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Axis Capital Holdings Ltd  (NYSE:AXS)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Fourth Quarter 2018 AXIS Capital Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Mr. Matt Rohrmann, Head of Investor Relations. Please go ahead.

Matthew Rohrmann -- Global Head of Investor Relations

Thank you, operator. 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 fourth quarter and period and year ended at December 31, 2018. Our earnings press release and financial supplement were issued yesterday evening after the market closed. If you'd like copies, please visit the Investor Information section of our website at axiscapital.com. We set aside an hour for today's call, which is also available as an audio webcast through the investor 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 (412) 317-0088. The conference code for both replay dial-in numbers is 1012797.

With me on today's call are Albert Benchimol, our President and CEO; and Pete Vogt, our CFO.

Before I turn the call over to Albert, I will remind everyone that the statements made during this call, including the question-and-answer session, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set forth in AXIS's most recent report on Form 10-K, as well as the additional risks identified in the cautionary note regarding forward-looking statements in our earnings press release issued yesterday evening.

We undertake no obligation to update or revise publicly any forward-looking statements. In addition, this presentation may contain non-GAAP financial measures. Reconciliations are included in our earnings press release and financial supplement, which can be found in the Investor Information section of our website, which is located at axiscapital.com.

With that, I'd like to turn the call over to Albert.

Albert A. Benchimol -- President and Chief Executive Officer

Thank you, Matt, and good morning, everyone. And thank you for joining us to review our fourth quarter and year-end results. I'll begin by saying that this was a tough quarter. However, notwithstanding fourth quarter results that were clearly unsatisfactory, our overall performance for the year has continued to show progress on a multi-year trend of lower ex-cat combined ratios even as we've changed the mix of business to include less cat exposure and in a declining market.

Overall, 2018 was undeniably a year where we took steps forward both in terms of underwriting profitability and organizational progress. Let's first discuss our performance. As noted in our earnings announcement, our fourth quarter results were negatively impacted by high attritional property loss and cat activity. Based on our research and conversations with our clients and brokers, we do believe that the higher property loss frequency is broadly based across our industry and that the fourth quarter experience is more of an unusual quarter than it is a trend.

Separately, if you step back and look at our results over the past year, you'll see that AXIS delivered an improvement in full year underwriting performance both with and without cats. We feel the best way to review progress from period-to-period is on an ex-PGAAP basis and also on an ex-cat basis. So on that basis ex-PGAAP, ex-cat the full year calendar year combined ratio improved to 97.6% in 2018 from 98.5% in 2017, with a full two point reduction in the ex-cat loss ratio.

We also looked at the pro forma combined results as of the merger were effective on January 1, 2017 to do two full years of comparison, and on that basis the full year ex-PGAAP, ex-cat calendar year combined ratio improved from a pro forma 99.5% in 2017 to an actual 97.6% in 2018 with a 1.4 point reduction in the ex-cat loss ratio. Reflecting the significant actions that we took over the past year to strengthen our portfolio and in our efforts in that regard have only accelerated in the past few months.

As we've discussed in past earnings calls, beyond the underwriting actions we've also made tangible progress in furthering our strategy and in strengthening our business. A highlight for the year was a successful integration of Novae into our London operations to make us a top 10 insurer at Lloyd's. The market has enthusiastically welcomed our new status and we've seen significant new opportunities as a result of our enhanced relevance even as we've taken additional portfolio actions that have not yet been reflected in our results.

You'll also recall that during the year we launched a transformation program to allow us to better leverage data and analytics to make us more agile and better enable us to take advantage of opportunities in the market. We announce that between the synergies relating to the Novae integration and our transformation, we were targeting $100 million in net savings off the 2017 expense levels by the end of 2020. I'm pleased to say that as a fourth quarter of 2018, we've already achieved $70 million in annualized savings on a run rate basis.

Again, to be clear our fourth quarter results are unsatisfactory and we take ownership of that. But our performance of the quarter should not diminish the significant progress that was made in '18 to improve our business and strengthen our leadership position. Last year was all about laying the groundwork and furthering progress in the construction of our portfolio. This year, it's all about implementation and delivering on the expected benefits of our work and we feel that we have the wind at our backs.

