PartnerRe's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Executives

Robin Sidders - Director, IR

Costas Miranthis - President & CEO

Bill Babcock - EVP & CFO

Analysts

Amit Kumar - Macquarie

Mike Zaremski - Credit Suisse

Jay Gelb - Barclays

Michael Nannizzi - Goldman Sachs

Vinay Misquith - Evercore Partners

Matt Carletti - JMP Securities

Greg Locraft - Morgan Stanley

Matthew Heimermann - JPMorgan

Doug Mewherter - RBC

Jay Cohen - Bank of America

Josh Shanker - Deutsche Bank

Ian Gutterman - Adage Capital

Ron Bobman - Capital Returns

PartnerRe Ltd. (PRE) Q1 2012 Earnings Call May 1, 2012 10:00 AM ET

Operator

Before we begin the call, I will remind all participants that they are in a listen-only mode. (Operator Instructions). If you have not received a copy of the press release, it is posted on the company's website, www.partnerre.com or you can call 212-687-8080 and one will be faxed to you right away.

I will now hand over to Robin Sidders, Director of Investor Relations at PartnerRE who will begin the call.

Robin Sidders

Good morning and welcome to PartnerRE's first quarter 2012 results conference call and webcast. As a reminder, our first quarter financial supplement can be found on our website at www.partnerre. com in the Investor Relations section by clicking on Supplementary Financial Data on the Financial Reports page. On today's call are President and CEO of PartnerRE, Costas Miranthis; and Bill Babcock, Executive Vice President and CFO of PartnerRE.

Costas will start with an overview of the quarter and then hand over to Bill, who will provide more details on the results. Costas will provide additional commentary on the market and then we'll open the call up for question-and-answer session. I'll begin with the Safe Harbor statements.

Forward-looking statements contained in this call are based on the company's assumptions and expectations concerning future events and financial performance of the company and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

PartnerRe's forward-looking statements could be affected by numerous foreseeable and unforeseeable events and developments, such as exposure to catastrophe or other large property and casualty losses, adequacy of reserves, risks associated with implementing business strategies, levels and pricing of new and renewal business achieved, credit, interest, currency and other risks associated with the company's investment portfolio, changes in accounting policies and other factors identified in the company's filings with the Securities and Exchange Commission.

In light of the significant uncertainties inherent in the forward-looking information contained herein, listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made. The company disclaims any obligation to publicly update or revise any forward-looking information or statements. In addition, during the call, management will refer to some non-GAAP measures when talking about the company's performance. You can find a reconciliation of those measures to GAAP measures in the company's financial supplement. With that, I'll hand the call over to Costas.

Costas Miranthis

Thank you, Robin and welcome everybody to our first quarter results call. We had a good first quarter providing a solid start to what is so far at least a relatively uneventful 2012. Our underwriting results were strong helped by the low level of catastrophe loss events during the quarter as well as continued favorable prior-year reserve development that is consistent with our reserving philosophy. Our non-life combined ratio was 84.7% and together with a good quarter for our life business, this resulted in a 13% operating return on beginning equity for the quarter.

Improvements in equity markets and contraction in credit spreads during the quarter resulted in significant gains in our investment portfolio and a strong non-operating result. We grew our book value per share approximately 6% during the quarter. Our long-term growth in book value per share plus dividend remains our primary long-term objective. Given the challenging economic environment in which we operate we are pleased with these results.

We continue to provide top-quality security to our clients. We have one of the strongest balance sheets in the industry supporting our assumed risk with $7.6 billion in total capital. As many of you know last month we published PML disclosures for several catastrophe zones. This is in addition to the disclosure we have provided quarterly for several years now on aggregate limits for peak rates including Cat.

The new PML disclosure should help provide further insight and understanding for the catastrophe exposures we carry in the zones provided and how these exposures evolved over time. I will talk more about the specifics of the April renewal environment in my remarks at the end of the call, but I would like to point out that I am pleased that we continue to find profitable opportunities to grow and diversify our overall portfolio. Some of these opportunities are reflected in the current quarters, but others will not be fully recognizing premium until subsequent quarters.

