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Allied World Assurance Holdings, AG (NYSE:AWH)

Q1 2013 Earnings Call

April 25, 2013 8:30 am ET

Executives

Sarah Doran - Senior Vice President of Investor Relations and Treasurer

Scott A. Carmilani - Chairman, Chief Executive Officer, President and Chairperson of Executive Committee

Thomas A. Bradley - Chief Financial Officer and Executive Vice President

Marshall J. Grossack - Chief Corporate Actuary and Executive Vice President

John J. Gauthier - Chief Investment Officer, Executive Vice President and President of Awac Services Company

Analysts

Matthew J. Carletti - JMP Securities LLC, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Robert Glasspiegel - Langen McAlenney

Raymond Iardella - Macquarie Research

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Operator

Good morning, and welcome to the Allied World Assurance Company First 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, Investor Relations Officer. Please go ahead.

Sarah Doran

Thank you, and good morning, everyone. Our press release and financial supplements were issued last night after the market closed. 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 May 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; John Gauthier, the company's Chief Investment Officer; and Marshall Grossack, our Chief Actuary. Also here to assist with questions are several other members of our management team.

Before we begin, I will note that statements made during the call may include forward-looking statements within the meanings of the U.S. federal security 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 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 the U.S. federal security laws. For more information and a reconciliation of these measures to the most directly comparable GAAP financial measures, please refer to our earnings press release.

With that complete, I can turn the call over to Scott.

Scott A. Carmilani

Thanks, Sarah, and good morning, everyone. Thanks for joining our call. Allied World had a strong first quarter of 2013, delivering both solid underwriting and investment results. We generated a net income of $159 million for the quarter as our diluted booked value per share has grown by over 4% from year end 2012. We continue to benefit from our diversified investment strategy, as well as from some favorable reserve development. We generated a total investment return of 1.3% for the quarter, which amounts to $113 million.

Turning to production. The company's top line grew by 23% for the first quarter to $837 million gross premiums, compared to $681 million in the first quarter of 2012. We also achieved an 85% -- 85.1% combined ratio. Underlying our growth were strong retentions on existing accounts, new business opportunities and an improving rate environment. On average, our rates on our insurance portfolio are up over 3.5% for the quarter, specifically 6.3% from our property lines and averaged 3% in our casualty businesses.

In our U.S. insurance segment, gross premiums are up 25% for the quarter for the prior year to $256 million. We continue to write new business in the specialty areas and specialty casualty areas with the DBA leading the drive and are getting momentum in newer lines, such as inland marine and primary construction.

Overall rates were up 5.9% in the first quarter for our U.S. segment, with our property rates up more than 10% and then casualty lines averaging 5.5% increases. Our retention rates in the U.S. segment averaged about 77%.

For our Bermuda and the international insurance platform, premiums were up 13% for the quarter to over $129 million, driven by the expansion of our international trade credit products and some growth in our casualty and health care lines. Overall, rate changes in our international insurance segment were flat for the first quarter, although property rates were up by over 4.3%, led by accounts affected by the Superstorm Sandy from last year. Our retention rate in the international segment was similar at about 75% on average.

Finally, we continue to experience steady growth amid the opportunities for our reinsurance segment and completed a very strong January 1 renewal season. Premiums here increased by 25% in the first quarter from last year to $453 million. This growth was achieved through the increased property cat writings, mostly from our strategic partnership with the collateralized reinsurance company, Aeolus Capital. Other drivers included some international expansion and the growth and our presence in the crop business, where we even benefited from rate improvements following last year's drought and hopefully expected better margins now.

Now let me turn the call over to Tom, our CFO, to discuss the financial aspects for the quarter. Tom?

Thomas A. Bradley

Thanks, Scott. To start, I wanted to note, at the top of the call you heard from Sarah Doran who recently joined us as Senior Vice President, Treasurer and Head of Investor Relations. We welcome her to the team. I know a number of you have already talked to her and, hopefully, the rest will in the coming weeks.

