Aspira Women's Health Inc.
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

Welcome to the Allied World Assurance company Second Quarter 2015 Earnings Call and Webcast. [Operator Instructions]. I would now like to turn the conference over to Sarah Doran, SVP, Investor Relations and Treasurer. Please go ahead.

[Sarah Doran:]

Thank you, Allison. Good morning and welcome to Allied World discussion of our second quarter 2015 results. Hopefully all of you have seen our press release, 10-Q, financial supplement and investment supplement which were released last night after the market closed. All of these materials can be found on our website at www.awac.com under the IR section. Our speakers this morning are Scott Carmilani, Allied World's President and CEO, Tom Bradley, CFO, Marshall Grossack, Chief Actuary and John Gauthier, Chief Investment Officer. They will discuss the financial results of our business and the current market environment. Before I turn over to Scott, I'd like to note that our presentation today may include forward-looking statements within the meaning of the U.S. federal securities laws. The company cautions investors that any forward-looking statement involves risks and uncertainties, many of which are outside our control and is not a guarantee of future performance. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors. These factors are described in the company's filings with the SEC. We're not obligated to and do not undertake any obligation to update or revise forward-looking statements which speak only as of the date on which they are made. Also, in our remarks and responses to questions, we may mention some non-GAAP financial measures within the meaning of the U.S. federal securities laws. Reconciliations are included in our recent earnings press release and financial supplement. And now, Scott Carmilani.

[Scott Carmilani:]

Thank you. Thank you, Sarah. Good morning, everybody. Thanks for joining our call this morning. Allied World generated a net income per diluted share of $0.10 for the quarter and an operating income per share of $0.27, again on a diluted share basis. One thing I'm pleased about this quarter is that, for the first time, we started including results from our newly acquired Asian operations in Singapore and Hong Kong. Unfortunately this quarter, we had $25 million of cat losses and another $20 million of large loss events affecting our quarter's performance beyond what we were expecting. Additionally, we've also felt some mark-to-market losses in the investment portfolio due to rising interest rates and volatility in the capital markets. Underlying all this is the strength and health of our specialty business units. We continue to demonstrate our ability to grow in areas we see attractive, as well as to manage the volatilities in production in markets that we see as less attractive. For instance, you'll notice that we're reducing our treaty portfolio this quarter by 20%, still managing to grow our business overall as a company. We also took steps to reduce our property cat exposure and the volatility at the same time, with a combination of business mix and the purchase of more cat reinsurance protection, thereby reducing our expected losses from major events for the rest of this year. Tom will give some more details shortly. Turning further to our details on operational results, it's important to note that our top line increased by 9% for the quarter to $826 million, driven by 10% growth in the North America insurance and 8% growth in Europe and Asia, about 84% growth in our newly acquired Asia businesses, both of which were offset by a decrease, as I mentioned, of almost 20% in our treaty reinsurance segment amid a decrease in participations in some of the treaties and reducing some of our exposures where rates and terms were below par. While market conditions do remain attractive across the main lines of our insurance portfolios, we're seeing rates moderating. On average, casualty rates are still up slightly, but maybe 2%, while property continues to decline close to double digits. In North America, much of our growth continues to come from the specialty lines that we've been marketing and talking about previously again and again. Again this quarter, we're taking further action in our healthcare book by reducing writings and further pushing structural changes to the risk in this portfolio. In global markets, on a constant dollar basis, we doubled our gross writings at the close of the Asian acquisitions in April, 84% on our reported basis. Rates are down here almost 7%, while retentions are remaining in the mid-70s. Here, both casualty and property rates are down in the high single-digit rates, with property down slightly more. Lastly, as I've been stating, reinsurance had decreased 20% compared to the same quarter of prior year. This is due to non-renewals across both property and casualty lines within our portfolio. Reinsurance does remain an important contributor to our business capabilities and has been an important contributor to our performance. But, in markets like we see right now, shrinking that business, especially while we're able to find attractive pockets of growth in our insurance portfolio, has made a lot of sense. With that, let me turn over the call to Tom, our CFO. Tom?

