XL Group Plc (XL) Michael S. McGavick on Q2 2016 Results - Earnings Call Transcript

| About: XL Group (XL)

XL Group Plc (NYSE:XL)

Q2 2016 Earnings Call

July 27, 2016 5:00 pm ET

Executives

David Radulski - Senior Vice President & Director-Investor Relations

Michael S. McGavick - Chief Executive Officer & Director

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Analysts

Kai Pan - Morgan Stanley & Co. LLC

Jay Arman Cohen - Bank of America Merrill Lynch

Brian Robert Meredith - UBS Securities LLC

Sarah E. DeWitt - JPMorgan Securities LLC

Josh D. Shanker - Deutsche Bank Securities, Inc.

Michael Nannizzi - Goldman Sachs & Co.

Ryan J. Tunis - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Ian J. Gutterman - Balyasny Asset Management LP

Randy Binner - FBR Capital Markets & Co.

Amit Kumar - Macquarie Capital (USA), Inc.

Meyer Shields - Keefe, Bruyette & Woods, Inc.

Ryan Byrnes - Janney Montgomery Scott LLC

Operator

Good evening, and welcome to the XL Group's Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please be advised this conference is being recorded.

Now, I would like to turn the call over to David Radulski, XL's Director of Investor Relations. Please go ahead.

David Radulski - Senior Vice President & Director-Investor Relations

Thank you, Laura. And welcome to the earnings conference call for the second quarter of 2016. Our call today is being simultaneously webcast at www.xlgroup.com. Note that on July 25, 2016, we completed our re-domestification from Ireland to Bermuda, and XL Group Ltd. is now our public parent company.

However, as the quarter ended June 30, the results discussed today are those of XL Group plc. We posted to our website several documents, including our press release and quarterly financial supplement. We also remind you that we use our website as a means of disclosing material information from time to time and encourage you to monitor our Investor Relations web page.

On our call today, Mike McGavick, XL Group's CEO, will offer opening remarks. Pete Porrino, XL's Chief Financial Officer, will review our financial results; followed by Paul Brand, our Chief Underwriting Officer and Chair of our Insurance Leadership Team; and Greg Hendrick, our Chief Executive of the Reinsurance Operations, will review their segment results and market conditions. Then we'll open it up for questions.

Before I begin, I'd like to remind you that certain of the matters we discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations, all of which involve risk and uncertainty, and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements. Therefore, you should not place undue reliance on them.

Forward-looking statements are sensitive to many factors, including those identified in our most recent reports on Forms 10-Q and 10-K, as well as other documents on file with the SEC, that could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date on which they're made, and we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise.

With that, I turn it over to Mike McGavick.

Michael S. McGavick - Chief Executive Officer & Director

Good evening, and thank you for joining our call. Tonight, as is our normal practice, I'll share some highlights from the quarter results; Pete will discuss the financials; and then Greg and Paul will go through the Insurance and Reinsurance segments retrospectively.

Turning to our results. The most notable aspect of the quarter, as it has been for the entire sector, was the high level of catastrophes. We pre-announced our losses of $240 million due to these events back on July 13. Major sources of loss were the wildfires in Fort McMurray, Alberta, the earthquakes in Japan and Ecuador, and U.S. and European storms. These events reduced our second quarter operating earnings by $0.84 per share, as you'll hear in greater detail from Greg and from Paul. These losses were in line with our expectations and in line with, or below, our market share. And it is noteworthy that both segments turned a profit despite these losses.

Turning then to our underlying performance in the quarter, we would say, simply, this is more like it. The quarter was largely free of distortions related to the Catlin acquisition, and many of the metrics suggest that we have taken an important step forward in the right direction.

Despite the cat events, and including $52 million in integration costs, in the second quarter, XL Catlin generated $0.37 in operating earnings per share and grew fully diluted tangible book value per share by 3.6%. XL Catlin's ex-cat accident year P&C combined ratio of 90.3% was an improvement of 1.8 points from the first quarter of the year, and 2 points from the second quarter a year ago. These improvements came from both operating and underwriting discipline.

Let me focus briefly on underwriting discipline. You've heard us often comment that we believe that this combination of XL and Catlin has really changed our relationship to the market. We know that the way clients and brokers think about us is truly different. And as a result, we have been given the opportunity to write things that neither XL nor Catlin would have seen before. And what we're seeing now is the effect of these new opportunities and the effect of our discipline, come together.

You'll hear in a moment from Paul that when you take out programs we're exiting, the growth rate in Insurance was actually about 5%. So, why would we be having that success? Well, submission volume is up from our top broker partners, and we are quoting a commensurate more amount. But our hit ratio, the amount that we actually write when we quote, has stayed flat, meaning we're finding about the same portion that we are willing to write on our conditions, but we're getting a greater volume to select from.

This gives me comfort that we are not chasing business, as does our system of backchecking price adequacy. This is the hallmark of the underwriting discipline. And while this progress has been building quarter-over-quarter, it is exactly the kind of thing that we believe we should be able to continue to produce, even accelerate, as our underwriting teams are really hitting their strides. We are very proud of the hard work of our underwriters and their support teams in these difficult market conditions.

Before I turn it over to Pete to discuss our financial results, I'll make two brief comments on other important topics that I'm sure are on your minds. First is Brexit. We believe we are well-prepared, as well-prepared as possible for this outcome, that we have thought about the future possibilities, and that we're in a great position to respond accordingly to whatever develops.

Second, our parent company moved to Bermuda, which was completed as of Monday. Bermuda has served as a base for global insurance and reinsurance providers for decades and has, in the Bermuda Monetary Authority, a proven world-class regulator.

XL has had substantial operations in Bermuda for 30 years and, of course, it was the corporate home for Catlin before our companies joined. So our integration, combined with Bermuda receiving full Solvency II equivalents early this year, made this a very logical move, which we think will serve the company well. We are pleased to be there.

It is worth noting, from a day-per-day perspective our clients, brokers, counterparties and partners should see no change in how we work with them. And as we said before, we expect no material impact to our future results or global effective tax rate as a result of this move.

So in sum, positive progress showed in the numbers in the second quarter. We are determined that it will continue.

With that, I'll turn it over to Pete.

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Well, thanks, Mike, and good evening. Operating net income for the second quarter was $106 million or $0.37 per share on a fully diluted basis, compared to $246 million or $0.84 per share in the second quarter of 2015, which included two months of the legacy Catlin operations.

As indicated in our July 13 8-K, our natural catastrophe losses for the second quarter totaled $240 million compared to $60 million in the prior-year quarter. The largest of these events, the wildfires in and around Fort McMurray, accounted for approximately half of our estimate of catastrophe losses for the quarter. During the second quarter, we incurred $52 million in integration costs, which are included in our operating income.

For the quarter, our property and casualty combined ratio was 96%, or 6.1 points higher than the same quarter last year, again primarily driven by those catastrophe losses. As Mike noted, our ex-cat accident year combined ratio was 90.3%, or 2 points better than the same period last year. Paul and Greg will discuss our underwriting results in further detail.

As discussed on previous calls, the second and fourth quarters are significant reserve valuation quarters, and as a result, we react appropriately to any development indications identified during those in-depth reviews.

Prior-year net development in the second quarter was a favorable $99 million, or 3.9 loss ratio points for the quarter, compared to net favorable development of $109 million or 5.3 loss ratio points for the same quarter in 2015. This reflects favorable development of $34 million in the Insurance segment and favorable development of $65 million in the Reinsurance segment.

Operating expenses have remained generally flat compared to the first quarter of this year and slightly higher than the second quarter of 2015, due to legacy Catlin costs being included only from May 2015 onward. We continue to view full year overall expense levels and integration expense levels as in line with the estimates provided in our 8-K filed in June.

