Allied World Assurance Co Holdings' (AWH) CEO Scott Carmilani on Q4 2015 Results - Earnings Call Transcript

| About: Allied World (AWH)

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

Q4 2015 Earnings Conference Call

February 4, 2016 10:00 AM ET

Executives

Sarah Doran – Senior Vice President, Strategy, Investor Relations and Treasurer

Scott Carmilani – President and Chief Executive Officer

Tom Bradley – Chief Financial Officer

Marshall Grossack – Chief Actuary

John Gauthier – Chief Investment Officer

Analysts

Matt Carletti – JMP Securities

Dan Farrell – Piper Jaffray

Charles Sebaski – BMO Capital Markets

Amit Kumar – Macquarie

Michael Nannizzi – Goldman Sachs

Ian Gutterman – Balyasny

Operator

Welcome to the Allied World Fourth Quarter 2015 Earnings Call. My name is Christine and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will turn the call over to Sarah Doran, Senior Vice President, Strategy, Investor Relations and Treasurer. You may begin.

Sarah Doran

Thanks very much. Good morning, and welcome to Allied World's discussion of our fourth quarter 2015 results. Hopefully all of you have seen our press release, supplement, and investment supplement which were released last night after the market closed. All of these materials can be found on our website at www.awac.com under the Investor Relations section.

Our speakers this morning are Scott Carmilani, Allied World's President and CEO; Tom Bradley, Chief Financial Officer; Marshall Grossack, Chief Actuary; and John Gauthier, Chief Investment Officer. They will discuss the financial results of our business, and the current market environment.

Before I turn over to Scott, I'd like to note that our presentation today may include forward-looking statements within the meaning of the U.S. Federal Securities Laws. The company cautions investors that any forward-looking statement involves risks and uncertainties, many of which are outside our control and is not a guarantee of future performance. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors.

These factors are described in the company's filings with the SEC. We're not obligated to and do not undertake any obligation to update or revise forward-looking statements which speak only as of the date on which they are made. Also, in our remarks and responses to questions, we may mention some non-GAAP financial measures within the meaning of U.S. Federal Securities Laws. Reconciliations are included in our earnings press release and financial supplement.

And now, Scott Carmilani.

Scott Carmilani

Thank you, Sarah, and good morning to everyone on the call. Starting with the quarter it’s obviously been both challenging underwriting environment and investment environment. Allied World earned a profitable combined ratio of 97% for the quarter, consisting of $19 million in underwriting income, $43 million of operating income and $1.7 million of net income.

Tom Bradley, our CFO, will provide the full year statistics in a moment. But I want to comment further that on the quarter we ended this year with a deep dive on our prior year reserves for healthcare. And landed on adding a full $32.5 million to those reserves an attempt to fully account for the potential losses we have exposed.

We believe this adjustment will fully take care of all prior year losses as they develop. Our Chief Actuary, Marshall Grossack will provide some more detail on that during his comments. For the full year of 2015, we grew our top line by 5% this year to over $3 billion in premiums.

A slower pace in the past previous years, or past two previous years, mostly due to the competitive reinsurance environment that drove this portfolio to 15% decline over the course of the year. Our insurance businesses paid similar rate and capacity issues, but we still managed to grow in targeted lines of business, while shrinking those, not meeting our return hurdles.

We’ve also considerably grown in the international side, with the addition of our agent operations which accounted for almost all of our international growth for both the quarter and for the year. For the quarter, our global markets grew by 75%, North America 6%, and our treaty reinsurance operations shrank by more than 45%.

Let me provide a little context around the current market environment before we get into more detail on the year. On average rates across our insurance portfolios continue to downward trend in this quarter as they have all year. The conditions across all of our markets are competitive to variant degrees.

Property rates have decreased more than casualty rates, pretty much throughout the year. And casualty has seen more accelerated decreases, in the higher access layers, in the Lloyd's market particularly where they do U.S. liability. And even in the Lloyd's specialty markets like marine and aviation which have witnessed less severity, but nonetheless in their losses.

The smaller account business, particularly primary, casualty, and specialty areas like programs have seen lesser decline. Although, are certainly down from previous years.

Our current mix of business favors reinsurance business and more primary line where we can closer to our customers and clients and decision makers to provide reasonable solutions. While we are well positioned in the current market to give, and given the current dynamics, we continue to believe that the industry is in need of wide spread rate increases and should be educating the clients and brokers better about the economic dynamics in play in the U.S. and around the globe. Both from an underwriting perspective and from an investment perspective and its effects on the industry’s capital and reserves.

For individual segment comments, starting with North America. The growth has been driven by professional liability, programs and some of the specialty areas we’ve been focusing on for a few years now. We continue to take to make adjustments and take actions on our healthcare portfolio. With the completion of the reserve and claim reserves the results I mentioned earlier. And we make underwriting adjustments where we can and forgo the businesses that we do not meet average we acquire returns.

In global markets, we grew by 70% for the year, as I mentioned 75% just in Q4 alone. This giving – is giving us nine months credit for the agent businesses we acquired back in April and continue to integrate into the Allied World system.

The rate environment in global markets has been, even more challenging than that in North America, particularly in the Lloyd’s right placement. Despite these challenges, we continue to see opportunities for some growth in a couple of areas that remain rational.

In 2015 and continuing into this year, we focus on improving our infrastructure and product capabilities in this segment, making investments in order to position ourselves for better opportunities and future market improvement.

