Aspen Insurance Holdings Ltd (AHL) 2017 Q4 法說會逐字稿

Hello, and welcome to the Aspen Insurance 4Q 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the call over to Mark Jones. Mr. Jones, please go ahead.

Thank you, and good morning, everyone.

On today's call we have Chris O'Kane, Chief Executive Officer; and Scott Kirk, Chief Financial Officer.

Last night, we issued our press release announcing Aspen's financial results for the fourth quarter of 2017. This press release as well as corresponding supplementary financial information can be found on our website at www.aspen.co.

Today's presentation contains, and Aspen may make, from time to time, written or oral forward-looking statements within the meaning under and pursuant to the safe harbor provisions of U.S. federal securities laws. All forward-looking statements have a number of assumptions concerning future events that are subject to a number of uncertainties and other factors. For more detailed descriptions of these uncertainties and other factors, please see the Risk Factors section in Aspen's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC and posted on our website.

Today's presentation also contains non-GAAP financial measures, which we believe are meaningful in evaluating Aspen's performance. For a detailed disclosure on non-GAAP financials, please refer to the supplementary financial data and our earnings release posted on our website.

With that, I'll now turn the call over to Chris.

Thank you, Mark. Good morning, everyone.

Last night, we reported an operating loss per diluted share of $3.14 for the quarter, largely reflecting natural catastrophe losses from the wildfires in California that impacted Aspen Re, together with an increased frequency of midsized and attritional losses that impacted the Aspen insurance book. Book value per diluted share was $40.10 at the end of 2017. These results are not acceptable. Not acceptable to us and we know they are not acceptable to you. We're not here today to make excuses. We're here to explain what happened, why it happened and most importantly, what we're doing differently now and going forward so that this does not happen again. We remain totally, firmly committed to enhancing value for our shareholders. We firmly believe that with actions we have taken to address the insurance book, actions which we will discuss this morning as well as continued solid performance from our Reinsurance operation and the gradually improving rate environment, we can deliver loss ratios in both segments that are highly competitive. In addition, with the benefits from our effectiveness and efficiency program, we will have an operating expense ratio more in line with our peers.

So let's start with Aspen Insurance. As we discussed in prior calls, this business has been the source of considerable poor performance. In 2017, Aspen Insurance had an underwriting loss of $197 million. The biggest single component of this loss was catastrophe losses of $117 million. Given that 2017 was one of the costliest cat years in history, we would anticipate considerable exposure, but these cat losses exceed our expectations and we have taken steps and are continuing to take steps to prevent this from recurring.

You should always learn from losses. We have seen parts of our portfolio that have performed relatively well, but other parts have disappointed us seriously. And nowhere is this true than in our U.S. property book. We will continue to balance our portfolio and target the best risk adjusted returns. As a result, we are moving away from major property accounts that contain considerable catastrophe exposure.

The second component of the insurance loss was midsized and attritional losses. To understand these, I need to give you some further color. Let's start again with U.S. property. Historically, this has performed well. The average loss ratio in the 8 years ending in 2016 is 51%. But as we have reported to you previously, in 2016, we wrote some primary habitational and similar business. This is a relatively small part of the book but has around $50 million of loss in 2017. We ceased underwriting this business in May 2017 and our exposure has considerably reduced. But these risks will not fully run off until the middle of this year. In the fourth quarter of 2017, we placed a 50% quota share of the U.S. property book and anticipate the impact of any adverse experience will be much more muted. This is because the size of the unearned premium within this component to U.S. property is rather small and because it is now subject to a 50% quota share reinsurance. I should also note that we have achieved rate increases of 14% since the beginning of the year on this book and conditions appear favorable for acceptable margins.

Now I need to turn to our Energy business; and in particular, the downstream Energy business, where we believe the industry loss ratio in 2017 was approximately 200%. Unfortunately, we'd had our share of some of these losses arising from policies before our Head of Global Energy joined us in 2016. Our Global Head is called Tim Kania, and he has worked extremely hard to reposition this book, focusing primarily on risk selection and risk management. New underwriting guidelines, enhancement selection will improve the loss ratios, and we must monitor this closely. While much reduced, there are still a small number of downstream Energy risks in the book, which will not be completely run off until later. The remainder of the Energy book, namely upstream Energy and Energy liability, produced very good results in the quarter and in the year. Following the experience of 2017 and rate reductions over the last several years, we are seeing improving pricing in downstream Energy with, for example, rate increases in the U.S. of around 8% at the beginning of this year.