Keith Lennox, who you've worked with for a number of years is moving over into an important role as the CFO of our reinsurance business. So back to the numbers.

Scott mentioned results for the first quarter of 2013 were very strong, with net income of $159 million or $4.49 per diluted share, which compares to $218 million or $5.70 per diluted share for the first quarter of 2012, which was also a great quarter.

From an operating perspective, we recorded income of $84 million or $2.38 per diluted share and achieved an 85:1 combined ratio. This is in line with the operating income of $92 million or $2.39 per share and 85.2 combined ratio in the first quarter of 2012.

Total investment return was $113 million for the quarter, consisting of $33 million of net investment income and net realized investment gains of $80 million. John will speak to our investment results in a few minutes.

Underwriting income for the quarter was $69 million, reflecting an increase of 16% over the same period last year. Our reinsurance and international segments recorded quarterly underwriting profits of $45 million and $31 million, respectively. Our U.S. insurance segment posted an underwriting loss of $7.6 million, driven by reserve strengthening in U.S. professional lines.

The company recorded $44 million of favorable prior year reserve development, consisting of $30 million of favorable development in our international segment and $25 million of favorable development in our reinsurance segment. This was partially offset by $11 million of reserve strengthening in the U.S. segment. We did not record any catastrophe losses this quarter. Additionally, our loss related to Superstorm Sandy is unchanged from the prior quarter. Marshall will speak further to our reserve position in a few minutes.

Our expense ratio was 30% for the first quarter of 2013, an increase from the 29.2% we reported in the same period of 2012. The ratio was impacted by an increase in compensation expense due to the appreciation of our stock price for the quarter, as well as higher acquisition costs in the reinsurance segment attributed to a new retro sectional cover repurchased and higher property commissions on certain accounts. Over the course of the full year, we expect expense ratio to settle back down under 30%.

Operating cash flow was $14 million in the first quarter of 2013, compared to $143 million in the first quarter last year. The change in operating cash flow was driven by higher paid losses related to Superstorm Sandy, increased participation in Aeolus program and the payment of year end cash bonuses.

We ended the quarter with a diluted book value per share of $96.50, which is up over 4% from year end 2012 and up almost 13% from a year ago.

During the quarter, we repurchased shares in the open market via our 10b5-1 plan. Purchased 432,117 of our common shares during the quarter at an average price of $83.88 per share for a total cost of $36 million. This price represents an 11% discount to our $94.55 average diluted booked value per share during the quarter.

As of last night, we had repurchased 17 -- 72,469 shares since the beginning of the quarter for $6.7 million, leaving our remaining authorization at $367 million. As our valuation has increased significantly over the past year, we have continued prudent share repurchases.

In keeping with our focus on capital management, as previously announced, our Board of Directors has proposed a 33% increase in the quarterly dividend from $0.375 to $0.50 per share. This is subject to shareholder approval at next week's Annual General Meeting.

We ended the quarter with shareholders' equity increasing $106 million to $3.4 billion. Our total capitalization at quarter end was $4.2 billion, with a debt-to-capital ratio of 18.9%.

I will now turn the call over to our Chief Actuary, Marshall Grossack, to provide some commentary on the loss ratio for the quarter and update us on PMLs.

Marshall J. Grossack

Thanks, Tom. Our reported loss ratio for the first quarter 2013 was 55.1%. This includes a 9.5 point or $44 million net benefit from reserve releases for the quarter. The current action year loss ratio, excluding these items, were 64.6% for the first quarter of 2013. The bulk of our reserve releases were from the 2008 and prior loss years. International General Casualty was in line with the greatest favorable development of about $17 million.

As of the end of the first quarter, our carried reserves are 4.2% over the midpoint of our actuarial range. The favorable development during the quarter continues to be a function of prudent underwriting and actual losses, emerging better than expected.

