Kestrel Group Ltd (KG) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Maiden Holdings fourth-quarter and full year-end 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Noah Fields, Senior Vice President of Investor Relations. Please begin.

Good morning, and thank you for joining us today for Maiden's fourth-quarter and year-end 2016 earnings conference call. Presenting on the call today we have Art Raschbaum, Maiden's Chief Executive Officer; along with Karen Schmitt, our Chief Financial Officer. Also in attendance today is Pat Haveron, President of Maiden Reinsurance, Limited.

Before we begin, I would like to note that the information presented here today contains projections or other forward-looking statements regarding future events or the future financial performance of the Company. These statements are based on current expectations and future events, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from these expectations. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's annual report on Form 10-K and our quarterly reports on Form 10-Q.

Some of our discussions about the Company's performance today will include reference to both non-GAAP financial measures and information that reconciles those measures to GAAP, as well as certain operating metrics, and may be found in our filings with the SEC and in our news release, located on Maiden's Investor Relations website. Please also note that, unless otherwise stated, all references to common share data in today's discussion are on a diluted share basis, and comparative comments will refer to Maiden's results in the fourth quarter of 2016 relative to the corresponding period in 2015. I will now turn the call over to Art.

Thank you, Noah. Good morning. As we indicated in our pre-release communication several weeks ago, in the fourth quarter we have recorded a $120 million reserve charge, reflecting continued adverse development, primarily in the commercial auto line.

As you know, for quite some time, we and others throughout the industry have continued to experience unexpected adverse loss development. In the fourth quarter, we experienced a continued unexpected level of loss development, primarily emanating from the 2011 to 2014 historical underwriting years across Maiden's portfolio. In the Diversified segment, much of this activity was focused on our historical excess of loss portfolio, and to a lesser extent, our pro rata business.

In the AmTrust segment, we experienced adverse development, primarily in their US program segment. As you may know, AmTrust also reported an elevated level of loss development from their program segment (technical difficulty) in the quarter.

Across our portfolio, the fourth-quarter charge reflects both the response to incurred loss development during the quarter, and an overall increase in our reserves in view of the ongoing loss cost volatility. Karen will provide more details on this following my opening remarks. As a result of the reserve charge, Maiden's full-year combined ratio was 103.2%, and our return on equity and operating return on equity were 1.6% and 1.9%, respectively.

Our balance sheet remains strong, with total equity of $1.4 billion, which is up slightly from year-end 2015; but it does reflect the impact of higher interest rates on the market values of our securities, and a lower level of contribution from earnings in 2016. Importantly though, absent the adverse impact of our historical commercial auto-related adverse development, Maiden's performance would have generated underwriting profit, and double-digit ROE and operating ROE for the year.

Despite the challenges of the quarter and full year, we're very pleased with both the continued expansion of our Business in both the Diversified Reinsurance and the AmTrust Reinsurance segments. Gross premium written in the quarter were up 9% from the year prior, reflecting strong business development across Maiden. Absent the charge, we experienced an increase in our earnings run rate, driven by the continued growth of invested assets and increasing portfolio yield. Importantly, the 2015 and 2016 underwriting years reflect profitable underwriting results and a much more contained exposure to commercial auto in the Diversified segment.

Looking further at business development, beginning with the Diversified Reinsurance segment, gross revenue in the quarter was up 8% versus 2015, while full-year revenue in this segment was up 6% from the prior year. It should be noted that the 2016 underwriting activity reflects a significantly reduced commercial auto component. Those limited accounts that we do write today reflect terms and conditions that are responsive to the historical development that we've seen over the last several calendar years.

More broadly, we continue to see incremental growth coming primarily from our US Diversified Reinsurance segment, which reflects both the addition of new client relationships, as well as the expansion of existing client relationships. As you may know, in our US reinsurance business we maintain a niche focus on serving the non-catastrophe needs of regional and specialty insurers.

