Aspira Women's Health Inc.
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Good day. And welcome to the Allied World Assurance Company First Quarter 2015 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sarah Doran, SVP, Investor Relations. Please go ahead.

[Sarah Doran:]

Thank you. Good morning, everyone. Our press release, 10-Q, financial and investment supplements were issued last night after the market closed. If you'd like copies of these documents, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available through May 8th on our website as a replay. The dial-in information for this replay is included in our earnings press release. Our speakers this morning are Scott Carmilani, Allied World's President and Chief Executive Officer; Tom Bradley, the company’s Chief Financial Officer; Marshall Grossack, our Chief Actuary; and John Gauthier, our Chief Investment Officer. Before we begin, I note that statements made during the call may include forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements are subject to a number of uncertainties and risks that could significantly affect the company's current plans, anticipated actions and its future financial condition and results. These uncertainties and risks include, but are not limited to, those disclosed in the company's filings with the SEC. Forward-looking statements speak only as of the date on which they are made, and the company assumes no obligation to update or revise any forward-looking statements in light of new information, future results or otherwise. Additionally, during the call, management will discuss certain non-GAAP measures within the meaning of U.S. federal securities laws. For more information and a reconciliation of these measures to their most directly comparable GAAP financial measures, please refer to our earnings press release. With that, let me turn the call over to Scott.

[Scott Carmilani:]

Thank you, Sarah, and good morning, and thank you for joining our call this morning. Allied World had a strong quarter and will continue to be in competitive environment as we put up a combined ratio of 88% and generated a 13% annualized net income return on equity. Continued benefit from our underwriting strength, selectively growing our Insurance platform, and of course, from our investment performance. Our topline decreased this quarter by near 2% to $881 million, driven by a 12% decrease in our treaty reinsurance ops, reflects a challenging market in general and non-renewal of poor performing property and crop treaties. The Insurance segments continued to experience strong momentum in the quarter, generating 10% growth in North America, 11.9% on a constant dollar basis in our global markets platform. On average the rates across our Insurance portfolio were flat for the quarter, with overall casualty rates up near 2% and property rates down 6% plus. To the North American Insurance segment, much of the growth came from our casualty lines, specialty casualty lines including, our Defense Base Act business, Excess Casualty and Construction. Overall, the rates in our U.S. book were up 5% and the casualty rates were up almost 7%. Notably, this is our 11th consecutive quarter, which we've achieved rate increases exceeding 5% in our U.S. specialty casualty and casualty books. This market continues to be among the strongest in the world. For the quarter, our overall retention ratio was just shy of 80% in this argument. Despite some headwinds from the strengthening dollar, the Global Markets Insurance segment had a 3.8% growth in gross written premium. The currency movements during the quarter had an impact on our business, and Tom, will get into that in just a minute. Much of our growth in the quarter was driven by new lines of business, including our onshore construction and our marine liability book, as well as growth across our existing lines of business. Overall, the rate change for our Global Markets Insurance segment were down about 4% in the quarter in the Global Markets, casualty rates down 4% and property rates down 5 plus percent. Our retention rates in the Global Markets Insurance target largely unchanged from the prior quarter in mid 70s. Three weeks ago we achieved another milestone for our growth for Allied World when we close on the acquisitions of the RSA’s Hong Kong and Singapore operations. These two operations bring established P&C businesses that will fast-track Allied World access to these attractive parts of the Asian market, like the diversified book of long established distribution relationships in that region. We want to welcome the 300 plus new colleagues who have joined Allied World as part of this acquisition and really look forward to continuing combine and build out our capabilities in the region, lots of work to do, but we are very excited about the prospects. With that, now, let me turn over the call to Tom, our CFO, to start the financial aspects of the call. Tom?

