Good morning. Welcome to the third quarter 2013 AXIS Capital 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 touch tone phone. 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, Director of Investor Relations.
Thank you, Amy. 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 third quarter ended September 30th, 2013. 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 an 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, and the international number is 412-317-0088. The conference code for both replay dial-in numbers is 10034219. With me on today's call are Albert Benchimol, our President and CEO, and Joseph Henry, our CFO.
Before I turn the call over to Albert, I will remind everyone that statements made during this call, including the question and answer session, which are not historical facts, may be forward-looking statements made under the U.S. Federal Securities laws. Forward-looking statements contained in this presentation include, are not necessarily limited to, information regarding our estimate of losses related to catastrophes, policies and other loss events, general economic, capital, and credit market conditions, future growth prospects, financial results and capital management initiatives, evaluation of losses and loss reserves, investment strategies, investment portfolio and market performance, impact to the marketplace with respect to changes in pricing models and our expectations regarding pricing and other market conditions. These statements involve risks, uncertainties and assumptions, which could cause actual results to differ materially from our expectations.
For a discussion of these matters, please refer to the Risk Factors section in our most recent Form 10-K on file with the Securities and Exchange Commission. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, this presentation contains information regarding operating income and our consolidated underwriting income, which are non-GAAP, GAAP financial measures within the meaning of the U.S. Federal Securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release, which can be found on our website. With that, I'd like to turn the call over to Albert.
Thank you, Linda. Good morning, everyone. Thank you for joining our call. We're pleased to announce a very good quarter on all fronts. After-tax operating income for the quarter was $197 million, comparable with the prior year. Our annualized operating return on average common equity was 15.6% for the quarter, and our diluted book value per share increased 4.5%. Our results benefited from strong contributions from both underwriting and investments, continued strong premium growth globally, favorable reserve development, and a relatively light catastrophe and weather activity in the quarter. For the nine months, we reported a combined ratio of 90.5%, operating income of $4.08 per diluted share as compared to $3.60 in the prior year, and operating ROE of 12.1%, reflecting ongoing strong performance. Back to the quarter. Our gross premiums written were up 7%, with both segments contributing. This is the result of our continued efforts on three fronts.
First, we've amplified our activities and showed strong growth in improving market segments, particularly in the U.S. Second, we're seeing ongoing returns from the substantial investments we've made in new initiatives of recent months and years. Finally, we continue to be disciplined in the selection of risk we are prepared to assume in a competitive market. For the quarter and for the year to date, our accident year loss ratio, excluding catastrophes, was 56%. That ratio is up over the prior year quarter due to differences in mix and to a lesser extent, claims activity and prudent views on loss trends in certain lines. However, for the year to date, which is more relevant, the ratio improved a little over a point, reflecting margin expansion in lines that have benefited from improved experience and rate increases and various actions taken to optimize our portfolio.
Over the last couple of years, we've made significant progress in growing lines of business which would help to reduce our overall portfolio volatility. Some of these lines may have higher loss ratios than our historical product mix. However, they contribute meaningfully to improvement in our overall risk-adjusted returns. Our ongoing efforts to reshape our catastrophe portfolio have a similar positive effect. We believe our risk selection, combined with our diligent attention to portfolio construction, will continue to deliver significant returns for our shareholders. With that, I'll turn the call over to Joe.
Thank you, Albert, and good morning, everyone. During the quarter, we generated strong results with an annualized operating ROE of 15.6%. In addition, quarterly diluted book value per common share increased by $1.93 per share or almost 5% in the quarter. Our results benefited from growth in our book of business and continued favorable prior year reserve development, which was partially offset by natural catastrophes and weather-related losses which, although light compared to expectations, were higher when compared to the same period of last year. Valuation improvements on our available-for-sale investment portfolio, due primarily to the strong results from our other investment portfolio and the positive impact of spread tightening on our high-yield fixed maturity holdings, also contributed to the growth in our diluted book value per share.
Moving into the details of the income statement, our third quarter gross premiums written increased 7% to more than $900 million, with growth emanating from both of our segments. In our insurance segment, our top line was up $45 million, or 9%, reflecting a continuation of the trends noted in the first half of the year. The liability line was our strongest contributor. Growth in our professional lines business reflects our continued global expansion. Property benefited from rate increases as well as new business, which significantly exceeded the continued reduction of cat-exposed business written through MGAs. The accident and health line continued to contribute to the top-line growth during the quarter, bringing the year-to-date increase in gross written premiums to almost $90 million. On the other hand, we had minor reductions in aviation and marine lines. In reinsurance, our top line was up $12 million, or 4%.