Lastly, let’s talk about the reinsurance segment. In reinsurance, although it’s our smallest quarter, is the fourth quarter, our top line was down almost 50% from the same quarter last year. And as I mentioned earlier, down almost 15% for the full year. For the quarter, the reductions were driven by multiple factors. There’s a net $13 million negative swing from last year that comes from non-recurring premiums in the form of rate adjustments and our premium adjustments to whole portfolios and no reinstatements earned this year that we did in the prior year. There was also about $9 million of non-renewals are decreasing participations on our existing book.

With that, I’m going to turn it over to Tom, to give us more color on the full year.

Tom Bradley

Thanks, Scott, and good morning, everyone. For the full year 2015, Allied World generated underwriting income of $120 million, operating income of $212 million and net income of $84 million. Our results were impacted by current and prior year reserve strengthening, as well as by net realized investment losses, primarily related to the mark-to-market on the fixed income component of our investment portfolio.

With the continued market volatility, our portfolio returned 10 basis points during the quarter and 60 basis points for the full year. John, will get into additional detail in a few moments. This quarter, we did not experience any catastrophe losses, this compares to the $22 million of cat losses in the fourth quarter of 2014.

For the full year, we incurred $60.5 million of cat losses, of which the largest event was the explosions at the port of Tianjin, China that resulted in a $28.9 million net loss in the third quarter, and estimate that has not changed through year end.

For the year, the company’s expense ratio increased to 31.4% from 30.3% in 2014, driven by the acquisition ratio. While acquisition costs have increased across each of the three segments, the overall increase was primarily driven by the change in the mix of business coming from the acquired Asian operations. The G&A component of the expense ratio decreased slightly from last year due to the lower compensation expenses.

Operating cash flow was $513 million for 2015, compared to $417 million in 2014. This increase was driven by the receipt of funds from prior underwriting years related to our participation in Aeolus collateralized property catastrophe reinsurance program.

In the first month of this quarter, we received distributions from Aeolus of about $300 million from the 2015 underwriting year. As many of you know, our contracted quota share with U.S. re-expired as of the end of 2015. We have renewed our commitment for the 2016 year. But reducing our capital participation from the $350 million in 2015 to $200 million for the 2016 underwriting year.

This is done consistent with our desire to reduce volatility from cat PML. In the fourth quarter, we completed the process with RSA to agree on the final purchase price for the Asian acquisitions as per the contract signed in August 2014.

The final aggregate purchase price is $176 million, a decrease of almost 20% from $215 million at announcement. About half of the reduction was due to favorable currency changes and the balance was due to reserve and other balance sheet adjustments. We did not repurchase any common shares during the quarter. For the year, we repurchased over $245 million as compared to $175 million in 2014.

We have now restarted our share repurchase program as of the beginning of this year. Through yesterday, we have repurchased almost 600,000 shares for $21.6 million leaving $151.5 million of remaining repurchase authorization.

We ended the quarter with shareholders equity of $3.5 billion, down $246 million from year-end 2014. This was driven by $359 million of dividends paid and shares repurchased during the year. Our total capital was $4.8 billion, which includes the recent $500 million, 4.35% senior notes we issued in October to refinance the existing $500 million, 7.5% senior notes that mature in August. Adjusting for the double leverage, financial leverage is 18.8%, unchanged from net of third quarter, premium leverage is 0.69 times.

With that, I’ll turn the call over to our Chief Actuary, Marshall Grossack.

Marshall Grossack

Thanks, Tom. Our reported loss ratio for the fourth quarter of 2015 was 66.3%. This includes an increase of two percentage points or $12.5 million of net adverse reserve development on prior loss years. The current accident year loss ratio excluding these items was 64.3% for the quarter, which compares to 60.1% in the prior year quarter.

For the full year, net reserve releases were $81.6 million, with an accident year loss ratio excluding prior year development of 67%. This compares to 64.6% in 2014. Breaking down the $12.5 million of adverse reserve development, it was driven by $17.7 million of adverse development in the North American Insurance segment, slightly offset by net favorable development of $5 million in the Global Markets Insurance segment and $0.2 million in the reinsurance segment.

Net adverse development of $17.7 million in the North American insurance, was due primarily to strengthening the healthcare line of $32.5 million on prior loss years. This $32.5 million was comprised of $27.2 million in the medical malpractice insurance area and $5.3 million in healthcare management liability insurance.

The medical malpractice additions were due to higher than expected loss emergence in the 2012 and 2013 accident years, coupled with a recent in-depth study by the claims underwriting in actuarial department and the open medical malpractice claims.

After the strengthening, the net loss ratios for our medical malpractice book are now in the low to mid 80s for actions years, 2011 through 2015. The market remains extremely soft in this segment, however, at this time, we believe, we’ve taken a major step in getting this issue behind us. And we are hopeful, no material reserve adjustments in the medical malpractice line will be necessary in the near future.

Overall the lines in the global market segment emerged well during the quarter, resulting in positive development of $5 million, compared to $4.2 million in the prior year quarter. While this included in other slight addition to the trade credit book. It was down from recent quarters. We’re optimistic that the loss activity in this line will not be as large as we have seen earlier in the year. But we will continue to monitor this book closely. Given the potential for volatility from its prior regional emerging markets focus.

Our efforts improve monitoring and collection and other attributes of this book are beginning to show positive results. As of the end of the quarter, our reserve position sits at 3.6% over the midpoint of our actuarial range. As Scott mentioned, on average rates across our insurance portfolio were down a few points during the quarter, with overall cash lead rates down in the low single-digits, and property down in the high single-digits. Rates in the North American insurance segment were down about 2% and in global markets it’s down about 7%.