I'm pleased to report a benign catastrophe quarter. Then, as Tom mentioned, we did strengthen some professional line reserves for the 2011 and 2012 years on our U.S. segment by about $24 million.

Finally, let me provide the quarterly update to our PMLs. As of the first quarter, our 1:250 and 1:100 hurricane PMLs are $731 million and $561 million, respectively. U.S. southeast wind continues to drive our hurricane PMLs, with the Gulf Coast being the second largest contributor.

Our 1:250 and 1:100 earthquake PMLs are $544 million and $380 million, respectively, with California still 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. Allied World investment portfolio returned 133 basis points or $113 million for the quarter. While the core fixed income continued to provide low but steady returns, we once again benefited from the diversification strategy we've employed over the last several years, as our non-core strategy contributed almost $100 million of the $113 million.

As you'll note, in response to your inquiries for additional transparency on the breakdown of the return, we've added new detail to Slide 17 of the financial supplement. Of the $113 million return, approximately $38 million came from fixed maturity investments, $32.5 million from investment income and $5.5 million from realized and unrealized gains.

Breaking that down even further, our noninvestment-grade, mortgage-backed strategy and our bank loan strategy, both below investment grade, contributed about $22.6 million of the $38 million of fixed maturity returns, with the remaining $15 million coming from the core fixed income.

Our equity portfolio had another good quarter, providing an 8% return or $46 million in total dollar return. Our hedge fund and private equity strategy continues to perform favorably, generating returns of $34 million or making up only 8% of the total portfolio. Lastly, investment expenses were down slightly for the quarter.

Several of you have asked for additional color on the investments managed by the Allied World Financial Services partners. As of the end of the quarter, approximately $370 million had been invested with these partners across 6 different investment strategies. For the quarter, these strategies generated a weighted average total return of 6%, contributing over $20 million of investment return.

Speaking of Allied World Financial Services, while our partners are off to a great start, there have been no changes to our valuation of these investments.

And with that I'll hand it back to Scott.

Scott A. Carmilani

Thanks, John. Let me end our remarks by saying that I'm pleased with Allied World's start to Q1 2013. Our goal has been always to increase shareholder value and we continue to deliver returns and book value appreciation, supported by growth in underwriting income and strong investments performance.

We are confident that our platform and business mix are well suited to be competitive client solutions for this market, and we will continue to generate exciting prospect for Allied World going forward along with strong returns for our shareholders.

With that, I'm going to open it up to questions from the group. Thank you. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Matt Carletti of JMP Securities.

Matthew J. Carletti - JMP Securities LLC, Research Division

Just had a couple of questions. First off, could you elaborate a little more on the adverse actions you took in the U.S. insurance segment? I know you mentioned it was accident years '11 and '12 Professional Liability. But could you give a little more color on what you were seeing that drove you to take the increase?

Scott A. Carmilani

Sure. Let me have Marshall give you the response to that.

Marshall J. Grossack

Yes. As you know, Matt, our approach on casualty lines, we always try to be pretty proactive if we see any kind of potential problem. Whilst we see good news, we would tend to wait 2 or 3 years for -- to make sure it is actually good news. So it's hard to do that. Again, here, we are seeing across several of our professional lines a little bit higher frequency of loss than we'd like to see for 2011 and particularly, 2012. And so we've added, as I mentioned, $24 million to these lines. The lines business that we're adding to are kind of our small D&O and now profit lines, D&O, health care and lawyers. We are also taking up -- we have been taking some actions on the underwriting side regarding that. We've been increasing the rate, adding higher retentions and we're managing our limits and geographical steps.

Matthew J. Carletti - JMP Securities LLC, Research Division

That's really helpful. And on net investment income, it dropped a bit in the quarter. I mean, I know that there's macro issues and that's been going on for a while. But is there anything one-time or abnormal in that? Or is that just more of a -- I know you guys have been kind of harvesting, locking in gains and trading it for kind of lower go-forward yield. Is kind of the level in the first quarter a good place to start projecting the rest of the year?