Growth was driven by professional lines, mainly reflecting selected new business, with agriculture continuing to contribute. These increases were partially offset by decreases in property and motor relating to a number of factors, including premium adjustments and a reduction in reinstatement premiums received. Our consolidated net premiums written were up 10%, exceeding the growth rate for gross premiums written. Similar to prior quarters, the difference is driven by a number of factors, with changes in reinsurance purchasing in our insurance segment having the biggest impact. This included reductions in the quota share cession rates for significant portions of our professional lines and liability books, a reduction in the cost of our property per risk and property cat protections, and higher retentions for both property and marine.
Our net premiums earned were up 10% for the quarter, with growth in insurance and reinsurance driven by our accident and health and agriculture initiatives, respectively. Our third quarter consolidated current accident year loss ratio increased 3.2 points to 61.5% compared to the same period of last year, primarily due to the increase in the frequency of natural catastrophe and weather-related events, and a change in the mix of our business with a proportional shift towards lines that incur a higher loss ratio, such as agriculture. In insurance, the current accident year loss ratio increased 1.3 points to 55.9%. This increase in the accident year loss ratio during the third quarter of 2013 was primarily due to the change in our business mix.
For the year-to-date 2013, the current accident year loss ratio for insurance is 63.8%, up slightly from 62.6% for the comparable period of 2012, largely reflecting the increase in the natural catastrophe and weather-related events in the first half of the year. The third quarter current accident year loss ratio for our reinsurance segment was up five points to 66.6%, primarily attributable to catastrophe and weather-related losses. We recognized $51 million of natural cat and weather-related losses, net of reinstatements, relating to a number of worldwide loss events, namely European hailstorms, $15 million; Mexican floods, $15 million; Toronto floods, $15 million; and Colorado floods, $3 million. These contributed 10.5 points to the accident year loss ratio, whereas in 2012, net losses related to U.S. drought conditions and Hurricane Isaac contributed 5.9 points.
An additional factor that contributed to the variance was the change in the business mix, with a significant growth in our agriculture line, which again incurs a higher loss ratio. For the first nine months of the year, the current accident year loss ratio for reinsurance increased by 0.9 points to 63.5%, with the same factors contributing as described in the quarterly comment above. During the quarter, our results continued to benefit from net favorable prior year development, which aggregated to $80 million. Short tail classes in both segments contributed $57 million of that balance, primarily reflecting better than expected loss emergence.
In addition, we continue to give weight to our actuarial methods that reflect our favorable experience for liability reinsurance business, which contributed a further $26 million of favorable development for the quarter, and to our reinsurance professional lines, which contributed $10 million, reflecting lower ultimate loss estimates for years 2009 and prior. The favorable experience was partially offset by adverse development in our credit and surety line of $15 million, which follows recent claims activity on certain European bond exposures. The third quarter reflected a steady acquisition cost ratio, while our G&A expense ratio decreased 8 tenths of a point to 14.8%. While our total G&A costs increased primarily due to increased headcount as we continue to build out our global platform, from a ratio perspective, this was more than offset by the growth in our net earned premium during the quarter.
Net investment income was $103 million for the quarter, up from second quarter's $83 million, and very similar to the $104 million of the third quarter of last year. Once again, the most significant driver of the change in net investment income quarter-to-quarter was the performance of our other investment portfolio, which contributed $32 million to this total versus $12 million last quarter and $34 million in the third quarter of last year. The majority of our other investment portfolio is hedge funds, which benefited from the strong equity markets during the third quarter. Income from our fixed maturity portfolios, including cash and short-term investments, remained steady at $75 million for the quarter, similar to last year's $76 million and $73 million in the prior year quarter.
The yield to maturity for our fixed maturity portfolio declined modestly from 2.4%-2.2% during the quarter, due primarily to some spread tightening and a reduction in the duration of our portfolio from 3.5 years-3.2 years. In the aggregate, the total return of our cash and investment portfolio for the quarter was 1.4%, inclusive of foreign exchange impact. The primary drivers of return were spread tightening on some of our fixed maturity holdings and strong returns from our equity and hedge fund holdings. We continue to hold a high-quality, well-diversified portfolio with cash and investment assets totaling $14.8 billion at September 30th, up approximately $0.5 billion from June 30th and a year ago. Our fixed maturity weighted average credit rating remains unchanged at AA-. Our total capital at September 30, 2013, was $6.8 billion, consistent with our capital position at year-end.