We've commented in the past that a significant amount of growth comes from the expansion of our existing client relationships, whether that's as the result of their own growth or an increase in our involvement in their programs. This quarter was no exception. While we've taken underwriting actions and non-renewed several accounts for pricing or underwriting reasons, we maintained a renewal retention rate in our treaty portfolio of just over 90% in the fourth quarter during our active January 1 renewal season. As indicated, loss ratios across the portfolio reflect profitable 2015 and 2016 underwriting year results.

In our historical non-commercial auto Diversified loss reserve portfolio, that continues to develop favorably. While US market conditions remain competitive, we continue to believe that our unique client-focused business model, along with our highly efficient balance sheet and operating platform, provide significant differentiators.

Submission activity remained strong throughout the year. While hit ratios were lower than previous years, reflecting continued discipline, we were able to bind a number of new accounts. We just completed our January 1 renewal season activity, and we're pleased with the outcome.

While competition is challenging, in general we found that most clients, on accounts that needed underwriting and rate corrections, were responsive to our revised terms. This is, of course, the nature of the long-term relationships that we've built over many years. We continue to focus on enhancing the value of our client relationships with a growing number of support services and activities that range from regulatory compliance to predictive analytics.

While Karen will provide more specific detail on commercial auto, there has clearly been a marked change in the behavior of claims severity, particularly in the trucking and public auto elements of commercial auto. There are many theories about the causes of this phenomenon, but in our view, loss cost severity increases, particularly in our excess of loss book, have been most significant in high-density geographies like the northeast and California, and litigation settlement values have grown significantly.

While there are definitely behavioral factors such as distracted driving, less experienced drivers, and greater miles driven that play an influencing role, there has been a very pronounced increase in average excess of loss settlement values and frequency. Fortunately, our Diversified portfolio exposure has been significantly reduced over the last several years, after rate strengthening and enhanced risk selection.

In the European-focused business, a lot of good groundwork was established that we believe positions us to carefully build both the capital solutions business and our auto OEM branded insurance products business in 2017 and beyond. In our capital solutions business, we're dealing with an extremely competitive market. We entertained a significant number of opportunities over the course of the year, and bound a smaller number of new accounts. Most importantly, however, we made substantial progress in expanding market awareness of our highly differentiated capital solutions business, which is reflected in the level of submission volume throughout the year.

That said, in a highly competitive marketplace, discipline is essential. There were dozens of opportunities that we entertained, but could ultimately not support. We're confident that, over time, our strategy will serve us well.

We also believe that 2017 could be something of an inflection point, since company solvency capital ratios in Europe will now be publicly disclosed. We've been approached by a number of companies that are beginning to strategise approaches to protect, strengthen, and manage the volatility of their solvency capital ratios, and reinsurance and subordinated debt are both topics of interest.

With regard to our branded auto OEM business, 2016 was a challenging year, given a weakening euro. While we maintained our position with our core OEM clients, year-on-year revenue was down.

On the other hand, 2016 was a very good year for forward business development, as there are a number of new programs that have been in active development, both within the auto OEM space and in the expanding area of retail and financial services branded opportunities. Some of these involve branded auto insurance or payment protection insurance, or PPI.

You may recall that in our branded insurance model, our European-based team works with best-in-class insurers to develop branded consumer insurance products, capturing both fees, as well as creating reinsurance opportunities for our Bermuda underwriting team. The team also works to develop PPI opportunities for our Swedish life insurance company, Maiden LF.

While we hope to see more OEM PPI opportunities during the year, the team has been successful in developing new non-automotive private level PPI opportunities that should begin to ramp up later in 2017. We also expect to entertain a number of auto OEM-related PPI opportunities in 2017.

On balance, we believe that the Diversified segment is positioned for continued, disciplined growth. Our target is to expand our Diversified Reinsurance segment gross writings by 10% in 2017; but importantly, we will not sacrifice profitability for growth.

With regard to the AmTrust segment, we continue to enjoy solid growth. While the pace of increase has moderated since the full impact of the Tower portfolio is fully absorbed, growth continues to reflect incremental M&A activity, along with modest organic growth. In the fourth quarter of 2016, the year-on-year increase in gross writings was 9%, due in large part to the partial commutation we implemented last year, which resulted in an unusually low Q4 premium in 2015.

