Aspira Women's Health Inc.
Q4 2013 Earnings Call Transcript

Published: 6 Feb 2014

[Operator:]

Good morning, and welcome to the Allied World Fourth 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 Mei Zhang [ph], Investor Relations. Please go ahead.

[Unknown Executive:]

Thank you, and good morning, everyone. Our press release and financial supplements were issued last night after the market close. If you'd like copies of either, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available through February 21 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 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 not limited to, those disclosed in the company's filings with the Securities and Exchange Commission. 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 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 now turn the call over to Scott. Scott?

[Scott A. Carmilani:]

Thanks, Mei [ph], and good morning, everyone, and thanks for joining our call this morning. We're, of course, pleased to announce another great year of results for Allied World. The company ended up 2013 with a diluted book value per share of $102.58, up 11% from prior year, driven by our strong underwriting results and solid investment returns. The company achieved a combined ratio of 86.2% for the full year, a very good operating result by any comparison, compared to 94.5% in 2012. This year's net income was $418 million or $11.95 per diluted share. The investment portfolio gained a healthy 140 basis points for the quarter, approximately 2.6% for the year. With increased returns from our non-core assets beginning to complement our core investment income, we're happy with that result. Our Chief Investment Officer, John Gauthier, will give more details on our investment results in just a few minutes. For the year, our results benefited from $180 million of net favorable reserve development. The majority of which came from our international insurance and our reinsurance segments. Reflecting on the fourth quarter alone, and as I've referenced briefly in prior calls, the changing new health care laws and practices likely puts a little bit of stress into that industry and puts it into a state of flux for some period of time while it works itself out, and we have been seeing a bit of an increase in potential claims in our health care-related businesses, mostly due to mergers and antitrust legal challenges. As has always been our approach, we are quick to get in front of potential adverse development in a prudent manner. In the fourth quarter, we completed a review of those potential exposures in that area and are adjusting our carried loss reserves for the 2012 and 2013 accident years as a precaution. I would and should have emphasized that it's still very early days for these manners, and they will likely take months, if not years, to resolve as they make their way through the court systems. I should also emphasize that we've already been making significant underwriting adjustments to the terms, conditions and pricing to these policies wherever possible and believe that we are a first mover among many of our competitors in this space. We'll, of course, be closely watching this space and closely watching it over the coming quarters. Our Chief Actuary, Marshall Grossack, will be giving you some more details in just a few minutes. We'll also be spending a great deal of time with our customers and our brokers and increase dialogue on the subjects so that we can help everyone work through these issues. It's our intent to be in this business for a long time, as we have been in this business for a long time, and continue to think we will be in this business for a long time to come. Company's top line grew by 18% for the year to $2.7 billion in gross written premium. That compares to $2.3 billion last year. This was driven by double-digit growth in all 3 of our business segments, 23% in reinsurance, 17% in the U.S. insurance business and 12% from our international insurance segment. On an average, our rates across our insurance portfolio were up a modest 2.5% for the quarter, with overall casualty rates being up 3.5% and property rates being down by almost the same percentage. In our U.S. insurance segment, gross premiums exceeded $1 billion for the first time in 2013. They're up 17% for the full year to actually $1.2 billion, attributable to strong new business across most of our lines and regions, as well as meaningful growth in our newer lines, like construction and surety, as an example. This was partially offset by the nonrenewal or loss of business in some of our health care and other related professional lines business as we did not get to meet our return to threshold for some of that business. Overall, in the U.S. business, our rates were up a healthy 5% for the segment for the fourth quarter, with our casualty rates up over 5% and property rates basically flat to 1.5% at most. Overall, our retention rates in the U.S., as you might expect, given everything I've said, are modestly lower than they have been in a while and, for the quarter, a mere 70%, mostly driven by our corrective actions as we've attempted to change rates and make corrections in some of this business, where we can. In January, we announced that Gordon Knight was retiring from his position as President of our U.S. insurance segment. Gordon has been an integral part of building out our U.S. franchise and of our successes in the same space. Over the past 6 years, we've been very pleased and honored to have him as part of our company, and also, we're very happy that he'll remain part of our company as -- in an advisory capacity as we go forward. Succeeding Gordon as our new President of Allied World North America is Lou Iglesias. Louis has almost 30 years of technical underwriting experience in this industry and has an exceptional reputation in the marketplace with both our distribution partners and many of our clients. I'm looking forward to working closely with Lou as we continue to build out our North American operations. The international segment, that saw a 12% increase in gross premiums for the full year in 2013, now up to $642 million, driven by growth in most of our lines of business and continued expansion of new initiatives such as our small professional liability in the U.K. and our aviation business we started back in October. This segment had a very strong quarter in terms of gross production of $188 million as we saw this growth coming from all 3 geographic regions

