Aspira Women's Health Inc.
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Good morning, and welcome to the Allied World Assurance Third Quarter of 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sarah Doran, Director of Investor Relations. Please go ahead.

[Sarah Doran:]

Thank you, and good morning. Our press release, financial supplement and 10-Q were issued last night after the market close. If you’d like copies of any, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available through November 9 on our website as a teleconference 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 will note that statements made during the call may include forward-looking statements within the meanings of 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 events or otherwise. Additionally, during the call, management will discuss certain non-GAAP measures within the meaning of the 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. Let me turn the call over to Scott.

[Scott A. Carmilani:]

Thank you, Sarah, and good morning, everyone. Thanks for joining our call. We are pleased to announce another excellent underwriting quarter. Allied World generated a combined ratio of 84.2% for the quarter compared to 88.1% for the prior year, and a net income of $123 million or $3.54 per diluted share. We also did not experience any significant cat losses for this quarter. Our diluted book value per share grew a healthy 3% from the second quarter, a growth rate that is on par with that of over the last 5 years, to $99.16. Following a volatile second quarter, our investment portfolio gained 80 basis points for the quarter and approximately there a 1.2% gain year-to-date with increased returns from our noncore assets providing a nice supplement to our investment income. John Gauthier, our Chief Investment Officer, will give you all the details of that in a few minutes. This quarter also benefited with more than $61 million of favorable reserve development, more than half of which came from our Reinsurance businesses, positively impacting our combined ratio by 12 points. Marshall Grossack, our Chief Underwriter, will give you more details on that later. Our top line grew by over 15% for the quarter to $581 million of gross written premium compared to $504 million in the third quarter of 2012. This was driven by high double-digit growth in both our U.S. Insurance and Reinsurance businesses and almost 10% growth in our International businesses as we took advantage of attractive opportunities in what we see as a positive rate environment. On average, rates on our insurance portfolio were up 4% for the quarter. Casualty led that with a 4.5% rate increases, and property lagged at around 1.5% rate increases. Breaking out the segments, our U.S. Insurance segment, gross premiums were up 17% for the quarter over prior to $309 million for the quarter. As with last quarter, much of this growth was driven by our P&C lines. Casualty, programs and then the marine lines led that increase. We also continue to see some meaningful growth from our newer lines such as DBA, primary construction and surety. Notably, we benefited from rate increases across all of our U.S. Insurance business. Overall, those rates were up over 6% for the quarter. Their property rate's up only 4%, but casualty rate's up more than 7%. Our retention ratios in the U.S. segment are around 76%. The International segment saw a lesser increase of 10% in gross premiums for the quarter but still grew to $133 million, driven mostly by the transfer of an aviation book of business from Markel, which was done in conjunction with our recently announced entry into this line of business via a renewal rights transaction. We are writing our aviation business out of our European platform, which also includes our London Syndicate. Additionally, we saw some growth in professional liability driven by new initiatives in both Bermuda and in Europe. Overall, the rate changes in our International segment were down slightly to minus 1% for the quarter for both property and casualty lines. Our retention rates in the International segment, not surprisingly, are 2% lower than those in the U.S. segment at 74% as we try to keep pressure on rates and keep prices where we can and where they're possible. Finally, we continue to increase -- we continue to experience steady growth and opportunities in our Reinsurance segment. Premiums in this segment increased by 16% in the third quarter of last -- from last year to $139 million. This growth was driven by new business in our international platform, specifically from our Singapore and Latin American franchises. Notably, at $54 million, the segment underwriting income for the quarter was the highest in our company's history. And at a 48.5% loss ratio, this quarter was among the lowest. With our opportunistic focus on Reinsurance, we continue to find ways to generate meaningful profitability. Now let me turn over the call to Tom Bradley, our Chief Financial Officer, to discuss the financial aspects of the quarter. Tom?

[Thomas A. Bradley:]

