Allied World Assurance's (AWH) CEO Scott Carmilani on Q2 2014 Results - Earnings Call Transcript

Jul.24.14 | About: Allied World (AWH)

Allied World Assurance Company Holdings, AG (NYSE:AWH)

Q2 2014 Results Earnings Conference Call

July 24, 2014 8:30 AM ET

Executives

Sarah Doran - Senior Vice President, Investor Relations

Scott Carmilani - President and CEO

Tom Bradley - Chief Financial Officer

Marshall Grossack - Chief Actuary

John Gauthier - Chief Investment Officer

Analysts

Amit Kumar - Macquarie

Matt Carletti - JMP Securities

Dan Farrell - Sterne Agee

Bob Glasspiegel - Janney Capital

Sarah DeWitt - Barclays

Mike Nannizzi - Goldman Sachs

Ian Gutterman - Balyasny

Operator

Good day. And welcome to the Allied World Assurance Company’s Second Quarter of 2014 Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Ms. Sarah Doran, Senior Vice President, Investor Relations. Please go ahead.

Sarah Doran

Thank you and good morning. Our press release and financial supplement was 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 August 8th 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 CEO; Tom Bradley, our CFO; 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 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.

With that, let me now turn the call over to Scott.

Scott Carmilani

Thanks, Sarah. Good morning, everyone. Thanks for joining our call. Allied World continued to have a solid quarter and continue to earn growth in book value. Company generated a combined ratio of 90.3% for the quarter and a net income of $152 million, a $1.52 per diluted share.

Consistent with last quarter, we grew diluted book value by -- per share by 4%. Our investment results have shown the strength of our total return strategy. The majority of our return coming from net realized gains, we generated a total return of 1.4% for the quarter or $122 million. Our Chief Investment Officer, John Gauthier will give you more details on the investment results in a few minutes.

Halfway through year, our diluted book value share has grown by over 8% from year end. Our combined ratio is 85% on par with the 84% from the first half of 2013. Our second quarter results also benefited $45.1 million of net favorable reserve development. The majority of which came from our reinsurance and international insurance segments, positively impacting our combined ratio by over 8 points. Marshall Grossack, our Chief Actuary will give you more details on that a little bit later.

Turning to our operating performance, we grew our topline selectively this quarter, generating $760 million of gross written premiums on par with last year. And on average our rates in our insurance portfolio were up 1% for the quarter, with casualty rate leading the way, positive -- continued positive rate momentum of 5.6% rate increases, while property has been down over 11.5%. As you know, the majority of our business is casually-weighted and casually-oriented.

This has really been a tale of two stories and is reflective of where and how the market opportunities are present or not. We continue to grow insurance businesses and our treaty insurance book saw some moment between quarters, shifting treaties and effective dates, and reflecting different premium volumes for the quarter. We also had some reduced premium mix and exposure in our property cat book this quarter by approximately $10 million compared to last year.

In our U.S. insurance segment, gross premiums grew 11% for the quarter, attributable to the growth in excess casualty, inland marine, reps and warranties M&A line of business. This was particularly offset by a decrease in healthcare insurance, as we continue our focus in making structural changes to improve the profitability of this book.

Overall, rates in this segment are up 5.6% for the quarter, with casualty rates up a little bit closer to 8% and property rates down by about the same percent, 8%. This is now eighth consecutive quarter of casualty rate increases of more than 5% in this segment. Overall, our rate retention in the U.S. was about 74% for the quarter.

The international insurance segment also saw an increase in gross premiums for the quarter, up 6%. Our net was up higher by 8% -- by 15%, driven by European platform this time. We’d contributions from recently added lines such as aviation and marine cargo, as well as growth from our existing lines.

Overall, rate changes our international insurance segment were down to modest 5% for the second quarter, with casualty up only 1% or close to flat and property more dramatically down 14% for the quarter. And overall, our retention rate in the international insurance segment was 87% for the quarter.

I mentioned there was some momentum in the reinsurance business, $50 million less written in this quarter than last year, $40 million of which is virtually timing and restructuring of treaties, some of which moved up to the first quarter, the bulk of which are moving to the third quarter and $10 million is reduced premiums.

Now, let me turn the call over to Tom. I’ll answer calls at the end of the call. Thank you.

