Validus Holdings' (VR) CEO Ed Noonan on Q4 2015 Results - Earnings Call Transcript

| About: Validus Holdings, (VR)

Validus Holdings, Ltd. (NYSE:VR)

Q4 2015 Earnings Conference Call

January 29, 2016 10:00 AM ET

Executives

Jon Levenson - Executive Vice President

Ed Noonan - Chairman and Chief Executive Officer

Jeff Sangster - Chief Financial Officer

Kean Driscoll - Validus Re CEO

Analysts

Amit Kumar - Macquarie.

Michael Nannizzi - Goldman Sachs

Matt Carletti - JMP Securities

Josh Shanker - Deutsche Bank

Brian Meredith - UBS

Meyer Shields - KBW

Jay Cohen - Bank of America.

Ryan Byrnes - Janney

Ian Gutterman - Balyasny

Operator

Good day, ladies and gentlemen, and welcome to the Validus Holdings Ltd. Fourth Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, Executive Vice President, Mr. Jon Levenson. Sir, please go ahead.

Jon Levenson

Thank you and good morning, and welcome to the Validus Holdings conference call for the quarter and year ended December 31, 2015. After the market closed yesterday, we issued an earnings press release and financial supplement which are available on our website located at validusholdings.com. Today’s call is being simultaneously webcast and will be available for replay until February 12, 2016. Details are provided on our website.

Leading today’s call are Ed Noonan, Validus Chairman and Chief Executive Officer, Jeff Sangster, Validus Chief Financial Officer and Kean Driscoll, Validus Re CEO. Before we begin, I would like to remind you that certain comments made during this call may be deemed forward-looking statements as defined within U.S. Federal Securities Laws. These statements address matters that involve risks and uncertainties, many of which are beyond the company’s control. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements and therefore you should not place undue reliance on any such statements.

More details about these risks and uncertainties can be found in the company’s most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, both is filed with the U.S. Securities and Exchange Commission. Management will also refer to certain non-GAAP financial measures when describing the company’s performance. These items are reconciled and explained in our earnings release and financial supplement.

With that, I’ll turn the call over to Ed Noonan.

Ed Noonan

Thank you, Jon. Good morning and thank you for taking the time to join us today. Validus completed another successful year with $409.7 million of net operating income and 11.3% return on average operating equity for the year. We grew book value per diluted share including dividends by 1.8% in the fourth quarter and by 10% for the full year.

Each of our underwriting businesses performed well in the quarter and continued to approach the market with absolute discipline. Our AlphaCat subsidiary continues to go from strength to strength with assets under management growing to $2.4 billion in the quarter, with an additional $20 million added post January 01.

Our business model allows us to continue to generate strong returns despite the competitive environment while managing the risk we take on very prudently. I’m going to turn the call over to Jeff Sangster to give you more detail on our financial results, then Kean Driscoll will provide more color on our business. Jeff?

Jeff Sangster

Thanks Ed and thank you all for joining the call today. Before I provide an overview of the results of operations for the year and the fourth quarter as well as our financial position, I’d like to make reference to some changes we have made to our segment presentation as well to a consolidation -- effective this quarter as we continue to improve disclosure transparency.

The presentation changes were made to present results of Validus Re, Talbot and Western World segments on an underwriting income basis. Investment results, foreign exchange, other income, finance expenses and income taxes are presented on a consolidated basis reflecting how we operationally manage and monitor these areas.

Results of AlphaCat are now presented on an asset manager basis consistent with how AlphaCat operates for Validus and third party investors. Prior period comparatives have been restated to reflect the change in presentation.

Turning to our consolidation framework, effective this quarter, we have adopted the revised accounting standard for consolidations. As a result, all AlphaCat entities which were previously accounted for under the equity method of counting are now consolidated and PaCRe has been deconsolidated from our group results.

As this was a retrospective application of new guidance all prior periods have been restated. Turning to the full year 2015 results of operations, our net operating income available to Validus common shareholders is $409.7 million or $4.74 per diluted common share. Our net income available to Validus common shareholders were $374.9 million or $4.34 per diluted common share.

As a result, Validus has now produced a full year profit in each of the ten years we’ve been in business. Net operating return on average equity for the year was 11.3% and return on average equity for the year was 10.3%.

Book value per diluted common share at yearend was $42.33, an increase of 10% from the prior year inclusive of dividends.

Now turning to the fourth quarter results of operations. Our net operating income available to Validus common shareholders is $105.4 million or $1.24 per diluted common share. Fourth quarter net income available to Validus common shareholders was $69 million or $0.81 per diluted common share.

Annualized net operating return average equity for the quarter was 11.6% and annualized return on average equity for the quarter was 7.6%, book value per diluted common share of $42.33 increased by 1.8% from September inclusive of dividends.

Speaking in more detail to the results of the quarter. Total gross premiums written were $309.6 million for the quarter, a decrease of $27 million or 8% from Q4, 2014. The principle components of the decrease in premium are as follows.

Gross premiums written in the Validus Re segment decreased by $18.4 million or 56.2% over the prior year’s quarter to $14.3 million, the reduction was primarily driven by a decreases in the marine and specialty lines of $15.9 million and $4 million respectively.

The decrease in the marine lines was mainly driven by the absence of an $11 million onetime gain on the commutation of a flagstone contract which occurred in Q4 of 2014. The decrease in the specialty lines was mainly driven by adjustments to existing business, most notably a $15 million reduction in property insurance premium estimates for the year. This decrease was offset by $7.1 million of new casualty business which is written in the fourth quarter.

Gross premiums written in the Talbot segment decreased by $17.8 million or 7.2% over the prior year’s quarter to $229.7 million. The reduction was most notably driven by decreases in the marine lines of $12.2 million. The decrease in the marine lines was principally driven by reduced premium in the cargo line of $9.2 million due to ongoing market conditions and economic factors which have reduced new business and renewals.

Offsetting the decreases above was an increase in the Western World segment of $5.9 million or 9% over the prior year’s quarter to $71.1 million. The increase was driven by increases in both property and liability lines of business.

Shifting to a discussion of losses, our quarterly combined ratio was 78.3%, including a loss ratio of 39.5%. We did not incur any notable or non notable loss events during the quarter.

Net favorable development from prior years was $58.1 million, equal to 10.7 loss ratio points. Our favorable development is primarily from non-event reserves in the amount of $47.8 million. Net favorable development from prior years on event-specific reserves was $10.3 million. The net favorable development by segment was: Validus Re, $22.6 million; AlphaCat, $5.1 million, Talbot, $23.1 million; and Western World, $7.3 million.

