PartnerRe Ltd. Q2 2008 Earnings Call

PartnerRe Ltd. (PRE)

Q2 FY08 Earnings Call

July 29, 2008, 10:00 AM ET

Executives

Robin Sidders - Manager of IR

Patrick Thiele - President and CEO

Albert Benchimol - EVP and CFO, PartnerRe Ltd., CEO, Capital Markets

Analysts

Jay H. Gelb - Lehman Brothers

Doug Mewhirter - RBC Capital Markets

Matthew Heimermann - J.P. Morgan

William Wilt - Morgan Stanley

Vinay Misquith - Credit Suisse

Susan Spivak - Wachovia Securities

Thomas Cholnoky - Goldman Sachs

Brian Meredith - UBS Securities

Presentation

Operator

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

At this time I'd like to turn the conference over to Mr. Robin Sidders, Manager of Investor Relations at PartnerRe, who will begin the call.

Robin Sidders - Manager of Investor Relations

Good morning. And welcome to PartnerRe's Second Quarter and Half Year 2008 Earnings Conference Call webcast. As a reminder our second quarter financial supplement can be found on our website at www.partnerre.com, in the Investor Relation's section by clicking on supplementary financial data on the Financial Reports page.

On today's call are Patrick Thiele, President and CEO of PartnerRe and Albert Benchimol, Executive Vice President and CFO of PartnerRe. Patrick will start with an overview of the second quarter and year-to-date and then hand over to Albert, who'll provide more details on the results. Patrick will come back at the end and conclude with some additional commentary then we'll open up the call for question and answers.

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, 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 SEC.

In light of the significant uncertainties inherent in the forward-looking information contained herein, listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company disclaims any obligation to publicly update or revise any forward-looking information or statements.

In addition, during the call, management will refer to some non-GAAP measures when talking about the company's performance. You could find a reconciliation of those measures to GAAP measures in the company's financial supplement.

With that, I'll hand the call over to Patrick.

Patrick Thiele - President and Chief Executive Officer

Thanks Robin and welcome everyone. We had a strong second quarter and first half of 2008 with very exceptional results. To date this year, we have achieved a 15.5% annualized operating ROE and a 3% growth in book value per share. Despite the noise in the second quarter in our net income, as a consequence of our adopting FAS 159, we achieved good second quarter results, with 35% growth in operating income, 11% growth in net investment income, and 6% growth in net premiums written. The growth in premiums, much of which is due to FX was achieved in spite of a softening market and highlights our preferred position within the market.

Albert will walk you through the second quarter and year-to-date results but I'd like to highlight a few key points. First, without saying much more about the impact of FAS 159, it is worth noting that it is not a reflection of the quality of our investment portfolio. Of our $12 billion investment portfolio, 89% is in fixed income of which 59% are AAA rated bonds. The increase in risk-free rates is what led to the unrealized losses in this quarter, not subprime, not CDOs and not equities.

Second, we have as long been our practice, taken a prudent view of setting our reserves as our best estimate of relevant losses. This quarter we did that in our U.S. Ag business, where we saw a significant flooding in Iowa and Illinois during the second quarter. We know that there will be some level of loss and as we discussed last quarter, we know that these estimated losses won't be reported to us until at least the third quarter. Nevertheless, we have increased our loss picks while we wait for a more precise indication of what level of losses will emerge.

Similarly, we have discussed industry losses on U.S. D&O related to the credit crisis, and we see no reason at this point to change our estimate of industry losses from our initial pick of approximately $6 billion to $10 billion. Within that context, loss reporting is developing as expected. By our count, the number of credit related security class action lawsuits have increased to 91 as of June 30th. We have continued reserve at a level that we believe will prove to be prudent in coming years. And we will update that view of all that at year around.

I'll now hand the call over to Albert who will walk you through the strong results of the second quarter and the solid performance of the company year-to-date.

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Thank you Patrick and good morning everyone. As Patrick noted, we report strong performance this quarter with business written at acceptable levels of profitability, good balance in our risk portfolio, low loss activity, favorable development of reserves and strong growth of investment income. Our high quality investment portfolio performed relatively well, but of course, we were not immune to the effects of rising interest rates.

As we advised when we announced our adoption of FAS 159, this accounting standard would add volatility to our income statement and we're certainly seeing that today. But this does not change the important fundamental metrics of our operating performance, nor the construction and evaluation of our balance sheet. In our normalized segment, net premiums written grew 6.7%, without FX, they would have increased 1%, driven by the growth of the U.S. agriculture business which offset declines in the other lines.

For those of you that monitor premiums by sub segment, FX contributed 12 percentage points to the growth over the comparative number, for Global P&C, 8 percentage points for the Global Specialty sub-segment, and 3 percentage points to the catastrophe sub-segment.

In terms of losses, it was a relatively quite quarter, as compared to the more active first quarter this year, and this accounts for the sequential improvement in our technical ratio. Patrick already mentioned the U.S. agriculture business and the flooding in the Midwest, otherwise we had small participations in other weather related and manmade losses across the globe during the quarter, but none of these were meaningful.