Thanks, Scott. We generated net income of $123 million in the quarter or $3.54 per diluted share. This comparison with $220 million, or $6 per diluted share, in the same period of '12. In terms of operating income, we are reporting $102 million, or $2.93 per diluted share, compared to $79 million or $2.16 per diluted share last year. This quarter's operating income per share and underwriting income are among the strongest in the company's history. Underwriting income for the quarter was $80 million, representing an increase of almost 53% over last year. For the 9 months, underwriting income is $236 million, a 34% increase over the 9 months of '12. As Scott mentioned, the company booked over $61 million of favorable prior year reserve development during the quarter, consisting of $35 million and $30 million of favorable development in our Reinsurance and International insurance segments, respectively. This was partially offset by $4 million of adverse development in our U.S. Insurance segment. As Marshall will discuss, within the U.S. segment, we did strengthen reserves by about $4 million net, which includes $31 million of strengthening for the 2011 and '12 accident years, mostly offset by $27 million of favorable development in the prior years. This strengthening is mainly in the professional liability lines of healthcare D&O, private not-for-profit D&O and lawyers' D&O. Be assured that we are actively managing these lines. We will continue to take underwriting action to terms and conditions resulting in flat or reduced premium and reduced exposure. We are also taking rate action, and we are seeing rate increases approaching 15% in certain of these lines. We will continue to closely monitor and manage these areas until we are satisfied that they're profitable. Total investment return was $67 million for the quarter consisting of $39 billion of net investment income and net realized gains of $27 million. As Scott mentioned, we are increasingly seeing the positive contribution of our noncore investment assets to net investment income. But this quarter, a steeper yield curve in part drove a reduction in our net realized and unrealized investment gains, at least compared to the second quarter. The comparison to -- compared to the third quarter of 2012, the comparison to last quarter is quite a bit better. John will speak to our investment results in a few minutes. Our expense ratio was 30% in the third quarter, slightly higher than third quarter of last year's ratio of 29.4%. The main drivers of the higher expense ratio were higher acquisition costs due to profit commissions and higher accruals for performance-based compensation, including the impact of a higher share price during the quarter. Headcount is up 11% year-to-date to support our organic growth. In past years, our approach has been to adjust for much of our performance-based comp in the fourth quarter. But this year, we've been incorporating the estimated adjustments consistently throughout the year. I want to point out that the year-to-date expense ratio of 29.6% is right in our target range. Operating cash flow was $338 million for the 9 months compared to $500 million in the first 9 months last year. The decrease is attributable to a $173 million increase in paid losses driven by Superstorm Sandy and the crop reinsurance losses from 2012. We also increased our cashed outflow for net funds held by $57 million largely due to our participation in the collateralized property cat reinsurance program. We ended the quarter with diluted book value per share of $99.16, which is up 3% from the second quarter and over 7% from year end. During the quarter, we repurchased 427,388 of our common shares via our open-market 10b5-1 plan at an average price of $94.93 per share and a total cost of $41 million. As of last night, we had also repurchased 150,000 shares since the beginning of the quarter for $15 million, leaving our remaining authorization at $272 million. We've continued prudent share repurchases in tandem with our recently increased dividend and have an appetite to continue to repurchase our shares above book value. We ended the third quarter with shareholders' equity of $3.4 billion, up over $117 million since December, and a total cap of $4.2 billion with financial leverage of 18.8% and operating leverage of 0.61x. I will also note that we have tightened our financial close process in order to file the 10-Q at the same time that we release earnings, and we did so last night. I will now turn the call over to our Chief Actuary, Marshall Grossack, to provide some additional commentary on the loss ratio for the quarter.

[Marshall J. Grossack:]

Thanks, Tom. Our reported loss ratio for the third quarter of 2013 was 54.2%. This includes 12 points, or $61.5 million net benefit from reserve releases for the quarter, slightly higher than the amount released in the same quarter last year and on par with that of the third quarter of 2011. The current accident year loss ratio, excluding these items, was 66.2% for the third quarter 2013. Through September, our year-to-date reserve releases were $154 million with an accident year loss ratio, excluding these items, of 64.9%. The release of the $154 million year-to-date is also slightly ahead of the release for the comparable period last year and on par with that of the 2011 period. The Reinsurance segment had the most favorable development with $35.4 million. The International segment had almost $30 million of favorable development, while the U.S. Insurance segment had adverse development of $3.7 million. As Tom mentioned, the reserve strengthening in the 2011 and 2012 accident years for the U.S. segment was attributable primarily to higher-than-expected frequency for private and not-for-profit D&O and lawyers' D&O. In healthcare D&O, we had 3 large claims emerge, which caused us to increase our ultimate loss ratio selections. As of the end of the third quarter, our carried reserves are 4.4 points above the midpoint of our actual range. During the current quarter, we projected that our storm-related losses were $12.4 million comprised of $6.5 million from German hailstorms and $5.9 million from storms in Mexico. Neither of these events qualifies as catastrophes in both our [indiscernible] and our Reinsurance segment. I'd also like to provide a quarterly update to our PMLs. As of the third quarter, our one-in-250 and one-in-100 hurricane PMLs are $719 million and $556 million, respectively, with Florida as our largest contributor. Our one-in-250 and one-in-100 earthquake PMLs are $505 million and $349 million, respectively, with California being our largest contributor. As with last quarter, we're now disclosing additional PML information, including the parallels I referenced further broken up by zone on a table in Page 20 of our financial supplement. Let me now turn the call over to John Gauthier, our Chief Investment Officer, who will discuss our investment highlights for the quarter. John?