Tom Bradley

Thanks, Scott. For the second quarter of 2014, Allied World generated net income of $152 million, operating income of $76 million and underwriting income of $52 million. This was driven by growth in net premiums earned, a combined ratio at 90%, continued favorable prior year development, strong investment returns and no reportable catastrophe losses. Our second quarter annualized net income return on equity was 17%.

In the quarter, our expense ratio was 31.7%, compared to the prior year quarter of about 30%. This increase was driven by a combination of profit commissions to customers in the programs business and reinsurance, and compensation-related expenses impacted by our higher stock price. Recall that much of our stock-based compensation is cash delivered. So movements in the share price directly impact G&A. The share price this quarter was up about 11%.

The six-month expense ration of 29.8% is in line with our run rate expectations. We recorded operating cash flow of $146 million in the quarter, compared to $120 million in the prior year. This increase largely relates to our participation on the collateralized property catastrophe program with Aeolus Re. The first six months of the year, we received distributions of over $200 million from prior underwriting years.

Under our new $500 million two-year share repurchases authorization, we continued our buyback strategy utilizing our 10b-1 plan. For the quarter, we repurchased over 1.9 million of our common share in the open market at an average price of $36.36 per share for total cost of $70.9 million. As of last night, we had also repurchased 430,000 shares since the beginning of the quarter for $16.7 million leaving our remaining current authorization at $437 million.

We ended the quarter with dilutive book value per share of $36.98, which is up 8.1% from December and 3.6% from March. We have shareholders equity of $3.7 billion, up $163 million from year end and total capitalization of $4.5 billion with financial leverage of 17.8%, net premium leverage of 0.6 times for the quarter.

In the second quarter, we renewed our catastrophe reinsurance program with the new structure. This cover now provides per occurrence an aggregate protection to cat exposure across our global insurance and reinsurance portfolios. This expense on our prior program, which only cover U.S. exposures in our insurance portfolio.

This cover will provide for $150 million excess of $300 million on the first event and $100 million excess of $100 million on the second event, multiple events can erode the retention. The entire program is placed on 100% collateralized basis. This new coverage is very effective in managing tail of our PML as Marshall will describe.

I'll turn the call over to Marshall to discuss this and provide some commentary on the loss ratio for the quarter.

Marshall Grossack

Thanks, Tom. Our reported loss ratio for the second quarter of 2014 was 58.6%. This includes 8.4 points or $45.1 million net benefit from reserve releases for the quarter. The accident year loss ratio, excluding prior year adjustments, was 67% for the quarter, which compares to 63.7% in the prior year quarter.

Drilling down by segment; in the second quarter of 2014, the reinsurance and international segments had net favorable development of approximately $26.2 million and $20 million respectively, while the U.S. insurance segment had slight adverse development of approximately $1.1 million. This was driven by healthcare specifically in hospital professional liability as well as lawyers E&O.

As of the end of the quarter, our reserve position sits at 4.3% over the midpoint of our actuarial range. This is largely consistent with the prior year quarter where we estimated our reserve position at 4.2% over the midpoint.

This quarter in addition, our reinsurance segment had $18.5 million of loss associated with several storms in United States and the April 1st earthquake in Chile. Due to our new catastrophe reinsurance program and reduced property writings, our 1 in 250 U.S. hurricane and U.S. earthquake PMLs fell 11% and 7% respectively in the second quarter. Our largest 1 in 250 PML U.S. hurricane currently represents 15.9% of total capital, down from 18.2% last quarter.

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 Gauthier

Thank you, Marshall, and good morning, everyone. Allied World’s investment portfolio returned a 140 basis points or $122 million for the quarter. This compares favorably with both the investment loss of $78 million in the second quarter of 2013 and investment gain of $102 million in the first quarter of this year. Year-to-date the total investment return is 2.6% or $223 million.

As a reminder, given our total return philosophy, we’re some agnostic between net investment income and net gains. Net investment income was down quarter-over-quarter mainly driven by one-time non-cash goodwill adjustment at one of our claims TPA.

As we had said before, the results of the non private -- other private securities will be lumpy. Our investment related businesses continue to do very well. We remain comfortable with the remaining valuations and are committed to the strategy, which has earned significant return since inception and benefit the overall knowledge base supporting our portfolio.