[Tom Bradley:]

Thanks, Scott, and good morning, everybody. In the first quarter, Allied World generated underwriting income of $68 million, operating income of $92 million and net income of $124 million. Our results benefited from $63.6 million of net favorable loss development on prior years, which Marshall will elaborate on in a moment. This quarter we are reporting $9.9 million of foreign exchange losses, compared to a de minimis amount in the first quarter of ’14, $6.2 of this expense was due to the forward contract we placed in December to hedge a portion of the British pound sterling purchase price of the RSA Hong Kong and Singapore acquisitions. This contract locked in savings from the strengthening dollar in the fourth quarter. Upon closing the acquisitions earlier this month, we funded a purchase price of $193 million. This is a savings of more than 10% of the $215 million purchase price announced upon signing of the definitive agreements in August and is due to the strengthened dollar. The balance of our FX loss this quarter is attributed to the impact of the movement in the euro, British pound sterling and Swiss francs on our operations and net foreign currency assets. While the majority of our premium is in U.S. dollars, about 15% of our business is in non-U.S. dollar currencies. In the quarter, the translation of those currencies reduced the gross written premium in global markets by about $4.2 million. The company’s expense ratio for the quarter was 30.9%. Expenses increased by $16.8 million, largely due to the increase in stock compensation expense, driven by the rise of stock price during the first quarter. We called that our portion of our stock-based compensation is cash delivered. So movements in the share price directly impact G&A. The share price rose 7% in the first quarter of ’15, while it declined 9% in the first quarter of ’14. This equates to about a 130 basis point increase in the year-over-year expense ratio. Operating cash flow remained strong at $318 million for the quarter, compared to $303 million for ’14. Turning to capital management. For the quarter, we repurchased over 1.2 million common shares in the open market at an average price of $40.08 per share and a total cost of $50.9 million. As of last night, we also repurchased 435,000 shares since the beginning of the quarter for $18 million, leaving our current remaining authorization at $350 million. Also on capital management, we are pleased to have announced that the company has proposed an increase to the annual dividend by 16% to a $1.04 per share. With this increase, our annual dividend to shareholders will have increased in excess of 50% over the last two years. This proposal is subject to shareholder approval at the Annual Shareholder meeting next week on April 30th. We ended the quarter with diluted book value per share of $38.99, which is up 2% from December. We are also reporting shareholders equity of $3.8 billion, up $51 million from year-end. Our total capital is $4.6 billion with the financial leverage of 17.6% and net premium leverage of 0.6 times for the year. With that, I will turn the call over to our Chief Actuary, Marshall Grossack.

[Marshall Grossack:]

Thanks, Tom. Our reported loss ratio the first quarter of 2015 was 57.2%. This includes 11.2 points or $63.6 million of net benefits of reserve releases for the quarter. Each of the three segments contributed meaningfully to favorable development this quarter. Breaking down the release of the $63.6 million by segment, North American Insurance contributed $25.2 million, Reinsurance $23.2 million and Global Markets Insurance $15.2 million. The reserve strengthening in the 2011 and 2012 accident years for the North American Insurance segment is attributable primarily to actual loss emergency, higher-than-expected medical malpractice. However, releases from most of the lines -- most of the lines more than offset this reserve increase. We continued to apply corrective actions to medical malpractice book and payer back from business that does not meet our underlying threshold. The accident year loss ratio excluding prior-year adjustments was 68.4% for the quarter, which compares to 61.1% in the prior year quarter. During the current quarter, we experienced attritional loss difference from several property and aviation events, including $7.65 million for Typhoon Rammasun in Australia, $3.5 million to the Germanwings plane crash in the French Alps and a total of $12.75 million for three large property losses. In each of these losses for less than $10 million did not meet our catastrophe threshold. As of the end of the quarter, our reserve positions sits at 4.2% over the midpoint of our actual range, which is largely consistent with that position in the prior year quarter. Let me now turn the call over to John Gauthier, our Chief Investment Officer, to discuss our investment highlights for the quarter. John?