We've seen responsible underwriting and more moderate to flat growth levels in select business units, geographies, and lines of business. Full-year gross premium writings increased by 6.3%, which is a bit misleading, again, since it also reflects the impact of last year's commutation.

It's important to recognize that not all of AmTrust acquisitions are in the main quota share. There have been instances involving new lines of business or existing excluded activities that Maiden chooses not to participate in.

We believe that AmTrust will continue to react responsibly to increased competition, and absent any M&A subject to our contract, relative growth will moderate. We continue to maintain a very active risk-based audit schedule of claims, underwriting, and accounting activities, and are actively monitoring changes in their risk profile, underwriting philosophy, claim processes and practices, as well as pricing.

With regard to the largest line reinsured, workers' compensation, we see no significant changes in risk profile, as AmTrust remains focused on the lower-severity, smaller commercial accounts. Similar to AmTrust, we also have seen an elevated level of incurred loss development, primarily in their program business from commercial auto and general liability. We do not believe that the AmTrust commercial auto issues are quite analogous to the adverse trends that we've been experiencing in our US Diversified Reinsurance segment. As I've mentioned, for Maiden's Diversified segment, our issues have chiefly come from excess of loss commercial auto, with either trucking or public auto exposures related to the 2011 to 2014 underwriting years.

We're not seeing a similar level of latent development for AmTrust. Their commercial auto portfolio is exposed to a limited level of trucking and public auto risk. We have observed more proactive claim actions with significant increases in paid losses and case reserves, in response to the broader industry trend, in particular in our last two reporting quarters. Within the program business, we did also experience, as I mentioned, some adverse development in the general liability line, and we've responded accordingly. Importantly, despite the adverse development, our AmTrust relationship remained profitable in 2016.

In summary, despite the impact of adverse development and the reserve charge in the quarter, there is significant reason for optimism, as we continue to build our unique Business. Absent the continuing issues with commercial auto, the balance of our underwriting portfolio has performed well. While we cannot ever be certain that loss costs will not drive adverse performance in the future, we believe we have and will continue to be responsive to issues swiftly.

As a result of the level of loss cost volatility we've experienced, we'll continue to maintain relatively conservative booking ratios across Maiden throughout 2017. That said, with only a 1% underwriting margin, we would expect to return to double-digit operating ROEs in the coming year.

While we recognize the concern that such a large reserve charge in the quarter creates, we're committed to restoring underwriting profitability, returning to double-digit operating returns in 2017 and beyond, while carefully and profitably growing our Business. I would like to now turn the call over to our Chief Financial Officer, Karen Schmitt, to review the results in greater detail. Karen?

Thank you, Art, and good morning. As Noah said earlier, unless otherwise stated, all references to common share data are on a diluted share basis, and comparative comments will refer to Maiden's results in the fourth quarter of 2016 relative to the corresponding period in 2015.

We reported a fourth-quarter 2016 net loss attributable to common shareholders of $75 million, or $0.87 per common share, compared with net income of $25 million, or $0.32 per common share. The net operating loss was $70 million, or $0.81 per common share in the fourth quarter, compared with a net operating profit of $26 million, or $0.34 per common share.

Gross premiums written in the fourth quarter of 2016 increased 8.8% to $572 million. The Diversified Reinsurance segment's gross premium written grew 8%, and totaled $157 million. The gross resulted from existing client accounts and revenue from new customers added throughout the year. In the AmTrust Reinsurance segment, gross premiums written were $415 million.

Net premiums written totaled $521 million in the fourth quarter, an increase of 7%. Net premiums earned were $616 million, an increase of 6%. Net premiums earned in the Diversified Reinsurance segment increased 7% to $186 million. The AmTrust Reinsurance segment net premiums earned were $430 million, up 5%.

Net loss and loss adjustment expenses of $523 million were up 32%. The loss ratio of 84.5% was elevated compared to the 67.8% reported in the fourth quarter of 2015, as the fourth quarter of 2016 was impacted by the significant reserve charge, due primarily to commercial auto business, which I will provide more detail on in a moment.