Net income generated during the year and a net increase in our preferred share capital from transactions during the first half of the year were offset by common share repurchases and dividends and the decrease in unrealized gains in investments due to an upward shift in sovereign yield curves during 2013. During the quarter, as we discussed with you on the last call, we halted the repurchase of our shares under the authorized share repurchase plan as we went through the Atlantic wind season. We currently have $409 million of remaining authorization for future repurchases and expect to resume repurchasing shares this quarter. During September 2013, A.M. Best upgraded the financial strength rating of each of our principal operating insurance and reinsurance subsidiaries to a financial strength rating of A+ (Superior).
As you know, this is the second highest rating that this agency awards, and we are very excited about the potential opportunities the increased rating brings to our franchise. Our strategic expansion opportunities continue to progress, and we remain optimistic about our prospects. We believe that our diversified global franchise and strong balance sheet will continue to allow us to take advantage of market opportunities as they emerge. With that, I'll turn the call back over to Albert.
Thank you, Joe. Looking forward, the overall insurance markets continue to improve on average, but with increasing variation by accounts, lines of business, and geographies. The U.S. continues to see the strongest improvements. For our insurance business, average price increases are coming in at a slower pace than that observed in the second quarter of this year. For our international division, rate activity as a whole was flat, similar to last quarter. The specialty lines which comprise this division were typically mixed. We anticipate continued flat rate change for this division, with decreases in some specialty lines, in particular aviation, terrorism, and offshore energy, offsetting positive rate change in others. Offshore energy is gradually and modestly coming off historical high pricing following a two-year period of benign losses. Meanwhile, onshore energy rates saw continued modest improvements after a number of large losses in recent quarters.
As with the second quarter, property rates have stabilized in this division. In our professional lines division, rate change was flat overall, but again with wide variations. For the U.S., pricing across all units was positive. On the other hand, the Bermuda excess lines are seeing pressure, especially on Side A coverages. Classes which have seen higher than expected claims activity in recent years are also seeing much higher rate increases. For example, primary public D&O is seeing rate change in the order of 7%. International professional lines face significant pressure. While professional lines overall have not improved as much as we may have hoped for at the beginning of the year, we expect continued slow improvement with rate increases on primary layers continuing to be more robust and international professional lines under more pressure.
In our U.S. division, all lines remain in positive rate territory with a 6% rate change for the division overall. While pricing momentum has slowed on property lines, our casualty business continued with double-digit rate improvement. This division is thriving in the current environment, with new submissions up over 20% and good retentions. The abundance of capacity addressing property business has taken the edge off a bit after two years of rate improvement, but we're still seeing many attractive opportunities. Within our reinsurance segment, underlying primary market conditions are a positive. Increasing competition amongst reinsurers is such that some, or in certain cases, all of the improvements are staying with the cedents, leaving reinsurers with a generally stable level of overall profitability on renewed business.
The combination of new capital and the advertised reduction in reinsurance purchasing from several large cedents should make market conditions a bit more challenging as we enter 2014. The unprecedented influx of capacity into the U.S. property catastrophe market forced rates down 10%-20% in some cases. Pressure on rate extends to property and catastrophe lines outside of Florida and the U.S., although not with similar severity. Signs of competitive pressures abound. Reinsurers have been more willing to offer expanded coverages, including multi-year terms, private layers, and aggregate covers. Outside of property lines, the competitive landscape is also intensifying as reinsurers seek to expand their product offerings. Pressures on commissions exist across the board. As historically low loss trends continue, cedents are reviewing their buying strategies and generally retaining more. Consolidation in reinsurance buying is resulting in more multi-line programs.
Despite these pressures, profitability generally remains good, and where necessary, underlying primary rate improvements are accruing to the benefit of our treaties. Overall, though, the market remains reasonable as I said, and we are confident in our ability to navigate through the various issues. We have pricing systems in every line of business that are focused on return per dollar of risk. When that return per dollar of risk is adequate or attractive, we will deploy our capital to support our clients. Underwriting excellence has been the hallmark at AXIS, and it remains our key strength and differentiator in shifting markets. We are investing heavily to enhance our strong underwriting culture and provide our underwriters with the tools and resources they need to succeed. We're also adding improved data and analytics to meet our goals of optimizing our portfolio, reducing earnings volatility, while still delivering top-tier returns.