$2.3 million of the Western World fourth quarter favorable development resulted from the risk premium key gap adjustment which represents the final occurrence of such an adjustment. Western World produced a combined ratio of 94.3% in the quarter or 98.1% after adding back the key gap adjustment.

The quarterly consolidated accident year loss ratio, excluding notable and non-notable loss events and changed in prior accident years was 50.2% in the quarter in comparison to 53% in Q4, 2014. Beyond underwriting results, I’ll comment on the AlphaCat contribution to earnings, the quarterly investment results and our capital position.

AlphaCat had total assets under management of $2.4 billion as of January 01, 2016, $2.1 billion of which is managed for third parties. Third party AUM has grown over 90% since January 01, 2015. In addition to significant growth in the ILS funds, AlphaCat also funded and launched a new sidecar, January 01.

The recent growth in AUM has solidified AlphCat’s position as a top ten ILS manager and continues to be of important strategic value to Validus. Turning to the results of the AlphaCat segments, AlphaCat contributed $7.1 million of income in the quarter net of non-controlling interest, which is comprised of the following components.

AlphaCat earned management fees of $6.3 million in the quarter of which $1.3 million were earned from related parties. Offsetting the fees are expenses incurred by AlphaCat managers of $3.4 million. Investment income from AlphaCat sidecars and ILS funds was $5.9, adding our share of PaCRe loss retained by Validus of $1.7 million; AlphaCat contributed $7.1 million in the quarter.

As noted in our January 12, press release PaCRe was off risk effective January 01, 2016. The PaCRe investments and Paulson funds were liquidated with an effective date of November 30. The assets have been returned to the initial investors with the exception of $4 million of operational cash, 10% of which represents the remaining Validus exposure to PaCRe.

We still like to model and our experience of PaCRe has honed our skills. We ultimately decided to exit the vehicle as the investment volatility and the returns on the catastrophe business materially changed from our original pieces.

Starting this quarter, we have increased our disclosure detailing the allocation of investment income and invested assets between managed investments and non-managed investments, the latter category being third party investments in AlphaCat.

Our investment portfolio fared well in the quarter as we avoid below investment grade bonds that drove volatility in the fourth quarter and our portfolio has no public equities and asset classes have experienced significantly volatility thus far in 2016.

Our consolidated investment portfolio including cash and cash equivalents and restricted cash is $8.6 billion as at December 31, 2015. Excluding non-managed short term investments cat bonds, cash and cash equivalents and restricted cash of $2.2 billion or managed portfolio of $6.4 billion.

Our consolidated net investment income for the quarter was $31.6 million excluding the non-managed investment component, managed net investment income of $30 million contributed to a quarterly annualized effective yield of 1.9%, a decrease of one basis point from the Q3, 2015 annualized effective yield of 1.91% and an increase of 12basis points from the Q4, 2014 annualized effective yield of 1.78%. Duration of the portfolio was 2.15 years at December 31, a decrease from 2.24 years at September 30.

Net of our net non-managed portfolio, we recorded $3.4 million in realized investment losses in the quarter and $34.5 million in unrealized investment losses.

Total shareholders’ equity available to Validus at December 31 of $3.64 billion and total capitalization available for Validus at December 31 is $4.42 billion. Excluding non-controlling interest, debt to capital at quarter end was 5.5% and debt in hybrids together as a percent of capital was 17.7%.

Our 1:100 U.S. windstorm PML is 17.2% of total capital, excluding non-controlling interest, an increase of $103.9 or 15.8% from Q3, due to the timing of the Validus Re retro purchase which Kean will describe in more detail.

Our peak zonal aggregate is 49.9% for the Validus Re capital. During the quarter, we repurchased 1,233,505 shares at an average price of $45.81 per share for a total of $56.5 million in the quarter. Our full year repurchase total is $260.4 million. When combined with full year dividends of $130 million we have managed $373.4 million of capital in 2015, which closely aligns with our goal of managing capital to match our full year net income of $374.9 million.

Since January 1st we have repurchased 369,146 shares at an average price of $43.80 per share for a total of $16.2 million in the quarter thus far. Our existing share repurchase authorization has $516.5 million remaining.

It is this time of the year that we finalize our budget and establish our capital management plans for 2016 which we will be discussing with our board next week. As was the case at this time last year, we are comfortable with our current excess capital position. As in increased business opportunities we again expect earnings for the year to be a good proxy for the amount of capital we intend to manage through share repurchase and dividends.

In summary, capital return in 2015 closely matches the plan we detailed at the beginning of the year an achievement we intend to repeat in 2016. With that, I’ll turn the call over to Kean.

Kean Driscoll

Thanks Jeff, and good morning everyone. Today, I’d like to cover the reinsurance market rate environment in our key classes of business at January 01. I’d like to start by reminding you of Validus’ significant investment in analytics and research. Validus research employs over 40 professionals in cat modeling, scientific research and software developments. And 12 of our staff have PhD’s in areas such as engineering, meteorology, advanced mathematics and statistics. We also have over 20 actuaries on staff, most of whom are associates of fellows of the Casualty Actuarial Society.

We've committed substantial human and economic capital to ensure that we have the most important use on loss cause in the market. In addition, we actively share our insight with our customers to help them improve their understanding of risk into more effectively deploy risk capital. We believe we are without peer in our commitments to understanding risk and helping our customers leverage our insight.

I mentioned this because the greatest challenge we have as an organization is sourcing, identifying, and assuming profitable risk. We have confidence in our ability to source risk as we are a global leader in property, marine and energy and our barrier specialty cost. We also have strong belief in our ability to identify those risks that are priced well and those that are priced poorly.

Most importantly, we continue to receive desirable findings on the risk we choose to support, specifically at January 01, there were several instances where major clients reduced limits purchase and we were able to maintain or grow our expiring capacity. Our clients recognize our unique value proposition not only in providing an excellent security and consistent capacity but also view Validus as a partner in understanding and managing risk.

In a market feeling the effects of excess capital, our ability to access well priced risk is a true differentiator for both Validus Re and AlphaCat.

Now onto the renewal market. U.S. property market renewals is very orderly and rates were down low single digits. We agree with the general market commentary on rates but we believe the rate reductions in our portfolio were less than the industry average for the reasons I just outlined. Terms and conditions were generally unchanged and there was a modest upper trend toward locking in more multiyear capacity.

