Now we are moving more into the non-life side. Next presenter will be Albert Benchimol, President and CEO of AXIS. Albert joined AXIS in 2011 as CFO. He became CEO the very next year. He was a senior member at PartnerRe, senior executive at PartnerRe for some time as well. Since joining AXIS, Albert has built an experienced team of people. The pace of change of the company continues to increase. In fact, it increased even more now with an acquisition in 2017. To talk about that change, where the company's going, I will turn it over to Albert.
Thank you, Jay, and thank you for inviting us to present at your conference, and thank you all for being here. What I hope to do today is actually do spend some time on the changes that have happened because, in fact, it's been a pretty material change since our inception as an intelligent provider of capacity to a very hard market, to a change in the market, which is not quite the same today. We'll start with the typical summary slide. Not much here to say other than the fact that we are a hybrid company. We write insurance and reinsurance on a global basis and pro forma for the acquisition of Novae last year, we have a book of business of approximately $6.5 billion. A little over 60% is insurance, and the rest is reinsurance.
Our strategy has been relatively consistent for quite some time, we are aiming to be a leader in the specialty risks, both on insurance and reinsurance. We know that a midsize company cannot be all things to all people, we're very much focused on the specialty risks where we can add value with our expertise, with our claims service, with our agility, and focus on leadership positions in those areas where we choose to play. We've come a long way in achieving that, and I'll walk you through it. Another part of our strategy is that we're very focused on making sure that we leverage all forms of capital for the benefit of our customers. We currently have $1.9 billion of third-party capital, which we use to support both our cat book as well as our non-cat book.
As Jay mentioned, it's been a bit of a journey, and when you think about it, AXIS was one of the very successful companies that were founded after the World Trade Center. When you think about it, through the first decade of our lives, we provided very large capacity to very profitable and very volatile lines. In fact, over 75% of our profits in our first decade came from terrorism, aviation, energy, property, and property cat. I don't have to tell you that those markets today are nothing like what they were 15 years ago. Over the last five years, we've made quite a journey into transitioning ourselves from a provider of capacity to volatile lines to being an established relevant player in core markets.
Today I'm very pleased to say we've achieved that relevance in core markets being a top 10 player in the U.S. E&S space in North American professional lines in London and Lloyd's, and we're also a top 15 reinsurer globally. I think it's fair to say that this transition has taken some work and has come at some expense. An expense which I would say has dragged our results over the last few years, but I feel very confident that we are today in a position to really move forward and take advantage of the work that we've done over the last five years.
Meanwhile, since our inception, our book value creation has been quite good, and in fact, adjusted for dividends, we've had book value growth of over 11%, and that includes the reduction in book value that we suffered last year as a result of the cats. To be fair, we're in a business that does have some volatility, and historically we've been able to recoup any capital lost to a large cat year, and we are confident, of course, that we will do that again. The subject of volatility is really what I want to talk about in terms of what we've done. The point was to transition our book from volatile lines in a volatile portfolio, which admittedly was incredibly well rewarded in the early 2000s, and you could be aiming for 20%, 25% ROEs in those days.
If you look at where those lines are today, they're not doing that. We've taken the point that we don't believe that we're being rewarded, nor that our shareholders appreciate excessively volatile results. The goal was to shift the portfolio, reduce the volatility, but nevertheless achieve top quintile performance with industry average volatility. What I have here is a slide that updates a slide that I've given now for two prior years at the Bank of America Merrill Lynch Insurance Conference, and it's split in two. The top is the insurance book, the bottom is the reinsurance book. The light blue line represents the volatility in our plan. Obviously when you present a plan, your risk managers, your actuaries work on the analysis, the mean result, the spread around the mean result, and the volatility. We have purposefully reduced the volatility of our book.
In fact, the plans that we've produced for 2018 have literally half of the volatility that our plans in 2010 have had in both insurance and reinsurance. Importantly, we've been delivering on that lower volatility, and so those dark blue diamonds that you have on both lines are the trailing 12 quarter loss ratio volatility. You can see that through the shift in the book of business, which includes writing smaller accounts, smaller limits, different reinsurance, different portfolio construction, different markets and lines of business, we've been able to reduce the volatility on an ex cat basis for our books of business, and we feel that we are achieving very good return potential with low volatility.