Commission and other acquisition expenses increased 8% to $186 million in the fourth quarter. The expense ratio increased to 32.9% for the fourth quarter, compared to 32.1%, due to changes in the mix between AmTrust and Diversified segment, as well as the Diversified quota share business, which has continued to increase as a percentage of their overall portfolio.

General and administrative expenses for the fourth quarter of 2016 totaled $17 million, an 8% increase. The general and administrative expense ratio was 2.8% in the fourth quarter, compared to 2.7%.

The combined ratio for the fourth quarter of 2017 (sic) totaled 117.4%, compared with 99.9%. In order to provide some visibility to the underlying performance of the current underwriting, if we exclude the fourth-quarter reserve charge related to prior-year development, Maiden's combined ratio for the fourth quarter of 2016 would have been 97.9%. The Diversified Reinsurance segment was 128.3% in the fourth quarter, compared to 103.6%. The Diversified segment combined ratio was negatively impacted by reserve additions of $57 million from commercial auto business. Excluding the fourth-quarter reserve charge, the Diversified Reinsurance combined ratio would have been 98.1%.

The AmTrust segment combined ratio was 108.1% in the fourth quarter, compared to 95.8%, as net adverse development of auto and general liability reserves, primarily related to AmTrust specialty program business unit, reduced profitability of the segment by $52 million. If we exclude the reserve charge in the fourth quarter of 2016, the AmTrust combined ratio would have been 96%.

Additionally, in the fourth quarter we reported $11 million of adverse development in the non-operating Other category, which reflects additional reserves for Maiden's former client, National General Holding Corporation. This charge reflects the results of our evaluation of the remaining outstanding claims during operational claims audits conducted in 2016. We believe we are reaching the end of the portfolio run-off, and this increase is intended to address the balance of remaining claims.

I would now like to provide some additional information regarding the previously announced reserve charge. During the fourth quarter, we became aware of greater-than-anticipated losses relative to our prior expectations, primarily in the commercial auto line of business in both of our active segments. For the Diversified Reinsurance segment, commercial auto incurred losses were $15 million greater than expected, including both excess of loss and quota share contracts. In response to this higher emergence, we booked $57 million of additional loss, as it became clearer that our prior expectations were not sufficient.

In the AmTrust Reinsurance segment, we booked a $52 million reserve charge, primarily related to $10 million greater-than-expected commercial auto and general liability incurred losses in the program business. Similar to our actions in Diversified Reinsurance, in view of the higher level of loss emergence, we increased our provision for this element of the AmTrust reserves. Finally, as mentioned, we took $11 million of charge in the Other category, reflecting the non-operating NGHC run-off business.

As a result of this loss emergence across our underwriting portfolio, the total reserve charge of $120 million was taken in the quarter. We believe we have put these issues behind us, but it is always difficult to make definitive statements about reserves, and this represents our current best estimate. We are working with all of our clients to improve performance of these lines, and have been reducing exposure, re-underwriting, and raising prices as appropriate.

Turning to investments, net investment income for the fourth quarter was $39 million, an 11% increase. For the FY16, net investment income was $146 million, an increase of 11%. Investable assets increased 9% to $5.1 billion, compared to $4.6 billion at December 31, 2015. The average yield on the fixed-income portfolio, excluding cash, is 3.3%, with an average duration of 5.07 years.

The new money yield on the $588 million of investments purchased during the fourth quarter was 3.36%, with an average duration of 6.57 years. That said, we expect our new money duration to moderate in future quarters.

During the quarter, our focus remained on purchasing high-quality, investment-grade, fixed-income securities, and putting more cash to work as rates increased. Including cash, the average duration is 4.9 years, versus an average duration of liabilities of 3.8 years.

We continue to target a portfolio duration of assets to be reasonably close to the duration of our liabilities; however, this difference may change from quarter to quarter depending upon the level of cash on the balance sheet at the end of the quarter. With our strong operating cash flow and very limited exposure to natural catastrophes, our liquidity risk is relatively modest.