Finally, I want to mention our Casualty business. Over the last couple of years, we have substantially reunderwritten and reduced the size of this account. During the year, we produced runoff protection against some of our casualty reserves, which means that any further adverse development from this source will be extremely limited. With the work that we have done, we are now satisfied with the product range we have in U.S. specialty lines and our positioning in those lines.

Furthermore, in the last 2 years, we have reevaluated the appropriate line size for all of our Insurance lines business and decreased them considerably across the insurance book. We've also taken a different and more risk-averse view of our portfolio by seeding more to reinsurance. We retain less risk today, we seed more risk. Across many of our lines, including casualty, financial, special lines, Marine, Energy and U.S. property, we have deployed sizable quota shares and placed these with overriding commissions that are fair to us. These have a major impact on freeing up capital, and we expect them also to stabilize earnings.

We've also reduced voluntary participation in our own reinsurances. In the past, we have used an internal reinsurance vehicle in which we were retaining risk. Given the dynamics in the market in the last years, we decided this vehicle was not the optimum strategy as it significantly reduced risks placed in the vehicle. Nevertheless, in 2017, we retained, within insurance, $44 million of loss, which, given our 2018 reinsurance structures, would be covered by external reinsurance.

What I have said so far should demonstrate how our Insurance business has been repositioned with the aim of reducing volatility and enhancing profitability. I don't want to play down our results for 2017 in any way. The losses are real. They're painful. But it's very important to note that the majority, 8 or 9 out of 12 of our global lines of business, were profitable in 2017. There's lots of successful underwriting talent and some exceptional leaders in our business lines. I'd like to single out just 2 of them this morning. The first is Surety. It's led by Mike Toppi. Mike and his team have built the business successfully and organically since he joined us. In our prerelease 2 weeks ago, we mentioned that we had loss deterioration in this book in the fourth quarter. What we did not point out, however, is that this is the only material loss we have ever incurred in this line since it was launched in 2012. The cumulative loss rates here, in that time, is absolutely first class. Even with this [movement,] the team delivered another year in 2017 of solid underwriting income.

And another successful line, which saw the impact of a couple of losses in the fourth quarter, is Cyber Risk. This is sizable and one of the areas in which we have successfully built out and where we've achieved good results. Despite an adverse quarter, the business grew and was profitable in 2017 overall. We expect it to continue to enjoy profitable growth in 2018 and beyond.

As you know, we recently made a leadership change in Insurance with David Cohen now leading the day-to-day management of the Insurance business. David has brought about a profound repositioning of our Insurance business. It is extremely important to note and to understand when assessing his contribution that the overwhelming bulk of the issues -- the negative issues in 2017, arose from risks that predate David's arrival in the company.

So to recap, the business that we write is better priced, the line sizes have been reduced and, coupled with the increased use of external reinsurance, we expect to experience much less volatility. Our goal is to deliver loss ratios that are competitive and we're moving aggressively to achieve that.

Now let's turn our attention to Reinsurance. Like most of our peers, the Reinsurance results for 2017 were dominated by a significant level of natural catastrophe losses. This continued in the fourth quarter with major wildfires in California that resulted in $124 million of cat losses for Aspen Re, of which $17 million was fully reinsured by our sidecar, Silverton Re. So what drove these losses? We supported a couple of long-term clients in California with significant participations. These participations over our 15-year relationships have yielded excellent returns. In addition, when building our portfolio of cat risk with Aspen Re, we have long preferred to be relatively risk averse with regards to Florida and Gulf hurricane risks while maintaining a slightly overweight position in California.

Aside from major catastrophes, there's quite a bit of good news in Reinsurance. The leadership team remain nimble and continue to find opportunities to develop and to diversify our Reinsurance business. An example of this was the strategic compelling opportunity we entered into recently with CGB Diversified Services, a highly respected company in the crop insurance industry. As a part of this transaction, we sold our AgriLogic business and acquired a stake in a newly formed company that directs replacement of reinsurance on a combined book of $1.1 billion. Our investment provides Aspen with the opportunity for further growth through providing quota share reinsurance capacity on a much larger, more diversified and fast-growing portfolio of business.

In addition, our Capital Markets business continued to enhance its position through its established relationships with long-term capital allocators and increased third-party capital under management by more than 20% to $550 million in 2017. Our Capital Markets business continues to provide investors with direct access to our underwriting expertise, provides brokers and clients with additional capacity and provides Aspen with flexibility in managing our exposures.