Also noteworthy, was a strong result in our catastrophe sub-segment where we had no losses to speak of in the quarter and additionally benefited from reductions and estimates from prior years events. Finally, Non-Life reserves continue to develop favorably, with estimates for prior years reduced by $130 million this quarter. In addition, estimates for losses from the prior quarter were reduced by $16 million for a total quarterly benefit of $146 million. By contrast, in the second quarter of 2007, reserves releases from prior periods were $111 million of which $107 million related to prior years.

As you know, we are prudent in our approach to setting initial loss ratios and measured in the reduction of prior year estimates. Of the reserves released year-to-date, over half relates to short-tail lines, a quarter represented reductions to mid-tail lines, and less than a quarter relate to causality lines which reflects our current conservative view of the potential impacts of the sub-prime debacle on D&O claims. All together, this lead to a second quarter combined ratio of 85.9 essentially flat with the prior year. And for the six month period, Non-Life net premiums written grew by 8.7% on a reported basis but would have been 3% growth without the benefit of FX, with the combined ratio of 89% and a technical result of $292 million.

In our Life segment, premiums written were flat in the quarter and up 8% in the year-to-date period. But each of these would have been 10 percentage points lower, were if not for the weaker U.S. dollar. Although we continue to grow our mortality business, the cancellation of a large longevity treaty, a slowing progress in our business volume. Profitability metrics for this segments are on plan, with an allocated under writing results which includes both allocated investment income and operating expenses of $7 million this quarter, versus $4 million in last year's second quarter.

Investment income and capital market activities performed quite well in a difficult environment. Consolidated investment income of $145 million represents growth of over 11% over last year's level. Investment income growth was driven by a larger invested asset base as a result of our strong cash flow, $222 million in the quarter and $1.156 billion over the last 12 months, as well as higher rates in FX.

I believe one of the reasons we can show consistent growth in investment income besides our strong cash flow, is that there are no unusual partnerships or distribution dependent vehicles in our investment portfolio. It's all straightforward interests and dividends and as long as we continue to generate cash from operations, we can look forward to a dependable income strength.

As we've noted earlier, we reported realized and unrealized losses of $296 million in our invested assets and since our adoption of FAS 159 earlier this year, these are fully reflected in our income statements and this led to our reporting a net loss of $26 million this quarter. Arguably, other companies at similar investment returns, but to the extent it did not adopt FAS 159 for all their invested assets, you would see the change in their portfolio values reflected in their comprehensive income.

A couple of thoughts on this charge. First, it represents substantially unrealized changes in market values. We incurred only $8 million of realized losses on securities and derivatives in the quarter. Secondly, these charges are substantially all due to the impact of rising interest rates. You'll recall that during the quarter, the U.S. five year bond rates increased by 78 basis points, while the German five year rate increased by 92 basis points. There were no impairments to speak of in our very high quality portfolio. As we've said it before, we held no CDO's nor sub-prime securities. We have only a very small allocation to less than investment grade securities and these actually performed well in the quarter. Thus, we are confident that the underlying securities will ultimately return to their par values overtime.

One of the benefits of FAS 159 is that the total accounting return for our capital markets assets closely approximates the actual return of the underlying portfolios. Taking together the investment income, technical results, other income, realized and unrealized gains, divided by average assets, we get a total return of negative 1.2% for the quarter. Interestingly, had we held an entirely risk-free Government portfolio of similar duration and currency distribution, the return would have been negative 2.4%. The reason for this out performance versus the risk-free alternative, was that spreads tightened the many of our fixed income securities and our equity returns while negative, still outperformed the risk-free rate.

Operating expenses were up this quarter, driven by FX, increases in payable and bonus accruals, as well as higher withholding taxes. Interest expense for the second quarter was $15 million compared to $12 million in the first quarter of this year and $13 million in the second quarter of '07. The increase in the second quarter was essentially due to the prepayment penalty on the early refinancing of our $220 million bank debt which we refinanced in May with 10 year, $250 million bond.

The net foreign exchange line shows a gain of $2 million in the second quarter, compared to a loss of $9 million in the second quarter of last year. The volatility in the foreign exchange line substantially reflects the difference in forward points embedded in our hedges, as opposed to any weakness in our hedging program.

Few words on taxes, the total tax benefit was $53 million in the quarter, comprised of a charge of $26 million against operating income and a benefit of $79 million against net realized and unrealized investment losses. The effective tax rate on operating income was 12% this quarter, based on a distribution of our operating earnings. However, on our non-operating loss the tax benefit rate was 27%, mainly due to the fact that our investments generating unrealized losses were located in jurisdictions with a higher average effective tax rate.

For the first six months of 2008, we had a tax benefit of $11 million, comprised of $53 million tax charge on operating income and a $64 million tax benefit on non-operating losses. The effective tax rate on operating income was 14.5%. As you may recall, we recorded in the first quarter, an unusual tax charge related to our European reorganization, but we advice you that we expected to finish the year with a tax rate that was within our historical range of 10% to 15% and that remains our outlook, barring unusual cash or FX movements.

Putting it all together, operating income was $184 million this quarter or $3.39 per share, as compared to the $136 million or $2.34 per share reported in the second quarter of '07. The major drivers for the improvements being higher Non-Life premiums earned, larger reserve releases and growth of investment income.

