Endurance Specialty Holdings' (ENH) CEO John Charman on Q2 2016 Results - Earnings Call Transcript

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Endurance Specialty Holdings Ltd. (NYSE:ENH)

Q2 2016 Earnings Conference Call

August 2, 2016 09:00 ET

Executives

Gregg Schroeder - SVP IR & Corporate Development

John Charman - Chairman & CEO

Mike McGuire - CFO

Analysts

Ryan Byrnes - Janney

Quentin McMillan - KBW

Ian Gutterman - Balyasny

Jay Cohen - Bank of America

Operator

Good morning everyone and welcome to the Endurance Specialty Holdings' Second Quarter Earnings Results Conference Call. This call is being recorded. Your lines will be in a listen-only mode during the presentation. You will have an opportunity to ask questions after the presentation and instructions will be given at that time.

I would now like to turn the call over to Gregg Schroeder, Senior Vice President of Investor Relations and Corporate Development. Please go ahead, sir.

Gregg Schroeder

Thank you, Bethany. And welcome to our second quarter call. John Charman, Chairman and Chief Executive Officer; and Mike McGuire, Chief Financial Officer; will deliver our prepared remarks.

Before turning the call over to John, I'd like to note that certain of the matters that we discuss here today are forward-looking statements. These statements are based on current plans, estimates and expectations and include but are not necessarily limited to various elements of our strategy, business plans, growth prospects, market conditions, capital management initiatives, and information regarding our premiums, loss reserves, expenses and investment portfolio. Forward-looking statements are based on our current expectations and assumptions regarding our business, the markets in which we operate; the economy and other future conditions and involve inherent risks and uncertainties.

A number of factors could cause actual results to differ materially from those contained in the forward-looking statements and we therefore caution you to against relying on any of these forward-looking statements. Forward-looking statements are sensitive to many factors, including those identified in Endurance's Annual Report on Form 10-K that could cause its actual results to differ materially from those contained in forward-looking statements. Forward-looking statements speak only as of the day on which they are made and Endurance undertakes no obligation publicly to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

In addition, this presentation contains information regarding operating income and other measures that are non-GAAP financial measures. For reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release which can be found on our website at www.endurance.bm

I would now like to turn the call over to John Charman.

John Charman

Thank you, Greg. A very good morning to you all and welcome to our second quarter earnings call. In the second quarter, we generated net income of $76.6 million and $1.14 per share and operating income of $54.8 million and $0.81 per share. Underwriting profitability was solid in both our segments, with an overall combined ratio of 92.6%. Our results included a net negative financial impact of $55.5 million from a number of second quarter catastrophes, namely the Fort McMurray wildfire in Canada, the Kumamoto earthquake in Japan, and convective storms in Texas and Europe. Our strong embedded risk management practices, prudent underwriting, and significant reinsurance and retrocessional protection mitigated the impacts to Endurance of these catastrophes, as reflected in our relatively low market share of approximately one half of one percent.

I'm very pleased with how we have continued to proactively manage our risk profile and exposures, particularly in light of the fact that our year-to-date catastrophe premiums grew 65% over the same period last year. As we have now fully integrated Montpelier's catastrophe portfolio.

Strategically, the second quarter was another excellent one for endurance, as we achieved solid, targeted growth and gross written premiums of 32%. Reinsurance benefited from successful Montpelier renewals and additional business by our recently added casualty and specialty teams. Our insurance business saw continued significant growth throughout our core business; with important additional contributions from recent product expansions include our new Lloyd syndicate, our recently launched U.S. general aviation partnership, and our new global risk solutions group.

This disciplined targeted profitable growth has been achieved against a backdrop of fierce global competition. Over the last three years, we have made tremendous progress. Our insurance and reinsurance portfolios are now significantly more balanced, more relevant, and much more diversified across products and geographies. In the first six months of 2016, Endurance underwrote $2.7 billion of gross premiums, which is greater than the gross written premiums for the full year of 2013, the year when I joined Endurance.

Importantly, through disciplined underwriting and risk selection, we have improved our core margins while meaningfully adding to our scale. This is evidenced by our current quarter's accident year loss ratios, excluding the catastrophes, being relatively flat for both segments, compared to a year ago, despite market pricing declines over the last 12 months and an elevated level of individual risk losses. Our expense ratio is also showing the clear benefits of our increasing scale and successful achievements in expense synergies from our integration of Montpelier.

Later in the call, I will provide some specifics on market conditions and our second quarter activities. First, though, I'll turn the call over to Mike to provide more detail on our second quarter results. Mike?

Mike McGuire

Thanks, John. And good morning, everyone. In the second quarter, Endurance generated net income to common shareholders of $76.6 million, and $1.14 per diluted share. Operating income was $54.8 million and $0.81 per diluted share. While both segments generated underwriting profits this quarter, a higher-than-usual frequency of global catastrophes and large risk losses adversely impacted our results.

