Good morning, and welcome to the AXIS Capital first quarter earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Linda Ventresca, Head of Investor Relations. Please go ahead.
Thank you, Austin, and good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the first quarter of 2018. Our earnings press release and financial supplement were issued yesterday evening after the market closed. If you would like copies, please visit the investor information section of our website, www.axiscapital.com. We set aside one hour for today's call, which is also available as an audio webcast through the investor information section of our website. A replay of the teleconference will be available by dialing 877-344-7529 in the United States. The international number is 412-317-0088. The conference code for both replay dial-in numbers is 10118928. With me on today's call are Albert Benchimol, our President and CEO, and Pete Vogt, our CFO.
Before I turn the call over to Albert, I will remind everyone that the statements made during this call, including the question and answer session, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks, uncertainties, and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set forth in AXIS's most recent report on Form 10-K, filed with the Securities and Exchange Commission on February 28th, 2018, as well as the additional risks identified in the cautionary note regarding forward-looking statements in our earnings press release issued on April 25th, 2018. We undertake no obligation to update or revise publicly any forward-looking statements. In addition, this presentation may contain non-GAAP financial measures.
Reconciliations are included in our earnings press release and financial supplement, which can be found on the investor information section of our website. With that, I'd like to turn the call over to Albert.
Thank you, Linda. Good morning, everyone, and thank you for joining us to review our first quarter performance. For AXIS, the story of the first quarter is that our actions of the past few years are starting to deliver meaningful results. I'm pleased by the quarter's results, which I believe signal the start to a strong 2018 for AXIS. I'm going to begin by putting our first quarter's results in the context of recent transformation actions and the ongoing evolution of our company. After which, Pete will provide a bit more detail on the numbers, and I'll close with our customary review of pricing and outlook.
Over the past five years, AXIS has undergone a fundamental transformation from an intelligent and opportunistic provider of large capacity for volatile lines in what was a hard market, to a relevant and leading player in a select number of attractive markets, positioned to deliver superior results across a wide range of market conditions. In that time, we exited a number of lines and markets where we did not see a clear path to leadership or profitable growth, including the Australian retail market, Canadian property, global excess casualty, retail distribution for property and casualty lines in the U.S., and most recently, onshore energy. We also invested in developing lines with exciting potential, including A&H, renewable energy, Cyber, agricultural reinsurance, and mortgage reinsurance. We provided our underwriters with better tools and analytics and achieved industry-leading claim service levels. We expanded geographically and completed the acquisitions of Aviabel and Novae.
We recruited strong talent. By the end of 2017, AXIS was a relevant top 10 player in substantially all of its chosen markets, including the U.S. E&S wholesale business, North American professional lines, and the London and Lloyd's market for international specialty lines. This quarter's results provide some insight into the earnings potential of our progress to date. We reported operating income of $1.46 per share and operating ROE of 10.8%. However, our reported GAAP results understate the true profitability of our book, as the PGAAP adjustments related to the Novae acquisition had a negative $14 million impact on reported earnings. As Pete will discuss later, these PGAAP adjustments will substantially run off by the end of the year. Thus, we believe a better indication of our underlying profitability is on an ex-PGAAP basis. On that basis, ex-PGAAP, our annualized operating ROE was 12% in the quarter.
Let me add that the integration of Novae continues to proceed according to plan. Pete will address our results with the Novae operations attributed separately to insurance and reinsurance segments. On a combined basis, the continuing business of Novae delivered a running rate accident year combined ratio in the mid-90s for the quarter, excluding any PGAAP adjustments. This performance still does not reflect the full benefit of the recent and ongoing underwriting actions we've taken on the Novae portfolio Nor the full synergies we expect to achieve from the integration of Novae. You'll recall, we announced revised synergy projections of $60 million by year-end 2020. This quarter reflects only $7 million of achieved synergies or $28 million on an annualized basis. There's still more progress to come.
Separately, we've also earlier this year expanded our transformation program to include the redesign of our operating model based on best practices utilized by forward-thinking companies both within and outside our sector. You'll recall, the highlights of the organizational changes that we announced included the realignment of accident and health operations to the insurance and reinsurance segments, restructuring our finance and IT functions around an integrated organization structure, and the creation of a global underwriting and analytics office. These actions put the company on a powerful path forward as we accelerate our strategy to be a leader in specialty insurance and reinsurance, while increasing our efficiency and profitability. Simply put, we aim to be better, smarter, and faster in serving our clients and partners in distribution.
We will, on the one hand, be more efficient in the delivery of our differentiated services, and on the other, invest in greater analytics, technology, and development for our staff. We expect that these operational efficiencies and investments in new initiatives and talent will make AXIS more agile and responsive, and better position our company to lead and win in today's markets and into the future. In addition, we expect our ongoing transformation to deliver net additional expense reductions of $40 million by year-end 2020, even as we invest in our people and in our business. When added to the $60 million in synergies from the integration of Novae, total expected cost savings should exceed $100 million by year-end 2020. We're proud of our achievements to date and keen to continue our progress to deliver outstanding products and services to our customers and superior returns to our shareholders.