[Tom Bradley:]

Thanks, Scott and good morning, everyone. I'd like to start by reviewing the accounting for the newly acquired Asian business. This is detailed in footnote four of the 10-Q we filed last night. But, to summarize, we delivered cash consideration of $194 million at close and estimate that the post-closing adjustments will reduce that consideration to approximately $163 million. Our preliminary fair value work for the purchase GAAP accounting adjustments yields goodwill of $76 million, intangible assets of $91 million and value of business acquired, VOBA, of $37 million, along with the acquired assets and liabilities. $14 million of the VOBA is in excess of the carry deck. The intangibles will amortize over four to 18 years and the excess VOBA will amortize with the related unearned premium reserve over the next year and a half. Note that the amortization of the VOBA is included in the underwriting results of the global market segment as part of acquisition cost. The finalization of these adjustments will be booked in the third quarter when the post-closing adjustments are finalized. The company's expense ratio for the quarter was 32.4% compared to 31.7% last year. The ratio without the acquired Asian operations would have been 30.6%. The excess VOBA amortization adds about 50 basis points to the ratio and the rest is due to the higher average acquisition cost of that business. Note that all of the expense ratio increase is in the acquisition cost component, while the G&A ratio actually decreased to 16.8% compared to the prior year quarter of 17.9% as we continue to carefully manage our expenses. Going forward, the new Asian business will add 100 to 120 basis points to the expense ratio, exclusive of the excess VOBA amortization which also lowered the loss ratio by a similar amount. This quarter, we restructured our seated catastrophe reinsurance program which renews each May. As we remain focused on mitigating volatility, we bought more protection into the tail and lowered our largest one-in-250 year probable maximum loss by over 130 basis points to 14.4% of total capital. This cover provides per-currents and aggregate protection to cat exposures across our global insurance and reinsurance portfolios. It is an expansion on our prior program and is centered around excess of $300 million of aggregate protection, with additional occurrence coverage. We also purchased some industry loss warranties to round out the program. Moving on to cash flow and capital management, operating cash flow remained strong at $110 million for the quarter compared to $146 million in the prior year period. We repurchased over 4.8 million common shares at an average price of $40.69 per share and at total cost of $194 million this quarter. This includes over four million shares that were repurchased directly from Exor at a price of $40.55 per share in a negotiated transaction. This was a unique opportunity for us to buy in a significant block at a discount under our existing repurchase authorization. Given the amount of shares we have repurchased year-to-date, an amount that exceeds what we repurchased for all of 2014, we will likely suspend our repurchases for most of 2015. As a reminder, we have 173 million of remaining repurchase authorization through May of 2016. Final point on capital management. We were pleased to receive shareholder approval for a 15% dividend increase during our April AGM. And note that the dividend has now increased over 50% the past two years. We paid our first dividend relative of this increase earlier this month. We ended the quarter with shareholders' equity of $3.6 billion, down $153 million from year-end, largely due to the shares repurchased. Our total capital was $4.4 billion, with financial leverage of 18.1% and net premium leverage of .65 times for the year. With that, I'll turn the call over to our Chief Actuary, Marshall Grossack.

[Marshall Grossack:]

Thanks, Tom. Our reported loss ratio for the second quarter 2015 was 66.8%. This includes 3.4 points or $21.8 million of net benefit from reserve releases for the quarter. The reinsurance and global markets insurance segments, a net favorable development of approximately $30.4 million and $2.2 million respectively, while the North American insurance segment had adverse developments of approximately $10.8 million. The reserve strengthening in the older acts in the years of North American insurance segment was largely attributable to severity of professional lines, as well as frequency of loss in the healthcare medical malpractice book. The professional line strengthening of $9.3 million was primarily driven by two large claims in our Bermuda professional lines book in the 2007 loss year. Healthcare additions had a 3.2 point impact on the loss ratio for the North American segment. As Scott said, we continue to apply corrective actions to the medical malpractice book and pare back from business that does not meet our underwriting standards. Medical malpractice premiums are down 19% from the comparable quarter last year and 29% from two years ago. Global markets insurance had net favorable development of $2.2 million compared to $19.8 million in the prior year quarter. The decrease was driven largely by losses in trade credit which had a 10.5 point impact on the global markets loss ratio. These losses were concentrated in the Latin American portion of the trade credit book and were driven by currency and commodity price moves. Given that currency and commodity prices may remain volatile, there is potential that this line will continue to be volatile. We have been taking underwriting actions on the book, such as enhancing our credit monitoring and portfolio construction. On an actuary basis, the loss ratio, excluding prior year adjustments, was 70.2% for the quarter which compares to 67% for the prior year quarter. During the current quarter, we experienced several non-cat weather and fire-related losses of approximately $20 million which had a 3.1 point impact on the consolidated loss ratio. In addition, we had catastrophe losses of $25 million related to the New South Wales storms. The catastrophe losses of $25 million had a 3.9 point impact on the consolidated loss ratio and approximately $21 million was recorded within our reinsurance segment and $4 million within our global markets insurance segment. As of the end of the quarter, our reserve position sits at 3.6% over the midpoint of our actual range which compares to 4.2% in the prior year quarter. Let me now turn the call over to John Gauthier, our CIO, to discuss our investment highlights for the quarter. John?