Starting with a review of our underwriting results, our second quarter overall combined ratio was 92.6%, as a higher loss ratio in our reinsurance segment was partially offset by a lower general and administrative expense ratio in both segments.

Within our insurance segment, the second quarter combined ratio was 93.2%, two points better than the 95.2% recorded in the second quarter of 2015. As lower loss and general and administrative expense ratios were partially offset by a higher acquisition expense ratio.

The current accident year loss ratio of 77.9% improved 3.5 percentage points from a year ago. Both the second quarter this year and second quarter last year included large individual market losses within the property, marine energy, and aviation lines of business. We expect these results to improve and normalize as the year further develops.

Our risk selection and portfolio diversification helped to mitigate general market rate deterioration experienced over the last 12 months. The insurance segment acquisition ratio was higher than a year ago, as a much greater portion of earned premiums were from our expanding specialty non-agricultural lines of business, which [indiscernible part 3 1:06] acquisition costs.

These mixed driven increases have been partially offset by earned premiums acquired by Montpelier where the deferred acquisition costs were written off under purchase accounting, benefiting the insurance segment's acquisition ratio by 0.8 percentage points in the second quarter.

Looking forward, this specific benefit is expected to largely disappear as the majority of unearned premiums acquired from Montpelier were recognized in the first 12 months following the acquisition.

The insurance segment's general and administrative expense ratio decreased 2.4 percentage points, even as we have continued to make significant investments in our expansion of our global underwriting capabilities. These improvements reflect a benefit from the enhanced scale we are achieving, higher seating commissions, and expense synergies from our successful integration of Montpelier. We expect these favorable expense trends to continue as our business gains further scale.

In our reinsurance segment, the second quarter's combined ratio was 88.7%, compared to 73% recorded a year ago, as the higher loss ratio was partially offset by lower acquisition and G&A ratios. The reinsurance segment's accident year loss ratio was 16.3 percentage points higher than last year, largely as a result of higher catastrophe losses, which were 18.7 percentage points in the current quarter, compared to 3.9 percentage points in the second quarter a year ago. The reinsurance accident year loss ratio, excluding catastrophes, was 49.7% for the current quarter, relatively stable compared to a year ago, despite continued market pressure on pricing.

The reinsurance segment acquisition ratio improved primarily due to a 2.9-point benefit from the earning of Montpelier premiums with previously written-off acquisition costs. Similar to insurance, this benefit will diminish going forward.

The general and administrative expense ratio also improved 3 percentage points due to operating efficiencies achieved due to the Montpelier acquisition as well as increased seating commissions received from quarter share retrocessional protection.

Our total gross premiums written in the second quarter were $1.1 billion, an increase of $275.7 million or 32%, compared to the second quarter last year. This growth was driven by our successful renewals of the now-integrated Endurance and Montpelier portfolios as well as from continued significant organic growth, from the strategic investments we have made in underwriting teams.

Insurance segment gross premiums written were $594 million, an increase of $125 million, or 26.6% from the second quarter of 2015. It's a strong growth in our expanding U.S. and London insurance operations, enhanced by a new Lloyd's franchise. Excluding agriculture, second quarter gross premiums written in insurance increased $170 million or 48% compared to a year ago. On a net basis, non-agriculture insurance premiums written grew $75 million, or 44.7% in the current quarter due to the increase in gross premiums.

In the agriculture business, net premiums were modestly negative in the current quarter due to the timing of reinsurance purchases, which were not finalized until the second quarter. On a year-to-date basis, agriculture net premiums declined 8.6%, predominantly due to decreases in commodity prices.

Within the reinsurance segment, second quarter gross premiums written were $543 million, an increase of $151 million or 38.5% compared to a year ago. Driven primarily by successful renewals catastrophe of Montpelier business and to a lesser extent from selective new business and casualty and specialty lines.

Moving to investments, our portfolios total return was a positive 1.14% in the second quarter. As the decline in interest rates benefitted our fixed income portfolio and our high yield and equity oriented portfolios generated positive returns. Our net investment income was $44 million, an increase of $11.7 million from a year ago mainly due to a larger investment portfolio and improved alternative asset performance.

Turning to capital, we ended the second quarter with $4.8 billion of shareholders equity available to the company and total capital of $5.5 billion. Diluted book value per share was $68.20 which when adding back dividend paid was up 2.3% in the quarter and 5.3% year-to-date.

Our growth intangible book value per share plus dividends was 3.2% in the quarter and 7.2% year-to-date. As we discussed in our last earnings call as part of our capital management strategy. On June 1 we redeemed Series D preferred shares which had an outstanding value of $230 million and a dividend yield of 7.5%. On an annual basis this redemption will reduce our preferred dividend expense by $17.3 million.

Before turning the call back to John, I wanted to quickly review our current catastrophe protection as we move further into wind season. Our catastrophe re-insurance business benefits from significant quarter share retrocessional protection as well as peak and non-peak zone aggregated access of loss retrocessional coverage.