With that, I'm going to turn the call over to Scott, who will take you through our financial performance in more detail.

Thank you, Chris, and good morning, everybody.

In the fourth quarter of 2017, we recorded a combined ratio of 148% and net operating loss of $186 million and diluted book value per share at December 31 of $40.10. Our results for the quarter have been impacted by 2 key items. First, we reported total net catastrophe losses of $138 million, largely related to the California wildfires, which also have affected mainly our Reinsurance segment results. Second, we experienced a higher frequency of midsized and attritional losses, primarily in our Insurance segment, and those totaled approximately $60 million. The largest portion of these related to several fire and property losses in the U.K. and the U.S. In addition, we're also impacted by some cyber losses and an increase in a previously reported Surety loss that Chris has already mentioned.

Gross written premiums for the group was $688 million, an increase of 14% compared with the fourth quarter of 2016, with growth coming from both segments. Full year 2017 gross written premiums were $3.4 billion, an increase of 7% from 2016. Net written premiums have decreased by 21% from the fourth quarter of 2016 to $340 million, due primarily to quota share reinsurance placements, including the placement in early December of a 50% quota share on our U.S. property book. As a result, the ratio of net to gross written premiums for the group declined to 49% from 71% in the fourth quarter of 2016. For the full year, this ratio was 66%.

Loss ratio for the group was 106.5% compared with 63.2% in the fourth quarter of 2016 with 27 points of the increase due to these cat losses. Prior year net favorable reserve development was $13 million or 3 percentage points in the fourth quarter of 2017 and $105 million or 5 percentage points for the full year. This compares with total releases in 2016 of $129 million. The releases were from both segments in the fourth quarter and for the full year 2017.

Our accident year ex-cat loss ratio was 82% compared with 62.6% in the fourth quarter of 2016. This was driven principally by the current year loss activity in Insurance, with midsized and attritional loss activity accounted for approximately 12 percentage points of the increase. There was also an impact from Reinsurance segment where some premium adjustments added 7 percentage points to the accident year ex-cat loss ratio this quarter.

Turning now to our expense ratios for the full year 2017. Our total expense ratio declined by 50 basis points to 37.8%. The decrease was driven by the reduction in the acquisition ratio of seeding commissions from the outlook reinsurance earned through in 2017.

I'll turn now to our segments. And firstly, Reinsurance. In what is Aspen Re's smallest quarter for production, gross written premiums increased by 10% compared with the fourth quarter of 2016. The AgriLogic business, which generated $40 million of gross written premiums in the quarter was the main reason behind the premium increase in our specialty subsegment. However, approximately $35 million of these premiums related to the 2018 crop year. And as part of the transitional arrangements following the sale of AgriLogic in the fourth quarter, they were seeded out. And this accounted for the decrease in net written premium in the Reinsurance segment in the quarter. Our Reinsurance business recorded an underwriting loss of $146 million and a combined ratio of 153.2% for the fourth quarter. We had net cat losses of $135 million or 50 percentage points on the loss ratio.

The accident year ex-cat loss ratio was 70.7% compared with 56.2% in the fourth quarter last year. While there were a few small losses in short-tail lines in the fourth quarter, approximately 12 percentage points of the increase, which due to experience related and other premium adjustments, which reduces the denominator of net earned premium. On a full year basis, the accident year ex-cat loss ratio was 61.8%.

I'll turn now to Insurance. Gross written premiums were $472 million, an increase of 15% compared with the fourth quarter of 2016. Growth came from all subsegments, but primarily our Financial and Professional Lines. We continued to see further impact this quarter from the Reinsurance changes that we implemented last year. As I mentioned earlier, the property quota share that we placed in December 2017. Net written premiums were $188 million and decreased by 19% from $232 million in the fourth quarter of 2016. This results in a net-to-gross written premium ratio of 40% in the quarter. For the full year 2017, the ratio was 53% compared with 76% in the prior year.

The net loss ratio in the Insurance segment was 95.2% compared with 68.5% in the fourth quarter last year. We had approximately $10 million of net cat losses from the California wildfires, but these were largely offset by the reductions in estimate of the cat losses we reported earlier in the year. For the full year 2017, the Insurance segment loss ratio was an unacceptable 79.8%. As Chris mentioned earlier, we are taking action in certain affected areas of this book. The net loss ratio for 2017 in these lines that are not performing as we would like was 139.6%. We believe the steps we had taken will improve the results in these lines. And across the rest of the book, the net loss ratio was a far more competitive 57.5%.