The second component of volatility obviously is cats. If you look at our history, this is an organization, again, describing the book that we had initially that was very highly exposed to cats. The chart that you have on the left basically shows you the industry cat losses since 2005. The three big blue bars are the $100 billion-plus years of 2005, 2011, and 2017. The white line shows you what our cat loss ratio was in each of those years. You can see that in 2005, we had a 40-point cat loss ratio, which was expected for the volatile book that we had. In 2011, that went down to 28, and 2017 down to 20. We've made some progress. We feel good about that. Bluntly, we need to make more progress, but we feel good with regard to the progress that we've achieved.
When you look at where we are both on an absolute basis and now on a relative basis, if you go back as recently as Sandy in 2012, AXIS lost 6% of its book value in Sandy when our peer group was losing 3%-4%. We were literally outliers in terms of our cat impact on our book values. In 2017, we're now much more in the middle of the pack of our Bermuda hybrid peer group. I'm only showing that in terms of relative performance. What matters to me is what we achieve in our own book, and as far as I'm concerned, we will continue to make more changes and reductions to the volatility and susceptibility to cat losses. Let's talk about our book of business as we see it.
The chart shows you our insurance business. On a pro forma basis, we now have a $4 billion insurance business with leadership positions in its key markets. What's also very interesting is the profitability of that book. Sometimes we don't spend enough time thinking about it. Through the transitions that we've had, notwithstanding the investment that we've made in a lot of startups, we've actually compared very well to our peer group. If you only exclude A&H, which has been a significant investment in a new business for us over the last five years, we took it from zero to $500 million. It didn't break even until 2015. It's now making a small amount of profit. The point is that the growth of that business dragged us. If you exclude A&H alone, the average combined ratio of the last five years goes from 94.5%-92.7%.
Almost two points in A&H, of course, A&H today is delivering profitability. That shows you the expense, if you will, or the impact of some of the transitions that we've made and why we believe that today we're in so much better shape than our five-year track record would indicate. Another change that we have is in our distribution to ensure that we have access to the business that we want, which is less of the Fortune 1000 and the volatile lines and much more of the smaller accounts and more broadly diversified portfolio. I think when you look at it, we literally today have only 36% of our insurance premium coming in from the top three.
We also have a very large presence, as you might imagine, in the E&S world. A growing share from the top E&S brokers, but a greater proportion of program business or small account business involved and diversified sources. Our sources of revenue are much more diversified in 2017 than it was in 2013. I want to give you a quick update on Novae. I've given a pretty long update during our conference call. Suffice to say that most of what we had achieved over the last 15 years was done organically, and we have done very well. The one area where we did not have the relevance and the leadership positioning in the market that we wanted was in London. We had grown an organic book of $750 million, and we were pleased with what we had.
On the other hand, though, in a $66 billion market, we just didn't have the scale and the relevance that mattered. We found an opportunity to acquire Novae in 2017. On a combined basis we now have a $2 billion plus portfolio in London, and we're probably number eight or nine at Lloyd's top 10 in the London market. We now have both the relevance, the scale, and the spread of business that really allows us to declare victory, if you would, in terms of relevance in each of our key markets. Simple update on Novae. There is no doubt that Novae was a company that had had a checkered past in terms of what it had done in the past. It had some problems in the past in terms of their reserves. They have been transitioning, and so they had some loss results.
Perhaps that's the image of Novae that a lot of people have. On the other hand, I think Matthew Fosh and the team have done a very nice job in the last couple of years of really focusing on their core lines of business where there was an opportunity for profitable growth. They had already started the journey that we had already been on ourselves. Our due diligence of Novae really demonstrated that the external view of the company and what we saw was different. The reserves in our minds were very strong. They had already worked towards exiting the lines that were causing them problems. They were doing well in the other lines of business, and we thought that it would be an acquisition that made sense. We proceeded with it.
What I can tell you today, so now we've been in the doors of that company since July of last year, is that other than the fact that the closing book value was a little lower than we had planned on because of the third quarter cats, every other facet of the Novae acquisition is developing better than we initially planned. Let me give you some examples of that. Number 1, when you buy a company, the first thing you worry about is the reserves. We knew the reserves were strong, but we had an opportunity to confirm that. And so earlier this year we announced that we had closed an RITC, a reinsurance to close transaction with Enstar whereby we transferred to Enstar all of the liabilities for 2015 and prior. This is a legal novation of liabilities to a third party.