[Thomas A. Bradley:]

Great. Thanks, Scott. For the full year 2013, the company generated net income of $418 million, operating income of $364 million and underwriting income of $278 million. This was driven by 15% growth in net premiums earned, continued favorable prior year development and relatively light cat losses for the year. The company booked over $180 million of favorable prior year reserve development in 2013, consistent of $106 million and $96 million of favorable development in our international insurance and reinsurance segments, respectively. This was partially offset by $22 million of adverse development in our U.S. insurance segment. The only catastrophe event in the year that met our reporting threshold was a $13.5 million loss for Typhoon Fitow in the fourth quarter within the reinsurance segment. This compares to $180 million of cat losses in '12, substantially all of which was attributable to Superstorm Sandy. Our expense ratio was 30.2% in 2013 compared to last year's ratio of 29.4%. The entire increase was in the acquisition ratio component, which increased from 12.6% in '13, up from 11.8% in 2012. This is primarily due to higher profit commissions related to our property cat reinsurance book, where we experienced mostly benign cat activity during the year. The G&A component of the expense ratio remained consistent with 2012 at 17.6%, even as we increased headcount by 14% to support our organic growth. The total investment return was $217 million for the full year, consistent of $157 million of net investment income and net realized gains of $60 million. We are increasingly seeing the positive contribution from Allied World Financial Services and our other non-core investment assets in these returns. John will speak to this more in a few minutes. Operating cash flow was $114 million in 2013 compared to $629 million in 2012. This decrease was driven by a $300 million increase in our funds held balance for the year relating to our participation in the collateralized property cat reinsurance program with Aeolus Capital. Additionally, the decrease in cash flow was attributable to a $230 million increase in paid losses for the year, including over $100 million of claims paid related to Superstorm Sandy. With regard to that program in Aeolus, I can point out that already in 2014, we've received over $200 million of reimbursement of funds held from prior underwriting years. During the fourth quarter of 2013, we continued our share buyback strategy, utilizing a 10b5-1 plan. We repurchased 480,311 of our common shares in the open market during the quarter for a total cost of $52 million. As of last night, we had also repurchased 210,000 shares since the beginning of the quarter for another $22 million, leaving our remaining authorization at $213 million. For the full year of 2013, we repurchased shares totaling $175 million at an average price of $94.52 and paid dividends of $64 million, returning $239 million to shareholders. This represents 57% of our 2013 net income. We continue to have appetite to repurchase our shares at current values and above. We ended the quarter with diluted book value per share of $102.58, up 11% from a year ago. We ended the fourth quarter with shareholders' equity of $3.5 billion, up over $190 million for the year. Total cap at year end was $4.3 billion, with financial leverage of 18.5% and net operating leverage of 0.6x for the year. I will now turn the call over to our Chief Actuary, Marshall Grossack, to provide some more commentary on the loss ratio for the quarter.

[Marshall J. Grossack:]