In the aggregate, demand was flat, but we did see several instance in which clients have historically executed a strategy of retaining more business and consolidating purchasing are now moving to employee reinsurance to reduce volatility and purchasing more reinsurance at lower levels.

The international property market was challenging. There’s a broad push from the excess capacity in the market to source diversifying risk. Unfortunately in some instances that levels were achieving profit is difficult. Nowhere was this more evident than its segments of the Asian market where reinsurance underwriting standards have generally lapse and data quality is poor.

Despite a recent history of large cat and risk events, and rapid growth in aggregates, we still saw a double digit rate declines. And accordingly, we continue to strengthen our reinsurance portfolio in the region. We along with many of our competitors are intrigued by growth prospects in Asia. We think Japan continues to be a great trading market as is South Korea for pursuing growth throughout Asia will not be at the expense of our underwriting standards.

The Australian, European and U.K. markets were also pressured, but we continue to find attractively price risks. The story in the Marine and Energy markets is the impact from the collapse in oil prices. This has led to reduced drilling activity and a virtual standstill on construction projects which in turn puts pressure on insurance, reinsurance premiums. Our proportional contracts terms and conditions are largely unchanged, ceding commissions are flat, but its risk limits remain static and premium levels drop, expected volatility of results increases, so we shift the capacity and we reduce some shares and response.

Cargo classes are feeling the effects of oil price reductions as well as commodity, reduce commodity prices. Excess of loss rates were up around 5% and there continues to be excess capacity but is a leader in the market we are seeing a broad showing of opportunities and continue to receive desirable signings on a better price programs.

We see opportunities for growth in Marine and Energy in Europe, Asia and Latin America as we leverage the benefits of our expanding local office network.

Our specialty segment is comprised of broad array of classes including aerospace, composite, workers comp cat, mortgage terrorism, trade credit and political risk. We’ve successfully grown in attractively priced segments in the specialty market over the last few years and find these non-correlating classes to be complementary to our cap portfolio.

I’ll address some of our new initiatives. We are in the third year of writing trade credit and have had success increasing our shares to January 01. We very much like the risk return prospects in this class and the market has performed well since 2008.

Closely related to trade credit businesses are political risk accounting. We entered this market in 2015 and at January 01 renewals [Indiscernible] accounts as we continue to find new attractively priced placements.

We also recently entered the mortgage guarantee market in the U.S. covering both PMI and GSC business. We won our first transaction in 2015 at a modestly grown new account at January 01. We see good opportunities to support the growing market of mortgage reinsurance placements sponsored by Freddie Mac and Fannie Mae.

Composite has been a strong growth of area for us. These transactions were a combination of specialty and rain and energy classes typically geared towards more declines. Our ability to cross sell in classes in a composite structure and competitive advantage and we generally see less competition on these placements than for standalone coverage. The composite rates drop about 5% at January 01.

Having just completed our first major renewal on the cash lease base, we’re really pleased with the response from our ceded sub-brokers. Two quarters ago, we discussed our strategy of creating more connectivity with our customer base by expanding our product offering. The acceptance has been terrific. We prudently approach the market, leveraging existing relationships at the corporate and individual level.

Briefly commenting on the retro market, we were able to purchase the most comprehensive and affordable program in our history. We purchased worldwide aggregate protection in addition to protection on a marine and specialty portfolios. The capacity predominately originates from the collateralized market and our purchases are accretive to expected return on equity.

Our U.S. win PMLs increased by 15.8% from last quarter. This is predominantly driven by the timing of retro purchases and we expect to make adjustments to our net portfolio that will reduce our win PMLs to levels that are more in line with our Q3, 2015 published results.

Now a few comments on AlphaCat. As Jeff noted, we’ve had excellent growth in AUM. This increase demonstrated the recognition of the reinsurer line asset manager model by investors who increasingly value the market access and superior analytics available from a large specialty group like Validus. The increase in AUM also reflects the long term investment track record of AlphaCat.

The income generated by AlphaCat is a steady contributor the group’s earnings but equally important AlphaCat helps us optimally combine ISL capital with balance sheet capital to offer customers the most efficient reinsurance solutions.

We deployed nearly 1.2 billion of limits through AlphaCat during the January 01 renewals at 2.3 billion of limit enforced. Our ability to leverage our analytics and portfolio management skills and our balance sheet strength and our capabilities as an asset manager firmly position us as a global leader in cat and a go through solution provider for our customers.

Working in constant with AlphaCat has not only produced excellent returns for our investors but has allowed Validus to improve the ROE on our cap portfolio. Now back to Ed for additional comments.

Ed Noonan

Thanks, Kean. As Kean has described Validus Re is performing well despite competitive pressure. And the same holds true for our Western World and Talbot operations.

Looking at Talbot underwriters, we see fundamental headwinds in London. Rate competition is creeping up for the most classes although there are a few outliers. Aviation, haul and energy are all far too competitive with mid teen rate decreases, as a direct consequence of the class of oil prices in the case of haul and energy.

Most other classes are of 2% to 7%. In the aggregate, our portfolio have seen 6.6% rate slippage for the full year of 2015 with a slightly better result in January at 4.8%. The ongoing trend of brokers bundling up their business and the facilities with higher commission of these is also creating a difficult competitive dynamic. We generally don’t find these to be consistent with prudent underwriting and therefore rarely participate.

The effect of these facilities is to put pressure on timings. This is a soft market phenomena and a way for brokers to offload their expense problem under underwriters.

In a market where many players are seeing underwriting margins in a low single digits, given the way even two point to brokers is reducing underwriting margins by 40% or 50%. We don’t think that’s a rational long term model and frankly I’m sceptical as to the benefit to the ultimate customer.

We’ve been seeing Talbot having growth prospects in the U.S. as part of our developing brokerage portfolio. The U.S. remains the world’s biggest market and we are materially underway. Rates in the U.S. are competitive but generally not silly and there is room for many of our core classes for Talbot to expand.

Talbot continues to generate strong underwriting results due to the class of business mix and their leadership position on a high percentage of the business we find attractive.

During the quarter, we announced that that Rupert Atkin will be stepping into the Chairman's role and Peter Bilsby will take the helm at Talbot. Rupert has had one of the most successful careers in Lloyd’s over the last three decades and has built an outstanding business. Peter has been with us for about six years and he was originally hired with succession in Lloyd. Peter is a strong executive with deep experience in both Lloyds and the company market, and we are in very good hands.