[John Gauthier:]

Thank you, Marshall, and good morning, everyone. Allied World Investment portfolio returned approximately a 100 basis points or $90 million for the quarter, compared to 120 basis points or $102 million for the first quarter of 2014. The portfolio generated net investment income of $45 million during the quarter and had net gains of approximately the same amount. Returns were positive in all segments of the portfolio with core fixed income generating $40 million of return, non-core fixed income $16 million, equities $23 million and hedge funds and private equity $14 million. Our net investment income benefited from the ceasing of our private equity portfolio as distributions have grown significantly over time and stood at $8.4 million for the first quarter. Overall, however, NII was down 6% when compared to the prior year quarter, driven by a non-cash currency translation adjustment at one of Allied World Financial services investment. The $4.2 million CTA loss brought AWS earnings down to only $800,000 for the quarter. As we have said before the results of AWS with that investments will likely remain lumpy, but we remain very optimistic about the direction of those earnings over time. The global equity markets were mixed during the quarter. Strong performance came from euro stocks, which were up 18%, the Nikkei was up 11% and the Hang Seng was up 6%. The S&P in U.S. markets were essentially flat for the quarter. Allied World’s equity portfolio benefited from its global sales was up approximately 2.5%. For the first time in the last three quarters, we saw stabilization in crude oil prices, which was one of the reasons for the stability in the high-yield market. Managed exclusively by our AWFS partners are high-yield returns in both credit and securitized were up 1.8% for the quarter. We view the global growth outlook to be modestly positive for the remainder of the year, with the U.S. likely to see continued growth, which we think will result in a change in that policy later in the year. Therefore we remain underweight duration and overweighted diversified portfolio of risk assets which we believe will continue to provide favorable returns. With that, I’ll now turn the call back to Scott.

[Scott Carmilani:]

Thanks John. I’m very pleased with the first quarter results for Allied World. We’re off to a great start for the year. We continue to see strong momentum in our key markets and we’re well positioned to build out our Insurance platform with the opportunities that exist such as those in North America. We welcome all the new employees, agents and clients who are joining Allied World in both Singapore and Hong Kong and the region as a whole and very much look forward to working together to build a stronger product offering in that region and part of the world. I want to thank everyone for joining us. With that, I'm going to open up to questions from the group. Thank you.

[Operator:]

[Operator Instructions] And our first question comes from Michael Nannizzi, Goldman Sachs. Please go ahead.

[Michael Nannizzi:]

Thank you. One question, would it be possible to maybe, Marshall, to quantify the losses you guys called out in the press release in terms of point, maybe by segment. Just to kind of get an idea of what that -- how that impacted the NOI?

[Marshall Grossack:]

You’re talking about in the current accident year?

[Michael Nannizzi:]

Yeah.

[Marshall Grossack:]

Yeah, it’s a 9 point add to global markets, 3.8 points to North American insurance and 2.5 point to reinsurance.

[Michael Nannizzi:]

Okay. So if we adjust for those -- for those items then, that should get us to how we should be thinking about where your results are if we want to look at it on two underlying basis?

[Marshall Grossack:]

Yeah. I think that’s reasonable.

[Michael Nannizzi:]

Okay. Great. And then can you talk a little bit more about the healthcare reserves. It looked like you didn’t do anything for ‘14 and ‘13 on the insurance side this year but accident year ‘12 listed this year. It looked like that has started to slow down as we kind of move through 2014. Love to just get an update on that and kind of what you’re seeing there and kind of what caused you to add. I think you might add little bit to ‘11 as well, small into ‘11. Just trying to get an idea of what happened there and are there any other older claims that you are looking at, that could be in that box right now?

[Marshall Grossack:]

Yeah. I’ll touch it on really quickly. As I mentioned, the medical malpractice, so it’s specific medical malpractice which is part of the broader healthcare split there. The losses are trending worse than expected and it has been going on for several quarters. And on the underwriting side, we are being, so kind of forward looking more selective and reflecting the smaller margins that we’re seeing in our line of business. So as the reserving side, it is more -- the trends are worse than expected. It's really, we’re getting more claims than the kind of $1 million under, kind of, range if you will. So it’s not like one or two claims. And while we think our loss picks are prudent, we try to reflect this worsening trend. It is realistic and that could go up a little bit more. I mean, but we try to be unbiased in our picks. It is also possible it could go down. And I think -- finally, I think it is important to remember this is a very diversified company. We write many, many lines of business. That’s not going to be unusual at any time to have one or two lines that are having some problems as we have many others that are trending well.