Our estimated operating tax rate to ordinary shareholders remains consistent with the 10% to 12% we noted in April, with adjustments to the prior-year tax revisions lowering the six-month rate to 8.8%. Our annualized operating ROE, excluding integration costs in AOCI, was 5.7% for the six-month ended June 30, 2016, and was significantly impacted by the catastrophe losses in the second quarter.

Turning to the investment portfolio, and as usual, my comments will exclude the Life Funds Withheld Assets. Net investment income was $176 million, in line with the same quarter last year and greater than the $164 million in the previous quarter. While the low interest rate environment continue to pressure net investment income, the second quarter benefited to a modest extent from some non-recurring factors, including certain amortization adjustments.

Given current yields, net investment income will continue to remain under pressure, as we have approximately $3.1 billion of assets with book yields of 2.4% rolling off over the next 12 months. During the second quarter, our average new money rate was 1.7%.

The gross book yield of the fixed income portfolio at the end of June was 2.3%, virtually unchanged from the first quarter. The duration of the fixed income and cash portfolio was 3.3 years at the end of the quarter, marginally higher than the prior-year quarter, mainly due to cash being put to work.

Total affiliate income was $35 million for the quarter compared to $41 million in the prior-year quarter. While our hedge fund affiliate portfolio broke even for the quarter, it did not meet its benchmarks. Many of our funds pursuing quantitative equity strategies were challenged, and several of our directional equity funds did not fully capture the market rally.

On a year-to-date basis, our hedge fund portfolio continues to outperform its benchmark, and we continue to believe that a modest allocation to this asset class improves our overall risk adjusted returns. Our private equity, strategic and other operating affiliates posted relatively strong equity earnings. Our investment manager affiliates contributed $15 million (11:14) to affiliate income with the gain on the sale of an individual position being an important contributor.

Unrealized net gains were $1.14 billion at the end of the quarter. The total mark-to-market return on investments was 1.5% for the quarter in original currency. The favorable return was driven by lower rates, which more than offset the adverse impact in credit spread widening.

Looking forward, we expect financial markets to remain volatile over the near to mid-term, and we will continue to monitor our portfolios closely, as a result. And with respect to the capital management, we continue to execute share buybacks during the second quarter.

Our board of directors approved a new share buyback program at our May meeting authorizing the purchase of up to $1 billion of our ordinary shares, replacing the remaining amounts under our previous share buyback authorization. During the quarter, we purchased 9.7 million shares for $328 million at an average price of $34 per share, leaving $816 million available for purchase under our share buyback program.

This accelerated rate of buyback represents the completion of the additional $250 million we discussed in April, as well as a slight acceleration of our 2016 target given current market conditions. We continue to view these buybacks as an efficient capital management tool and remain focused on ensuring that our overall financial leverage moves towards our target levels over the next few years.

And I'll now turn it over to Paul to discuss our insurance segment results.

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

Thanks, Pete. This evening, I'll cover the results for the segments, provide an update on current market conditions and finish with some comments on premiums and expense management.

First, the results. I am pleased to report our 14th consecutive quarter of profitability dating back to Q1 2013, despite the higher cat activity we experienced during the quarter. The segment produced a calendar quarter combined ratio of 96.4%, compared to 97% in Q2 2015, and 96.5% last quarter.

Higher cat expense of $97 million, compared to $60 million in Q2 2015, and slightly lower prior year reserve releases of $34 million, compared to $38 million last year were more than offset by material improvements in the underwriting expense ratio of 1.8 points and the accident-year ex-cat loss ratio of 1.1 points. On accident quarter ex-cat basis, the combined ratio was 92.6%, compared to 95.4% in Q2 2015 and 95% last quarter.

For Q2, we reported an acquisition ratio of 13.7%, compared to 12.9% in Q2 2015 and 14.1% reported last quarter. This is more in line with the guidance provided last quarter. The reason for the slight increase over prior year is because Q2 2015 only reflected two months of the Catlin business, which included a larger share of wholesale specialty business where the gross acquisition costs are higher and the loss ratio is lower than the legacy XL business.

This increase in acquisition ratio is largely offset by a Q2 operating expense ratio of 18.1%, which was 2.6 points lower than Q2 2015 and by a net accident-year ex-cat loss ratio of 60.8%, which was 1.1 points lower than Q2 2015.

Pricing has remained broadly consistent at minus 3% for the quarter. Our casualty line showed flat pricing in the quarter. Our professional and specially businesses were both down 3% reflecting continued competitive conditions in the North American professional, aviation, and crisis management lines. And our energy, property and construction businesses were down 5%.

Insurance gross premiums written in Q2 increased by 13% or $292 million year-over-year driven mostly from the Catlin acquisition, where we had three months of the Catlin business in the quarter versus only two months in Q2 2015. When we look at both legacy organizations and normalized for foreign exchange, our actual year-over-year growth was circa 1% in Q2.

However, when you consider the portfolio tuning activities we started in 2015, where as mentioned previously, decisions were made to exit certain underperforming businesses, totaling approximately $100 million in the quarter, we see growth in the range of 5%, and 3% on a year-to-date basis.

This underlying growth whilst the market remains difficult our underwriters continue to leverage our enhanced capabilities and stronger market presence post the transaction into finding new profitable opportunities.

Driving some of these opportunities was also the addition of new talent as Q2 was a strong quarter for new leaders of both existing and new businesses.

We recruited Dan Riordan to lead our global political risk trade and credit business, Patrick Corbett joined to head our new retail accident health business, Simon Mobey we've added to head our Ultra High Net Worth, Brian Benjamin joined to launch our global merger and acquisitions businesses, and Stephen Oh was recruited to lead our excess and surplus lines business. We fully expect these new leaders and businesses to add further profitable growth to the segment in both the short and long-term.

For the insurance segment, ceded premiums written in the quarter were $732 million compared to $818 million in Q2 2015. This represents 29.1% of GPW compared to 36.8% in Q2 2015 and 39.9% reported in Q1 2016. As mentioned last quarter, the ceded written premium line reflects some changes in the way we purchase our reinsurance program, the timing of our reinsurance program purchasing as we move towards an enterprise wide reinsurance program.

On a year-to-date basis, our cession ratio was 34.5% compared to 35.7% in 2015, and we expect it to further reduce as the full year unfolds and we fully transition to our enterprise wide reinsurance program. The benefits of which will continue to deliver better value to our shareholders by sustainably improving the group's risk return profile with strong coordination across our wider capital strategy.

It is essential that we react to the top line challenges by carefully managing expenses. In the quarter, we selectively exited another 35 positions for a total of over 70 positions during the first half, as we continue to streamline our underwriting capabilities across our divisions and regions.

While some of the expense savings from these actions are reflect in the quarter, additional savings will flow through in subsequent quarters along with other efficiency initiatives that are currently underway.

In summary, we have delivered another quarter of underwriting profitability despite market conditions and higher cat activity. We continued to grow the book and made significant progress on our efficiency and portfolio management initiatives. And we fully expect this to continue as margin expansion remains our primary focus.

And now to Greg, to discuss the reinsurance results.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Thanks, Paul. Today I'll discuss the results for the quarter with added color on property catastrophe losses and summarize current market conditions.

Beginning with the results, the reinsurance segment produced acceptable underwriting performance given the property catastrophe activity with a calendar quarter combined ratio of 95.1%, compared with 74.5% for the second quarter of last year. The result for the quarter experienced favorable prior year development, increased accident quarter ex-cat loss ratio and property catastrophe losses, offset by a lower expense ratio.