Scott A. Carmilani

Yes. I think that's a pretty decent steady state.

Matthew J. Carletti - JMP Securities LLC, Research Division

Okay. And the last question. On the DBA business, Scott, you mentioned that it was driving a bit of the growth. Could you comment on the recent, at least, the current Obama budget proposal calls for kind of eliminating the business? Could you -- how much DBA business do you guys have now? And what's your view on whether that business will stay or not? I know it's a very early version of the budget and it'll change a lot before it's final.

Scott A. Carmilani

Yes. I don't see that benefit changing well because a lot of it's built on the inefficiency of the government to handle that benefit for the clients and the governmental agencies to begin with. And it's an efficiency place, where the U.S. and our governments a long way from being able to handle that efficiently. And I don't see that going away any time soon. It's rapidly going past $100 million in business for us and the Department of State is a great example of that. So that was at all at one point in a single out-for-bid program, and that's been broken up into every single individual contractor buying their own program. So they're both government contractors and private sector who we provide service to, that fall into that category. And it's an important business for us.

Operator

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

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

One question, Marshall, on the development. Is there -- is any of it related to -- or the same business that generates some adverse development in prior quarters or in early '11? Or was any of it related to business that you've picked up because, obviously, there's been some growth in that segment in the last couple of years. There's a couple of follow-ups.

Marshall J. Grossack

What I think you're asking is, is it related to the private equity losses from a couple of years ago. No, it's not. It's frequency in employment practices, liability for private entities, inverse to the rate environment that we've experienced over the last 4 or 5 years. So we're tightening down rate, pushing it quite a bit, tightening down terms and conditions, pushing that quite a bit. It's just didn't happen fast enough in '11 and '12, but I think we're getting there now. So -- and a lot of it is actually lawyers, D&O and E&O and some D&O for -- in the health care-related businesses. So it has nothing to do with those private equity, what I would call club claims from 2 years back.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Got it. That helps. And then in the international segment, I guess, the actuary loss ratio ticked up in the first quarter. I don't know, Scott, if you mentioned any of that specifically in your commentary than you more talked about the reinsurance line. Could we get a little bit of color on kind of what happened there if that -- if there was something under the covers that created some distortion? Or is that just kind of where it ended up?

Scott A. Carmilani

Give me that one again, Matt. Was it the international segment?

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

International, yes. International loss ratio, underlying loss ratio. So you're -- if my math is right. So you're 69 and change in the first quarter? You were down year-over-year, but it was higher than it was in the last 3 quarters and relatively high, historically.

Marshall J. Grossack

Yes. This is Marshall. I think I know the answer to that. That's really a yearly charge. We did increase at the start of the year what we're charging for yearly expenses, which is for proxy for handling claims and that's kind of a one-time kind of catch-up. So it's just kind of hitting the first quarter, but that's certainly not a run rate-type thing.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Can you, Matt, give us just kind of order of magnitude there first? Is that possible?

Marshall J. Grossack

About $9 million.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay, great. And then lastly on -- in reinsurance. And I think the answer is probably crop, but I just wanted to -- I mean, it looks like you've grown a decent amount over the last couple of years, very opportunistically as rates were rising, yet the underlying loss. And we had a pretty benign quarter from a weather perspective, and the underlying loss ratio is a bit higher. I would've expected it to be a bit lower. I'm wondering, if you back out the crop stuff, is that actually the case? Or -- if could you give some more color on there I'd appreciate it.

Scott A. Carmilani

Crop's a decent chunk. I wouldn't deny that over the first quarter call. But as I mentioned in the comments, probably a bigger number, it comes from the collateralized reinsurance participation we did with the Aeolus Capital, where we saw some really good opportunity for the -- as we look out for the whole year 2013. We've, opportunistically, seen that the rates, contracts, terms and everything were better for the Jan 1 season than we expected to be for the midyear so we put more eggs in that basket for Jan 1, if you want to look at it that way.