[John J. Gauthier:]

Thank you, Marshall. Good morning, everyone. Allied World investment portfolio was up 80 basis points for the quarter, producing $67 million on a total return basis compared to a negative 90 basis points or a $78 million loss last quarter. We had positive returns across all asset classes as our short-duration positioning in the core fixed-income space offset the steepening yield curve and we continued to see the benefit of our diversification strategy as equities, hedge funds, private equity and all other private securities all saw positive returns. As Tom mentioned, we generated $39 million of net investment income versus $38 million for the second quarter. During the last 3 quarters, we had seen our net investment income stabilize and start to increase, generating between $33 million in the first quarter and $39 million for this quarter. Year-to-date, our portfolio demonstrated positive performance with a total return of 120 basis points or $102 million. Breaking that $102 million return into more detail, key components included our distressed mortgaged-backed securities portfolio, which generated a return of $27 million; our bank loan portfolio at $14 million; equities generated a positive return of $25 million; and hedge funds and private equity generated returns of plus $57 million. These gains offset a loss of $21 million in our core fixed-income portfolio. It's been a tough year to make money in core fixed income with rates rising. Regarding the outlook for the market, on our last call we pointed to 3 potential headwinds to economic growth and capital market returns as we moved into this part of the year. One, the impact of potential fed tapering; two, the change in the fed chairmanship; and three, hyper-partisan bickering on the fiscal side. It now appears that the tapering may have a -- may have been delayed a few months, and markets seemed to have digested the announcement of Janet Yellen as the next fed chairperson. But it appears the term hyper-partisan in regards to the debt and budget debate may have been an understatement. We are hopeful yet realistic that the short extension to the debt and budget debate will not remain an overhang on growth and on return expectation through the remainder of the year. As for our overall positioning, we remain a short duration bias and will continue to diversify the portfolio into noncore assets, where we feel we are being well compensated. If you think about the allocation of returns so far this year, almost 50% has come from the liquid parts of the portfolio, representing less than 10% of the portfolio. Speaking of other private securities, Allied World Financial Services finished the quarter with approximately $138 million of value and minority stakes of our partners. We are pleased to report that those strategies have generated $5 million of net investment income this year. As for the portion of our portfolio managed by our AWFS affiliate, MatlinPatterson and Crescent Capital, total assets there managed as of 9/30 were approximately $850 million. Several of the strategies employed there have generated total returns in excess of 10% of the portfolio year-to-date, well ahead of the rest of the portfolio. So far, so good there. And with that, I'll hand it back to Scott.

[Scott A. Carmilani:]

Thanks, John. Let me end my remarks by saying that we are very pleased with Allied World's third quarter performance with excellent underwriting results, continued growth across all 3 of our segments and improved investment results from last quarter all contributing to our diluted book value growth in this quarter. Our goal has always been to deliver returns and book value appreciation, supported by strong underwriting and meaningful investment performance. We remain very optimistic about the company's prospects moving forward. We're confident that our platform and business mix are well suited for our clients and for the market, and we will continue to execute on the exciting prospects for Allied World going forward, generating strong turns -- strong returns for our shareholders and our clients alike. With that, I'm going to open it up for questions from the group. Thank you very much. Operator?

[Operator:]

[Operator Instructions] Our first question will come from Amit Kumar of Macquarie Capital.

[Amit Kumar:]

Just 2 quick questions. The first relates to capital management. You mentioned that you would have an appetite to repurchase above book value. Can you sort of go back and refresh us? What metric do you use in terms of buying back stock? Some companies would say net income equal to buyback plus dividends. Maybe just refresh us on the thought process for 2014.

[Thomas A. Bradley:]

Yes, Amit. We haven't disclosed the algorithm behind the 10b5 plan for actual buying. But in general, we've been returning over the last couple of years something on the order of 50% to 60% of our combined income, our consolidated income, and given us some room to handle growth and other shocks to the system. It's not hard and fast, but we look to still return a significant portion of that capital appreciation through dividends and the buyback.

[Amit Kumar:]

Got it. And I guess related to that, your cash and cash equivalent is a healthy $1.2 billion. I mean, is there something which might be imminent in terms of how you're thinking of deploying that? Can you just maybe give some more color on that?