Western World continue to make strong progress in the quarter. Building up insurance income takes time, but the re-underwriting the company undertook post acquisition has improved the loss ratio run rate by 12.7 points during 2015. With the shift to more short tail products, we expect this trend to continue in 2016. Overall, rates were up 3.1% for Western World, but we think that’s skewed by corrective pricing in some areas and the underlying run rate is slightly lower.

The property team we had, had an excellent first year. The U.S. property market is extremely competitive so we’ve been very disciplined in our activities. We are only quoting about 28% of the business we see and only binding 25% of what we quote with modest incremental PMO usage.

Western World invented the binding authority contract business and it’s their core expertise. The combination of their 50 year reputation and an extraordinary use of automation creates real competitive advantage.

During the fourth quarter, Gary Tiepelman joined us to open our Scottsdale office. Gary is one of the most highly regarded leaders in the contact binding authority business and he adds to our opportunity in the class as well as our existing management strength.

Binding authority business has average premiums of about $2,200 and is far less competitive than the rest of the markets. One of the biggest keys to our success is our agency processing system, which is regarded as best-in-class by wholesale agents. We’ll average this advantage aggressively in the segment and this is low 90s combined ratio of business with extremely high retention ratios.

We’ll also continue to add classes as well as underwriters from our Talbot operation to build the specialty brokerage segment in the U.S. using Western World infrastructure and licenses. We continue to be very bullish on this latest addition to the group.

A word on our reserving, we saw higher than normal favorable development to the year across our business. Despite that favorable development our reserve position has not moved related to our actuarial indications.

Unlike long tail companies we’re not burning off big redundancies from the past. We don’t manage our reserve releases and we do nothing to alter the natural burn off of our IBNR. Our ongoing releases are a function of our prudent reserving philosophy, which remains unchanged.

Having said that, we think 2015 was a bit of an outlier on the high side and wouldn’t typically expect to see releases of quite that magnitude. Finally, I’m feeling rather bullish about business despite the competitive environment.

We’ve weathered the worst of rate decreases in the U.S. catastrophe market which is our biggest source of earning. And while we benefit from the lack of major events, we’ve also spend a good deal of money to protect the portfolio and based on our returns I think our model works.

This year looks to be the bottom of pricing cycle for U.S. cat. And we’ve used both AlphaCat and retrocession to again optimize our risk position. While we have competitive headwinds on London, the ongoing development of our U.S. business gives us space to grow.

So, while the various pricing cycles we operate in have not yet turned positive. Our ability to weather the market and still produce strong returns is very gratifying. The near term still has its challenges, but when navigating them very well while we build strength for the inevitable upturn.

And with that, we’ll be happy to take any questions you might have.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Amit Kumar with Macquarie. Your line is open. Please go ahead.

Amit Kumar

Thanks and good morning, and congrats on the quarter. Two questions if I may. The first question goes back to the broader discussion on capital deployment, and I guess capital usage at 1/1 [ph]. Excluding the discussion on PML and retro-purchases do you get the sense that less capital was deployed at Validus Re at 1/1, because lot of the growth came in the AlphaCat segment then how should we think about that?

Ed Noonan

Amit, you ask not very nice questions. I almost didn’t do this call. I was going to do a competing call for insurance executives. But nevertheless we’ll answer.

Amit Kumar

I will donate $5 million

Ed Noonan

No, I mean, I don’t feel like there is a material difference in the capital deployed. We felt like there were ample opportunities in really all three major segments for us. Property, marine and energy despite of the headwinds our team and their position in the market continue to find good new opportunities, clearly international property was challenged and there were some pullback there, but with respect to that as a major capital driver, its less of an impact than in the U.S. And specialties really been a nice growth opportunity for us. That fall in context of our ability to source profitable opportunities throughout AlphaCat and deploy a significant new influx of AUM.

So, I think in the aggregate we had meaningful growth enterprise wide but Validus Re is largely deploying comparable levels of capital and as I noted the PML impact is really a timing issue more than anything else.

Amit Kumar

Got it. That’s helpful. I guess the second and the final question I had was, this goes back to the broader discussion on consolidation. Now there is this new debate emerging in the marketplace that’s standalone MI players might figure in the next round of consolidation with Bermudians with a lower tax domicile. Now you talked about obviously that your mortgage insurance fees, I’m curious what your thoughts on that and could Validus play a role in larger consolidation in the MI space? Thanks.

Ed Noonan

We do look at everything, track everything, think about everything and we’ve thought about MI. In general that would be such a fundamental and transformational change to the nature of our business that I think we’re more comfortable having it as part of our reinsurance portfolio than an acquiring MI business. I don’t want to say never, because there could be some circumstance where it was really compelling, but that’s not a place where we are spending kind of our strategic energy in thinking.

Amit Kumar

Got it. That’s very helpful. Thanks, thanks for the answers and good luck for the future.

Ed Noonan

Thank you.

Operator

Thank you. And our next question comes from the line of Michael Nannizzi with Goldman Sachs. Your line is now open. Please go ahead.

Michael Nannizzi

Thanks so much. Ed, just Western World you mentioned, the improvement in the loss ratio year to-date, but the expense kind of offset that, so we still running about 105, 106 there. So, just given the changes you mentioned, do you see yourself getting to underlying profitability and those are all underlying numbers. Do you see yourself getting to underlying profitability in Western World in 2016?

Ed Noonan

Yes. I think if we don’t get there, we’ll get very close and we’re talking about underwriting profitability.

Michael Nannizzi

Underlying, underwriting, yes.

Ed Noonan

Yes. I think by the end of – by the fourth quarter certainly on a run rate might expect to be there, maybe even a bit earlier than you’re depending on how some of our new product stack. There’s couple of aspects to what’s going on. First, we canceled or not renewed so much business right after acquisition, now that cut into premiums and drove the expense ratio up. And so, it wasn’t the result of some greater expenditures at Western World, even the additions of the teams that we’ve talked about really haven’t move the needle there, really a function of declining premium, which has now stopped and premiums as you can see in the fourth quarter are growing again and we expect that trend to continue. So, that will have a meaningful impact on the expense ratio over the course of the year. And as we continue to grow this short tail products that will have a meaningful impact on the loss ratio in 2016 as well the absence of the underperforming business is no longer with us.

So, all those things come together we think that on a run rate basis in the second half of the year at some point we expect to be generating underwriting profits. The market will dictate a lot of that and as well loss activity, but I think we’re feeling pretty good about that.