Last month, the Lloyd's Franchise Board granted approval in principle for the new AXIS Syndicate 1686. This is yet another step in expanding our global underwriting platform to deliver an efficient, globally diversified portfolio to our shareholders. This is the latest of a number of initiatives this year introducing new product and expanding geographic distribution. Lastly, I could not conclude my prepared remarks without highlighting our recent upgrade to an A+ by A.M. Best, which is not only a testament to the strong track record of AXIS and of our favorable positioning, but also a key differentiator in defending and expanding our targeted business in what is currently a mixed market. With that, operator, I'd like to open the line for questions.
To ask a question, you may press star then one on your touch-tone phone. If you're 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 Jay Cohen at Bank of America Merrill Lynch.
Thank you. Good morning, everyone.
Good morning.
I guess I'll start with a couple of questions. First is your own reinsurance buying. Obviously, you've made some changes, in general, retaining more of the business. Can you talk about what the plan might be for going forward? Should we expect that net-to-gross ratio to continue to change? That's question number one. Question number two, on the investment side, can you talk about the new money yields you're seeing available in the market relative to your portfolio yield?
Sure. Joe, why don't you take that?
Yeah. The last one, Jay, we're attracting 2.2% from new money versus a book yield of 2.6%. The gap is widening a little bit from where it was in the second quarter.
I think on the reinsurance buying side, excuse me, Jay, I think there's a couple of factors. The first is growth in lines of business where we don't buy reinsurance. Obviously, as you see lines of business such as A&H that are predominantly kept net, that's going to have, on its own, an impact on the ceded ratio. The other area is in how we choose to optimize our various portfolios. I think what you've seen in the past and what we'll continue to see is an increase in our net retention per risk on the various property-related lines, but probably more buying on the catastrophe side, taking advantage of the terms that are available to manage our PMLs, to manage our zonal limits, and so on.
With regards to the professional lines and liability lines, we're liking the trends that we're seeing on the professional lines, and we're likely going to be keeping those levels pretty much where we are right now. I think on the casualty lines, we're growing these relatively strongly right now. We generally have a high cession rate on those, and over time as that book develops, we are likely to keep a little bit more of that business.
That's great. Thanks guys.
Jay, it's Joe. The only thing I'll add to that is that a lot of these changes that we put in effect occurred in March and April of this year, and most of that has flown through our ceded written. Not all of it has actually flown through all the ceded earned yet. You'll see a little bit of that continue on into 2014.
That's helpful. Thank you.
From Michael Nannizzi. I'm sorry, Nannizzi from Goldman Sachs.
Thanks. I guess, Joe, have you guys bought back any stocks so far in the fourth quarter?
No, we have not.
Okay. I'm just trying to understand. I get it was a light wind season, and I get you didn't want to buy back stock, and you talked about that on the second quarter call, but it just seems kind of unusual, or I'm just trying to understand why you wouldn't have bought back even halfway through wind season some or following the end of September when nothing occurred. Do you have a different plan in terms of wanting to deploy the capital, maybe at one-one, or you want to hold the capital back to do something else? I'm just trying to understand kind of that change in posture, I guess.
Well, Mike, you know what happened last year in the fourth quarter in terms of wind season. Not that we're afraid of that, but if you look at what we've done so far this year, we've purchased 8.5 million shares, $360 million worth of stock.
Yeah.
Our operating income, less dividends, is $384. We're almost exactly on the plan that we indicated to you before, we intend on following through on that in the fourth quarter of the year.
I see. Okay. That's kind of the expectation is that maybe you pulled forward some of the buyback into the second quarter, you're going to wait to replenish and adopt the same sort of pattern on the forward. Okay. That makes sense. I guess we've seen a lot of folks moving into crop this year. I'm just curious. I'm guessing that year-over-year pricing is maybe flattish despite last year's losses. First off, what's your outlook there, is that an area where you want to continue to grow? What's the competitive dynamic like on the reinsurance side? If I could, what are your expectations just given the decline in corn prices this year? Is that potentially going to have any impact on your book? Thanks.