Operating cash flow was $144 million during the quarter. Our cash and cash equivalent position fell by $284 million to $150 million as of December 31, 2016, compared to $434 million at September 30, 2016, due to active investment activity during the quarter.

We regularly evaluate our capital levels to ensure we have the most efficient and secure capital structure available to us. While the mark-to-market impact on our fixed-income portfolio was significant during the quarter, our unrealized gain position is stronger than at December 31, 2015, and our capital level remains strong.

Shareholders' equity was $1.4 billion, up 1% compared to December 31, 2015. Common equity at the end of 2016 was $1 billion, an increase of 21% compared to year-end 2015, as common equity increased following the conversion of Maiden's mandatory convertible preference shares on September 15. Book value per common share was $12.12 at December 31, or 3% higher than December 31 of 2015. Last week, our Board recognized our continued earnings power through the declaration of a $0.15 per common share quarterly cash dividend.

As I've mentioned previously, we have two securities available to be called this year, which we hope to replace at lower cost. We have $100 million of 8% senior notes eligible to be called, and later in the year there are $150 million of 8.25% preference shares available to be called. If we deem it appropriate to call these securities depending upon capital requirements and market conditions, we will notify the market as soon as appropriate.

On a final note, while we expect to file our 10-K on a timely basis, there are a number of audit procedures still under way; and if necessary, we could seek an extension should the audit not be completed before the filing deadline. Should that be the case, we will, of course, inform the market as appropriate. I will now turn the call over to Art for some additional comments.

Thank you, Karen. As we think about 2017, discipline will be key to restoring profitability across our underwriting platform. The landscape for winning and retaining business remains highly competitive. In the US, competition remains intense, with Maiden generally able to achieve its required rate with clients.

In Europe, competition is severe, with many reinsurers focused on protecting their market share. There remains an overabundance of capital available to the global insurance markets, with demand being outstripped by capital growth.

With regard to changes in the US tax code under discussion, there will be some level of uncertainty throughout the year. It's at this point premature to make any definitive estimates of what, if any, impact this will have on Maiden. At this point, we do not believe the proposed changes will significantly impact our business model, but we'll be responsive to any potential impact to our cost structure.

We enter 2017 with the primary objective of strengthening our operating performance through improved underwriting, invested asset growth, and improving yields in our fixed-income portfolio. As Karen mentioned earlier, we have a great opportunity to lower our cost of capital. Our most recent underwriting year performance is solidly profitable.

From a business development standpoint, we're focused on the disciplined expansion of our Diversified business, both in the US and Europe. Our AmTrust relationship remains strong and profitable, despite some adverse development in the quarter. Absent significant acquisition activity, we expect favorable but more moderate growth in 2017, as they maintain discipline.

Across Maiden, our focus is on returning to delivering double-digit operating returns on equity, producing underwriting profit, increasing earnings and book value, and carefully expanding our underwriting portfolio. We will not sacrifice profitability for growth, but we do believe that our highly differentiated business model provides a unique strategic platform that is focused on delivering exceptional value to our regional and specialty insurer clients, leveraging our scale and our highly efficient business infrastructure, and maintaining our market specialist orientation position us for continued disciplined growth.

This concludes our prepared remarks. Operator, could you please open the lines for Q&A?

(Operator Instructions)

Randy Binner, FBR

Good morning, Randy.

Hi, good morning, Art, thanks. Picking up on the end of the commentary there, there's a lot of good details, but Karen did you mention something about the audit being ongoing and a potential delay? I didn't know if I heard that right as it relates to the 10-K, or did I not hear that right?

Yes, what I said was that we still have a number of procedures under way. If we need to seek an extension, we'll let you know. As you know, it's due tomorrow. We're hoping to conclude it; we've got a full-court press. But as of this moment, we are not concluded.

At this point, we expect to conclude it.

Okay. What's the nature of those procedures?

