Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Arch Capital Group earnings conference call. My name is Keisha, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If at any time during the call you require assistance, please press star zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under the Federal Securities laws. These statements are based upon management's current assessments and assumptions and are subject to a number of risks and uncertainties. Actual results may differ materially from those expressed or implied.
For more information on risks and other factors that may affect future performance, investors should review periodic reports that are filed by the company with the SEC from time to time. Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends the forward-looking statements and the calls to be subject to the safe harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the company's current report on Form 8-K furnished to the SEC yesterday, which contains the company's earnings press release and is available on this website. I would now like to turn the conference over to your host for today, Mr. Dinos Iordanou and Mr. John Hele.
Please proceed.
Thank you, Keisha. Good morning, ladies and gentlemen, and thank you for joining us today. We're finally closing the 2011, which was challenging from an actual cat point of view. It was our worst year ever, surpassing even the 2005 Hurricane Katrina year for us. Fortunately, we have started the 2012 with a more positive outlook as market conditions are showing signs of improvement. Taking all that into consideration, our fourth quarter performance was acceptable. On an operating basis, we earned $126.8 million, or $0.92 per share, which on an annualized basis represents a 12% return on equity. Our investment performance for the quarter, including the effects of foreign exchange, was a total return of 82 basis points, and our underwriting performance was very good at a 90.1 combined ratio. This was aided by reserve releases from prior years, predominantly from short tail lines.
John will give you more of a breakdown in a few minutes. Cash flow for the quarter was $110 million, which on an adjusted basis was slightly higher than the 2010 fourth quarter numbers. Our book value per common share was $32.3, a 2.7% increase from September 30th, 2011, and it was due mostly to our operating results. The broad market environment continues to show improvements across the board. From a rate standpoint, most lines of business moved into positive territory. The exceptions were in executive assurance and healthcare, where we're still seeing rate reductions, a bit less than in prior quarters, but they're in the range of 1%-7% for healthcare and approximately 6% for executive assurance. Even with these improvements in the rate environment, we believe that significantly more rate is needed in many lines in order to achieve adequate returns.
In our view, based in part on the level of interest rates currently available for new money invested, the long-tail lines require quite a bit of improvement in premium rate to become attractive. We view primary casualty, umbrella liability, excess liability as areas requiring the most significant rate improvement. Workers' compensation on an industry-wide basis is achieving high single-digit rate improvements, this is still not enough to bring this line of business to adequate returns. In our reinsurance sector, rate improved significantly on a risk-adjusted basis in the property cat area, while all other lines remain basically unchanged. From a premium production point of view, on a consolidated basis, our gross written premiums were up 5.3%, and our net written premiums were up 5.8%. The insurance group was up approximately 2.5% on both a gross and net basis.
The reinsurance group was up 16.5% on a gross basis and 14.7% on a net basis. The increase resulted from new opportunities in U.K. motor based on current operating conditions in that marketplace, an increase in accident and health business, as well as from property cat backup covers due to the storms. We always are looking for opportunities to expand our underwriting capabilities organically. In the past six quarters, we were successful in attracting management teams in life and accident and health, mortgage insurance and reinsurance, treaty reinsurance in Canada, global crop hail business, as well as title insurance in Canada. All these are investments in talent and capabilities for the future. In some of these lines, we're already producing business, and in some, we're in the process of building the needed infrastructure and obtaining the necessary licenses.
While the degree of success of these opportunities in the short term will be dependent on market conditions, we're confident that over the long term, these will prove to be successful profit centers contributing to the value of our enterprise. During the quarter, we essentially did not purchase any of our shares. This decision was influenced by several potential opportunities that were presented to us in the last quarter. This activity was unusual, and if successful, these transactions would have had the potential to utilize a significant amount of capital. These opportunities emanated from the property and casualty sector, life and health reinsurance sector, and mortgage sector. Unfortunately, only one of these transactions has closed. The biggest obstacle to closing some of these deals has been the wide spread between the bid and ask.