We have a clear runway to enhance profitability and are committed to a journey that will provide substantial rewards to all our key stakeholders. With that, I'll turn over the call to Pete, who will go through the figures in more detail.
Thank you, Albert, and good morning, everyone. During the quarter, we generated strong results featuring net income of $63 million and an annualized ROE of 5.5%. Our operating income for the quarter was $123 million, and an ex PGAAP basis, our operating income was $137 million, generating an ex PGAAP annualized ROE of 12%. Net income this quarter benefited from good ex CAT underwriting results, a lower level of catastrophe and weather-related losses, continued favorable prior year reserve development, and strong investment income. These positive factors were partially offset by net investment income losses and foreign exchange losses. Diluted book value per share declined by 2% in the quarter to $52.57. The decline was principally driven by net unrealized losses on investments. Before I get into specifics, I would like to provide an update on a number of items.
Firstly, with regard to the acquisition of Novae, in the quarter, we recognized $60 million of intangible amortization, including $57 million of VOBA amortization. This expense affected the company's operating income but was not included in the results of the company's insurance and reinsurance segments. As previously disclosed, the VOBA is expected to be immaterial beyond mid-2019. Underwriting income in the quarter continued to include the earn-out of Novae's unearned premium as of the closing date, without the recognition of the associated acquisition costs since the DAC asset was written off at closing. This DAC would normally have been amortized into acquisition expenses. We estimate that the consolidated acquisition costs on an as-if basis would have been $40 million higher, resulting in an as-if acquisition cost ratio of 23.1% versus the reported ratio of 19.6%.
As we have previously mentioned, we entered into a reinsurance to close agreement for Novae's 2015 and all prior years' liabilities. The agreement effectively transfers responsibility for discharging all liabilities associated with all business underwritten by Novae in 2015 and prior years. The positive financial impact associated with this transaction was reflected in the fair value of Novae's balance sheet at the closing date. During the quarter, we recognized a reduction in reserves for losses and loss expenses representing the transfer of the liabilities to the reinsurer, consideration paid, and a payable representing consideration due to the reinsurer at March 31, 2018. The transaction had no impact on our net income in the quarter. In the first quarter, we realigned our accident and health business units into the insurance and reinsurance segments. Financial results relating to A&H were previously included in the results of the insurance segment.
As a result of the realignment, A&H results are included in the results of both the insurance and reinsurance segments. In the investor information section of our website, we have supplemental historical financial information presenting this alignment. Non-operating transaction and reorganization expenses of $13 million were recognized in the quarter. These expenses are associated with the integration of Novae and our transformation program. Moving into the details of the income statement. First quarter gross premiums written increased by 39%, with an increase in both reinsurance and insurance segments. The reinsurance segment reported an increase in gross premiums written of $415 million in the quarter compared to the same period last year. Approximately a third of the increase is due to the timing of renewals, primarily driven by multi-year contracts written in 2016 that were not available to renew in 2017 but have renewed in the first quarter of 2018.
These contracts renewed for a one-year term. $50 million of the increase is driven by the acquisition of Novae. Foreign exchange movements contributed $80 million to the increase. Lastly, we had good premium growth in A&H and CAT from new business and strong growth in the motor business, driven by rate increases as well as new business. The insurance segment reported an increase in gross premiums written of $336 million in the first quarter. The increase is mostly driven by $302 million of premium associated with the acquisition of Novae. Year-over-year, Novae's gross premiums written declined about 10%, with two-thirds of the decrease related to discontinued lines, and the remainder due to the non-renewal of certain accounts, primarily those identified to be underperforming within the property and marine lines.
The legacy AXIS insurance book was up 6%, primarily driven by aviation due to our acquisition of Aviabel, professional lines new business across a number of business units, and an increase in liability lines due to new business and renewal rate increases. Consolidated net premiums written increased year-over-year by 32%. Reinsurance net premiums written increased by $286 million compared to the same period in 2017, including $19 million attributable to Novae. The additional increase of $267 million reflected the increase in gross premiums written, partially offset by an increase in premiums ceded in catastrophe lines. Insurance net premiums written increased by $191 million compared to the same period in 2017. The increase is almost all attributable to the acquisition of Novae. Consolidated net premiums earned increased by 24% year-over-year. Reinsurance net premiums earned increased by $41 million compared to the same period in 2017.
$13 million of the increase is attributable to Novae, with the remaining increase due to strong premium growth in catastrophe, motor, and accident and health lines, partially offset by an increase in ceded premiums earned in catastrophe lines. Insurance net premiums earned increased by $188 million compared to the same period in 2017. $178 million of the increase is attributable to Novae, with the balance due to strong premium growth in A&H, along with premium growth in aviation lines associated with the acquisition of Aviabel. We reported a consolidated combined ratio of 90.8%, an 11.3 point improvement from the first quarter 2017 consolidated combined ratio of 102.1. While this is our reported numbers, these are not the most useful ratios to gain an insight into our business performance.
