your disclosure on the CAT side is a little bit more limited than some others, I was wondering if maybe you would be willing to give us a sense of how your annual aggregate internally generated PML compares with your largest single event PML on kind of a one in 100 year basis or one in 250 year basis?
Costas Miranthis
Matt, I guess that we will include the disclosures when we are ready to give the whole picture. You will see it in our Qs and Ks. So, and I don’t think there is any point in giving isolated piece of the information now on, and it won’t be, as I said I promise in the first half of next year you will see that information.
Matthew Heimermann - JP Morgan
Or can you give us a sense of maybe how that has changed beginning of the year to end of the year given some of the reductions that you have been talking about?
Costas Miranthis
I think it is roughly proportional. You will see in an aggregate basis this thing about the portfolio being down about 15% to 20%. I think what is more interesting is that the significant variations in some zones, some of the non-peak US zones have gone down significantly more than that?
Matthew Heimermann - JP Morgan
Okay, and then I guess last question, for Bill, just and I guess this isn’t a question, this is a comment. But I guess just going forward, especially if you are going to preannounce the CAT number so close to earnings, I think most of us would probably find it more helpful if you just gave us the total you expect in the quarter rather than parsing it out the way you did. I certainly appreciate kind of the threshold and I think kind of inter quarter that makes a lot of sense, but just when we get so close I think most of us kind of look in for a total rather than a portion?
Costas Miranthis
I know this was addressed to Bill, but I will jump in. in general, what we expect to do is give you information as and when we have reliable information. In this particular quarter, and I think it happened in the last couple of quarters, we have specific events that happened very close to our reporting date that led to the announcement of losses being very close to the reporting date. This is not a policy that we want to announce one week or two weeks before we announce the results.
For this quarter in particular, given that we had the development in Japan, we waited to get all the information we could gather from the scene, before we reported numbers to you. This was not a new event. It was development on an existing loss.
Matthew Heimermann - JP Morgan
No that is fair. And I’m not disagreeing with you in total, I am just in the event that you have, in the unfortunate event you preannounce so close to the quarter as you have in the last couple of quarters, I think if you give a total loss it will be more helpful. It certainly understand kind of your 35 million threshold for other events, and in the past when you preannounced those it has generally been at the point in the quarter where it is easier to put into context. So that was my only point.
William Babcock
If I understand Matt, just two points I would like to make. You know the first one is that we did give you our total CAT unit losses that was all in. and frankly on this call, we can’t give you a CAT all in for all lines for a quarter because we don’t know where to draw the line. So I understand your point, but I feel what we gave you was as responsive as we could be to these concerns.
Matthew Heimermann - JP Morgan
All right. Thanks.
Operator
And we will take our next question from Jay Cohen of Bank of America/Merrill Lynch. Please go ahead. Your line is open.
Jay Cohen - Bank of America/Merrill Lynch
Thank you. Most of my questions have been answered. Just one follow-up on the Thai flooding, from what I understand a fair amount of the commercial insurance market in Thailand is held by Japanese insurance companies, and clearly you did have a sizeable exposure to Japan, and I’m wondering if you take that into account when you make your comment about your relatively modest market share in Thailand? And then am I wrong to begin with, I maybe wrong?
Costas Miranthis
No, I think you are right that a very, very significant proportion of those losses is likely to go to Japanese companies. And those exposures are reinsured, but the reinsurance is typically very different from the quake reinsurance. Those are reinsurances known for Japanese insurance abroad, and we actually don’t participate in that at all.
Jay Cohen - Bank of America/Merrill Lynch
Great. That is helpful. Thank you.
Operator
And we will take our next question from Justin Maurer with Lord Abbett. Please go ahead. Your line is open.
Justin Maurer - Lord Abbett
Good morning guys. Costas, you have had a tough first year on the job I guess. Just thinking about what you’ve had to deal with obviously the cash, but then just kind of the finishing off of bringing the PARIS book together and rates under pressure, and now kind of repositioning the book. If you take a step back, and you probably have not had the chance to what do you think you guys have been able to accomplish that maybe we can’t appreciate, particularly thinking about repositioning of book. As you know there has been a lot of criticism about the Japanese piece and what was really the red online that you guys were getting for that business. Was it really as profitable as you thought it might be, and so again if you could give us a 20,000 foot view?
Costas Miranthis
Look it is – right, it hasn’t been the easiest of starts. Comparatively every cloud has a silver lining and I think having had this experiences early on, we had good kind of photo takers and step back and said that some things that we ought to be doing differently. And I said before you should expect to see a more active management of CAT exposures. And you should expect to see us moving up and moving down, perhaps more actively than we have done in the past.
The flipside of that may be more active capital management. But that is the end of the story. On the longest I think it will take some time to look at all of our operations and how we go forward, the longest in challenges. And I think we are making some good progress there. it has been unfortunately we count for that with all the activities on that because we had to deal with losses this quarter, but I am very encouraged by the progress that we are making there, and the integration of Paris Re is now behind us, as I said, we are moving all as one company.