We continue to work on some of these opportunities and on new ones that we receive in the first quarter of 2012. In general, our philosophy on capital management has not changed. We prefer to deploy our capital in our business first and absent the ability to do so to returning to our shareholders. Although the current operating environment is improving, we still do not have clear visibility on the degree of improvement in market conditions or on our ability to close on some of the unusual deals that we have been working on. As a result, we will take a wait and see attitude with respect to share repurchases until we have more clarity. Before I turn it over to John for more commentary on our financial results, let me touch upon and update you on our cat PMLs.
As of January 1st, 2012, our one in 250-year PML single event was $881 million or 20% of common shareholders equity in the Gulf and $842 million in the Northeast. Our Florida Tri-County PML now stands at only $638 million, which gives us ample capacity for the upcoming Florida renewal season. With that, let me turn it over to John for more commentary on our financials. After John, we'll come back and have you ask your questions. John?
Thank you, Dinos. Good morning. On a consolidated basis, the ratio of net premium to gross premium in the quarter was 73%, the same as a year ago. Our overall operating results for the quarter reflected a combined ratio of 90.1% compared to 92.7% for the same period in 2010. 2011 fourth quarter included $78.8 million or 10.5 points of current accident year cat activity, net of reinsurance and reinstatement premiums, compared to $31 million or 4.9 points in the 2010 fourth quarter. The 2011 fourth quarter included $60.6 million for the Thailand flooding, where we're reserving toward the higher end of our pre-announced range of $35 million-$65 million, corresponding to a total industry estimated loss of $10 billion-$20 billion.
In addition, the 2011 fourth quarter reflects an estimated $5.4 million for the Christmas Day Australian hailstorm. The 2011 fourth quarter combined ratio reflected 15 points or $101 million of estimated favorable prior year reserve development, net of related adjustments, compared to 6.1 points or $38 million in the 2010 fourth quarter. The net favorable prior year development in the 2011 fourth quarter is comprised 64% from property cat, property and other short tail lines, 20% from medium tail lines, and 16% from longer tail lines. The 2011 fourth quarter net release in general reflects the better-than-expected claims emergence that we experienced throughout 2011 across most of our lines.
The 2011 fourth quarter current accident year combined ratio, which excludes named cat events in prior year development, was 101% in the insurance segment, slightly better than the 102.9% in the 2010 period, primarily due to lower expenses. In the reinsurance segment, the 2011 accident year combined ratio was 83.7%, higher than the 77.9% from the 2010 period Due in part to a change in the mix of earned premium towards medium tail other specialty lines, which generally have a higher booked combined ratio than property lines. The 2011 fourth quarter expense ratio of 33.9% was lower than the 34.6% in the 2010 fourth quarter, reflecting lower operating expenses and incentive compensation charges, which more than offset a higher level of commission expenses related to prior year favorable development.
On a per-share basis, pre-tax net investment income was essentially flat at $0.59 in the 2011 fourth quarter, compared to $0.60 for the same period a year ago, and $0.60 in the third quarter of 2011. Our embedded pre-tax book yield before expenses was 2.98% in the 2011 fourth quarter, down from 3.09% in the 2011 third quarter and 3.52% a year ago, which primarily reflects lower reinvestment rates. The portfolio duration was 2.99, down from 3.17 at the end of the third quarter. We continue to be cautious with the duration of our investment portfolio due to the risks in our global economy. The total return of the investment portfolio was 82 basis points in the 2011 fourth quarter, compared to a minus 7 basis points in the corresponding 2010 period. Excluding foreign exchange, it was a positive 95 basis points in the quarter.