As I noted in my opening remarks, this quarter benefits from a lack of DAC amortization associated with the runoff of the Novae unearned premium, and the same quarter last year does not include Novae results, we're not comparing on a like-for-like basis. In order to provide better insight into the changes in the business, I will compare the first quarter of this year, reversing the PGAAP impact on acquisition costs and combining the first quarter of 2017 AXIS results with the first quarter 2017 Novae results, which we provided in supplementary disclosure earlier this year. On this pro forma basis, the current quarter consolidated combined ratio is 94.3% and is a 10.4 point improvement from the first quarter 2017 AXIS Novae consolidated combined ratio of 104.7.
The 10.4 point improvement is driven by a 4.8 point improvement in the current accident year loss ratio, ex CAT and weather, a favorable increase in prior year development affecting the loss ratio by 4.4 points, a decrease in the G&A ratio of 1.8 points, and lower CAT and weather losses, partially offset by a higher acquisition cost ratio. The current quarter consolidated current accident year loss ratio decreased by five points to 61.3%, compared to a pro forma first quarter 2017 of 66.3%. During the quarter, we incurred catastrophe and weather-related losses of $35 million or three points. This is a decrease of two-tenths of a point from pro forma 2017 CAT and weather losses of 3.2 points. The first quarter losses were principally due to weather-related events.
The consolidated current year accident loss ratio, ex CAT and weather, of 58.3%, is a 4.8 point decrease from pro forma first quarter 2017 ratio of 63.1%. Both segments improved. The reinsurance segment current accident year loss ratio, ex CAT and weather, of 62%, is a decrease of 5.9 points from a pro forma prior year ratio of 67.9%. The drivers of the improvement are rate increases across a number of lines, reducing impact from the Ogden rate change, favorable experience in property and credit and surety, and the positive impact of mix resulting from our underwriting actions. The insurance segment current accident year loss ratio, ex CAT and weather, of 54.5%, improved 3.8 points from a pro forma prior year ratio of 58.3%.
The improvement was driven by a 9.7 point improvement in the legacy Novae book, primarily driven by the favorable impact from discontinued lines, and a 1.2 point improvement in the legacy AXIS book, driven by favorable changes in business mix and the favorable impact of rate and trend, partially offset by an increase in mid-size and attritional loss experience in aviation and marine lines. Turning to loss reserves established in prior years. During the first quarter, our results benefited from net favorable prior year reserve development of $54 million, including $32 million attributable to the reinsurance segment and $22 million attributable to the insurance segment. Included in the $54 million is favorable development of our 2017 CAT reserves of $26 million, split $19 million in the insurance segment and $7 million in the reinsurance segment.
During the first quarter, the pro forma consolidated acquisition cost ratio of 23.1% increased seven tenths of a point compared to the same period in 2017. There was no material change in the insurance segments ratio and a 1.5 point increase in the insurance segments ratio, primarily related to changes in business mix. On a year-over-year reported basis, we will continue to experience a higher acquisition ratio and a lower current accident year loss ratio, ex CAT and weather, due to the mix of business provided by the Novae acquisition, which consists of primarily smaller accounts. The G&A expense ratio of 14.5% decreased by 1.8 points compared to the pro forma first quarter 2017 G&A ratio of 16.3%.
The decrease mainly related to realized synergies in the Novae acquisition and an elevated level of expenses in the first quarter of 2017, primarily due to one-time separation costs and share-based compensation costs. In the first quarter, the income from strategic capital partners was $13 million, up from $11 million last year. It consisted of $5 million in other insurance-related income, primarily attributable to profit commissions associated with third-party retrocessions, and $8 million included as an offset to G&A expenses. Net investment income was comparable to the first quarter of 2017, with an increase in income from fixed maturity securities, largely offset by a decrease in income from alternative investments, in particular hedge funds, which benefited from the stronger performance in equity markets in the prior year quarter.
In the quarter, the total return on cash and investments, including the impact of foreign exchange, was a negative one tenth of a point, compared to a positive 1.1% last year. The year-over-year decrease in total return was primarily driven by the increase in unrealized investment losses on the fixed maturity securities, primarily as a result of an increase in U.S. Treasury rates. The balance sheet is strong, and today we have more sources of capital available to us than we have ever had in our history. AXIS is well positioned to continue to support clients across its portfolio in lines where we feel we can get an appropriate return on capital. The suspension of share repurchases has continued into 2018, as we continue to focus on restoring capital to levels held prior to the major CAT losses in 2017.
With respect to the integration of Novae, we are still comfortable that we will deliver $60 million in run rate savings by 2020, with at least $30 million-$35 million in this year. As Albert noted earlier, this integration, combined with our ongoing enterprise-wide transformation program, is expected to deliver $100 million in run rate cost savings by 2020, even as we continue to invest in our future-ready operating model. Finally, we feel comfortable that various other underwriting and risk management initiatives, together with continued progress in targeted growth initiatives and continued momentum in strategic capital partnership activities, will continue to drive strong results. With that, I'll turn the call back over to Albert.