Thanks, Tom. Our reported loss ratio for the fourth quarter of 2013 was 60.2%. This includes 5 points or $26.4 million net benefit from reserve releases for the quarter. The 2013 accident year loss ratio, excluding prior year adjustments, was 65.3% for the fourth quarter of 2013, which compares to 94% in the fourth quarter of 2012 when Superstorm Sandy hit. For the full year, net reserve releases were $180.3 million, with an accident year loss ratio, excluding prior development, of 65%. This compares to 74.8% in 2012, which, again, reflects the impact of Superstorm Sandy. Drilling down by segment, in the fourth quarter of 2013, the international reinsurance segments had favorable -- net favorable development of $21.2 million and $15.9 million, respectively, while the U.S. insurance segment had net adverse development of $10.7 million for the quarter, largely due to the managed care E&O and healthcare D&O claims that Scott addressed earlier. The impact of these claims is somewhat offset by our reducing reserves in the U.S. segment for the 2010 and prior accident years. Also, in the U.S. segment for the 2013 year, we recorded additional net IBNR of about $25 million in the quarter. This strengthening was related to 3 elements; first, the managed care E&O and healthcare D&O antitrust claims; second, increase in our 2013 loss picks for lawyers E&O and private and not-for-profit D&O; and third, several large fires impacting our property line of business. As Scott mentioned, we are actively managing these lines and taking corrective actions as it relates to pricing and terms and conditions in order to mitigate our exposure going forward. As of the end of the year, our reserve position sits at 4.3% over the midpoint of our actual range. This is largely consistent with the year-end 2012, where we estimate our reserve position to be at 4.5% over the midpoint. The favorable loss reserve development during the quarter continues to be a function of overall actual losses emerging better-than-expected. I'd also like to provide the quarterly update to our PMLs. As of the fourth quarter, our one-in-250 and one-in-100 hurricane PMLs are $764 million and $582 million, respectively, with Florida as our largest contributor. Our one-in-250 and one-in-100 earthquake PMLs are $576 million and $387 million, respectively, with California being the largest contributor. 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. As Scott and Tom mentioned, Allied World investment portfolio was up 140 basis points or $115 million for the quarter and 2.6% or $217 million for the full year. We have seen a sequential increase in investment income every quarter in 2013, beginning at $33 million in the first quarter to $47 million in the fourth. Breaking down the $217 million full year return, the core fixed income portfolio was roughly flat for the year, in spite of meaningful rises in interest rates of over 100 basis points. So while we were able to avoid losses on the largest portion of our assets, we were also able to generate positive returns from our non-core portfolio. High yield and bank loans returning $53 million, equities returning $72 million and our non-affiliated hedge funds and private equity portfolio returning $92 million. We'll talk about Allied World Financial Services in a minute. While rates rose and equities rallied meaningfully during 2013, we continue to believe that a short duration overweight risk asset strategy makes sense as we move into '14. During our last 2 calls, we've talked about 3 meaningful risks to our domestic markets, the beginning of fed tapering, transition to a new fed share and hyper partisan politics in Washington. It seems like we've actually moved beyond those risks, at least for the time being, but other risks have emerged, including increased concerns about emerging market economies. Our emerging market exposure is fairly minimal, and we continue to provide full transparency on our holdings by country, which can be found on Page 26 of our supplement. We remain optimistic for higher-than-consensus growth in the U.S. economy, which should portend good things for our portfolio positioning. While we had modestly extended duration in the fourth quarter, we've taken advantage of the recent equity market sell-off and bond rally to increase equity exposure and further shorten our duration here in January and February. Even with the turmoil in the capital markets, we had a positive return of around 25 basis points for the month of January. Turning to the Allied World Financial Services, we finished the quarter with approximately $147 million in minority interest stakes of our partners, most of the increase of the year coming from the equity accrual, which is basically our share of their earnings. In addition to those partners generating excellent returns on the assets and liabilities they manage for us, we are pleased to report that our equity investments are also targeting to generate returns. As a group, the AWFS segment generated $9.6 million of income for the quarter and $14.7 million of investment income for the full year. Remember that we report on a quarter lag, so the $14.7 million is actually 3 quarters of results. While there's some seasonality to some of these businesses, annualizing a 3 quarters income of $14.7 million would generate a first year return of over 15% on our investments, in addition to all the other benefits we received. The returns from Allied World Financial Services equity investments were the dominant cause of the 20% increase in net investment income between the third and fourth quarter. As I've said for the last few calls, with Allied World Financial Services, so far, so good. And with that, I'll hand it back to Scott.