We have already attached our first layer aggregate non-peak zone access of loss retro and still maintain substantial additional coverage available for future non-peak cat events for the balance of the year. The even so far this year have also eroded some of our aggregate retention for our peak zone cat coverage and thus are closer to recovery as we enter this wind season.

As you can see in our investor supplement our P&L has a percentage of equity following the mid-year renewals remain near our historically low levels as we continue to carefully manage our catastrophe exposures within the client competitive market.

With that, I will now turn the call back to John for some additional comments.

John Charman

Thank you Mike, and before discussing market conditions and our underwriting activities as we are now just one year and two days past our closing of the acquisition of the Montpelier, I think it is important to reflect on the success that has been. We have now completed all the renewals successfully retaining what we desired out of Montpelier's core portfolio bearing in mind current trading conditions.

Importantly, the risk portfolios were integrated completely and they bring us to manage through a period of increased catastrophe frequency with below average exposure compared to our market position. We have now exceeded our synergy expectations having eliminated greater than 50% of Montpelier's G&A expense base.

These benefits are clearly visible in our declining expense ratio. Strategically, the acquisition immediately brought us a stronger balance sheet, enhanced relevance in the global catastrophe market, a scalable Lloyd's business that we are expanding and Blue Capital, an established alternative capital franchise that we have already begun to leverage.

Capital synergies have enabled us to improve our capital position while retiring costly debt and preferred equity and reducing our interest in preferred dividend costs. Looking into our second quarter business development, we continue to have excellent momentum. Our insurance franchise continued this strategic expansion in the second quarter as our non-agricultural business achieved targeted growth of approximately $170 million.

Our insurance businesses have benefitted from broad investments we have made across our professional liability, causality and other specialty capabilities over the last three years. Growth in the second quarter was accelerated by our newly acquired Lloyd's business where we have now embedded our diversified under-writing expertise.

Our recently launched W. Brown aviation partnership and our new global risk solutions business. Partially offsetting our growth this quarter was deliberate productions in some Marine and Energy lines of business where the rationale competition remains. Pricing remains competitive across most classes of insurance, but we are encouraged by some signs of discipline, significantly increased market loss activity, particularly in Aviation, Energy and Property classes are beginning to positively influence under-writing behavior amongst the more professional carriers.

These carriers are beginning to push back on rate reductions and deteriorations in terms of conditions. But this discipline is not uniform across all distance. Overall our insurance pricing is flat to down a few percent. However, certain large property and energy risks are still being aggressively priced.

Some smaller count liability and cash to the accounts are experiencing positive pricing in response to the lost trends. Our ability to grow in the current competitive markets is importantly based on the expertise, market knowledge and standing of our underwriters. Over the past 3.5 years we have added nearly 150 US based insurance underwriters and an additional 30 senior underwriters in London.

While these underwriters have generated significant new premium for Endurance, the underlying businesses and customers are long established and well known to us. It is critical to note that our new businesses are generated from deep, valued and sustainable relationships from brokers and clients and not driven from price reductions.

Our comprehensive insurance price monitoring support's view, Endurance's quarterly price changes over the past 3.5 years, indicate price movements in the range of up to a few percentage points that are down no more than 3 percentage points, very much in line of a broader market trends.

Turning to reinsurance, market conditions remain competitive during mid-year renewals but price declines continue to moderate from flat to down 5% within the catastrophe line of business. The renewal period negotiations were more rationale as a small amount of additional purchasing was matched by slight increase in supply. At the end of the June 1 renewal season, some firm order terms had to be reissued in order to ensure cat programs were fully placed in advance of the wind season.

During the June & July renewal season we optimized the consolidation of our book of business with Montpelier's and we reduced our limits as we selectively constructed our combined portfolio. As a result our second quarter reinsurance premiums were up $151 million or 38.5% over the second quarter of 2015.

Mainly from combined catastrophe renewals as well as some incremental new business from our casualty and specialty reinsurance teams. Our focus on long term partnerships with key clients continues to serve us very well as we were able to secure differential terms.

Over the last 3.5 years we have meaningfully transformed and enhanced our reinsurance underwriting and analytical capabilities. We are now more relevant to some clients and brokers and our reinsurance portfolio is more significant with improved profitability, greater balance and diversification. Since the transformation of Endurance began back in 2013, we have implemented comprehensive, strategic multi-year reinsurance and retrocessional programs to enhance our scalability, manage our growth and risk exposures and improve our net margins.

Overall our year-to-date premium retention levels are around 60%, fairly consistent with the year ago and well below our peer averages. This long term support provided by high quality reinsurance partners. Validates the excellence of our underwriting while reducing out volatility potential and enhancing on net returns. Looking ahead, we have excellent momentum in our business, and we are extremely well positioned to thrive in this competitive market.