I think starting, Mike, with the market in general. There's been more people coming into it, especially on the reinsurance side, as the primary companies this year, following the severe drought last year, were looking to purchase more. Our experience is a little bit different than what you mentioned in terms of pricing. I think you're right, pricing is flattish on the primary side, certainly on the excess of loss side, especially on loss impacted accounts last year, we certainly saw pricing increases, I expect that that will stay. In terms of the growth, I think that we have very well-developed markets in the U.S. and some in Canada, there's also, in my mind, real opportunity internationally.
One of the things that we feel really good about is the fact that the team that we brought in to supplement the existing team that we already had in place, the team that we've brought in has real expertise and real contacts, not only in terms of the U.S. and North American market, also internationally. We think that this market certainly still has opportunities, both domestically and internationally. I think in terms of international positioning, we feel very good about where we are right now. With regard to the profitability of the year, it's looking in our mind and certainly reflected in the numbers as it's an average year. We don't think it's a particularly highly attractive year. We certainly don't see this as a loss year for the business. We see this as an average year in terms of profitability.
Got it. Great. Thank you.
Our next question comes from Gregory Locraft at Morgan Stanley.
Hi. Good morning. Congrats on a nice quarter. Albert, you'd mentioned the A+, and I'd never thought of you guys as disadvantaged due to ratings. I'm just wondering what does it open up in terms of lines of business? How will you run the business a little differently? Maybe you could also talk about the Lloyd's initiative as well, because again, I never thought it was something you had to have, but now you've got both Lloyd's and an A+, what are you going to do with it?
Well, it hasn't hurt us, but it's good to have both. I think the short answer is that the A+ doesn't change the strength that we had the day before or the day after, but I think it's great to have the recognition from the rating agencies for all of the hard work and accomplishments that our people have done. There is one area where I would say the A+ does make a difference, and that's in the casualty and the long tail reinsurance business. Buyers of long tail reinsurance really care about the ratings of the reinsurers they use, and I know for a fact that even putting them on the panel in the first place and the size of the allocations are really influenced by the A+. I'd rather have it than not have it. I think it does provide some benefits.
In our mind, it's nice to have an external validation for all of the good work that we've done and of our market positioning. With regard to Lloyd's, we absolutely did not need Lloyd's in the first phase of our life cycle. We built a great international platform. We grew the business. Where we are right now, as we look to the next decade, where do we take this company to the next step? This is just one more area, one more initiative in terms of diversifying our distribution channels, expanding our geographic reach, and accessing new markets.
It's the right thing for us at this stage of our life cycle, and I expect that it'll provide us with greater ease in accessing risks in certain areas of the world where we have not been licensed previously and access to certain business that generally tends to stay in the Lloyd's market. We see both of these as a positive.
Yeah. Great. Just jumping back to Mike's question on the buyback front, I wanted to just clarify. There's no change? You guys are going to return 100% of op income this year in dividends and buybacks?
That was exactly Joe's point. We've given back through September 30th, essentially 100% of our operating income, through dividends and repurchases. Our goal has been, and continues to be, that we would return pretty much close to our 100% of our operating income in dividends and repurchases. We will be reinitiating our repurchase program as soon as our window opens. We're right on target. We're right on plan. No change.
Sounds good. Okay, great. Last is just, you guys are fortunate because you have a balanced model globally. You can sort of access the risks that are most attractive when you wish. Do you think we could see a world next year where you're shrinking reinsurance and growing insurance? Given your pricing commentary, it seems like reinsurance is more challenged than primary lines. How do you think about it in the next year, both from a top line and a margins perspective?
Well, Greg, I appreciate you saying it because that is in fact one of the great values that we have here, which is we have access to both the insurance and the reinsurance markets, and we have them available both domestically in the U.S. and internationally. We don't have a preset view of how much percentage of our top line needs to come from insurance or reinsurance or for that matter international or the U.S. It's really about building the best portfolio that we can at the time. With regards to the pressures that I've described earlier with regard to the reinsurance market, there's no question that within the reinsurance market, there's competition there. At the end of the day, the underlying markets are still improving and some of those benefits are coming to us. We will continue to write good business in the reinsurance market.
At every renewal, we take a look at what the terms and conditions available to us are. I mentioned earlier the various tools that we have to look at the profitability. I fully expect that we will continue to have a substantial and profitable business on the reinsurance side. There may or may not be as many new opportunities for growth in the market itself, as we've demonstrated to you, through the number of new initiatives that we've created, we're not waiting only on the market. We're creating new opportunities for ourselves. The example that we used last year was the fact that we were getting into the agricultural business in a bigger way. We started a U.S. marine reinsurance business. This year, we added a weather and derivatives unit to our business. We're expanding our presence in Asia. We are masters of our own destiny.