We were able to do that at a value that was below the book value of the reserves, which again confirmed our view that these were strong reserves. The only reserves that we have left for Novae are 2016 and 2017, and they've been developed and they've been reviewed, and we feel that they've had all the kinds of conservatism that we saw in the prior book. We feel very good about the reserves. The portfolio is a publicly traded portfolio, no issue there. The book and the staff has been very, very good. We were able to integrate the staff, and now in London we have a best of both company with leadership that comes from both Novae and AXIS. We've been able to control literally 100% of the renewals that came through.
We didn't renew all of them because there were certainly some businesses that we didn't want to keep, but by and large, of the business we wanted to keep, we were able to do that. The markets for 2018 certainly was presenting itself much better than we thought that it was going to when we did the acquisition. Finally, when we did the acquisition, we were expecting $50 million of savings. We're now planning $60 million of savings. From our perspective, we believe that Novae is going to provide substantial strategic and financial benefits, and indeed better than we originally anticipated. I want to spend a little bit of time on this slide, and I apologize for the complexity of it, but it's really meant to explain this transition that Jay was referring to.
We have made significant changes in our portfolio over the last five years to really focus on relevance and profitability in our chosen markets. If you focus on the slide on the chart on the left, it's a typical Boston Consulting Group kind of slide. What matters is that on the vertical axis, it's profitability. Whatever's on top of the chart is good. On the bottom, it's relevant. You're relevant in your market, you have access to business, you influence what you write. You want to be in the top right-hand quadrant, which is you're relevant in your market and you're profitable. In 2013, 54% of the portfolio of our insurance group was in the top right quadrant. In 2017, 72% of the portfolio was in the top right quadrant.
The bottom right quadrant is where you are a leader, you're relevant in your market, but the profitability isn't where you want it to be. In 2013, that was 18% of our portfolio, down to 13% of our portfolio. The worst quadrant is the bottom left. You're not relevant in your market, and you're not making the money you need to make. That was 18% of our portfolio in 2013. It was 3% of our portfolio in 2017. We've been doing that shift, and we've been doing that mix while we were investing in new businesses, which is the top left quadrant, which is businesses that are profitable, but you're not yet where you want to be in terms of size and scale, so you want to grow that. Consistent with the entrepreneurial nature of that company, it was about 10% of the business in 2013.
It continues to be 10%, 11% of the business in 2017. The shift in the portfolio in terms of relevance and profitability, the ability to control our own future in our markets is so much stronger today than it ever was. That came at a cost. The cost came from reducing exposures in other lines that used to provide a lot of profitability and a lot of premium, admittedly in a market that no longer offered that. Building businesses that initially didn't have a lot of scale, had a lot of startup expenses, had a lot of G&A, and needed to build up. That's what I wanted to show you on the right-hand side of the page.
What you see on the right-hand side of the page is our new initiatives excluding A&H, and A&H kind of stood on its own with a $500 million book. You can see that in 2017, those new initiatives are generating $150 million in net premium earned at a combined ratio ex cat of 92 in 2017. Five years ago, we had around $35 million, $40 million of that business, and obviously it was delivering a combined ratio of 113, mostly G&A. As we were shifting the book from the old core lines into the new business, we paid a price in terms of a higher combined ratio as we were making that transition. We are today in a very different place. Of course, we were doing that in a declining rate environment.
On the left-hand side of the chart that you have here, the red is the rate chart where we've suffered approximately 6% pricing decline in our insurance book over time. You can see that we were able to work and improve our combined ratio notwithstanding the fact that we had these headwinds of rate behind us. As I'm happy to say, as demonstrated on the right-hand chart, we're now seeing a change in market conditions. We had approximately 2%, 3% growth in pricing in the fourth quarter of 2017. The best month was December with 3.5%, that continued into January with 4.1% average rate growth. We're feeling very good that now we have the positioning, now we have the relevance, and we actually have the wind at our backs in terms of getting some better rates.