Let me now turn the call over to John Gauthier, our Chief Investment Officer to discuss our investment highlights for the quarter. John?

John Gauthier

Thank you, Marshall and good morning, everyone. As you all know, market volatility persisted in the fourth quarter given the ongoing decline in energy prices. The decision by the Federal Reserve to raise short-term interest rates and ongoing concerns about global economic growth.

Rates rose across the yield curve during the quarter and core fixed income returns were negative. While investment grade credit spreads remain mostly stable during the quarter, high yield spreads widened by 30 basis points leading to a negative 2% return for the broad high yield market. Within the CCC quality rating spread widened over 250 basis points. Crude oil futures were 18%, the only bright spot for the quarter was in global equity markets with the S&P up 7%, Euro stocks up 6%, the Nikkei up 10.5% and Hang Seng up 5%.

For the full year, there were a few places to find meaningful positive returns. Within that context Allied World’s investment portfolio had a modest gain for the quarter, returning 10 basis points or $10.3 million on a total return basis. That compares to 40 basis points or $34 million in the fourth quarter of 2014.

During the quarter, net investment income was essentially unchanged at $49.1 million compared to the prior year quarter and increase 7.55 compared to last quarter. The investment income was offset by mark-to-market losses during the quarter of $39 million, predominantly on our fixed income portfolio.

For the full year, our investment portfolio returned 60 basis points or $54.4 million compared to 3.1% or $266 million for the full year 2014. Full year net investment income was $182 million, up 3% from $177 million in 2014, driven by a higher allocation to fixed income assets, as well as increases in income from our hedge fund and private equity portfolio.

As I mentioned on last quarter’s earnings call, we have been de-risking our portfolio at both evaluation and volatility have increased. Given the recovery in the equity markets during the quarter, we took the opportunity to further lighten our allocation. From 7.4% at the beginning of the quarter down to 4.4% at the end of the quarter. And this is down from almost 10% earlier in the year.

We’ve also been decreasing our allocations to lower rated, especially CCC rated security for similar rate reasons. While we have rotated these funds into our core fixed income portfolio, we continue to have a 22% allocation to the non-core portfolio. We believe it’s reasonably well diversified amongst lower grade credit, hedge funds, equities, private equity structures and Allied World Financial Services stakes. We expect that allocation to move around, but likely stay between 20% and 30% based on the availability of market opportunities.

Related specifically to our energy exposure, our portfolio has a 2% direct and indirect exposure to the broad energy sector. 75% of that 2% is an investment grade bonds, actually light allocation for portfolio of our size and diversity. This quarter you will know we increased our duration as 2.6 years given the upward rate movement as compared to 2.2 year duration in the prior year, quarter – excuse me, and 2 year duration in the prior year quarter. This increased duration is serving us well in the early 2016 as rates rally. We will continue to manage that carefully.

Turning to Allied World Financial Services, we finished the quarter with approximately $126 million invested in minority stakes with our partners. These strategies contributed $4 million of net investment income during the fourth quarter.

And with that, I’ll turn the call back to Scott.

Scott Carmilani

Thanks, John. Although 2015 was a challenging year, I do believe our platform is well positioned in the current market and we will continue to serve and grow with our clients and deliver value to our shareholders. We have shown that our underwriting will remain disciplined and we will actively push for rate adequacy. We continue to be active managers of our capital. We start the year with a base of $3.5 billion of equity capital, and since having returned over $350 million of capital to our shareholders during the year. We are very optimistic about the company’s prospects moving forward and our ability to create value for our shareholders.

And with that, I’m going to turn it open to questions and open it up to the group. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question is from Matt Carletti of JMP Securities. Please go ahead.

Matt Carletti

Hi, thanks. Good morning. I just wanted to dig in further on the healthcare addition, specifically, it has been definitely sounds like this quarter was different than past quarters. And in the past, it sounded like was kind of, as you go, you are waiting for the data to develop, I think Tom, I can’t remember with his last quarter, the quarter before. I asked you a question about taken a bigger swing at it and your answer, very fairly was we could do that. But it would be haphazard because we just haven’t had the development of the data to support it. What changed this quarter?

Its sounds like maybe you have that data. Can you walk us through maybe at a little deeper level, some metrics that might give us comfort that it’s enough that this will put the issue behind us, whether that’s – what’s case versus IBNR? Maybe what you know – just what’s different now versus kind of the past several quarters?

Scott Carmilani

Matt, this is Scott. I’ll answer that. First, this is the first time where we’ve actually, and Marshall was very specific in his comments. We put the underwriting department is the clean departments and actuarial departments all together took out all known losses and claim notices from really 11 until now and did a real deep dive on each and every single claim. We did a scientific math around its probabilities, as well as a judgment in each of the claims as to where they could potentially go to court or be settled or go away.

And we did a ground up analysis. This is the end result of it and we did it specifically now because I think, we’re far enough away from the 11 and 12 years where we could take some credibility on what we have is, what we have as we go to the end of the year. And we wanted to put an end to the noise at – we and all of our shareholders and you have been experiencing.