Justin Maurer - Lord Abbett
There was some criticism, there was some inference in the screen, I mean you guys were one kind of renewal period away from kind of fully integrating those vehicle one renewals, which happen to be that region, you know, and you maybe got caught a little bit just on the timing issue. But would you have undertaken may be as significant of a review or repositioning in a portfolio had, and if it is hypothetical, how do you guys have been able to kind of skate through that period without the events that we have this spring or was that something that you were contemplating doing regardless?
Costas Miranthis
It was something that I would have contemplating doing regardless.
Justin Maurer - Lord Abbett
Okay. All right. I appreciate the color. Thanks.
Operator
And we will take our next question from Vinay Misquith with Evercore Partners. Please go ahead. Your line is open.
Vinay Misquith - Evercore Partners
Hi, good morning. First question is on the credit reinsurance book, just curious about what is happening with losses on that business given the troubles in Europe?
Costas Miranthis
I can tell you about the loss experience that we have had over the last couple of years, and because you know the credit portfolio back in 2008 had some meaningful losses, but we experience since then has been extremely positive. You can say they have taken actions. They have both been cleaning their own book and putting premium rates up, and that account right now is one of the more profitable areas in the whole portfolio, even with a very conservative preserving position for that segment. And there is no evidence of any uptick in losses.
Vinay Misquith - Evercore Partners
Do the business [ph] have exposure to Southern Europe or is it mainly Northern Europe?
Costas Miranthis
The business has exposure to across the world. It is not just in Europe, although the bigger concentration of the exposure typically tend to be in France and Germany.
Vinay Misquith - Evercore Partners
Okay, great. And the second question is on the accident year loss ratio ex-CAT, I think that increased this year versus the year ago quarter, just wondering sort of what are the movements causing the high accident year loss ratio? Thanks.
Costas Miranthis
Vinay, I would say, I think the general comment here it is going to be mix, it is going to be an increase in midsize losses in certain lines, and it is going to be continued competitive pricing in many lines as well. So I would say that those three things those are all the biggest drivers.
Vinay Misquith - Evercore Partners
That is great. Thank you.
Costas Miranthis
You are welcome.
Operator
And we will take our next question from Brian Meredith with UBS. Please go ahead. Your line is open.
Brian Meredith – UBS
Hi, good morning. Two quick questions here for you. First could you tell us if you got any impact from the deck accounting changes or expect any impact from the deck accounting changes?
William Babcock
We don’t. No, we have no impact. We have had no impact and don’t expect any.
Brian Meredith – UBS
Okay, excellent. And then the second one for Costas, so you have hired a new global strategy and business development head, I guess the question I have is, what are some of the initial kind of areas or initiatives that that person is looking into?
Costas Miranthis
As I said before when I came in, one of the things I wanted to do is take a good look at all of our businesses, look at the challenges, look at where we have opportunities. And as I look at the staffs that I have had here on this group, this is an area that I needed somebody to help me with. So based on that, we hired (inaudible). He has arrived. He has been with us for around a month, and he has been spending some time to getting to learn the organization.
And to be frank with you, we haven’t sat down with that and prioritized what the areas that we need to be looking at yet. I know that that is something that I want to be doing, and I want to be doing on a regular basis to have – where we look before the current year plan, beyond the next renewal or the renewal after that and looking at the strategic challenges we face in each one of the segments of our business. And this is just formalizing this process.
Brian Meredith – UBS
Great. Thank you.
Operator
And we will take our next question from Amit Kumar with Macquarie. Please go ahead. Your line is open.
Amit Kumar - Macquarie
Hi thanks and good morning. Just two quick follow up questions, first of all just going back to your comments on the one on one discussion, did these discussions factor in the new RMS 11 euro model and if not what impact do you foresee from that model change going forward?
Costas Miranthis
Yes, RMS 11 euro is out. As far as I am aware it hasn’t been implemented by many citizens, and I’m not sure whether it will be implemented for the January 1 renewal. The effect of that is unclear to me. I think it may create more demand in some areas and less in others in different layers of the program. I will see. I think it is too early to tell.
From our own account, as I said before, first of all, we don’t manage to a model. Second we don’t use a single model. We use multiple models, and we rely very heavily on our own internal views. So in terms of the attractiveness of the business, I don’t think we’re materially changing our views. We look at what others are doing, and we are learning from that.
So I think it will be a mistake to say that we ignore all the changes and what RMS is changing. We’re looking to learn and understand the reasons for the changes, but it hasn’t fundamentally changed our perception of Greece or Europe.
Amit Kumar - Macquarie
Got it. Okay that is all I had. Thanks.
Operator
And we will take our final question from Ian Gutterman with Adage Capital. Please go ahead. Your line is open.
Ian Gutterman - Adage Capital
Thanks. First of all thank you for the disclosure about the reserve development and the investments, you saved me therefore questions. Just one other numbers one, on the CATs, just to be clear there was no losses from current quarter events including Irene and the Denmark floods?
Costas Miranthis
Not that were in excess of 35 million individually.