Incredible job in the transformation of the reinsurance book. Moving on to our reinsurance book. We have a solid mid-sized global P&C reinsurer, a very strong spread of business customer relationships and geographical dispersion. We have over 600 clients exposure in 77 countries, our $2.6 billion portfolio is 43% casualty, 30% specialty, 27% property, and about 58% of that is pro rata, and the balance is excess of loss. It's a very well-balanced book of business and historically delivered very strong results. In fact, our aggregate combined ratio Inception to date, $27 billion of premiums written on a gross basis, an average combined ratio of 89. A quick update on the 1/1 renewal. It's a $2.6 billion portfolio, as I mentioned. About $1.5 billion of that renewed at 1/1. We kept the portfolio flat. Within that, however, there was a fair amount of movement.
There were a number of cancellations or non-renewals. We reduced our share in areas where we were not getting the pricing that we wanted to with important accounts. We didn't abandon our accounts, but we reduced our share in some of those treaties. We increased our share in those accounts and those treaties that provided some opportunities for improved results. We went to new business, the net of which was approximately a flat book. That said, within that flat book, we achieved pricing and terms and conditions that should deliver on a price basis at least, improve technical results, and improve ROE across the book. Another component of our strategy is third-party capital. We believe strongly that third-party capital is here to stay. It has an appetite.
It wants to participate in the risk transfer universe. We believe it's a real opportunity for us to make that capacity at the returns that that capacity wants available to our customers. We are absolutely convinced, as are our customers, that reinsurance is the better product. Reinsurance has consistency. It's provided by experts who are focused on long-term relationships. We provide multiple lines of business. It makes sense. There is a lot of that third-party capacity out there that is willing to do that, less advantageous structures, but a lower return. We believe that our job is to make that capacity and those prices available to our customers, but wrapped with the service and customization that reinsurance desires. That's a strategy that's working very well for us. We currently have about $1.9 billion worth of third-party capacity in terms of capital at our disposal.
About 55% of that is targeted towards cat risk and the rest to more diversified non-cat lines. As you can see on this chart, in 2017 we ceded to our third-party partners almost $500 million of business. We generated $36 million of fees in the process. Our customers get the capacity they want at the best rates available. Our partners in third-party capital get a great portfolio at the market price that they want. We generate fees in the process. I would argue that we do not think of ourselves as an asset manager. This is really all about helping us providing our customers with capacity at the best price possible, but we're nevertheless generating a substantial amount of fees in the process. So that's been the journey, in terms of Sorry. I apologize. Did I miss one? I apologize.
Let me just find the slide for you. While we're doing all of that, we also recognize that we need to take advantage of the changes that are emerging in the market. There's a lot of data and analytics that are out there. There's a lot of insurtech opportunities. There are a lot of changes happening. We want to make sure that we are, as we call it, future ready, able to take advantage of those opportunities. Let me give you just a couple of examples. Our strategy with regard to insurtech is the following. We believe that insurtech is going to provide substantial opportunity for the industry to deliver its product and services more efficiently, more effectively towards customers, and provide a better customer experience. That's really critical. Importantly, we believe that the insurance industry is not as efficient as it needs to be.
We're delivering essentially 60% loss ratios as an industry, and that means that our customers are paying us $100,000, and we're giving them back $60,000. That is not a great deal. This industry needs to work at a higher loss ratio and to do so more efficiently. We need to leverage better processes, better analytics, better technology. We're an insurance company. We're not going to be developing a lot of that technology. We're an insurance company. We're not a private equity shop. What we can do is we can monitor the market and be an early adopter of technology that allows us to advance our strategy, and that's exactly what we're doing. In order for us to become even more future ready, we've made some additional changes that we've announced earlier this year.
Among them, we've created a group analytics and underwriting function, and for the first time ever, a group chief underwriting officer to ensure that as we're allocating our capital, as we're shifting our portfolio, we're doing so in areas that provide the most promise. We've taken our A&H business where it made perfect sense to keep it as a standalone unit to nurture its growth. Now that it's a $500 million business split between $300 million insurance and $200 million Sorry, $300 million reinsurance and $200 million insurance, we think at this point in time it's got the scale and the ability to be part of the broader reinsurance and insurance world.
We're going to realign our A&H business into the insurance and reinsurance segments, and we believe that will allow us to achieve better synergies both on the growth side in terms of leveraging relationships and clients, and also on the productivity side in terms of being able to provide more efficient backroom support. The third thing that we're doing is we're integrating our IT function and our finance functions from what was previously a federated model whereby in the federated model we had functions in the segments and the kind of group functions.