We continue to look for opportunities for additional investments for Allied World Financial Services. Of the $122 million of total return, $37 million came from net investment income and $85 million from gains.

All asset classes made a positive contribution in the quarter. Due to continued strength in the bond market, our fixed income portfolio provided $70 million of total return. Of that $70 million, $50 million came from the core portfolio and $20 million from our non-agencies, bank loans and private debt portfolios.

We also saw the benefits of our newly positioned equity strategy, as equities continue to rally meaningfully and contributed $35 million of return for the quarter. We increased our equity allocation during the quarter.

Lastly, hedge fund and private equity portfolio returned $25 million for the quarter. We had $66 million in net redemptions in our hedge funds and our private equity portfolio increased by about $35 million due to drawdowns. Overall, during the quarter, we saw -- we increased our exposure to non-core assets by approximately $150 million, led by equities and an increased allocation of the non-agency portfolio.

We remain underweight duration and overweight of diversified portfolio risk assets, which we believe will provide favorable returns and will outperform core fixed income. We remain optimistic for higher than consensus growth in the U.S. for the remainder of 2014 and we think that our portfolio is positioned appropriately.

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

Scott Carmilani

Thanks, John. In closing, let me end my remarks by saying that again I'm pleased with Allied World’s first half of the year performance. We remain optimistic about the company’s prospects moving forward and remain very confident that our businesses that we have and continue to build are profitable, sustainable and accretive to our franchise. We are confident that our platform of business mixes are well suited for the clients and markets we serve and we will strive to execute on the exciting opportunities and prospects for Allied World going forward. We’re continuing to generate strong returns for our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Amit Kumar of Macquarie. Please go ahead.

Amit Kumar - Macquarie

Thanks and good morning, and thanks for taking my questions. Just two quick follow-ups. The first question is on the development and the healthcare book. I know that we talked about this in the past. I guess there were like three large claim previously. You had also talked about frivolous lawsuits, which were happening last quarter. Were the trends in Q2 a continuation of those trends or is this something different?

Scott Carmilani

Unfortunately something different. These were hospital liability claims, not D&O or E&O related. Couple of them were well celebrated in the press area in a week, at least one of them was. And it was a mitten-out situation with doctors in the hospital book. So it came from a totally different spot this time.

Amit Kumar - Macquarie

And I guess, the related question would be what sort of gifts you comfort that, this will not expand going forward in terms of the limits?

Scott Carmilani

They were one-off event within the very large hospital systems. The hospital did a very good job in arresting the problem when they became aware of it. One case is doctors are not even with us any more. I don’t want to get in too many details on the particulars of the claims but we feel that these are singular events. But we are and have been reevaluating the healthcare portfolio including the hospital book, the D&O book related to it and E&O book related to it.

So we had work -- we have ongoing work to do on that book. We’ve been reunderwriting a lot of it, repricing it where we can, tightening up turns where we can, creating more awareness with clients and brokers and our underwriting staff. That continues on I think through rest of this year. Most of the book had been re-underwritten. And you’ll see some of the reduction in the premium of our portfolio in the first half of this year. And we’re looking to take it forward into next year.

Amit Kumar - Macquarie

Got it. And then the last question I have is and then I’ll re-queue. On the lawyers C&O, can you expand on that comment which you made in the opening remark regarding some noise on that front?

Marshall Grossack

Yeah. I mean, the lawyers you know is -- last year we also did have some issues. And this is continuing to be largely EPL-driven claims in that. And again it is the older year as we have already taken lot of corrective underwriting action towards that. So we do believe that is getting behind us.

Amit Kumar - Macquarie

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

Operator

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

Matt Carletti - JMP Securities

Thanks. Apologies, I missed in the prepared comments. But it set a specific reserving question relating to the international insurance segment, on the general casualty line. It looks likes the 2008 accident year had a little pop in it. But there is favorable on either side. Is that relate to a single case, single contracts or the situation or is there something else going on there?

Marshall Grossack

Yeah. Matt, this is Marshall. That is one specific full limits claim that we had given the 2008 year. So we do have to pump up things little bit for that.

Matt Carletti - JMP Securities

That’s all I have. Thanks a lot.