[Michael Nannizzi:]

Okay. Thank you. Thanks for that Marshall. It was really helpful. And then maybe just starting on GMI, now that we were getting a little bit more historical context there. How should we -- say, I mean, clearly expectations was high, that’s coming down. Should we be thinking on the G&A side? Should we think about the dollar amount of expenses there kind of staying roughly where they are and then maybe the topline rising and that kind of growing into what you're expense base is there or how should we be thinking and what is like when you guys model that out internally? Where do you pencil out due in terms of where that expense ratio should settle out?

[Scott Carmilani:]

Mike, this is Scott. Look at the GWP in the Global Markets group. You’ve touched the point, it’s not quite at scale yet. It’s bit lower than our even own expectations to get there given the challenging rate environment. We’ve got a disciplined staff to earnings exactly chasing the market downhill. So a bit of a struggle there. It should get scale. It will get scale. It will get scale in three months, six months, nine months. It’s hard to really pin down how long it’s going to take. We should be able to grow into that demand, should we? Remember you haven’t seen any of the impact of the RSA business yet. You will begin to see that very quickly as that close on the really first day of April. So we’re starting to -- that's happened in real time as we stood here. And as an example, the 9 points of deterioration in the loss numbers that Marshall talking about is $4 million. So it’s too losses really to account. So while they are where they are, once that becomes a more scaled out business that should be a lot less. And just to answer your question, what we expect the run rate for their expense to be in line with the rest of the company over time.

[Michael Nannizzi:]

When you scale, okay. Got you. And then last one if I could just sneak in. I was just trying to looking through the disclosure on [A list] [ph] and the funds withheld there. It seems like you have put some dollars in, in '14 and for '14 and '15 business and then some of the dollars came out from '13 and then I think subsequently from '14 business. What is the dollar amount of funds withheld? Is it -- my math it should be about $400 million and less amount of dollars came out after you guys filed the 10-K, but should we be thinking about topline in the reinsurance business and how much will be contributed by partnership with [A list] [ph] in this fashion? Thanks.

[Scott Carmilani:]

Mike, in 2014, we supported [A list] [ph] with $300 million of capital; in 2015, it’s $350 million, so up just slightly. Most of the '14 capital has been returned. As of now, there is a little bit of lingering that will continue to come in, but most of that came back in the first quarter. So slight increase in our support for the 2015 underwriting year and that translates at depending on the ray of line on where they put that business in at something in the 20% to 25% range to GWP for the reinsurance treaty operation.

[Michael Nannizzi:]

20% to 25% of that $350 million or 20% to 25% of the total premiums for the segment?

[Scott Carmilani:]

20% to 25% of the $350 million that put to work.

[Michael Nannizzi:]

So the operating leverage that you’re employing. Got it. Okay. Understand. Thank you so much. Thanks for all the answers.

[Operator:]

Our next question comes from Matt Carletti from JMP Securities. Please go ahead.

[Matt Carletti:]

Thanks. Good morning. Just had a couple of questions. First one just relating to PMLs and just how you’re looking them going forward? I mean, we took a nice step down on last year’s midyear renewals, things have been pretty steady since then and most of the perils. Are you comfortable longer-term kind of where things are now? Do you see some of the global markets and other insurance businesses growing more rapidly than maybe what’s out there and more property cat and we should expect to seem to continue to come down going forward?

[Scott Carmilani:]

You shouldn’t see them materially changing. The tail of the PML was mostly driven by the reinsurance operation and it’s a global spread. We tried to spread that all around the world, but the peak exposure in U.S. win consists with most companies is there. So the growth in global markets isn’t going to have a big impact on PML.