Operator

[Operator Instructions] Our next question will come from Bob Glasspiegel of Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

I think it was Marshall, you said that you've taken some underwriting actions on U.S. Professional Liability and Healthcare? Your premiums are still growing in those lines. Are those slower than some of the other lines you set sort of rates offsetting exposure declines? Or are we going to start to see the growth slowing in the second quarter?

Scott A. Carmilani

Well, what happens, and I'm you've -- I'm not teaching you anything here. What happens when you start pushing rate hard, your retention ratio goes down a little bit in the beginning. So our retention ratio has dropped off a few percentage points as we're pushing rate, and we're pushing rate in the high teens in that area and in, many cases, much more our relative limit basis. So it's going to be a slug for a while. I don't think we're immune to that in the industry. I think those who have big Professional Liability businesses in that space are probably seeing some of the same frequency. It has grown a little bit for us, but it tails off as we make these corrections.

Robert Glasspiegel - Langen McAlenney

Okay. So rate is offsetting the exposure declines. So that's why we're still seeing some premium growth still along those lines?

Scott A. Carmilani

That's right. And you'd see more if we were -- if we got to where we wanted to be or if the market was accepting it the way we're pushing it. But there's been a little bit of a trade-off there.

Robert Glasspiegel - Langen McAlenney

Okay, great answer. On the flip side of the U.S., as you had very large releases in International and reinsurance. I was wondering if New Zealand, Australia cats releases have been a part of that. Or probably some other items maybe you could expand?

Marshall J. Grossack

Yes, this is Marshall. Nothing from New Zealand or Australia. We did release, I want to say, about $5 million or $6 million for the Thai floods with the one cat event that we really brought down a little bit during the quarter.

Robert Glasspiegel - Langen McAlenney

Okay. Anything specific in the international side? Because the $29 million was almost half of your losses.

Scott A. Carmilani

Yes. I think that's outlined in the supplement, but...

Marshall J. Grossack

Yes. The $17 million of the international takedowns was from international General Casualty, so it's a lot of [indiscernible].

Scott A. Carmilani

That's our large excess book.

Robert Glasspiegel - Langen McAlenney

Okay. What are you seeing there?

Scott A. Carmilani

We're just seeing favorable development. 5, 6, 7 years out, pretty benign.

Marshall J. Grossack

Yes. We were seeing favorable development if we've had some favorable rulings on some claims as well.

Operator

Our next question will come from Ray Iardella of Macquarie.

Raymond Iardella - Macquarie Research

So, I guess, not to touch on the adverse in the U.S. but, I guess, Marshall, you had suggested 2012, there was some adverse. And just looking at the accident year loss ratio for 2012 relative to first quarter, there was about 320 basis points of improvement there year-over-year. So, I mean, is that underlying improvement actually better than what's actually stated in the financial statements just given some of the adverse in 2012? Or how are you guys thinking about that?

Scott A. Carmilani

Well, we hope it'll be better that's why...

Marshall J. Grossack

We do think it's better. We've been taking underwriting actions and rate increases all through 2012 in a lot of these lines and we moved some on the reserves. So yes, we do think it is getting better.

Raymond Iardella - Macquarie Research

Okay. So is that 320 basis points sort of the right way to think about it? I know you had some large losses in '12 and then, obviously, the adverse development in the U.S. insurance. So is the 320 basis points sort of the right way to think about the improvement that you guys would be expecting?

Scott A. Carmilani

It's early. It's only the first quarter. So I'd caution you there. Hopefully, it's better than that. If we're raising rates 20 points and tightening down terms, we would hope that, that will be at least that. But it's early.

Raymond Iardella - Macquarie Research

Okay. And then maybe just touching on the international insurance side and Professional Liability there. Just looking at the K, it looks like there wasn't any releases from the '09 to 2011 years, accident years, I should say. I'm just curious kind of what's the thought process there. I mean, are the trends you're seeing still good? And you're just taking a more conservative stance? Or is -- maybe you can elaborate on that as well.