The total return in the fourth quarter benefited from a recovery in equity markets and stable returns on U.S. Treasuries, offset by a negative return on some alternative assets. Our alternative assets include bank loans, global and emerging market bond and multi-asset funds, and energy investments. These alternative assets drove the $14.7 million in net losses in equity method accounted investments. We expect that these funds will have more volatility quarter to quarter, but we also expect that over the longer term, we will gain an acceptable return. We continue to maintain the vast majority of investable assets in a very high-quality fixed income investment portfolio. Starting this quarter, due to the ever-changing views of the rating agencies, we are reporting the average quality of our investment portfolio from both S&P at double A and Moody's double A1, and we have split out our U.S.
government and government-sponsored securities in a separate category in our disclosures. In the past, our average credit quality was calculated as an average of the three primary rating agencies. We added an exhibit to our financial supplement on our Eurozone investments, including sovereign debt, corporate, covered bonds, and other sectors. Our exposure to troubled Eurozone countries is minimal, and we have no exposures in Greece. We recorded net foreign exchange gains of $13.2 million during the 2011 fourth quarter, mainly due to the strengthening of the U.S. dollar against the euro. These gains resulted from revaluing our net insurance liabilities required to be settled in foreign currencies at each balance sheet date. This should be compared to the minus 13 basis points total return from foreign exchange on our investment portfolio, which essentially then offset this income statement gain in the equity section of our balance sheet.
For the 2011 year, our effective tax rate on pre-tax operating income was a benefit of 3.7% and 2.2% on pre-tax net income. The cat activity this year, low investment returns, and the relative mix of income or loss by jurisdiction have resulted in a beneficial net tax position. Our preliminary estimate of the implementation of the new DAC accounting standard required on January 1st, 2012, that we communicated last quarter, is still the same, and the new standard should reduce our book value by less than 1% and should not have a material impact on operating earnings in 2012. Our balance sheet continues to be conservatively positioned with total capital at $5.03 billion at December 31st, 2011, up from $4.9 billion at September 30th, 2011. In the quarter, we had no material share repurchases.
Our debt plus hybrids represent 14.4% of our total capital, well below any rating agency limit for our targeted rating. As we announced last calculation of our target capital position, we have now implemented our version of RMS v11. As of December 31st, 2011, our actual capital is in excess of our target capital. With regard to subsequent events to year-end, based on current information, we expect to record a loss of $8 million to $10 million on our investment in AOLAS LP, which we report on a one-quarter lag and is included in other income. We also expect a loss net of reinsurance and reinstatement premiums of between $18 million and $35 million for the January 2012 Costa Concordia marine event, corresponding to a total industry loss of $850 million to $2 billion.
Reflecting on the 2011 full-year results, the after-tax operating profit was $204 million, which reflects the significant level of catastrophic activity during 2011. The year combined ratio was 98.3%. The insurance segment had an accident year combined ratio, excluding cats and prior year development, of 100.6%, and the reinsurance segment produced an 80.6% ratio. For the year, the operating ROE was 7.2%. Our book value per share ended the quarter at $32.3, up 2.7% from the last quarter and 6.8% from a year ago. With these comments, we are pleased to take your questions.
Ladies and gentlemen, if you wish to ask a question, please press star one. If your question has been answered or you wish to withdraw from the queue, simply press star two. Questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Michael Zaremski with Credit Suisse. Please proceed.
Hi, good afternoon. Thank you.
Good morning.
Regarding the "unusual deals" that closed, the one deal that closed in 4Q, was that the U.K. motor deal?
Yeah, that's the one. Yes.
What was the size of the U.K. motor deal? Then I guess, just a number of questions around this. Why are the deals unusual? What type of returns do you feel these opportunities offer? Are they similar size to the U.K. motor deal?
A lot of questions. Let me start with, the U.K. is not unusual. It was an opportunity for us to partner with some people that they have an existing book of business, and they're looking to expand the market conditions. They're attractive for the time being, and we can achieve double-digit ROEs. The deal size depends how successful they are in growing their business. It's going to be in excess of $120 million for the year. It's a 2012 event for us. Some of the other transactions, they weren't as usual, meaning that you might put them in the category of either renewal rights deals with books of business offered to us to pick up underwriting teams and the renewal rights. We had a few of those. We're still working on some. We've seen opportunities in the mortgage space.