[Scott A. Carmilani:]

Thanks, John. In closing and before questions, let me end up my remarks by saying again that I am very pleased with Allied World's strong 2013 results. We believe that the planned and slow build-out of our global operations, as well as our disciplined underwriting philosophy, has been driving strong key financial metrics. Over the last 5 years, the company has reported an average combined ratio of 87.5%, which when you combine that with our solid investment returns, it's helped to generate an average net income ROE of over 16% over that same period. Book value growth for our shareholders has always been a top priority, and these results have allowed us to grow diluted book value per share, adjusted by dividends, by 136%. We will continue to strive for double-digit value growth, and we remain very optimistic with our prospects as we head into 2014 and beyond. I'm confident that this company is well-structured to perform and compete in most of the markets we serve and ready for all economic conditions we face. And with that, I'm going to open it up to questions.

[Operator:]

[Operator Instructions] And our first question is from Matt Carletti of JMP Securities.

[Matthew J. Carletti:]

I just had a question on the adverse in the U.S. insurance. I was hoping we could dig into it a little deeper. And I guess, preface this is with, I realize that the net numbers we're talking about don't add up to a ton in any given quarter, but it is 4 out of the last 5 quarters that we have seen net adverse in U.S. insurance. And so whatever color you can provide will be helpful in terms of maybe how your view of the real estate and professional liability and health care has evolved over the past few quarters in terms of giving us, as analysts and investors, some comfort that you're getting further out in front of this and that, hopefully, 2014 doesn't see a similar trend of kind of playing catch-up. And whatever you can provide will be helpful.

[Scott A. Carmilani:]

Yes, Matt, this is Scott. I'm happy to address that, and I'm glad you asked the question because I know it seems to be on people's mind. I, of course, think it's a lot less of a big deal than I think you do. Most of the adverse development we had put up in the previous 3 quarters before weren't really health care, they were more small PL and E&O lines of business, not directly health care. So I think we've addressed most of that throughout the year. And what's happened in the fourth quarter is really not coming from that. I think that's been fully addressed. What's happening -- what we did in the fourth quarter is really do a deep dive on the healthcare-specific D&O and E&O lines, and there's been a rash of recent activity, as I mentioned specifically on the call. I have to be very careful with what we say because this is really -- we're way out in front of this one in terms of addressing it. These are just -- at this point, we're aware of notices and entities that are involved in situations, but yet, there's still not even formal claims or responses as to how they will be dealt with. So it's way too early for me to get involved publicly as to what that might mean and how much it might cost, but we're really hunkering down for potential legal battles because a lot of those things -- quite frankly, one man's opinion aren't -- are fairly meritless but could get tort -- dragged into the legal system, depending on how they're protected or fought and could involve numbers of entities, mostly because of the new laws and the way the plaintiffs' bar and law firms are trying to work through those laws.

[Matthew J. Carletti:]

What -- maybe on an individual claim basis, and this could -- they aren't even claims, but individual kind of policy basis, is there a general line size we're talking about on individual ones so we need a certain amount of frequency to occur or these larger, chunkier because they have a severity element to them and we're not talking of a large number?

[Scott A. Carmilani:]

Again, it's -- a lot of it is legal defense, so -- versus clients have done something wrong. So I think it's going to be more of a spread over a number of -- right now, we think it's a spread over a number of cases that might get consolidated rather than a big, chunky -- unlike the financial crisis, if that helps.

[Matthew J. Carletti:]

Okay. That does. And then just last question, I'll get out of the way for others, could you provide any -- you mentioned -- Marshall mentioned, I guess, 3 areas that the additional IBNR of $25 million in the quarter went towards. Can you give us a rough breakout? I'm really just curious more so how much went to kind of the managed care and lawyers E&O, private D&O that he mentioned versus, say, how much of an impact for the large buyers.

[Marshall J. Grossack:]

Yes. I think that $11 million was for the large buyers. It's about $6 million for the -- for this managed care event that Scott has been talking about, and the rest is just an increase of the loss picks for -- as I mentioned, for the lawyers and not-for-profit D&O.

[Operator:]

And the next question will come from Dan Farrell of Sterne Agee.

[Dan Farrell:]

Can you tell us within the health care line in the U.S. where you have the 2013 loss ratio set? And can you compare that to where the 2012 and 2011 are currently set?