We find opportunities, although the reinsurance markets are more competitive, I have every confidence that Jay and his team are going to continue to do very well next year.
Okay, good. Again, congrats on the nice quarter.
Thank you.
Our next question comes from Vinay Misquith from Evercore.
Hi, good morning. The first question is just on the buyback. You've not said anything different now versus before, but just curious. Your top line is growing double digits, yet you can buy back 100% of stock. Curious as to whether that's because you had lots of excess capital before, or are you growing in lines of business that are diversifying and so therefore don't need as much capital?
I think your second point is the more relevant point, which is that we are, in my mind, doing an excellent job of diversifying the portfolio, of making much more efficient use of our capital, which is why, and you and I have had this conversation before, I believe that we can actually combine a lower volatility portfolio with sustained high ROEs.
Okay, that's helpful. Second was more of a numbers question. In the primary insurance segment, we saw the G&A expenses sort of tick down sequentially quarter-over-quarter. Were there some one-time items this quarter that helped it, and should we expect a lower run rate in the future?
Vinay, I'll dig out the insurance G&A ratio comparable in a second. We did have one or two one-time items in our overall expense structures, and those get allocated down to our businesses. Again, you saw an improvement in the G&A ratio overall. As Albert saying, we're continuing to invest in the company. The reason our expense ratio went down was really because of the growth in earned premium relative to our expense growth.
Okay.
Bear with me for a minute on the specific question on insurance.
Sure. I may ask another one, if I may.
Okay.
At the investor day, I think you talked about a 10% ROE roughly. Given what's happening in the reinsurance market, do you think that's still the kind of ROE that the company is running business at?
I think we were referring to the fact that we can see the marginal business coming in at 10% ROE. In fact, I would argue that with some of the pricing changes that we're seeing in higher underlying interest rates, we're seeing some improvements on that. Again, with regards to the reinsurance book, I would see two things. One is because notwithstanding, as I mentioned, the competition and some higher ceding commissions, we're still getting the benefit in many cases of the underlying improvements. That's a net positive. Secondly, as you know, the biggest driver of the E piece is the catastrophe book.
By balancing our catastrophe book, by removing some of the peaks in the catastrophe book, it actually resulted in a lower capital requirements for our overall reinsurance book, such that again, I see the ROE on the reinsurance business, just like I do for the rest of the company, moving in a favorable direction.
Okay, that's helpful. Thank you.
Vinay, I'll just come back on insurance. As you noted, our expense ratio actually dropped by about a point, there's nothing unusual there. It's really just the growth in earned premium year-on-year. The reinsurance segment expense ratio jumped up a bit. Again, Jay and team are through the new initiatives, they're adding staff. There's nothing unusual in that expense number on the insurance side is what I'm trying to say.
Sure. I was talking about the absolute dollars was less this quarter versus last quarter. You know what? I can catch up later on if that's.
Okay.
Thanks.
The next question comes from Charles Sebaski at BMO Capital Markets.
Good morning. Thank you. First question is on the adverse development in the credit and surety in the Europe. I was curious what kind of exposure still exists on what's running adverse on that.
You've seen the news about the Spanish surety bond losses.
Yep.
Our piece of that was about $15 million. There's very little room for additional deterioration in that number.
Okay.
Okay, I'll leave it there.
Okay. Didn't mean to cut you off. The more you want to say, please.
No, that's okay. I'm good.
Regarding the Lloyd's business, what's the expectation on what kind of business you expect to write through that syndicate in premium volume? Maybe not this quarter, but longer term.
Right. Well, in the first instance, the goal here is to transition some of our business that we're already writing onto a Lloyd's platform and seed a syndicate, which is based on business that we're currently writing mostly out of our London, Ireland, or Bermuda books, mostly on the energy, the marine side, some property business. That will form the core. I don't see this as an expansion into new lines of business. I see this more as an expansion of our current lines of business into more international markets and more opportunities.
Okay. Just one numbers question. In the reinsurance division, the acquisition ratio jumped up a bit. Should we think of this as a, it's a bit over 22 now, as kind of a run rate from business mix shift or something unusual?