That is a reinsurance behind either bank portfolios and/or building societies portfolios. The size of these deals can be anywhere from $100 million to $300 million, $400 million in range. In essence, depending on the line and the capital attraction or the capital utilization can be anywhere from $50 million-$250 million. Looking at that, I wanted to be cautious in the way that we were deploying our capital because you can get in the batter's box and hit a few home runs, or you can get in the batter's box and strike out, but you can always do a share repurchase at a future date. That was what was driving our decision-making.
Okay. That's very helpful. Lastly, the AOLAS loss. What drove that? Is $35 million the maximum loss potential on this investment?
Well, the investment is being a very successful investment for us. We invested $50 million. We receive already $67 million in distributions, and we have a carrying value as of the end of the year of $35 million. When you add it all together, this investment almost double our money, independent of the loss that we're going to take in the first quarter. The loss is emanating from the worst cat year in the history of insurance. It's fourth quarter cat losses, and it's coming from mostly the floods in Thailand.
Okay. Thank you.
Your next question comes from the line of Gregory Locraft with Morgan Stanley. Please proceed.
Hi, good morning, guys. I wanted to just understand on the buyback, if you could just remind us of the philosophy and sort of your appetite going forward with the stock at 1.2 book.
If you go on our website, I think we have a grid that tells you as to when we decide, and at what level to do the buybacks. Basically, it's a combination of what we anticipate the current business ROE to be versus how long will it take for us to recover. If it's 3 years of less, because if you're paying above book, you got a recovery period. If the period is 3 years or less, we choose buybacks. If it's going to be more than, and we have excess capital, and we don't think there is potential in the future to utilize it, we'll probably use some other method, maybe an extraordinary dividend, et cetera. This has been our philosophy consistent now for the last 5 years. No change in that. John, anything you want to add, or?
Well, I think the point is that, as Dinos said, we're going to wait and see, and we make the decisions when we get there, in that quarter, at that time, what the trading is, what the outlook is for business. We will make those decisions when we get there.
Okay. Yeah. I mean, again, you guys, few in the entire industry have been as aggressive as you in returning capital the last 5 years. With the share count not moving down the last several quarters, I guess what I'm wrestling with is do I take the organic earnings? Because you're right at the upper end of that threshold, the chart to which you're referencing. I'm wondering if you're going to do any in 2012 or if it's sort of-
Listen
over for now.
I don't know. I would like to do none because the market is so good. I'm deploying my capital in the marketplace. Having said that, when I said the bid and ask had a wide spread to it. We were pricing a lot of our deals, I wouldn't say all of them at 15% ROE. Some of them it was even at 12% ROE, expected ROE. Even with that, we couldn't get the buyers to agree with that. Some of the buyers they were looking for us to deploy capital at 5%, 6%, 7% ROE. We're not going to do that. I'm not saying we're not going to work on the deals. We're going to work. We'll put a price out that we're comfortable with. It's going to be in a double-digit ROE.
That's what we tell the market, that's what we tell the brokerage community, that's what we tell the buyers. Now, do I have clarity if the market will respond to that or not? No. If I had that clarity, I can give you more of a precise answer. Not knowing that's why I said I'm going to have a wait-and-see attitude. We'll continue to work on these deals. Some of them they have a long leeway. Some of them might take 2 quarters, 3 quarters from beginning to end. If we're successful, it's music to my ears. I'm deploying capital for what I'm getting paid for in our business. If not, we're going to revisit excess capital, what do we do with it?
Okay, perfect. Thanks. One last one, totally different area, just the reserve releases was definitely much, much better than peers. Obviously, your balance sheet continues to be in excellent shape. You did provide some color in the commentary as to where it came from and stuff. Can you maybe be a bit more granular? Obviously what we're all trying to figure out is the sustainability of that going forward. Again, any comments or thoughts?
I thought John was pretty granular. It's 64% of.
Prop CAT.
property CAT, which means that I think we have a better record in reserving CAT than most. At the end of the day, if they don't materialize, we're a bit conservative. You've seen what we've done with the Thai losses too. The contingent business interruption is so difficult to estimate. Even though we never wrote excess of loss CAT business in the country of Thailand. We have no direct traditional excess of loss CAT business in that territory. We're anticipating losses coming from both our insurance group and reinsurance on large industrial risks that they're done on a global basis. Because the contingent business interruption is such a difficult measure, we became very conservative. At the end of the day, I'd rather be on the high end of the reserving range than the low end.