Later in the call, I'll speak to some of the trends that we're seeing in the market. But first, let's turn to Pete who walk us through the results in more detail. Pete?

Peter Vogt -- Chief Financial Officer

Thank you, Albert, and good morning, everyone. During the quarter we incurred a net loss of $198 million and an operating loss of $148 million. The loss was largely attributable to cat losses associated with Hurricane Michael and the California Wildfires as well as an increase in our ex-cat and weather loss ratio. These negative factors were partially offset by continued favourable prior year reserve development and strong investment income.

Looking at the consolidated income statement for the quarter, the current combined ratio was 117.3%, an increase of 16.6 points from the fourth quarter of 2017. Year over year increase in the combined ratio is essentially driven by two areas. First, 11 point increase in the cat and weather related losses, primarily impacted by Hurricane Michael and the California Wildfires, and over 2.5 point higher ex-cat and weather loss ratio substantially caused by the reinsurance segment, where we had both higher property per risk losses and a continuing change in mix other reinsurance book to less cat business and more casualty business combining to increase the loss ratio.

The cat and weather related losses in the quarter totaled $269 million, net of reinsurance and reinstatement premiums. The insurance segment total $92 million in cat and weather-related losses and the insurance segment totaled $177 million. The losses from Michael and the wildfires combined to come in at the midpoint of our previously provided guidance. The quarterly G&A ratio was 11.3%. This was a decrease of 0.7 (ph) of a point compared to the same period in the prior year. The decline was driven by ongoing actions that we have previously communicated to you. Notably in the quarter, the Novae integration generated run rate savings of $10 million and our transformation initiative produced an additional $7 million of savings.

There were some onetime expense benefits in the quarter that lowered the G&A ratio and a normalized G&A expense ratio would be 12.8%. This compares to a normalized G&A ratio of approximately 14.1% for the fourth quarter of 2017, a decrease of 1.3 points year over year. Fee income from strategic capital partners with $6 million in this quarter compared to $8 million in the prior year quarter. This quarter was negatively impacted as we wrote down profit commissions of about $6.5 million due to the impact of the cat losses. This important part of our business continues to grow well with year-to-date fees aggregating $48 million, up from $36 million last year.

With a full calendar year, the company continued to show progress with an ex-cat and weather combined ratio adjusted for PGAAP of 97.6%. The ex-cat and weather loss ratio was down two points, The acquisition ratio was essentially flat after adjusting for PGAAP and one timers. And we generated a solid improvement in G&A expense ratio as a Novae integration delivered $38 million in full year savings and the transformation effort has delivered savings over the last two quarters.

Let's move on to the underwriting results of both insurance and reinsurance segments. Let's begin with insurance, the insurance segment reporting growth in gross premiums written of $66 million in the quarter. Due to an increase in credit and political risk, liability and professional lines partially offset by declines due to the Novae discontinued lines. The growth in insurance net premiums written was reflective of the growth in the gross premiums written.

For the quarter, the insurance combined ratio was 106.3%, which was up year-over-year by 12.4 points. Year-over-year increase in the combined ratio is largely driven by an almost 10-point increase in the cat and weather related losses. The quarter included 15.6 points of cat and weather related losses, pre-tax cat weather and related losses were $92 million caused by Hurricane Michael, $62 million, the California wildfires, $27 million and other events in the quarter totaling $3 million.This compared to $34 million in the same period of 2017.

The ex-cat and weather loss ratio ticked up slightly in the quarter compared to the same period last year. The small year-over-year increase is due to premium adjustments in the quarter. Otherwise, on a normalized basis, the ratio is essentially flat. Nevertheless, this is still not a good quarter -- not as good a quarter as the prior quarter. This quarter's loss ratio reflects about four points of pressure coming from our property book as the rest of the portfolio is performing well.

Albert noted that we took a number of positive actions to improve the portfolio during the year. However, it does take time for the affected business to run off the books. We estimate that fully two points of the pressure we saw from the property in this quarter and in year-to-date came from business placed in runoff during 2017 and 2018. It is these reasons that we remain confident in the book as we head into 2019.