[Scott A. Carmilani:]

No, that's not something we publish. You could see -- if you look historically at our triangles that we do publish, you can go down to the health care space, I think, and see whereabout it's been reported. And this is about 8 points of additional expectations for those losses. So this is not like we're taking it from a 60% loss ratio to 200%. It's somewhere in the 60%s to somewhere in the 70%s.

[Dan Farrell:]

Can you say, magnitude, is '13 set higher or lower, same versus 2012?

[Scott A. Carmilani:]

Well, that's about how much higher it is from the year before.

[Thomas A. Bradley:]

It's less than '12.

[Scott A. Carmilani:]

Less than '12. Yes.

[Thomas A. Bradley:]

Yes.

[Dan Farrell:]

Okay. And then when we think about 2014 and we think about -- you've obviously been taking corrective action. You've been putting through rate, and you've been doing things to try to address this. How quickly does that come through? I'm trying to think about how we look at 2013 business tickets that gets put up. Maybe if you could just give a little color around that.

[Scott A. Carmilani:]

Well, what I'd say to junior underwriters is we earn $1 a premium a day. So it takes 12 months to fully earn, and policies are annual. So depending on when they are written, it takes full year to get through. On a calendar year basis, that's -- you can look at 18 to 24 months for it to have its full impact, but we've been working on this for some time now. So '14 should look good or look better, I should say, for a lot of the professional lines areas, and hopefully, we've taken enough corrective actions to stay ahead of the health care thing. Now I'm not sure what the rest of the industry is doing yet. I think we're out in front of this compared to many, either in reacting to it or proactively trying to do something about it, and it'll affect different companies differently, depending on size, shape and form.

[Thomas A. Bradley:]

And, Dan, remember, in the U.S. segment, casualty in general and professional lines, in specific, we've been reporting pretty strong rate increases 7, 8 quarters in a row now. And as Scott mentioned, kind of some of those areas we were strengthening earlier in 2013 didn't see strengthening in the fourth quarter. We're not going to declare victory totally, but we think we've gone a long way in terms of moving beyond those problems.

[Scott A. Carmilani:]

This is not a systemic, fundamental collapse of a portfolio. It's just a -- we're in the business to pay claims and help clients when they face new situations, and we've got to help them get through them.

[Operator:]

And our next question comes from Mike Nannizzi of Goldman Sachs.

[Michael Nannizzi:]

I guess, one question. In the international segment, the expense sure looked like it ticked up in the fourth quarter versus last year. Was there something specific there? Or, I don't know, if you mentioned in your comments, sorry about that.

[Thomas A. Bradley:]

I didn't specifically mention it, but Scott talked about a fair amount of growth in investment. And new businesses, we're putting up in the international segment, and that is fairly directly correlated to that. And Julian James is bringing on several new teams in the fourth quarter in the London market. We talked about aviation, which kind of came on first, but there's also general casualty in marine coming on late during the quarter, but really not seeing any earned premium come through yet. So we are making those investments.

[Scott A. Carmilani:]

As you know, '08, '09, 2010, there was a humongous build-out of people in resource in the U.S. segment. What you start to see is a much more concentrated effort. And I've said this in past calls, that we'll be doing that internationally. Staff is up almost 40% there this year. We'll move into a new facility later this year. And as an FYI, our building in London is completely full. We're using conference rooms and bathrooms for people.

[Michael Nannizzi:]

Okay. I mean, so how should we think about that? I mean, when do you expect the premium flow to come through, such that the ratio starts to normalize? Or how should we think about top line?

[Scott A. Carmilani:]

Start seeing it now. I mean, you've already seen it in the fourth quarter. If you look at the fourth quarter growth of just our international business, that hasn't grown a while, and there's a big pop in the fourth quarter.

[Thomas A. Bradley:]

Yes, in the written and New York City [ph] [indiscernible] will follow. And on a corporate level, managing the expense ratio across all those businesses, that 29.5 to 30 still remains our target range kind of longer term.

[Michael Nannizzi:]

Got it. And then can you talk about -- Scott, can you tell us, what was the underlying in the insurance segment, excluding these sort of IBNR changes or current accident year in your actions? Can you kind of give us some color on that?