At the end of the day, this is wonderful in that it's very responsive to the segment, but it's also more expensive and it's slower. We think that by having a more integrated function and still keeping the resources in the segments, we'll be more agile, be able to respond more quickly, and be able to do so more efficiently. There will clearly be savings in doing this, but we also intend to reinvest a good chunk of those savings in insurtech, in analytics, in improving our customer centricity to make sure that we have better chances to win in the market going forward. Let me give you a sense of the basis of my optimism of how we see ourselves.
If you look at 2017 on a pro forma basis as if Novae book and the AXIS book were integrated at the beginning of the year, and you do so without any PGAAP adjustments, kind of on an as if ongoing basis. We have a book that's about $6.6 billion in gross written premium, delivering last year a combined ratio of about 112, and on an ex-CAT basis, 96.8. The point is that both Novae and AXIS had been working on their portfolios, had had some discontinued lines that were not off the books yet. There were about $200 million of that business in 2017, some of it in AXIS, some of it in Novae. That book of business didn't do so well, delivering a combined ratio of 158, and on an ex-CAT basis, 120.
There's less than $50 million of unearned premium reserve that will be earned on that book of business. We have a pretty good idea that this book of business is behind us, that should earn out through the rest of 2019. If you look at the continuing book, it's a $6.4 billion book delivering approximately a 96 ex-CAT combined ratio. That's the base that we're starting with. We also recognize that in 2017, we had a number of unusual loss events. For one, we had extraordinary frequency of attritional losses in the insurance book, both on the insurance and reinsurance books. We think that is higher than the average over time. Of course, we had the Ogden rate change, which hit us in the first quarter. Many of you are familiar with the Ogden rate change.
It's the rate that's used to discount future payments for long-term liabilities in the U.K. That took a hit, and it hurt us close to a point on average for the entire book last year. It's our expectation that at the very least, the impact of Ogden should no longer be with us. There's very little unearned premium left on that one, and our U.K. motor book was renewed at price increases averaging in excess of 30% at 1/1. We're actually comfortable that the U.K. motor excess layer book is not going to have the negative drag that it had in 2017. We also have in our minds a lot of things that are looking very positive going forward. One of which is we're continuing to work on improving our mix.
The analytics and the portfolio underwriting actions that we've taken in the past are continuing, and as they do so, they start to earn their way through the income statement. We've got a little bit of a breeze at our back, as Kevin likes to say, with regard to pricing. As I noted earlier, the integration of Novae, we are expecting $60 million of improvements synergies to come through. Of that, we think $30 million-$35 million will come through in 2018. We think $50 million-$55 million in the aggregate will come through in 2019, and the balance in 2020. Those are the kind of things that give us optimism that we're starting 2018 in a much stronger position. This is where we are. That's our journey. We were an outstanding provider of large amounts of capacity to volatile lines, that market is no longer there.
We successfully transitioned ourselves to being a leader in our core markets with our top 10 positions in our chosen markets. We've put behind us the investments and the expenses to take us to where we are today. Our job today is to take this platform, which is a platform that we want in the markets that we want with the people that we want, and to execute the hell out of that and to deliver the returns that we need to make. We are confident that we are today delivering or producing a portfolio that's delivering double-digit ROEs with lower volatility than in the past. A lot of people talk about M&A. I will say we don't need to participate in M&A. We've made the acquisitions we need to make. We've got the platforms. We've got the offices. Our job right now is focused on execution.
That's my speech, if you would. It's been a great journey, and going forward we're going to focus on delivering on the platform that we have. It's been a busy five years. Jay talked about change. There was a lot of change in the organization. Today I think that our positioning as a relevant, implanted leader in markets is critically important in a world where there's a significant amount of broker power, where there's a significant amount of undifferentiated capital. Being able to lead and influence the business that you write, to be at the table, to be present when the opportunities come, provides a defensible market position, and we've achieved that. The portfolio is very different today than it was in the past. It's got much more balance, much more smaller accounts, much less volatility.
We believe that the actions that we've taken will deliver significant improvement in 2018 and beyond, and that's where we are. Thank you for your attention. I see we have a few minutes left, and I would be very happy to answer questions. Yes.
Sorry just to put you on the spot on this one, since you threw out a 4.1% number for January, how sustainable do you think that is, and what do you envision needs to happen across the market for that to be sustainable over the rest of the year or potentially improve from there?