Our integrated underwriting culture provides us a unique unsustainable competitive edge, in attractive -- in attracting market leading on driving talent. Importantly today we are much more relevant to our plans and brokers with expanded products and geographies, increased capacity and balance sheet strength. We expect to strongly leverage these incredible advantages to generate superior underwriting profitability for the benefit of our shareholders.

And with that we are now ready for questions.

Question-and-Answer Session

Operator

[Operator instruction] And we will take our first call from [indiscernible].

Unidentified Analyst

Well, thanks and good morning and thanks to the call.

John Charman

Good morning.

Unidentified Analyst

Now just too maybe a couple of questions to begin with. First of all just a question of the feedback we were getting last night, I wanted to talk about the underlying trends for both insurance and reinsurance, if I exclude into the cat losses you know looking at the insurance [ph] AY-LRX cat of 76.2, the reinsurance LY-LR X cat 49.8 this was higher than my estimate as -- did and I was wondering maybe there's a component often non-notable losses in these numbers, which maybe this treatment needs to get a better understanding of, and if not perhaps this need to have a bring down to go forward estimates and maybe we just talk about that a bit.

Mike McGuire

Sure, this is Mike McGuire, on the insurance segments said that the biggest change that I think you're referring to is within our property marine and aviation lineup line of business on the insurance side. And the accident your loss here for that that that line of business for the second quarter was 84.5%. And so that data is certainly much higher than what we would normally expect that business to run that, we had that I guess to use your term of non-notable we got a handful of individual large risk losses that individually were -- that were not material on their own but certainly added up to push up that loss ratio in the quarter.

And it is actually down from where it was in the second quarter of last year, but this is a class of business that is it's very short tail and it tends to be cat-like and so it can be pretty lumpy. They're just three years a point of reference of that to probably marine and energy lines of business on the insurance side. Three to six months last year we're – and I add to your loss ratio of about 77% but for the full year last year it was 62% and so quarter-by-quarter that line of business can be pretty lumpy. But we are ex back and that over the course of the year that that business should be generating loss ratios in the high fifties low sixties overall, for each course to be pretty lumpy.

So we are expecting that should normalize. And that's far in away the biggest change if you looked at either year-over-year or you know in a sequential quarter-over-quarter.

Unidentified Analyst

Is there a reason why, because many companies to break it outright right and they specify non-notable bucket, is there a reason why you choose not to do that. I mean I understand it you never wonder things differently; I'm curious what the process is behind that.

John Charman

We try not to getting obsessed on the first quarter but Mike why don't you give a proper answer.

Mike McGuire

I think part of that's right John, but the important thing is we think about this goes way back in terms of pre-announcements, we've generally follow the approach that if we have to have losses that exceed generally $25 million on a net basis we generally think about disclosing those prior to our normal releases. Now things like traditional losses or to use your term non-notable when you call them non-notable for a reason it's a collection of individual losses that if you go too far down that path you end up disclosing every little movement in your financials before you actually release your overall results and that just that's a slippery slope, and so I would really focus obviously on that the big material items and then obviously on this call we can clarify individual movement in lines in business that are to use your term non-notable.

Unidentified Analyst

This is helpful; maybe you can do monthly reporting like a progressive that's to make it fun. The second question I have is this goes back to the late John was commenting about growth versus the risk verses returns verses competition. The one question which I get is if you look at the AYX cat ROE it's running at 67% for Q2 5% or so for the first half. Given those returns I think the question is if you look at that the commentary coming out of commercial players and brokers everyone's talking about pricing deterioration, competition. I'm curious why that level of growth versus maybe some level of capital management, I mean have you made that decision saying that; okay you know we're on the growth mode here we'll step off the exhilarated once we hit our target, and then we'll come a look back at other things. I'm just trying to understand the metrics because it seems to me that the cost of capital perhaps is not being hit at least in the near term.

Mike McGuire

That we could have a very lengthy debate and made about what the cost to capital is terms of how the equity market vies it but I'll save that for another day. But I think you -- your question is an important one and I'd like to point it out the difference between return on equity and underwriting profitability and combined ratio, now clearly there is an impact on our reported return on equity from the amount of excess capital that we have been holding, and we are growing into that obviously we had very strong growth in net premiums written. But then look at the underlying combined ratios of the business, I would suggest that our 92.6% combined ratio in a period where we had a pretty significant level of cat and risk losses, is a pretty good underwriting margin and if we can continue building businesses, that have the capability of generating in high eighties and lower nineties kind of combined ratios, that's a very good use of capital to grow into.

And we're not blindly pursuing that we're very focused on maintaining that underwriting profitability so and we're not doing it in the absence of capital management, obviously it's only been one year since we closed the acquisition of Montpelier and we have taken action on our capital structure, we retired that 200 million of senior debt at the end of last year, in June of this year we retire $230 million preferred -- that preferred equity and so those -- or those certainly add to earnings capability the company by reducing the interest and dividend expense. It is not that the capital management that analysts attend to look at in terms of share repurchases. But make no mistake those are pretty significant reductions to our overall cost to capital.