While we are comfortable with our current portfolio including our overall level of capacity exposure as always we will continue to respond to pricing changes relative to risks to achieve the best risk adjustments return for the overall portfolio. I will now hand over the call to Bill who will provide you with more details on our financial results for the quarter.

Bill Babcock

Thank you Costas and good morning everyone. As you just heard we are pleased with our strong results for the first quarter of 2012. We reported operating income for the quarter of $182 million or $2.76 per diluted share which translates to an annualized operating ROE of 13%. This compares to the operating loss of $10.82 per diluted share, we reported in the comparable prior-year quarter which were significantly impacted by major earthquake events in Japan and New Zealand.

Net income for the first quarter 2012 was $360 million representing an annualized net income ROE of 24.7%. Diluted book value per share at quarter end was $89.63, an increase of 6% over yearend 2011.

First quarter non-life net premiums written totaled $1.3 billion basically flat compared to the prior-year quarter while net premiums earned were down 9%. These changes are on a constant Fx basis and are all references to percentage premium changes for the remainder of my prepared remarks. The decrease in net premiums earned reflects decisions made in prior quarters to non-renewed certain business primarily at our catastrophe and global P&C sub-segments. The non-life technical ratio for the quarter was 76.8% with each of our sub-segments contributing meaningfully to this result.

Non-life technical income for the quarter was $185 million. Our results for the quarter include favorable prior-year reserve development of $164 million or 20.6 points on the technical ratio.

This compares to $142 million we reported in the comparable prior-year quarter and $52 million we reported in the fourth quarter of 2011. Given the significance for this development, I'd like to share with you some of the key drivers. I should start by saying that the development we experienced this quarter is the result of applying the same practices and methodologies around reserve setting that we've utilized in prior periods. We have made no changes here. Of the $164 million of favorable development we reported this quarter $76 million came from our short tail lines, $60 million from our long tail lines and the balance from our medium tail lines.

Of the $76 million of short tail lines favorable development $25 million comes from our Northern American agriculture book and it is almost entirely related to adjustments made settling the 2011 MPCI crop book. I’ll talk more about the crop adjustment in a moment. The next largest contributor to our short tail favorable development was catastrophe at $19 million. This was not driven by adjustments to our estimates for 2011 major catastrophe events, but rather smaller events related to years 2010 and prior. I should also point out that the $50 million gross reserve we established in the fourth quarter of 2011 in our catastrophe sub segment related to major 2011 catastrophe events was unchanged this quarter.

In our long tail lines favorable development of $60 million, the largest contributor was North American Casualty at $27 million driven by continued benign loss trends. Our Global P&C Casualty and Non-Proportional Motor Books also contributed the combined $27 million. Finally, in our medium tail lines, Aviation was our single largest contributor at $30 million.

On last quarter's call, we discussed the reasons the prior-year reserve development was lower in what we had experienced in recent quarters. Mainly, a higher level of upward premium adjustments and mid-size losses in our global specialty lines. We told you that we believe the mid-sized losses were due to the sort of random fluctuations we expect from time to time and non indicative of any underlying trends. Our experience this quarter has only served to reinforce this view.

Now turning to our non-life sub-segment results and starting with North America. Net premiums written increased by 1% while premiums earned decreased by 8% compared to the prior-year first quarter. The primary reason for the decrease in earned premiums was a $15 million downward adjustment related to agriculture premiums, again related to the 2011 crop year. I mentioned the 2011 crop year adjustment in discussing reserve development as well, so let me explain.

In finalizing the MPCI 2011 crop year, the profitability of the crop year not only results in changes to loss estimates, but to premiums and commissions. The net of these adjustments results in a positive $4 million contribution to our net technical results. Costas mentioned that we are seeing additional opportunities in several lines and US agriculture is one, rebound to 2011 crop year account early during the second quarter which is not reflected in our first quarter results.

During the second quarter, we expect to record net premiums written of about $70 million related to this account with full-year premiums on this account expected to be about $140 million. We currently estimate our 2011 US crop book in total to be about $260 million. The technical ratio for the North America sub-segment for the first quarter of 2012 was 83.4% 9.2 points better than the prior-year quarter.