Ian Gutterman - Adage Capital
Okay, can you give us a sense of what they were below that in aggregate, just to help me on the accident year?
Costas Miranthis
Actually I will give you the two largest impacts. Irene was 33 million spread across a couple of segments, and the cloud burst in Sweden was about 18 million, I am sorry Denmark.
Ian Gutterman - Adage Capital
Denmark 18?
Costas Miranthis
Was 18, yes.
Ian Gutterman - Adage Capital
Great. Okay, and then I just wanted to follow up on the capital discussion. Obviously, I would like to see you repurchase stock given where the price is, on the other hand I anticipated maybe incorrectly that you had been a little bit more nervous about proceeding here just given the agency industry concerns, and having more development in the quarter, and still some uncertainty, can you just sort of talk about how comfortable you are buying back stock until you are sort of settled with the agencies?
William Babcock
Maybe the best way to describe it is to say, the comments that we have made both in the prepared and during the Q&A about share repurchases contemplate our capital position, and view of the regulatory – of the rating agency. So not sure I can add more other than to say that that is factored into my comments.
Ian Gutterman - Adage Capital
Okay. Fair enough, and if I can throw at the flip side at Costas, I guess I wonder why if we have new business that is barely double-digits, maybe it is even high single digits. Why is it the opportunity given the IRR and the stock prices got to be well into the double digits, very, very, very high double-digits, why we want to be actually be looking to shrink that one line, just because price is up a little bit, I mean who cares. Right, it is still not enough, why not shrink to enable you to do more buyback and then have more powder for when the market does turn somewhere down the road, rather than deploying still adequate returns. I mean it just seems to spread between the ROE of the new business, and the IRR of buying back your stock is maybe the (inaudible)?
Costas Miranthis
I think it is a very good question. Clearly what we try to do is as I said is maximize economic value per share over the medium and long term. As part of the way of maximizing that is retaining relevance. So you can go on shrinking the book, but you lose relevance. You can push to the extreme, and you are right because purchasing back your own stock at the current valuations, there is very few things that will fit that. But ultimately we are in the reinsurance business, and we are yet to be able to take advantage of the turn in the market. So we got to balance the two, and the option of not growing is always there.
It will depend on what price increases we see, and determine that they will makes more sense to make a little bit more room for share buybacks we may make.
Ian Gutterman - Adage Capital
That is fair, and I am not suggesting you should cut your bucket by half, but you know if your shrunk 10% next year, I don’t think that would hurt your relevance in the market. And I guess the way I thought about it, and it is not just directed to PartnerRe, it is really across the sector, but don’t we have a hard market in buybacks, isn’t the return in buybacks equal to or greater than the returns we get from underwriting in a hard market, so why wouldn’t we take advantage of that, and create as much capacity as we can by cutting back ratings that clearly are in that hard market returns?
Costas Miranthis
I guess I understand, I understand your viewpoint, and I think it is everybody’s viewpoint, and something that I would take into account.
Ian Gutterman - Adage Capital
Okay. Fair enough. Thank you.
Operator
And it does look like we have a follow-up question from Jay Gelb from Barclays Capital. Please go ahead. Your line is open.
Jay, your line is open. Okay, we will take a follow up question from Mike Salinsky with Credit Suisse. Please go ahead. Your line is open.
Mike Salinsky - Credit Suisse
I guess I get to ask the question since Jay didn’t. Just quick question in the supplement, it shows the average yield to maturity at market being 2.5% that is down from around 3% in prior quarters. I guess I’m just curious what that number exactly means, but I can’t back into it, and I ask because you have talked about expecting lower interest income levels going forward?
William Babcock
I am not quite sure of your question. Can you restate that?
Mike Salinsky - Credit Suisse
So, you talked about expecting lower interest income levels, due to rates being down, and then if I look in your supplement and investment portfolio the overview, you show an average yield to maturity at market for the portfolio I believe being 2.5%, which is down a full 40 bps from the prior quarter. So I want to see if I should be reconciling anything with this number with regards to interest income?
William Babcock
No, I think those figures as well as the increasing in the spread of the reinvestment versus portfolio yield that we mentioned is really indicative of that you should expect decreases. You know, what we experienced this quarter again if you look quarter-to-quarter you can always have a little bit of noise, which is what we saw this quarter. Costas mentioned that it was an increase, but it really masked a decrease FX and other it is. They are small but you should expect the trend to be decreasing.
Mike Salinsky - Credit Suisse
So the new money yields were what versus the book yields this quarter?
William Babcock
I don’t have the absolute numbers, but I have the spread. It is 131 basis points.
Mike Salinsky - Credit Suisse
Thank you very much.
William Babcock
You are welcome.
Operator
And it appears that we have no further questions.
Robin Sidders
Well, thank you everybody. This concludes our call. Thanks for joining us today, and thanks for your interest in PartnerRe. We look forward to speaking with you again during our next quarter.
Operator
And this concludes your teleconference. Thank you for your participation. You may now disconnect.
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