John Charman

Please remember we embarked on this journey over three years ago, we spelled out very, very clearly what we are going to do, how we are going to do it, it where we began to do it. And with very strong underwriting capability in the market and a global market that is fiercely competitive. There are all wide ranges of expertise, there are wrapped in the gathering businesses that are struggling with their financial results. And we like to think that we're at the other end of the string. Because we are underwriting business trying to ride individual risk businesses, with very good long standing relationships with our clients and our brokers. That gives us a fundamentally different profile from a lot of the rest of the industry.

And I said back in 2013 your candidacy of divergence between the underwriting companies in the business with the focus on the strategy and expense management. And those other businesses that quite frankly can only underwrite broker facilities to grab revenue and convinced themselves that they can crank underwriting profitability out of it.

Unidentified Analyst

Sure, so fair point I'll stop here and thanks a lot for the answers and that good luck for the future.

John Charman

Thank you.

Mike McGuire

Thanks, Matt.

Operator

And we'll take another question from Ryan Byrnes of Janney.

Ryan Byrnes

Thanks everyone and good morning everybody.

John Charman

Hi Ryan, how are you?

Ryan Byrnes

Good thank you. Just have a question on the G&A and corporate expenses and kind of that the monthly -- synergy so you know simply on an absolute basis the G&A expenses and the corporate expenses was $67 million and that compares to 60 million last year which was pre-Montpelier and on an absolute basis there were 84 million the first quarter, just want to see how that was so aggressively taken down in the quarter and again just how repeatable that was in terms of one timers in G&A expenses and it was a just a simple nature of the contract expenses from the reinsurance purchases.

John Charman

Before Mike adds in detail I just want to go back to 2013, other critical popped of our long term strategy was substantially to reduce our G&A expenses. In spite of the fact we were going to invest heavily in our businesses. And so this is not just a one off. And it's critical to our well-being and we will on a go forward basis we are move into a whole ton market leading competitive G&A ratio. That is our strategy in mind you can.

Mike McGuire

Yes and John comment is a fair one and just to add a little bit of color on that to your question on whether there one-offs there really were not one offs in our in our expense run rate for the first half of this year and or in the second quarter, and we are seeing an accelerating benefit to our net general administrative expenses from the impact of seeding commissions, we've talked at long length about the value of the significant reinsurance purchasing that -- we undertake and then were starting to earn those seeding commissions on those are largely locked and as the seeded premium earnings grow so does the seeding commission off set, and so it's enabled us to still invest in the growth of our business in terms of our growth G&A but it is more than being offset by expanding seeding commission offsets.

Ryan Byrnes

Okay, thanks to that, let me guess on absolute basis so again in the quarter-to-quarter $17 million on an absolute basis. I mean if $67 million I mean I don't have the run rates but is that a reasonable I guess or it is a range 84 to 67 reasonable just trying to think about that.

Mike McGuire

Yes Ryan. I'm not going to give you specific guidance I would echo Jon's comments is and if we look at where we were at the midpoint last year we had about a 16% G&A ratio that through six months this year it's 13%. And over the next three years we would look -- we would be targeting that G&A ratio down closer to 10% or 11%.

John Charman

We said about that three and half years ago achieving market leading competitive expense ratios.

Ryan Byrnes

And to confirm that's G&A and corporate combined.

Mike McGuire

Correct.

Ryan Byrnes

Okay. Great and then if I just want one more question for me and I'll let others to add it. I just want the -- I think and I've heard the comment that year your retro cover for kind of your non-peak-cat may have attached in the quarter, I can't quite see that through the PMOs [ph] but I guess I'm not quite sure if those are peak or verses non-peak but just wanted understanding of how much retro coverage I guess you have for that non-peak-cat retro piece.

Mike McGuire

Ryan you wouldn't see that our PMO disclosures those PMOs are really focused on a much more peak zones and obviously what I talked about in my prepared remarks was a cold spot that retro cover that we have that the every events that we saw in the second quarter attaching to that coverage, so we don't disclose details of our individual reinsurance protection but just as a note and we have attached to that cover, we still have some runway ahead of us if either second quarter events adversely develop or if there's other non-peak-cat events. In addition the accumulation of global cat losses did that deteriorate some of our peak-zones aggregate retention, and so if we think about going into win season which is our peak exposure the aggregate retro that we had in places, we're closer to attaching by way of that reduction and that retention.

John Charman

But again, Ryan, coming back to three years ago it was a strategic decision that we made. And its evidence by of look out we're retain premium around 60% where the rest of the industry has got retain premiums in the upper eighties on average. We have deliberately make sure that we have dealt with the potential volatility that can occur and does tend to occur at the bottom of pricing cycles. So we have very, very expensive reinsurance protection throughout both of our businesses.

Ryan Byrnes

Okay great, thanks I appreciate it.

Mike McGuire

Thank Ryan.