This improvement was driven by the absence of large catastrophe losses and the agriculture adjustments I just mentioned. In our global P&C sub-segment, net premiums written were up 11%, compared to the prior year quarter, mainly on new business and increased participations in our motor line. Net premiums earned were down 10% reflecting decreased writings in prior quarters.

As we discussed with you last quarter, these reductions were due to pricing deterioration relative to exposure. The technical ratio for the quarter was 85.5% and includes 17.4 points of favorable prior year reserve development. The technical ratio in the prior year first quarter was 104.9% reflecting the significant catastrophe activity experienced in that quarter.

In our global specialty sub-segment, we saw growth in net premiums written of 13%, driven by new business primarily in our shorter tail lines and lower downward premium adjustments this quarter. Net premiums earned were down 2% reflecting decreased writings in prior quarters, partially offset by new business written which is yet to be earned. This sub-segment contributed $44 million of technical profit this quarter. The technical ratio of 85.8% includes 18 points of favorable prior year development.

The technical ratio for the catastrophe and large loss affected first quarter of 2011 was 95%. Net premiums written and earned in our catastrophe sub-segment were down 26% and 28% respectively compared to the prior year quarter. We've discussed the drivers in these reductions on last quarter’s call. Regarding the results for the quarter, our catastrophe sub-segment contributed $79 million of technical profit this quarter, reflecting a 12.6% technical ratio in what was a fairly quiet catastrophe quarter.

As I mentioned earlier, we made no material adjustments to our estimates for large 2011 catastrophe events unless our attritional IBNR provision for these additional IBNR provisions for these events unchanged.

Before moving off the topic of catastrophe risk, we were pleased to publish PMLs for 11 peril zones during the first quarter. You will find we’ve also included this information in our financial supplement and will also include it in our quarterly Form 10-Q filing which we expect to file later this week. We plan to update this information, quarterly in future financial supplements in 10-Qs and 10-Ks.

Now on to our life operations. Net premiums written for the quarter totaled $215 million up 6% from the prior year quarter. Net premiums earned were also up by 7%. These increases were primarily the result of a new longevity treaty we wrote in the fourth quarter of 2011. The non-life allocated underwriting result, which includes allocated investment income and operating expenses, was $21 million this quarter compared to $12 million we reported in the prior year quarter. The increase is the result of higher favorable development on prior year reserves during the current quarter.

In the financial market this quarter, equities were up, credit spreads narrowed, and U.S. risk-free rates increased slightly. The result is that risk assets performed well this quarter. Investment activities contributed $327 million to our first quarter pre-tax results excluding investment income allocated to our life segment. Of this total, $129 million was included in pre-tax operating income and $198 million in pre-tax non-operating income.

During the quarter we achieved a total return of 2.0% on a local currency basis. Investment income for the quarter was $147 million which is down 5% compared to the fourth quarter of 2011, FX adjusted, primarily due to lower re-investment rates and the timing of dividend receipts.

At the end of the first quarter of 2012, new money rates trailed our current portfolio investment income rate by 128 basis points. This gap is largely unchanged from the prior quarter. Absent the closing of this gap, we continue to expect pressure on investment income going forward.

We maintained our short neutral duration position again this quarter as we continue to remain defensive against an increase in rates. Consistent with our disclosure in recent quarters, we will include details of our EU investment holdings in our Form 10-Q filing. We made no significant changes for those holdings during the quarter.

Looking at operating expenses, they were $98 million during the first quarter of 2012 compared to $113 million in the fourth quarter of 2011. The decrease is the result of lower headcount and true-up adjustments related to pension and other employee benefit expenses we recorded during the fourth quarter of 2011.

The effective tax rates this quarter were 15.1% on operating and 16.5% on non-operating income. These rates reflect the geographies where profits and losses emerged and there were no large or unusual tax items impacting effective rates this quarter.

The effective rate on operating income is on the higher end of our expected range, primarily as a result of the income contributions associated with favorable reserved development in taxable jurisdiction. Comprehensive income for the quarter was $376 million, reflecting our net income for the quarter of $360 million.

Currency translations added $70 million this quarter as the U.S. dollar weakened against the Canadian dollar. Operating cash flow was $79 million this quarter, reflecting loss payments related to catastrophe events 2011. The time value of money in our non-life reserves was $618 million at quarter-end.