It's a combination of a number of things. As you know, there are three things that affect our ratios there. Obviously, we mentioned earlier that in some cases, ceding commissions are up. You'll note that there is a transition in our reinsurance book towards writing a little bit more proportional. By definition, proportional has a higher acquisition expense ratio, generally more stable, but has a higher acquisition expense ratio. There's always a little bit of noise on a quarter-by-quarter basis as it relates to sliding scales, profit commissions up or down, so on and so forth. That's really the three major pieces. There isn't anything there that I would think of as a seismic shift.
Okay. I appreciate it.
The next question comes from Ryan Burns at Janney Capital Markets.
Hi, good morning, everybody. Quickly, just on the underlying loss ratio in the insurance segment. I guess you guys noted that business mix played a factor there. I assume that's coming from the A&H growth. I'm just trying to figure out, going forward, should we look for that underlying loss ratio to continue to be in the same levels going forward, i.e., less, I guess, improvement going forward as the mix shifts with the A&H build-out, but I guess less volatility?
Yeah. Good morning, Ryan. As Albert indicated, looking at loss ratios on a year-to-date basis is probably a better thing to do than just looking at one quarter at a time. If you take out weather from our accident year loss ratios, we've actually seen an improvement in insurance of a point and a half during the year. As we indicated earlier in the year, we had some rate increases that were expected to come through earned premium, and we would expect to see some improvement in the margins, and I think we are realizing that.
Okay, great. Just quickly on the Spanish surety stuff, were you guys writing quota share reinsurance there was excess of the loss, and was it all for multiple years? Just trying to figure out where you guys had the exposure from.
Look, it's a combination of a number of things, but we did not have large quota shares. Matter of fact, I'm not sure that these things are significant in any case. The $15 million that we took is a combination of not only a small incremental reserving increase that we're putting with regard to the Spanish bonds, but also just a little bit more money across the board just for the additional uncertainty of legal risk, if you would, with regard to the European portfolio. It's literally $7 million that are related to the Spanish bonds, and the rest is just more caution with regard to the regulatory environment in Europe.
Sure. Great. Thanks a million, guys.
The next question comes from Meyer Shields at KBW.
Thanks. Good morning. Can I start with a question-
Morning
on the PML side? If we look at, I guess, the major risks, I'm thinking of Southeastern hurricane and California Japanese earthquake. There wasn't much change in the 50 or 100-year PMLs, but there was a pretty decent sequential drop in the one in 250. Is there any way of extrapolating from that, what the reduced capital needs are?
I wouldn't try. When we do our capital, it's on a line-by-line, risk-by-risk analysis. We calculate, you might imagine, all permutations of capital requirements on a per-risk basis, on a line-of-business basis, on a standalone, diversified. There's just way too much in there to be able to extrapolate a specific percentage. The one thing that I think is absolutely worth taking away from this is the management of the PMLs, and the management of the diversification of the book of business is such that we are today a much more efficient user of capital. Which is why we can, as Vinay brought up earlier, which is why we can grow at double-digit rates and still give back all of our incremental capital to our shareholders.
Okay. No, that makes sense. There was a bit of a slowdown in the insurance Accident & Health premium growth, and I was wondering whether there's something significant going on there or just quarterly variation.
If you look back at last year, the third quarter was by far the slowest production quarter of the year. It's just the nature of that business, that the third quarter doesn't do much. I think if you take a look at it on a nine-month basis, the growth rate is very impressive and continues to move forward. Chris and his team are doing a great job. They know exactly what they need to do. They're very focused on achieving their goals.
Okay, excellent. Thank you very much.
Our next question comes from Brian Meredith at UBS.
Yeah. Albert, just a couple of more questions on the A&H business here. I'm wondering, is it possible to give us kind of a breakdown of what the impact of the mix shift for more A&H in the insurance business had on the overall combined ratio?
Actually, we do an analysis of all of the contributors, if you look at it, I believe A&H is actually the single largest contributor to the increased loss ratio for the insurance division overall. Both through a combination of mix and the fact that it's a higher number. If we look at our A&H book it was 9.6% of our premiums in the third quarter of 2012. It was 13.7% of the premiums in 2013 quarter, that's in the mid-60s. Imagine the fact that it's a higher ratio than the average for the insurance segment and a much larger proportion of the earned premium, that's why it's having that impact on the.
Very helpful, thank you. Then, back in the A&H, what right now is the mix of reinsurance versus primary in your A&H business right now? I guess kind of looking forward, how do we expect that to continue to progress?