For the six month period these improvements were partially offset by the high loss experienced of the first quarter, resulting in a more modest improvement to $5.28 per share from the $5 per share reported in the prior year. And as we discussed earlier, the net income numbers are not comparable given the adoption of FAS 159 in 2008.

Let's move on to the balance sheet, which was essentially flat in the second quarter. Total investments and cash... excuse me, total investments and cash stand at $12 billion compared to $12.2 billion at the beginning of the quarter, as reinvested investment income and new cash-flow were not quite sufficient to offset the changes in market values driven by higher rates. However for the six month period, investment income and new cash flow FX more than offset a negative impact of market values resulting in over a $400 million year-to-date increase in the investment and cash portfolio.

I'll refer you to our financial supplement for a fair amount of detail on our portfolio composition. Our asset allocation at June 30th was not dramatically different than the allocation at March 31st. The largest change was a reduction of AAA assets as a percentage of the fixed income portfolio from 64% to 59% as we are selectively acquiring more credit risk in our fixed income and principle finance portfolios, given the currently tightened of spreads of many assets. Nevertheless, average fixed income quality remained solidly AA.

The average yield to maturity of our fixed income assets rose 58 basis points to 5%, reflecting the higher rates partially offset by tightening spreads. We also reduced deterioration of our bond portfolio was a hedge against the potential effects of rising inflation.

Freddie Mac and Fanny Mae were very much in the news these past few weeks. Their mortgage pools do comprise 72% of our $2.5 billion MBS & ABS portfolio. And we also own another $272 million worth of GSE corporate obligation.

That said we remain extremely comfortable with their quality. We can now imagine a creditable scenario where the U.S. government does not support these entities. I noted earlier that we do not have direct exposure to subprime residential mortgage sector nor CDO's and MBS & ABS portfolio, but that said we believe that there are likely sub premise... subprime assets that have been excessively discounted in the market and we've determined to make a small opportunistic allocation to this asset class in the second half of the year.

As to equities, we've been cautious on this asset class making further small reductions in second quarter, following our meaningful cutbacks over the last 18 months and that has served us well. However, here again at current evaluation levels we're likely to make modest gradual additions to our equity allocations. We cannot call the bottom, but we believe that current values will likely provide good returns over our two to three year investment horizon. Even if further volatility is likely in near term. Likewise after years of avoiding poorly priced structured finance business we are now seeing opportunities to add to our private markets portfolios at attractive terms.

Gross Non-Life reserves was $7.6 billion at June 30th and net Non-Life reserves were $7.5 billion showing growth from the prior periods. You will find all relative metrics on our reserves in our financial supplement. I only want to remark on the impact of interest rates on the time value of money on our reserves.

As you know, we carry reserves of the nominal value even if they will be paid out over a number of years. Discounting them at a risk fee rate for the relevant payment schedules and currencies, generates the time value of money in our reserves which is not reflected under GAAP.

Given the higher interest rates in the second quarter, the time value of money in our Non-Life reserves increased by $131 million to $1.184 billion. The offsetting interplay between the impact of interest rates on a fixed income portfolio and our non-life reserves provides stability to the economic value of our company that is not reflected on our GAAP statements. And while we continue to experience net favorable development in the quarter this is the result of new information, we've made no significant changes to our processes nor to the prudence that we excise in the setting of our reserves.

Total capital was down 0.6% for the quarter but was up 2.2% for the year and up over 10% year-over-year. Book value per share declined 1% in the quarter but was up 3.3% for the year and over 19% year-over-year as we noted in our press release.

The foregoing shareholders equity figures exclude the potential future exercise of a $400 million forward sale agreement. The current rates forward contract expires in October 2008, and we are currently considering alternatives to amend or extend the forward sale agreements before its expiration.

During the quarter, we purchased almost 344,000 shares in the open markets for $25 million. We currently have 3.9 million shares remaining under our current repurchase authorization. We see great value in our stock given significant discounts to both GAAP and economic values and we will be very likely being more active in stock repurchases in the second half of this year.

And with that I'll return the call to Patrick.

Patrick Thiele - President and Chief Executive Officer

Thanks, Albert now for the forward-looking part of the call. As we mentioned in the press release, Non-Life market's conditions for the July 1st renewal were about as expected with greater competition and the gradually declining pricing environment. Despite this deterioration, we renewed the bulk of our business at generally acceptable priced profitability levels and above our long-term 13% target.

So far in 2008 we've held our premium volume, we said at the beginning of the year Non-Life frame would be about flat for the year on a currency adjusted basis with some give up in more compatible lines of offset claims, offset somewhat by the agriculture business and some new opportunities in the Brazilian market.

The second half will likely be more challenging in terms of maintaining written premium levels as the market continues to soften. Of course, if you recall that our earned premium is typically higher in the second half of the year than the first.

Given our excellent diversification, we are well positioned to continue to write business in diversifying lines and we expect that given our market positioning and our top tier financial strength, we will have greater stability and resilience than many of our peers with no significant give-up in relative profitability.