We calculate this using the risk-free rates for each major reserving currency. This represents an increase from the $561 million we’ve reported at the end of 2011 and is due to the increase in risk-free rates during the quarter.

Total capital at quarter end was $7.6 billion up 4% since year-end reflecting our good first quarter results. Our capital remains very strong especially in light of the de-risking in our portfolio over the past year.

On the share buyback front, repurchases were minimal during the first quarter. We repurchased 183,000 shares at a total cost of $12.4 million. During the second quarter to-date, we have repurchased an additional 839,000 shares at a total cost of $56.4 million. The repurchases we made to-date in 2012 were executed on average discounts of 20.6% to year-end book value per share. We currently have 4.3 million shares remaining under our existing share repurchase authorization. If our shares continue to trade at similar levels and absent a change in market conditions, we expect to continue to execute on our existing repurchase authorization.

Now, I’ll hand the call back to Costas to update you on how we view current market.

Costas Miranthis

Thank you, Bill. Our April 1 renewal book is relatively small at about $330 million and it is diverse in terms of lines of business and geographies. As I mentioned at the beginning of the call, we saw positive indications of the rates stability or improvement in several of our large business. We continue to see meaningful price increases in catastrophe lines both in the U.S. and International. Japanese treaties will pack and for other lines such as marines saw substantial increases in rates this quarter.

Outside of the CAT business, there are positive signs of rate improvement in several areas. Most specialty lines, particularly energy in the US and E&S -- In the U.S., the E&S property market and to lesser extent, the E&S casualty market -- special casualty market in particular showed positive trends.

In this environment, we’re pleased with our April renewal performance which effects the asset we expect to amount around 12% increase overall on renewable premium with a significant portion of this increase coming from the U.S. This increase does not include the impact of additional premium in our U.S. agriculture account that Bill mentioned earlier.

We expect the upcoming June and July renewals which are predominantly property renewals to continue the positive momentum in risk adjusted pricing. More broadly, however, low investment rates will continue to put pressure on the returns. So wider terms that we have reached an inflection where rate improvements are beginning to outpace loss trends in many lines, we have some way to go before we reach our targeted profitability. These trends need to be sustained for sometime, I suspect they will; but there maybe variations by line in geography because we got [tied].

As I said before, PartnerRe can do very well in this environment. We have first class underwriting talent and expertise and established global franchise with local presence and reach and a strong customer base and a willingness to assume risks at a right price.

I am happy to take now any questions that you may have and operator we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will go to Amit Kumar from Macquarie. Go ahead, your line is open.

Amit Kumar - Macquarie

I guess the first question relates to the pricing commentary. What would be very helpful if you could sort of tie that back and in talking about June and July renewals, if you could tie that back into the PML data on page 28 of your supplement and maybe talk about how similar or different those PML numbers will look after 6/1 or 7/1 renewals?

Costas Miranthis

Thanks Amit, I don't expect that we will make any substantial decrease in our total fixed zone PMLs and that depending on pricing conditions we may increase around those. Within that order of framework that our CAT exposure in aggregate is at a level that we are very comfortable with; you may see readjustments in different zones which will be dependent on our exceptional price, rate increases relative to risk.

I should tell you that in the April renewals there have been some adjustments. The PMLs that we published earlier related to PMLs that will reflect the exposure that we had in place in January, the main adjustments that happened in April has been reduction in CAT risk zones primarily California and Japan. But in Japan, we were able to increase the premium right where simultaneously decrease in the PML exposure due to increased rates.

Amit Kumar - Macquarie

And I guess just moving on, you know the discussion on capital management, I am wondering does that slow as we head into the hurricane season and pick-up after the hurricane season or when you look at the stock right now, you think its compelling enough to continue buying back during the hurricane season?

Bill Babcock

As we said in our prepared remarks, we continue to expect to execute on our share repurchase program. And if pricing continues and if our shares continue to trade in wind season, we may slow, but we won’t consider ourselves precluded from buying in wind season at these levels.