Operator

And we will take it Quentin McMillan as KBW.

Quentin McMillan

Good morning, thanks guys. I just wanted to touch back on and the ROE question that may have brought up earlier because I think a couple people are asking off more side on this. Mike if I'm kind of hearing you correctly can you square what I'm thinking that it sounds like you're parsing out operating ROE and sort of what the underlying fundamental profitability of the underwriting businesses as two separate things and what I'm trying to sort of get out is are you kind of indicating to us that there's an over capitalization of the excess capital that you guys of sort of built up for organic growth and or M&A or whatever else that might actually be a headwind and potentially not letting you drive to 10% operating ROE, at least this year or in the near term, even though you fundamentally would be writing the underwriting business at what you see as sort of a 10% a re-type level that it -- is that -- does that makes sense and can you clarify that for me.

Mike McGuire

I think that's a fair way to look at it Quentin. And that the fact the matter and you can see it very clearly in our PMOs or our operating leverage that we are under levered in terms of deploying capital, we are growing into that as we're adding profitable underwriting businesses that should get us closer to having our ROE and deployed capital versus our total capital being closer, but we still have a ways to go in terms of the continued build out of the business.

And the key focus those making sure that as we grow into that capital base that were maintaining that level of underwriting profitability which is in speaking question really focusing on maintaining profitable combined ratios and our underwriting businesses is the key path to success for us. Clearly we need to grow into and -- we would desire growing into the amount of capital base that we have but it's got to be with underwriting profitability.

Quentin McMillan

Okay and to square for John's comments I recently saying that you know it doesn't make sense to write business below the double digit ROE, still be writing business at a double digit ROE today but it might not show up in terms of what we see as the reported operating ROE in 2016, but longer term which still expected you know that 10% plus type level is what you're shooting for and what you expect.

Mike McGuire

Absolutely, if you would dug into the returns on deployed capital for our business segments we're deploying capital in double digit ROE business. And not as it is clear focus for us. And the other thing that does influence our return on equity is a pretty significant overhang from amortizing our intangible assets and that I guess is pretty unique to I guess how we have accounted for the intangible assets that we acquired that Montpelier, that has a pretty heavy earn rate coming through particularly this year that is suppressing the operating ROE.

Quentin McMillan

Okay great. in the quarter it seems like and again please correct me if I'm wrong on this but it seems like excluding the cat losses which everybody had, your underlying losses were a little bit higher than we might expected, and it's really more of a frequency type issue, is there any sort a quantification you could give an and I know I am sort of -- into the kind and non-cat weather related losses at similar to omit that any sort of quantification you can help us with for how much frequency might have added to the combined ratio in the quarter.

Mike McGuire

Yes, what I would focus you on and it is the property marine energy line in our insurance business. And that was a relatively smaller and premium base about $67 million in the second quarter, but I had an act here loss ratio of 84.5%. Over the medium to longer term we generally would expect that to run a high fifties to low sixties.

John Charman

I think you have to look at the seasonality of some of this stuff, if you don't mind me saying so. I am very comfortable with the loss that we have had throughout our businesses. These individual market losses where we have very low participation and it occurs from time to time and it can be a timing issue. As Mike said very clearly, once we get through the year end we would expect these things to normalize back to well within our loss base.

Quentin McMillan

Okay. Just to pick out and my apologies for the, this looks like it's running a bit higher as well. Is the specialty line, it kind of had a little bit of uptick of a quarter versus what you had been running at? Is there anything to sort of call out in there?

Mike McGuire

Yes, you are talking about the specialty reinsurance line?

Quentin McMillan

Yes.

Mike McGuire

Yes, that was the, in our specialty business it would include two reasonably sized risk losses. One in Trade credit and another in Energy that were reasonably sizeable market losses that did push up the attritional loss ratio in the quarter, I would say those were some of the unique losses and that as you said, that did add about 15 points to our specialty; on the loss ratio on the reinsurance side. The bulk of that change year-over-year sequentially quarter after quarter would be really there were two losses.

Quentin McMillan

Okay. The 15 points on a 72 number gives me about a 57-ish debt so high 50s, low 60s is sort of what you expect that line to run at give or take?

Mike McGuire

Yes.

Quentin McMillan

Okay. Great. Can you also, I think that I had a problem with it. I am not sure if everybody did, just overestimated what the earned premium was coming through from the Montpelier was? I know that the book has been integrated but can you help to square a little bit what the benefit from the earned side was in this quarter from the Montpelier coming in or any numbers that can kind of give a little bit more, something we can crunch on and do some analysis with?

Mike McGuire

Sure, what I will refer you to is the supplement. If you look at Page 30 of our financial supplement and you can see how we have laid out the premiums coming through. We have detailed it by year and obviously you can roughly approximate by quarter what each of the annual periods would be and so for 2016 we would expect the Montpelier's quite premiums to be about $165 million and so that's split over 4 quarters.