As discussed in prior quarters, we believe the best way to look at the acquisition cost ratio is adjusted for PGAAP. The insurance segment acquisition cost ratio on an ex-PGAAP basis was 21.2%, compared to 20.1% on an ex-PGAAP basis in the prior year, an increase of slightly over a point. The increase was entirely driven by premium adjustments, increasing the fourth quarter 2017 ratio, without that adjustment in the prior period the ex-PGAAP ratio would be flat year-over-year.

For the full year in 2018, insurance improved ex-cat and weather loss ratio by 2.8 points. Insurance experienced improvement in both the legacy access and legacy Novae books, where we saw progress across most lines of business and had improvement in its G&A ratio as the Novae integrations started to deliver savings as I noted earlier. We expect that the cancelled -- as the cancelled business runs off as we earn in the better price business written in 2018, the underwriting performance should improve in 2019.

Let's move on to reinsurance, the reinsurance segment reported an increase in gross premiums written of $10 million in the fourth quarter. The increase is driven by reinstatement premiums in the quarter attributable to the fourth quarter cat losses, as well as new A&H business. These increases to a partially offset by premium adjustments in the property division as well as the restructuring of a significant treaty in our pro lines division.

Reinsurance net premiums written decreased by $38 million compared to the same period 2017. The decrease in net premiums written reflected the increase in seated premiums in cat, A&H, credit and surety and liability, partially offset by an increase in gross premiums written in the quarter. The reported current quarter combined ratio is 124%, which was up year-over-year by 22 points. The year-over-year increase in the combined ratio is largely driven by a 12.5 point increase in the cat and weather related losses as well as almost a five point increase in the ex-cat and weather loss ratio.

The quarter included 28.8 points of cat and weather related losses, pre-tax cat and weather related losses were $177 million, primarily attributable to Hurricane Michael, $57 million, the California Wildfires, $102 million, and other events in the quarter totaling $18 million. This compared to $99 million in the same period in 2017. The reinsurance segment almost 5 point uptick in the ex-cat and weather loss ratio substantially drove the year-over-year increase in the group's ex-cat and weather loss ratio.

The rise in the loss ratio was driven by a few items, including higher mid-sized property loss experience. Notably, we increased our estimate for the Colombian dam loss and this impacted the loss ratio by about a point. We experienced some pressure on the property per risk book from a number of sources. There is no single event and this impacted the book by about almost two points. The year-over-year quarter comparison is affected by about a point due to a favorable claim outcome reported in the fourth quarter of 2017.

Lastly, our current book has less cap premium and more long tail casualty. This mix change drove almost 1.5 point increase in the loss ratio year-over-year. The reinsurance segment acquisition cost ratio was 24.1%, essentially flat to the prior year when adjusting for PGAAP. In 2018, as with insurance, the reinsurance segment saw progress with an improvement of almost a point in its ex-cat and weather loss ratio across both the legacy Axis and Novae books and it had an improvement in its G&A ratio of two-tenths of a point.

Moving on to investments, of 100 -- net investment income in the quarter was a $113 million, an increase from $101 million in the fourth quarter of 2017. Driven by growth in income from fixed maturity securities, attributable to a rise in U.S treasury rates. This was partially offset by a decrease in income from the hedge funds due to poor equity market performance in the fourth quarter.

Our current book yield is 3.1% and our new money yield is 3.6%. The duration of our portfolio is slightly less than three years. The 50 basis point spread between the current book yield and new money rates provides an ongoing opportunity for increased investment income in the future as our asset portfolio rolls over.

Diluted book value per share decreased by 5.3% in the quarter to $49.93, principally driven by operating results. Net realized and unrealized losses on investments and common dividends. And lastly, one additional item to note. With regard to the acquisition of Novae, in the quarter we've recognized amortization of Novae of $23 million as well as approximately $16 million or 1.3 points of DAC benefit at the segment level.

The net drag on operating income from the VOBA DAC adjustment was $9 million after tax or approximately $0.11 per share in the quarter. For the year, we experienced a drag on operating income of $48 million after tax from the VOBA DAC adjustment. The good news is the VOBA is almost gone and in 2019 we expect approximately only about an $8 million net drag on operating income.

That summarizes our fourth quarter results and now I'll turn the call back over to Albert.