As you all recall through our various presentations, reinsurance continues to be the larger part of the book of business. Over time, our goal is to bring that business down to 50% of the overall book. This is a good time to kind of speak to where we are in the various phases of our A&H business. The reinsurance business is the part of the business that is easier to grow. You don't need to have offices across the world. It's a more concentrated distribution mechanism. In fact, not only have we grown faster on the A&H, but in fact, we've already broken even and made a profit on the reinsurance part of the A&H business. The insurance business is a much slower business to pick up.
You have to have all the licenses in place, I think we've shared with you some of the frustrations we've had in getting all of those licenses in place, and we have those now. It's the on-the-board representation, and it's the quoting on a risk-by-risk basis. It's a slower ramp-up. Again, this is very consistent with the plan that we had in place. We need to have a better balance between insurance and reinsurance. We need to have more granular risk-by-risk composition of our portfolio, I really view that as phase 2 of our A&H strategy. Phase 1 was get to the size of the business that will allow you to at least break even, get the name out there, get the platform established, I continue to believe that we will have completed phase 1 by the end of 2014.
I think beyond that, as you go from 300 to 500, it's much more of an insurance-based growth. It's much more of a risk-by-risk growth. Ultimately, lower expense ratios in that part, acquisition expense ratios on that part of the business. Where we are right now is, in my mind, on plan with where we want it to be and where we need to be.
Great.
Brian-
Brian, the only thing I'll add is that growth in insurance year-to-date versus last year was about 22% and growth, I'm sorry, in the quarter is 22%, on a year-to-date basis is 118%. It's up to about 20% of our total premium across A&H and growing pretty rapidly.
Great, real helpful. Just lastly, Albert, I'm just curious, any opportunities with your A&H business, maybe the specialty health area with the Affordable Care Act?
Well, I think right now, as you might imagine, there's a lot of turmoil in the U.S. market with regard to the Affordable Care Act. It's difficult right now to see how things are going to fall down. I am convinced that, in fact, you're going to see more limited coverages in the standard healthcare contract, which in my mind is going to create significant opportunity for alternative coverage for additional wraparound covers. I'm actually very optimistic that on the back end of resolving the transition to the ACA, there will be increased opportunities for us in our A&H business.
Great. Thank you.
Our next question comes from Ian Gutterman at Bank of America.
Hi. Not quite, but close enough. A number of my questions were asked. I just have a couple left, I guess. Just to clarify a couple of things on the reserve releases. Professional lines sounded like it was favorable this quarter. I think the past couple of quarters, there was a little trouble. Do you feel like that's behind you now, given what you saw in the quarter?
Yes. As you know, we took a pretty hard look at our professional lines business in the second and third quarters and feel that our professional line reserve position is adequate overall. We saw no need to strengthen those reserves further.
Great. On the short-term releases, can you give a little color on, was it prior year large cat driven, or do you book sort of attritional property losses and then if nothing happens, you release it the next year? I'm just kind of wondering the context of those releases.
Right. For the most part, it's a combination of the two. We have had some releases from earlier accident years, but for the most part, it's our actual experience versus expected, and our actual losses have actually been lower than we've expected, so we've been able to release them.
Got it. Great. Albert, I guess you only have. Oh, I'm sorry, go ahead.
No, I'm sorry. Go ahead, please.
I was just going to ask Albert if any update on your own plans in the ILS world.
I'm not sure there's much to talk in terms of updates. As you know, we have initiated over the summer a third-party capital initiative that will allow us to partner with some sources of capital and provide them with a portion of the business that we write in certain lines of business. We're having tons of conversation. We're having a couple of small deals that we've done, which look a lot more like Retrocession than anything else, really. I expect that in 2014, there will be some small portions of certain portfolios that will be shared with some external sources of capital. This is a long-term play. There's a lot of things happening, a lot of headlines happening in the ILS space in 2013. We're approaching this thing as a longer-term play, making sure that we match the right investors with the right risks.
Again, our goals here, our anticipation is that this will be a gradual buildup of good partnerships over time, and it's progressing as we expect it to.
Got it. Great. Thanks so much.
As a reminder to ask a question, you may press star then one on your touchtone phone.
I'm not sure. I'm going to turn this phone back again.
At this time, we show no further questions. I'd like to turn the conference back over to management for any closing remarks.
Well, thank you all for participating in our conference call. Obviously very pleased for an excellent quarter. We look forward to speaking with you again in the early part of next year. Have a good day.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.