The accident year ex-cat loss ratio for the fourth quarter was 95% compared with 68.3% in the prior year. The $60 million of losses I mentioned earlier accounts for the increase.

I'll now move on to investments where we continue to deliver strong performance. This quarter, we recorded net investment income of $48 million together with realized and unrealized investment gains of $15 million. The total return on our aggregate investment portfolio was 30 basis points in the quarter, reflecting net gains across our equity and fixed income investment portfolios. For the full year 2017, Aspen's aggregate investment portfolio had a total return of 340 basis points. Our fixed income book yield was 2.56%, up from 2.49% at the end of 2016. And the duration of the fixed income portfolio was 3.9 years at the end of 2017.

Now let me now move on to capital. As I've said previously, we look at our capital straight from several perspectives. The first is regulatory. And there are no issues or concerns with our regulators. The second is the view of our internal capital model. And on this basis, we remain within our operating range. The third view comes from our rating agencies. And while S&P and Moody's recently changed their outlook on our financial strength rating, they cited underwriting performance as the key contributor. As Chris detailed, we are taking aggressive action to address the underwriting concern and have committed to those agencies to maintain a robust capital position.

So many of you are likely thinking about the impact of these items I've just talked about in terms of the results for 2018. And while we don't provide guidance, I'd like to comment on a few items. First, is the expected impact of the recently enacted U.S. tax bill. We expect tax reform to have a modest impact on the amount of tax we will pay. However, we believe these changes are manageable with an impact on net income of approximately $10 million in 2018. The ultimate impact, of course, will depend on where profits emerge across the globe.

Second, with the continued use of quota share reinsurance on various pieces of our insurance book, we believe that the retention ratio across the group will be in the low 60% range in 2018. Third, as our operational effectiveness and efficiency program continues to ramp up in 2018, we expect savings to flow through to our operating expenses. We remain confident that the program can deliver savings of $30 million in 2018, $55 million in 2019, $75 million in 2020, and that the $80 million run rate savings can be achieved starting in 2021. We expect our total expense ratio to be lower than 2017 and continue to decline into the mid- to low-30 range over the next 3 years.

Finally, following the sale of AgriLogic, we've returned to being a crop reinsurer rather than a provider of crop insurance. We do not expect significant changes in the earnings patterns from what we've seen over the last few years, but we do expect modest increases in written premiums. However, there will be a change in geography in terms of expenses in the income statement with a higher acquisition ratio and a lower OpEx ratio. Net-net, we do not expect the overall expense ratio for Aspen Re to change dramatically.

And with that, I'll turn the call back to Chris.

Well, thank you, Scott.

Now before we open the call up for questions, I want to spend a few moments to speak about the Aspen franchise.

Our Reinsurance business is a gem. With client relationships going back 15 years, it has mature platforms in Asia, Europe, London, Bermuda and across the U.S. We have highly effective distribution. We worked extremely hard to build close and deep relationships with [less] transaction-driven clients to give us good risk-adjusted returns across the cycle. For the more transactional clients, we work closely with Aspen Capital Markets, and we play our part in reaching good solutions for both buyer and seller. These are not just words. If we look at the numbers over the last 10 years, Aspen Re achieved an average combined ratio of 91%. In addition, don't forget the upcoming impact of the operational effectiveness and efficiency program. This will allow us to compete with twin advantages on efficient cost base and highly skilled profitable underwriting. We're very pleased with the outcome of the 1/1 renewal season for Reinsurance. We were able to get the signs we wanted on the business we targeted. We renewed about 50% of our annual book of business and we achieved a blended rate increase of 6%. We remain disciplined about our pricing and as a result, we did sacrifice about $50 million of top line renewal premium. The degree of rate improvement we achieved for the 1/1 renewals exceeded our expectations.

Now we should turn to Aspen Insurance. This business has not produced the results we expect. As said, there is a core group of business that achieved excellent performance and good growth. These lines, which include Excess Casualty, Cyber, Surety, Accident Health, Railroad Liability, Crisis Management and Professional Lines, grew by approximately 25% in 2017, have had an overall loss ratio of 51%. These lines currently represent slightly more than a quarter of our total Insurance business, a proportion that we expect will continue to grow.

