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RenaissanceRe Holdings Ltd (NYSE:RNR)
Q2 2020 Earnings Call
Jul 29, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the RenaissanceRe Second Quarter 2020 Financial Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Keith McCue, Senior Vice President, Finance and Investor Relations. Thank you. Please go ahead, sir.

Keith Alfred McCue -- Senior Vice President, Finance and Investor Relations

Good morning. Thank you for joining our second quarter financial results conference call. Yesterday, after the market closed, we issued our quarterly release. If you didn't receive a copy, please call me at (441) 239-4830, and we'll make sure to provide you with one. There will be an audio replay of the call available from about 2:00 p.m. Eastern Time today through midnight on August 27.

The replay can be accessed by dialing (855) 859-2056 U.S. toll-free or one (404) 537-3406 internationally. The passcode you will need for both numbers is 3449228. Today's call is also available through the Investor Information section of www.renre.com and will be archived on RenaissanceRe's website through midnight on August 27, 2020. Before we begin, I'm obliged to caution that today's discussion may contain forward-looking statements and actual results may differ materially from those discussed.

Additional information regarding the factors shaping these outcomes can be found in RenaissanceRe's SEC filings to which we direct you. With us to discuss today's results are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer.

I'd now like to turn the call over to Kevin. Kevin?

Kevin O'Donnell -- president and Chief executive officer

Thanks, Keith. Good morning, and thank you for joining today's call. I'm glad to report that we had strong performance both financially and operationally in the second quarter. For me, three accomplishments in particular stand out: First, we raised over $1 billion of new common equity, building a fortress balance sheet in anticipation of significant future opportunities. Second, our three category approach to managing our COVID-19 exposure proved sound with reported claims developing in line with expectations.

Finally, we executed disciplined and focused renewals across property and casualty, working constructively with our customers and brokers to achieve rate adequacy and improve terms and conditions. I will address each of these accomplishments in greater detail and discuss the quarter more generally. As usual, Bob will also update you on our financial performance for the quarter.

Beginning with our capital raise. Throughout our 27-year history, we have placed a high bar to raising common equity. Post-IPO, we have only issued common shares on one other occasion not concurrent with an acquisition. To raising equity, I believe we need to answer at least three questions: Why now? Why equity? And why $1 billion?

First, why now? We are confident in our ability to execute into an improved market and believe the opportunity will persist for several years. Prior to the emergence of COVID-19, P&C markets were already experiencing constrained supply and elevated demand, resulting in upward pressure on rates. Numerous factors led to this supply demand imbalance.

Property markets have experienced three consecutive years of elevated catastrophe activity, resulting in large losses and substantial trapped ILS capital. Capital casualty markets were beset by significant loss inflation, caused by historically large jury verdicts and increasing frequency of severity. This preexisting rate trend was accelerated by COVID-19 and the deep economic recession that follows. COVID-19 will be among the largest insured losses in history.

The loss will develop slowly and will add uncertainty, which drives demand for reinsurance as buyers look to reduce volatility. At the same time, the increase in demand has been mirrored by a reduction in supply caused by increased underwriting discipline in dislocated retro markets. This confluence of factors has resulted in material rate increases that will impact almost all lines for an extended period, and which we expect will create opportunities for us over the next several years.

For all the reasons, we concluded that this was the ideal time to raise new equity. Second, why did we choose equity? Our strategy is to use our integrated system to match desirable risk with efficient capital. Throughout our history, we have been innovators in preferentially accessing the most efficient forms of capital, depending on market conditions, flexing between common, preferred cat bonds, retro, side cars and dedicated third-party capital as well as senior debt, credit revolvers and LOCs. Each form of capital is selected to maximize its efficiency relative to the risk it is deployed against.

Given our current conditions, common equity was the best option. It is permanent. It is flexible capital fully available for underwriting that we can deploy in order to maximize long-term shareholder value. And finally, why $1 billion? On our previous earnings call, we told you we already had excess capital. But we chose this amount as we believe it gives us the increased scale necessary to maximize the market opportunity we are expecting.

We ran multiple proformas to determine the size of this opportunity and feel confident that we can deploy the capital we raised while maintaining a prudent buffer. We envisioned two main opportunities to deploy the capital we raised: opportunity one, is growing into an improving market; and opportunity two, is retaining more risk. Our first and best opportunity is to grow into an improving market. We have a long-term demonstrated track record of profitable growth and believe that current conditions afford us considerable options to grow our business by deploying more equity.

With the fortress balance sheet, we can provide our customers with certainty of execution. Many insurers are concerned about their ability to purchase sufficient reinsurance in retro next year. This will result in a reluctance to take new risk or renew existing business even at attractive rates. Approximately half of our business renews at January one, and we are already having productive conversations with our customers ahead of this important renewal. Providing certainty of execution makes us a first call market for both new and large opportunities and gives us preferential access to private deals.

Our second deployment opportunity is to retain more risk. A key component of our gross-to-net strategy is the flexibility to grow and shrink the amount of risk we share with others in order to construct the most efficient underwriting portfolio. As market conditions have evolved, our customers are increasingly seeking the stable, flexible, long-term capacity that a rated balance sheet can provide. With additional common equity on our balance sheet, we are able to offer more rated capacity, which enhances the flexibility of solutions we are able to provide to our customers.