From here on out I don't see any changes in the competitive environment through the January 1st renewals of next year. I'll reiterate what we have said before, this is the type of market where PartnerRe can distinguish itself. We are focused on managing through the current soft market, but at the same time we're building the foundation for success for when the market turns at some future date.

We continue to target a 10% growth rate in our economic and GAAP book value per share. We've exceeded that over the last five years, over the last three years, over the last two years. Our year-to-date 15.5% annualized operating ROE is above our 13% long-term target and I expect that buying unusually large catastrophe losses we will exceed that again for the full year of 2008.

With that, I will open up the call to questions. Operator we are ready for the first question.

Question And Answer

Operator

Thank you. [Operator Instructions]. First question coming from Jay Gelb with Lehman Brothers.

Jay H. Gelb - Lehman Brothers

Morning, Patrick can you give us a bit more insight on the potential for crop insurance losses in the third quarter. How should we be thinking about the different variables?

Patrick Thiele - President and Chief Executive Officer

What we have tried to say in the prepared remarks was that in fact we have upped our loss pick during the second quarter to a level that reflects our best judgment as to what the year's loss level will be for the Ag line. As you know we have approximately... we said we have approximately $285 million worth of written premium that we'll earn quarterly, approximately the same in the quarter, each quarter. In the second quarter we caught up the loss ratio pick for both the first quarter and second quarter.

Our current estimate that will need to be confirmed by the loss reporting that comes in the third quarter and fourth quarter is approximately 99 technical ratio which is up approximately 10 to 12 points where we started the year.

Jay H. Gelb - Lehman Brothers

Okay. So in your view and that should address the potential losses for the full year?

Patrick Thiele - President and Chief Executive Officer

Jay, I said a couple of things. As you know there are three factors here that we need to look at. One is the actual yield and the price that comes in. In many cases as long as the prices are higher than they've been that's going to be a natural offset so we can't just take a look at the yield and determine that, but what we've done right now is we've gone through on a state by state basis, taken a look at it and taken our best estimates on what we know and we're saying that given what we know, on a technical basis this should be close to breakeven. But we will not know anything and we are not giving you any indication or projection until we get the information. What you have today, is our best estimate based on everything we know. But there are moving parts here, crop prices could change, things could happen in the future, ail, I don't know what else, this is the best estimate, given what we know.

Jay H. Gelb - Lehman Brothers

That's fair enough. And is it also reasonable to say that, although there have been tremendous losses in Iowa that that's been offset by profits potentially in other geographies?

Patrick Thiele - President and Chief Executive Officer

When we did our review, we went through on a state by state and in most cases by a county-on-county basis. Yes, as in any large portfolio, you don't expect to have flood losses everywhere. We do have a significant exposure to Iowa, it's approximately 20% of our overall portfolio. And again, the action we took in the second quarter to increase our technical ratio to 99 is our best estimate, our best judgment of what the overall losses could be. And of course you remember in fact that there is a government back staff which exists on state-by-state basis, which exists in the three tiers that we talked about on our conference call.

Jay H. Gelb - Lehman Brothers

Right. And thank you very much for that, that's helpful. Second issue, I just wanted to touch base on your combined ratio which is now over, if my calculations are correct, over 100% for two quarters in a row, what does that say about the adequacy of pricing?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

First of all, I am not sure that actual [ph] year combined ratio is in fact over 100%, the way we looked at it. If we look at the first six months, it would seem to us... it's a combined ratio, that's right. I was looking at the technical ratio. I think what it says is it gives you a sense of where we've been and I think that the way to look at these numbers is really to look at the trend. I think you know that our reserving policy in any case is to reserve above the midpoint. So, what you really want to do is look at the year-over-year trend and we're approximately five-six points ex-reserve releases above last year. And as we mentioned at the end of the first quarter, given where the pricing is, and the loss trends that we're seeing, we believe that we will be booking year-over-year 5 to 6 points higher reflecting the combination of loss trends and pricing changes.

Jay H. Gelb - Lehman Brothers

Okay. It's helpful. Thank you very much.

Operator

Moving on we'll take our next question from Doug Mewhirter with RBC Capital Markets.

Doug Mewhirter - RBC Capital Markets

Hi, good morning. First, investment question, did you quote any Fannie Mae or Freddie Mac preferred or common shares?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

We do not hold any Fannie/Freddie preferred, we do not directly own Fannie or Freddie common. We do have a small position in a couple of S&P 500 industries and if you run through that, our position through the S&P 500 is less than a $0.5 million worth of stock exposure. But we don't own any direct securities... equity securities of Fannie or Freddie.

Doug Mewhirter - RBC Capital Markets

Yes, thanks. That's helpful. And my second question, I guess it's a more general question on reserves. The reserve development that you've taken, I guess, we'll just call it year-to-date. What estimate years, primarily as it comes from, I know it's come from literally all over the world, you mentioned half of it was short-tail, a quarter mid-tail and a quarter long-tail, does that imply that maybe most of it was in 2007 and 2006 accident years?

Patrick Thiele - President and Chief Executive Officer

It's very unlikely there would be 2007 underwriting years, certainly for the long-tail. The... obviously, the shorter tail and the medium tail lines would be coming from the '06 and the '07. Do you have the...