Amit Kumar - Macquarie

A final quick question, in terms of the discussion on losses, we have talked about the reporting threshold in the past, you did mention there were low level of catastrophe losses. I am not sure if I missed this in opening comments, can you just sort of give a bit more color, may be they didn’t add up enough to publish in the press release, but maybe just touch upon some of the losses which happened during the quarter?

Costas Miranthis

Look in any quarter we pick some losses which are nowhere near our threshold. This quarter if you look at natural CAT events, that probably added up somewhere between $20 million to $30 million and they were spread across the whole portfolio. The principle event within that would be the U.S. tornado that occurred in February, March.

Amit Kumar - Macquarie

And that excludes your Costa Concordia number of $10 million?

Costas Miranthis

In addition to that we have a number of risk losses. Costa Concordia was $10 million, but we have losses like or you probably never heard about on that size every quarter. We probably had another two losses of that magnitude in our portfolio. So there are one-off individual risk losses that we factored down into natural, (inaudible) we have an appetite to take $10 million, $15 million losses every quarter.

Operator

Our next question comes from Mike Zaremski, Credit Suisse. Go ahead, your line is open.

Mike Zaremski - Credit Suisse

Costas, just a quick follow-up, I wasn’t sure, do you say that PMLs at April 1st were higher or lower?

Costas Miranthis

Lower. Lower in specifically two zones where, California quake and Japan quake would be low and we will happily serve in our second quarter too.

Mike Zaremski - Credit Suisse

Last quarter you talked about new business ROEs in the 9% to 10% range I believe; how are you feeling about new business being put on in 2012?

Costas Miranthis

It’s hard to say; when I talked to you back in February, we were looking at the overall portfolio getting priced 94 to 10%, it haven’t materially moved from that low; incrementally it’s getting a little bit better. The new business that we put in April was slightly better than what we saw before. There is widespread in ROEs within that context with business pricing from mid to low single digits to high teens.

Mike Zaremski - Credit Suisse

And lastly, the last time I see that the life insurance underwriting income being positive was ‘09 and I know Bill you said there were some favorable development. Can you quantify the favorable development and put them in perspective of how we should think about the run rate?

Bill Babcock

Yeah, the favorable developments in our financial supplement, we break that out separately for you on the life book. Life is a, in terms as you saw last year, we’ll have quarters where we make reserve adjustments and impairments on individual treaties.

We didn’t have any of those this quarter and other than the normal fluctuations we see from the mark-to-market impact on our European GMDB book. There is really nothing unusual and no impairments that we recorded this quarter. So apart from the mark-to-market impact which you’ll have every quarter this is close to what you expect as a run rate.

Mike Zaremski - Credit Suisse

So I need to check them, so was the mark-to-market impact very positive this quarter?

Bill Babcock

I think that our numbers were at $6 million to $7 million.

Operator

Our next question comes from Jay Gelb at Barclays. Go ahead, your line is open.

Jay Gelb - Barclays

First I just wanted to clarify on the share buybacks. Absent some large industry events, some large industry loss, do you anticipate being able to complete the remaining share buyback authorizations by the end of this year?

Costas Miranthis

Yeah.

Jay Gelb - Barclays

And then on investment income, I just wanted to confirm if there wasn't any currency impact in there, looking at the linked quarter impact, since it was down around $9 million quarter-over-quarter.

Bill Babcock

That's very minimum.

Jay Gelb - Barclays

Aright, so this is just low rates building in.

Bill Babcock

Yes.

Jay Gelb - Barclays

Okay and then you mentioned that sort of June and July reinsurance renewals, we've reached an inflexion point here on rate versus loss trend, what are your expectations for rate?

Costas Miranthis

My expectation is that the trends that you saw in January and again in April will persist for the June and July renewals year-on-year being 8-10, perhaps high percent, higher, perhaps higher in some specific areas.

Operator

Our next question will come from Michael Nannizzi with Goldman Sachs. Your line is open.

Michael Nannizzi - Goldman Sachs

Costas, I was just wondering on Japan you just kind of talked about the trade-off between exposures and risks, what sort of business are you focused on there, is it earthquake, is it wind, is it commercial or personal on the earthquake side. I was just trying to get an understanding of which areas you are focused on there and just one follow-up. Thanks.