As retro rates rise and the ILS market faces challenges, we will share less risk and sell more retro, so as more of our capital and should be able to do so in a manner that increasingly contributes to our bottom line. Shifting to COVID-19. Last quarter, I explained our three category approach to managing our COVID-19 exposures. To date, reported losses have developed largely as expected within this framework.

If you recall, I categorized our potential COVID-19 exposure as falling into one of three distinct categories: Category one includes event-like losses, closely linked to the virus, such as event contingency, event-based casualty class and certain types of accident and health. We booked full limit losses for canceled events through the end of the year and excluded COVID-19 from future renewals. In the second quarter, we began to receive claim notifications against these reserves as events have been canceled or postponed, which have been in line with expectations.

To be clear, however, we have not canceled events in 2021. Category two covers well understood economic risks. These include losses caused by recession and are risks we are paid to take. Last quarter, we increased certain loss ratios in our Casualty and Specialty book to reflect the elevated risk related to COVID-19. We continue to monitor our credit portfolio, including mortgage for COVID-19 losses. While the likelihood of loss has risen, the current situation is fundamentally different than the great financial crisis.

Loans are of higher quality. Regulations are tighter and the housing market is underbuilt. In addition, the U.S. government has extended the largest and the most comprehensive forbearance measures in history. For these reasons, we believe that our mortgage book is adequately reserved. And Category three is the known, unknowns, primarily business interruption. As has been widely reported, coverage of pandemic business interruption risk under property policies has been controversial, except where communicable disease coverage extensions have been provided, policy holders generally have not paid for the benefit of protection, and it follows that pandemic losses should not be covered.

Our cedents continue to advise us that they have minimal exposure to business interruption losses and intend to fight any and all attempts by the plaintiff's bar to impose liability. We continue to stay closely connected with our cedents on these exposures and are monitoring court actions in Europe and the U.S. Finally, before I turn it over to Bob, there's one more item I'd like to address. As we announced several weeks ago Aditya has departed, and I have assumed interim responsibility for our Ventures business.

I'm excited to have the opportunity to work closely with our talented Ventures team at a time we are seeing many opportunities to profitably deploy partner capital. We thank Aditya for his 12 years of service and wish him continued success. Our Ventures unit is one of the oldest and most respected ILS managers in the business. It has grown to play a critical role in our gross-to-net strategy and integrated system, which it will continue to do so going forward.

Despite third-party capital markets becoming increasingly dislocated, we successfully raised over $250 million of capital, including our aligned participation for Upsilon, Medici and Vermeer balance sheets in support of the midyear renewals. Our ability to do so is a result of superior underwriting, excellent enterprise risk management and investor confidence in our aligned approach.

We greatly value the trust that our partner capital has placed in us to deliver high-quality portfolios of risk, and I'm confident that we can continue to earn that trust in the future. So with that, I'll provide an update on the renewals for our segments at the end of the call.

But first, let me turn it over to Bob to talk about our financial performance.

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Thanks, Kevin, and good morning, everyone. We had a solid quarter with strong financial results and several strategic accomplishments. I'll begin my prepared comments with an update on our operational response to COVID-19, and then we'll provide an overview of the capital raise and its impact on our financials. I will then discuss our financial results, starting with our consolidated returns and then providing more detail on our three main drivers of profit: underwriting income, fee income and investment income.

Beginning with an update on our operational response to COVID-19, after more than three months working from home, we began to transition back to our offices in Bermuda and Zurich. We opened these two offices on an optional and limited basis in June and a transition back has been smooth. Most of our employees, however, continue to work remotely, and we're all operating well in this mixed model.

Importantly, throughout the second quarter, we continued to invest in the business through active recruiting. We hired and onboarded several new employees remotely to support the needs of our expanding business. Now moving to the capital raise. Kevin discussed, we raised $1.1 billion in common equity through a public offering and a concurrent private placement with State Farm of 6.8 million common shares at a price of $166 per share.

We anticipate that our largest opportunities to deploy this capital will be at and subsequent to the January one renewal. In the interim, this capital will have some pressure on earnings per share. This quarter, that impact was minimal. And finally, you will note that during the quarter, our book value per share increased $17 or 15% as a result of our capital raise, significant mark-to-market gains on our investment portfolio and strong operating income.

Now moving to our consolidated results. We reported annualized return on average common equity of 38.5%, driven by mark-to-market gains in our investment portfolio. Annualized operating return on average common equity was 12.7%, influenced primarily by favorable underwriting results and fee income. Reported net income for the quarter of $576 million or $12.63 per diluted common share. Our operating income was $190 million or $4.06 per diluted common share.

This excludes net realized and unrealized gains on investments, TMR transition-related expenses and net foreign exchange losses. Gross premiums written for the quarter were $1.7 billion, up $225 million or 15% from the comparable quarter last year. 90% of this growth came from our Property segment and 10% came from Casualty. As a reminder, we acquired Tokio Millennium Re on March 22, 2019. So this is the first full quarter since the acquisition, where results are comparable year-over-year.