[John Gauthier:]

Thank you, Marshall. Good morning, everyone. Allied World's investment portfolio returned approximately 30 basis points or $23 million, for the quarter compared to 140 basis points or $122 million, for the second quarter of 2014. Year-to-date, the portfolio has generated $112 million of total investment return, equating to a 1.3% total return. During the quarter, net investment income grew to $43 million, but was offset by realized and unrealized losses of $20 million due to higher yields across investment grade, fixed income assets. Those losses were offset by realized and unrealized gains in the rest of the portfolio. During the quarter, the yield on 10-year treasury rose 43 basis points, generating a total return of negative 3% while the Barclays Aggregate Bond Index returned 1.7% negative. Having a short duration fixed income portfolio benefited our returns, allowing us to break even on core fixed income investments and generate a positive total return of $7.6 million when our leverage credit portfolio was included in the fixed income results. Domestic equities moved sideways during the quarter, with the S&P500 returning 30 basis points. Allied World's equity portfolio, representing just less than 10% of the entire portfolio, returned approximately 2% for the quarter due predominantly to its allocation to non-U.S. markets. The equity portfolio generated a dollar return of $17 million. Net investment income from hedge funds and private equity increased from last year's quarter as our portfolio continues to season. Unfortunately, mark-to-market returns were less in 2015 second quarter than they were in the second quarter of 2014. Allied World Financial Services had a small loss for the quarter, but we continue to see a variety of benefits out of these partnerships, including ground floor opportunities to invest in unique situations which have very little correlation to the remainder of our portfolio. Overall, the portfolio generated net investment income of $43 million compared to $37 million in the prior year quarter. Our portfolio grew from $8.6 billion to $8.9 billion predominantly as a result of the inclusion of the acquired Asian operations investment portfolios. Most of those assets are in core fixed income securities. The balance between core and non-core shifted modestly during the quarter, with non-core declining to 28% of the portfolio. We believe our non-core allocation will continue to drive returns across the portfolio and expect to maintain an allocation of around 30%. We remain underweight duration and overweight a diversified portfolio of risk assets which we believe will position us well in a challenging environment. Given the interest rate environment that we saw this past quarter, we remain comfortable with our short duration bias. And with that, I'll turn the call back to Scott.

[Scott Carmilani:]

Thanks, John. As we mentioned earlier, we're pleased to have the newly acquired Asian operations on board and incorporated into Allied World's results. One thing I'm very happy with this quarter is the integration progress thus far. There's still much work to be done on the systems and technology side, as well as process feeds. And on that note, a press release went out earlier this week announcing the addition of new leadership that we're bringing on board to help and assist in maximizing the potential of our new teams in both Singapore and Hong Kong. Mike Garrison comes to us with over 20 years of international insurance experience, was most recently Chief Underwriting Officer of Starr Insurance Companies. I've known Mike for over 15 years and very excited to have him on board and an executive of his caliber will help our Asian teams get better and better as we move forward in such an important role. While our quarter was mixed, given current year events and financial market performance, I am pleased with the positioning of our franchise and the ability to grow profitably. We're seeing strong momentum in key markets and are well positioned to take advantage of these opportunities. But, we're also very mindful of the rate pressure we're seeing and the challenging margins we're seeing on other lines of business. With that, I'm going to take questions and open it up to the group. Thank you.

[Operator:]

[Operator Instructions]. And our first question comes from Bob Glasspiegel from Janney. Please go ahead.

[Bob Glasspiegel:]

On the med mal reserve increase, was it ACA integration or is there some new issues that you're seeing that's causing deficient?

[Tom Bradley:]

Yes. I think the majority of it, there is a little bit to do with the integration, but the vast majority of it is kind of just your standard hospital professional liability-type claims, so just claims where something goes wrong in the hospital.

[Bob Glasspiegel:]

So, it's an individual claim rather than some broad issue that you're addressing from a macro point of view which I think was what -- draw the last rounds of increases there.