Costas Miranthis

That portfolio, we have exposure both to earthquake and wind in Japan although earthquake exposure is significantly higher than our wind exposure. Our wind exposure is rather small in Japan. The portfolio on the earthquake is comprised of both commercial which is the stock companies principally and residential which is the mutuals. One of the things that happened over the last year there has been a rebalancing of our portfolio. So it's more balance between commercial and residential. Our portfolio in prior years had a heavier exposure to residential.

Michael Nannizzi - Goldman Sachs

And then just kind of looking at your results and I know we don't get a Cat number, but just sort of thinking about, is there a way to translate your results to a current actual year basis and to think about kind of the business you are putting on, it looks like I think your question asked before was that 9% sort of ROE. You know on a new business basis, I mean is that how we should think about the business you are kind of putting on the books right now or maybe that's not right if you could just kind of help me understand excluding the development, you know how to think about the businesses you know.

Costas Miranthis

I think you have seen about it is about 9% across the whole portfolio, if that's not a bad number. This is the, this is how we think about the business that we are getting, we are finding right now. As I said before there's a variation within that between Cat and other lines, but in aggregate the blended number, about 9% is probably about right.

If we try to back into a number looking at quarterly results and trying to do the take out gain, take out the cats, take out the favorable year development, there's a number of things that you got to be careful about and I will pass you on to Bill to give you some numbers there.

First of all, some of the adjustments in prior year reserves have offsetting adjustments in current year. For example this quarter there was fairly meaningful adjustment, give us agriculture which had an offsetting effect in premiums of commission and that has if you try to back that out from price development, you need to be careful of the treatment of that because it can lead to misleading impressions of the current accident year loss ratio.

Secondly you got to remember that we put the current year conservatively. We have always done and if you follow PartnerRe over the last 10 years or so if we have consistent prior-year developments with current accident year loss ratios, combined ratio that appear high and that’s by design. And as we move that portfolio and we have to move the portfolio so there is little bit less of a Cat component to areas where we book high because of there is potential for reserve development, you would expect to see more of this consolidated in the current year peak.

Third, I think we talked about Cat, normally you try to take the Cat out, we disclose individual Cat events once they exceed $35 million, but it doesn’t mean that there are no Cat events in any quarter. As I said earlier this quarter we did have some Cat events. We also have individual risk losses, none of those are significant by themselves, but if you try to deduce well the underlying run rate and (inaudible) loss ratio is you need to allow for those.

And the final thing, obviously the overall ratio, combined ratio, loss ratio will depend on the final mix that we have in the portfolio, but as an ROE, the 9% is not a bad number.

Bill Babcock

Well, I was going to add a little color to Costas' comments, give you may be few numbers to address the magnitude of some of the explanation Costas just gave you?

The ag adjustments is actually fairly material. If you look at the overall non-life combined ratio and all you did was to take prior favorable development added pack. You'd end up with the number that was fairly high. The ag ratio is actually about 2.5, the overall combined ratio is impacted by that 2.3 points, if you don’t account for those pieces correctly. And when you look at just the North American sub-segment, if you were to do that calculation, you would end up with a number that's actually 7.6 points too high.

So again, it has a fairly material impact, if you don’t count for the pieces correctly.

Not much I can add to the kind of the prudent reserving explanation that Costas gave you. On the specialty lines we talked about some smaller losses and we have got about handful of five losses that range in the neighborhood of $4 million to $10 million.

Some maybe a little higher than the normal quarter, but not unusual. For catastrophe events, the largest single addition we put in any segment was about 15 million to 20 million in Cat BU. Again and these don’t aggregate to a lot but that you have some impact. And then finally Costas mentioned some mix changes, and he referenced mix changes in the overall portfolio which is absolutely true.

Changes in mix also do impact some of our sub-segments as well and I'd point to our global P&C book where over the past year or two, we've cut back on catastrophe exposed treaties and most recently started writing some lower volatility business there, most notably motor insurance, so that hopefully provides you a little bit more color on some of the things that Costas just referenced.