Operator

The next question comes from Dan Farrell, Sterne Agee. Please go ahead.

Dan Farrell - Sterne Agee

Hi. Good morning. Just that you had no cap losses in the quarter but there was some activity in the U.S. from a weather perspective. And I’m wondering if there was any higher than normal impact from weather that was embedded in your core loss ratio in any three segments. And if that is, could you sort of quantify it?

Scott Carmilani

Our reinsurance segment had losses from the weathering storms in Nebraska around $15 million, $16 million but it wasn’t big enough to generate a cat for us.

Tom Bradley

I’ll reiterate our policy is if individual catastrophes reach $10 million, we would report as a cat loss. We do occasionally and get these either attritional or citing more than attritional series of losses, in this case $17 million in that segment and a couple of $1 million in the U.S. segment this quarter. So you do see a little bump up in the current year, the current accident year loss ratio of couple of points over the prior year driven by some of those events.

Dan Farrell - Sterne Agee

Okay. Thanks. And then just on the gullible write-down on the TPA business in the financial services platform. Can you talk a little bit more about what drove that? Is it sort of an earnings slow down? Should we think about anything from the earnings power of that business that flows through your net investment income going forward?

John Gauthier

Yeah, Dan, it’s John. We’re going to be sensitive to the fact that these are all private companies. So our disclosure is not going to be overly robust but let’s say, we think it’s a one-time adjustment that does put any potential earnings slowdown behind us. New finance team came in place at the enterprise and decided to what we think, take in a conservative adjustment we let it flow.

We obviously had to let it flow through our earnings for the quarter. But as we disclosed in the queue, we’re actually -- other than that, we had $6 million of earnings. So we think it’s one time for that specific and otherwise we’re pretty confident and optimistic about the remainder of the portfolio.

Dan Farrell - Sterne Agee

Okay. Just one last question, with regard to all of these investments, these are all listed at cost on your balance sheet, correct, but any view of sort of market or economic value relative to that because it feels like a situation where you had to take a specific write-down but there might be other aspects for what is more value, it’s not been reflected.

John Gauthier

Dan, these are actually recorded at equity method.

Dan Farrell - Sterne Agee

Okay.

John Gauthier

So they are actually mark-to-market like the -- almost all the rest of the portfolio. So we book them at cost. We increased the value for just our pro rata of share of their reported earnings and decrease for distributions. So they are actually using the correlation there. This write-down relates to that firm internally, changing their financials and making that adjustments. And we just pick up straight pro rata share of whatever their results are for the period.

Scott Carmilani

And there is no write-up of any mark-to-market benefit of any of the investments there.

John Gauthier

That’s correct.

Scott Carmilani

If they had to increase the value.

Dan Farrell - Sterne Agee

Okay. Thank you very much guys.

Operator

(Operator Instructions) The next question comes from Bob Glasspiegel of Janney Capital. Please go ahead.

Bob Glasspiegel - Janney Capital

Good morning Allied. Scott, you could be doing the right thing with what’s going on in reinsurance by cutting back your right engine, purchasing more reinsurance and getting more protection in your -- for a cat environment, that maybe worse than it’s been. But you’re the third company to sort of report underlying deterioration in reinsurance which seems appropriate in light of the price income material that you gave for that line.

But is there anything that we should be thinking about that can protect you guys from reporting, deteriorating from the underlying pricing trends they’re developing. Now you’re acting strong enough to be able to hold margins. Should we think that underlying margin should be deteriorating in that line prospectively?

Scott Carmilani

Well, I think what you’ve seen is lack of major giant cats, the attritional -- the combination of less rate and attritional frequency in that property cat book I think has caused the loss picks to go up 4 or 5 points. And obviously you are right, we are not alone, I got to believe a lot of the market’s seen some of that because of the nature of the storms that has come about to the first half of the year.

I think we are really in good position based on our cat portfolio because most of that was written earlier in the year. And as you know, a lot of the cat business has done by July 1. There is not a lot that happens between right now which we’re already sitting here towards the end of July and the rest of the year. So most of that has been done and dusted for us and I would assume for the industry as well.