[Tom Bradley:]

Yes, I think that's fair to say.

[Scott Carmilani:]

Yes and that was from multiple years.

[Bob Glasspiegel:]

Got you. What's the unearned premium reserve on the RSA that's flowing through?

[Tom Bradley:]

$145 million coming through from RSA.

[Bob Glasspiegel:]

And last question, just on the investment income roll on page 24, the other private it hit in the quarter, was that marks, John, were you saying, relative to the bond market or was there something else driving that?

[John Gauthier:]

No. The other private you'll remember are predominantly the Allied World Financial Services and we account for those on the equity method accounting. So, when we have businesses underperforming, we have to take a write-down. We don't get the opposite benefit when businesses are outperforming. So, one of our partnerships has been underperforming expectations and we thought it prudent to mark as securities down.

[Bob Glasspiegel:]

Have you identified which one?

[John Gauthier:]

We have not.

[Tom Bradley:]

Hey, Bob, I want to add something to the healthcare comment. I don't want to leave the impression that this was just one or two large losses is the only issue here. We're seeing a very competitive environment across the healthcare medical liability and it's an area where we're probably going to continue to see headwinds.

[John Gauthier:]

Hey, Bob, John. Just to follow up, we do reference in the Q the type of entity it was for Allied World Financial Services, not by name.

[Operator:]

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

[Amit Kumar:]

Just a few follow-up questions. Let's start with the topic which we have been discussing for quite some time. In Q1 2014, you had talked about some of the policy limits at that time. A number was given to us. I think it was maybe 5,000 or 6,000 or something like that. What I was trying to figure out, if Marshall can maybe talk about the policy limits, the number of new claims we have gotten by healthcare, PL and trade credit so we can make some assumption as to what sort of lever exists if things do go south any further.

[Marshall Grossack:]

Well, I don't know. Our policy limits aren't 5,000 or 6,000. We write in the U.S. typically five million might be a common limit that we write. I think it's a little difficult to answer that question, though. I don't know. Tom, do you have any thoughts whether we should give that type of detail?

[Tom Bradley:]

We have well over 100,000 policies in the company. For professional liability in particular, the losses that were affecting this quarter, one was a full policy limits loss of $25 million. So, that was unexpected turn of events in a trial case that went the wrong way from a prior year. Had nothing to do with the financial market losses in those same years. In the healthcare space, this is a half a dozen fairly large claims, as Marshall had pointed out, that were hospital-related and the way those policies had been structured over the past few years, the defense was provided outside the limit of liability and, I mean, you could surmise that law firms have been taking advantage of the contract. So, part of the structural changes we've been making is trying to change the way those contracts respond in terms of co-insurance deductibles and-or coverage plainly and that's a low, slow onslaught and because the market isn't necessarily recognizing the same issues.

[Amit Kumar:]

In terms of that comment, if we don't have that level of detail, how does an investor using the GLTs and the information provided get some sort of comfort that this thing is in the rear-view mirror, to a large extent? Or is this a recurring problem which means all of us need to look at our earnings estimate real carefully, going forward?

[Tom Bradley:]

Yes. I mean, it's difficult to look at the global loss trial. We mentioned last quarter and really still is the way it is, frequency and severity continue in this line of business to be higher than we expected for the prior years. So, we have taken underwriting actions which are impacting the more recent years, but now we're talking about 2013 and prior. Our approach has been to book these years at the midpoint of our actual range. So -- but, when you book at a midpoint, there is some chance it could end up being a little bit higher or a little bit lower as we move down the road. As an analyst, one thing that you might look at that was just besides the global loss triangle, you can look at the schedule P in our yellow book and that should also give you another approach to look at it.

[Amit Kumar:]

The second question I have is on the cat losses. I think it was the New South Wales storm losses. Are these losses coming out of the new office you opened in Australia in 2014? Is that where it came from?

[John Gauthier:]

No, it was underwritten for many years out of our Singapore office and it's predominantly two large treaties that we support.

[Tom Bradley:]

Yes. So, 21 of the 25 is our reinsurance treaty book which is not based out of Australia.

[Amit Kumar:]

The last question and this is a question I've been getting all night, maybe this is a question for Scott. There is all these noise which is occurring in multiple segments at this juncture. Do you think pursuing a growth strategy at this time is the right strategy or perhaps slowing down and fixing everything and getting to the point where you have complete comfort that a potential investor will not challenge you on some of these things, fixing them and then embarking on a growth strategy? Has some path been given at the top level as to is the growth mode at the right mode at this juncture? Or am I overthinking it?