Michael Nannizzi - Goldman Sachs

And just one bigger picture, Costas, just trying to understand I mean your comments about reserves and kind of setting your loss to retire and that kind of what PartnerRe has done, how does that dynamic, how should we think about that dynamic relative to new business? So if you are setting your loss to retire does that mean that your pricing is going to I imagine it means that the prices that you are going to probe will be higher than peers that have lower loss [picks] and if you are looking to grow some areas of your book, how should we think about that whole trade off, just looking at it from the outside.

Costas Miranthis

It has no impact on how we think about the pricing and how we quote to our clients. This is a matter of financial, it impacts our financials in that, we knowingly we decide to book particularly the longer tail lines or lines where we believe there is a reserve risk, at the loss ratio which is higher than the estimates that we use to quote business and those are the estimates that we believe are our best estimates given everything that we know today and given the trends that we expect to see in the future. The reason that we do it is a matter of prudence.

Unexpected events happen and we would like to have a margin, if those unexpected events happen. It's not in your policy, it is something that we found over the years and we continue to do.

Bill Babcock

I should also point out that the kind of this actuarial mid estimate. While we don’t, we are making the best estimate. We as well as many others have found that to be excessive in this if you look at experience over the past several years. So we continue to price for a trend that we expect, what we had expected hasn't come true. So that's a contributing factor as well.

Operator

Next question will come from Vinay Misquith of Evercore Partners. Your line is open.

Vinay Misquith - Evercore Partners

Great quarter. The first question, I just wanted to get some clarity on the impact of Ag on the prior favorable development. And if you could give me some comp with respect to premiums and was that different from the impact last year because I am just looking at the numbers and they seem similar to first quarter last year.

Bill Babcock

Yeah. Vinay, I don't think I gave you the numbers but let me -- I will give them to you again. On the premium side, the impact of reduction in premium was about $15 million. The adjustment we made to lawsuits was about a reduction of $22 million and we added back about $3 million in commissions.

Now what maybe a little non intuitive is that the when you look at where we classify that, is that $22 million related to a change in premium or do we consider due to other factors. It’s in the other factor numbers, not in the premium number. That answers your question?

Vinay Misquith - Evercore Partners

So your premiums were down $22 million for this -- $15 million this year because of the Ag of prior year. Correct?

Bill Babcock

Yes.

Vinay Misquith - Evercore Partners

Okay, great. The second question actually for Costas. You mentioned 9% to 10% ROE on the business you are writing this year. How does that flow down to the bottom line once you add in to an excess capital of such holding?

Costas Miranthis

I think when we price the business we attribute a capital level thing. It plays appropriate for our business. Its quite complex to trying growth from there to the financial to current year and the complicating factors is prior year releases. I mean if we don’t -- if the prior year reserve releases stop, any excess capital that we hold will act as drag on our ROE.

The other thing that you got to bear in mind, when we talk about ROEs, we think about ROEs two ultimate leases, how the cash flows from the current business that will put in the books will play out with high in capital and we receive investment income at new money rates, and we work out what that means in terms of ROEs. The current financials reflect the number of other things. The investment income that we have is not investment income at new money rates.

We have -- we benefited from prior year reserve releases as I said earlier. So is actually quite complicated to get from one to the other, assuming we have -- we experience the same trends to that we’ve seen in the past. My expectation is that overall for the financial year, that picture will not be too different from what you’ve seen, what I am quoting as a new ROEs that we buy now.

Vinay Misquith - Evercore Partners

That’s great. Bill, just a clarification on the CATs because you throw out several numbers out there. With the total impact from the small losses and the CATs be about $40 million to $50 million for this year you think or first quarter?

Bill Babcock

For this quarter?

Vinay Misquith - Evercore Partners

Yeah.

Bill Babcock

Probably, towards the higher end of that number, yeah.

Operator

Our next question will come from Matt Carletti, JMP Securities. Your line is open.

Matt Carletti - JMP Securities

Just two questions. First one, Costas, can you just clarify the comment you made on April 1, the 12% was ex-Ag. Was that a rate number or a premium number?

Costas Miranthis

Premium number, it is a premium increase on it.

Matt Carletti - JMP Securities

Okay, great. And then secondly, just going back to the topic of buybacks, just thinking about it on a, say, high level, going forward should we think about PartnerRe and kind of maintaining capital mode and looking at buybacks and dividends as keeping the capital stable? Should we expect capital to grow or shrink?