I think one of the challenges this year in terms of process is that with the reserve transaction that we took several weeks ago when we announced, that put us a little bit behind in terms of the whole process. Our auditors have been responsive in working alongside, and working with us to conclude the audit, but it's delayed it a little bit in terms of where we've been at the same point, historically. We're a little bit behind that right now.

Thanks for that. On the calls in 2017, has the market -- you're looking at basically eight handles right now. On what you're paying, is the market still materially better for fixed-income securities that you could swap into? Can you give us a little color on what we can expect there, because that -- in the past, you've been able to improve your balance sheet to the benefit of the income statement. It's not like the old 14% prefs, but still it seems like you could do better. Can you give us any color on what you can do there?

We definitely expect that we'll be able to do better. We'll be looking -- we've had some initial conversations; we'll be looking to do something with those securities later in the year, we expect.

I think it's fair to say that in terms of market outlook and some of the feedback we've been receiving from bankers, it's actually been quite positive. I don't think we've lost a lot of ground. I think spreads have narrowed a bit. The commentary from one of our bankers has been that they don't expect material changes on that in the near future.

We're cautiously optimistic. We won't know until we do it, but we certainly expect sizable improvement in our cost of capital from both of these transactions.

Yes, and there hasn't been any -- with A.M. Best, there has not been a shift post the reserve charge, is that correct?

They have not made any commentary about the reserve charge. We always communicate with our rating agencies in advance, and we're trying to be as responsive as we can to them.

I won't speak for them, but we've had good, constructive discussions. I think there's an acceptance that this is a line of business that's been affecting a lot of companies, and I think a recognition that the action is appropriate.

I'm going to sneak one more in; I'm sure the other guys have questions. The $11.5 reserve edition in the run-off [nachen] segment, is that commercial auto related? I think the answer -- I would be surprised if it is -- or is that just latent BI claims on auto accidents that have persisted?

Yes Randy. What we've done -- as you know, in the past we've had a little bit of movement there. This was about a $1 billion portfolio of business that we assumed over that period of time. This last year, we wanted to get a definitive sense of how the tail -- the last dollars of the remaining claims, where we think there's greatest volatility. Historically, that's the case -- last dollars are the most unpredictable.

We had our claim professional from our Bermuda platform out; great cooperation from NGHC. We looked at largely the universe of claims that we felt could influence loss cost, and we made a ground-up evaluation of what that value is. That's what this number reflects.

We feel we've got it behind us. Could there be a little bit of noise? I suppose there could; but we've tried to be responsive and bring this to an end.

Mostly personal auto though, the subject matter risk?

They have a commercial -- as you know, they have a commercial auto book, Randy, that is very low-vol; it's not heavy trucking. It's more business auto. Some element of their portfolio includes that, but I wouldn't say that's the driver of this additional loss activity. I think it's basically large BI claims that are in the tail.

Yes, right. Okay, thanks a lot.

You're welcome. Thank you.

Ken Billingsley, Compass Point.

Good morning, Ken.

Good morning. I wanted to follow up on -- these are related to the reserve charge, how it impacts your number. The first one is I know you announced on the FSI portion that it relates to commercial auto and GL. They also mentioned that in the special programs there was a workers' comp piece in there.

Does that have an impact on you? Is that lines of businesses that you had excluded? If you could just clarify, I believe you don't include non-admitted business that they write?

Yes, thanks Ken. We did not take a reserve charge for workers' comp; it really was related to auto and general liability. When they separate out their program versus their non-program, it's possible that a piece of workers' comp developed differently than the rest.

But when we look at our overall workers' comp from AmTrust it was performing very well. In fact, we're pretty happy with where we are with that business, particularly as California continues to improve. The reserve charge that we took was really related more to the program auto and GL.

As you know, we do our own independent analysis. We have an outside actuary that does an independent analysis, as well. We don't try to reconcile back to what their view of ultimate.

The other important point is, in terms of the net reserve movement it could be influenced in their business by other offsetting elements, or elements of run-off portfolios they've acquired that we don't participate on. It's a lot of -- it's hard to foot point-to-point, but I think for our purposes, the action was dominantly around commercial auto and GL.