Marshall Grossack

Yes, hi Matt, this is Marshall. I think to kind of follow through with what Scott had mentioned, I think another kind of benchmark that we can kind of get in place to get comfort with. And again, I don’t think I was fairly clear in saying that. We believe we’ve taken a major step and we’re hopeful there is going to be no material reserve development. But, I think another thing you can think about and getting a little more comfort with is, we do have outside of hiring actuaries and, I did go through a kind of where we’re sitting now against their range, totally independent of the work we’ve done and we’re certainly at that the high end of kind of their indications as well.

Tom Bradley

Also add to that, this is Tom. Just did that – Marshall noted that, while there’s a prior year development that we’ve talked about, we also added to the 2015 accident year $5 million as well to kind of bring all those years up into the 80s to give us that that kind of comfort over the entire book of business.

Matt Carletti

Okay, that’s helpful. And then just a clarification Marshall, on the where you are versus the actuarial range cutting each quarter on the whole book and I noticed that it came up a little bit this quarter. With that similar situation hold on kind of the healthcare line, particularly that you’re now sitting or maybe you have been sitting similar amount, I don’t know more or less above where the external actuaries have put it?

Marshall Grossack

Yes, I mean absolutely. We’ve moved well up in that range, year-over-year and even since the last quarter.

Matt Carletti

Okay, great. Just one more question away from reserves. You’ve obviously noticed that the PMLs came down in the quarter I assume that relates to kind of the reduction in the allocation to U.S. Just want to ask the question on, what – can you update us on your view going forward of kind of volatility lines of business? I mean, obviously reinsurance that has been shrinking, and I know the number in the quarter probably makes it look a little bigger than it is. But how should we think about going forward kind of the balance of whether its cat or other kind of very volatile businesses and perceived higher returns on those businesses balanced against kind of the more stable kind of insurance franchise that you are building?

Scott Carmilani

Matt, first, the reduction in PMLs for the fourth quarter has nothing to do with U.S. because, U.S. runs its course for the whole year on investments and business we put to work in the – really the first quarter of last year.

Matt Carletti

All right.

Scott Carmilani

So that – any effect to that result will be felt in 2016 not in 2015. I don’t think, I’m giving away any industry secrets that and we’ve said, both Marshall and I have made comments on rates have deteriorated and they have compounded over the last two, three, four years really. So there’s no – that’s not simple – as simple math, there’s just more volatility around the expected outcome for any events in property cat, really around the globe, specifically in North America but really around the globe. So as we see volatility go up and the return go down relative to that. We’re now in the phase where luck has more to play than skill.

So we’ve been shying away from some of that risk and we’ve been decreasing volatility really across the company both on the investment side, and on the underwriting side to better manage that. Be more conservative around that and that’s cause the mix and the shift of the mix to change a bit. Not just in the reinsurance business but also in the insurance business as well.

Matt Carletti

Okay, great. And obviously I had my timing off there on the e-list. I guess, the follow-up question is would it be correct to assume that going forward as we see PMLs updated in Q1, Q2, that those are consolidated correctly we should see with less allocated to U.S. we should expect that PML by come down further all else equal?

Scott Carmilani

All else equal? Yes.

Marshall Grossack

That’s correct.

Matt Carletti

All right. Great, thanks for the answers.

Operator

Thank you. Our next question is from Dan Farrell of Piper Jaffray. Please go ahead.

Dan Farrell

Hi and good morning. Couple of questions just first on the below 80s level for loss ratio that you gave for the 2011, 2013 years. I think you said that was just from that now. Can you tell us how that compares to some of the years that were better? And also where that compares to where you’re booking current accident year picks for that one?

Scott Carmilani

Well, it compares almost in line with where we’re booking current accident year. And depending how far back you go, we had years in the mid-07, mid-08, mid-09 years where that book ran in the 50s.

Marshall Grossack

Yes. Okay, I’ll jump in. You can certainly get the exact answer, if you could go to our global loss triangles. And you could certainly see that there, but yes, it was 40s and low-50s earlier before those years.

Scott Carmilani

Yes, and again to be clear, it wasn’t just 2011, 2012, 2013, it was 2014 and 2015. We’ve taken up into the 80s as well.

Marshall Grossack

That was my comment, we are looking now what we were there, and what we have adjusted those years too.

Dan Farrell

Perfect, that’s I wanted to make sure. And clarification on the PMLs, the current PMLs you’ve disclosed in the quarter, are they as of year-end 12.31 or did they include 11.16?

Scott Carmilani

They do not include 11.16 and they’re not as of the 12.31, they’re more as of 12.01, but I can tell you that not much happened in December.

Dan Farrell

Right, right, right. Okay, but it does not, I guess, I was trying to it doesn’t include January 1.

Scott Carmilani

Does not.

Marshall Grossack

Correct. It’s the portfolio in force as of 12.01. Next quarter you’ll see the update to include the January 1 activity both for U.S. and everything else that we do.

Dan Farrell

Okay, great. And then you can you give us any sense in the reinsurance segment. And I agree with mix changes that you’re making, but can you give us a sense of what that might do to move in sort of book accident year where the mix have a meaningful impact to last text for the whole segment?

Scott Carmilani

It had some impact.

Marshall Grossack

Yes.

Scott Carmilani

I don’t believe we can comment on what it’s going to do all in.

Marshall Grossack

Yes, I mean – it is fair to say that moving a little bit away, when you drop our PML, the cat business is still our kind of the lowest loss ratio business even that has a higher risk components to it. Would increase our loss ratio slightly.

Dan Farrell

Okay, great. Thank you very much.

Operator

Thank you. Our next question is from Charles Sebaski of BMO Capital Markets. Please go ahead.