Michael Nannizzi

Thanks. And then just, could you on the expense ratio, we seen that sort of tick up through the year, should we be thinking about yearend in the fourth quarter is a better indication of where you expect to be or is there is still some seasonality in there, just given the lower rating in the fourth quarter or anything else may cause the back. Half of the year to be a little bit top-heavy in the higher expense ratio of business, just trying to get an idea of given the shifts in the portfolio or how we should we thinking about that?

Ed Noonan

Sure, Mike, the real driver is the performance compensation in the back half of the year. So, last year we took almost all of that increase to our accrual in the fourth year. This year we split that over in Q3 and Q4, so you’ll see that the expense in Q3 and Q4 is materially higher than Q1 and Q2, was entirely driven by the increase in accrual to the performance best comp.

Michael Nannizzi

Okay. And that was more pronounced -- I mean, so last year, that -- the first-half to second half was a couple points. This year, it's like 4 to 5 points. So, is that -- so should -- I just want to make sure we're thinking about that right on the forward?

Ed Noonan

Yes. I think that’s right. As I said, it was more pronounced in the fourth quarter alone last year, whereas its spread a little more over the third and fourth quarters this year. Obviously, our earned premium is down a little on the back of – especially on the back of marine and energy lines through the year and writings have been down at both Talbot and Val Re and so the earned premium is down a little and that’s contributing broadly to an uptick in the ratios.

Michael Nannizzi

Got it. Okay. And then if I could, the other insurance-related income -- and we are breaking that out now; that's super helpful. But is there a pattern of seasonality, whether it's in AlphaCat or the other segments that we should be aware of? And, how…?

Jeff Sangster

Right. Do I cut you?

Michael Nannizzi

No, go ahead. No, sorry, that's all right.

Jeff Sangster

That is really should be reasonable stable throughout the year. As we earn a little of our performance based fees from AlphaCat in the quarters where we have higher risk. So you’ll see that might tick up in Q3 if we don’t have an exposure to wind event. But generally most of that is fees based on underlying assets managed and as a result, will be reasonably stable.

Michael Nannizzi

Got it. Got it. And then I've just got one last one, Ed, if I could -- and thanks for taking all the questions, is you sort of -- you mentioned, Ed, reserve development upfront and sort of thinking about budgeting. I'm just curious -- when you guys look at your budgets and forecasts, do you include a provision for development? And if not, how are you looking at sort of a normalized return in 2016 or just on a run rate basis at this point?

Ed Noonan

Yes. So don’t budget for reserve releases, because we believe that every moment in time we have posted our best estimate of what our liabilities are and so the two would inconsistent.

Michael Nannizzi

Right.

Ed Noonan

And as far as run rate, I don’t think that we give guidance on that and so that’s a little tricky. I would say that the best indication I can give you probably is just looking right out the supplement you get a pretty strong sense of the X reserve release component of the business. The only thing I would say is that if passed this prolog each [audio gap] easily reflected just looking at the supplement. But I realize that’s probably not the most fulfilling answer I can give you, but consistent with…

Michael Nannizzi

No, that's fair. I mean, I guess, I mean if I were to look at -- just doing some math, I mean, just on 2015, it would look like the accident ROE, even with relatively light capital this year, looks like it's in the sort of 5% to 6% range. And so I guess my question is, if that's right, is there an opportunity maybe to, if you don't have that much control over that number, just given the environment, is there a greater opportunity to reduce the capital balance significantly so that you can take that from a sort of mid single to higher, just by adjusting the denominator? Is that something -- A, is that right?

Ed Noonan

Maybe the thing that I would encourage you to focus on is, you’re looking in an accident year ROE, if that is a good indicators it’s going to turn out to be redundant – materially redundant and so what looks five to six today on an accident year basis, likely would generate a significantly higher ROE, so again I realized there is not some disclosure I can give, that will help you populate this spread sheet on that but I don’t look at 2015 and expect the accident year to end up at 5% or 6% binding..

Michael Nannizzi

Okay. Got it. Okay. Thank you so much.

Ed Noonan

Okay.

Operator

Thank you. And our next question comes from the line of Matt Carletti with JMP Securities. Your line is open. Please go ahead.

Matt Carletti

Thanks. Good morning. Just have a few mostly numbers questions. Maybe for starters a couple of the accident year loss ratios, ex-cat -- Talbot, which is usually very steady was quite low this quarter. I think it was 50 and we've been pretty steady around 58. Obviously a good thing, but I was hoping maybe you could give a little color on what was driving that?

Jeff Sangster

Yes, sure, Matt. A bit of anomaly there, given that we’re in the fourth quarter, it sort of a function of the accounting for prior-period development. What drops to the change in prior accident years is only anything that’s happened in the previous calendar year or earlier, so obviously in this case that’s 2014 and earlier. What we had was development on reserves that we put up earlier in the year, and so that’s prior quarter development as oppose to prior year development.

Matt Carletti

Got you. Make sense.

Jeff Sangster

Yes. That amounted to about $14.7 million or 7.2 loss ratio points. So if you add that back to the 50.2, you are at that 57.5 which comes in right on top of your 58 that you mentioned, and then taking out a step further in the – you’ll notice the offset to that is that the BBD was a bit lower than run rate and if you add back to 7.2 points that 11.3 becomes 18.5 which is right where it’s been over the last several quarters.

Matt Carletti

Make sense. Perfect. And then kind of a similar question on the same sort of number for Western World, I mean, obviously it’s been a nice progression down. You talked about some of the reasons why, I guess, my question on the 67 [ph] or so reported in the quarter, do you view that as a pretty clean quarter a good jumping off point? I think Ed mentioned, you expect some further improvement on that number or is there anything going on this quarter that artificially move it one way on the other?

Ed Noonan

Good observation, you’ll notice the loss ratio is ticking down each quarter in 2015 which is exactly the trend line we expected as we took underwriting actions and change the business mix there. That’s going to continue. And so, we think the trend line is going to continue. But the one thing that I would point out is an exceptionally low loss ratio on property in a quarter, that was around 24, and that’s probably lower than -- definitely lower than where were budgeting it probably lower than where that’s going to run. So -- but as we increase the property component that is going to improve the loss ratio more broadly.

Matt Carletti

Okay. That’s help. Then last question just I know as we get towards year end sometimes its Q4, sometimes it Q1, but you usually kind of year end true-up in the Ag book, does that happen in Q4 or is that something we should expect in Q1?

Ed Noonan

Yes. We’re still conservative on the Ag book, Q1 is when we really get a final sense of how the years looking. We did take our loss ratio down from 100 to 98 in the fourth quarter to reflect the fact that we think it’s profitable for 2015. We think that maybe slightly conservative, but once we know for certain in Q1 really just the final.