[Scott A. Carmilani:]

I can give you color. The underwriting accident year for 2013 is very solid. We got a little noise in the U.S. property book in the fourth quarter and the 4 or 5 fires that were fairly significant. One was just right here in lower Manhattan. That was a pretty significant loss on a retail store or is it retail consumer building. But our overall U.S. property book, I'll tell you, it has as good a year as 2006 or '09. It's very, very strong operating result for the year. And overall, our casualty book is performing stellar for 2013. So the reported activity in 2013, overall, is quite good. There's a little noise in 2 part of 20 of our business units, and that's why we have the other 18 business units.

[Michael Nannizzi:]

Got it. I mean, if I look at that, I'm just trying to square, so your year-over-year in the fourth quarter in U.S. insurance, you're up about 10 points in the underwriting loss ratio. So if we back out those items or if we try to think about the rest of the 18, let's say, what did that look like apples-to-apples, if that's possible to calculate?

[Scott A. Carmilani:]

Apples-to-apples on the accident year loss ratio?

[Michael Nannizzi:]

Yes. So excluding the fires and the IBNR increases in the fourth quarter, what did that underlying loss ratio look like?

[Scott A. Carmilani:]

Yes, so you just substract that $25 million, you get -- my human calculator is looking right at me.

[Thomas A. Bradley:]

Yes, I'm trying to think. I think in the U.S., all we really added was that $25 million.

[Michael Nannizzi:]

Okay. So just that $25 million. Okay.

[Scott A. Carmilani:]

Yes. It's about those same 10 points.

[Michael Nannizzi:]

Got it. Great. And then last question, I mean, in terms of professional liability, recent years, outside of health care, I mean, have you noticed any additional claims or frequency trends, severity trends that have been cropping up for recent accident years?

[Scott A. Carmilani:]

No. In fact, the opposite. A lot of the stuff we had taken action on in previous years regarding the financial institutions, meltdown in '07, '08, '09 is actually looking a little bit better so far. It's a little too early to claim victory, but -- or that we're doing well. But most actuaries internally and externally think that, that's starting to work itself out to the positive.

[Michael Nannizzi:]

Got it. And then last -- I appreciate it. And then just last one. Crop in the reinsurance, any impact in the fourth quarter?

[Scott A. Carmilani:]

No. I'm glad you brought that up, because I know that's been a subject of lots of competitive market buzz. Our crop portfolio for 2013 is making money, and will make money for the full year 2013. And we're very happy about that. Some of the losses and poor experience you've heard from other carriers, I think, were centered in particular states, which we weren't -- didn't have -- thankfully, didn't have major concentrations in. And the states we did have slightly bigger shares in through other markets that did well, not necessarily public companies, more than offset that. So we're looking at a positive more than likely takedown for our 2013 crop book. And what I'll say is crop is generally a Jan 1 renewal season, and that's all going pretty well, although you won't see that book for us until later in the quarter because we wait until the plantings get done and we know what the yields -- I mean, the plantings look like before we book that premium in the March, April time frame.

[Thomas A. Bradley:]

Another part of that portfolio is the fact it also includes excess of loss coverages. So it's not just a straight quota-share book of business. So that adds to the profit profile.

[Operator:]

And the next question will come from Charles Sebaski of BMO.

[Charles J. Sebaski:]

I just want to -- I know you've discussed a lot sort of the health care and the U.S. insurance. But, I guess, I'm trying to understand what -- I know you're getting out ahead of it with the IBNR, but it would seem that there must have been something that -- a trigger point of something happening. And I know you sort of say it's early and there's a lot of uncertainty, but the Affordable Care Act and whatnot has been going on for a while. I guess, just sort of what changed this quarter in the review that sort of said, "This is concerning?"

[Scott A. Carmilani:]

There is no trigger or silver bullet, as I like to talk about when we're talking with the claims folks and the actuaries. It's sort of a growing trend of attitude amongst plaintiff lawyers in response to some of the changes in the Affordable Care Act and the new health care laws in general and how entities with -- are trying to move within that space. You're seeing an awful lot of merger-related activity and some judges and lawyers not liking the process and some clients being worried about the outcomes. And a lot more press read the papers. And there's a big article about it in yesterday's New York Times in the head of the Business section that gives you a good example of some of the things that are of concern amongst multiple entities, public and private, in this space, whether it's companies they are set up to be like that or companies that are public and are merging and acquiring to grow to take advantage of the new system. And so it's all over the map.