You might say we've done the same in prior years, in 2005, in 2004, et cetera. If you look at our history, we had consistent reserve releases from short-tail lines. This is not the first year. It just happened to be unusually higher. On short-tail lines, you know what you got. It's either you got a loss or you don't, and you don't have to wait for many years to figure it out. The 16% on long-tail lines, which is about $16 million out of the total, came from the very good years in the casualty business, 2004, 2005, 2006. This is no reserves from any of the later years. The medium term, it might be a few years after that, but is mostly medium term.
It's in the professional liability or just.
Claims made professional liability business with low limits that usually within three, four, five years, you know where you are. Any more color, John?
Yeah. Greg, we've seen, and I think some others have seen in the industry through 2011, trend has been less than we have built in for this year. That's allowed some of these releases across many of our lines to flow out. Whether or not that trend continues or not, we keep assuming trend is on a long-term basis. It will come back someday to that. We can't tell you when. We have to look at that quarter by quarter.
Okay. That's really good. Then just one follow-up on the short tail lines. Perhaps you actually said this already, but which events did this come from?
Across many. It's also property as well as property CAT.
Right. From all events starting with 2008. Don't forget, 2008 was a very heavy year with earthquakes, floods, et cetera. It's all events. It's not just one event.
Okay, great. Thanks a lot, guys.
Your next question comes from the line of Jay Gelb with Barclays Capital. Please proceed.
Hi, everyone. Just wanted to catch up on a couple points. Dinos, at year-end, how would you peg the level of excess capital for Arch?
A little stronger than what we told you last quarter because we didn't do share repurchases, and our premium growth hasn't been that dramatic yet.
Regarding the premium growth in reinsurance, I think you mentioned the potential for a couple one-time deals. Were they in the reinsurance segment?
Well, the one that we did, it was in the reinsurance sector, and we set the size of it. It's about figure $25 million a quarter. It's about $120 million, and it's a 13-month deal.
Okay, that's going to still flow through.
It will flow through the year
in 2012, not just earned?
It will flow through 2012, yes.
In written?
Written, yes.
Got it. Okay. On the pace of investment income, on the recurring investment income, which has been slowing each quarter, is that $80.5 million, is that the right run rate? We should take into account lower reinvestment yields going forward, so it might continue to drop.
The reinvestment yield is less. We look to always find opportunities. Also what I want to point out to you, the number that you mentioned is before expenses, right? You said, what the embedded yield, you said it was what, 2.98%?
I suppose, yeah.
Well, that's before expenses, so if you're putting it on your model, you better take out investment expense out of that, too.
Right. Directionally, would there be sort of
Yeah. I don't think it's going to move more further down because we're finding enough products with still high credit quality and enough spread from Treasuries to continue maintaining approximately in the 2.5%-3% yield. We're going to try to stay there. I don't expect that to move dramatically. Don't forget, we have a
The yield, Dinos, or the investment income result?
The investment income.
Got you. Okay. I just want to understand a little better structurally on the share buybacks. The reason to hold back a bit on share buybacks, is that more because there's potential to deploy more capital in the business as the market continues to firm and as well as kind of these one-off deals? There still seems to be so much excess capital on the balance sheet.
It was both. We have the ability to grow the business quickly. If you go back in our origin, 2002, 2003, 2004, we went from zero premium to $3.5 billion gross in three years. Our ability to deploy quite a bit of capital. As a matter of fact, our first year on a policy year basis, on an underwriting year basis, reinsurance group grew out to $1.2 billion in 2002. Given a market turn that we can sense giving us good opportunities and good pricing, we can deploy capital very quickly. Now, you put on top of it some unusual opportunities, somebody presenting us with $100 million renewable book of business that we would like to take over.