[Thomas A. Bradley:]

No, there's nothing imminent in terms of deploying. There's some -- some of it was just timing, but others is there was some cash held back in terms of duration management and approaching the uncertainty of the government shutdown at the end of the third quarter. But nothing strategic beyond that.

[Amit Kumar:]

Got it. The only other question I have, and I will reach you after this, is on Page 16 of your supplement on the reserve releases, you mentioned Reinsurance, obviously, was a big contributor. In that $14.2 million from 2012, was there some sort of a one-timer or truing up? It just seems higher than the past, and that sort -- it sort of stood out.

[John J. Gauthier:]

That number is largely related to just the fact that the property results have been good. That's almost all property driven. And we've had a lack of anything coming in. And even, we've had a little takedown on the Reinsurance side for Hurricane Sandy would be another thing that was in there. So it's just been basically a first party kind of story.

[Amit Kumar:]

Got it. So it's more of an outlier this quarter than in the trend line?

[John J. Gauthier:]

Yes. Yes, well, we have another great year with no cats, Amit, [indiscernible].

[Scott A. Carmilani:]

It's a weather-related story, or a lack thereof.

[Operator:]

The next question will come from Sarah DeWitt of Barclays.

[Sarah DeWitt:]

The pace of your premium growth has been faster than what we've been seeing from a lot of others in the industry. Can you just talk about broadly what's driving that? And do you view that as sustainable going forward, particularly if the pace of rate increases slows?

[Scott A. Carmilani:]

Well, the pace of rate increases has slowed in property. I wouldn't say it has slowed in most of the casualty and specialty businesses that we're in. So that's on par from last year and this year and really for the last few years I've been keeping track. Our growth rate this year is slightly below last year but only slightly below last year. And we've got -- we had put a number of initiatives in place over the last few years that are just now sort of catching up to themselves and beginning to have scale. So dollars-wise, I think the growth rates that you've seen have been what we expected and what we've been planning for.

[Sarah DeWitt:]

Okay. And do you see more opportunity for that to continue going forward, whether that be through hiring more teams, or what are you seeing there?

[Scott A. Carmilani:]

We're always looking for opportunities domestically, internationally, globally, if I will -- if I may. We announced a recent team acquisition just last month, and I made a comment to that in regards to a renewal rights deal for an aviation team and portfolio in London. And we expect that to add value to the organization over time. And in any given year, we're always working on 3 to 5 initiatives, whether they're teams, book of business or geographic expansions for our company. We still view ourselves as relatively small and lots of room for growth.

[Sarah DeWitt:]

Okay, great. And then just looking at the reserves strengthening in the U.S. Insurance, we got these small additions for a couple of quarters now. What would it take to just put this behind you?

[Scott A. Carmilani:]

Yes. I'm not surprised by that question. This is mostly activity from the '11 and '12 year. And if you just think of the normal tail for our professional liability claims, we made business. It takes 2 or 3 years to wind itself through sort of an expected outcome and a little bit longer than that sometimes to pay out all claims. How long exactly and to what extent, we may be seeing that. It's really hard -- almost impossible to predict. I'll allow our Chief Actuary to comment in a minute. What I will say is we've made lots of changes to the portfolio through the end of 2012 and throughout this year, which we highly expect will change the future outcome of that business as we roll forward.

[Marshall J. Grossack:]

Yes, I mean, it's Marshall. I'll just jump in really briefly. Obviously, our goal is not to have to add to these lines every quarter. We have moved the 3 problematic lines, all to kind of the -- our high -- we always have a range of actual indications. And in this quarter, we have moved them all to the highest end of the range. It's not -- ranges can change every quarter as new information comes in, but we are definitely trying to get ahead of the issue.

[Operator:]

Our next question will come from Mike Nannizzi of Goldman Sachs.

[Michael Nannizzi:]

Just one question about the health care. So it was health care and professional lines, I think, that drove the favorable development in the U.S. Can you just talk about how that book is different from the International segment that I believe also has some of that same exposure, health care and professional liability, and kind of the diverging trends that the reserve development seemed to imply?