[Thomas A. Bradley:]

And, Charlie, maybe I'd add, similar to the question of why the fourth quarter of '13 versus next quarter or the one afterwards. Frankly, as Scott mentioned, things were changing, things were bubbling up around. And Scott basically ordered up a full study of it. And the study was complete in the fourth quarter, and we reacted to it. So our time is kind of based on trying to get as knowledgeable as we can about the situation and making our best estimate then as opposed to waiting until there's some other sharper event in the future.

[Charles J. Sebaski:]

And so just thinking about those, so this is a few points on loss ratio across the book. So this isn't -- there's still room either way for development, right? These programs where the strengthening happened or the increased loss pick, they're not capped out currently, are they?

[Scott A. Carmilani:]

No, but -- scientifically, no. And, of course, the answer has to be it could go either way. We hope we're more than adequate.

[Charles J. Sebaski:]

Okay. I guess, also in U.S. insurance, just the other line seems to have continued to pick up growth and just any comment on what's going on and what's driving that growth.

[Scott A. Carmilani:]

So that's partly result of investments we made over prior years and a lot of those teams and divisions hitting stride. A lot of it is coming from specialty casualty operations. We have a new construction team. We have a new real estate team. We've made some announcements and increased responsibilities around the U.S. segment. And we've got a lot of momentum there, and we're running with it.

[Thomas A. Bradley:]

Yes, I mean, as you can see from the supplement, it doubled in the full year. And as Scott mentioned, a couple of brand new businesses like construction and surety and some other businesses that have been ramping up like the M&A business and in the Marine and Environmental really contribute to that 100% increase from 2012.

[Charles J. Sebaski:]

Okay. And then just going forward, what -- how should we think about tax rate?

[Scott A. Carmilani:]

We're not moving anytime soon.

[Thomas A. Bradley:]

Yes, I mean, I think the average you've seen over the past 3 or 4 years is going to be as good as any. Our mix of business, it is what it is, and nothing material changing in that structure to do anything different.

[Operator:]

And next, we have a question from Bob Farnam of KBW.

[Robert Farnam:]

Quick and maybe 2 questions. Did you have some sort of true-up with the accident year loss ratio in the international and in the reinsurance segments? It just looks like there's a pretty big drop in that accident year loss ratio relative to the first 9 months of the year. And the same thing happened last year. So I'm just kind of curious what may be driving that.

[Marshall J. Grossack:]

Yes, that's a good question. We saw that as well. There is probably a little bit of seasonality to those numbers. As we go through a year, we do hold on to a lot of our property reserves, but usually, by the end of the -- when we get to the fourth quarter, if everything is looking good, we will often look at letting go of some of that.

[Robert Farnam:]

Okay. Good. And have you changed or are you thinking of changing your reinsurance cover based on the pricing environment today? Have you thought of changing your own cover?

[Scott A. Carmilani:]

Which reinsurance cover? We have 40 or 40-some-odd treaties. Our reinsurance relationships are important to us, and they still will. A lot of our treaties come up in March, April, May and the early summer. Most of them are in various stages of renewal or negotiation. We are looking at our reinsurance buying, as I think most companies are. And we're -- it's too early to say what decisions we're making on that. That's probably a second or third quarter.

[Robert Farnam:]

All right. So that was my question, basically. Will you be retaining more or less going forward? But it sounds like that's not answerable yet. Is that correct?

[Scott A. Carmilani:]

Not in this forum, no.

[Operator:]

And the next question is from Ian Gutterman of BAM.

[Ian Gutterman:]

I jumped on a little late, so I apologize if I'm asking for a repeat here. But, John, can you explain why the investment income was up so much sequentially?

[John J. Gauthier:]

Why what?

[Scott A. Carmilani:]

Investment income up sequentially.

[John J. Gauthier:]

Yes, I mean, the Allied World Financial Services, was most of the change quarter-over-quarter, had a very good -- well, their third quarter, which we realized in our fourth quarter. That was $9.6 million for the quarter, Ian.