[Scott Carmilani:]

No, you're under-thinking it. Of course at the top of the organization we're absolutely addressing this. You have to understand, there's multiple lines of business within each major segment and I can assure you that these lines of business that we've had noise in in the quarter which I would absolutely categorize as noise and not systemic, are taking action and they are not growing. They are, in fact, shrinking as Marshall pointed out multiple times, particularly in the healthcare book. The two other lines of business, while there's some noise from a 2007 and a couple of claims in professional liability, I can assure you that the actions we've taken from 2007, 2008, 2009 in that portfolio, we're making good, profitable business and I would absolutely try to go that D&O book right now in this market. And we continue to do so. In the trade credit market, we have noise around Latin American business because, as the currency and commodity fluctuations that have been witnessed which you should know as well as I what's been going on in that part of the world in the last six months and 12 months and because we had some mid-term credit type deals, meaning multiple year, we kind of got stuck on some of those risks. We have been morphing the book away from just Latin American business or I should say predominantly Latin American business, into other things. We're adding more credit quality underwriting and we're taking corrective action. The areas where we're growing, where you're seeing major growth, like in the Singapore and Hong Kong books through the RSA acquisition and the other specialty business we're growing here in the United States, is the reason why we're growing is because we're seeing better margin opportunity in that business than we would see in the business where we have to highlight in this call as losses in the current quarter.

[Operator:]

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

[Matt Carletti:]

Sorry to keep going back to reserves, but I just wanted to kind of drill down on one of them. Above all the -- I appreciate all the color you've given so far. I think of all, a handful of line items that saw some noise. Your answers have been really helpful and put some concerns at ease. The one I just wanted to go back to is healthcare and I think there were a few comments made, some about booking at the midpoint and things not being systemic. If I'm doing the math right, over the past 10 quarters, there's been $149 million added to the 2011, 2012 and 2013 accident years in healthcare. So, while it is noise each quarter, I don't think many would agree that that is insignificant. So, I guess the question is can you give us some color at what inning of the game you think we're at? If things are -- kind of been booked at the midpoint or whatever the view is, why do we keep kind of pay-as-you-go and not try to get far out in front of it and take a bigger, hopefully one-time sort of move that does put it in the rear view? Because to me that seems to be the one line that's had a little more systemic to it whereas I would agree that a lot of the others have just been a lot of noise. Thanks.

[Tom Bradley:]

Yes. Matt, I'll start and then hand off to Marshall. I'd like to put it in the context of kind of two areas, kind of do you kitchen-sink this. It is in the context of an overall reserve position that remains well comfortably over our midpoint. And so, from an overall balance sheet perspective, we feel very comfortable with that. We do go at it each quarter, with Marshall and his team estimating where we're. There is some incrementalization here kind of naturally as the book has evolved. We have been making a lot of underwriting changes. There has been a lot of competitive issues in that market and you've seen it shrink dramatically over that same 10-quarter period, quarter-over-quarter. So, the idea of is there a number that's one and done, I don't know if we know what that is other than just having something that's so big that it would be irresponsible. I don't want to say it like that, but it would be a guess to just do that. So, I'll hand it to Marshall for the details.

[Marshall Grossack:]

Yes. I mean, well, first comment I'll make is what all shows up to the analysts as healthcare. I'd like to categorize that. That really has been kind of different areas, so it's not like it's always been the same spot. So, the first few years or maybe those 10 consecutive quarters that you mentioned, was really more the E&O and D&O space and did have, I think, a lot related to the ACA and that type of thing.

[Marshall Grossack:]

And antitrust, so a lot of mergers were taking place because of the consolidation in the healthcare space. More recently, it had been on the pure medical malpractice, hospital professional liability side. So, I honestly would like to think that we're near the finish line on that, but I certainly can't put my hand on a Bible and say that. We're reacting, I think, in the right approach, as Tom mentioned and trying to get to that number.

[John Gauthier:]

Yes. A year ago, we talked a lot about making corrective action in the book and we did so on the professional liability-D&O and E&O portfolios and they're doing much better. As Marshall says, we're now starting to see more noise than we expected on the med mal book. It's still not wildly unprofitable, to the point where we're looking to exit the marketplace in total. We're trying to underwrite our way out of it and price for it and change it. That doesn't happen overnight and unfortunately there's just some lumpiness as we take more [indiscernible].