Thanks, Pete. Let's spend a few minutes going into detail on the market and recent price changes we've seen across our business. In our insurance book, we're seeing the continuation of the positive pricing momentum that started after the record third quarter CAT events of 2017. In this quarter, our average renewal price change was up 5%. This compares to +3.5% in the fourth quarter of last year and -1.4% in the first quarter of 2017. For the moment at least, it seems to be gathering some steam, with the monthly rate change increasing in succeeding months, with average increases of 4% in January, 4.7% in February, and 6.6% in March. In the first quarter, 89% of renewed premiums were flat to up, while that figure was 72% in the fourth quarter of 2017.
Similar to last quarter, the strongest improvements were observed in our U.S. division, where we achieved average increases of 11.7%, with solid double-digit improvements across both E&S property and excess casualty, while primary casualty and programs were up in the mid to high single digits. In our important London-based international insurance division, the average rate change for the first quarter was 4.3%, with the strongest increases in the U.S. and Caribbean-exposed property lines. 90% of our premiums renewed were flat to up. Our U.S. and Bermuda professional lines division was up a bit above 1% for the quarter. This is noteworthy, as it is the first time we saw a positive overall price change in some time for professional lines. About 79% of the book renewed flat to up. The strongest increases are in primary layers and D&O, while excess layers and E&O lines are closer to flat.
Across all insurance lines and geographies, we're seeing more submissions and achieving growth where it makes sense. We're aggressive in pushing price increases where it's warranted. This has resulted in lower retention ratios in some cases, but we're showing growth and improved profitability, so we're satisfied that we're taking appropriate actions. The reinsurance market is also seeing an improved tone, but it is more subdued, as there is still excess capacity. In quota share business, we're benefiting from the underlying price changes, but ceding commissions are generally flat, other than in treaties that have delivered poor performance. In those cases, particularly in the U.S., one is likely to see ceding commissions drop one or two points. Otherwise, it's generally renewal at expiring terms. Excess of loss treaties are similarly stable, except in the case of poor underlying performance, and there, increases are generally in the low single digits.
Exceptions are, of course, in the U.K. excess motor business, which responded to the change in the Ogden rates last year, and catastrophe, where the markets are modestly up in the U.S. but generally flat elsewhere. I think it's fair to say that CAT markets have not responded to the extent hoped for at the end of last year. The recent April 1 renewals were in large part focused on the Asia-Pacific region. Rates and terms are very stable in Japan and flat to slightly negative outside Japan. Overall, in both our insurance and reinsurance portfolio, earned rates is on average matching trends. On a written basis, however, rate is ahead of trends, which should bode well for future periods. I'm cautiously positive on the outlook, despite the abundance of capacity in many lines. I believe the market is simply too stressed to give up any more pricing.
There will be no tide to lift all boats, and meaningful underwriting margin improvement will be dependent on individual companies' ability to access attractive risks and select among the best opportunities to create profitable portfolios. In that regard, I'm bullish about our prospects. Our global diversified specialty hybrid platform and top 10 positioning gives us significant flexibility over our competitors, and we remain focused on improving our portfolios to deliver stronger results. Regardless of market conditions, we will continue to strengthen our franchise platform and capabilities and leverage risk funding with the goal of delivering stronger performance. As I mentioned at the onset of our call, our actions for the past few years are starting to deliver meaningful results.
Perhaps the best way to illustrate this is to compare the results of legacy AXIS business year-over-year without the impact of Aviabel and Novae portfolios, which we've only recently started to influence. Within the legacy AXIS portfolio, the ex-CAT accidental combined ratio improved by three and a half points in insurance and six points in reinsurance. We intend to continue our disciplined, data-driven approach to portfolio construction to make the most of our recent acquisitions and achieve further progress in underwriting performance. The success we're seeing in our Novae integration work is encouraging as we continue to meet and exceed our objectives in delivering on this very important effort. The organization is energized, and we're making significant strides in cementing our leadership role in the London international specialty insurance space.
In summation, I'm pleased with the quarter results and feel it's a bright start to a strong 2018 for AXIS. Our differentiated market positioning, underwriting actions, and progress along our targeted $100 million of cost savings by 2020 give us a clear path to improve performance. I'm confident about our ability to deliver on our goals, and we are as committed as ever to the successful execution of our strategy in 2018 and beyond, producing superior outcomes for all of our stakeholders. Thank you for your attention. With that, we'd be happy to open the call for questions. Operator?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Elyse Greenspan with Wells Fargo. Please go ahead.
Hi, good morning. My first question, Albert, I appreciate all the pricing color. In terms of just outlook from here, do you think that the upward momentum you pointed to rate increases improving every month of the quarter, do you see that continuing? I guess, in your comment there, if we get to the June and July renewals and all the capital that's been coming back into the reinsurance market potentially causes rates to decline at the mid-year, do you think that that will have an impact on the upward momentum that you're seeing in the primary insurance market?