[Ian Gutterman:]

Okay. Got it. So the fixed income, I assume, is fairly steady?

[John J. Gauthier:]

It has been.

[Ian Gutterman:]

Okay. Got it.

[Scott A. Carmilani:]

Nobody likes to do their distributions in the fourth quarter before they owe taxes.

[Ian Gutterman:]

Sure. That makes sense. Okay. And then just to rehash a little bit and make sure I understood right on the U.S. business. First, Marshall, that $25 million of IBNR, just to be clear, was that part of the adverse development or was that all booked as '13 accident year?

[Marshall J. Grossack:]

The $25 million that I was discussing, that's all in the 2013 year.

[Ian Gutterman:]

Okay. Got it. Okay. So what I was trying to think through is when I look at sort of your, I guess, '11 and '12 accident years had developed adversely, caught about $70 million each. So, I guess, we have -- I'm trying to figure out sort of how you're thinking about picks in light of that going forward. So it sounds like you've taken a '13 pickup, if you will, $25 million sort of out what you observed from the '11 and '12 years. And how does that inform '14? Should we think of that $25 million sort of being, if you will, permanent carryover that's -- that '14 is probably going to have about $25 million more IBNR than '13, too? Or is this kind of a onetime catch-up? Or what's the right way to think about just sort of how the adverse development informs future picks is, I guess, the short way of asking the question.

[Marshall J. Grossack:]

Yes, I will say a lot of moving parts here. To kind of put it in perspective, our increase in loss picks increased our loss ratio by 4 points in our professional lines, so that was kind of the magnitude of the increase here in 2013. When we think about future years, we're thinking a lot of additional things that have happened rather than the past and trying to take into account rate changes and underwriting changes and things that we've made. So we probably...

[Scott A. Carmilani:]

Transition [ph] cost.

[Marshall J. Grossack:]

Yes. So we're a little more -- we like to think that these actions are going to have a little bit of an impact. So we are probably coming in starting 2014 a little bit lower than 2013.

[Operator:]

[Operator Instructions] And our next question comes from Amit Kumar of Macquarie.

[Amit Kumar:]

Just, I guess, 1 or 2 quick follow-ups. Just going back to the discussion on health care book, what is the usual tail on these policies?

[Scott A. Carmilani:]

As in the casualty world, it's short -- on the short side. So you're looking at anywhere from 1 to 5 years at max, averaging in the 3 to 4 range. It depends on what it is. If it's a bad operation, you know about it in the current year. If it's a legal battle that's brought in by plaintiff firms and they're trying to set up a class action, that could take a couple of years.

[Marshall J. Grossack:]

Yes. I'll jump in on that as well. First thing, you got to remember, it's all claims-made business. So we are going to have it all reported to us at the end of the year with maybe just a very small lag there. And then Scott's right on. Certainly, within -- I always tell my team, within 3 years, we should really know what the number is.

[Amit Kumar:]

Got it. And, I guess, maybe this is somewhat related to the last question from Ian. Is there some sort of a metric as to the percent of book, I guess, percent of policies impacted by the reserve change? I guess, what I'm trying to figure out is the adjustment...

[Scott A. Carmilani:]

It's insignificant. It's a handful of insurers, maybe a dozen.

[Amit Kumar:]

Okay. That's actually quite helpful. And when you say maybe a dozen, what's that as a percent of total policies?

[Scott A. Carmilani:]

It's not even worth talking about.

[Amit Kumar:]

Okay. That's helpful. The only other question, and I apologize if I missed this in the opening comments, did you touch upon your crop expectation broadly for 2014?

[Scott A. Carmilani:]

Yes.

[Thomas A. Bradley:]

For 2014.

[Scott A. Carmilani:]

2014, no, we don't give forward-looking statements, but we like the business as much as we did last year, I can tell you that.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Scott Carmilani, CEO, for any closing remarks.

[Scott A. Carmilani:]

We'd just like to congratulate Sarah Doran, our Treasurer and Head of Investor Relations, who had a baby last week, and it's why she's not here right now. So she'll be back for the next quarter. Have a good day, everyone.

[Operator:]

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