As we indicated before, we did not renew a significant portion of the TMR portfolio. So our top line growth of 15% during the quarter was achieved despite downwards pressure. You will also see the impact of the TMR acquisition in the ratio of our ceded to gross premiums. Legacy business that we acquired from TMR was covered by the ADC, so not subject to our normal ceded program. While the ratio of our ceded to gross premium stayed flat year-over-year at 31%.

This ratio has increased in the Casualty segment from 25% to 28%, as renewed business is incorporated into our ceded program. This was offset by a decline in property ceded from 35% to 32%, reflecting our decision to cede less business this quarter. Now I'll dive deeper into our financial results. And to begin with, we have reorganized our financial supplement to better align it with our three primary drivers of profit: underwriting income, fee income and investment income. We have enhanced disclosure around noncontrolling interest and retained investments while also removing duplicative information.

I'll begin by discussing underwriting income, where we reported income of $217 million for the quarter or a combined ratio of 78.5%. Both segments performed well in the quarter, with property contributing underwriting income of $201 million and Casualty contributing $16 million of income. Net premiums earned were approximately $1 billion, up $99 million or 11%. Our direct expenses, which are the sum of our operational and corporate expenses, totaled $61 million for the quarter, which is a decrease of $23 million from the second quarter of 2019.

The ratio of direct expense to net premiums earned was 6%, a decrease of more than three percentage points from the comparable period last year, driven by strong operating leverage as well as lower transition and operating expenses. Transition-related expenses associated with the acquisition of TMR have declined by $12 million from $14 million in the second quarter of 2019 to $2 million in 2020. We anticipate these expenses will continue to wind down over the near term.

Additionally, operating expenses were down two percentage points, partially driven by about $5 million in savings from reduced travel, marketing and office operational expenses related to COVID-19. Now moving to the Property segment, where gross written premiums were up by $203 million or 24% from the comparable quarter, driven by rate increases, growth in lines at the forward renewals in Japan, mid-year renewals and expansion of our Lloyd's delegated authority insurance book.

We reported a current accident year loss ratio of 35% and prior year favorable development of 1% in the Property segment. We did have $8 million of adverse development in the other property book, which was driven predominantly by a variety of small events in the attritional book. This was more than offset by $15 million of favorable development in the property cat from reserve releases across the last three accident years. Underwriting expenses were down four percentage points, reflecting improved operating leverage and a lower acquisition expense ratio in both property cat and other property.

Overall, we reported a combined ratio of 59% in the property book. Both property cat and other property were profitable, reporting combined ratios of 33% and 86%, respectively. Moving on to our Casualty results, where we grew gross premiums by $22 million or 3%, primarily related to increases in underlying rate and growth in new and existing deals. While reported growth was $22 million, excluding the impact of TMR nonrenewals, we estimate that organic growth in our Casualty segment resulted in more than $100 million of premium increases in the second quarter.

The current accident year loss ratio was 68%, which is in line with our expectations. And finally, we reported a combined ratio of 97% with favorable prior year development of 2%. Now I'll shift to our second driver of profit, fee income. Total fee income for the second quarter was $46 million, made up of $27 million in management fees and $18 million in performance fees. Year-to-date, fees are up 32% compared to the first half of 2019 as our partner capital business continues to grow and perform.

As I mentioned at the beginning of my prepared comments, we've made several changes and improvements to the financial supplement, with page 12 providing greater insight into how the noncontrolling interest from our joint ventures business impact our financials. We have added a new table to this page that shows the amount of partner capital that we manage on behalf of DaVinci, Medici and Vermeer. This capital is reflected as noncontrolling interest on our balance sheet and for the second quarter totaled $3.4 billion, up from $2.7 billion in the comparable quarter last year.

As a reminder, this noncontrolling interest does not include partner capital related to Upsilon, Top Layer or Langhorne. DaVinci, Medici and Vermeer reported solid results in the second quarter, bolstered by low catastrophes and mark-to-market gains. The noncontrolling interest charge attributable to these vehicles was $119 million, which reduced our earnings accordingly. Compared to the second quarter of 2019, the noncontrolling interest charge increased by $47 million.

This was driven by strong underwriting performance, growth in partner capital and mark-to-market gains. Regarding Upsilon, which is not highlighted in the financial supplement, total managed capital at the end of the second quarter was $2.1 billion, $1.8 billion of which belongs to our partners. All premiums associated with Upsilon flow through our financial statements as gross written premiums. However, we treat our partners portion of Upsilon as ceded premium. Therefore, only our 14% share is included in net written premiums.

Fees we earn from Upsilon serve to offset operating and acquisition expenses. And now closing with our third driver of profit, investment income. Financial markets snapped back in the second quarter, in contrast to the extreme volatility we saw in the first quarter. Our investment portfolio also recovered mark-to-market losses from the first quarter of 2020, reporting total investment results for the second quarter of $538 million with realized and unrealized gains of $448 million, predominantly in fixed maturity and equity investments.

During the quarter, we increased both the allocation to and duration of investment-grade corporate credit, both of which benefited our investment results as rates decreased and spreads tightened. Our fixed maturity and short-term investment income for the quarter was $76 million, and overall net investment income for the quarter was $89 million. Of the $89 million in net investment income, we retained $67 million with the remainder being shared with partner capital.