Reserve releases in the quarter totaled $65 million, compared to $71 million a year ago. As Pete noted, in the second quarter, we completed a full review of our reserves and the releases were primarily in casualty classes. This quarter we see the impact of the aligned parameters and reserving assumptions across both legacy companies for prior and current accident years. Further, our actual versus expected analysis was favorable across both legacy portfolios.

The reinsurance segment produced an accident quarter ex-cat loss ratio of 54.4%, which compares to 50% in the second quarter of 2015. The increase is driven primarily by last year's harmonized accident year loss ratio picks across the combined segment particularly in the casualty treaty and property catastrophe exposed portfolios. As we have noted in previous calls, XL Catlin's philosophy on reserving is to take bad news quickly and allow good news to fully season.

In particular, for property catastrophe exposed treaties, we allow for the seasonality of exposure and a lag for delayed reporting from our clients. Further, within the reinsurance segment, we recorded attritional cat losses in the accident year ex-cat loss ratio. This produces a higher accident year ex-cat loss ratio in the first half of the year relative to the second half. This can be seen in the historical accident year ex-cat quarter loss ratios for the legacy XL portfolio.

Catastrophe losses totaled $143 million, net of reinstatement premiums during the quarter, compared to no catastrophe losses in the second quarter of last year. The cat activity during the quarter resulted from numerous events and produced between $15 billion and $20 billion of market insured loss around the globe.

For context, we estimated that XL Catlin Re has roughly a 2.5% share of the $150 billion global property and casualty reinsurance market and between 4% and 5% of the $20 billion to $25 billion catastrophe excess of loss market. While a precise reinsured market loss estimate is difficult to calculate, we are satisfied that our losses in the quarter were at or below our market share.

As we have noted previously, our combined catastrophe portfolio will produce higher nominal dollars of loss relative to the legacy XL book, but it is a better diversified portfolio. Expense ratio decreased 4.7 points to 30.6% in the second quarter compared to 35.3% for the second quarter of 2015. This decrease is primarily driven by lower operating expenses as the impact of our expense synergies earned through. Further we saw a 1.9 point drop in our acquisition expense as the impact from purchase accounting begins to diminish.

Turning to top line, gross written premiums for the quarter was $1.02 billion, up from $782 million in the second quarter of 2015 with the increase driven by the Catlin acquisition. April 1 was the last renewal to complete as a combined company, and we were able to grow our share of the Japanese market, contributing $221 million of new business across the segment. This is offset by continued underwriting discipline as we non-renewed nearly $100 million of premium due to unacceptable pricing or terms.

And finally, a long standing client decided to retain a quarter share treaty which resulted in just over $80 million of non-renewed premium. On a combined basis for the full quarter, our top line grew 2% after adjusting for foreign exchange and reinstatement premiums.

Shifting to reinsurance market conditions, we found the pricing environment challenging, with rate decreases continued to decelerate in most lines and regions, and we appear to be reaching a bottom in many classes of business. During the quarter, rates for the segment were down approximately 3%. Our global catastrophe portfolio was down 3% this quarter, significantly less than the 8% decrease we experienced in 2015.

For the remainder of the property treaty book, rates were also down 3%. Our casualty business renewed essentially flat over last year and the remainder of our classes were flat to down low single digits.

Overall, the U.S. short-tail and global casualty treaty markets resisted any meaningful reductions on renewals as many placements were repriced or failed to reach their target placement.

In summary, the second quarter results were acceptable for the reinsurance segment. Despite increased connectivity, we were able to generate an underwriting profit in the quarter. Underwriting teams continue to do an excellent job retaining profitable business and finding new opportunities, while maintaining underwriting discipline. Underwriting in our second year together, we're well positioned for success given the strong support from our clients and brokers.

I'll now turn it back to David.

David Radulski - Senior Vice President & Director-Investor Relations

Laura, can you open the lines for questions, please?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. Our first question is from Kai Pan from Morgan Stanley. Your line is now open.

Kai Pan - Morgan Stanley & Co. LLC

Good evening. Thank you. First question on the expense ratio side, it looks like material improvements year-over-year as well as comparing with the first quarter. Could you talk a bit more about what are the sources of this like the improvements as well as the sustainability of it? Are we expecting those ratio or (25:13) in absolute dollar amount go even lower given that Paul talk about that the some of the reduction were yet to earn us through going forward?

Michael S. McGavick - Chief Executive Officer & Director

This is Mike. Hi. Thanks. A couple of things. First of all, we are continuing to execute on our synergy program, and that benefit continues to grow in its impact over time depending, of course, on the timing of departures, the timing of shutdowns of systems. All those things that we've been doing have a growing impact on into next year.

So those are the sources, and those are the reasons that it continues to grow, is its just timing of the execution. We have had some continuing activity, as Paul described, and those just kind of go on top of what we've done before and continue to earn out again according to the actual departure dates or shutdowns of operations.

So we do expect the expense ratio and the absolute level expenses to be able to continue to decline. Of course, in the end, expense ratios are a coefficient between what goes on with the top line and that absolute level of expense. And there we are seeing some meaningful growth, as you would have heard. When you x out programs that we're exiting our insurance operations, for example, grew about 5%, we saw some growth in the reinsurance segment as well. And so that can have a continuing improvement effect on the ratio.

In terms of the absolute level of expense, we remain on track to deliver what we said we would deliver, as we issued in the 8-K, where we gave you a forecast all the way through to next year. I would only add one other thought, and that is the – I think if there's one point that I've made over time, but I don't know that I've made it emphatically enough, when we established that 8-K level of expense for next year, that was based on a series of presumptions about what volume of premium we'd be working with, because, of course, some costs are variable and some are fixed.

But I want to make it clear that if, for some reason, and I wouldn't forecast it today, but if for some reason, we see the market get from here even more difficult than it has been, and you've heard both Greg and Paul talk about some decline in the rate of deterioration or in Greg's case perhaps reaching a bottom in some lines. But if it were to suddenly get worse again, we would expect to get beneath the absolute level of expense that we put out in that 8-K. We would have to drive our expenses down to match what the market delivers in terms of top line.

Kai Pan - Morgan Stanley & Co. LLC

That's great. Then second question on the underlying loss ratio. It shows some improvement, 100 basis point in the insurance operation. Why some deterioration on the reinsurance side? You mentioned like three drivers, harmonization of the reserve, practice as a mix, as well as the rates. Could you talk a little bit more about each of these buckets, how much contribute to that? And as regarding to the harmonization process, are we done, since we are already at sort of like anniversary of your merger close?

Michael S. McGavick - Chief Executive Officer & Director

Yeah. Two quick things, then I'm going to turn it over to Greg and then to Paul. First, with respect to the harmonization process, that was actually completed at the end of last year. There's been no additional work in that regard. What Greg is commenting on is that some of the impact of the higher loss ratio picks for this year, that work having been done at the beginning of the year, now starts showing up relative to last year's lower picks. But generally speaking, that harmonization work is done, and we continue to be very pleased with where the loss ratios are going across both segments.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Yeah. Thanks, Mike. Kai, before I start, a little preface, attribution to any one of these three categories I'm going to give you is difficult with the reinsurance portfolio. They're large, chunky treaties. A handful of them can impact the outcome of any subset of our book, but in looking at the 4.4% increase, that attributed roughly 40% to the intersection of cat and non-cat in our property portfolios. 40% to the casualty treaty, initial accident year loss pick, and about 20% to rate and mix.

So let me start with the cat and non-cat. Step back for a moment, in the financial supplement, we have two lines in there that really are impacted predominantly by property catastrophes. The property cat line, which is the pure excess of loss cat reinsurance that we write, and the property treaty line, which is the pro risk and the pro rata, which has both cat and non-cat exposures in it.