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

It's 2003 and 2005, where the bulk of the reserves are coming from.

Doug Mewhirter - RBC Capital Markets

Okay. And then primarily for the long-tail or for --?

Patrick Thiele - President and Chief Executive Officer

No, overall.

Doug Mewhirter - RBC Capital Markets

Overall.

Patrick Thiele - President and Chief Executive Officer

I mean obviously there is some from different years, but the large bulk of it is the '03, '04, '05.

Doug Mewhirter - RBC Capital Markets

Okay. Thank you very much. That's all, my questions.

Operator

And next up from J.P. Morgan, we have Matthew Heimermann.

Matthew Heimermann - J.P. Morgan

Hi. Good morning everybody. Quick question, can you give us the earned premium through six months on the Ag book?

Patrick Thiele - President and Chief Executive Officer

Yes, it's approximately the same as the... I'll get the number.

Matthew Heimermann - J.P. Morgan

Okay.

Patrick Thiele - President and Chief Executive Officer

But I think it's relatively the same as the written.

Matthew Heimermann - J.P. Morgan

Okay, that's fair. And then I guess, just in terms of the... can you well, the agricultural, I was surprised by some of the strength in the U.S. premium as well as the cat book, I mean the Ag one is your specialty, so I got that, and I can back it up. But can you maybe give a little bit more color on where some the other new opportunities are coming, that are rolling through those particular segments?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Actually, Matt, I read through that. I think there's a bit of a misunderstanding. The Ag business is U.S. based business. So, in fact the growth of the U.S. book is entirely on the strength of Ag, if it weren't for Ag, U.S. would actually been down close to 9%.

Matthew Heimermann - J.P. Morgan

Okay. U.S. P&C would?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Really the U.S. P&C.

Matthew Heimermann - J.P. Morgan

Okay. Because that's where it's confusing, because I think if I look at the premium breakdown in your press release, the Ag shows up under specialty, but I guess there must be some distinguish meant between, what's old Ag and new Ag then?

Patrick Thiele - President and Chief Executive Officer

I thinks that's right Matt. I think we think of it as a specialty line but we report it through the segment. So, when we say specialty, we don't think of it as a segment per say. If you look at our financial supplement under the U.S. sub-segments, and that's says what, 13,14. You'll see the composition of the Ag business within the U.S. book and that shows you an increase in that.

Matthew Heimermann - J.P. Morgan

Okay, I missed that.

Patrick Thiele - President and Chief Executive Officer

With regards to the cat, one of the reasons contributing to the quarter-over-quarter growth in cat is because there was a timing issue. We had delays in the renewal of a piece of business that normally comes in the first quarter. We booked it in the second quarter and if you look at the six months on a combined block basis, that's actually a better way to look at it and that would have been flat and ex-FX, it was down.

Matthew Heimermann - J.P. Morgan

Okay. That's helpful. I think just in terms of the accident here, loss ratio increasing 500 to 600 basis points, can you give a sense of what... how that breaks down in terms of maybe excess changes in loss ratio assumptions for excess business versus pro rata, whether there is a material difference?

Patrick Thiele - President and Chief Executive Officer

I've to tell you, the book is... have got so many different parts to it. We don't look at it that way. The underwriters look at it on a granular basis, book by book. But we don't have that information in a way that goes through a processes that I'm comfortable disclosing at this point.

Matthew Heimermann - J.P. Morgan

Okay. Fair enough. Thank you.

Operator

Our next question now comes from William Wilt with Morgan Stanley.

William Wilt - Morgan Stanley

Thanks for that. Actually, my specific numerical questions were asked, so just a broader one on loss cost trends. I was surprised in a couple of earlier primary insurance company conference calls, when the discussion was on commercial property, that the carriers had said that they weren't seeing an increase in construction materials, they weren't seeing an increase in inflation related to construction materials, cement, steel, etcetera, flowing through their numbers. And I am wondering if you've had the same experience on the reinsurance side as pertains to commercial property? And then I'd be also interested in, Patrick any observations you have on never ending search for an inflection point in loss cost trends?

Patrick Thiele - President and Chief Executive Officer

I guess the... again, first I'll say, we don't actually track it that way. When I look at the overall book and I think you are talking about the U.S. primarily, we still do see loss trends in kind of the mid-single digit range. That's our expected loss trend. Obviously, reported losses over the last... well over this year, continuing the trend that we've seen over the last several years, have continually come in less than we expect. But we do see kind of a mid-single digit continuation of the trend overtime and then are surprised on a quarterly basis when in fact the reported are less than the expected. As to when, and in fact that is being offset, as we've said it before in the reported numbers, because in fact when we go back and look at the starting point, we are continually putting that loss trend off a lower level. So, in essence the loss trend is being offset by a continued reevaluation of '03, the '04, and the '05 years downward. And so, in effect that has led to a reported loss ratio which has been very stable. And in fact if you look at our, across our book, if you look at the actual dollar amount of losses over the last eight quarters they have been absent the large loss affect, they have been very stable during that period of time.