Also worthy of mention is our Lloyd's operation, which also represents just over a quarter of our total Insurance segment premium and benefits from the global distribution of the Lloyd's franchise. At Lloyd's, we achieved a very good loss ratio of around 57%. While 1/1 is less important for Insurance than Reinsurance in terms of renewals, the results were also encouraging. Highlights include double-digit rate increases in Marine and Energy liability, in Marine Hull, U.S. Ocean Marine and U.S. property. With reasonable increases in the range of 5% to 10% in U.S. Energy and U.S. Environmental. Most other lines, lag renewals in the flat to plus 4% range.

I also want to mention progress on the operation effectiveness and efficiency program. This is a truly transformational program for the company, and it creates a more dynamic and scalable platform to execute on opportunities and enhance long-term shareholder value creation. While it's still early days, we're making very good progress on implementation. We did the first wave of streamlining in December and closed down some peripheral offices in Europe.

In closing, it has been a dreadful quarter and a dreadful year, but we believe we have identified the issues, isolated them and taken appropriate actions. I want to convey to you the confidence that we have in our senior underwriting team, in the businesses they run and in their ability to deliver improved performance this year as we capture the benefits of improving pricing environment and of our operational program. Again, our goal is to deliver loss ratios in both segments that are highly competitive as well as an operating expense ratio that is more in line with peers. We do understand that it's absolutely imperative for us to deliver substantially improved financial performance.

Thank you for participating in the call this morning. And with that, we're happy to take your questions.

(Operator Instructions) And the first question comes from Amit Kumar with Buckingham Research.

Just a few questions. Maybe let's start with the franchise. And you outlined the strengths and weaknesses of the franchise. I'm curious, why shouldn't a strategic review be conducted by the Board of Directors at this stage, especially given all the nontraditional interest we are seeing in the space from names such as AIG, SoftBank, et cetera?

I'm going to -- I think the view of the board and my view and -- it's always been true, but it's true even more so right now after such a dreadful quarter, after such a bad year, is that we should consider what the best things to do with this business are in the interest of our shareholders. I'm not going to tell you this morning we've made a choice because we haven't. We're really examining what went wrong, how to fix it and how to use that base to enhance increased shareholder value in the best way possible.

With all due respect, Chris, we have seen multiple restructuring and management changes. You were commenting about Steve's departure. And if you go back and look at the past press releases, we have seen a lot of change at the top. I think the only thing consistent at Aspen is you. And I am curious, why are you confident that this time around it should be different? And why should shareholders trust you?

So there's no question we are sad and we are disappointed by what happened in 2017. We did, of course, talk to you and our investors about the very many steps over the last several years, the reposition in insurance. And we are shocked by the losses in those 2 short-tail lines. If I isolate the issues, U.S. property and downstream Energy. U.S. property, we talked in the past about a small book focused on some poor quality risks. We spotted it. We closed it down last May. There's a lot of unearned premiums. There's a lot of risk to run off. That's running off. It will be run off by beginning of the summer this year. We put some reinsurance on it and that particular cause of downside (inaudible) volatility should not be recurring. In addition, we've reviewed the use of capital -- use of cat capital in this line of business. And we have found that in some cases, it's simply not the optimal use. We have therefore taken steps to reposition our book of property in the U.S. away from the major accounts that carry a tremendous amount of cat accumulation risk. Those 2 things and then the 50% quota share we put on the line of business do 2 things: one, they make that business potentially profitable, which is an (inaudible) thing; and two, the downside volatility is much, much reduced. So that's one of the issues that I think is very different in '18 as we go through this year than it was last year. And I'd have to confess there was some failings in the underwriting in U.S. property. But you can't just stand around saying, "Sorry," you have to fix them. That's what we're doing. The other area of material underperformance is another short-tail line is Energy, Property, downstream Energy. That is a book that -- I mentioned on the call, Tim Kania joined us around about just over 2 years ago. There were some 3-year deals in that book. There were some risks of a type that we would no longer write. There were some risks with insufficient risk management. You can't turn around quickly. And that said, I think Tim and his guys are doing everything possible as speedy as they can, but you do have exposure sitting in that. That shouldn't have run off so badly, but then there's a backdrop of an extraordinary year for downstream Energy losses. As I said, I'm not sure whether the industry loss ratio globally [flat at 200%] in 2017 or whether that's just the sort of Lloyd's and London market part of it. It's very hard to get the data. But whatever it is, it's close to 200%. And unfortunately, even in a repositioned book, we got our share of that. We could spend a lot of time on this important question, Amit. But those are the 2 things, as we look at our numbers, which were not understood 12 months ago, 18 months ago. They -- the delayed potential impact of those in terms of the downward impact on results and which are different going forward. So if you ask why I believe, I'd point you to those 2 things in particular. There is more detail, but I'm sure you got further questions.