If we take over any one of these deals, you're starting to use big chunks of capital, and why not be cautious in the way. If some of these deals don't materialize, that means we'll continue to have excess capital. I'm even surprised that you guys keep asking questions on how we manage capital, because I think our track record has been phenomenal. We're not trying to hold onto it. We're only trying to deploy into the market as best as we can. If we have excess, we're not shy of giving it back to shareholders.
We understand. On the transaction, you're looking at potential, not just traditional large insurance or reinsurance deals. There's also in the market the potential for renewal rights transactions.
Absolutely.
Got you. Makes sense. Thanks, Dinos.
Your next question comes from the line of Vinay Misquith with Evercore Partners . Please proceed.
Hi. Good morning.
Hi, Vinay.
The first question is sort of on the opportunities you're seeing. Are you seeing them in the normal P&C insurance market or other-
We saw them in three sectors, Vinay. We saw them on the P&C sector. We saw them on a new initiative, which is the mortgage space, and then we see them also on a new initiative, which is our life and A&H reinsurance sector. We've seen them. Don't forget, you bring powerful teams, good underwriting people with market connections. Even though we believe, at least we believe, that we're conservative underwriters, the market is responding and sending us these opportunities. Now it's up to us to find the right ones with the right profitability and bring them home and close. I'm an optimist. I'm a patient optimist. Market is moving in our direction. We probably can utilize a little more capital over time. We're seeing these kind of opportunities. If we hit on some, fine. If not, we'll go back to our old ways.
Now-
Vinay, maybe just John, I just want to add that the mortgage, the main focus is international, where there's good opportunities there, say in the U.K. and some other places, Australia. There's some proven opportunities there.
How are you getting these opportunities now? Why are you getting these now? Do you see more stress in the market, or have you hired new teams that have helped you to get these opportunities now?
Yes and yes. There's more stress in the market because the traditional players lack capacity and or ability to do that. Of course, you got to have the right team in order to get the opportunities. The combination of both is what's presenting us with these opportunities.
Okay, that's helpful. Now I believe on the auto deal , you said it would be a double-digit ROE. Is that what you're targeting for?
Yes. We believe we're going to produce double-digit ROE. We have good partners there. We like the people. We have partnered together, and we like the sector for what's happening in the U.K. motor market.
Okay. What other competitor actually pulled out of the excess of loss business for the U.K. market? I'm just curious as to how you got some news of that.
This is not excess of loss. This is a partnership. It's a primary deal with Side by Side.
Okay, that's great. Just one more, if I may. What's your accident year ROE on the business that you're writing right now for your normal P&C business?
Right now on a policy year basis, we think we're still in around 9% range. That's how we're calculating it.
Okay. That's great.
A lot of that influence comes depending if you're going to do your own calculations. I can run you through pretty quickly. On an accident year, this is not policy year. On accident year basis, this way you can follow the numbers. We produced 7.2% for the year. The cat losses, they were $a couple hundred million more than normal. Then we had about $275 million of prior year reserve releases. That will bring your ROE slightly below 7% on an accident year basis. Now, why is my policy year better? First, there is some rate increases that is going to improve the book. Second, I think our mix is changing to higher ROE. The percentage of business with a higher ROE for the 2012 year, it's a little higher than what we had in the prior year.
When you push that, we're getting somewhere in the high 8% and change 9%. We do those calculations. That's why I can speak to them because are we happy with it? No. You don't see my comments to be too enthusiastic that, hey, we're going to go and write a lot of business. Our growth is still predominantly emanating from one-off opportunities rather than across the board improvement. I'm more optimistic than I was last quarter because I think the market environment is moving in a good direction.
That's great. Thank you very much.
You're welcome.
Your next question comes from the line of Matthew Timmerman with J.P. Morgan. Please proceed. Hi, good morning, everybody.
Hi, Matt.
Hi, a couple questions. Just, I was hoping you could help me understand, if you execute on some of these new opportunities, how would it all affect your ability to write other business if market conditions improve? I guess, can appreciate that it would take up absolute capital. I'm just wondering in terms of how much kind of dry powder do you have left from diversifying type lines, let's say casualty or other things?