Our managed investment portfolio reported yield to maturity of 1.1% and duration of 2.9 years on assets of $18.1 billion, while our retained investment portfolio reported yield to maturity of 1.4% and duration of 3.7 years on assets of $12.7 billion. We're comfortable with our asset allocation and duration and will continue to monitor economic developments and the impact on our investment portfolio.

And with that, I'll turn it back over to Kevin.

Kevin O'Donnell -- president and Chief executive officer

Thanks, Bob. I'll start with comments on our Property segment, then move on to Casualty. Across the board, however, the common denominator for the quarter from an underwriting perspective was that we achieved higher rates and better terms and conditions in both our segments and almost all lines of business. Starting with property cat. We had a disciplined renewal in Florida at midyear, executing a proactive plan to prudently manage our net risk and renew on our preferred core accounts.

Our strategy going into the renewal was to push rate as well as terms and conditions. Rates were up 30% to 40% on average. We were the first call for a number of purchases, and we're able to obtain private market rates well in excess of firm order terms on the preponderance of our deals. We consolidated our participation to a smaller number of more meaningful relationships in Florida, reducing the number of clients we support by about 1/3. For our Florida book, we reduced our limit, while holding premiums flat and increasing expected profit.

Overall, we reduced our Southeast PMLs, both as a percentage of equity and on an absolute basis. There were several reasons we reduced in Florida at the June one renewal. Effective claims handling has been a challenge for some Florida companies, especially those relying on independent claims adjusters. We believe that claims adjusting and subsequent repair will be made more difficult and therefore, costly by the impact of COVID-19 and the restrictions it places on movement. Cat models do not reflect this shift.

In addition, the environment of pervasive claims fraud remains unchanged. Consequently, we chose to maintain relationships with our best partners in Florida, those who we believe will most effectively handle post-storm claims adjusting. Ultimately, it was our willingness to meaningfully cut back on Florida exposure that allowed us to aggressively and successfully push for higher rates. Outside of Florida, rates across our property segment were increasing prior to COVID 19. The crisis has accelerated these increases.

For peak zone exposure, we saw rate increases of 10% to 20%. For non-peak exposure, rates were up 5% to 10%. Even with increased rates, capacity was tight and we fully expect this momentum to carry through the January one renewal. With the new capital that we have raised, we are in an excellent position to grow into a dislocated market. The widespread positive reaction to our capital raise and strong recognition of our fortress balance sheet have further enhanced our reputation as a first call market, which can bring certainty to the renewals of even the largest and most complicated reinsurance programs.

In fact, during the quarter, we were able to provide bespoke solutions to a number of very large cedents seeking to reduce their volatility by utilizing our full suite of cat-focused balance sheets: Renaissance Reinsurance Limited, Davinci, Upsilon, Vermeer, Top Layer and Syndicate 1458. As I discussed last quarter, we've been monitoring the performance of our other property book closely and have been increasing on cat-exposed risk where we believe we are being paid appropriately. We continue to optimize our other property portfolio with the renewal focus for this quarter being on proportional and per risk contracts, specifically with global clients.

In the second quarter, we chose not to renew several large deals that did not meet our return hurdles. In our risk book, we increased on good programs and cut back where rate was inadequate. We continue to see ample opportunity in the U.S. primary E&S insurance market where risk-adjusted rates are up 20% to 30% as capacity tightens. Terms and conditions also improved with ceding commissions down materially, especially on the most challenged programs.

Shifting now to ceded retro. June one is the second largest renewal date for the retrocessional protection that we purchased. As I have already mentioned, retro markets remain dislocated. We went to market early, engaged fully with brokers and had a successful renewal despite these challenging market conditions. Prices were up at midyear as expected, but we were in a strong position due to the $400 million Mona Lisa cat bond issued in January. On average, the price we paid for retro increased about 20% over 2019's midyear program.

And as expected, we purchased less limit than last year and at higher attachment points. That said, we are happy with our portfolio and believe that we're in a strong competitive position. Moving now to Casualty. The second quarter is a significant renewal period for our Casualty business, and we were able to execute our renewals in a precise and coordinated way. Like Property, rates were increasing across many Casualty lines prior to COVID-19, driven in part by loss cost inflation trends.

Increased uncertainty from COVID-19 is accelerating these pre-existing rate increases and rate continues to suppress trend in most lines, including general liability, umbrella, D&O, professional liability and cyber. The market has not experienced corrections of this magnitude in almost 20 years, with rate increase in the double-digit territory for many classes and well above what was anticipated at the beginning of the year. In addition, ceding commissions are reducing on many programs, amplifying the impact of rate increases.

Over the year, we have focused on building strong positions on high-quality casualty programs. We believe this puts us in an excellent position to benefit from underlying rate increases as the market improves as well as to grow on the best programs as others got back. With respect to COVID-19, we clearly articulated our risk appetite and our approach to exclusions. We were able to attain COVID-19 exclusion on many deals, and we're only comfortable renewing business without 1/1. The underlying policy contained COVID-19 exclusion.

The product was intended to cover losses from economic recession and was appropriately priced given the elevated uncertainty or where exposure was minimal. In several instances where we were not able to exclude COVID-19, we chose to walk away from business. Overall, however, we renewed our Casualty portfolio largely intact and with an improved margin. There has been some speculation in the market that COVID-19 will suppress loss cost inflation in 2020.