Bob Glasspiegel - Janney Capital

Okay. Thank you. And Tom, if I could just follow up on your sort of expense ratio guidance to use of six months. We should be looking for the expense ratio to be a little worse year-over-year prospectively and what’s sort of driving that?

Tom Bradley

Yeah, I don’t know if it was little bit -- I think last year we ended up in the mid-29s and I usually talk about kind of targeting mid-29 to 30. The biggest incremental driver is just the impact on the stock comp as kind of being a volatile piece of it. And given the success in the stock, it’s driving that expense.

So if there is a marginal increase over last year, it is likely to be there. Otherwise, we have been adding to our headcount to support the growth in the business, but it’s been pretty smart. We are not out front of building something and then watching it grow. It’s the other way around. So I am not looking for any big spikes there.

Bob Glasspiegel - Janney Capital

So you are modeling roughly flattish expense ratio in your plan ex the stock price fluctuation impact?

Tom Bradley

Yeah, I think that’s the way to think about it. We are not going to be a low cost provider given the mix of our business, but I think we are pretty smart about the way we manage that in the middle.

Bob Glasspiegel - Janney Capital

Thank you.

Operator

The next question comes from Sarah DeWitt of Barclays. Please go ahead.

Sarah DeWitt - Barclays

Hi, good morning. The underlying combined ratio ex reserve releases and cat was elevated at about 99%. And I understand the roughly 2 points or so of that is coming from a higher expense ratio, but still elevated results compared to where you have been running. So were there any other unusual items there and how should we think about the -- what’s the right run rate for that going forward?

Scott Carmilani

There are number -- I don’t know if I’d categorize them materially as unusual. The nature of that business is sometimes you get hit and it’s a little bit lumpy. I think it was 8 point of reserve development, so that’s where you’re getting to 99 off the 90. We mentioned a big casualty loss and we had two or three healthcare losses. It wasn’t a bunch of unusual things.

Tom Bradley

I mean, I think for the current accident year, the main drivers were, I did mention in my prepared remarks about $18 million of losses from U.S. storms and from the Chilean earthquake. And then if you go look at our Q, we also mentioned a couple large fires that we had. So those were the four or five events that I think drove this being a bit of a higher quarter over last year quarter loss ratio for the current year. I think that’s just the nature of insurance and reinsurance as you’re going to get those things every now and then. So I wouldn’t really draw conclusions.

Scott Carmilani

They are definitely not trends, they are one-off.

Sarah DeWitt - Barclays

Okay, great. Thanks for answers.

Operator

The next question comes from Mike Nannizzi of Goldman Sachs. Please go ahead.

Mike Nannizzi - Goldman Sachs

Thanks. Just wanted to pick up on Bob’s question Scott I guess to the extent. So this year’s business is effectively being written, but how should we think about next year or just how are you thinking about the reinsurance business on a go forward basis in terms of margins and hurdle rates and allocation of capital?

Scott Carmilani

Yeah, Mike, it’s a big world and there is opportunities in different places. Our gross is down $50 million for the quarter and I mentioned approximately $10 million of that is less writings than we’ve had in prior year and somewhat intentional because it didn’t meet return on those. There is approximately $30 million that we did not book in this quarter which we expect to book going forward as those treaties have just been pushed out to different timelines.

So year-over-year I think our treaty books are on plan to where they should be. Depending on whether that stays into 2015 or not, it really depends on the rate environment. If it deteriorates further from where it is today, I could see us further taking action there. If it gets better, I could also see us further taking action there. It’s still six months left in this year and that’s a lot of time in the eyes of Mother Nature.

Mike Nannizzi - Goldman Sachs

Yeah, got it. Thanks. And I guess, I mean, kind of mark to -- I think I know this question was, but asking about the cats here in the second quarter in reinsurance, I mean it looks like if we kind of back those out or adjust for those, the year-over-year underlying loss ratio is effectively flat in reinsurance. So does that sort of imply that your ability to extract margin over the past year in reinsurance is unchanged? Is that how we should think about that?

Scott Carmilani

I mean last year wasn’t really low loss year, and you take those out and this is all low loss year, so it’s pretty similar. The casualty book is pretty stable in reinsurance. So it’s the property piece that has a little bit of the volatility there.

