Total shareholders’ equity of $562 million and total tangible equity of $530 million we’re offloading over $400 million of loss reserves through the transaction against which we hold a significant amount of capital. I think between those two pieces, your capital ratios are not too different from where they are kind of as they net out. Again, those loss reserves against the $93 million discount to book. So hopefully, that helps. Obviously, we hold a lot of capital against those reserves.
Tracy Benguigui: No, that’s very helpful. So if I piece that all together, I’m wondering if that $93 million net loss could squeeze your underwriting capacity to grow.
Sarah Doran: We do not expect it to. Our rating agencies ratios are very consistent with where they have been. And the idea, I think, as we said – as I said in my remarks, is that we contribute that capital down to the U.S. entities, but our premium surplus stays pretty consistent. But more so looking at the loss reserves to equity metric, again, it’s fairly stable. So there is no expectation that that’s going to squeeze our growth rate, especially with our remaining businesses being effectively more capital light than the reserves in the Casualty Reinsurance business. I think that’s probably the kicker.
Tracy Benguigui: Okay. And can you share some color on your E&S retention that dipped due to a new casualty reinsurance treaty?
Frank D’Orazio: Yes, I can give you some color there. So you’ll recall last year at the midyear point, we increased our retention on one product line, specifically our excess casualty treaty, by 10 percentage points at the midyear, and that drove a higher net to gross retention over the last four quarters. But at the midyear 2023 renewal, we undertook a very broad review of our E&S ceded reinsurance structure and looked at a goal of trying to improve our volatility projection and maximizing underwriting income while certainly utilizing the strong relationships that we have with our reinsurance partners. So this new structure the way we think about it allows us to make changes based on market conditions or reinsurer appetite and ultimately the performance of the portfolio.
So the new treaty provides broader quota share coverage across all casualty lines, including primary participations. So that’s different. And in doing so, it provides us basically with risk sharing across what I’ll call maybe some of the more volatile elements of the E&S portfolio as well as some of our larger lines such as General Casualty and Manufacturers and Contractors. And fortunately, it gives us a very favorable ceding structure and economics relative to both ceding commissions as well as first dollar protection in areas that we didn’t have before. The other point that is worth noting particularly in this quarter, is that we expanded our use of excess of loss reinsurance protection, which allowed us to move to that flat rated structure, I think, Sarah kind of spoke to it a bit earlier.
So very notably, that means that the reinstatement charges and volatility that have impacted our results in Excess Energy go away for business written under the new treaty structure. So had the losses that we wrote in prior accident years that were reserved this year been written under this structure, there would be no follow-up reinstatement charges. So overall, we’re very pleased with the outcome and would expect, I think, the third quarter to be a pretty reasonable proxy relative to the net to gross retention going forward.
Tracy Benguigui: You mentioned that the ceding commissions were favorable. So that’s relative to your policy acquisition costs. Do you still see a nice spread?
Frank D’Orazio: Yes. Well, I would say despite I think what’s some headwinds in the reinsurance market, I think overall, on the treaties that we place and there is a number of them that make up this structure. I think we had a slight pickup of several basis points.
Tracy Benguigui: Got it. Thank you.
Frank D’Orazio: Thanks, Tracy.
Operator: Thank you. Your next question comes from the line of Brian Meredith from UBS. Your line is open.
Brian Meredith: Yes, thanks. A couple of quick ones here for you. Frank, I am just curious, given that you had adverse reserve development in the E&S segment, I was a little surprised that you took down the loss picks as much as you did this year. I mean it doesn’t seem – and I am wondering, was there a change in kind of reserving philosophy at James River used to hold picks fairly high and have that adverse development coming forward? Just maybe a little more into kind of the thought process behind how those two fit together or if they fit together at all?
Frank D’Orazio: Yes, I can at least start here. I think it’s similar to my earlier comments that we have been very conservative in our recent accident year loss picks at a time when we’ve just done so much relative to additional underwriting oversight and discipline in the organization, have taken a lot of steps relative to exclusionary language, we’ve gotten out of a number of loss leaders in that specific portfolio over the last couple of years and had given that some time to kind of set in. And so, the benefits of those actions, plus all the rate that we’ve taken in these market conditions, made us feel comfortable that was an appropriate step to take.
Brian Meredith: Great, thanks. And then one other just quick one here, the internal control weakness, is that something that the rating agencies have been – discussed with the rating agencies as well. I’m just curious. I know you talked about the reinsurance transaction, but just the reaction on that.
Sarah Doran: No, absolutely, Brian. We have a very regular quarterly dialogue with them, and we went through all of that a few days ago, for sure.
Brian Meredith: Great. I appreciate it. Thank you.
Operator: Thank you. Our next question comes from the line of Meyer Shields from KBW. Your line is open.
Meyer Shields: Great, thank you. Good morning. And congratulations on the Casualty redeal. I was hoping, Sarah, can you for modeling purposes, give us a sense as to the size of the investment portfolio that’s being transferred to Fleming?
Sarah Doran: Sure. The investment portfolio at JRG Re is about $550 million, Meyer, so it’s about 25% of our overall portfolio, give or take.