Charles Sebaski

Good morning, thank you. I would like to not to belabor, but go back to the healthcare reserves and the process that you undertook, if I look back over the last three years you guys have pretty decent reserve strengthening in this line and 2013 and 2014 and now in 2015. And it seems like you’ve changed the process that this ground up analysis is different and I guess, what I’m wondering is that, is this something that is one-off? Will this be a process that you do for all the lines of business, will you be doing this annually by annually going forward?

Scott Carmilani

Well, look we always do ground-up loss analysis. You have to understand that for most of this book it’s a claims made business, so claims made and reported means, you could have a notice of a potential claim that you could expect to go away. And you could come back and become a lawsuit. So, you can’t really have a full picture of 2011 and 2012. You probably can’t even have – you might have 50% of the picture or more than 50% of the picture in 2013, you might have 75% of the picture in 2014.

By the end of the 2015, we felt we had a very clear picture of what was reported and had the potential to be more than just a notice of potential claim and what the magnitude of those losses were. So that was the time to really deep dive. And because this business was challenge – a lot of these claims were related because of the massive consolidation and the effect on the DOJ making noise around medicare changes that we were able to go in and do a deep dive on it with the – as Marshall said all the component parts of internal as well as KPMG from the external also having a view on what’s happening in the industry. Taking our data and industry data and what’s going on.

Marshall Grossack

Yes, and Charles I’ll just add, because you had talked about healthcare reserve changes going back to 2013, recalled that the 2013 reserve increases we’ve made run the healthcare management liability D&O type of lines, not in MedMal. That started emerging in the second half of 2014. And I will reiterate Scott’s comment on terms of kind of why now and what the process is. It isn’t a new process or different process but as you might expect lines that are running hot get more focus and get more attention and get more analysis and particularly when you’re doing – I think you bring out the underwriting process along with it to think about what is going to happen going forward. All those things come together to form this opinion.

Tom Bradley

As you all are well aware we started making underwriting changes to this book middle of 2014, and we did what we could do it and we are sitting at the end of 2015 and that just not enough. So we are making sure we’ve done enough now.

Charles Sebaski

Okay. Could – transfer transition over to the North America division in total and the accident year loss pick coming in about five points higher than a year ago and I guess from a comment you made in your prepared remarks Scott the industry meeting rate increases on an overall basis. So if I take that comment and I look at your accident year loss picks coming up and you are still growing. So I guess the question is this – if the industry needs rate and your loss picks are accelerating up. Should you not be shrinking?

Marshall Grossack

Well if all things were the same I would say yes. And we are shrinking in the areas where we see less or negative margin where we are growing is where we see still remaining margin or in niches where it’s less effected by rates and more to do with solutions for clients like construction, like surety, like the program business which is more of a distribution play than it is a technical underwriting mentality. So we are shrinking in the areas that are challenged. We do have, in our opinion I would say compared to many others a conservative loss picks across the portfolio and I doubt highly that you haven’t seen major carrier players have stress in their prior-year results. And that is beginning to be seen in the marketplace.

Charles Sebaski

If this quarter’s accident year loss pick which I’d say – 72.5% for North America is that a reasonable expectation of 2016 run rate at the current pricing dynamic in the market.

Tom Bradley

I’ll start, and I let Marshall jump in but there is about $16 million with the current year strength in the quarter, which would really need to spread back over the full year to get an effective annual rate.

Marshall Grossack

Yes, I think that’s – Tom just said exactly what I would have said, so that’s correct.

Charles Sebaski

$16 million in 4Q for the 2015 accident year.

Tom Bradley

Correct.

Marshall Grossack

Yes, so it’s about five points I think.

Charles Sebaski

Okay, thank you very much.

Operator

Thank you. Our next question is from Amit Kumar of Macquarie. Please go ahead.

Amit Kumar

Thanks for letting me ask the question. Two quick follow-ups if I may. Number one on the discussion on MedMal and the ground-up analysis, did that cover the entire book or was it only for sort of the portions which have been problematic in the past?

Scott Carmilani

The entire book.

Tom Bradley

We didn’t cover the entire medical malpractice but when you look into our financial supplement what we call healthcare which also includes management liability, managed care liability. So that’s about 25% of all the reserves or 75% of all the reserves are in the medical malpractice books. And that’s been the area that’s been the focus of some – more of the focus on some of these calls in the past few quarters.

Amit Kumar

Got it, and there was a question which talked about what a change and I think the response was that everyone sat down together and looked at it, I’m a bit confused why did everyone sit down now versus not doing this in the past?

Scott Carmilani

I already explain that Amit, its time, passage of time and having a firm handle on everything that has been reported.

Tom Bradley

It’s not like we having been looking at in the past but this was given the state of the other reporting and the fact that the line continue to run hot we did a new focus on it this quarter.

Amit Kumar

Maybe I’m not smart enough here going back to Matt’s question regarding finality as time passes obviously you will have finality correct. So, I mean if you are talking about reserving it’s all about making an assumption on day one versus making an assumption at day 90 when you are getting closer to it obviously you will have better finality – what am I missing here please explain that?

Marshall Grossack

Actuarial science.

Amit Kumar

I mean, no this question has been asked so many times on calls and yet we saw this issue being sort of bled through again maybe – maybe again clearly I’m not smart enough to understand this.