Quentin McMillan

Perfect. Apologize for, just one or two last questions today, think there is not too many people behind me but on one of your competitor's, well on Greenberg's call, they mentioned that retail major accounts business is experiencing downward pricing pressure. But he also said that lead layers for both primary and excess were capabilities make a real difference are seeing pricing that's less competitive than straight excess layers. Now to me that feels like what you guys are trying to do in the global risk solutions business so I wanted to get your thoughts on…

John Charman

That's exactly what we are doing Quentin.

Quentin McMillan

Exactly. So I was hoping you could comment in terms of the pricing pressure that Evan was speaking about being a little bit less and give a little bit of color in terms of Michael Chang and team are doing there, maybe with premium commentary or anything you might want to share.

John Charman

I would just echo what Evan has said and the pricing pressure because it is a highly specialized set of products that are offered to major businesses that value a) the suite of products; b) the quality of the underwriting and the capability of the underwriting; c) the servicing capability, the loss prevention capability and this is stuff where there is very strong relationships between the carriers and there are very few of us in that business and the assurance. And so, the brokerage tends to be, if brokers are involved, the brokerage tends to be much more reduced than you would find in the traditional surplus lines market where there is a lot of free for all, more of a free for all how I describe it. It is a pretty unique business to be in and that's we want to be in it and that's why we are going to add a lot of value to our clients.

Quentin McMillan

That sounds exactly what I am hoping for. Think that turns great. Just one last thing in terms of the seasonality. Mike I think you have spoken, in past, about crop insurance business, the way you tend to book that business is that you basically book it at a break-even in the first or second quarter or maybe the first half, I apologize on mixing up wording on that, but can you just talk about that and maybe a) to do that this year, which might be a little bit higher booked than what you are hopefully expecting the back half to look like and b) what impact might that be?

Mike McGuire

Sure. You are awfully right that our agricultural business is quite seasonal in terms of how we recognize the loss ratio. There's a few interesting movements as you think about. The first half of this year versus the first half of last year. So, through six months our accident year loss ratio for crop was an 85%. Through six months last year it was about 89% and so as I think about the four points of improvement that we have already seen this year, a big part of that came out of the tail-end of last year's earnings in the first quarter so the 2015 crop year that had some premiums that earned in the first quarter and so that came through at what last year's essentially ultimate loss ratio was which the full year last year ended about 81% loss ratio for our agriculture business.

This year so far looks as good if not better than where we were last year and so this year we already had some benefit in Q1 that really was from a very good last year that earned through but for the current crop year, we started essentially break-even. It gets a little bit better in Q2 but really to the extent that results continue as we would expect them to, we should see a pretty substantial improvement in the backend of this year for our crop insurance business. And if you look back quarter-over-quarter you can see that the third quarter accident year ratio, so from second quarter 2015 it was about a 90%, in third quarter it was 77% and the fourth quarter was a 73% to get to a full year 2015 of about 81%. And so we have started very much the same way this year, starting at higher, the year is looking as good if not better than what it was last year and so we have every reason to believe that we should have a similar experience to last year.

Quentin McMillan

And that's a reasonable estimate a 80-ish% range on what you expect the business to be at on the loss ratio basis or even slightly better?

Mike McGuire

In the low 80s is what we would generally expect the loss ratio to be.

Quentin McMillan

Great. And I apologize. One very last one is how much benefit do you guys realize in terms of the expense ratio advantage that you have from the seeding commissions within the insurance segment on a point basis whether this quarter or in the past 12 months or in the last year? However, you want to quantify it if it helps.

Mike McGuire

I am not sure we would want to put that information out there. Obviously that's sensitive information in terms of how we position our reinsurance and in the margin of our underlying business that we are seeding up.

Quentin McMillan

Fair enough, thanks very much guys.

Mike McGuire

You can see it coming through on our expense ratios. Even as we have been investing significantly in our build out, our dollar expense levels and ratios have been much flatter than you would expect from a expanding business.

Quentin McMillan

Appreciate all the answers and sorry to go on there for a while.

Mike McGuire

No problem.

John Charman

That's okay.

Operator

And we will move to Ian Gutterman of Balyasny.

Ian Gutterman

First congratulations to Quentin, I think you set the world record for the most questions on a conference call there. Mike my first one is easy. The tax rate seems like it was unoperating, I am sorry, the operating tax rate seemed like a pretty meaningful benefit, am I doing that calculation right or do you have that number?

Mike McGuire

We obviously had a relatively small income tax benefit coming through the income statement. Similar to what we had last quarter, we have a pretty significant amount of valuation allowances up against our US operations and as we continued to drive towards profitability, we have seen an incremental reduction in some of that valuation allowance and that has come through modest tax benefit. We still have about $100 million of valuation allowances up against our US deferred tax assets.

Ian Gutterman

Great. Thank you. Second do you have the gross cat loss for the quarter?