While this is possible, we believe that the underlying dynamics that led to this problem continue to exist. And to the extent it is currently muted, loss inflation will resurface as the pandemic subsides. In closing, we overcame a number of challenges to outperform both financially and operationally in the second quarter.

We exercised disciplined at the June one property renewal and continued to build a market-leading casualty book. Our COVID-19 risk remains manageable, and we experienced strong gains in our investment portfolio. Finally, we've begun the process of reopening our office, which we'll begin to execute slowly but deliberately.

And with that, I'll turn it over for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.

Elyse Greenspan -- Wells Fargo -- Analyst

Thanks, good morning. My first question, I guess, kind of goes back, Kevin, to some of your introductory remarks, where you pointed to this being an improving market that could last a couple of years is what I believe you said. So I'm just trying to tie that together to the time frame, would you guys with this over $1 billion of equity capital that you raised? Over what time period do you think that you can put that to work? Would that be 2020, 2021? Sorry, are you thinking on 2021 and beyond?

Kevin O'Donnell -- president and Chief executive officer

That's a great question. We'll look to deploy in 2021. We might find some opportunities that come up. But yes, as you know, most of the business in reinsurance is placed in the first half of the year. So our capital raise is really targeting and deploying in 2021, obviously, January being a very important date for that. As I mentioned, we have kind of two levers we're going to pull.

One, is we're going to restructure our portfolio and the other is we're going to grow into the opportunity. The restructuring is something that is 100% in our control. So as we think about what the book looks like, we can absolutely deploy based on the target pro forma we have in 2021. And we feel confident that where the markets are and our observations of rate that we're seeing that we can deploy this in 2021 from organic perspective based on our performance as well.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then my follow-up there. We're obviously in the middle of wind season right now, right? And it seems like it could be an active storm season, but obviously, the flip side is, it could be an inactive storm season. So if there's not a high level of hurricane losses, just based on your view of 1/1 right now, do you think that there is enough momentum? Can you just give us your initial thoughts on pricing there to put the capital to use if there is not an active storm feedback?

Kevin O'Donnell -- president and Chief executive officer

Yes. So I think there's enough uncertainty in the market, and I feel confident about where rates are headed, that even if there's relatively light number of landfalling hurricanes or no landfalling hurricanes that we're still going to have strong momentum moving into 2021. I think there could be substantial further dislocation if there's additional large losses from hurricanes in 2020.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, thank you. I appreciate the color.

Kevin O'Donnell -- president and Chief executive officer

Yes, thanks.

Operator

Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your line is open.

Yaron Kinar -- Goldman Sachs -- Analyst

Good morning, everybody. I guess, Just following up on Elyse's last question. I think we're also starting to see some capital raises and even from, I think, incumbents that are looking to get into E&S markets. How much does that impact the longer-term opportunity? I think in 2005, we kind of saw I think the raise capital kind of slow down the rates story. Is there a chance that, that happens this time, too?

Kevin O'Donnell -- president and Chief executive officer

So obviously, we're watching closely what's going on with both the capital raises into existing companies and new formations. That doesn't affect anything that we're trying to do other than it may change exactly as you're saying the environment, in which we're conducting our we were executing our strategy.

The way we look at it is we build our strategy. We build our performance and we engage with our customers. We're not competing with that capital necessarily. That capital is not informing our strategy. So as we look at what we're trying to do, I remain confident that regardless of the capital that's being raised by both by existing companies and by new formations, it shouldn't dislocate our plans for growth.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay. Longer term, so I can see how they wouldn't be ready necessarily to compete in the market in 1/1, but maybe beyond that, you could see a little more of a competitive environment?

Kevin O'Donnell -- president and Chief executive officer

No, I think that's a good point. Our goal is to deploy the capital we raised in 2021. The benefit of incumbency in this business is quite high. So as we see more demand for reinsurance, we'll look to meet it with this capital. And also as others look to recalibrate their books against the risk they want to take, we'll look to grow into that. So as this other capital comes online, I think we're just in a stronger position. And it will be up to us to execute our strategy to make sure we're not dislocated by it.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. My second question, and Bob, I apologize if I missed it in your comments. But what was the source for the large realized gain this quarter? I just wouldn't have expected this large of a number considering the relatively short duration of the portfolio?

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

There's two sources, and you'll see in the supplemental. Probably 3/4 of it came from our fixed income. And that was a result generally of our positioning. We started late in the first quarter, repositioning into some investment-grade credit. We saw some opportunities in the spread. We continued that in April, and that gave us some benefit on that aspect of it, coupled with the rebounds of fixed income came back actually stronger than it did what it gave back in the first quarter. Equities made a significant rebound, as we saw a significant resurgence in that over $100 million. So that's the other 1/4 of it. You'll see that's how we get there.

Yaron Kinar -- Goldman Sachs -- Analyst

Got it. Thank you.

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Thank you.

Operator

And our next question comes from the line of Meyer Shields from KBW. Your line is open.