Thank you, Elyse. I'm happy to provide the details on a monthly basis, but I would be loath to project that we will continue to add one or two points of pricing increase per month. I think the levels that we have are levels that are sustainable. I think they work well for the customers, for the brokers, and for the companies to try and maintain a well-functioning market. I think we do need to keep these increases going forward. We'd be, of course, very happy to see improved beyond that. We're working on the basis that if it stays at these levels, we need to build profitable portfolios at those levels. I do want to differentiate our outlook from what we're seeing in our various insurance lines and the reinsurance market.
As I mentioned, I think the reinsurance market is much more subdued than what we're seeing, at least in our markets, for insurance lines. There, in non-loss affected CAT business, we've essentially seen flattish, maybe up a couple of points, but really not much change. In loss affected portfolios, we've seen mostly high single digits and in some cases, double digits. I expect that to continue. My expectation, of course, is that there will be more loss affected treaties renewing in the May to July period. My expectation is that CAT, on average, will probably show high single digits on average when you incorporate the higher preponderance of loss affected treaties. I think that's where we are. I continue to hope that we will not see a diminution of the current pricing.
I'm also not supporting a vision of substantial improvement beyond the levels where we are today.
Okay. In terms of reinsurance, the growth you saw in the quarter, Pete, you highlighted there were some multi-year covers from 2016 that renewed this first quarter.
Yep.
Are there other multi-year covers from in the back three quarters of 2016 that we should think about in terms of modeling that are up for renewal this year?
Yeah, that's a good question. I don't have that answer right off the top of my head. I'll get back to you on that. I think most of it really occurred in the first quarter, but we can follow up on that.
Okay. A couple other questions just related to the expense level. Is the acquisition cost ratio that about 23% or so excluding the purchase accounting adjustments, is that the right level to assume going forward ex purchase accounting?
That's a good level to assume ex purchase accounting. I think it's going to continue to drift up into that low 20s area as the purchase accounting impact goes away.
Okay.
Elyse, you know that we have in every quarter, a little bit of up and down around the loss sensitive factors. As reinsurance numbers develop well in certain lines of business, we give up a little bit more commission. That was a little bit higher this quarter. There's always going to be a little bit of up and down. Pete is right. That's generally a good level.
Okay. In terms of the purchase accounting benefit for the remaining three quarters, is there any kind of color that you can give us about thinking the benefit that we should model going forward? Is the right way to think about it that you wrote off about $209 million of deferred acquisition costs. Is that the level that will come back as a benefit by the end of 2018, or can you just help us think through the modeling there?
Yeah. We expect in the modeling, Elyse, that through the course of 2018, you'll see about a $120 million benefit. We got about 40 of that in the first quarter, which I mentioned, 80 for the rest of the year. That will decline throughout the year. You'll see more of a benefit in 2Q, less in 3Q, even less in 4Q as that DAC amortization benefit runs off. In total for this year, we're looking to, it's going to probably be about $120 million, and the remaining 80 will not be run off evenly. Probably about 45% of that remaining will be written off in the second quarter, and then the last two quarters, the rest, maybe 30% and then 25%.
There's no benefit in 2019, the only thing we need to think about 2019 is just in terms of the intangible amortization running through the model?
No, there'll be a little bit, but it'll be de minimis. I think by the time we get to 2019, Elyse, there'll be about probably $19 million left, and that'll run off for the most part in the first half of 2019.
Okay, that's great. Thank you very much. I appreciate the color.
You're welcome.
Of course, that benefit will be offset by the amortization.
Yeah, the amortization of.
Which will be a negative. The underwriting, yeah.
Just to expand on that, Elyse, we gave the schedule out for the VOBA, and again, we expect that to be $171 million of a drag this year, of which $57 million was amortized in the first quarter, and that'll be down to about a $27 million drag in 2019. Again, most of it running off in the first half of next year.
Okay. Thank you very much.
Our next question is from Kai Pan with Morgan Stanley. Please go ahead.
Thank you, and good morning. I just want to follow up on your comments on the underlying improvements of the loss ratio improved five points year-over-year. Why suddenly? I know you have done a lot of work in the past several years. Why suddenly all showing up in this quarter? I just wonder what's the sustainability of the 58% going forward.
Hi, Kai. It's Peter. I would say that what we're seeing finally come through is at the last three to five years of work on the underlying portfolios. We had good progress in the areas we expected to see good progress, and it's coming through as we're actually starting to earn it in this first quarter. There's always puts and takes in a quarter. I think the quarter benefited from a low level of property activity on the reinsurance side this quarter. By the same token, we had a higher level of mid-size losses on the insurance side associated with our aviation lines and marine. I'd say it was a really good quarter. I do think these levels can be sustainable, but we did not do anything different this quarter.
We're just continuing to see the improvement that's taken a long time to turn the ship over the last three to five years start to earn through.