Mike McGuire

Do I have, I have is, what I will give you is our net loss that prior to reinstatement premiums was about $75 million.

Ian Gutterman

Yes, I saw that in the release. I just want to know how much benefit you got from all the reinsurance.

John Charman

That's what we did say Ian was the fact our losses against our market share were very, much lower.

Ian Gutterman

Okay. Because I guess what's surprising a little bit John was just your loss as percent of equity was 1.5% and that was pretty much in line with a lot of other companies. I guess, just because you have bought so much reinsurance and that has been part of the strategy. I guess I would have thought you would have outperformed Piers and bet the lower end.

Mike McGuire

Which as a percentage of equity we were.

Ian Gutterman

Okay. Maybe we can compare numbers after the call. I was doing some math and I was getting in line with others but okay. Did you mention the press release that there was growth in aviation on I think both, insurance and reinsurance and you talked about it a little earlier. But I was hoping you could expand a little bit. I has John has -- that's been for several years a line that you have, commented on at length of how difficult that is and how underpriced that is. It doesn't really [ph] better sense, that was the one that caught my eye and surprised me that you were growing there.

John Charman

It's a highly competitive marketplace. We didn't want to go into it till we could find the very best people in the market to represent us which we did relatively recently. And, there are very substantial number of products that are within the aviation business. But we have the people, with very good standing, with very good reputations. And in that sort of business, you could have 10 underwriters producing the same client list. The differentiation in the pricing that those 10 underwriters could be receiving for exactly the same risk could vary up to 25%. The better the people we have, the stronger pricing capability we have and it's not only aviation business, the traditional aviation business that we have recently established in London but also we have an excellent relationship with W. Brown who has been around for a long time, one of the best general aviation underwriters in the marketplace and highly successful over a 25-year period; so not everything in the garden is smelling badly.

Ian Gutterman

Exactly. Okay and my last one real quick is, was the casualty growth related to, without asking you to speak about a specific client, a large multinational insurer who has been very well -- buying new reinsurance in this quarter?

John Charman

Not in the slightest. I can assure not in the slightest.

Ian Gutterman

Perfect. Just wanted to check.

John Charman

Let me tell you I would love to see the mathematics behind that particular, we don't comment on individual transactions, but by golly, not in the slightest. I think that type of business are making those sort of assumptions.

Ian Gutterman

Okay. Just wanted to make sure John, thank you.

Operator

[Operator Instructions] And we will take a question from Jay Cohen with Bank of America.

Jay Cohen

Yes. Thank you.

John Charman

Hey, Jay.

Jay Cohen

Good morning John. For the third quarter Montpelier acquisition was closed towards the middle or the end, middle of third quarter of last year. Will you still have -- or written premium coming in of the third quarter of 2016?

Mike McGuire

There is a small number of July 1 renewals that were renewed by Montpelier prior to our closing so there will be a little bit coming through. And I have that number right in front of me but there will be some incremental combination that takes place for a third quarter. But the bulk of the renewals have already taken place.

Jay Cohen

Great. That's helpful. And I noticed that Doug Warman is running the US insurance business, recently left. Can you talk something about his departure? He was kind of a big hire several years ago.

John Charman

We never comment about individuals, I am afraid Jay, which I would expect you to respect. But we -- his contribution and that's it.

Jay Cohen

No, that's fair. Last question, guess you have had about 5 quarters in a row now where your other investments produced kind of subpar or negative returns. How are you feeling about that asset class given the recent performance?

Mike McGuire

Yes, Jay we talked about this I think at length last quarter. And we talked about a number of actions that we took on some of our alternative asset managers and we are in the process of redeeming little over $200 million out of some of the underperforming managers. And I would say on the positive side we did see a positive earnings contribution in the second quarter although I was still somewhat under what we would strive to see that return. And again some of the managers, we are still in the process of redeeming continued to underperform so what we saw in the second quarter, very much validated the decisions we had made at the very beginning of this year to terminate some of the underperforming managers.

John Charman

It was a pretty major review we undertook. We got rid of 25% of those managers.

Jay Cohen

I guess, we will see that asset class begin to come down starting in the third quarter?

Mike McGuire

Not much of the redemptions have really come through. There's redemption notice periods and liquidity provisions that will take us roughly a year and a full to get out of those managers that we have terminated but the bulk of that will be in the third and fourth quarter this year.

Jay Cohen

Got it. That's helpful. Thank you.

Mike McGuire

Thanks Jay.

John Charman

Okay.

Operator

And there is no further questions in the queue. I would like to turn the call over to John Carman for any additional or closing remarks.

John Charman

So thank you Bethany and thank you all again for joining us on our call today. We look forward to speaking to many of you at the upcoming investor events and when we announce our third quarter earnings in November. But thank you all again for taking the time to listen to us and ask the questions that you have done. And with that Bethany this concludes our call.

Operator

And ladies and gentlemen this does conclude today's conference call. Thank you everyone for your participation. You may now disconnect.

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