Matt Carletti

Okay, great. Thanks a lot for the answers and congrats on a nice quarter and year.

Ed Noonan

Thank you, Matt.

Operator

Thank you. Our next question will comes from the line of Josh Shanker with Deutsche Bank. Your line is now open. Please go ahead.

Josh Shanker

Ed, if we don’t you the hard questions, you don’t think we are listening. So I hope that Amit and I are going to okay in the future. Let’s go through a few things.

Ed Noonan

I said that because, I just want to go on the record and say, I disagree with the Ron Bobman who thinks that I could shoot an analyst on Fifth Avenue and it wouldn’t affect the stock price. I don’t agree with that at all.

Josh Shanker

Well, I mean, you could skip these conference calls and see if your poll numbers go up? So, first question, Ed, you said -- just as a sort of a cautious outlook, that you wouldn't expect the prior year reserve releases to be as strong this coming year as they were last year. Would you have said the same thing in the year end conference call last year? Is there something actually different about your outlook or was it so good this year, why should we -- don't budget it? It was very good in 2014 also. Was there a difference in that commentary?

Ed Noonan

No. I mean, we’re just – I think if we thought about this year ago, I probably would have said something similar and the year before that something similar, while the trend line is been really strong. But I didn’t say that with any kind of actuarial analysis sitting in front of me so much as just, hey, what this year seem to be running very heavy on favorable development, we shouldn’t expect that kind of a normal level of activity.

Josh Shanker

Okay. And then Jeff said that the retro purchases this year were attractive and would be accretive. All things being equal, would that suggest you believe that your -- absent your ROE for 2000 and -- has bottomed in 2015? And the way the market is trending is improving for where you sit in the sort of value chain?

Jeff Sangster

Yes. I think I would characterize the upfront market, so the assumed market, as flat or flattening. There is a disconnect with respect to the pace of rate change in the first year reinsurance market versus the retro market, at least specifically to how we are able to purchases. So we saw ROE, expected ROE accretion related to that and specifically related to our portfolio, so I’m hesitant to make kind of broader commentary on that,

Josh Shanker

And given your writings at January 1, what’s happened to your gross exposure compared to year ago?

Ed Noonan

Our gross exposure is up modestly 4%.

Josh Shanker

Okay. I guess I'll try and figure out how I can turn that into a prediction about something. And finally, Western World -- I don't know what my thoughts were when you bought it -- I guess you yelled at me because I was telling you that I prefer you to go out of business than make a big acquisition?

Ed Noonan

Don't put that evil on me.

Josh Shanker

But that being said, where are we on track. Did the 2015 come in almost precisely at expectations? Are you behind? Are you ahead? And if we give you a lot of robe say three, four, five years out what’s the kind of earnings power we should hope for at Western World on an underwriting basis?

Ed Noonan

Yes. So, I may not get it exactly, right, but we bought the company I said in three or four years we should be looking at 10% return on our investment. And that still feels about right. I think we thought this year that we would get better traction with the flood product that we launch, not just its going fine, it just selling insurance income takes a while to build up, so we’re probably a little bit ambitious on that. But by the same token I think we got better attraction with the property team we added than we thought we would get, maybe the two are wash or something close along those lines.

And so, I feel like maybe the most interesting thing is that Western World’s binding authority business is a really nice business and they are really good at it. There are sort about commodity. Wholesalers want the Western World contract. So, we’ve added product to their binding authority in particular property and some places coastal property. That has only increase the attractiveness of that product and so they have been opening relationship with small wholesalers with some of the individual offices of large wholesalers. And we see I think really good organic growth coming that way. With the addition of Gary Tiepelman joining us in Scottsdale, historically Western World has only written about $12 million west of the Mississippi in their binding authority business.

And Gary brings 30 plus years of relationship, west of the Mississippi that we think we’ll able to start capitalizing on very quickly. So, from my standpoint I feel really bullish about the contract binding authority business and I think that will continuing. You saw growth in the fourth quarter, I think you’ll continue to see growth on that and hopefully as Gary gets traction you’ll see acceleration in the growth. So, are we on track yet? I kind of feel like we’re on track. The other part of what we’re trying to accomplish is to create the space in New York brokerage for the type of specialty products we like. And that’s way the property team fits. That’s where the FI team we added fits. And that’s where lot of Talbot products will fit.

I think we are – whether we’re on track or not in terms of adding teams and underwriters, it’s a little tough, I don’t know that I had a sense of timing on what we would add people of that. But I feel like we’ve got the right – we got everything we need to do it. We’ve got the right structure in place. We got the right infrastructure in place. The Talbot and Western World guys are joined at the hip and they collaborate very closely. So, yes, I mean, we feel like we’re at this point I’m really bullish. I feel like we’re on track and I still feel pretty comfortable with that kind of three, four years thus getting to 10% return on investment.

Josh Shanker

Is there anything you can do to accelerate awareness?

Ed Noonan

Accelerate awareness, Western World has been marketing the hell out of the company over the last 15 months and the Validus acquisition has added lot of excitement. So, in terms of adding awareness, maybe not, I mean, look if we want to go and write another $100 million of business tomorrow, we could do that. We could go along the big kind of super wholesale operations and say, yes, we’ll give you earthquake capacity or coastal wind capacity and we could write a ton of business. That’s not actually the game plan. We want to build the company piece and piece and the property capacity that we use, generates other business to Western World than the binding authority area, that’s really valuable to us. And so, if I was in this for the next three quarters, I probably write the market today and not feel horrible about it. But I don’t think that’s a right long term strategy.

So thinking it for the long term, I feel like we’re going about it in a good way. I think we spend a lot of time in planning over the last few months and asking ourselves this question and navigated the dialogue with Western World management. And I think we have come to the conclusion that yes, if everything is in perfect, its going pretty well. So I think we feel good about it.

Josh Shanker

Okay. Thank you for all the answers and good luck.

Ed Noonan

Thanks.

Operator

Thank you. And our next question comes from the line of Brian Meredith with UBS. Your line is now open. Please go ahead.

Brian Meredith

Yes. Thanks. Just a couple of quick numbers questions here for you. The first one, on the retro that you bought, what was the retro spend this year versus this last year? Is it going to be roughly similar or just better terms and conditions?

Ed Noonan

Spend was down a little as Kean alluded to you, that we bought a little last set 1-1, so 1-1 spend of about $10 million but full year, a budget I wouldn’t do as really much different other than the fact that the rates improvement that we’ve been able to achieve.