So with that property treaty book, we set a loss ratio pick for the year that's comprised of cat, large loss, and attritional. And as the quarters unfold, we tend to react – not react to reported experience, particularly because it's very limited early in the year, and instead to prefer to true that up at the end of the year.

And so it's in line with our bad news fast, good news slow philosophy that you see that – what I referred to, which is higher in the first half of the year, lower in the second half of the year. Of course, I would not be doing my job if I didn't point out, future loss activity could happen that would vary this outcome, depending upon how losses broke.

The second piece is the casualty. And quite simply, our casualty treaty portfolio, relative to last year, the legacy Catlin business is now set at a higher initial pick, in line with the legacy XL book. This increase was established during the fourth quarter of last year, which was another full review quarter and where we harmonized our accident year picks, which Mike just talked about. We then project that forward to the current accident year, which we've done. And then here again, we allow this to season over a number of years, to make sure any good news that might emerge is real and solid.

And finally the third piece, rate and mix. Rate, as we've been talking about, has been down over the last two years. So you're seeing a little bit of a small impact from that in increase to loss ratios in 2016. And mix has impacted the loss ratio a bit, although it's not really mix across those different segments of the portfolio. It's within the segment, certain treaties that we've written, that might – because a number of these classes, particularly casualty, we roll our accident year pick up by treaty. So, the mix of how those break in a given year will be impacted.

So, intersection property cat and non-cat, casualty treaty portfolio, rate and mix. And I think this is just a very prudent way to run our book for long-term success.

Kai Pan - Morgan Stanley & Co. LLC

Okay.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Paul?

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

Yes. I mean, as we've talked about before, we started sort of re-underwriting even before (31:56) came together. I think that the impact of some of those actions around exiting some of our (32:02) business and it takes a bit of time for that to start to earn through into the loss ratio, because you obviously still have the unearned premium to earn through. We're also very focused, in terms of additional underwriting actions that we can take. We got a big lift in terms of how we think about pricing and portfolio analysis by bringing the businesses together. And we've been working on some of those insights, and that is starting to show through in the numbers in the second quarter.

Michael S. McGavick - Chief Executive Officer & Director

The only thing I'd add in closing this is that, with respect to the insurance segment. We – while we are seeing the benefit of actions taken last year and into this year, we don't think we're done with our ability to continue to improve, despite the headwinds we're facing.

Kai Pan - Morgan Stanley & Co. LLC

That's great. Last one, if I may. If we look at buyback, so far $800 million to $683 million year-to-date, and your full year target is $950 million. I just wonder how you sort of like – are we expecting a much slower pace in the second half, or is there some upside to the full year guidance?

Michael S. McGavick - Chief Executive Officer & Director

Well just – this is Mike. I'll start and hand it over to Pete. First, just to remember where we were. We had said at the beginning of the year we thought it'd be around $700 million for the year. We did note in the second quarter – or in the first quarter call, that we had decided to do another batch of $250 million that was executed quite quickly. In response, in essence to our reforecast of what we thought the top line would do, based on what we saw in the first quarter and what we've seen, so we tried to make sure that we were not holding capital that we didn't think we would need to support growth. So that was an isolated $250 million to add to that $700 million. Pete?

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Sure. So, hey Kai. The year-to-date, the $683 million, right, one way to think about that is, first half of the year we had initially, as Mike said, targeted $700 million. And so that would have been $350 million of a buyback, if we would've done a pro rata, which was the plan, and then the additional $250 million which we completed, to get to the $600 million. So we are $83 million above that. I did mention in my comments about an acceleration. I would expect, given where our shares are trading, that that acceleration will continue. At some point in the future, we will talk about whether or not the $950 million should go up. The only comment I'd make there is that, right now, is sort of the minimum target, but we're not, at least at this point, ready to go and say that it will go above the $950 million.

Kai Pan - Morgan Stanley & Co. LLC

Great.

Michael S. McGavick - Chief Executive Officer & Director

Kai, the way we think about this is, as we always have, we start with our required capital. We add a buffer. Then we decide what we could do with anything above that. So we're on the same philosophy we've always been on.

Kai Pan - Morgan Stanley & Co. LLC

Thank you and good luck.

Michael S. McGavick - Chief Executive Officer & Director

Thanks.

Operator

Thank you. Our next question is from Jay Cohen from Bank of America. Your line is now open.

Jay Arman Cohen - Bank of America Merrill Lynch

Yes. Thank you. I guess on the reinsurance side, the acquisition expense ratio did come down. That number has jumped around a bit. I'm wondering, if we look at the 2Q number, is that a reasonable run rate at this point, or will it tick down a little bit more?

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

There is very little impact left in there from the purchase accounting, so it should be for the second quarter mix of business, Jay, it's a reasonable run rate. Remember each quarter does change. So you'll get a bit of a different impact from the first quarter, the second quarter and so forth.

Jay Arman Cohen - Bank of America Merrill Lynch

That's great. And then on the overhead, the G&A expenses, in the segment, it did look like the absolute value came down from first quarter to second quarter. On the corporate side, taking out the integration expenses, it looked like it may have ticked up. Was there some reallocation there?

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Hey, Jay. It's Pete. No. Last quarter, I commented a little bit on the expenses. One, that the first quarter total expenses were a little lower than run rate because of some, I'll call it, accruals we made at 12/31 that we didn't fully need. And I also commented that our corporate expenses, mostly as a result of that, were lower than what you would expect, mostly for timing. And in this quarter, that timing reversed. I would say the corporate expenses are higher than what I would say the normal run rate would be. And so therefore, you would have seen that allocation change a little bit to the segment, but not in a material amount. The difference from quarter-to-quarter for corporate was about $20 million-odd, right, and if – and again, as I think about corporate going forward, it'll be a little bit less than what we had in this quarter so far, but not materially. And so the work in (37:00) allocation change it was more just the way that the accruals ran through the corporate segment.

Jay Arman Cohen - Bank of America Merrill Lynch

That's really helpful, Pete. Thank you.

Operator

Thank you. Our next question is from Brian Meredith from UBS. Your line is now open.

Brian Robert Meredith - UBS Securities LLC

Yes. Thanks. First question, here. Paul, you mentioned in your commentary about the reinsurance purchasing and how it benefits shareholders from a risk adjusted return perspective. I'm just curious, how should we think about that from a modeling purposes or kind of think about looking at it going forward? Should we expect lower cat loads? How should I think about that from my perspective, an outsider's perspective?

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

Sure. And I think it's – it's quite a good time to be thinking about ways we can enhance and improve our reinsurance buying. I mean, I would expect to see that absolutely. There's an interplay between how much volatility we want to take on our own balance sheet versus how much that we want to have on reinsurers or other types of third-party capital.

We should also start to see this working through and potentially helping with loss ratios as well. So we go through quite an exhaustive set of discussions around what the optimal points for some of these things are, and that depends upon our view of risk, our view of prices and the availability of different reinsurance products. But it's easier to make improvements at the moment than as other times.

Brian Robert Meredith - UBS Securities LLC

Great. Thanks. And then another just quick question, Paul. You guys do a fair amount of professional liability. What does the loss trend look like in that line of business right now? I mean, we saw a big pickup in class-action litigation in the second quarter. Any concerns about that?

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

We're not seeing that coming through in our numbers at the moment. I mean, it is – I mean, clearly, it is something that we're watching. I mean, we've seen things like this happen before. And so we're aware of how to underwrite our way around it. But, as I say, not seeing that in our numbers yet but definitely something we watch for.