Yeah, if I can add to that, Kai, obviously, we spent a lot of time analyzing results. We go through the loss bridge. We identify factors like ceded and adjustment premiums, rate, trend, mix, experience, you name it. I think a couple of highlights. Number one, we didn't have the adverse impact of Ogden, which as you know, hurt us last year. That had a meaningful impact on the loss ratio. We continue to have growth in the A&H business, which tends to have a higher expense ratio, but lower loss ratio, through the business. We've had some ups and downs on the losses. As Pete says, we didn't have any substantial large loss activity in the reinsurance division, good property activity. On the other hand, we had pretty poor aviation results this quarter. We had some additional losses on marine.
Obviously, the property book in the U.S. was affected by the weather events. Every quarter you're going to have something. By and large, I think not unreasonable. Of course, the addition of the Novae book makes a difference because the Novae book, as Pete pointed out, has a higher acquisition expense, but generally a lower loss ratio, and fully two points of the improvement in the loss ratio is the inclusion of the Novae book in our consolidated results. From our perspective, this really is consistent with the runoff of the discontinued lines that we've had. We got out of retail property and retail casualty in the U.S. in the end of 2016. Those lines hurt us in 2017.
As those premiums ran off, you're now seeing a book which is less exposed to the discontinued line and more demonstrating the underlying profit potential of the ongoing continuing business.
Yeah, that's great. Just follow up on that. Is there any seasonality in Novae's book through the year? What I'm trying to understand is that your historical AXIS's loss ratio has been pretty consistent throughout the quarters. Is there going to be more seasonality with the inclusion of Novae?
I would say twofold. By and large, not really. One of the good things about their book, of course, and that we were very attracted to, is that they have a lot of small accounts, very diversified. They actually add diversity to our book of business because they have more European exposure, and that adds balance. Those are good things. I would say that when you think about CAT exposure, our CAT exposure was predominantly around the, when it comes to wind, mostly around U.S. wind. Quake happens every month if you want, but when you think of wind, it's predominantly in the summer and early fall. Novae has a much larger European property book, we're probably going to be more exposed to European property wind losses.
I would say that it probably is going to reduce the overall seasonality of our CAT exposure because whereas we were low in Europe before in the European wind season, we're now going to be higher. We've always been, like everybody else, higher exposure in the summer for U.S. wind, and we're going to continue to have U.S. wind exposure. Yes, they have a different pattern, but I think it probably levels out our pattern because of the rebalancing between Europe and U.S.
That's great. On the cost saving, the $100 million. I just want to make sure that's after potential reinvestment in the business, that would be flows through the bottom line. Also, could you provide a schedule in term of the annual cost saving, like a target as well as the restructuring cost through the next three years?
Kai, thank you for bringing that question because it's actually very important. In as much as the numbers that we gave you, the 60 and the 40, they're actually the result of additional savings Elsewhere, but we specifically allocated a good chunk of those savings to investing in our people, to investing in development, investing in technology and analytics. The number that we give you is a net number after incremental investments that we're going to do in our people and in our business. That, of course, is going to be achieved off of the expense structure and the expense base that we have in 2017 that will roll through 2020. Peter, you may have some insights on calendar year projections. We feel pretty good that by the end of 2020, we will have eliminated those expenses.
Yeah, Kai, we are very confident in still sticking with the estimates we gave you for the $60 million associated with Novae. If you take our $7 million synergies actually experienced in the first quarter of 2018 and annualize that, you can look at, we've already got $28 million on an annualized run rate towards our $60. We do expect to get up to $35 million of that this year, so $30-$35, and as we said, $50-$55 next year, with the full $60 coming in 2020. For the additional $40 that Albert mentioned, we do have end plans that suggest that we will get to that additional $40 million also by the end of 2020. We have not gone through the detailed scheduling on when all those actions will actually take place.
I'd say that the predominant will actually come through in 2019, with the remainder coming through in 2020.
It's fair to say that we don't expect substantial amounts in 2018.
Yeah.
As we're working through it, we'll be rolling out the new organization structure. There'll be things that are done through the rest of this year. We don't expect that there will be any real savings from that incremental $40 during this year, and we'll see more of that split between 2019-
2019 and 2020. Yep.
Is that helpful?
Great. Yeah, it's very helpful. My last question, if I may, is on industry consolidation. We have seen increased M&A activities in industry. I just wonder, will that provide any opportunities for AXIS, or you will be solely focused on integration Novae and growing organically?
We're focused on integrating Novae. We've got a full list of projects in front of us right now. We're doing a lot of work, very successful, and I think on schedule. We're completing the integration of Aviabel. We're focused on the execution of the strategy, the integrating of Novae and Aviabel, and making plans.
All right. Thank you so much.
Good. Thanks, Kai.
Our next question comes from Amit Kumar with Buckingham Research. Please go ahead.