As to when we think that's going to change, well I guess we don't... we certainly don't have a crystal ball in terms of when it's going to happen. We look at the inflation statistics the same way you do with a certain amount of trepidation and as we start the planning process for 2009 of course we'll try to put that in our forecasted loss trends. So that when we price the business we have a healthy respect for potential increases in loss trends in the future.

William Wilt - Morgan Stanley

That's great, thanks very much.

Operator

And let's move on taking a question now from Vinay Misquith with Credit Suisse.

Vinay Misquith - Credit Suisse

Hi, good morning. First a few numbers question, could you help us with what the flood loss dollar number was this quarter, that would be really helpful?

Patrick Thiele - President and Chief Executive Officer

Look, again its not so much a flood loss dollar level. I think what we've done is we have decided that until we have better information we will book this thing at a 99 technical ratio. Obviously we booked it at a lower number in the first quarter so there was a bit of a catch-up. And I would say approximately given what the numbers have been I would say approximately $16 million to $17 million net, net in the second quarter to bring all premiums earned-to-date to that technical ratio.

Vinay Misquith - Credit Suisse

Okay, that's fair. So for the rest of the year you'll be just following the 99% technical ratio for the Ag business correct, okay?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

No, as it matures we will then begin to, we should have begin to get some estimates as to what the actual reported loss would be, hopefully in the third quarter. But more or likely significantly in the fourth quarter and we will adjust our loss pick or take a new loss pick based upon our best estimate at the time.

Vinay Misquith - Credit Suisse

Fair enough. The second question also was a numbers question on the interest expense, how much of that was due to retirement of the debt?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Essentially, the entire quarter-over-quarter changed $2.7 million.

Vinay Misquith - Credit Suisse

Okay, great. And so we should expect not to go back to normal life levels in the next few quarters, correct?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Yes.

Vinay Misquith - Credit Suisse

Great. And I noticed that your investment yield increased this quarter by about 18 days, I'm just wondering was that because you are now investing into riskier assets because you see more opportunities and what your outlook is for the rest of the year. I think you've already spoken about it on your prepared remarks.

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Well, lets take a step back. Our yield at market actually increased by 58 basis points to 5% quarter-over-quarter. The underlying risk free rates are actually up substantially more than that, and the spreads actually came down, so although we are selectively increasing the risk in our portfolio, the risk assets that we have put on have actually performed better than the risk free assets. So the real driver for the higher yield is first and foremost the risk free rate and this 5% yield at market that we have in our portfolio should contribute to investment income growth in the future.

Vinay Misquith - Credit Suisse

We have seen from many of the insurers and re-insurers that the yield has actually come down, do you think that your yield went up because you have a higher proportion of your assets in securities that yield, the interest rates actually moved up?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Let me try again. If we had government portfolio's our yield would have moved up even more. It has nothing to do with the composition of risk. The risk assets actually tightened it this quarter. I cannot speak as to why other individuals have a lower yield, the only thing that I can presume, as I mentioned in my prepared remarks is that all we own are straight forward securities that pay just borrowing dividends and interest. There are no partnerships, there is nothing else in there and my expectation is that the year-over-year changes that you see in a lot of other people reflect the changes in distributions from partnerships.

Vinay Misquith - Credit Suisse

Fair enough, thank you.

Operator

We'll now move on and taking a question from Susan Spivak with Wachovia Securities.

Susan Spivak - Wachovia Securities

Good morning. Patrick and Albert, I was wondering if you could just review with us your strategy in the life health reinsurance market and how you plan on a growing that business?

Patrick Thiele - President and Chief Executive Officer

That's a fairly board question. The life market and again we write life business only in Europe, we don't have a significant health portfolio, we don't have a significant life portfolio... any life business in the United States. So my remarks are really directly related to the life business in Europe with a small smattering of business in Southeast Asia and Latin America and the Europe PN life market, in fact the market is getting somewhat more competitive on the mortality side. We've spoken often in the past, in fact that this is not a cyclical business, it is not cyclical to the same extent that the non-life business is. But there is ebbing employing of competition and at the moment on traditional mortality business in Europe competition is heating up a little bit for whatever reason. As we said in the past the real opportunity that exists within the life business, life reinsurance business for PartnerRe is on the longevity side. There has been an enormous amount of heat around both securitization of longevity risk and annuity type risk.

In the securities markets there is an equivalent amount of discussion and of activity on the reinsurance, traditional reinsurance side. We're part of that effort, we're involved in it, and our hope is that eventually some of this longevity risk, this annuity risk can in fact be transferred to us into our book. It is a... it's a difficult line to understand, it's a difficult risk to write, so we don't have growth goals as to the longevity or to the annuity line. And ourselves we're trying to be intelligent and cautious about how we write this sort of stuff. And as I said, the market has not clearly lest [ph] around a particular form or particular structure yet.

Susan Spivak - Wachovia Securities

Is it a business Patrick that you'd be willing to grow through acquisitions?