Brian Robert Meredith - UBS Securities LLC

Thank you.

Operator

Thank you. Our next question is from Sarah DeWitt from JPMorgan Chase. Your line is now open.

Sarah E. DeWitt - JPMorgan Securities LLC

Hi. Good evening. Last quarter, I think you pushed back the timing on getting to a double-digit ROE. And this quarter it seems like if you take the earnings x the integration cost and normalize the cap, you're nearly at a double-digit ROE. So are you more optimistic on the timing of achieving that goal?

Michael S. McGavick - Chief Executive Officer & Director

This is Mike. Obviously that was a noteworthy exchange last time around. So I'm going to be particularly thoughtful as I answer you. As you look at the quarter, and you could do a number of your own calculations to try and figure it out, you'll notice that the key drivers that we're really focused on and that we can operate to, whether gross written premium, whether expenses, whether technical ratio, the loss ratio, and our capital management activities, all of them in this quarter are moving in the right direction. That said, we're mindful of how we felt about last quarter and how the world felt about last quarter.

So my view is that projecting exactly when we'll cross that line is really not a useful conversation today. I'm looking forward to that conversation based on what we learn in the next quarter as well, but I will tell you these trends are obviously more pleasing and we remain absolutely committed to, even in this difficult part of the cycle, operating and achieving that level of performance.

Sarah E. DeWitt - JPMorgan Securities LLC

Okay. Makes sense. Thanks. And then just a couple of numbers questions. On the investment and operating affiliate earnings, is 2Q a good run rate for that number? Was there anything unusual in there?

Peter R. Porrino - Chief Financial Officer & Executive Vice President

I'm sorry. Couldn't hear you, sorry, which ones?

Sarah E. DeWitt - JPMorgan Securities LLC

Operating and investment affiliate income?

Peter R. Porrino - Chief Financial Officer & Executive Vice President

So I would have said in the operating, no, there wasn't anything significant in there. In the investment manager one, there was the gain that I mentioned before that was a significant component to that. And that was about $11 million worth.

Sarah E. DeWitt - JPMorgan Securities LLC

Okay. Great. Thank you.

Operator

Thank you. Our next question is from Josh Shanker from Deutsche Bank. Your line is now open.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Yes. Thank you for answering my questions, and congratulations on a good quarter. So my first question, following up on something that Jay Cohen said, you noted that the expense ratio in terms of the operating costs for the reinsurance business that would be a good run rate for the second quarter. Does that mean we're getting to the bottom of where you can apply synergies and cost saves in the reinsurance segment? Or why can't that get better from here?

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

So, Josh, as I heard Jay's question, it was on acquisition costs. Not on the operating costs, so I answered....

Josh D. Shanker - Deutsche Bank Securities, Inc.

Maybe I heard it wrong then.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

If I misunderstood, then I apologize to Jay and to you. Our operating expenses, I'll let Pete take that.

Peter R. Porrino - Chief Financial Officer & Executive Vice President

I think Greg, on your ratio, I mean we did have an increase in earned premium, right. And we do those ratios on earned premium, not on written premium. And so I do think that there was sort of a reduction in the second quarter versus the first quarter and whether or not that continues, that one, Greg, you may have a view on. But there was – you could see a big increase in the earned premium that drove that ratio down.

Josh D. Shanker - Deutsche Bank Securities, Inc.

And I remember (43:35) trying to think about that going forward, that it's materially lower than the first quarter, but a lot of that growth is tough for me to see because there's Catlin volume in there. Do you have any help thinking about how that should be maybe seasonally or as thinking one year ahead, where you'd be on an annual basis?

Peter R. Porrino - Chief Financial Officer & Executive Vice President

So this is Pete, Josh. Let me start and I'll hand it back to Greg. And I'll handle the expense side of the ratio and then I'll let Greg handle the premium side of the ratio. The expense work that is being done is obviously going across both segments and corporate. We still have a ways to go. I mean if you look at the 8-K that we put out there, we expect on an absolute dollar basis that our 2017 expenses are going to be between $70 million and $80 million less than our 2016 expenses, right. And that will be done partially within reinsurance and partially within corporate that gets allocated to reinsurance. And so from an expense point of view, I absolutely expect the expenses are going to go down and therefore the ratios go down. And I'll turn it over to Greg if you want to talk about the premium side.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Yeah. And reinsurance is a lumpy business. And in this quarter one of the pieces of business that we were fortunate enough to lead for a core client had a component of retrospective and a component of prospective nature to it. So we earned more premium in the quarter on that retrospective piece then we normally would. So there's no good way to give you a good idea that this was just a piece – that this is just a piece of this puzzle was the – that lumpiness of earned premium. And we will have that on reinsurance, as we go quarter-to-quarter.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Okay. And then in Mike's opening remarks, despite the catastrophe, he said that look, we expect to be about 2.5%, I guess, of the industry loss or what not. Given the new reinsurance purchasing habit and (45:34) whatnot, would you expect that this kind of outcome in the future would be what you're expecting if the events were to repeat, or is there a lesson learned and you might try and come together and trim some exposures?

Michael S. McGavick - Chief Executive Officer & Director

I'm going to let Greg comment on some of the specifics. Let me give you a few really important notions. Number one, the market share Greg will talk about, but our view was that by becoming a leader in the reinsurance marketplace, and particularly in the catastrophe marketplace, where we had a very long track record of extraordinary results, was the way that we could continue to participate effectively in that marketplace given the structural changes that are going on.

So in essence, size is really mattering in reinsurance, and we believe that pushing those expertises into greater concentration would give us an opportunity to ride through those structural changes. The guys that are getting hurt by all the alternative capital coming in are largely the smaller players. So we think we've been well-positioned. We think that also is going to give us the opportunity over time and we've already seen some of this particularly in terms of terms and conditions to lead the market where it needs to go and not just follow it. So we're very pleased with the position. We've sawed it (46:45) intentionally. And we see this quarter, as a reflection of that larger share of market.

Having said that, when it relates to how we consider our reinsurance programs, that reinsurance program is now put together for the whole firm, and we could therefore, are able, as Paul noted, to cede less with what we think is actually better protection to our peak exposures and better protection to the overall loss experience.

So we already are seeing the benefits to those lower cessions of profits, and we think equal to or better protections for the firm. How individual cats play out is a whole different story. You never know what zone you're going to get hit in, how that fits with the whole story. But this quarter we would tell you this came out as expected. It came out relative to our market share or better across the various events.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Yeah. And Josh, this is Greg. On that 2.5%, that's a gross market share of the total P&C reinsurance market. And then the add-on to that is on share of property cat as a loss, we have about a 4% to 5% share. So this loss is a blend of those two books. When I look at this, if I'm really forcing to estimate in a re market loss, I'd give you a much broader range than I gave you on the industry loss. So the $15 billion to $20 billion industry loss could be around about $5 billion to $7.5 billion of reinsured market loss. And when we look at your numbers, we have $167 million of gross loss in the current quarter events from these cats, and that gives us about a 2% to 3.5% market share, some refrain between that 2.5% overall market share and the 4% to 5% cat market share. So that's roughly the math we went through to how we felt good about where we are on these events.

Josh D. Shanker - Deutsche Bank Securities, Inc.

Well, thank you for all the color. It's quite in depth and once again congratulations.

Michael S. McGavick - Chief Executive Officer & Director

Thank you.

Operator

Thank you. Our next question is from Michael Nannizzi from Goldman Sachs. Your line is now open.

Michael Nannizzi - Goldman Sachs & Co.