Meyer Shields -- KBW -- Analyst

Yeah. Thanks, Kevin, I was hoping to clarify one point. And that is you've described, I think, being optimistic about this about the opportunities that will last on a multiple year basis. Am I wrong in thinking that the dislocation in the ILS market, subject to this year's hurricane, but that dislocation shouldn't take more than 12 months to finish only the other?

Kevin O'Donnell -- president and Chief executive officer

So I think I'm not sure how to answer that. But what I would say is the ILS market has suffered from a couple of years in a row of trapped capital. And in many instances what was trapped to being lost, particularly because of the development in Michael and Irma. So I think there's some bruises in that market. I think the uncertainty about trapped capital and BI losses will be awakening for many ILS capital providers, as to better understanding the types of risk that they're taking.

I think the retro market being heavily impacted, again, will weigh on appetites for ILS capital. And then finally, this has been seen as a low beta asset, and you're seeing that it's suddenly correlating with losses they've taken elsewhere in their portfolios. So when I look at how ILS capital is allocated into this space, I think there's a lot of internal obstacles for the ILS portfolio manager to compete against other asset classes based on the uncertainty that they've realized over several years.

So when I think about ILS capital, we are a believer in ILS capital, otherwise we wouldn't have built everything that we built. But I think there are headwinds there that will certainly last through 2021. And depending on where other markets go and how losses develop, there could be some more interest over 2021 or the lack of interest will continue to persist.

Meyer Shields -- KBW -- Analyst

Okay. No, that's helpful. Is there any useful rule of thumb that we can adopt in terms of how much net written premium the additional $1 billion of common equity would support? I'm looking at that through the lens of assuming that a lot of it would be in either reduced retro purchases or additional third-party retro writings?

Kevin O'Donnell -- president and Chief executive officer

Yes. It's I understand your question. I think the way we look at it is we're going to deploy one of the issues is we have the money of a holding company. We will downstream it into different balance sheets based on how we can construct those to best leverage the return on the capital. So it will be different by the amount and business mix within each of the portfolios.

So I think it's difficult for us to give you a two to one, 2.5 to one or something like that ratio to think about the capital. I'd say what we're going to focus on is maximizing return and then downstreaming the capital is appropriate to the balance sheet that optimizes the new opportunity and this capital most efficiently. But sorry, I can't be more clear, but it's not a simple answer. It's just saying what the ratio is.

Meyer Shields -- KBW -- Analyst

Understood. Thanks so much.

Operator

Our next question comes from the line of Josh Shanker from Bank of America. Your line is open.

Josh Shanker -- Bank of America -- Analyst

Yeah, good morning everybody. I was trying to figure out, look, Michigan nominal, and I've heard that you're optimizing the portfolio. But in the decision to cut PML, I mean, I guess do you expect that I still I'm not satisfied with the answer. It seems like that there would have been an opportunity to increase exposure here at this moment right now as well as 1/1? I mean you went into a little bit, but I just thought there would have been more exposure to Florida given what you're talking about rate and whatnot. Can you go into sort of when you raise the capital, maybe timing, there was an issue there. Can you walk through it a little bit better?

Kevin O'Donnell -- president and Chief executive officer

Sure. You broke up for a little bit. I think your question is, why didn't we grow more in Florida? Why did we raise the capital now because you would have thought with the rate change probably would have been good for the portfolio?

Josh Shanker -- Bank of America -- Analyst

Or maybe I mean, maybe it was because it's on June two. Maybe you didn't have the capital, I don't know. I just thought that it seems like there was a great opportunity to deploy here. And you went to cutting PML, I mean there's yes, you cut PML, it's a more efficient portfolio. But here, we have a non-cat quarter with a 12%, 13% ROE. It just seems like there was an opportunity already past that maybe wasn't taking advantage of.

Kevin O'Donnell -- president and Chief executive officer

Okay. So when we looked at Florida, firstly, Florida is a much smaller part of our portfolio. Just let me outline that. With a premium for Florida currently is significantly less than 5% of our overall premium. So growing or cutting in Florida means a lot less now than it did for a company like us 10 years ago. Secondly, the decision not to grow was arms. So we had ample opportunity to put more company to more capital at risk, and we decided that the uncertainty in the market didn't warrant the exposure of significant more capital.

We did bring some more ILS capital to the market through the $250 million that we commented on us raising. So when I think about the opportunity in Florida and the opportunity for this capital, we raised it early because we needed to have conversations with our clients early to make sure that they understood that we were coming in positively positioned to grow 1/1. Whether we deploy it this year or not is not going to matter over the long-term on our success for having raised this money.

Our success in raising this money is whether we can deploy in 2021 and keep it deployed as time passes and make sure it's accretive. So we didn't put an emphasis on trying to grow in Florida. In the conversations we had with investors, we were clear that, that is not what the target of this capital was.

And what we were doing is looking to the future to make sure that in 2021, we take advantage of the opportunity and construct the best portfolio. So nothing about our actions in Florida were different than what our expectations were. And Florida is a significantly smaller part of our portfolio than it used to be is kind of the way I would summarize it.

Josh Shanker -- Bank of America -- Analyst

Okay. That's good. And an unrelated question, do you have any approximate dollar number for how much expenses you saved in the quarter by not being able to travel and whatnot? And how much that help EPS?