[Matt Carletti:]

Yes, absolutely. Thinking more the other way that other things growing and it remaining more the same.

[Scott Carmilani:]

And as I just mentioned…

[Marshall Grossack:]

Most of growth is not property.

[Scott Carmilani:]

As I just mentioned, this is growing slightly in 2015 with additional capital invested.

[Matt Carletti:]

Right. And then just -- and that is consolidated into the PMLs correct?

[Scott Carmilani:]

Yes. It has.

[Matt Carletti:]

Great. And then just one other question, I got this for Marshall. Just when I look through the movements in the disclosure on page 14 on the reserves, the one thing and small thing but kind of jumped out, I was just curious if provide some color as 2012 across all three segments and in the aggregate was all three segments are little bit adverse and it’s not huge, it’s single digit millions and then in the aggregate was the only to show adverse. So is there any color you can provide and just what you are seeing in the accident year, what appears to be across separate lines that might be leading to that?

[Marshall Grossack:]

Yes. I mean, I would say that’s more just chance than a trend. I mean, obviously in North America, we’ve already kind of talked about the medical malpractice issue there. In global markets, that’s a single claim. I mean, so that could just come any quarter, any kind of chance thing so and then the casualty bump in reinsurances.

[Matt Carletti:]

Global markets is that plane crash in France

[Marshall Grossack:]

Not for 2012.

[Matt Carletti:]

Oh, 2012 sorry.

[Marshall Grossack:]

That’s professional liability claim.

[Matt Carletti:]

Okay. Great. Thank you. And congrats and nice to the year.

[Scott Carmilani:]

Thanks, Matt.

[Operator:]

Our next question comes from Amit Kumar with Macquarie. Please go ahead

[Amit Kumar:]

Thanks. It’s Macquarie Capital. Just two quick follow-ups. One to Mike’s question, other to Matt’s. Going back to the discussion on the attritional losses, can you sort of remind us if there were any similar losses in 2014? So, I guess, if we should be adjusting the 2014, if I’m allowed, just to get to an apples-to-apples comparison?

[Marshall Grossack:]

Yeah. This is Marshall. 2014 and the first quarter ran pretty clean. So there is really not a whole lot of adjustments to make there.

[Amit Kumar:]

Got it. That’s helpful. The other question I had was just going back to the discussion on med mal and I know, I completely agree to very small numbers not meaningful? But is it more of a state issue or a legal environment issue? Can you just sort of delve a bit deeper on to that? What exactly is or is it just the usual volatility and noise around the segment?

[Scott Carmilani:]

I don’t believe it’s a state issue. I believe it’s somewhat of a legal environment issue, combined with the effects of the changes in healthcare law federally and the impact of major consolidation in healthcare space, where lots of large institutions are becoming a lot larger and some are handling the risk management well and some are tumbling.

[Amit Kumar:]

Got it. That’s helpful. And thanks for refreshing us on that. And just finally on, there’s been a lot of chatter on Brazil and Petrobras? Could you potentially have anything out there? I know its early days, just trying to get a sense as to what’s going on on that side?

[Scott Carmilani:]

There is nothing to comment on Brazil, always is not materially we knew about, we would comment on it.

[Amit Kumar:]

Okay. That’s all I have. Thanks for the answers and good luck for the future.

[Scott Carmilani:]

Thanks, Amit.

[Operator:]

The next question comes from Vincent DeAugustino from KBW. Please go ahead.

[Vincent DeAugustino:]

Hi. Good morning and thanks for taking the questions. Just a quick one here, first, sort of, I know in the 10-Q there is some mention of an additional agreement to acquire the RSA level one operations for one British pound and so I was just curious if there was something I’d missed or if it was incremental and maybe any color on size and valuation there?

[Scott Carmilani:]

We’re actually a major side. It was -- is in a licensing agreement that they held to manage a small portfolio of business that was in that territory in Malaysia. And as you can tell, we didn't -- we bought it for a dollar so we can transfer the license.