Thanks, and good morning, and congrats on the print. Two quick questions, if I may. The first question obviously is going back to the discussion on Novae. In the opening remarks, you mentioned that the number was mid-90 CR, and there was sort of room to improve on that. Can you just sort of update us as to where do you think that number settles on a normalized basis?
As you know, we're not really keen on guidance, Amit, but the reason I feel confident that mid-90s accident year combined ratio has room to grow is twofold. The first is, as Peter mentioned, we're less than halfway through the synergies associated with the Novae acquisition. By definition, that should help. The second issue is that although we like a lot of what Novae had done, in fact, what attracted us to Novae in the first place was that they had already taken a lot of the tough decisions to focus their book of business on areas where they were profitable. The truth is, there were still some parts of that portfolio that could continue to use some action. I know that over the last six months since we've been in that company, there's a bunch of business that we chose to non-renew.
You still don't see the benefits of that portfolio improvement. Just in the first quarter, we probably non-renewed willingly probably somewhere between $30 million and $50 million of business that we said, "You know what? Going forward, this is not business that necessarily meets what we want to do." Again, you won't see any of that reflected in the results for several quarters. I feel good that we're doing the right things, that we're continuing to do the right things. As these actions work their way through the earned premiums and the expense lines, I have confidence that we're going to see further improvement in the Novae and the London book results. As by the way, I expect in the overall book of AXIS.
Got it. That's helpful. The only other question I have is, I guess going back to Kai's question on consolidation. Probably, I'll try to ask it in a bit more direct manner. Your name has been reported in the press, and there obviously has been a lot of discussions in the investment community based on VR and XL and other franchises. Clearly, there has been exuberance in the stock price based on that investment chatter. Based on the response to Kai, should the takeaway be that you are more focused on the integration, and hence it's premature to think that anything could happen? Or how should I sort of string those two comments together?
Well, let me start with the policy that our policy is not to talk about rumors. Our policy is not to talk about hypotheticals, what could happen in the industry. Or not happen in the industry. My response to Kai and my response to you is that we're focusing on things that we can do and that we can control. Right now, we're focused 100% on the execution of our strategy because we think that will deliver significant benefits to our customers, our employees, and our shareholders.
Okay. I will stop here. Thanks.
Our next question comes from Meyer Shields with KBW. Please go ahead.
Thanks. Good morning.
Morning.
Albert, you've talked, I think very reasonably about disappointing property catastrophe rate increases despite record or near record catastrophe losses last year. If we don't have the same sort of historical uptick post-events, is the line of business still worth the volatility?
Well, that's an excellent question, frankly, that's the reason you'll notice that our net CAT premium has actually declined over the last five years. CAT is still an important component of risk management for our customers on the reinsurance side. I think it makes sense that this should be an important component of our offering. As you know, many customers continue to want to have CAT protection through their traditional reinsurance program, in addition of course, to taking advantage of alternative markets. It's my belief that customers are willing to pay a little bit more for the incremental benefit and service that you get on reinsurance. Net-net, I think that you will continue to see that our net CAT exposure will decline if we don't get the adequate compensation for it.
Our strategy, and it's our strategy that we've put in place and executed now for quite some time, is that we want to continue to provide a full range of products and services to our customers. Then, to the extent that it makes sense for us to partner with third party capital and share those CAT premiums with our third party capital partners, we will do so. It's a strategy that delivers fees in the good years and that reduces the net losses in the bad years. That's a policy that we will continue to use.
Okay. Fantastic. That's helpful. Second, I was hoping you could talk a little bit about net to gross ratios by line of business within insurance. In other words, whether there are any changes in reinsurance purchasing by line of business.
The short answer is there always is, because every year we have an opportunity to review the construct, and consider attachment points, whether we're doing more quota share, more excess, so on and so forth. I would say that if you look at our numbers, we have probably over the last two, three years, increased our sessions in professional lines. That's a pattern that's been there. I don't expect meaningful change to that approach. I think that every year we look to optimize our property reinsurance purchases, and as you know, we renew our property program including CATs in early May. We're looking to optimize that structure, and we'll be reporting on that later on. Other than that, we continue to maintain the patterns that we have in the past.
Okay.
Is there anything you want to add to that? Hang on a second. Maybe Peter has something that you want to add to that.
Yeah. The only thing I would add, Meyer, is we did actually buy some more reinsurance in the Cyber space. We actually have a really good quota share treaty that actually Novae had on its Cyber book. We had actually had a smaller quota share on our book, and we actually at one more increased our purchasing to help protect the Cyber book. We're a large player in Cyber. We love the business. We think we're very good at it, and we've got a Cyber Center of Excellence. In order to protect the unknown unknowns, we bumped that quota share on our book as well. You would've seen some increased sessions coming out of the insurance side due to that new treaty. We feel good about it. It's a good treaty, good seeding commission, and a good profit commission if the business performs well.
Right. To your earlier point, Meyer, our CAT premiums, we're increasing the sessions of CAT premiums this year. You'll recall I mentioned earlier, in this year we're seeding about half of our CAT premium, and that number was closer to 42% last year.