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Yes. Josh, this is Bob. I talked about that in the prepared comments, about $5 million, and that's from lower travel. Lower travel mostly covered that. There was some marketing and reduced office expenses. We kind of expect that to hold through this quarter here. We don't expect much to open up. We'll see how that develops over time. But as offices start opening up, we'll see some of that come back. The bulk of it is going to be travel. Until the markets open up for business travel, that probably will stay down slightly.

Josh Shanker -- Bank of America -- Analyst

Thank you.

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Thank you.

Operator

Our next question comes from the line of Jimmy Bhullar from JPMorgan. Your line is open.

Jimmy Bhullar -- JPMorgan -- Analyst

All right, thanks. So first, I had a question on just your view on COVID losses. To what extent do you think you've got sort of clarity on ultimate claims and have already booked most of them versus just ongoing uncertainty in some lines, whether it's business interruption or something else?

Kevin O'Donnell -- president and Chief executive officer

COVID-19, I think, is something we'll be talking about for many quarters as we go forward. Firstly, it's still an ongoing. The pandemic is ongoing as we all see in the news every day. And our belief that this will result in very large losses has not changed. We think the best way to handle COVID-related losses is with the framework that we have and apply discipline to that framework. So we think about the framework. We're trying to be as transparent as possible, recognizing that.

This loss is going to be slow to develop and very difficult to estimate. So if you think about the three categories, we go from pretty transparent and the most direct impact from the virus to category two, which things have less direct tie to the buyers and probably more related to the recession and the depth of the reception, which is unknown, and the length of the recession is unknown, is probably the primary driver for loss into category two.

And the third one is a bit of an unknown because of the challenges that will continue, I think, for many for a significant period of time with regard to how the BI losses are or are not covered in primary policies. So what we're trying to do is provide a framework that's transparent and be disciplined in our approach to that framework. So with that, it is not possible at this time to come up with what a final COVID lost related number is because we believe the event to be ongoing, and it's largely dependent on the shape of the recession.

Jimmy Bhullar -- JPMorgan -- Analyst

And as you think about losses for your balance sheet, are you comfortable deploying the capital that you've raised even with that uncertainty? Or is it likely that you'll keep some of it as long as there's not great visibility into what your exposure could be?

Kevin O'Donnell -- president and Chief executive officer

That's a great question. I think the way we think about it is, although a number is difficult to produce, we have done extensive analysis on understanding what our exposure can be and then testing that exposure under very extreme scenarios as well as more likely scenarios. So all that said and done, I feel very, very comfortable about our balance sheets and the exposure that we have.

The realization of that exposure to loss may be it temporarily is difficult to predict, but none of it affects our appetite for risk, and none of it changes our willingness to deploy this capital. So when I think about the capital raise that we have, it's 100% opportunistic looking for the future. It is not in reflect of potential uncertainty with related losses potentially from COVID-19.

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. And then just lastly, on expenses. You mentioned you gave the number out on travel expenses. But as we look at your expense ratio overall, it was fairly low. How do you see that sort of ramping up now that more people are back at the office, and I'm assuming your marketing-related activities will pick up as well. Do you think the expense ratio will stay depressed through the second half of the year or go back to more of a rate that it was at in 1Q?

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Yes, Jimmy two things on that one. One, is we expect the COVID-related reductions just because we're not working in the office, that will stay around for a while because we don't expect everything to get back to business as usual. But more importantly, the driver, if you look back over history, I talked about our we leverage our operational base extremely well relative to the gross or the net premium written.

I talked about that. So we do a step investment. We expect over time as we deploy more capital out there, the volumes increase, we'll have to spend more in the infrastructure. But if you look back over time, you'll see we've demonstrated a strong track record for leveraging our operating platform.

Jimmy Bhullar -- JPMorgan -- Analyst

Thank you.

Operator

Our next question comes from the line of Phil Stefano from Deutsche Bank. Your line is open.

Phil Stefano -- Deutsche Bank -- Analyst

Yeah. Thanks and good morning. It felt like messaging earlier in the year may have been around the potential to withhold some capacity, at least into the midyear renewals with an expectation that there might be new purchases of reinsurance just to help manage volatility in the COVID uncertainty. Does it feel like that demand came through? Or is beginning to come through? Or have the conversations you had feel like this might be more of a 2021 event, which is kind of helping to steer where the equity raise could be put into play?

Kevin O'Donnell -- president and Chief executive officer

Yes. as we said, I think in the last call and trying to emphasize on this, we think that the COVID that the pandemic is ongoing. And with that, we believe that the losses will emerge slowly. All that kind of is the lens in which we're looking at the market. We think the opportunity for us to deploy this capital is in 2021.

Should there be additional purchasing? We've been in good contact with our customers. And if they are looking to supplement their purchases in 2020. We're having those discussions. But I don't want to leave with a false impression that we're going to deploy this in 2020. Our goal is to deploy in 2021.

Phil Stefano -- Deutsche Bank -- Analyst

No, understood. I guess my follow-up question would be, was there a reaction from the Ventures capital partners in response to the equity raise? And I guess, part of me wonders whether they view the increase in pricing and maybe to an extent then being crowded out as you have the ability to do additional business yourself on the heels of the equity raise? Maybe that's an unfair correlation I'm trying to draw, but just curious if the conversations with the capital partners changed in any way?