Okay, and then when I look at the Diversified RE segment, I was looking at the accident year fourth quarter of 2016 versus 2015. It looks like on an accident year it's running even better year over year.

My question stems around -- and I believe, and maybe I read this wrong, but on the reserve charge it also included some fourth-quarter adjustments, as well -- in the $120 million. Specifically, we're talking more about the $57 million for Diversified RE. How much of that $57 million is 2016, and specifically fourth-quarter adjustments that you identified?

Yes, the Diversified charge of $57 million was for really underwriting years, 2015 and prior. The 2016 year is holding up, it's largely at price, but early indications are that the pricing's holding. Actually, 2015 has really been pretty good.

There are some areas and some lines of business where 2015 moved a little bit. While the total was 2015 and prior, the vast majority of it was really 2012 through 2014. Earlier in the year, some of the development that we took, we had 2011 was causing more of a problem, but that settled down a little in the fourth quarter. For Diversified, 2012 through 2014 was the majority of it; a little bit in 2011, a little bit in 2015, and 2016 largely holding at this point.

The other point of that, Ken, I think I mentioned earlier in my prepared remarks -- the other excess lines are actually continuing to develop well, so we've had good performance there. We're always being skeptics in terms of whether that performance could also be -- find us faced with latency, but we've done a lot of aggressive audit activity on that. Anything could happen, but as it stands today we feel pretty good about the margins that we generate in that business, and continue to generate.

No current-year adjustments of significance then? I hear what you're saying about 2016 is holding up well, but that would infer that there aren't any current-year adjustments from prior quarters within the year?

Not a current adjustment. We have been booking commercial auto higher during 2016. We did not adjust the prior quarters for 2016. We just started them higher.

Last question, to follow-up on talking about the filing of the 10-K, we saw that AmTrust and NGHC both already reported they're going to file to delay this. Does their delay have any impact on your reason you guys would be delaying?

Our view is that we're -- it's the mechanical process of completing the audit and the fact that we started a little bit late. I would say ours is specific to Maiden and its completion. The information is being reviewed and evaluated by our outside auditor, but we wouldn't suggest that there's a -- that our situation is the same as either of them in that respect.

But you're not -- it's not something you're waiting on them for, it's all your own process at this point?

It's our process.

Okay, thank you very much.

[Meyer Schultz], KBW.

Thanks, good morning. Art, when you look back, is there anything different about the current commercial auto cycles compared to past examples of lines of business under-performing? In other words, you talked about shrinking your exposure, but it sounds like rates are getting better, terms and conditions are getting better. At what point in time does this become an attractive line?

It's a great question. As I think we may have commented before, we don't shy away from it if we can get the terms and conditions we need. But unfortunately, we don't necessarily see that -- we could be out of sync with the rest of the market and they're seeing opportunities to write-in rates lower than us. That's what makes it a competitive business.

But from our perspective, I wouldn't say there is dramatic wholesale opportunity to expand our auto book. We're entertaining opportunities and we're moving forward.

As far as the preface of your question in terms of this line of business, in our history -- and this predates Maiden, but the old GMAC RE platform -- we've never seen a line of business that performed this adversely, and this dramatically in terms of expanded latency. You can assess things and you can say well, obviously whenever you see a development that exceeds your expectation you say you got pricing wrong; but what's happening here is the loss development characteristics that were somewhat anticipated have completely been invalidated.

We're chasing the tail, if you will, and trying to get it right. I think some of our actions at year end reflect the fact that obviously if we continue to see incurred development we've got to react. We want to be responsive to that in the most significant way that we can, and be responsible.

I don't think commercial auto -- I think there are elements of the way commercial auto has been historically priced that are flawed, particularly in the environment we're in now, where you have a lot of variability in miles driven. You've got a lot of environmental factors that aren't easily discerned in the traditional underwriting process. What we've been trying to do is work with clients to re-think the way that commercial auto is underwritten, priced, and monitored.