Patrick Thiele - President and Chief Executive Officer

As we've said I think acquisitions broadly speaking we've... we look at the life business, we look at the non-life business, we've stated that we could grow on the life side where it has been somewhat below a normalized level. Less than 10% of our capital is exposed on the life side. I could see that increasing, would we be interested, the... we tend to look at virtually everything. The difficulty for us is that we have quite stringent valuation policies inside this company. So that any acquisition has to make economic sense for us, and I wouldn't see weakening or aggregating those policies in the life business.

Susan Spivak - Wachovia Securities

Okay, thanks for the answers.

Operator

Our next question now comes from Tom Cholnoky with Goldman Sachs.

Thomas Cholnoky - Goldman Sachs

Yes, good morning. I just wanted to get back to your loss ratio and just try to help me think through something here. If we assume or if I assume that the environment really doesn't change for a while, let's say for the next two years or so and we are in a competitive environment. It suggests to me in your comment that we should expect your underlying combined ratio to increase by, as much as 400 or 500 hundred basis points per year. And at some point and you have been able to do that still make earnings by releasing a lot of reserves, but it would seem to me that at some point the reserve well will start to run dry and the higher accident loss ratio picks will really begin to show up in your reported results. What's wrong with that type of conclusion on my part?

Patrick Thiele - President and Chief Executive Officer

Well first, I disagree with your characterization of us making earnings through prior year reserve releases.

Thomas Cholnoky - Goldman Sachs

Well you benefited a tremendous amount from prior year reserve releases at the same time while being able to post higher accidental yield combined ratio?

Patrick Thiele - President and Chief Executive Officer

I think the current discrepancy between reported results and underlying trends is really a function of two things. First is as I said before we'd continue to have beginning point adjustments even though we continue to price for a loss trend which is in the single digits... mid single digits... mid to high single digits. In fact the true loss trend has been coming in below that and we continually adjust our starting point downwards.

The second issue is that what you don't see and what you don't give us credit for is in fact that we continue to set our current years loss picks with a degree of conservatism that's exactly the same as the prior years degree of conservatism. And so I think your characterization of the idea that we're going to "run out" of reserve releases, I am not sure why that's true.

Thomas Cholnoky - Goldman Sachs

Well I am just saying...

Patrick Thiele - President and Chief Executive Officer

Of course we will in some point in the future when in fact loss trends do pop.

Thomas Cholnoky - Goldman Sachs

Right, now I understand that, but I guess a lot of what people have been releasing and once again its little unclear as to what accident years you are totally releasing but a lot of what people have been releasing from the extremely strong pricing years of the last up-cycle where a lot of companies were clearly over earning and getting way too much premium relative to loss costs?

Patrick Thiele - President and Chief Executive Officer

I guess I would point you and the only place where you can see the sort of... we are releasing our reserve triangles in three weeks. So you'll get a better indication of it. I would point... but if you go to the schedule P information in the U.S. where you can see it very directly and you can see it indirectly through our reserve releases. If you compare our currently held loss picks to the industry certainly in the U.S we're 10 to 15 points higher than anybody else in the reinsurance business.

Thomas Cholnoky - Goldman Sachs

Right, right.

Patrick Thiele - President and Chief Executive Officer

If in fact, we "run out" of reserve releases which I have no ability to forecast.

Thomas Cholnoky - Goldman Sachs

Sure, I understand that.

Patrick Thiele - President and Chief Executive Officer

We'll probably the last one.

Thomas Cholnoky - Goldman Sachs

Yes I know, I understand, but I guess you're one you say that you're building in up $300 million to $400 million cushion if you will in your reserve picks, because that's kind of where you are on pace for the last two years to release reserves.

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

I think our disclosure on reserves Tom has been very consistent. We are publicly stating that we are booking reserves above the actual or mid-estimate.

Thomas Cholnoky - Goldman Sachs

I understand that.

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

So by definition we get the mid-estimate right, then by definition whatever it is that we are booking above the mid-estimate at some point in the future we will have to release.

Thomas Cholnoky - Goldman Sachs

Correct.

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

And what we are telling you is we are doing the same thing today, whether the AME is 50%, 80%, or 120% we're still going to book above the AME. And so I guess what we're saying is there are two and I think if I can just extend on what you're saying, there are two potential sources of prior year reserve releases. One is a change in view with regard to the AME and that could... and that every company is going to have some proportion of that. The second is, whatever a company has systematically put on their books above the AME and I would leave it you to identify what kind of policies other companies have. By definition, what we have stated and we continue to state is that the reserves that we are carrying on our books are management's best estimates and management's best estimate is by definition higher than the actuaries net estimate.

Patrick Thiele - President and Chief Executive Officer

I think the confusion arises because people will equate our "accident year" which has derived a loss ratio, which is derived by taking prior year development off our reported, as an AME it is not.

Thomas Cholnoky - Goldman Sachs

Okay.

Operator

[Operator Instructions]. Our next question now comes from Brian Meredith with UBS.

Brian Meredith - UBS Securities

Yes, good morning. A couple of quick questions here for you. First Patrick, some of your brethren over Europe had a tough time with their investment portfolio of late. Do you think that will have any impact on pricing over there or what implications that may have?

Patrick Thiele - President and Chief Executive Officer

I think that's a very good question, its something we think about. At least one of our competitor announced that they had 10% less capital at the end of second quarter than they had at the end of the first quarter, that's a significant reduction.