Yes. Just maybe 1 or 2 more and then I'll stop. And the previous answer, again, I'm not sure it added anything to what we already knew, the case you just made. And if you look at the stock price decline versus book value erosion, I think, clearly, the buck has to stop somewhere. And I think the buck stops with you. Moving on, the final question I have is on the P&Ls. If you look at the PML shift shown on Page 23 versus the previous presentation, why haven't the PMLs declined more based on the capital position of the company?

Amit, it's Scott here. I'll take that question. So you will notice that they have declined in terms of our wind exposure. I think the one that you're maybe pulling out is Cal-Quake. Cal-Quake is really largely model driven. It's a change in the RMS models. It's an update from their view of their '16 model to their '17 model. We've incorporated that into our latest numbers there. We've spotted that too, and we're looking at additional reinsurance arrangements to reduce that level of PML down.

And the next question comes from Josh Shanker with Deutsche Bank.

Chris, in your prepared remarks, you talked about changing the large case property book beginning in May of last year, which precedes obviously the events you've had in the second half of the year. What happened in the first half of 2017 to tell you that you were overexposed to losses before you actually had these things come through?

So Josh, there are actually 2 different statements there and you might be conflating them, okay? So on the one hand, the kind of attritional loss -- so the exposure maybe to hail and tornado, comes from a set of primary positions written in the U.S. And while there's a bit of exposure to cat, it's not really hurricane. It's simply attritional loss. And we noticed an uptick in the loss ratio, I want to say, probably toward the end of '16, actually, rather than in the end of '17. Now those things could be random fluctuations as you get in the P&C business or they could tell you there's something else going on. We investigated and we concluded there was something else going. And as I say, I think May last year, we ceased underwriting that type of stuff. But some of it is still in force. So I think that's maybe one part of the answer. The part about the major account properties, these are the big jumbo risks, we actually write them out of Bermuda rather than the U.S. This is a way to sell cat cover. And as you look at how the market is repriced and as you look at how this is controlled, and this is -- this is more from our cat modeling and accumulation modeling people rather than the underwriting performance. It has become clear that, that part of the book is just a poor way to use shareholders capital. Did that answer your question, Josh?

Yes. I was interested in the timing of when you thought you had a problem, which I guess dovetails into my second question. To what extent are the 4Q losses precisely occurring in 4Q? It seems like the problems that you're having are uniquely Aspen problems. We've seen some issues at some other companies, but generally, I -- you're not the biggest player in the market, and you've had a disproportionately high amount of losses. So I'm trying to figure out exactly the number of these events that were -- happened this quarter. Was it possible you could have reserved for some of these things prior to the quarter?

Josh, it's Scott here. I can take some of that. I pointed out that there were $60 million of midsized and attritional losses in the quarter. A large chunk of those was fire and fire-related and cyber. And those incidents occurred during Q4. We did mention a small Surety loss that have been adjusted from earlier in the year. Yes, some of the net is due to the attritional losses that Chris has referred to in that property book that had been earning through. But a significant portion is due to losses that have occurred during Q4.

So it goes back to what I talked about with Amit a moment ago. Property cat, Energy, stuff that was -- as Scott says, primarily losses occurring during Q4. I think in my prepared remarks, I did mention some casualty where we did a bit of repositioning primarily because we shrunk that book. But I don't think there's anything in the book that relates to losses experienced prior to the quarter. It was more of a repositioning cause.

And for the lines that have behaved very well up until this point, even including the losses you took. Do you chalk it up to bad luck? Do you need to reposition those lines where you have 8 years of great track record and 1 quarter has sort of called that into question? How confident are you that maybe this is just a confluence of events that caught you by surprise?

I think lines that are successful -- I mentioned some on the call, Professional Liability, maybe environmental Liability, Crisis Management, Surety. I think those have been with us for a long time. I think they're carefully underwritten. We look if there's anything sort of imminent within the problem. I can't tell you that it's incapable of experiencing downside volatility. Of course, that can happen. But I think they are sensible, well-written books of business that are on the right track. I think the issues really do substantially fall on 2 short-tail property lines. And by the way, as I'd said on the call, those are being enhanced, being very substantially repositioned.

All right. And one final one. How much did you pay for AgriLogic and how much did you sell it for?