I think there is an opportunity for much more active loss control support that we and our clients provide their insureds. There has been telematic information that's been maintained by a lot of commercial auto firms, but they aren't necessarily being used in tandem with the insured to create a better risk profile. I think that's where an opportunity is for us. That's a long-winded answer; I hope that's responsive.

No, it is. It's very thorough, I appreciate it. A follow-up question on that is to the extent that there are environmental factors -- maybe the settlement trends are something to pick on -- how worried should we be about some of these environmental factors migrating to other lines of business, if it's stemmed by let's say litigation or something like that?

I think that's a great question. I'm not sure what the reason that commercial auto has been an area of focus, but there was a recent [CONNING] study that you've probably read that also tended to point to the litigation trend, and how it has affected settlement values in commercial auto. I think there's always a risk of that, depending what areas of focus the plaintiff legal side is focused on it can have a pronounced effect on a line of business.

To date, we're not seeing it emerge in other lines, but we're ever-mindful of it. A lot of our audit activity and our evaluation activity with clients is focused on trying to identify any changes in trend.

Okay, and then final question, maybe with regard to Karen's comments about best estimates. Should there be maybe an increased margin, just to reflect the uncertainty around these trends?

Well, certainly in commercial auto, absolutely. Our pricing, as we're putting forth today, reflects the fact that there's volatility in that line of business. We should react on a risk-adjusted basis to ensure that our margins are strong.

Obviously our expected loss costs are calculating higher than they would have two or three years ago, because of what we've seen in terms of latency. But beyond that, we need to make sure, particularly on excess auto, that we're getting stronger underwriting margins because of that volatility.

Okay, but is there a need for margin in workers' comp in GL?

At this point, as we see it, again if you look at the totality of the long-term relationship that we've had with AmTrust, this has a very pronounced effect on the quarter, but in the aggregate, our combined ratios are still well within tolerance. We view the year-end effect of this as certainly something that certainly has an impact on our earnings in the quarter; but on a long-term basis, I think it just reflects one, the fact that we're reacting to the adverse as effectively as we can, but nothing that necessarily invalidates our view about the profitability of the business going forward, and the expected margins. Our margins on the AmTrust quota share have been reasonably strong for quite some time.

We spend a fair amount of time looking at individual pricing, doing spot audits of different areas of the business. In general, I think we've been comfortable that the reaction to competitive markets, they have a lot of opportunities because of their knowledge of the market place that they focus on, of really turning the dial down in areas where there's hyper-competition, and leveraging areas where they think they have a better advantage. They do have some substantial strategic advantages in their operating platform.

Okay. Thank you, that's very helpful.

Matt Carletti, JMP Securities.

Hi, thanks, good morning. A lot of ground has been covered. All I got left is a numbers question, so it's probably for Karen. Are you able to give us net reserves by what's behind the Diversified business, behind AmTrust, and behind others? I'm trying another metric to put the incurred charges in relative terms?

Sure, so let me see if I understand your question. Are you talking about the relative reserves between Diversified and AmTrust? I'm not sure--

Yes, or the -- I know you guys build account by account, individual account P&Ls and so forth. What is the net reserves supporting the diversified business today, or at year end, and what is the net reserve supporting AmTrust today, and what are the net reserves behind the run-off other business today?

I'm not sure. We don't typically disclose that level of detail, and I'm not sure how meaningful it would be, quite honestly, unless you had a comparison point for it. But I would say that obviously for specific to commercial auto, we definitely have a much stronger reserve position than we did a year ago. But in the totality, our reserves reflect Management's best estimate of the ultimate exposure.

Right. Are you able to disclose the reserves that you have as a total Company set aside for the commercial auto book?

Yes, commercial auto represents about 11% of total reserve.

About $3 billion of total reserves, roughly it's about 11%.

Okay, great. That's helpful. All right, thank you very much, and best of luck in 2017.

Thank you. At this time, I would like to turn the call back over to Noah Fields for closing remarks.

Thanks, everyone, for joining us today. We look forward to speaking with you in the future. Have a great day. That concludes our call.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.