Mike Nannizzi - Goldman Sachs

Got it. So how does pricing manifest in margin than in reinsurance. Is there a way that we should kind of be thinking about? I mean if Scott mentioned if pricing deteriorates, whether it’s pricing up or down, how does that manifest in your underlying margin? Or is it just because there is offsets of whether it occurs or doesn’t occurs and if it’s attritional that it’s just hard for us to be able to evaluate that from the outside?

Scott Carmilani

There is two parts to that as you know. There is the ceding commission we pay to the ceding market as well as the developed loss pick we see in and in turn the client sees on the success or failure of their book. So we haven’t seen the demonstrable change in loss picks on that portfolio. We have seen some pressure on ceding commission rates, and that’s where you’re starting to see us reduce lines and/or our participations in some treaties.

John Gauthier

I will also mention when you think about our loss picks, the actuaries here get involve with every single or not -- almost single treaty that we write, we actually have a loss ratio associated with each one of those. So we do compare that year-over-year and see how it’s changing. So we do put a lot of thought into our loss fixing. You also to have to remember that the reinsurance businesses has often earned over, at least a 24-month period on risk attaching basis. So lot of our loss picks that we’re looking at right now are business written in 2013.

Mike Nannizzi - Goldman Sachs

Got it. And then Marshall, maybe if I get one question there on the reserve development. Looks like, if I'm reading it right from the supplement, that you've taken about $30 million of favorable development on property reinsurance on 2013 business this year. And there are $26 million at cats, $26 million or $27 million of cats last year. So is that underlying or attritional loss development in reinsurance that we're seeing?

Scott Carmilani

Remember there is no cat in 2013, so some of that cat business is already clean.

Marshall Grossack

Yeah. I mean, this is really a combination of the two, but we did go back and we did actually have some case reserve set up that we have taken down and then just the lack of cat as Scott mentioned.

Mike Nannizzi - Goldman Sachs

Got it. Okay. Great. Thank you.

Scott Carmilani

Thanks Mike.

Operator

(Operator Instructions) The next question comes from Ian Gutterman of Balyasny. Please go ahead.

Ian Gutterman - Balyasny

Hi. Thanks. I guess my first, Scott, can you just give me a reminder? I mean I think I got this kind of right, but just in the international insurance segment about how much premium is Bermuda versus Europe versus Asia? And how the difference in growth was this quarter amongst those?

Scott Carmilani

Its not just Asia, its -- and that’s in our supplement but it’s…

Ian Gutterman - Balyasny

Yes, I was looking for just the insurance part though because in the supplement it includes reinsurance it looks like, right?

Scott Carmilani

Not in the insurance. It’s about two-third, one-third, Bermuda versus all other.

Ian Gutterman - Balyasny

Okay. And how is the growth different in Bermuda?

Scott Carmilani

(Indiscernible)

Ian Gutterman - Balyasny

Okay. I'm sorry. I didn't mean to interrupt. How is the difference in growth this quarter in the Bermuda part versus the non-Bermuda part?

Scott Carmilani

This quarter Europe grew slightly more than Bermuda did.

Tom Bradley

Yeah. Europe was the growth driver in that segment, Bermuda was more flat.

Ian Gutterman - Balyasny

Okay. I guess, I’m wondering in similarly pricing. I assume pricing is worst in the Bermuda part then rest of rest of world?

Scott Carmilani

Not necessarily.

Ian Gutterman - Balyasny

Okay.

Scott Carmilani

Casualty and property rates in Europe are falling more precipitously then they are. And it will be right in Bermuda although it’s an excess market. It still predominantly North American large account business.

Ian Gutterman - Balyasny

Okay.

Scott Carmilani

It has been pretty flat. Europe seeing downward pressure on both casualty and property rates.

Ian Gutterman - Balyasny

Okay. Got it. So I was trying to just get a sense of going forward, should we expect -- should we expect you to be pulling back possibly on top line there, just given pricing pressure seems to be picking up in Bermuda and London? And I know you have some new businesses you're growing but is there enough of the new areas to offset the pricing pressure on the existing?

Scott Carmilani

Unless design is some of the new ways to offset some of the pricing that on the deteriorated large access accounts. And we’ve been offering new -- innovative new products in the Bermuda market that are different than what we traditionally offered. I think that’s what some of the traction is coming from.