Good question, Josh. At the start of 2016 -- you're going to test my memory here, so it's a good question. $53 million is what we paid for it. There were clearly earn-out-related items attached to that. But we have effectively sold it for $68 million.

And the next question comes from Brian Meredith with UBS.

A couple questions here for you, Chris and Scott. I think the first one is, I appreciate what you're doing to kind of mitigate some volatility going forward with reinsurance and stuff. But -- and Scott, thanks for the 60%. But as I think about it going forward, what will the impact be on your return on equity from the additional coverage that you've lost? Because obviously, you've still got the capital, right, on your balance sheet?

You're right, Brian. I think there's a lot of -- it's a very good question and a complex one to answer. What you're trying to do is combine the earnings and the reduction in earnings volatility that you see with the reduced level of capital that you would be required to carry against that. It's -- you would expect going forward, as you derisk, it does take a little return out of the income statement. But on balance, we're trying to do our best in trying to achieve and balance that risk-and-return relationship as best we can.

Okay. And then the second question, I'm just curious, Chris, from -- some of these lines of business, the habitational that you've kind of gotten out of and you kind of mentioned there's a couple of areas. What lessons have you learned, actually, from kind of what happened with this line of business? Was it a breakdown in kind of maybe your systems or distribution, relationships? What do you think it was that caused some of these issues?

That being -- Brian, that's a very, very good, very profound question. This is an organization full of very careful, very thoughtful people, quite expert in what they do. We do pride ourselves in risk management. We should be evaluating -- we are evaluating everything. Everything as we look at our systems, processes, controls, risk management, looks more than satisfactory, looks very good. How then can this happen? And that's a -- it's a question that's difficult to answer because, clearly, if you had the full answer, you'd fix everything. But if I go to what those 2 issues, [first] party issues, we have a review system, quarterly performance review. I think that system, when it looked at its property book, did not go sufficiently granular. At the time, I said to you from 8 years up to 2006 -- that's 2016, sorry. That was a book that had 51% loss ratio. So maybe there's a little element there of confidence. So this just good stuff. Can we do a little more? This isn't going to be very big, this little more. It's a way to look at primary habitational. It's being done by a couple of new underwriting hires, those underwriting hires come and they show, indeed, a very enviable track record. So we say, we won't want to bet the ranch on this. We'll do a little bit of this. And actually, I think in the first year, it ran perfectly satisfactory. Then you see some anomalous losses and you question are they anomalous or not. You see a couple more and yes, you've got a problem. So I don't think there's a grand failing. It's just sometimes things that have worked in the past won't work in the future. They redeploy somewhere else, they won't work. The other area, which is the Energy area, we knew we didn't have the book of business that we liked. When David Cohen and Tim Kania got there, they said, "You guys have got to do a lot of repositioning." We've done that. But we're still unfortunately eating some of the cooking that was done in the kitchen before David and Tim arrived. I think that lesson is learned. It's a complicated question, Brian. And in the context of the earnings call, I don't want to go into too much detail. But I hope you get the flavor of the answer.

Okay, yes, that's great. And then another one quickly here. Looking at your January reinsurance renewals, property cat, an area of kind of big growth. Is that kind of net to your balance sheet? Or is that stuff that's going to your sidecar? What -- what's going into that figure? Or is that rate? How much is that rate, too?

Brian, it's Scott here. Yes, it is rate driven. But of course, we are going to be using our sidecar to lay off some of that into the reinsurance. So it's a fine balance, but that's where we are.

And where were they there -- you thought the best opportunities at 1/1 renewals within that space? Is that property cat reinsurance? Is that retro? Is that -- what did you like in that part of the business?

In advance of the 1/1 renewals, we looked very carefully at retro. Although prices went up a lot in some cases, there is a lack of transparency with retro that makes it harder to price. And we weren't actually satisfied that the greater deals were in retro land, so we didn't do any -- we do a very insignificant amount of retro. It continues to be insignificant. U.S. priced up better than international. And obviously, loss-effected programs carried more increase in rate than those that weren't. We have not changed the balance of the book significantly. I mean, I said in the prepared remarks, we've always had strong and successful relationships with some West Coast clients. And that worked until Q4, actually. But I think the pricing on those either has moved a lot in a couple of cases or will move a lot because some haven't been renewed yet. And I think that's going to be comparably attractive for us. The wind business is increasing in price but, of course, that's a -- it's a question of price, it's a question about capital, it's a question about accumulation control. So we're not looking to do a lot of more of that business. We've got to look at price adequacy. We're also going to look at the right use of capital and the right retained PML. So I think -- beginning of your question, are using a little bit more reinsurance to control that? In some cases, yes, we are. Or Aspen Capital Markets also.