[Vincent DeAugustino:]

Got it. Thank you for that.

[Scott Carmilani:]

Single digits of premium.

[Vincent DeAugustino:]

Okay. Perfect. And then, sorry, this is a follow-up for the third ground here, but running through some of the large loss in aviation stuff. So if that’s roughly 350 basis points, if I back that out, it looks like there is around 380 basis points of some additional movement relative to 1Q ’14 and so I was just curious of, A, I asked, right, B, if there any discernible trends on smaller attritional losses or anything else other than just volatility?

[Marshall Grossack:]

No. I think just the little volatility and that’s a pretty small amount.

[Scott Carmilani:]

You are talking about the difference between the accident years ’14 to ’15?

[Vincent DeAugustino:]

Correct. Yeah. Ex the large losses.

[Marshall Grossack:]

Yeah. I mean, we tend to every year we revisit our loss picks and we do think and Europe’s rates have been going up not quite as much as we’re seeing in the States we have increased our loss picks for few ones.

[Vincent DeAugustino:]

Okay.

[Scott Carmilani:]

Particularly, in the Reinsurance segment.

[Marshall Grossack:]

Yeah.

[Vincent DeAugustino:]

Perfect. And then to Scott and Marshall, just to reconcile some of your comments around healthcare, if I maybe paraphrase to make sure I have some of the commentary and consolidation and some of the healthcare providers getting larger? Is this a situation where patient's individual healthcare and a larger organization might not beginning the attention they need, which then increases the frequency of malpractice claims and if…

[Scott Carmilani:]

No.

[Vincent DeAugustino:]

No. That’s not the case?

[Scott Carmilani:]

No. Most of the claims have been just the opposite where doctors have been abusing the Medicare system and either doing procedures they shouldn’t be doing over and over and over again or billing the government for more -- for bigger portions than they should be. And as you wanted to get done starting find penalties, which are causing class action lawsuits for anybody who did involve in one of the operations.

[Vincent DeAugustino:]

Okay. Thank you very much. And then one just last one on, you’re thinking about this time year it is, imagine most insurance bonuses have been paid out and there’s a lot of M&A deals in the pipeline across the industry. So I’m just curious if you added to some of the talented team hires you guys have been doing or have some of those discussions kind of ongoing?

[Scott Carmilani:]

There’s nothing happening right now.

[Vincent DeAugustino:]

Okay. All right. Thanks very much.

[Operator:]

The next question comes from Charles Sebaski from BMO Capital Markets. Please go ahead.

[Charles Sebaski:]

Good morning.

[Scott Carmilani:]

Hi, Charles.

[Charles Sebaski:]

First question, I was wondering if you could help us out on the global markets business and how we should be thinking about not only the growth but the accident year loss pick? How that's going to kind of play out now that RSA is going to be incorporated there? And any color on for modeling purposes on where we -- what that book looks like would be helpful?

[Tom Bradley:]

To start with it bring it on the RSA businesses about going to double the size of the current global market segment. The business that comes on with an underwriting profit, a little bit different mix is kind of a lower expense ratio, a little higher loss ratio, it’s more of a middle market kind of business, but it will have a stabilizing impact on the overall global market segment and bring some scale as Scott mentioned earlier.

[Charles Sebaski:]

So last year the global markets had about a 91% combined ratio all-in, while we’ve got doubling here to think that it should be around a 90 give or take. Is that kind of ballparkish on how that RSA business is going -- should look or..?

[Scott Carmilani:]

Yes. I mean, we are not really forecasting that. Again I think it comes in profitable from an underwriting standpoint, but don't want to forecast the all-in result.

[Charles Sebaski:]

Okay. On the reinsurance book the contraction we saw here from some non-canceled -- from some non-renewals and how the book has gone up. Should we think that that's going to be like that the rest of the year? Should this 12%, 10% contraction rollout throughout the remainder of the year? Is that a one quarter phenomenon and the rest of the business is kind of independent?