[Scott A. Carmilani:]

Yes. Well, let me be more specific. The -- on professional liability, what we're talking about is small company and not-for-profit D&O, and E&O specifically. So the lawyers' E&O for small lawyers. So it's not U.S. and International, it's size of account more so than anything else. The large account, professional liability, both performing quite nicely, and we've actually had takedowns in the quarter and this year, and that bodes well. So what we've done is really put a lot of effort into tightening terms and raising rates significantly. When we talk about the average rate increase for the portfolio or casualty in general, and I mentioned the 7% in the U.S., when we talk about that portfolio, it's really closer to 15% to 20% rate increase because we need to do it, and we've tightened down terms and conditions everywhere we could. And that's caused our retention ratio on the portfolio overall to slip. So even though we're getting a lot more rate, the size of that book is actually decreasing. So that -- those 2 lines of businesses are shrinking within the company as we sit here today. Hopefully, those terms and conditions will stick and other competitors in the industry, who I'm sure are experiencing similar issues, if not even more so or less so, when they catch up to that and there's more discipline in the market, I think you'll see a turn holistically in the not-so-distant future. On the health care side, it's really just a matter of 2 or 3 large losses that popped. We're in the business to pay claims, and there's been a couple of large hospital systems that have had legal issues. And so the D&O for those large hospital systems have come under scrutiny in either conjunction with legal matters that involve the whole system either through mergers or acquisitions, Department of Justice, there could have been any number of different variables that caused it. And so, the actuaries have added a couple of loss ratio points to that expected outcome not because we paid the claim, but we expect it -- we see it coming. And that's really more of the noise you see there. I think the net increase is only a couple of million dollars there.

[Michael Nannizzi:]

Got it. It's great. And Marshall, if I could with a follow-up on the -- in the Reinsurance segment, is that favorable development that we've seen for '11 and '12 accident years, is that cat or is that non-cat property?

[Marshall J. Grossack:]

That would be a -- it's a mix, but it's probably more cat than...

[Scott A. Carmilani:]

They wouldn't -- the takedown for Sandy Marshall mentioned.

[Marshall J. Grossack:]

Sandy takedown, yes.

[Michael Nannizzi:]

Got it. Because I'm just looking like if we look at like the losses from 2012 that you booked in the years something in the neighborhood of $80 million. And so I'm just trying to understand, does that mean that your cat losses for '12, you booked them at $80 million, and those -- or maybe -- Marshall, maybe you can let us know like where have -- where does that $80 million kind of move down to as a result of time and development?

[John J. Gauthier:]

Yes, I don't know if I can answer that specifically to the $80 million, but there have been specific -- I know just off the top of my head, we've had a takedown on the Sandy and the Reinsurance. We also had a takedown on 2011 from the tsunami in Japan in our Reinsurance book value of about $5 million there as well. So...

[Scott A. Carmilani:]

And also maybe just to clarify a little bit, when we talk about the Reinsurance cat losses, the only 2 official cats we had last year were Sandy and a small loss in Isaac, both in the Reinsurance segment. We also booked a planned attritional loss ratio throughout the year, which we'd leave up until we're happy to take that down. And so much -- some of what you're seeing come down during '13 was booked IBNR for nonspecific cat events that were associated with those reinsurance treaties.

[Operator:]

Our next question will come from Dan Farrell of Sterne Agee.

[Dan Farrell:]

A couple of quick questions for you. Just on the other investment income from private securities, I was wondering if you could talk about how you think of that trending forward as those investments that you've made season? And then also, what's the potential of doing some other stuff there on the acquisition front to continue to grow that area?

[John J. Gauthier:]

Yes. I mean, depending on the underlying investment, you'll see some kind of potential volatility in that. But we'd like to think that $5 million over 0.5-year period would be a baseline from which to grow, not significantly, but we think it's a good kind of starting point so you can annualize that. Remember there's a 1-quarter lag in how we report that. So that $5 million year-to-date is really a 6-month number, not a 9-month number. Within that kind of a hedge fund and P&E space, we've got -- and we disclosed in our financial supplement the unfunded commitment. As those get drawn down and invested, we could see some decent return coming out of those as well. So we'd like to think there's some -- that this is kind of a baseline with some modest upside from here.

[Dan Farrell:]

That's helpful. And then on reserves, I actually wanted to ask you about some of the middle years. In 2000, they're still seeing some health reserve releases. How do you think the IBNR levels that are still left in, say, from 2006 to 2010 and in particularly the '09, 2010 years? How much stuff there hasn't been touched yet that much because of the tail? I know for some lines you'll wait 4 or 5 years before you start looking at stuff. So maybe you could just talk a little bit about your view or where we stand in some of those accident years.

[Scott A. Carmilani:]

It's something we always healthily debate every quarter and sometimes more than that between management and actuaries. And there's some scientific methodology that goes -- that gets injected there. And it would be no surprise that Marshall and I will have a slightly different opinion from both sides and end up somewhere in the middle. Marshall, do you want to comment?