Albert A. Benchimol -- President and Chief Executive Officer

Thanks, Pete. And now let's spend a few minutes discussing market trends and then we'll open the call for questions. The bottom line is that the fourth quarter exhibited an acceleration of the positive pricing trends we observed during the year. And everything we see points to a continuation of market discipline in 2019. Within our insurance segment, the fourth quarter was the strongest of the year with an average rate increase of 5%. This compared to average increases of 4% in the prior three quarters, bringing the average for the full year to about 4.3%.

December was even stronger with average increases in excess of 6%. From what we observed, we believe our average rate increases are ahead of the market, a belief that is supported by our retention rates that are almost 10 points lower than last year. In our U.S. Division, average rate increases were plus 7% for the quarter, rising to nearly 9% in December. The rate was led by U.S. excess casualty and E&S property, which both finished the year at about 11% for the quarter and the year-to-date. U.S. programs generated rate increases at 3% for the quarter and 4% for the year. While our primary casualty book rate was up 3% in the quarter and 5% for the year. Within our North American professional lines division, average rate was relatively stable at about 1% for the quarter and the year. Although, here too we observed an acceleration in December. Within that average there is a fair amount of variance.

Primary business was strongest at about 4%, while excess layers averaged over 2%. Our profitable small E&O portfolio was essentially flat for the year. In our London-based international insurance division pricing was strong in the fourth quarter with average rates up 8% bringing the full year average up to 4%. After some firm action by Lloyd's in the year, we saw the closure of eight syndicates and over 70 different announcements of exits or significant reductions in various lines from market participants.

This newfound discipline is having a tangible impact on risk appetite and pricing and are several anecdotes of price increases in the plus 100% to 300% range in the market. Of all the major lines, only terrorism and political and credit risk showed average price reductions in the quarter. Even perennial laggards such as aviation delivered 10% plus increases. Overall, across our entire insurance segment, 87% of the business renewed at flat or better in the quarter.

Let's now turn to reinsurance where we just completed our January 1 renewal season with more than 50% of our business up for renewal at that date. Our team achieved bottom line growth and modest improvements in the price technical ratio. Consistent with industry trends, we saw price increases and loss affected areas, but overall the market was generally flat. Conditions vary greatly by line and geography. In EMEA, Europe, Middle East and Africa, the market is still quite competitive. Rates were generally flat, loss affected non-cat property was modestly positive in the low single digit and liability was strongest as pricing reflected anticipated loss trends.

In our global specialty markets business, rates were again flat on average with the exception of engineering in light of recent poor results and lower Lloyd's capacity, with up to double digit increases for underperforming accounts. In North America, there was more price action, perhaps reflective of a greater dissatisfaction with recent results and loss trends. There were very little price reductions and price risks and pricing responded to loss activity. I would note that professional lines exhibited the strongest price action in the plus 5% to plus 10% range, but in some cases that was still not enough and we reduced exposures where warranted.

Global cat pricing was a disappointment to us at January 1. Loss exposed accounts received increases anywhere from 10% to 25%, but non-loss affected accounts renewed flat or with reductions in the low single digit range, especially in Europe where capacity was plentiful. Net-net, it could be described as a flat renewal. Generally, across the book ceding commissions were flat, unless the underlying book was not performing adequately. Overall, we achieve modest growth in North America and Asia and reduced our renewing book in Europe and in global specialty markets. We believe we achieved better balance in our book with a modest improvement in the price technical ratio.

Looking forward, we will have the large Asia-Pacific renewals in April and the North American renewals in June and July. Both markets experience significant cat losses recently and we would expect to see stronger price movements in Japan when the flood risks as well as the U.S cat books. While other lines should continue to behave in a manner consistent with January 1 and by that, I mean that reinsurers should share in the improvements that they are seeing in their clients.

Our attitude across both insurance and reinsurance is that most lines of business require more price action for this industry to deliver an adequate return, and we intend to push hard for it. We're not afraid to incur lower retention rates or shrinkage in businesses that are not delivering the right returns. While, it would be imprudent for me to make overly confident statements about the future, our expectation is that the market is gaining momentum in the right direction, as carriers recognize both recent claims and expected loss trends.