Yeah.
Okay. That's very helpful. I really appreciate it.
Thanks.
Our next question comes from Brian Meredith with UBS. Please go ahead.
Hey, thanks. Yeah. A couple quick ones here for you. First one, just curious on the investment income and fixed income that you had in the quarter. Given where we are right now with current rates, should we expect that to start ramping up here going forward? Anything you're doing with the investment portfolio to maybe take advantage of the higher interest rate activity?
Well, Brian, a couple things is just to give you a couple points because I know this is always a question, but the book yield at the end of the first quarter was 2.7%, and that was up from 2.5% at the end of 2017. Our current new money yield is 3.2%, so that's considerably above where our current book yield is. The other thing I'd point out is we do have about 15% of our fixed income portfolio in floaters. As rates tick up, we should be able to gain that advantage a little bit quicker.
Great. Any thoughts about kind of cash deployment stuff in the balance sheet or with ADC, I guess you've got some cash flows going out here soon?
Yeah. With the ADC, or not with the ADC, I'm going to call it the RITC.
Yeah. Okay.
We'll finish that up in the second quarter with some cash. You may not see that totally come through in cash because we've actually been working with the reinsurer to transfer securities across, which won't show up in cash flow. We do have some cash there, and we are keeping our eye on the timing of the payments. We still have the reserves up for the 2017 cats.
Okay, how much is that going to be from a cash perspective?
For this year, if I think about that, I don't quite have the timing on that. I can tell you that the total reserves at the end of the quarter for the CATs, as I mentioned, they did come down a little bit from where we were. We were at about mid-700s in reserves for the CATs of 2017.
Got you. Albert, I guess for you, let's kind of turn around the whole M&A topic we've had so far and maybe ask you what opportunities, not so much from buying companies, but what opportunities you anticipate there might be in the marketplace for you? Have you seen any from some of the consolidation activity we've seen so far this year?
Well, the issue is that whenever there's any kind of turmoil in any organization, whether that turmoil comes from M&A or anything else, there's always an opportunity to attract talent or an opportunity to attract new pieces of business because brokers would rather deal with different people. To that extent, you've seen this, of course, we continue to be recruiting top quality talent. We're looking at a couple of opportunities right now where brokers are thinking, "We might want to move this, we might want to move that." That's the everyday job of our business, is to try to take advantage of those things. We'll continue doing that.
Great. Just this last question. Can you just remind us, when you say you want capital levels to return to pre-hurricane levels before you look at buying back stock again, how do you define that? Is it getting the debt to capital ratios back down, getting shareholders' equity or common equity up to the level prior to the hurricanes?
Yeah, I think it's all of those levels. We said upfront that we have. If you look at our numbers, and Peter, you can jump in here, but our current leverage numbers are higher than our target leverage numbers, and there's two reasons for that. One is obviously that we took a dip in the equity last year because of the CAT losses. Again, at the very least, we'd like our equity numbers to be where they were prior to that. More importantly, we've also pre-funded the 2019 maturity, and we fully expect, and in fact we said so in the offering, we fully expect that we will repay that in spring, is it, of 2019?
Yes, spring of 2019.
Those things are going to get us back to a total leverage level which is below 30%, which is where we want to be.
Equity above where it was. I have to tell you, if we continue to see the kind of progress that we're seeing in our book and in pricing, we're always going to give priority to profitable growth.
Great. Thank you.
Our next question comes from James Niklicki with Citi. Please go ahead.
Yeah, thanks. My question is on the current accident year loss ratio. What was the favorable impact of rate and trend during the quarter? I know you quantified it last year.
Yeah. As I mentioned, in most places the rate and trend is almost zero. The place where it really changed was in U.K. motor, where we're now getting the earnings increases above the trend because frankly, we're playing catch up. Other than that, I would say on any one line of business, it would've been no more than plus two or minus Or sorry, plus 0.2 or minus 0.2 on the ratio. Is that correct?
Yeah, I'd say in total year-over-year, James, it's about a half a point in total. That half a point is really fundamentally driven by the changes we got on the motor book. Absent the motor book, it would be right about where Albert said.
Got you. Just one follow-up on the other insurance related income during the quarter. Nice jump there. Was that more on the fee income side or the weather and commodities business?
$9 million of that year-over-year improvement, James, was due to the lack of the loss of a weather and commodities derivative from last year. We had a loss of about $8.7 million running through that line last year on the weather and commodities. That's now zero.
Got you. Thanks, guys.
This concludes our question and answer session. I would like to turn the conference back over to Albert Benchimol for any closing remarks.
Thank you very much. I do want to recognize that this was a very good quarter, and it really does reflect the very hard work that our very dedicated and talented staff have done over the years to get us to where we are. We've got a great team here. They're very focused on their customers. They're very focused on delivering a strong result. I look forward to continuing to work with them to deliver further improvement on behalf of all of our key stakeholders. We'll talk to you in the next quarter. Thanks very much.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.