[Marshall J. Grossack:]

Yes, yes. It is always an issue of debate. I mean, when we think about those years, you got to split it between our -- kind of our U.S. business, which is more primary, and our Bermuda and International direct business and our Reinsurance longer tail lines, which is either more excess or, as a reinsurer, we're further removed from it. So on the U.S., we do kind of let that go a little more quickly because we're closer to the business. But on the International and the Reinsurance, we actually have a roundtable every quarter where we're going over every loss that's been reported to us out there, whether or not there's a case reserve on it, to try to get some feeling for whether there are some claims out there that could use up some of that IBNR, and then we kind of look at all the limits of those compared to our total held IBNR. So we're pretty cautious in letting go of that.

[Scott A. Carmilani:]

We do publish in the supplement the year-by-year takedowns and the IBNR that's left in those years. So that is in the supplement.

[Marshall J. Grossack:]

Right.

[Scott A. Carmilani:]

And I guess if you're asking, am I comfortable with the level of IBNR we have in those years, I would say yes.

[Operator:]

Our next question will come from Ian Gutterman of BAM.

[Ian Gutterman:]

I guess, let's see, first, on the International segment, on an accident year basis, you're kind of in the 99 for the year, sort of the mid-90s. That's up a few points from last year. I was just kind of curious, how do you think about that? Has mix shift made this more of a mid- to high-90s accident year-type business? Or are there some unusuals in there?

[Marshall J. Grossack:]

Yes, there are a couple unusuals in there. There was a large $5 million claim on our Bermuda cash lead book that it's unusual for something to hit and that we know about it within the same accident year, but we knew about this and decided we really need to kind of bump up our loss hit by $5 million just for that. And also, there's a large semiconductor fire out in, I believe, in China that was $2 million. And then we also had a few other kind of property-related claims that are a couple of million more.

[Scott A. Carmilani:]

There were some global cats this year. They weren't big enough to be named cats for us. But we did have some loss in the German hailstorms in the Reinsurance side, and we did have some loss in the U.S. But they weren't big enough to -- and the Mexican floods. But they weren't big enough to be called cats for us. So they were under our threshold. But they added it up to $5 billion, $6 billion, each one of those things.

[Ian Gutterman:]

Got it. That makes sense. And Scott, can you talk a little bit more about the aviation deal with Markel? And, a, sort of what your angle is on that? And, b, sort of why it's a good timing? And there's been a lot of people who've been very pessimistic on pricing in the aviation market.

[Scott A. Carmilani:]

Yes. Well, I think there's people who've been pessimistic on the aviation market who've been in there a while and seen the rate deteriorate for a number of years now. I can't argue with that. But I think if you're going to be in the aviation business, you've got to have the right team and you got to have what I would call top-tier pricing mechanism to do that. So we were fortunate to be able to acquire a top-tier team from Markel because Markel, I guess, decided they didn't want to be in that business and be in it from London. And for whatever reason, had some bad experience in prior years before and nothing to do with this team's performance or in their acquisition of Alterra. It's actually the Alterra team they acquired in their acquisition and just didn't want to -- it just didn't fit their core appetite. So we've made a mutual agreeable deal to transfer it over to us. It's probably a $40 million to $50 million book of business on an annual basis. But the way we did it, we ended up taking the in-force business from this year and the team. And so, we were -- we had to book some premium right away.

[Ian Gutterman:]

Got it. And is that a -- are you playing typical large account, large -- playing across the market? Or is there some kind of niche to it where you're doing small aviation, some kind of a [ph] class? Or is it just -- what kind of risk are they?

[Scott A. Carmilani:]

It's not a world [ph] class type of thing, but it will be very opportunistic. It's not going to be a $200 million, $300 million major player in the market but more likely going to be a niche, specialty and opportunistic player in that space.

[Thomas A. Bradley:]

But it does have a nice spread of business. In addition to writing the traditional mix of general aviation, there's also airport facilities in there. So it's spreads out.

[Scott A. Carmilani:]

Yes. But it's not at all pure aviation. It's got a lot of [indiscernible] business in it and along with what they call GA or the general; aviation market.

[Ian Gutterman:]

Okay, that's what I was wondering. And then maybe my last one is, can you just talk a little bit about competition in -- pricing competition in professional lines and medical? It sounds, I guess, anecdotally in professional lines that the primary is holding up a lot better than excess. Are you seeing that? And then medical, it sounds like there's been people maybe pulling back on medical, some due to pricing coming down.