[Matt Carletti:]

I mean, we too agree and in aggregate you guys are very conservatively reserved. It's just on a quarterly basis it's sometimes just a little frustrating to kind of keep see it coming from the same place. Just one other question and it's I guess a little less reserves-oriented. But just, Scott, you mentioned how in trade credit you've started to diversify the book a bit away from Latin America and other places and I was hoping you could give us a little color on kind of just where -- behind Latin America where the next biggest exposures in that book might be right now.

[Scott Carmilani:]

Europe, but we're adding underwriting resources in credit management here in the United States, particularly out of the Southeast and up here in New York over the coming months and Canada as well. So, we've brought in new management there. We're moving some people out of Europe over. As you know, we bought an MGA that we had a strong relationship with in that business and some of that trend -- and they were very focused on Latin America. And we always knew that we wanted to diversify the book into more global product capability as part of a broader product offering. It looks like we've been a little slow to morph away from just the predominance of Latin American business and some of the woes that have been recognized in those economies.

[Operator:]

[Operator Instructions]. Our next question comes from Charles Sebaski from BMO Capital Markets. Please go ahead.

[Charles Sebaski:]

First question, Tom, I guess you mentioned that there is going to be -- you expect a stoppage of the capital management of the share buybacks. And I guess if I look at the contraction on reinsurance and some more RI, I would have conceptually thought that those would have been capital-freeing type moves. And so, I was wondering if you could just give us some thoughts on -- I realize there was a big block bought from Exor, but outside of the normal market activity, why you would just proactively put a pause on.

[Tom Bradley:]

Yes. As you know, when we buy back outside of this Exor transaction, we do it with a 10-B buyback program which is in the market every day and kind of runs on autopilot, so you just kind of generate up your number. I did leave myself a little bit of room, I said, for most of 2015 and so it's possible that it restarts later in the year. But, I think, given $194 million to date, I certainly don't expect anything in the third quarter and we'll look at it again in the fourth quarter as we get towards year-end. But, maybe it's a little bit of caution, but I think it's appropriate, given we've been targeting kind of the $200 million to $250 million per year if you look back the last couple years and we're materially into that. So, we do have the $175 million remaining. We'd like to use as much of that as we can between now and next May, but I just don't want to commit to exactly when we would restart that.

[Charles Sebaski:]

Okay. Well, that's fair. I know you gave a little bit of color on the global markets business and how some expense ratios and loss ratios has come through. But, I was hoping you could just help a little more. I mean, due to the resegregating of your business or re-reporting of your business, global markets is kind of lumpy back-looking and now some moving parts, going forward, with the incorporation of the Asian business. So, I was wondering if you could help out a little bit on, like, wherein overall expense ratio in that business should be running, because while you talk about 50 bps of kind of amortization in the acquisition ratio and some other parts, but they don't kind of have a clean starting point?

[Tom Bradley:]

Yes. I mean, I think the Asian business is a higher expense, lower loss business, as I described, so rough numbers, it's kind of a 40 expense ratio, mid-50s kind of loss ratio on a run rate basis. So, we think it fits right in the right mode. That's on top of the global markets -- or included in the global markets business which also has a little bit higher expense profile, but a lot of that's due to some buildouts that we've been doing in that business over the last several years. So, what I think corporately, we had been targeting, call it a 30%-ish expense ratio. I think our mix shift's up to more like a 31% range expense ratio overall while we continue to look to get scale in global markets overall. But, global markets currently for the six months at a 54, I think as the scale builds out in that business from the new opportunities, it should be down more like a 40% loss ratio -- expense ratio on a run rate basis.

[Charles Sebaski:]

And then, I guess on that as well, I know you saw the growth from the Asian market on the gross basis. I guess I would have expected a bit more on the net, as well and the net growth was less. Is it just a timing issue there with the Asian rollout or how you're reinsuring I guess just--?

[Tom Bradley:]

Yes. There was a little bit of complication there with the reinsurance. We replaced a number of coverages that they had in place which did put a dent in the net earned premium for that business. When that rolls over next year, most of that will go into a number of our global treaties and other types of restructuring of their arrangement. So, I would say we may be slightly over-bought the reinsurance right at the closing in order just to replace the coverages they had in place, even though we didn't have all the earned premium available to support those purchases.