The first thing that I would say is we're not talking about double digits, right? I think the world of 15%, 20%, 25% pricing increases are just not going to happen anymore. You have to position yourself to make money in today's pricing environment, which is what we did at AXIS. I think where we are right now is that the reasons for the pricing changes are the underlying lack of profitability in the business. It's not a capital issue, it's the inherent profitability in the business. I think you'll hear people talking to you about trends, rising loss trends in casualty, rising loss trends, the higher amount of class action suits in professional liability. You're talking about some of these volatile lines having seen aggregate price cuts of an excess of 50%.
I think everybody knows that the level of profitability in this industry is simply not acceptable. Where we are today is actually not much different than where we were in 2000 and 2001 prior to the World Trade Center. If you look at where we were in the late '90s, we had a fair amount of, I would say, almost irresponsible underwriting. We had price cuts in the face of rising trends, and in 2000, 2001, people started to realize that. In fact, you were seeing prices increase well before the World Trade Center. The World Trade Center capped it, and because that was a new risk that people just didn't understand, it changed the paradigm of risk. Even before that change in risk paradigm, the market was changing. I believe that that's what we're dealing with.
I believe there is a rationale for ongoing pricing increases in the range of where it is now. If there are lines of business that don't require price increases, they won't get it. I think there are a number of lines of business that do require those price increases, and they're working their way towards it. You're welcome. Yes. Sorry. Yes, it has.
Albert, what is your definition of relevance? How do you measure it? It was premium on the slide.
Right.
How do you differentiate yourself in terms of relevance from another company who writes a significant amount of premium as well, but it's underpriced? They're going to get in trouble in the future, and I'm not suggesting you are, but.
That's fair. I generally say that you want to be in the top 10, so that you want to be at the table, if you would. At the end of the day, you don't have to be top 10 anywhere. You have to be very focused on the lines and markets where you choose to be relevant. By definition, those lines and markets have to be lines and markets that provide you some promise of profitability going forward. Which is why I showed you in the chart how we shifted our portfolio to one which is today 72% of the portfolio insurance is where we have both relevance and profitability. That's number one. If you look at our goals moving forward, we define success for us as being one of the top three go-to markets for ideas, for advice, for expertise, for service.
I don't think we're ever going to be top three because underwriting discipline probably won't allow us to be top three. You want to be top three in terms of who's called on, because that gives you an opportunity to look at the risk, give it your best shot in terms of structuring and pricing, and if you can get it, good, and if you don't, you don't need to. One of the really important issues around leadership, and when I talk about leadership, it's thought leadership, expertise, service, is even if you don't participate in every risk, the clients and the brokers still want to talk to you because you add value to that market.
What we tell our people is we want you to be top three go-to market, if you can get the risk at the price that you want and the structure that you want, by all means, write it. If you don't, you don't need to. That's how we approach it. Does that make sense? Yes. Andrew.
Hi. What do you mean by double-digit ROE? Is that based on stated book or tangible book, and is that for the entire year, or do you expect to approach it by a certain end date?
Right. That's a fair question. The first thing is, I'm talking about the ROE on our capital allocation, which ultimately has to add up to our GAAP equity. That's the first thing. We're talking about delivering double-digit ROE on GAAP equity. As you write this book today, as you know full well, you're going to be earning that book over the next 15-18 months. As I've said in our quarterly conference call, my expectation, without giving any guidance, is that as the new book of business becomes a greater percentage of our book, and as our older business wanes away, I would say that that UPR, as it runs off in future quarters, should have more of that distribution of double-digit books.
Over time, we believe that we will be improving our, assuming no changes, no unusual volatility, the usual caveats that you get in insurance, we believe that the book of business as it is currently structured, should be delivering improving ROEs as we earn more of the more recent book and less of the runoff and less of the book that was badly priced. We're also working on cost efficiencies. It's not just the loss ratios and the acquisition expense, but we're also working on cost efficiencies. Those $35 million we believe will be delivered in aggregate in the year, but probably, again, a little bit more back-weighted than front-weighted. We're confident that we can deliver $30 million-$35 million of improvement from those synergies that we identified in the Novae integration.
Unfortunately, we got to end it there. We have to move on to the next presentation. Albert, thank you so much for the presentation.