Brian Meredith

Got you. And then second question. I’m just curios, the increase in proportional business you wrote at 1-1, where is that coming from? What type of stuff is attractive?

Ed Noonan

They were a couple of. There was opportunities in Europe. There was one European proportional opportunity. There was a U.S. new portfolio of risk that was brought into the market and it’s one of the opportunity that I was referring to is traditional buying philosophies of increasing retentions and consolidated buying. We are changing as volatility of results started to manifest in underlying portfolios. So, we are seeing some ceding come back and buying on a proportional basis to address volatility and so we’ve got a couple of good opportunities there. So it was a pretty good spread through property and then also through some specialty classes. So no major trend there.

Brian Meredith

Excellent. And then maybe you can give us just your thoughts, Ed and Kean, on the discipline of the alternative capital at 1-1 renewals and kind of what you see here over the next, call it, year?

Ed Noonan

Yes. Brian. Interesting question. I think from our perspective, the impact of the ILS market probably gets too much credit on the downside and perhaps too much credit on the upside. We see generally speaking a very consistent communication from our investors with respect to the cap risk and we think we’ve got the right model to arbitrage that and to take advantage of it and deploy capital.

But we see good discipline in the ILS market. There are spots where collateralized markets or ILS players are not displaying the underwriting standards that we would, but we also see that type of behavior from traditional markets as well. So, we don’t see any discernible trends in one segment versus the other. It’s really has to do, I think with the difference in cost of capital.

Brian Meredith

Great. Thank you.

Operator

Thank you. And our next question comes from Meyer Shields with KBW. Your line is open. Please go ahead.

Meyer Shields

Thanks. Good morning. Ed, if I can harangue you a little bit more on the reserve side -- does the essence -- I'm sorry?

Ed Noonan

You are not from Univision, are you?

Meyer Shields

No, I don’t think so. I’m just wondering if I should say outfit that to you. Does the absence of major catastrophe losses and therefore less needs for RDE imply, or does that contribute at all to the expectation of less reserve lease going forward?

Ed Noonan

I don’t think so. We had this conversation about a week ago with our actuarial team. You do have to have claims reserves potential for release and so the question itself. So, we had kind of a light year in Talbot firm, individual risk losses. What does that tell us about the forward view? And I think it’s not linear. It’s probably proportional. But we haven’t had a material movement in overall claim levels in the aggregate and so, I think we feel like that shouldn’t have a material impact but it’s also one of the reasons why we kind of feel like this year probably was higher than we should expect to see.

But at the same time I can think of a few areas where we’ve got event reserves up or case reserves up. So far, we are not really getting the substantiation from customers that the event is as likely as large as we thought it was. But it’s also is offsetting the trends too. So, I think your general point is directionally right. I don’t feel like it’s likely to be terribly material in terms of its effect on reserve releases this year anyway.

Kean Driscoll

In terms of the number on event and non-event, split of PPE, the vast majority of it comes from non-event. If you look back over history in the aggregate, our events are -- we pretty much get them in the aggregate up a little here, down little there but in the aggregate we get them pretty much spot on. There hasn’t been a ton of aggregated PPD come from event. It’s really that non-event bucket and the burn-off of the IBNR as time passes.

Meyer Shields

Okay. No, that helps a lot. Thank you. When you -- I’m going back, I guess, you mentioned that the capital return over the course of the year matched up really nicely with net income. When you are budgeting for 2016 in the context of capital return, are there any differences between your budget for operating income and for net income?

Ed Noonan

No. The difference between operating and net income are the items that we can’t predict like FX and unrealized gains and losses on our investment portfolio. So those two numbers are identical and we are running our budgeting process.

Meyer Shields

Okay. Perfect. And last question, is there any major difference in the investment strategy associated with this year's AUM growth in AlphaCat, compared to what you had with the PaCRe vehicle?

Ed Noonan

Yes. We are not sure where you are going?

Jeff Sangster

The AlphaCat -- all of the AlphaCat AUM at this point is really supporting collateralized reinsurance of some type, whether that be in the ILS funds or the sidecars and so it’s effectively in cash and cash equivalents or similar risk type securities. So there is nothing even as risky as the Validus portofilio, which is extremely low risk in the AlphaCat investment.

Meyer Shields

Okay. Perfect. That covers me. Thank you very much.

Ed Noonan

Thanks, Meyer.

Operator

Thank you. And our next question comes from the line of Jay Cohen with Bank of America. Your line is open. Please go ahead.

Jay Cohen

Yes. Thanks. A couple of questions. The first is on the 1-1 renewal, the premium guidance or numbers that you gave out, that did not include a crop insurance or ag. Given what we've seen with crop prices, would you expect the ag premiums to likely be down or could you offset that with kind of gain share?

Ed Noonan

Yes. Jay, we are going through the process now. I think your thesis going in with respect to commodity prices that puts us a step back. But I look at the success that our team has had in the last two years, the relationships they have, the creativity they deploy in underwriting the market and we may or may not grow. I just don’t have insight on that yet but if there are opportunities out there, I’m confident that our team will find them.

Jay Cohen

Got it. And then the second question, Kean, you had talked about a flattening of the market. Just to make sure I understand that was U.S. catastrophe business you were talking about when you mentioned flattening?

Kean Driscoll

Yes. I think that was more geared towards the U.S. International market is clearly more challenged than the U.S. right now with respect to the rate environment. Feels like it’s about a year behind the U.S. in terms of rate movement.

Jay Cohen

Got it. Great. Thanks for the clarification.

Kean Driscoll

You are welcome.

Operator

Thank you. Our next question comes from the line of Ryan Byrnes with Janney. Your line is open. Please go ahead.

Ryan Byrnes

Thanks, Ed. Good morning, everybody. I just had a question on -- obviously there was very strong growth at AlphaCat third-party this year. Can we expect that to continue going forward? And maybe just give some color as to why you guys are able to grow so quickly?

Ed Noonan

Yes. So, first let me explain why we are able to grow so quickly. We don’t mirror the inflow of funds into the ILS market. In fact, one of things that’s happening is existing ILS investors are moving allocations from other managers to AlphaCat. So, you don’t see the ILS market up 90% over the last year. We are taking money from other managers. We don’t expect the inflow of ILS funds to be nearly as robust into the industry this year. They are very rational investors and right now they are seeing returns they are at or even slightly below the bottom of their acceptable range. And so I do -- we are not seeing people fleeing but we are also not expecting to see inflow in a lot of cases.