Scott Carmilani

Yes, you have to understand, at the end of the year every insured will send a laundry list of things that are happens in the year that may or may not give rise to a claim. More than 75% of that go away 10% or 20% of that becomes potential claims and the other 10% or 20% become actual claims. And there is a lot of back and forth and lawyering that goes on and negotiations that goes on to determine what’s going to be a claim, what’s going to go to core, what’s not going to go core, what’s going to get settled and what’s not going to get settled.

In the healthcare, MedMal arena there has been a lot of consolidation, a lot of changes, a lot of investigations that are being taken place by the DOJ and the Department of Labor were they come in did audit for medicare and medicaid some of them become nothing, some of them become serious and some have become actual losses where they put doctors on the hot seat. We are not going into every specific of every claim, it just takes time.

Marshall Grossack

And I’ll jump in and also – piggyback on what Scott is saying I think really the issue has been obviously been listing this year for a number of quarters in a row and our actual methods having – we are going with the actual methods but they were coming short and the things get kind of changing and developments is always little worse than we expected quarter-after-quarter. So that now kind of what made us say we need to go kind of beyond the traditional method and see kind of what else is causing and that’s were – we wanted to bring in the underwriting and the claims department for a deeper dive.

Amit Kumar

Got it and the final question I have is your stock is off close to 8% today why should investors believe you now that this is indeed the kitchen sink quarter and this achieves finality of this issue?

Marshall Grossack

I think we have a history of underwriting discipline and delivering results outside of these past two quarters and we’re given you our best take that this medical malpractice issue is behind us for the foreseeable future, can’t give you 100% insurance but that’s a pretty strong belief on that and we think our underwriting discipline has been demonstrated in the past and we’ll continue to play through going forward.

Scott Carmilani

Since the beginning of the time we have always been conservative in our experience from claims and reserving. All the way back to Katrina when we first put an announcement out of what our expected losses would be from those three terrible events if you look at the loss triangles of today it actually came in below what we picked back then. And every time we had an event or a catastrophic event, we’ve over estimated those expected losses, have kept a conservative position throughout time and we’ll continue to do so. We recognize bad news early and improvements more slowly.

Amit Kumar

So hopefully when we are talking about on this on the conference call for Q1, hopefully this will be behind us, correct?

Scott Carmilani

More than hopefully.

Amit Kumar

I will hold you to that. Thanks.

Operator

Thank you. [Operator Instructions] Our next question is from Michael Nannizzi of Goldman Sachs. Please go ahead.

Michael Nannizzi

Thanks a lot. Couple of question. One on the GMI segment that underlying loss ratio that was elevated. I don’t know if you mentioned it specifically before, I don’t think I heard it, so I just wanted to ask about that and if you could give us some indication of sort of what happen there?

Scott Carmilani

I give you a little color and I’ll let Marshall add the specifics. The trade credit book particularly the international or emerging markets trade credit book experience some issues with commodity pricing and just a change in currency evaluations and that put a little more stress on that book that we’re expecting. We have tighten down the controls there, strengthen our recovery efforts, but I think we’ll see some improvements on in the very near future as you know that was an MGA that we took over and acquired and made some change into the infrastructure item. So we hopefully have seen, we’ll see that improved dramatically.

There is also European flood in the fourth quarter not much you can do about that, and those losses I’m not sure the exact number of time I had. The aviation book had a little more loss than we were hoping for in the quarter and the marine cargo book had acquired Asian portfolio need some re-underwriting. So we took some charges there, so we can fix that portfolio.

Marshall Grossack

Yes, I mean those things Scott just mentioned on the current year in GMI is about $16 million on the 2015 accident year. We also had some new and restructured CDP insurance program which probably added close to a point to the loss ratio in 2015.

Michael Nannizzi

Got it, okay. So is that business you’ve sort of make those adjustments. It look likes it still running in excess of 100%, so underwriting loss. Is that the cases as far as you look at when you make your adjustments and sort of think about where the ongoing business is running?

Marshall Grossack

Yes, I think with the expense ratio where it is which is we don’t think as the ultimate, we think these expense ratio on that business settles into the high 30%s after complete integration and scale, but there is a slight elevation in the loss ratio, given us experience and the rated environment that we discussed previously.

Michael Nannizzi

Okay. Okay all right, and that’s helpful. And then can you talk about this book, this MedMal book where are you relative to your limits there at this point? And can your teams like now with all of this conversation, the question is how much is left to take. Is that a number that you guys can quantify at this point?

Scott Carmilani

I’m not sure I understand the question, where are we relative to limits?

Michael Nannizzi

Like the total limits that you have, yes, aggregate limit that you have exposure to for the claims that are currently in the system that you are resetting reserves for?

Scott Carmilani

No, I couldn’t comment to that because as I said earlier a lot of these stalls are closed without pay but to aware we have exposure we’ve – reserving for the limits.

Marshall Grossack

Yes, I mean like a property cat event, we can kind of get your arms around the 10 insures that they are impacted by that cat for unlike medical we have a 1,000 insured or whatever, so really can’t talk about where we are against our total limits. I think the way to think about is when I described it before and Tom mentioned as well, we have our loss ratios for this line for 2011 through 2015 in the 85% to 80% range which I think if you look that a lot of our [indiscernible] companies you would see that’s a pretty conservative big.

Michael Nannizzi

And then just over the reinsurance for a minute I mean the development there clearly slowdown in the back half of the year that was a big driver of just overall profitability and it looks like casualty lines are the cause and at least from your disclosure there are some older years and there are some more recent years, and property contributing less than it had in the past. Is that, I mean, is that just a fact that, I mean, your booking underlying loss ratios in low, in the high-30s? Is the expectation then, if there are no large losses that and with this development which seems to be in casualty that reserve development out of the reinsurance segment should slow? Should we should see – we should expect to see something more like we saw in the back half of the year as opposed to the more substantial levels that we have seen over the past several years?