[Scott Carmilani:]

Well, first comment I’ll make to that point is reinsurance is a lumpy annual business, it’s heavily concentrated in first quarter and overlaps between the second and third quarter. There’s not a lot of transacted treaties that go down in the fourth quarter.

[Charles Sebaski:]

Yes.

[Scott Carmilani:]

And many of the property -- heavyweight treaties are June and July. So I think that for its worth, it’s not -- it’s just not as smooth month by month business. So could you -- could one interpret the reinsurance, pardon me we will not make up or down in the first quarter, I would say, yes, that's true.

[Charles Sebaski:]

Okay.

[Scott Carmilani:]

We had a minimum.

[Charles Sebaski:]

And then also on the RSA acquisition, do I understand -- I want to make sure that I have something right. You guys -- the payment or the price at a $192 million is less, but there’s going to be -- there should be a tangible book value dilution on that, some kind of charge, I don’t know what came in this quarter. Am I thinking about that correct? In this upcoming quarter, it’s a $193 million of cash relative to goodwill charge or something else is going to be put on the books?

[Scott Carmilani:]

Yes. Charlie, that’s correct, it’ll be substantially all intangible and goodwill.

[Charles Sebaski:]

Okay. It will be about a...

[Scott Carmilani:]

It will in the second quarter.

[Charles Sebaski:]

Yes. Okay. Excellent. I appreciate the answers.

[Scott Carmilani:]

Thanks, Charlie.

[Operator:]

The next question comes from Mike Zaremski from Balyasny. Please go ahead.

[Mike Zaremski:]

Hey, good morning. Could you talk to why the case incurred loss ratio was kind of high again for the second quarter in a row, maybe if any color on what happened and should it continue?

[Scott Carmilani:]

Yeah. We write a lot of business that does have fairly large limits. So that is a major for a company like us and it can’t tend to be lumpy. So, I don’t think there’s any specific thing that would be driving that.

[Mike Zaremski:]

Okay. So no specific trends. Okay. And lastly in terms of the component of the expense ratio attributed to policy acquisition costs. Is this quarter’s a more elevated level, if I guess a higher run rate given either market conditions and/or business mix changes?

[Tom Bradley:]

As Scott mentioned, the first quarter is the biggest quarter of the year for the Reinsurance segment, almost half their business. And there was some upward pressure on acquisition costs in that segment, which is part of the driver.

[Mike Zaremski:]

Okay. Got it. I missed that. Thank you for the color.

[Tom Bradley:]

Sure.

[Operator:]

The next question comes from Bob Glasspiegel from Janney Capital. Please go ahead.

[Bob Glasspiegel:]

Good morning, Allied. I got a follow-up question on RSA. Now that the deal is closed, any sort of help on sort of the run rate of premiums in combined ratio for modeling purposes? It seems like the combined run rate -- combined ratio is less than where Allied World has been running, at least that's my recollection. Just the trajectory of rates in premium growth from that book versus your existing book and also what the invested asset pick up will be?

[Tom Bradley:]

I’ll start. The invested asset pick up is small, so we are buying branch operations and so there is some modest book value in it that we will pick up. The business is $250 plus million. As I mentioned, it’ll about double the size of the current global market segment and kind of going back to when we announced in -- excuse me in August. We’ve talked about underwriting profit kind of a mid-to-high 90s combined ratio in terms of what we were inheriting. We think there is some opportunities to do better. But again, we are not going to forecast that for the end of the year. I don’t know Scott, if you want to add anything?

[Scott Carmilani:]

It’s a different book of business than what we currently write and the reason it’s made up of a combination of agency business, which is much more directly controlled small account business. It’s infinity marketing which to direct relationships that are rather large and it’s just matter of other small account businesses. It’s a business that RSA hadn’t put an investment in the number of years. So there is lots of room for improvement and to do things creatively. It should be a business that is much less volatile than current lumps that Marshall described.