[Marshall Grossack:]

Yes. It'll be mostly timing.

[Charles Sebaski:]

And finally, just curious about the reinsurance business and where you've contracted down. I was hoping you could just give some color on what the conditions were. Obviously your PMLs have come down and so there was some cat business. Just wondering if you talked about if it's just straight pricing or if you're looking at if it's terms and conditions. What were the things that got you to kind of pull back the reins some and any geographic context on where that is? I would appreciate any color you'd give.

[Scott Carmilani:]

Yes. Well, underlying pricing outside of North America is weaker than it's been in a while. But, in treaty terms, pricing in terms and conditions often ends around seeding commission. There's been a fair amount of seeding commission within the industry for everyone and as seeding commissions have crept north of 30 to various levels, low 30s to mid-30s, in many cases reduced at our lines or when you take a 34% seeding commission and add it to an expected loss ratio and combine it with the expecting underlining rates, you could very quickly try to justify writing a treaty at 180% combined ratio or higher and that's not really a very attractive proposal, from our perspective. So, we'd much rather growth the direct book in that scenario when it models out to north of a 110 combined expected outcome. So, if we have existing business that's now modeled to a higher combined ratio than we would otherwise get or would be targeting for the rest of the portfolio, we've either been reducing lines of support or getting off treaties altogether. And it's everywhere. There has been a lot more migration for seeding companies to global treaties versus North America and international to -- they might have bought separate treaties before. We may have participated on one or the other and then, the new go-forward program is just one global treaty which doesn't always model that well and you can hide lots of things in those kind of treaties. So, it's hard to say whether it's U.S. or international. I could tell you that their shrinkage is all over the place.

[Charles Sebaski:]

Is there any expectation that the commitment or capital to [indiscernible] sorry if I said it incorrectly, is going to change in 2016 due to market conditions?

[Scott Carmilani:]

TBD and there's no formalized commitment going forward.

[Operator:]

Our next question comes from Michael Nannizzi from Goldman Sachs. Please go ahead.

[Michael Nannizzi:]

A couple quick numbers ones, first, if I could. Tom, on North America, it looks like the retention was up quite a bit year-over-year. I'm guessing that may be partially a function of the reinsurance change that you made or maybe some of that was timing. How should we be thinking about retention in North America on a go-forward?

[Tom Bradley:]

Yes. We did retain more premium. Really at treaty-by-treaty basis, there were some treaties we bought more. There were a number on covering our profitable lines of business where we kept more net. So, I think the rate that you're seeing here is probably more typical what to expect, going forward.

[Scott Carmilani:]

Yes, that is a function of how we restructured many of the treaties. And as Tom has said, in particular lines, some of which we've been talking about ad [indiscernible] here. We bought more protection and others we bought less.

[Michael Nannizzi:]

So, we should think about that continuing, okay. And then, just to follow up on Charles' question in GMI, my question more about the kind of unusual relationship between written and earned premiums. So, you had -- looks like your written -- your gross premiums were high. Your net were low. Seems like that might have something to do with the transaction. But, then your earned premiums were substantially higher than your net written premiums. So, just trying to figure out, like, what should we be benching to from here? Is this net earned kind of a good number to be thinking about and there's some noise on reinsurance or is there some noise in the net earned number, as well?

[Scott Carmilani:]

There is definitely noise and a lot of it's timing and effect of the acquisition. We could try to come back to you with a more full-on response than that, but some of it's the effect of the new treaty. Some of it's the effect of what global markets used to be and what the Asian markets haven't really earned that business yet. So, there's multiple things going on at the same time there. If you were looking for a runway, I would look at more of an historical percentage of our growth as our earning.

[Tom Bradley:]

Quickly, at a high level, Mike, 30% [indiscernible] is probably about the right number.

[Michael Nannizzi:]

In GMI?

[Tom Bradley:]

Yes.

[Michael Nannizzi:]

Okay. And then, in the interim, there should be no -- I mean, it should be, once you earn through the business that you purchased, then it should just be a typical kind of written to earn pattern?

[Scott Carmilani:]

Yes. That has the typical 12-month month-by-month earning pattern.

[Michael Nannizzi:]

And then Tom, just back to one comment you made on the healthcare business, you talked about headwinds. I mean, is that headwinds that you expect in the form of potentially more development on these older years or individual claims? Is it a higher [indiscernible] loss ratio as you work through the re-underwriting process, both, neither? How should we be thinking about this part of the business?