Tom Bradley

And our casualty business in Bermuda has terrific returns. So it has the ability to absorb…

Scott Carmilani

Rate reduction.

Tom Bradley

Yeah. And the European business, it is driven by a number of new businesses we talked about over the last year which are providing growth of a smaller base.

Scott Carmilani

Getting some scale.

Ian Gutterman - Balyasny

Got it. Can you give any examples of those new products in Bermuda?

Tom Bradley

Yeah. Aviation, Marine, onshore contracting and our reps in warranty business in Europe also.

Scott Carmilani

Yeah. Its call warranties and indemnity business in London, but it’s very similar to the M&A, reps and warranty business here in the state.

Ian Gutterman - Balyasny

Got it. And then can you expand, there was some commentary in the queue about pricing outlook. We believe going forward in the near term there will be pricing pressure across most lines of business in particular international. Am I interpreting that right that you’re seeing increasing pricing pressure or just a continuation of the pricing pressure you reported this quarter?

Scott Carmilani

I would say, it’s a continuation. It’s a statement that it’s a very competitive environment. There is certainly pressure. There is more pressure on property than there has been in a while, compared to casualty and/or professional liability, especially businesses, which tend to have a smaller band of volatility in pricing. But it’s there and I’m sure everyone -- I’m sure you’ve seen a lots of different commentary about it just a matter of degrees.

Ian Gutterman - Balyasny

Okay. And are you seeing people who are disappointed with what's happening at property sort of putting incremental pricing pressure on other lines? I mean I think obviously we've heard about seeding commissions and casualty reinsurance. But is it spreading into other parts of the insurance world as people are looking to move capital elsewhere?

Scott Carmilani

I haven’t seen it but I’ve seen a lot of competitive market being a little too aggressive in the healthcare market. I think there is a lot of markets that are looking at the last five years instead of last two or three years and being more aggressive and they probably should be. But that is the only area where I don’t see the market trending the way it should be.

Ian Gutterman - Balyasny

Got it. And then if I ask two quick numbers questions. Tom, I notice this quarter some -- in the U.S. segment that the 2013 accident year was adverse and last quarter that has stopped, but before that that had kind of been a pattern going back over the past year. So of the most recent accident year developing adverse. So can you just give us a little bit more color? I know you talked about that large healthcare loss but it looks like that was further prior years. Sort of what was happening in ‘13 and sort of what confidence do you have that ‘13 pick will hold first developing up like we saw with the ‘12 pick?

Tom Bradley

Were you’re talking about the insurance or reinsurance or..?

Ian Gutterman - Balyasny

U.S insurance that develop that adversely about $8 million in the quarter. The ‘13 accident year.

John Gauthier

I’m sorry. You’re talking about ‘13 developed $8 million adversely last year or this?

Ian Gutterman - Balyasny

No, I’m sorry. In this quarter it looks like the ‘13 accident year developed $7.7 million adverse for U.S. insurance.

Tom Bradley

Yeah. I mean, we always try to react to bad news early on in those years. So we have seen a little bit of increase frequency in a couple of those casualty lines of business, particularly the healthcare, which we just discussed. And so we did bump our pick up in that. We tried to be conservative. I think we have good track record overall of having adequate loss picks. So at this time we believe that’s correct.

Ian Gutterman - Balyasny

Got it. And then lastly for Tom, can you -- is there any rule of thumb you can give us on the stock price impact on expenses? If the stock's up 1% it's x hundred thousand or x million of incremental expense. It's just been a hard one to model?

Tom Bradley

It’s about $5 million that I mentioned. It's about a point. So it's about $5 million this quarter on the 11% run.

Ian Gutterman - Balyasny

Got it. That was similar than last quarter the other way?

Tom Bradley

I’m sorry.

Ian Gutterman - Balyasny

That was about similar than last quarter ratio the other way if I wanted to normalize both quarters?

Tom Bradley

Yes. Goes both ways.

Ian Gutterman - Balyasny

Perfect. Okay. Thank you.

Tom Bradley

Sure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Carmilani, Chief Executive Officer, for any closing remarks.

Scott Carmilani

I will just say thanks for participating on the call and enjoy the rest of your summer.

Operator

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

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