Got you. That's great. And then, just one other question I'm thinking about is, Scott, you said that you wouldn't expect your expense ratio to change that much with respect to kind of what's going on with quota shares and stuff. I would've thought that maybe with your [reference to] seeding more business, you may need to actually take another cut at your G&A expenses over and above what you already put out there because -- just because of the -- the revenue growth is lower. Am I thinking of that incorrectly?

Yes. Now I'd say, it's a good spot, Brian. You know that we're going to see some benefit from the seeding commissions that have earned through, that will earn through and continue to earn through. But obviously, with the effectiveness and efficiency program, the pincer is, is that we're very intensely focused on the OpEx ratio and coming up with as much efficiency as we possibly can to improve the margins.

And just adding to Scott's answer, Brian. I mean, I'd -- looking at what some of the major reinsurers have published recently, average rate increase of maybe less than 1%, but big growth in the volume of reinsurance written. And because they've got different books of exposure, probably [have more product] than we do. But our book of 1/1 in reinsurance, we increased rate adequately by 6%. I think that's [ahead] advantage is pretty good. And we basically were more selective. That means that we nonrenewed about $50 million of business, which is not a small amount. I think our view is quality over quantity when it comes to this stuff. And I think that's the right view in underwriting to preserve, enhance loss ratio. But you're right. You say that does put some more emphasis onto the cost side. And as Scott referred to earlier, the operational effectiveness and efficiency program is running well. We hired a new guide with a lot of operational experience to implement it. He started just last month. Terrific experienced individual, probably suggesting that there's maybe more benefit coming and less costs associated with achieving that benefit there. And when we analyze that a bit further, we'll talk to you about it on the future call.

(Operator Instructions) And the next question comes from Jay Gelb with Barclays.

In light of the challenged 2017 results, the negative outlooks from the rating agencies and companies like Validus being taking out of 1.5x data book and 1.7x tangible. Can you tell us what it would take for the company to undergo a strategic review?

I think the company is very open-minded, Jay. I think that -- we just had a board meeting. We have considered all the angles. We're still considering all the angles. And I can only say that board is as regretful and embarrassed as I am about the results, and we rule nothing out in terms of preserving and creating shareholder value for the future.

And the next question comes from [Mark Cowen] with Guggenheim Partners.

Just -- well, maybe adding a bit to Jay's question in respect to the rating agencies recent negative outlook position on the company. Could you talk about your relationships with your customers? Have you had tough discussions with them, I guess, following these announcements on losses for -- over the fourth quarter and the full year? And have you seen changes in their appetite going forward in respect to your ratings or your excess capital position?

So -- a very interesting question, Mark. I think, first of all, the Moody's news was this week and the S&P news was a few days earlier. It is a negative outlook. And the message from both organizations are closely related, although different. I think both came down to this question. What is wrong with your earnings capability? What's wrong with your insurance underwriting? And if you can't fix that, you're not going to be able to replenish capital. And if you're not going to be able to replenish capital, that's a big problem. So the pistol being pointed is by the agencies, I don't blame them for at all. It's the same as we feel ourselves that those insurance issues need to be cured. If they are cured, then capital begins to rebuild, subject to a lot of other variables. These are negative outlooks, they're not downgrades. They're essentially saying, you need to show us how this ship is moving forward in a better way and a better direction. And we're very, very, very focused on doing just that. If we're successful, the negative outlooks will be removed. And I don't think there's any clients' conversations that will be necessitated then. So far, it's important to note that S&P's -- is a claims [paying] rating, Moody's is a debt rating. Both are relevant, but I think both are received a little bit differently in the minds of different buyers. We have not had any adverse experience. We have not any going backwards with any client relationship. Most of those relationships, certainly in the reinsurance side, are long, deep based on good performance for a long time. And we're not anticipating any serious negative headwinds arising from what's been said so far.

(Operator Instructions) As there is nothing more as of press time, I would like to turn the call back over to management for any closing comments.

Well, there are no closing topics. I simply say to all of you, thanks for listening to our earnings call this morning. Take this away, that this is a management team and a board that feels very bad about what has happened, is absolutely committed to running this business more successfully from this day forward. Thanks. Good morning. Goodbye.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.