We remain confident that we will continue to improve our underwriting results as a business that we canceled our non-renewed runs off our books and the more recent better priced and more balanced business is earned through. AXIS is poised for significant continued progress in 2019 and if we stay true to our strategy and our core priorities, we believe that we are well-positioned to drive meaningfully improve profitability.

And now let's please open the line for questions. Operator?

Questions and Answers:

Operator

(Operator Instructions) The first question is from Elyse Greenspan of Wells Fargo. Please go ahead.

Elyse Greenspan -- Wells Fargo -- Analyst

Hi and good morning. My first question is, going back to some of your comments on property losses and particular in the insurance book. So I think you guys made a comment in introductory remarks pointing to margin improvement in that book in 2019. Can you just say if that's going to be a loss and expense ratio driven or I'm assuming both and then as we think about the programs running off, what type of drag should we think about, that we could potentially see at these property losses remain somewhat elevated in 2019.

Albert A. Benchimol -- President and Chief Executive Officer

Right, so let me start with the background and then Pete, please walk us through the specific numbers. I think that it's important to state that within the insurance book in particular, notwithstanding property losses that did not meet our expectations, the overall results for insurance actually did not deteriorate meaningfully. So most of the deterioration that you saw with us in the quarter really related to the elevated losses that we saw in the reinsurance book and I believe Pete walked us through those specifics.

And with regards to the improvements that we expect to see next year, it's our expectation that you should see improvement both in the loss ratios as well as our G&A ratios as we continue to achieve efficiency. But Pete you want to walk us through some of those specific numbers on the improvements.

Peter Vogt -- Chief Financial Officer

Yes, so Elyse, we should see improvements in both areas. As I said, right now we know that there was two points of pressure associated directly with business that's already been canceled and that was just in the quarter. With regard to that we've taken serious actions year-over-year with regard to what we did in 2018. So I would expect to see an overall improvement just on an ex-PGAAP basis and an ex-cat combined ratio on the loss side of about a -- over -- about a point associated on the entire company just from what we've already canceled on the insurance book. And that does not take into account, I'd say other underwriting actions as well as doesn't take into account the expected higher rates that we got in 2018 starting to earn in 2019.

In addition to that, to expect the G&A ratio, well, I think this quarter was, as I said it was artificially low. I do expect the G&A ratio for insurance to continue to improve as we continue to get more synergies associated with Novae. As I noted there was $38 million actually experienced in 2018, but by the time we got to the end of the year, we expect next year to be more like a $45 million. So an additional $7 million there just on Novae. And our transformation initiatives too will continue to kick in next year as we go toward our goal of saving a net $100 million by 2020.

Albert A. Benchimol -- President and Chief Executive Officer

So, I'll come back to that -- to the important point that, Pete talked about a point of improvement, that's essentially baked in from the business that has been canceled and we have on that non-renewed or canceled business, probably less than $50 million all in a VPR (ph). So there, of course will have some possible drag on that, but fundamentally that book will be off the books and we should see that go away. I really do want to emphasize, however, that we continue to expect that the other changes that we are making on our book both in terms of pricing, portfolio construction and selection, should also drive additional improvements.

Peter Vogt -- Chief Financial Officer

(inaudible) over two points on the insurance segment alone and right about a point for the entire company year-over-year.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. And then maybe following up on Albert's comments in terms of pointing to price, so, it seems like you guys are expecting some more price increases in reinsurance as we get to April and midyear, as you think about the reinsurance environment some of the mix shifts that you guys pointed to a bit more casualty in the fourth quarter had an impact. How should we think about the underlying loss ratio within reinsurance trending in 2019?

Albert A. Benchimol -- President and Chief Executive Officer

Right. So, two comments that I would make is everything that I tell you with regards to what we're seeing on the primary insurance rate changes to the extent that we're participating in quarter shares and as I mentioned by and large, we're not seeing major changes in the ceding commissions, a lot of those improvements will drive through into the reinsurance book also. And in the XOL, we're also responding to losses with pricing increases where necessary. So, we also expect positive trends in the underlying books in the reinsurance part.