[Scott A. Carmilani:]

Yes, I think all those comments are valid. There's close to 40 markets that we compete against in the professional liability and D&O space in particular. Where there has been trouble, we are seeing significant rate increases. It has flattened a bit in some of the larger class D&O business but still a lot better than it was 3 years ago or 4 years ago. So it has improved, and it is -- actually, the frequency into [indiscernible] that portfolio is quite a bit down. So we're quite satisfied with that. On the health care side, there had been some noise, there had been some losses. And you heard about our activity in that regard. And there are more people that seem to be competing in the space. There have been some markets that have pulled back. We're in both the primary and excess space in the health care market as we see ourselves as sort health care leaders. On the primary side, where we're able to inject risk management alongside with the clients, I think that portfolio is still performing quite well. And you can almost akin that to engineering the risks. Unlike in FM Global [indiscernible] in property, we try to do that kind of risk underwriting on the health care side. There -- that's an area of business that the margin was so much greater than a lot of the other business that even 10 points of slippage still makes it one of the more profitable lines of business we have. So we're paying attention to it. We're making sure we're underwriting it. And we're making sure we manage the claims that we do have. And that's what we're in the business for, to pay claims where people are -- make mistakes. And that is the ones where it's egregious on the plainest part.

[Ian Gutterman:]

Understood. And then on the professional lines, comment -- or do you see a risk appetite changing within classes or want to move down from excess more to primary? Or just any sort of changes in strategy as we go into next year?

[Scott A. Carmilani:]

Yes, yes. Well, that's -- not even as we go into next year. That's been ongoing all this year, and we've writing a lot more primary where we control our destiny, I mean, a little bit more and have a little more capability of managing the whole process for sure. And you're right, the rate environment in the primary market is holding up better than the higher excess market.

[Operator:]

Our next question will come from Bob Farnam of KBW.

[Robert Farnam:]

Actually just one quick question. Tom, you were mentioning kind of a budget for cat losses. Can you give us an idea of much you do assume in your numbers for an annual cat load?

[Thomas A. Bradley:]

Probably not. And just to be clear, we only do that on the Reinsurance treaty book. We book kind of an attritional cat loss ratio each quarter or throughout the year just given that it's directly a cat business for Reinsurance property cat treaty, and then we would pull that off if it's not needed. But we haven't shown what that is.

[Operator:]

The next question will be a follow-up from Amit Kumar of Macquarie.

[Amit Kumar:]

Just a few clean-up questions. First of all, and I hope I say this right, can you give us an update on Aeolus -- did I say that right? Aeolus 3 [ph] for 2014? How should we think about that?

[Scott A. Carmilani:]

You said it right. And if they're listening, they're very happy. Thank you. The big cat space has had a very -- relatively quiet year. Aeolus is only 9 months. And if you -- for those who have good memories, this is the week that Sandy hit last year, although I can say astronomically the high tide for the month is done. So it's not likely to have a repeat of Sandy even if we had a major hurricane in the next 10 days. So wind season is rapidly -- or the probability of a wind event is rapidly deteriorating as we sit here today and will be over in 2 weeks' time completely. But you never say never. But so far, through 9 months, Aeolus is having, as you would expect, an extremely good year. Do you have anything to add to that?

[John J. Gauthier:]

No, I'll just say they're starting the fund raising for next year, and we're optimistic that the people who have participated, the institutions that have participated in 2013 profitably will participate again next year. And as a partial owner, we'll be a recipient of that -- those fees. So much [indiscernible] there.

[Amit Kumar:]

I guess what I was trying to ask is, does it get upsized or downsized based on the capital position in the industry?

[Scott A. Carmilani:]

Does our investment get upsized?

[Amit Kumar:]

yes. Yes, yes.

[Scott A. Carmilani:]

Well, our investment is pretty fixed. We have a commitment of funds that we put into it, and that goes up slightly, but not much. Not materially.

[Amit Kumar:]

Got it, that's helpful. The only other question I had was with the discussion on recent broker facilities. You might have seen the recent discussion on the [indiscernible] 360 [ph]. There's similar arrangements. What are your thoughts on these arrangements? And what impact does it have on your book?

[Scott A. Carmilani:]

I expect that to have 0 impact on our portfolio, and I will go way out of my way to ensure that.

[Amit Kumar:]

Got it. That's helpful. And then I guess the final question I have is on Berkshire Hathaway and their expansion into the surplus lines market, if you will. I would presume that account sizes are different. So it's -- is there not much of an impact? Is that fair to assume?

[Scott A. Carmilani:]

I think you should ask Warren Buffett that question.

[Amit Kumar:]

I think I should then. But in all seriousness, has it -- would it have an impact? Do you feel that? Or is it too early?

[Scott A. Carmilani:]

I see them as a 41st competitor in the E&S market, and I wish him well.