Thanks so much. I guess a couple questions. One major question just on top line and leverage. I mean, clearly the system benefits from growth in terms of leveraging the benefit of a declining or a shrinking fixed cost base. We saw that with the results here. How should we think about your pursuit of growth in this market? Is the desire to improve operating leverage a factor? Do you think about the allocated economics of lower operating expense ratio in pursuit of new business, or is that not a factor?

Michael S. McGavick - Chief Executive Officer & Director

Look, we are consistent in our pricing approach. Our pricing is to the risk, and we don't vary our pricing strategies around our forecast expenses. We obviously have an expense load as a part of how we build it up. But we are not forecasting to oh, gee, we can take on a lesser price because we are going to have a lesser – since we are driving our expenses down to expand our margins, not consume them by worst performing business.

So our pricing strategy remains unchanged. It is about the risk we're taking on and taking them on appropriately. And while that is difficult to do in this market, that's why I emphasized the statistics I did at the beginning of the call. We're seeing more volume from which to choose, but we're finding our success rate against that volume to be the same as it was before. And that I think reflects that market discipline and, as I mentioned briefly in my remarks, we also have a rigorous process that is done through cross-checking of teams, across different lines to make sure that our adherence to our pricing principles is done appropriately. So, we would not chase top line just because we would get more efficient (50:48). We'd be looking to apply that more efficient operation to expanding our margins. We will pursue growth only to the extent it meets our pricing modeling and our terms and conditions.

Michael Nannizzi - Goldman Sachs & Co.

Okay, thanks. I guess, I mean, in insurance clearly you saw, I mean, even with the additional month I mean you saw good growth, the underlying improved and reinsurance is where you saw a lot more growth sort of than we had expected and the underlying – the loss ratio at least deteriorated year-over-year granted to Q 2015 was anomalistically low but still I mean you had some deterioration there. So, I'm just trying to balance that in terms of how we should be thinking about, I mean if that loss ratio sticks in that level – at this level, should we expect that you're going to continue to pursue growth in that segment?

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

So Mike, let me start with the kind of – is a very difficult place where I ask our underwriters to live which is I want them out there seeking growth in both upside – with current clients and new opportunities because of the market presence we have now. But at the same time not abandoning our underwriting discipline and I think some of my remarks was around we did have a great success in new business over $200 million, but we also let $100 million of premium go. And I think they're executing very well on that nice edge of trying to make sure you grow where you can, but don't give – we're not here to give away the store going forward.

Perhaps, I was – and I apologize I wasn't probably clear in the opening remarks. When you look at a full three quarters for both firms legacy Catlin and legacy XL and adjust for FX and reinstatement premium we grew 2% in the reinsurance segment. So, I'm pleased by that. It's a difficult market to grow in but I don't think it's indicative of any kind of heavy growth or giving away the store.

And I think the third thing is on the profitability as I've talked about, we feel is pretty good on the underlying book and so we're happy to write this business in a way we're writing it at the moment given the returns we have available to us.

Michael Nannizzi - Goldman Sachs & Co.

Great. Thanks so much Greg.

Operator

Thank you. Our next question is from Ryan Tunis from Credit Suisse. Your line is now open.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Hey, thanks good evening guys. I just have a few quick ones, hopefully. The first one I guess is just on the PYD and understanding if there's any one timers there. I mean was there adverse from Catlin from a harmonization or anything like that because just comparing it to the year ago when it was just XL, what we're running below the level was in 2Q 2015.

Michael S. McGavick - Chief Executive Officer & Director

Yeah, Ryan this is Mike. No, there were no big one timers or anything else. This is our ordinary deep dive quarter and it produced the results you see. A couple of other notes, we've seen good positive A versus B (53:36) both in the quarter and year-to-date across both segments. I'm very pleased by that. We've been quite clear in our earlier calls that going forward, we think the right way to think about the performance in the total portfolio is it'll produce, assuming all things being equal which they never quite are, roughly the same level of releases that you used to from the XL alone portfolio. The harmonization would have put Catlin at the end of the year kind of to the midpoint of the range, as we would expect, and then we'll see what happens over time.

In terms of the specific, we're not (54:12) – I won't be doing this again, to be blunt, because in future quarters, you just won't be able to tell where it came from. It's getting too far away from when the books were run separately. And of course, since eight months of last year, we were operating as a combined business, pricing in a combined way, it just gets less and less meaningful to try and ascribe attribution.

But if you did look backward and try and sort it out in this quarter, you did see some releases from things that were attributable to Catlin activity in the past. You saw some that were attributable to XL activity in the past. There was no one theme. And so I think that overall guidance was true in this quarter, and we think it'll be true going forward.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's really helpful, Mike. Thanks. And then just real quickly in insurance, how would you characterize the elevated large loss activity that wasn't cat there, in terms of the impact that might have had on the loss ratio year-over-year? Was there anything notable there?

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

Yes. Sure. I mean, clearly, we've seen the accident ex-cat loss ratio come down a little bit. And whilst we've had some larger losses within the quarter, that's not adversely affected that ratio, so I think (55:32) that a good size, with our new scale, we've got ability to absorb some of these things.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Okay. That's helpful. And then just one last one quickly, for Pete. I think you said that the core investment portfolio benefited from some favorable amortization adjustment. Just hoping you could quantify that? Thanks.

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Yeah. So, Ryan, if you look at the delta from Q1 to Q2, it's about $12 million. And I would say probably half of that was due to what I would characterize as the one-off, and half of that I would've said is more run rate, and that would include things like including the acquisition of the small company that we made back in the beginning of the year. Their portfolio would be adding about $2 million. And there are a couple other small things in there putting cash to work. I would call nothing major in the portfolio, a couple of tweaks here and there. But that would be it.

Ryan J. Tunis - Credit Suisse Securities (USA) LLC (Broker)

Thanks for the answers, guys.

Operator

Thank you. Our next question is from Ian Gutterman from Balyasny. Your line is now open.

Ian J. Gutterman - Balyasny Asset Management LP

Hi, thanks. Just, I guess maybe first to follow-up a little bit on the cats, do you have, just specifically for Canada, what your industry loss assumption is? And is my guess right that a lot of those losses came from your local office, as opposed to out of Bermuda?

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Ian, it's Greg. We're at the moment estimating about a $3.5 billion industry loss. It's important to note that we didn't take that loss and then market share it out to get to our estimate. Our estimate is built from the ground up, client by client.

Ian J. Gutterman - Balyasny Asset Management LP

Sure.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

And the loss, I don't have the exact splits in front of me, but the loss splits roughly a third in Toronto, a third in Bermuda, and a third in our London office.

Ian J. Gutterman - Balyasny Asset Management LP

Got it. Okay. Great. And then the question about mix that came up earlier. I guess just to expand on that a little bit. Greg, I think you talked about the growth in new business versus non-renewals, and Paul talked about, I think it was about $100 million of business that you sort of pivoted away from. Did those mix impacts on a go forward not so much what happened in this – on a GAAP basis this quarter – but on a go-forward basis, should those be positives to your margins going forward, or is there other things to consider, like long-tail versus short-tail, or other items that may not be so obvious, that we see show up in an accident year loss ratio improvement?

Michael S. McGavick - Chief Executive Officer & Director

I'm going to ask the two segment – this is Mike, Ian. I'm going to ask the two segment leaders to comment specifically for their portfolios. But overall, this is a clear positive. And as these continue to earn out, and as I said, I don't think we're completely done. In fact I know we're not done with the benefits from these kinds of activities. But I do expect, in terms of headwinds to GWP, they will decline over time.

Ian J. Gutterman - Balyasny Asset Management LP

Got it.