Tom Bradley

We made a good profit in the reinsurance segment in 2015 as we did in 2014 and as we did in 2013. It’s slightly less of our profit or kicked down in the fourth quarter, because the – as the, the reason the PMLs are down and then property writings are down. So, if there is just less dollars in the pot there’s just less dollars in take down.

Marshall Grossack

Yes, and then I don’t think we can really speak to what we think future potential redundancies are. That’s difficult to say.

Michael Nannizzi

Right. Well, I mean, I guess, I mean looking at year-over-year last year, we probably could have said the same thing the first half of the year, a lot of developments are going to happen, a lot of development and yet the underlying sort of track through the year. So maybe more simplistically what has changed from the back half of last year to the back half of this year?

Tom Bradley

We had less volatility in the portfolio. That’s the major thing that has changed. That might limit some of the upside and takedowns but should also limit dramatically the downside of a loss.

Michael Nannizzi

Okay, okay. Thank you very much.

Operator

Thank you. Our next question is from Ian Gutterman of Balyasny. Please go ahead.

Ian Gutterman

Hi, thank you. I guess, first, Tom or Marshall, I think it was Tom who said, I just want to clarify some of the numbers from earlier. You said did I get it right, that there was in North America a $16 million impact on the accident year come true in that full-year pick and a further $16 million in global. So $32 million total or did I confuse this?

Tom Bradley

Yes, that’s correct. Roughly $16 million in each segment. In North America it was about two-thirds of it was chewing up pick. And the other I would attribute it to property losses.

Ian Gutterman

Got it. Okay. Why don’t we start on just stop on some of the other reinsurance. You list the $100 million decrease in commitment. First of all, I would say is it fair to say that’s excess capital that could be used towards buyback?

Tom Bradley

You could say that if they use PML in general it is going to decline, which is a user of capital.

Ian Gutterman

Okay. And I guess, if you are – essentially you said you’re getting $300 million of distribution and you’re only putting $200 million back in. that $100 million difference, is that all free and maybe just how does that impact your, I guess, I get the bigger question, how does that impact your expectations for buyback in 2016?

Tom Bradley

We’ve been very consistent in buying back shares over number of years and we have our authorization remaining that we would like to continue to grow out. As I mentioned we’ve started the 10b5 program backup last month. And like I said we will be – we expect to be consistent buyer of stock particularly at these levels.

Ian Gutterman

Okay, I mean, is there any sort of quantification relative to expected earnings or anything like that you can give us at this time?

Tom Bradley

No. We’re not going to project earnings.

Ian Gutterman

Right, that’s right. I thought they are relative to earnings, that’s okay. I tried. Also on between, you look, coming down the PML change they have already incurred, if I’m trying to project cat load I’m guessing I can’t get – I won’t get in to actual number, but just as far as directionally is it reasonable to sort of look at the decline in PML over time to your cat loads probably declined by that much in combined ratio percentagewise and combined ratio points? Is that a reasonable way to look at it? Which is got something that less volatility?

Tom Bradley

Yes, I mean, the premium is going down is well.

Ian Gutterman

Right.

Tom Bradley

So the cat load relative to earned premium probably does not go down and it may go up if there’s rate pressure on it.

Ian Gutterman

Okay. Fair. Fair enough. Okay. And then I’m trying to see anything else before healthcare. I think we touched on some of the others. Okay. I guess can you tell me when did the review start? How long did it take?

Scott Carmilani

As Marshall said, this is a process we go through every quarter to look at reserves. And there wasn’t…

Ian Gutterman

Well, I mean – I mean if you guys, as you guys always talked in the past about, is sort of, you do the same process every quarter and it sounds like this was something above and beyond that. So I assume that will require bringing in an outside firm and doing extra work. It feels like that’s a lengthy process. Maybe, I’m overestimating it.

Scott Carmilani

Yes, I mean it’s over the course of the fourth quarter which culminates with the actuarial analysis for the end of the quarter, the upside, the third-party analysis happens every year, on every line of business. So we use that as a touch point for our own internal analysis. But going through…

Tom Bradley

There’s a lot of different levels of discussion to a back-and-forth that go on throughout the quarter. So I would say, the heavy lifting went on early in the quarter and the final decisions were made late in the quarter.

Marshall Grossack

Yes, I guess that we would be very clear on that point. We did not bring in an outside firm to look specifically at this issue. Every year we have an outside upon in actuary and they give their opinion on all the various lines of business.

Ian Gutterman

Got it. Okay, what I'm trying to get at is sort of the philosophy change, right? I think you guys just said and quite openly rate that prior to this quarter, right that this, we’re doing our best at this, but there is probably going to be some continual additions and it seems like there was a philosophy change made at some point during the quarter to try to get it all done it once and eliminate the future drafts. I guess I was sort of curious…

Scott Carmilani

I don't know if it was a philosophy change or just we've had enough. After two quarters of negative, underperformance we wanted to get it done.

Ian Gutterman

Yes.

Scott Carmilani

I think the key comment you heard from Marshall earlier was kind of the recognition that the traditional actuarial methods came up short a couple quarters in a row and that led to the realization of, we need to do something a little different and bring in some of this other analysis. So our normal hope is that the actuarial methods work and get us to the right point in the right period of time. But, kind of the recognition that they weren’t getting there is what led to this fourth-quarter activity.