[Operator:]

[Operator Instructions] Your next question will be a follow-up from Mike Nannizzi of Goldman Sachs.

[Michael Nannizzi:]

I was hoping I could get a little bit more clarity on the sort of the change in the way that you're recording comp expense sort of you've got from doing it in the fourth quarter versus -- or doing it pro rata throughout the year versus just in the fourth quarter. Can you talk about how much of the lift in the expenses year-over-year in that G&A number is, the comp piece versus new headcount?

[Thomas A. Bradley:]

Yes, it's mostly new headcount, frankly, along with the growth, but just that the comp accruals are a little lumpier. And actually, the G&A ratio from third quarter this year to last year is actually down. But from a dollar standpoint, it's one of the few type of accruals that we would make that isn't just kind of a routine salary thing. So it's, in total, less than $10 million for the quarter.

[Michael Nannizzi:]

Right. And is that -- is the headcount split relatively evenly? Or on a -- if we were to look at premiums and allocate that way or think about it that way, is that right? Or is it mostly on the insurance side?

[Thomas A. Bradley:]

No, it's mostly Insurance and International. The Reinsurance business is pretty low fixed cost, not that we're having to add a couple of people, along with backroom support, back office-type that gets kind of allocated across. But we've been careful to manage that up, and consistent with the growth, to maintain some leverage on the expense ratio.

[Michael Nannizzi:]

Got it. Great. And then in the property reinsurance business, you had some growth there, how much of that came on placements where maybe Aeolus had some participation and where you got to look at stuff that you hadn't before? Or how much of that is completely separate and away from them?

[Scott A. Carmilani:]

Some. I'd say 3 or 4 transactions we did alongside Aeolus and helped them and helped us at the same time. Dollar-wise, I couldn't give you a quote on that, but I can tell you that our cat portfolio with Aeolus is 30%, 40% of what we do in total on that reinsurance side today.

[Michael Nannizzi:]

And is that -- is -- most of that growth in property reinsurance, is that U.S. or is that global?

[Scott A. Carmilani:]

Global.

[Unknown Executive:]

Global.

[Scott A. Carmilani:]

It's global. The -- when I made my comments about the treaty reinsurance book growing and saying it's coming from the Singapore office in our -- and our Latin American underwriting platform, which we do out of Miami, by the way, those got -- both those books grew substantially, and a lot of it is property or property cat related.

[Michael Nannizzi:]

Got it, got it. And then just last one. One thing I'm just curious in terms of whether it's the U.S. health care book or maybe elsewhere, where do you see opportunities emanating from potential changes in health care reform, whether it's on a public or private exchange? Is there a touch point or an opportunity for Allied World just given potential changes there?

[Scott A. Carmilani:]

Well, there's opportunities and there's cautions as ObamaCare gets implemented. Aside from all the noise you hear in the papers or, I should say you read in the papers, hear on the news, one of the main effects we're seeing is the increase in the number of doctors who become employees of health systems and the amount of M&A activity that's going on amongst hospitals merging together to get economies of scale and better buying power. So with that, that greatly increases our opportunities because just the hospitals and the hospital systems that we insure are much bigger. The flip side to that is the exposures are also growing quite a bit too, and so risk management becomes paramount. And this is new territory for a lot of these systems, both on the M&A, antitrust, how they work within the ObamaCare. And a big part of what a -- what the bill does is require much more documentation of employee records, both from the patient care and prescription business, which is an antiquated -- if you think insurance is antiquated in there, the use of systems in health care is 10 years behind that. So there's a long way to go, and a lot of mistakes could be made in how they get up to speed on that. So we're very on top of that responsible market, and we're helping our clients any which way we can. We also recognize in -- that the exposures are growing a lot. So if you think rates are coming down, exposures are going up, we've got to get a lot more money and get clients to understand that their risk is different going forward. So that's a different message than -- when you're sitting down in a renewal meeting than we've had in a while. The other stuff you -- what you're reading about and seen about, the -- people subscribing to the online stuff and all of that, that has nothing to do with us. That's benefit providers and the Blue Crosses of the world. To the extent we do D&O insurance for some of those exchanges, we've got to pay attention to it. But from an actual business standpoint, that doesn't hurt us per se.

[Operator:]

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Scott Carmilani for his closing remarks.

[Scott A. Carmilani:]

I'll just say thanks, everyone, for your time. Thanks to the team for getting our 10-Q and everything out early this quarter. We look forward to coming out earlier in the process every quarter going forward. And thanks to all. Have a great day.

[Operator:]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.