[Bob Glasspiegel:]

In the trajectory of rates on the book and is that likely that should retain more business or less prospectively?

[Scott Carmilani:]

Those are 100% numbers, grows in that.

[Bob Glasspiegel:]

Okay.

[Tom Bradley:]

They have got a substantial Reinsurance program in place, kind of for day one acquisition. We are replicating that. But overtime, we will convert them into our Reinsurance structures. So there might be opportunities to pick up in that process.

[Bob Glasspiegel:]

In the trajectory of rates on their book versus your existing book?

[Scott Carmilani:]

It doesn’t work that way in that part of the world. This is the market-weighted business. You are talking about small account, smaller business. So it doesn’t have the rates swing that you’re used to being quoted in the European and Global Markets business.

[Bob Glasspiegel:]

That’s a positive in today’s environment.

[Scott Carmilani:]

It’s undetermined.

[Bob Glasspiegel:]

Thank you.

[Scott Carmilani:]

Thanks, Bob. Think of an A&H book, how do you determine the rate increases there.

[Operator:]

[Operator Instruction] And we have a follow-up question from Michael Nannizzi from Goldman Sachs. Please go ahead.

[Michael Nannizzi:]

Thanks. Thanks for the follow-up. In the reinsurance segment, how much of that decline in premium was exposure versus price. Is there a way that’s kind of just get an idea of the breakdown there?

[Scott Carmilani:]

I’m not sure I’m understanding the question. It means…

[Michael Nannizzi:]

So if premiums were down 12%, was the exposure that drove the premiums? Did that decline, did you write 10% less exposure and price was down 2% or how much of the change in the premium dollars is attributable to pricing for risk or the underlying risk itself?

[Scott Carmilani:]

More than latter.

[Tom Bradley:]

Yeah. I mean you can almost see that by -- we did talk little earlier about kind of our loss ratio pick for the reinsurance segments. So if you see the reinsurance segment, loss ratio pick going up but you would see there, that’s kind of giving us a fee line for the price component, the rate component.

[Michael Nannizzi:]

Got it. Okay. I mean, so when you look at that segment, we should be thinking about -- I mean, so adjusting for those items somewhere in a low 60s loss ratio. I mean, is that kind of where you guys are starting from here and given the trends of the market right now, is that kind of target you are starting -- you want to try maintain or do you expect it just a function of that mix of business and where you are looking to grow and shrink?

[Tom Bradley:]

I mean that first quarter.

[Scott Carmilani:]

All the above.

[Tom Bradley:]

The first quarter, accident year loss ratio was -- are best categorized as of right now given all the business we see. And obviously there is property in there which will move up and down as that occur or not.

[Marshall Grossack:]

And keep in mind, on the reinsurance side, many transaction are large in nature. We price each really kind of independently and make the decision based on the e-commerce of that really whether we should write or not. So that can really change on what we see on prices going forward.

[Michael Nannizzi:]

Okay. Is our market condition placing pressure on profitability in that segment or is there….

[Tom Bradley:]

Absolutely.

[Scott Carmilani:]

And we will stick with that.

[Michael Nannizzi:]

All right. And then last one, in the insurance business, I mean, I know there is a lots of pluses and minuses in the business. So one time was last year in first quarter and this year in first quarter, if we are just trying to like taking all of that in the consideration and measuring at the way you measure it year-over-year in the insurance segment. What happen in the margins? Did you see margins expand, contract, they roughly the same? Can you give us some lines because obviously there are so many moving pieces or some lines into kind of what happened from your perspective in the insurance segments at this quarter?

[Scott Carmilani:]

All in, everything considered, we ran an 88 combined. I feel pretty good about that. I don’t think otherwise materially change one way or the other from this time last year.

[Michael Nannizzi:]

Got it. Okay. Thank you.

[Scott Carmilani:]

Thanks Mike.

[Operator:]

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Carmilani for any closing remarks.

[Scott Carmilani:]

Thanks again -- thanks again for joining on the call on this plus three April day. Have a good day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.