So, we do expect it to slow but I think the biggest reason that AlphaCat has had the success it has is fundraising takes time and so there is a -- you do a lot of planting and working before you start to harvest and that’s clearly taking place over the last two years and we’ve got a really good following amongst institutional investors. Then second, the performance has been outstanding. And its linkage with Validus Re and its ability to source business and use our research function and our analytical capabilities is it’s truly a competitive advantage. I know we’ve been saying that for a while but I think that’s one of the things you are seeing in the growth of AlphaCat. It’s viewed as a smarter, more effective and better returning manager.

Ryan Byrnes

Got it. And then if I could just quickly shift back to the retro purchase at 1-1. Could you guys maybe give any sort of color as to maybe attachment point or capacity that you guys were able to get on that deal?

Ed Noonan

Yes. So, we take quite a bit of time to go through all of it, but the core program effectively attaches at $275 million. It’s worldwide aggregate cover, exhausting at $600 million. This is a significant amount of limit covering our natural peril exposure from a marine energy portfolio or U.S. property -- sorry, our global property portfolio, as well as some other sources of cat risk that come into the group.

We have marine and energy specific protections, specialty specific protections on our terrorism account attach at different levels. This is outside the world of our aggregated program. And then we have a structure that is pillared by peril and by territory that attaches significantly lower than the $275 million and I would view that as more of a pure earnings type protection.

Ryan Byrnes

Got you. No, but thanks. That's great color. Appreciate the answers, guys.

Ed Noonan

Yes.

Operator

Thank you. And our next question comes from the line of Ian Gutterman with Balyasny. Your line is open. Please go ahead.

Ian Gutterman

Actually, I just want to say I think if we work together, we can make conference calls great again.

Ed Noonan

Ian, I couldn’t agree with you more. I listen to so many calls that are failing. They are third rate. They are losers. They are said.

Ian Gutterman

Ed, we can make this call a winner. So, let's go here. First, I just want to follow-up on the AlphaCat. Can you just talk a little bit more specifically about sort of the clients where the growth came from? Were these Validus clients? You took bigger line sizes and gave some for AlphaCat? Was this business Validus? Was it Val Re? Was it writing on its own? What type of business drove the growth?

Ed Noonan

That’s really -- it's all of the above, Ian. We’ve got a number of different funds that if I described them in the aggregate are complementary to the core Validus risk appetite. So, we’ve got sidecars that are targeting the retro market, higher rate online business, attaching lower. That’s a nice complement to our risk appetite. We also have funds that are attaching more remote risk, which tends to be capital intensive, particularly in peak U.S. areas. That’s also complementary.

In terms of how we engage with customers, AlphaCat does directly engage where we introduce them and leverage our relationships. There are times where we write the business on behalf of AlphaCat and that’s really where we are able to optimize our net portfolio, meet the investor return hurdles, source business, maintain a bigger footprint in the marketplace and be more relevant to our customers. But be able to ultimately leverage the AlphaCat capital base. So it’s really all of the above. There is lots of different ways we touch customers, utilize AlphaCat capital.

Ian Gutterman

Got it. Got it. Earlier in the year, I believe you had some small issues in the trade credit business with lower commodity prices, with prices not just for energy but copper, and some of the others continuing to fall. Is there any increased concern there, or do you feel that issue is behind you?

Ed Noonan

Yes. That was really Q4 last year and Q1 out of the Talbot book that we saw an uptick.

Ian Gutterman

Right.

Ed Noonan

The number of those losses has dropped off substantially over the second half of the year and so we feel that’s a bit of anomaly. Obviously, we still have those losses reserved but haven’t seen new losses at that level throughout the remainder of 2015.

Jeff Sangster

Ian, they weren’t in the trade credit account. They were political risk losses. They too get very closed and sometimes hard to tell apart, but it is two different business segments.

Ian Gutterman

Okay. Fair enough. Fair enough. My memory wasn't quite accurate there. And then just lastly, Ed, just the terror book. I mean, obviously, we've seen a lot of rate pressure in that book, very few losses for quite a while. But just given the state of the world, it seems risk is higher, but I think I've asked this periodically before. I just thought I would get an update.

It does seem at least we are having -- that the events we have tend to be smaller events from a loss perspective, at least a property loss perspective, that don't necessarily reach the insurance market. Is that sort of your view of that's how the world looks? Or do you feel like there is increased uncertainty when you look to renew your terror book, that essentially the risk was greater than it was maybe a year or two ago?

Ed Noonan

Yes. I think what we probably all agree that geopolitical risk is greater today than it was couple years ago. And when we think about the terror book, that clearly is a consideration. The way we approach is that terror account is -- we think it’s important actually to have scale and to write a class like this. Because with scale, we can write very, very broadly and diversify the portfolio geographically. We can take care of the big event volatility using reinsurance and we do. And as Kean mentioned on our reinsurance account, we buy retro.

And so that leaves you with how many small to mid-size claims can you pay in the year and still make money and that requires a broader account that’s geographically diversified. So it’s a little hard because most terrorism -- there have been lots of losses in the terrorism market but there are small. And most terrorism events that we have seen have been targeted at violence against individuals in public place, not against the public places themselves unlike kind of the 9/11 scenario.

Ian Gutterman

Right.

Ed Noonan

But we don’t by any means that that’s off the table. And so that really addresses the severity in account which as I mentioned, we buy reinsurance at a relatively low attachment point for. And if the only thing that happened during any given year is one event like that and our portfolio in Talbot would still make lots of money. But to your general thesis, yes, we think that the risk is heightened. We all think that the insurance market is acting like it’s heightened. For them it's just a function of everybody who sets up a Lloyd's syndicate decides that this is free money and they ought to write a little terrorism.

Ian Gutterman

Exactly. Exactly. Okay. Got it. I think that's all I had. So keep standing up to those establishment insurance companies, Ed.

Ed Noonan

We are going to build the wall and keep them out, Ian.

Ian Gutterman

All right. Sounds good.

Ed Noonan

Thanks.

Operator

Thank you. And I’m showing no further questions at this time and I would like to turn the call back over to Mr. Ed Noonan for any further remarks.

Ed Noonan

So, thank you all for taking the time to joining us this morning. Good quarter, good close to the year. And as I say, I think we feel very good about our business model going forward. It’s performing well through the competitive environment. And while we are not into better times yet I think we are still pretty optimistic about it. So, thank you. Look forward to talk you in another quarter.

Operator

Well, ladies and gentlemen, thank you for participating in today conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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