Scott A. Carmilani

Yes. That's a good question. We -- our approach, especially, on the higher catching business, which is more in our international segment, is to typically wait 3 or 4 years before we start releasing any reserves, but we will conversely if we see something bad happening, like a Deepwater claim something -- we'd had something pretty much immediately. So we're getting at the point now where I think we can start looking at those years that they are running quite well. I think 2009 for Professional Liabilities is a pretty good year for the whole industry. That's certainly looking good in our international segment.

Raymond Iardella - Macquarie Research

Got it. And then one other question and, I guess, I'll requeue. In terms of U.S. insurance and growth and programs, for example, can you maybe talk about what's driving the growth there? Is there any particular programs that are new to Allied World? Or is there -- are there growth in sort of existing programs?

Scott A. Carmilani

Yes, there are a few new programs that are in the portfolio that we actually signed up late in 2012. And we are starting to see as the premium flow will come from those. Without getting specific to the names, there's 2 decent-sized MGAs down in the West Coast that are driving that, there's -- that drive $7 million or $8 million of that growth in the first quarter.

Raymond Iardella - Macquarie Research

Is that more a property or casualty? Or any other color you can give on that?

Scott A. Carmilani

No. They're multi-line for water districts and vineyards.

Operator

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

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Just a quick question on premium, actually on earned premium. That came in a bit lower than I would have expected to get from the written growth you've been seeing. Was there anything unusual in the earned? Or is it just some quarterly volatility that's normal?

Thomas A. Bradley

Dan, this is Tom. I think if you compare it to the fourth quarter of last year, it's actually sequentially down just a little bit. But what we had in the fourth quarter in the reinsurance business was [indiscernible] some reinstatement premiums from Hurricane Sandy and be just premium adjustments on the quota share business out of reinsurance. So probably about $25 million of premium adjustments in Q4, which, if you take those out, you've actually probably got a nice stream of growth if you look back over the last 5 quarters and kind of a normal growth in earned premium.

Dan Farrell - Sterne Agee & Leach Inc., Research Division

Okay. And then could you talk a little bit more about the Healthcare business? You've obviously been having some nice growth there. Maybe just expand a little bit on conditions and the attractiveness that you're seeing in that business.

Scott A. Carmilani

Well, no doubt the Healthcare universe in the marketplace has gotten more competitive in the last 2 years than it's been in the last decade. We've enjoyed a pretty good position in that space, both on the hospital Professional Liability and the med mal for larger institutions and mid-sized institutions. There is the new rules for Medicaid and Medicare are certainly causing angst to amongst the big institutions and there's more than likely more consolidation, not less. And there's more of a trend towards doctors becoming employees of institutions than less -- or our exposures are going up. Rates haven't been going up as much as exposures. But the delta between the underwriting margin we've enjoyed and what it looks like now, it's still very attractive. So we're still growing that portfolio. And it's still very attractive relative to, say, property insurance or some of the other General Casualty lines that are out there. So in the world of Casualty, as I explained to S&P recently, that's an attractive relative margin business in the Casualty's sphere of opportunities.

Operator

Our next question will be a follow-up from Michael Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I just have one question on -- can you talk a little bit about the competitive landscape right now in the kind of traditional specialty primary market versus the excess business, whether it's the international segment sort of the Fortune 1000? Or just generally where you play in higher layers? Is there a difference in terms of, again, either the competitiveness or the -- your ability to push for rate?