I'm having difficulty deploying my excess capital. I'm not worrying about capability because when you look at the balance sheet, it has very low leverage, 14.6-
4%
14.4%. I have approximately three quarters to $1 billion of hybrid capacity that I can go out without having to dilute my common and raise either debt or perpetual prefers or whatever form we decide to do. At the end of the day, the instructions that I have given to all of our operating units is operate in the marketplace as if you have unlimited capacity. I'm not talking from a risk point of view, but from a capital point of view. Once you utilize whatever I'm allocating to you and we need more, I'll go out and find it. We're operating with the ability that we have a lot of capacity and a lot of dry powder for us, given the right opportunity in the marketplace to capitalize on it.
Yeah, that's fair. Just to make sure I'm fully understanding what you're saying. Effectively, if you execute on these things, it's more about using the existing capital you have.
Right.
Any incremental growth and appetite or business would then be funded by that hybrid return.
As a first choice, yes, absolutely.
Yeah. Okay. That's fair.
I didn't buy all those shares back to go back and dilute my common.
Matt, it's John. We also have the earnings that flow through throughout the year that it also creates capital as well.
Yeah, absolutely. I think I snuck in retained earnings on my list, but to a degree. The other question I had was around the development. One of the things that's kind of muted the net reserve development you've been showing the last couple of years has just been a little bit of adverse push on some credit crisis exposed lines. I'm just wondering whether or not you're seeing some of those pressures dissipate as well.
Listen, we do a granular analysis by profit center, by IB and our family, and depending what you wrote, either on insurance or reinsurance, some things will pop up a little bit on one and go down on others, et cetera. All I can tell you is, I spend as much time with the actuaries to the point that I think they don't like me a lot because I ask too many questions and I spend too much time with them. I feel that our reserve position today is as good as it was a year ago or two years ago. That's basically also the opinion of outside people that they advise us, and they do independent reviews on what we have. We have a very good methodology in how we reserve the company. I think I'll let the track record speak for itself.
That's fair. Just one last numbers question. Just on the retention change you mentioned in the surety line. Is kind of the magnitude delta we saw this quarter the right way to think about it? I know it's not a huge premium line, but just want to make sure I-
It's not, I wouldn't read too much into it because, let's face it's a line we like to grow cautiously because let's face it's a credit line, and in the economic conditions we are, is something that you need to be cautious. Also, it depends how you buy your insurance protections on the surety. We're switching more from a quota share to excess of loss, which in essence, it allows us to retain more of the net premium to us.
All right. Thanks much.
You're quite welcome.
Your next question comes from the line of Ian Gutterman at Balyasny Asset Management. Please proceed.
Hi, Ian. We're going to fail you again. You seem to be always in the back of the room. One of these days I'm going to surprise you and go first.
Go first? Okay. I'll see the sun rise from the west.
I guess, first on this U.K. motor, can you talk a little bit more about what it is? I guess that line, from what I understand, has been a pretty miserable performer for some of the U.K. companies the past few years. I think there's been some adverse court rulings or regulatory rulings that have caused a lot of trouble. Why is that attractive? I thought that was a pretty poorly performing line these days.
Listen, motor insurance, I don't care if it's auto in the U.S. or motor, it's a predictable line. When you underprice it, you're going to find a lot of excuses why you're not making money. When you price it appropriately, you're going to make money. Rates have improved in the last couple of years. Some of the pricing challenges have been resolved. If you have good partners, and we think we do, don't forget, you also got to look at the partners that you partner with. We like the people. We felt it was a very good deal for us to do.
Fair enough. Just in general, these opportunities you're looking at, they sound more like, are they more opportunistic things that you're in for a year or two and then you get out, or are these sort of businesses that you might still be in five or 10 years from now?
Listen, we like to be in for as long as we can. I don't like to be doing all this work and go in and out, at the end of the day. On the other hand, we're not going to stay there and take losses. That's not what we get paid for. We get paid to make money for shareholders. It's that combination.