Paul Brand - Chief Underwriting Officer-Insurance & Chair-Insurance Leadership Team

Exactly. I mean, obviously, we try and maximize our attention around the business we like the best, and it's the business that really was underperforming that we've exited, and that's the $100 million that we talked about. And clearly, that still has a bit of time to earn, because while some of those actions were started early in 2015, some of them continued through into 2016, and we continue to tune the portfolio. That's what we're here to do.

Ian J. Gutterman - Balyasny Asset Management LP

Got it.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Yeah. From a reinsurance perspective, on an expected basis, we would – we believe the new business will outperform the business that we've exited and should improve. Obviously, the actual performance may differ from expectations.

Ian J. Gutterman - Balyasny Asset Management LP

Got it.

Michael S. McGavick - Chief Executive Officer & Director

And there's no profound shift, Ian, between casualty and property. The basic shape of the book is the same as at the time of acquisition.

Ian J. Gutterman - Balyasny Asset Management LP

That's why I wanted to check that. And then just, lastly, Mike or whoever else maybe it's appropriate for, I just was wondering if you could expand on a recent press lease about a High Net Worth operation. And I think it was in the UK, is that right? Can you just talk a little bit about what that's about, and what your vision is for that?

Michael S. McGavick - Chief Executive Officer & Director

Yeah. Sure, Ian, this is Mike. We did announce a couple of market-leading hires out of the UK, that they will go to work building and offering a comprehensive offering in the High and Ultra High Net Worth space in the UK and EU. Of course that distinguishes it from a lot of what you've seen announced of late. So we're not just joining that chorus.

The reason for this, and we've been looking at this for a long time. But we think this is a perfect time to be doing so, for what are obvious market reasons. But we have a breadth of product that is specifically designed for these type of folk. We've just never collected them up and presented them to the market in the way that we will in the future.

But if you consider, we're in aviation, we're in the fine art and specie, we're in kidnap and ransom, we're in yachts, we're in equine. I mean, and we have market-leading products and market-leading positions and market-leading services related to those, and some other handful of lines. And we believe that that leading position can lead to a really extraordinarily beneficial offering into the marketplace. Again, it is UK and EU facing.

Ian J. Gutterman - Balyasny Asset Management LP

Good, interesting. I might follow up with that – more on that later, but I'll let someone else have it. Thanks.

Operator

Thank you. Our next question is from Randy Binner from FBR & Company. Your line is now open.

Randy Binner - FBR Capital Markets & Co.

Hey, good evening and thanks. I'm mostly asked and answered. But I wanted to go back to the commentary around reinsurance pricing, because it seemed to be better than I would have expected. And I think Greg had said that you had about 3% declines overall versus 8% last year. And so I just wanted to make sure that I got that right. And I think the answer I heard was that you're leveraging the size of the platform to drive that. So the question I guess I have is twofold. One, do you have any sense if that level of holding the line on price is consistent with what other reinsurers of a similar size are seeing in the market? And is this a pause before more capital comes into your market, or do you really think that it's sustainable? Because intuitively, it seems like it would be getting worse than that.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

Sure, Randy. So from my perspective, yes, you did hear that right. On the cat book, the 3% this quarter relative to 8% last year, certainly is a much improved, if you'll pardon the term, result relative to the prior year. We certainly see pricing in – particularly in the markets I talked about, short-tail lines and the global – U.S. short-tail lines and the global casualty book, we see pricing there very much reaching the bottom.

Now, from my perspective, we could be at the bottom for a while and we think we're well suited and well prepared to do very well and succeed if it stays in the bottom. I don't see anything at the moment that would indicate a rush of capital coming into the business that would change that dynamic of a lowering or diminishing of the rate of decrease and kind of a flattening coming in.

The other part of the question I heard was around just kind of who we are. We definitely operate in a syndicated marketplace. So I would think from what I've heard so far anyways, these are in line with what some of our larger peers are saying. We do view ourselves as a market leader and we think in our June 1 Florida renewals in particular, we would say, our book there relative to the 3% decline for cat overall, we were flat in Florida.

We felt we were really one of the – a handful of market leaders around pushing the AOB crisis in the state. And so we definitely differentiated between clients that have a good form and look after that exposure and have a great claims capability (01:03:46) with the idea that when an event comes those that aren't well prepared will have a higher losses.

So we reduced exposure in the state. We've reshaped our portfolio there a bit. And just to me the ability to do that is a good sign that there wasn't a bunch of capital rushing in and people cutting off our ability to do that.

Randy Binner - FBR Capital Markets & Co.

That's great. And just can you peg in the non-cat book what the – what was the rate decline there roughly this quarter versus last year?

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

For most of the classes, it's about flat to down a few points. And last year I would have said it was down a few points to 5%.

Randy Binner - FBR Capital Markets & Co.

Right. Got it. Thanks a lot.

Gregory S. Hendrick - Chief Executive-Reinsurance Operations & EVP

You're welcome.

Operator

Thank you. Our next question is from Amit Kumar from Macquarie. Your line is now open.

Amit Kumar - Macquarie Capital (USA), Inc.

Thanks. And good evening, and thanks for fitting me in. Just had a one quick follow-up, perhaps going back to Sarah's question. That's a fair point that just getting caught up in the discussion in ROE. I think the bigger challenge is if you look at 2017 Street estimates, the mean is at 8%, but the range is from 5.4% to, let's say, 9% plus. So you can drive sort of a truck through it. I think investors are looking for some confidence or assurance on the trajectory of ROE improvement, and perhaps they're not getting a clear answer, what that might be. So, any help on that would be I think very much appreciated.

Michael S. McGavick - Chief Executive Officer & Director

I hear you loud and clear, Amit. And I've been – I hope my earlier answer was quite clear as well. The levers that we believe drive us forward toward that goal are kind of obvious. And in this quarter they – across them all, obviously, improved. So we're obviously that does give us greater confidence.

The question that Sarah asked was really about a forecast of timing. When are you going to cross the line? And as I said, given our experience with the first quarter and it's a very different experience with this quarter, we think it's wise to allow more evidence to develop for all of us, and then make a further comment.

But certainly from where we sit, we remain committed to the exact call we laid out before, and we will give further commentary around timing as we have a bit more evidence to back us up, given what we've been through. But, all of that said, you can't help but sit in this room and be more confident and more pleased.

Amit Kumar - Macquarie Capital (USA), Inc.

Got it. That's all I have. I realize it's already 6:10. Thanks for the answer and good luck for the future.

Michael S. McGavick - Chief Executive Officer & Director

Thank you.

Operator

Thank you. Our next question is from Meyer Shields from KBW. Your line is now open.

Meyer Shields - Keefe, Bruyette & Woods, Inc.

Thanks. I'll try to make quick a little bit this way (01:06:57). One, Mike, this is sort of based in ignorance, but you talked about how your hit ratios remaining constant and you're seeing more submissions. And I guess I would have expected the hit ratio to go up because you're in a more exclusive club post the merger. Am I thinking about that wrong?

Michael S. McGavick - Chief Executive Officer & Director

That may happen, but I haven't seen it yet. And I'm pretty pleased that I haven't. We're still in a declining rate environment. I think Paul identified only casualty is relatively flat. I think Greg identified casualty is relatively flat. Well, given this interest rate, if casualty isn't flat we're all idiots. So, to me the fact that some areas are a little bit flatter or slowing down isn't the same as saying, this is a sustainable market condition. And so our people are rightly picking their way through and being very cautious but certainly hunting for opportunity. And I do think your point is right. Over time, I expect our different market position, which we hear compliments about constantly, can yield a bit of a difference, but we've encouraged our people that we hunt for that growth, but be careful. And given that they know how serious we are about that, I wouldn't have expected to see that hit ratio move at this point.