Scott A. Carmilani

Sure. There's always a difference between primary and excess. Primary, I believe, and the larger account business has had more, let's call it, issues over the last 4 or 5 years. And there are many carriers that are adjusting their portfolios from that, the big players, if you will. The mainstream giant markets are repositioning some of their portfolios. And that's allowing for more competitive rate and better rates overall. The excess market, we've had a pretty good stretch of low severity claims in the universe of the U.S. and international. Not to say there hasn't been pops, there's been plenty. There's been explosions in the energy business, and there has been losses in Deepwater and things like that. And there has been what we call pharmaceutical-related loss that are always out there. But overall, the excess markets have performed very well, and you're seeing a lot of redundancy from our own portfolio there. So that's much more competitive and tougher to get more rate. We are starting to get a little bit of rate and we are taking action where we can. And we're granting -- as expiring to long-standing clients that had no issues. So it's a wide range of outcome, which is why, on average, our rates are only up a little over 3% on the excess book. On the primary portfolio and where we're competing for that business, I think you're seeing rates closer to double digit even though it's a low double digit.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. That helps. And then if I could, Scott, just follow up on my -- the question from earlier on. Reinsurance, maybe I'm not sure if I stated it right, but I was looking at the change in the underlying loss ratio. And my question was whether or not crops, maybe, runs at a higher loss ratio and you grew more there. And if we didn't look at that business and we looked at the sort of x crop reinsurance book, where the underlying loss or kind of ballpark where that came in? Just to try and understand the increase there both versus prior year and also versus just the last few quarters.

Scott A. Carmilani

So you're onto the driver. The growth in the crop business, which runs at a higher attrition rate, is driving that differential.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Okay, great. Great. And then without that in there, if we were kind of -- if it's possible to make that sort of apples-to-apples comparison, is it -- would the underlying -- the loss ratio reflect the fact that you've seen the rate gains over the last few quarters?

Scott A. Carmilani

Well, there's one other fact here that's in there. As our, as I mentioned, our cat portfolio grew substantially in sort of the crop business, this year, for the first time, what we bought have been a retro sectional cover. So there's a fairly good charge in there that's affecting the ultimate expense for that portfolio for the first quarter as well. That was 20...

Thomas A. Bradley

2 points on loss ratio.

Scott A. Carmilani

2 points on loss ratio. Thanks, Tom.

Operator

There will be a follow-up from Ray Iardella of Macquarie.

Raymond Iardella - Macquarie Research

And maybe just touching on Mike's question. Is there any way you guys can quantify the crop premium on the reinsurance side in the first quarter?

Scott A. Carmilani

Absolutely. Give me a second to pull it out. I don't know if I have it separately. Probably -- I got to be careful because what it is this through May 1. It's $77 million for the first quarter.

Raymond Iardella - Macquarie Research

And that's net written or gross?

Scott A. Carmilani

It's gross.

Raymond Iardella - Macquarie Research

Okay. And then maybe, Scott, can you talk about the M&A environment? Just -- I know last quarter we had chatted a little bit about it, and you guys did a little bit more on the Allied World Financial Services. But maybe just touching on the P&C side of the equation in terms of M&A.

Scott A. Carmilani

Well, there's rumors that we we're involved in deals we're not involved in. There is -- there are a few companies that are looking to be sold. And from what we know, there's a process around a few of those. I firmly believe still that there are more companies than there need to be in the marketplace. In the rest of the world, its consolidated in other industries, and P&C insurance has not. Should there be opportunities to do that, we would certainly want to be part of the process. But we haven't come across any or know of any that are out there as we sit here today. We're not actively engaged with anybody right now.

Raymond Iardella - Macquarie Research

Okay. And one last numbers question. Do you have paid losses for the first quarter?

Scott A. Carmilani

If you give me a second, I can pull that out.

Raymond Iardella - Macquarie Research

I can wait for the queue if that's the case.

Scott A. Carmilani

Yes. Let us come back to you on the exact number. I don't have that in front of me.

Operator

And that will conclude our question-and-answer session. I would like to turn the call back over to Mr. Scott Carmilani, President and CEO, for closing remarks. Please go ahead, sir.

Scott A. Carmilani

Okay. I want to thank everyone for their time this morning and I look forward to talking to you next quarter. Thank you.

Operator

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

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