Ian Gutterman

Got it, got it. And just on the underwriting side. I guess I will ask this as a lessons learned, maybe the way to say it is just obviously some of the stuff surprise everybody. But at the same time it seems maybe the catalyst for some of the surprises was the changing healthcare regulatory environment. And you know at the time that happened you were growing reasonably in this business. Is there any sort of lesson of whenever we see another line of business changing environment, we need to be more careful about how we grow until we have a better understanding of what is going on? Or is that just, you do not really – or am I reading too much into the correlation there?

Scott Carmilani

Well, maybe, maybe not. I think the hindsight it's easy to put money more in quarterback. Inhindsight, I think we underestimated the plan as far as antagonism once they saw the ability to go after these enterprises.

Ian Gutterman

Okay.

Scott Carmilani

More than 50% of hospital institutions are not-for-profit and are not typically the subject of this kind of scrutiny. But with the mass of consolidations it took place post-regulation changes, I think that made a bunch of them pretty vulnerable.

Tom Bradley

Yes, I think the other macro issue is as Marshall mentioned, we had a number of years with terrific loss ratios in this business and did really, really well. I think that drew competition into the sector over the past four or five years which ramped up during this period where we've come across the friction on the loss ratio, 2012 and 2013 particularly. And it’s hard to gauge exactly what impact that’s going to be initially. But we’re now seeing it.

Marshall Grossack

Well, that’s made it impossible for us to get the rate we need, the term changes we need in the 14 to 15 years. So that's why we adjusted those lost years as well, in anticipation that we’ll have more of the same. Because if we were able to tighten down terms and increase rates 15 plus% the way we wanted to, virtually across the board we wouldn’t be having this conversation. But, since we’ve been unable to achieve that portfolio, here and there, couple of accounts. But for the most part, the portfolio in the industry has continued to have aggressive pricing and weaker terms in the prior year. So, good luck to those who are new entrants.

Ian Gutterman

Understood, understood. And this is my last – corporate question is – for the full year, I guess the ROE was, call it mid-single digits and if I just look at, which is obviously below what you guys have done for a long time. If I look at the street estimates saying, by about 6% ROE for 2016. So it’s essentially same in 2016 as 2015 and not back for long-term trend. We’re without asking for specific ROE guidance, but just does that seem reasonable to you, do you feel like your ROE projection going forward is close to 2015 than what has been in the past or do you feel that this year is more of an aberration.

Tom Bradley

Well, the imminent point to there is it calls for the industry rates need to improve.

Ian Gutterman

Fair. Okay. I guess, I will leave it at that. Okay, thank you.

Operator

Thank you. Our next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Good morning, guys. Relative to the healthcare book method to beat that any further, but just thinking of the amount of deep dive you guys has been doing. Is there any analog other books whether last couple years or prior that have had issues that have kind of bled for a while and you finally had to sit down and strip it all apart?

Scott Carmilani

Sure. We have done that in the past. We've done it more recently with the trade credit book which doesn't have the tail, similar tail and we've been able to change that and take more action on that sooner. But, yes, of course we've done that. We did that in 2008 and 2009 in the professional liability portfolio and they are running quite nicely now.

Tom Bradley

And it’s actually very analogous to what we did fourth quarter of 2013 on the management liability aspect of the healthcare book, the antitrust type of issues, it was very similar we got to the fourth quarter and did a multi-disciplined deep dive to arrive at the action that we took in 4Q 2013.

Marshall Grossack

Yes, I need one more, just to pile and with Tom there, what we had in 2012 we had a long-term care program that was running a quite warm and we actually went in and looked at pretty much every open claim and definitely put that behind us.

Unidentified Analyst

Are there any issues, I’m just looking back a transcript from two and a half years ago and I’m just, it’s almost like deja vu on Q&A between yourself and Scott about that you're trying to be on top of this and there was a couple of things, and a couple of one offs and large hospital systems into your point that was P&O and E&O related. But was there any net analyses part of that or is that separate?

Scott Carmilani

Back then those are separate issues.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. And our next question is from [indiscernible] of Time Square Capital. Please go ahead.

Unidentified Analyst

Hey, good morning. There have been some recent reports that AIG/Lexington is retrenching for that from MedMal and I guess apparently even fully exiting certain issues. I’m just curious, one, as to your great degree of overlap with Lexington in some of these niche areas and two, just your thoughts on whether this could potentially have a beneficial impact on pricing in the competitive environment?

Scott Carmilani

I’ll answer that in reverse. I certainly hope so, it should. And I think if it does, there is opportunity. If there isn't, and there are still new entrants, believe it or not in the marketplace, I would be surprised that they would be undercutting rates and terms that exist today. But in this environment that we are in right now, maybe nothing should surprise anybody. To the extent we overlap with them, I think we compete with them, they’re obviously slightly larger – much larger than we are, in the space and they have written a lot more primary than we have, but we are both big institutional writers and I think as we now look at their results particularly but we would not be surprised that they are very synonymous.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. We have no further question. I’ll now turn the call back over to Mr. Scott Carmilani.

Scott Carmilani

I’ll just take a second to thank everyone for their time in the call. And their rigorous question around the healthcare portfolio and our intent to put this behind us. And so I would hope that you guys have been wanting to see this action taking place. And we look forward to a stronger 2016. Thank you very much.

Operator

Thank you. And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!