Kevin O'Donnell -- president and Chief executive officer

Yes. That's a great question. I've spoken to all our largest investors over the last couple of weeks, and we've spoken to all our investors over the last few weeks. So firstly, if you think we raised $250 million in the quarter and deployed it. So we are continuing to bring risk to third-party capital. Going into the 1/1 renewal, the way I think about our partner capital is that they have a right of incumbency on the deals that they're on just as we do.

So when I look at how we're going to structure the portfolios, we were not going to derisk them to deploy the capital that we have. What we're going to do is optimize their portfolio against the rate environment and the opportunity and then build our portfolios with a new equity. The one likely area where risk will be underwritten in a material way is in the retro market and in the aggregate market. The vehicle, which mostly takes that risk, for us, is Upsilon.

So I anticipate that the way Upsilon will be structured, consistent with the mandate for the risk that it targets, will be less appealing to buyers than other vehicles that we have. And with that, if there is a shift of risk, I think it's more likely to come from Upsilon than it is from certainly Vermeer, DaVinci, Top Layer and some of our other balance sheets. So we'll constantly look at how we can best match efficient capital with desirable risk, but we will not look and it's not our objective to cherry pick the investors that we have. We give them right of right to participate alongside capital raises, and they are true partners to us in the risk that we take.

Phil Stefano -- Deutsche Bank -- Analyst

I appreciate it. Thank you.

Operator

Our next question comes from the line of Elyse Greenspan from Wells Fargo.. Your line is open.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks for taking the follow-ups. My first question, I guess, Kevin, goes back to something that you just answered. So in response to the capital, you said it's at the holding company and you would downstream it depending upon where you can get the best returns on that capital. But is the desire to use most of the equity raise on your own balance sheet? Or is it also depending upon opportunities you could use some of that capital in partnership with some of your venture capital?

Kevin O'Donnell -- president and Chief executive officer

Yes. It's a good question. I think it's going to be a little of everything. So I anticipate it's if you look at our percentage on our vehicles, if you look at the size of the capital raise, most of it will be deployed on our fully owned balance sheets. That said, if there are opportunities to increase DaVinci's participation in the market or others, we'll look to deploy alongside our partners into those vehicles. So when I think about it, I would think about it as mostly on our owned balance sheets.

That said, we will also look for ways in which we can bring more risk to DaVinci is probably the most likely one, and we can certainly continue to invest more in Upsilon, should that vehicle should we want to rightsize that vehicle. We can the issue is what's written on some of these will likely shift in structure, where the risk appetite of the vehicle may not be as defined it may not be as natural fit for the vehicle. And with that RenRe Limited, which has the broadest appetite is a likely home for it.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. That's helpful. And then my second question. So on the TMR side, you guys had called out, right, this is the first quarter we annualized the deal. So the nonrenewal of some of the business had an impact on the growth within specialty Casualty. I know when you guys announced the deal, you had laid out some figures for what you expected to retain of the book of business.

But then my sense is as we've had conversations, you got incrementally more positive on some of the business that you had thought you might not renew. So can you just give us a sense of how much of that business needs to not renew, I guess, as we think about the modeling over the next three quarters within that specialty business?

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Yes. I'll give you back an answer. We did start last year. We looked at. We walked you down from about $1.2 billion in premium down to about $700 million is what we said we thought we would be able to renew. Going through the books, getting to know the terms, getting to know the understanding and the relationships gave us a much more favorable view of some of the books we were unsure of at the time. So we did outperform our expectations on the renewal of the TMR book.

We did probably well over $800 million versus the $700 million, which we felt very comfortable with. Now having said that, there's a strong element that we did not renew. And I talked about our implied growth was more of 100 than it was 20. Things we didn't renew, at least, was like auto and things like that, drove it down in general liability. You'll see that coming down on pieces of it. But we generally renewed a lot more of the book than we felt, got to know it better, and we feel strong with what we've underwritten.

Kevin O'Donnell -- president and Chief executive officer

Yes, the good news is having the 700 target and then getting to 830s if we found more good business than we originally hoped, and that was only added to our confirmation and that was a good deal for us to engage in.

Elyse Greenspan -- Wells Fargo -- Analyst

Yeah that's helpful, thank you for the additional color.

Kevin O'Donnell -- president and Chief executive officer

Sure.

Operator

I would now like to turn the call back over to our presenters for closing remarks.

Kevin O'Donnell -- president and Chief executive officer

So we appreciate you dialing in for this quarter's call. We feel great about the quarter that we just had, and we feel highly engaged and highly confident about our ability to deploy the $1 billion as we move toward the 1/1 renewal and look forward to speaking to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Keith Alfred McCue -- Senior Vice President, Finance and Investor Relations

Kevin O'Donnell -- president and Chief executive officer

Robert "Bob" Qutub -- Executive Vice President and chief financial officer

Elyse Greenspan -- Wells Fargo -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

Meyer Shields -- KBW -- Analyst

Josh Shanker -- Bank of America -- Analyst

Jimmy Bhullar -- JPMorgan -- Analyst

Phil Stefano -- Deutsche Bank -- Analyst

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