I think it's a positive sign, I'm not sure of that and I'm not sure that it's enough in itself to the rest of the decline. But there are some signs that at least non-life pricing is not in free fall in Europe, some of the more traditional P&C lines while continuing to decline are not accelerating in the decline.

So I think the way it is beginning to move a little bit more towards the idea that irrational competition may not be evident in Europe in the coming year.

Brian Meredith - UBS Securities

Okay, and what are you seeing with respect to terms and condition in the reinsurance market place right now?

Patrick Thiele - President and Chief Executive Officer

Surprisingly the terms and conditions have certainly in the U.S. casualty businesses where you really worry about the terms and conditions. In fact they are holding in pretty well, probably holding in slightly better than on the primary level. Pricing in the reinsurance, casualty with reinsurance line tends to follow this primary down. But I have not seen any significant, to date any significant deterioration in the terms and conditions. Elsewhere around the world, I think there was... as we said in the first quarter there were significant losses, property losses, large property losses, a lot around the mining industry and the energy businesses and there was some concern about business interruption. I've seen some positive moves in that standpoint where people are attempting to at least contain to be and in some cases trying to price forth. So, I'd say net, net over the whole portfolio there hasn't been a significant deterioration in terms and conditions in the second quarter.

Brian Meredith - UBS Securities

Great, thank you.

Operator

We have a follow up question coming from Matthew Heimermann with J.P. Morgan.

Matthew Heimermann - J.P. Morgan

Just one follow up question on the loss, kind of the big loss ratio discussion which is, do you have a sense just on the proportional business, that there is a big difference between the way you and the primary companies are viewing the business? We've focused a lot on maybe how you view versus peer reinsures but when you think about yourself versus feeding companies, do you think there is a big discrepancy?

Patrick Thiele - President and Chief Executive Officer

We said our loss ratio is obviously independent of what the underlying... what the scene gives us. Obviously, our opinion is informed by the information that they send in. But basically, we set our loss picks based upon the pricing ratio, especially in the United States. We... our AME is informed by the price loss ratio that we used.

Matthew Heimermann - J.P. Morgan

I absolutely understand that, completely understand. I was just more asking, point in time not prospectively, will or will not happen, but kind of how they... whether you see more mid-point behavior or AME in kind of the feeding companies?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

I think a couple of issues. Certainly, when it comes to case reserves, we tend to be much more closely guarded by the information we get from the clients. I think in terms of the pricing, just to give you a sense of how we price and how we book, we will get projections on the book of business, pricing and so on so forth. And we take that information, but at the end of the day we have to do our own analysis as to where we think pricing is going to go. And it probably does not surprise you that it is likely that the submissions we receive have a more optimistic view of where market trends will go, than what we use in our pricing and reserving.

Patrick Thiele - President and Chief Executive Officer

If you are asking whether there has been deterioration and the loss ratio in the submissions, yes, it has been. The seams [ph] are sending us submissions which have a higher year-over-year loss ratio.

Matthew Heimermann - J.P. Morgan

Yes. I guess I was more curious for that point, just in the pace of it seems as though at least in the first half of this year there... in some places you are seeing a bit, maybe more consistent deterioration, I'm sorry, but underlying loss ratio is increasing more consistent with what Europe baking it?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

Yes, it's hard, when you look at industry-wide statistics, the fact of the matter is, if pricing is going down at 4% to 5%, and broadly speaking in the U.S. commercial lines marketplace, you have to expect loss picks to deteriorate unless in fact we continue to have loss emergence which is significantly less than what we had expected.

Matthew Heimermann - J.P. Morgan

Absolutely.

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

And while that's been true certainly for the last couple of years, at some point in time that will change.

Matthew Heimermann - J.P. Morgan

The only other question I had was, do you have a sense just... I mean there is obviously a lot of factors going on, pricing, retentions etcetera. Do you have a view and maybe if you just ask in terms of mix of business, what the mix of casually versus property or short-tail versus long-tail might look like in '09 relative to '08?

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

For ourselves?

Matthew Heimermann - J.P. Morgan

Market or just on the industry?

Patrick Thiele - President and Chief Executive Officer

I really don't have an opinion. We don't forecast that.

Matthew Heimermann - J.P. Morgan

Okay. Thank you.

Operator

And we have no further questions in our queue at this time. I'll turn the conference back over to our presenters for additional or closing remarks

Albert Benchimol - EVP and Chief Financial Officer, PartnerRe Ltd., CEO, Capital Markets

I just want to give the information on the Ag premiums that we were speaking about. We've earned about $155 million of Ag premiums for the first six months of this year. We wrote $160 million in the first six months of this year, this is both U.S. and global. So, by and large earned and written follow each other very closely.

Patrick Thiele - President and Chief Executive Officer

Thank you Albert. And thank you all for listening again. As we said, we think we had a very good quarter, certainly on an operating basis, we had an excellent quarter. We look forward to presenting the results for the reminder of the year. Thank you very much.

Operator

That concludes today's conference call. Thank you for your participation. Have a good day.

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

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