There are a couple of things that give us greater confidence overtime, and why I did say in my comments that we could see some acceleration of our opportunity. Number one, it's known to everyone that every player in this phase shows distress to varying degrees. And we've certainly got some of our key competitors who are showing that. And when that kind of thing happens, our underwriters are going through a very careful exercise to identify accounts that either they have personal history or knowledge with, or where we know that's our kind of risk. And then we do target and go after things that could, I think, and has been showing signs of success in that activity. And it wouldn't surprise me if that improved our hit ratio, because you're kind of pre-selecting. So, that can help.

Second thing that we've been doing, and it's really, again, I think, accelerating, is we've been working very hard to make sure that our line sizes with good clients reflect our new position in the market and aren't just static to one or the other company's historical level of participation. Those are obviously good adds, because you know those accounts very, very well.

Some do see opportunities for it to accelerate, but I'm not at all displeased to see the equation I described at this point, but – sure, we could see that. I'm very pleased with our underwriting discipline. And I just – I know a lot of our underwriters, and the actuaries, and the folks that support us. They listen to these calls. And I just want them to know I'm very pleased. Let's keep hunting for those opportunities. And if we can show a difference in that way, I'll be even more pleased.

Meyer Shields - Keefe, Bruyette & Woods, Inc.

Okay. Thanks. That's very thorough. Now that we're past the anniversary of the deal closing, are we done with business leaving just out of agency concerns of book consolidation?

Michael S. McGavick - Chief Executive Officer & Director

There was so little that did – before that there really isn't – there wasn't much in the beginning to comment on. I don't know the timing of the one program. I know, there was one program that was a floor one. So, that would have been an April kind of departure, so that will have a little bit of trailing impact. But all right, that's not a topic we talk about literally.

Meyer Shields - Keefe, Bruyette & Woods, Inc.

Okay. Fantastic. Thank you so much.

Operator

Thank you. Our next question is from Ryan Byrnes from Janney. Your line is now open.

Ryan Byrnes - Janney Montgomery Scott LLC

Hi. Thanks for fitting me in guys. I just had a quick question on debt-to-cap levels. Obviously, the buyback is going to be elevated this year. But if I look at debt, I guess, plus preferred were in high 20%s, I think, when the deal was originally consummated, I think, you were targeting a mid-20%s range. Just wanted to get your updated thoughts on that.

Michael S. McGavick - Chief Executive Officer & Director

So, the first round, I just observed that the objective of the firm is unchanged. We like being kind of in the middle of the pack of our competitors around leverage ratios. When I got to excel, we were at an elevated – well, shortly thereafter, we were at an elevated position, we worked it back down to the middle of the pack. As a part of this transaction, we did move up again, and we do plan to work that back down.

You observed correctly that at this point in time, with the high level of shareback activity that is partly, of course, opportunistic given our share price that, that puts a little pressure on it. But the overall direction we intend over time is the same.

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Ryan, its Pete. I go with what Mike said with where the direction is over time. If you remember, when we first did the transaction and we had talked to the rating agencies, we have talked about starting out at a 30% ratio and going down from there. So, we started at a lower ratio, having gone down, and having gone down larger because of the extent of our buyback activity.

As Mike said, given the share price today, it's hard to justify taking capital and doing – and buying in debt, rather than buying in stock. We are doing cognizant that, that ratio though really can't go up meaningfully. It really hasn't gone up over the last couple of quarters at least. We do have $300 million of debt coming due in 2018, right. So, there is something out there in the mid-term that you might think that would be unlikely to be refinanced as a result of that. But it is something that we weigh pretty much every quarter about is do we need to do something? The one thing I would say is that, anything that we did on the debt side, it would only be 25% of what we would have to do pretty much on the buyback side.

Ryan Byrnes - Janney Montgomery Scott LLC

Okay. And then just, again, just to frame it out, is there an upward bound? Is 30% kind of the bright line for you guys, or is there a bright line in terms of the top end?

Peter R. Porrino - Chief Financial Officer & Executive Vice President

Yeah. Ryan, I'd hate to use the word bright line, but it's hard for me to envision being above 30%.

Ryan Byrnes - Janney Montgomery Scott LLC

Okay. Great.

Peter R. Porrino - Chief Financial Officer & Executive Vice President

The only other comment I would make is we haven't – Mike mentioned a little bit about how we think about buybacks. We go through the process of thinking about our capital and how much we – and at what point are we at the right capital base, and do we have too much or too little. I'd say, at this point, we are still comfortable that we have plenty of capital to conduct the business that we're conducting and an opportunity to buy back stock with excess capital, so.

Ryan Byrnes - Janney Montgomery Scott LLC

Great. Thanks for the answers, guys.

Operator

Thank you. Our next question is from Jay Cohen from Bank of America. Your line is now open.

Jay Arman Cohen - Bank of America Merrill Lynch

Yes. Thanks. I want to just go back to the ROE issue for a second, maybe think a little bit bigger picture. The fact that you have kind of pushed out this ROE target, I think, a casual observer of the company, the industry might say, gee, they screwed up the deal, and that's why they pushed out. And that doesn't seem to be the case. Obviously, you have market condition, maybe have gotten worse, interest rates are lower. Beyond those two things, is there anything else, Mike, that has caused you to push out the ROE target a bit?

Michael S. McGavick - Chief Executive Officer & Director

No.

Jay Arman Cohen - Bank of America Merrill Lynch

Just the macro issues then?

Michael S. McGavick - Chief Executive Officer & Director

Yeah, the macro issues, particularly, the way they played into the first quarter, gave us a bit of pause. And I think that – we saw obviously a humbling reaction to our observation. And we, of course, internally, took that as a lesson and as an opportunity to really get everyone redoubled in their focus to make sure that the transaction delivered, and delivered in the way that we believed it could.

And for the last quarter, I'd say, as I travel around the world, it's – there's been a bit of dissonance when I travel with investors, their conversations have been very pointed. When I travel with clients and with brokers, the conversations have been enthusiastic and even effusive in praise. And our colleagues experienced that dissonance, too, and say to themselves, geez, what's going on?

My – so, I – but no, this quarter tells a clear and more compelling story, but it's one quarter. And I'm going to take the humbling lesson of last quarter and be cautious in how I comment on that for the time being. But you shouldn't take in that any less commitment to our goal or any certainty that we can't make that goal in the right way at the right time. So, I'm – look, we'll take this conversation up more. You can tell I'm a little itching to say more than that, but all my colleagues are about to slit my throat. So, I'm – we're done. But I'm – there's – when you phrase the question the way you did, it really is a two-letter answer, no.

Jay Arman Cohen - Bank of America Merrill Lynch

Got it. Thanks, Mike.

Michael S. McGavick - Chief Executive Officer & Director

Yup.

Operator

Thank you. At this time, I show no further questions. I would now like to turn the call back over to Mr. Radulski.

Michael S. McGavick - Chief Executive Officer & Director

I don't think there's anything to add at this point. We're very grateful for your time and attention. We're grateful for all of the feedback that we got over the course of the last 90 days. You've all made a variety of useful comments that we've taken to heart. And I can tell you that we used those comments, and what's gone on these last 90 days to refocus and reenergize. And we're very pleased with the bit of progress that showed up this quarter.

But like I said, at the beginning, I really mean it. It's a step in the right direction, and it's more like it. And I just want to thank the people of XL all around the world; at XL Catlin, who've hung in there with us, who are seeing it through and are delivering the progress that we're showing.

David Radulski - Senior Vice President & Director-Investor Relations

Thank you. That concludes the call.

Operator

Thank you. That does conclude today's conference. Thank you, all, for participating. You may now disconnect.

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

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

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