Okay. The reason I was asking is, I guess I was wondering if it's something you hope to be in for a while, and that if you were optimistic on the cycle turning soon, that maybe you would want to push these things off and wait and go look and maybe build more longer-term franchises like some of your competitors are doing, hiring new teams to get in front of the cycle, things like that. Is that something on the radar, or does that still not make sense?
Listen, our attitude on talent has not changed. I spent a little time on my prepared remarks just to tell you what we've done. Usually we don't go out and put press releases if we hire some people, et cetera. We've done enough that I thought for a lot of the analysts, it would have been important for them to know because some of them, they hear about this, they hear about that, and they ask us the questions. We will hire talent independent of cycle. We don't care if you get a Michael Jordan come knocking at your door, you hire him. Right? Now, is the market allowing them to deploy their talent and show a lot of revenue and profit immediately? In some cases, yes. In a lot of cases, no. We're very patient. I'll give you two examples.
We brought a very strong property fac team. They're doing fabulous. Steve Franklin and his team, et cetera. The market allow them to operate and do well for us, and we let them do. We brought David McElroy and his team. They're fabulous people. Probably one of the best underwriting teams. The market did not allow it. We're patient. We told them, "Listen, we hire you for your brains. We hire you for your capability." One day the market will allow you to display what you can do. We'll be patient along with you. Our attitude is, we find the right people independent of cycle, we hire them. We warehouse them. I never saw a company go bust because maybe their expense ratio, it's a point or two above what it should be.
I've seen every single case that you do that when the right opportunities come, these teams more than pay for themselves. We're very, very patient about that.
Very good. Then just my last one is some of the lines you mentioned that were disappointing, casualty, executive assurance, things like that. It looks like you showed modest growth in those lines. I mean, not anything scary, but I was just kind of wondering if those lines aren't where your targets are, why aren't they shrinking as opposed to growing a little bit?
Well, a little bit of growth was in Europe, and it was mostly on small to medium size enterprises. That sector, both in the U.S. and in Europe, we like. Even within a line, even though we don't write the large financial institutions, the large FI business or commercial D&O, it's not in the best of shapes for us to be enthusiastic about significant growth. Things are improving, not fast enough for us. There is other sectors that we do like, there if we can grow, we're going to grow.
That makes perfect sense. Thank you.
You're welcome.
Your next question is a follow-up from the line of Michael Zaremski with Credit Suisse. Please proceed.
Oh, thanks.
Hi, Mike.
Hi. In regard to the cruise line accident, is $35 million, is that based on a $2 billion loss? Do you think the loss could reach $2 billion?
Yes, we don't think it's going to reach there. I don't have to make a judgment yet as to what I'm going to reserve it for next quarter. The industry experts, I'm not one of them, but they think that the loss is going to be somewhere between $850 million-$900 million. There is good logic around how they estimate that. You got about half a billion, which is the hull . Then you have the 32 deaths, you have the evacuation. You're going to have the removal of debris and wreckage, which all that is going to go on the liability side. The estimate is at $350 million-$400 million. That's not an unreasonable number. What things can change that is if we have a spill, you have an environmental disaster.
There is about $1 billion of cover on the liability side for pollution. If they run into some very difficult problem in removing, that might escalate. They don't anticipate that. I have to give you a range. In our way of thinking, both with Thailand floods or this one, we give you a pretty broad range, and we tell you what is going to cost us if it happens at $850 versus $2 billion. Do we believe $2 billion? No. I'm not sitting here and telling you that that loss is going to be a $2 billion loss.
It's a very high probability that it's going to be in the $850 million to $1 billion, it will be on the low end of what we By the end of the first quarter, I got to make that judgment and put a reserve up. As we get more information, we're going to refine that number. Right now, that's our range, $18-$35.
Understood. Thanks for the color.
You're quite welcome.
There are no further questions in queue at this time. I would now like to hand the conference back over to Mr. Constantine Iordanou for any closing remarks.
Thank you all for attending, and we'll talk to you next quarter. Have a wonderful day.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect your lines.