[Tom Bradley:]

Yes. I mean, I think a lot of it is kind of competitive headwind. That's among the reasons you've us shrink it quarter-over-quarter. You heard Marshall say that we've been -- from a reserving standpoint, we're getting there, but we're not ready to declare victory just until we see a pattern where it had stabilized from a competitive standpoint, where we can have success in pushing these rate changes and underwriting changes through the business. So, by headwinds, I mean you may continue to see it shrink and as a result of that it may have some loss volatility. But, we're narrowing in on it quarter-by-quarter.

[Scott Carmilani:]

We have been raising expected loss, looking forward versus what it was.

[Marshall Grossack:]

Yes. I think that was definitely one of the messages Tom was trying to get across, is that I think our -- well, we still believe our healthcare business is profitable. I think the margins are less than we saw back 2008, 2009, 2010-type years.

[John Gauthier:]

Yes. Still positive ROE business, as Scott said. This isn't a business we're throwing away, but we're not happy with the level of ROE, but it is positive.

[Michael Nannizzi:]

Right. And I mean, I guess is there any way to think about, like, the rate-taking and underwriting actions you've taken and post-underwriting actions, have you seen deterioration or is this still related to -- because it looks like some of the adverse development was in the more recent books, as well. And I mean, to Amit's point, you guys started talking about some of these sort of trends in healthcare in 2014 and late last year. So, just trying to get an understanding of is it -- to your point, are you honing in on the target? You've taken some actions, so you're seeing more development and you're taking more actions? I mean, is that kind of where we're in this process at this point?

[John Gauthier:]

Yes. Understand, we're in the business to pay claims and hospitals do make mistakes and people are injured. So, we're there for that. what we're trying to do is minimize the lawyer pile-on and judgements and settlements, as well as the consolidation continues in that industry, try to help clients ensure better risk management practices and have some skin in the game. It's working with smart clients. And part of the problem when a number of big hospitals merge together and they're both for not-for-profit, the one thing they're trying to do is save money and group purchasing and insurance is in the crosshairs of all that. So, you can imagine that some are good at it and integration and some are not. So, some of that's underwriting and some of that's the actions we're talking about, both on the terms and conditions side, the pricing side. And unfortunately what we have to do is on our loss expectation side, plan better for what has materialized over the last few years compared to what it was four years ago and prior to that.

[Marshall Grossack:]

Yes. And I'll just kind of mention also, looking at it from an actuarial side, 2014 is definitely looking better than some of these more problematic years, 2011, 2012 and 2013. So, I do think the actions we've been taking are helping, but as Tom mentioned, a little bit early to take a victory lap on that since we're only 18 months into the 2014 loss year.

[Michael Nannizzi:]

Right. I mean, I guess I was having obviously a lot of questions on this. I mean, if there were a way to try and kind of ring-fence or at least provide some indication of how big this sort of pool of [indiscernible] risk is, policies that remain outstanding where there are claims and just showing kind of the actions you've taken and loss performance over that time, you guys obviously have it and we can't see it. And so, it's just hard to evaluate this without a lot of information. It's just something, if it's possible, it might be helpful.

[John Gauthier:]

Yes. I can assure you, there's a lot of internal brainpower working on this weekly.

[Operator:]

[Operator Instructions]. Our next question comes from Wayne Archambo from Monarch Partners. Please go ahead.

[Wayne Archambo:]

Just to get out of the weeds for a minute here, I just want to get your general take on the overall, it seems like a pickup in activity in consolidation in the industry, players coming out of nowhere making significant bids for others. How does that affect your business in terms of pricing as there's more consolidation? How do you see yourselves as part of the consolidation of the industry?

[Scott Carmilani:]

Interesting question. I would assume the same as any other industry. While a lot of things are happening and happening around us, in the short run that could create lots of opportunity and dislocation as there are less markets and-or changes in buying for large accounts. In the long run, it could change leverage in the distribution world and that could be good. And having less competitors could be good. So, we see it as a net positive for Allied World, because I think we've got a pretty strong position in the markets where we're targeting. How do we fit into it? We tend not to worry about that on a day-to-day basis and stick to trying to make money.

[Operator:]

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

[Scott Carmilani:]

I think we've had lots of Q&A, so I'll leave that to close the call. And thank you all for joining today. Enjoy the week.

[Operator:]

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