Costas Miranthis

We believe we have ample capital and we look very comfortable and we probably had some excess capital on our current position. So if you take it from that, absent future opportunities to deploy that capital, the room that we have is earnings plus.

Operator

And our next question will come from Greg Locraft, Morgan Stanley. Your line is open.

Greg Locraft - Morgan Stanley

Thanks, good morning. Just wanted to clarify again on the top line. The 12% was renewable premium as you just mentioned and then there is an extra 70 coming in the quarter for it sounds like a very large crop contract. I just wanted to confirm that.

Costas Miranthis

Yeah. Let me just clarify. The 12% is on renewable during that period. Obviously, we have premiums from treaties found in previous periods. But financial quarter versus renewal quarter is a little bit different but I think generally that is correct. And I should also clarify the 70 that we booked in the second quarter effectively represents two quarters worth of premium for that treaty, the premium for the first quarter and the second quarter.

Greg Locraft - Morgan Stanley

Okay, so if I take --

Costas Miranthis

It will all appear in the second, right.

Greg Locraft - Morgan Stanley

Right, and so if I take the 330 that we renewed at April 1, and there is a 12% growth rate on that. That’s $40 million incremental and then the 70 is, obviously, 70 incremental. So our second quarter premium numbers should have been 100 million above the year before, which will be a 13% growth rate. Does that -- is that the math you are pointing to?

Costas Miranthis

No, actually I don’t have the numbers. So let me just explain when we talk about the premium that was renewed. That’s the annual premiums. So for a proportional treaty, what we show you in the renewable numbers is the full annual premium that was renewed, which gets booked in the quarter, is the quarterly written premium, So the math doesn’t quite work that way.

Greg Locraft - Morgan Stanley

Okay, great. So I guess then if I can jump to a little different than same sort of topic is what I am trying to get at is what your top line is growing at in the second quarter, year-over-year. It seems like you’re really accelerating the growth rate. And if the June and July renewals come in, we will skip July but if June comes in where you think, and it sounds like you expect the continuation of January and April, why wouldn’t we have, you know, a double-digit rate of growth in the second quarter?

Bill Babcock

Yeah. And again some of the written premium that you’re going to see in the second quarter relates to treaties we bound in prior periods. So to the extent we decreased premiums in those periods, you are going have lower written coming through on those periods. Some of the increases you are not going to see for a few quarters especially on the proportional treaties. The one big impact you are going to see is the $70 million.

Costas Miranthis

I think you got to be, when I quote numbers I quote increases on renewable and as I mentioned earlier during April, we had a good April renewal, depending on prices and depending on where we see the opportunity, its likely that we will have, the decent June and July renewal. But not all of that gets immediately reflected in the quarterly written premium numbers. That gets spread-out and the next quarter’s numbers are as much affected by decisions that were taken up to 12 months ago.

Greg Locraft - Morgan Stanley

I guess, I just sort of, I have been in the impression that you all have been derisking the book and it sounds like I mean certainly in the catastrophe segment we are seeing that that occurred in the quarter, but it seems like you have now reached and I think Costas used the words an inflection point where you are seeing pricing in excess of loss cost. I am sure a 9% ROE isn't what you are playing for over the long-term, but it seems like you are going for growth more than you have in the previous four quarters or so; is my reading correct or….?

Costas Miranthis

I think I will put it somewhat differently from here, because growth is not what we are focused on in the first place. First on the derisking, I mentioned earlier that we are comfortable with the current portfolio and the overall level of CAT exposure as an element in the overall portfolio. We don't need to reduce aggregate exposure. We can increase if the conditions are right within the framework.

There maybe zones where we decide to increase and others where we tried to pick. The question is, are we deciding to accelerate them, accelerate writings if its 9% ROE? Frankly, in the current conditions if a business is not contributing to a peak, we will take 9% ROE. We can achieve 700 basis points spread on a risk free rate with good technical fundamentals and a prospect that we’ll hang on to this business over the longer term. We are not going to turn the other way.

Operator

Our next question will come from Matthew Heimermann, JPMorgan. Your line is open.