The second comment is -- to your point, with regards to the mix of business and it's interesting that the way that this industry captures the ex-cat combined ratio is interesting because it gives full credit to the premium that you collect on the cat line, but it excludes the cat losses. So the more cat business you write, the more attractive your ex-cat loss ratio is. And that's really what's affecting the mix, we are writing less cat on a net basis through this year, my guess is that there will not be a major change of that into 2019. So I would hope that the full mix impact that we saw through the fourth quarter of 2018 is the bigger piece of it. There will continue to be some small impact in 2019, but Elyse, I think it's too small and it'll be lost in the rounding. So I wouldn't model that, I would just note that we expect some, but too small to really to stick out as a driving factor.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thank you. And then one last quick question, you guys have said after -- I believe after January 1 renewal, when you had a sense of the market that you would reevaluate whether you guys would return to buying back some of your stock kind of post Novae integration, et cetera. Given where your stock is trading today, I would assume share repurchase is a bit more attractive. Can you just provide us an update on your views on repurchases for 2019?

Albert A. Benchimol -- President and Chief Executive Officer

I think that's fair. So we've got two countervailing positions that we will be discussing on our upcoming board meeting. The first is that, obviously this was a disappointing quarter and our equity is down given the cat losses and that's something that we need to build back up. On the other hand we've recognized that the price of the stock is very attractive and that is something that we'll need to consider. So we will be considering both issues as we sit down with our board and go through it, but I think given where we are, given the recent losses in the capital, whatever action we would do if any would be limited.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, thank you very much.

Operator

The next question is from Brian Meredith of UBS. Please go ahead.

Brian Meredith -- UBS Investment Bank -- Analyst

Hey thanks. Couple of quick questions here for you. First one, just curious Pete, the G&A ratio that was lower this quarter and lower expenses, is there going to be any kind of reversal of that actually if you look into the next couple of quarters?

Peter Vogt -- Chief Financial Officer

Yes, it definitely will, Brian. As I noticed it was normalized. It was low on a normalized basis. It was close to 13% and I'd say that you'll see it kind of rise to those levels over the next couple of quarters. It's not going to stay down where it was this particular quarter.

Brian Meredith -- UBS Investment Bank -- Analyst

Yes, I guess so it may would it be -- maybe a little bit higher than usual in the next couple quarters to offset that. There was a timing issue on kind of G&A expense recognition.

Peter Vogt -- Chief Financial Officer

Yes. As I've said through the year, I do think that right now where, we are running a little bit low that I would trend the expense ratio to G&A ratio more to that. I'll call it 13.4% for 13.5% level, right around there.

Brian Meredith -- UBS Investment Bank -- Analyst

Okay.

Albert A. Benchimol -- President and Chief Executive Officer

As you might imagine -- Brian, as you might imagine there were a number of adjustments including certainly incentive comp reductions that came in the quarter, but the thing that is relevant in my mind is that we look at both the reported number and then we look at the normalized number. And the progress in the normalized number I think is quite strong because last year we also had a low fourth quarter G&A ratio, but if you look at the normalized for last year's fourth quarter and the normalized for this year's fourth quarter, the 12.8% number that Pete referred to would have been a 14.1% in the fourth quarter of 2017. So we are -- the improvement is consistent and it's across the board. It's just that obviously we hope to deliver results next year that will allow for a fuller incentive comp budget.

Brian Meredith -- UBS Investment Bank -- Analyst

Excellent. And then Albert, I'm just curious, obviously some fairly positive commentary about the rate environment at Lloyd's, you guys got a pretty big exposure there now. Are you in a position now, given some of the underwriting actions that are going on with your existing book to actually see some solid growth at Lloyd's?

Albert A. Benchimol -- President and Chief Executive Officer

I think there are some opportunities, but I want to be very clear to everybody, growth is secondary to profitability right now. And so, if we get offered five or six points of pricing and we think we need 10, we're not going to take that growth. So I think there are opportunities, I think this is probably the best market in Lloyd's in a number of years. And I think there are opportunities for growth and where there are those opportunities we will take advantage of them, but profitability is our number one priority.

Brian Meredith -- UBS Investment Bank -- Analyst

Got you. I was just wondering given that there are a number of incentive that are having to shut business, that was whether you were able to pick that cut?

Albert A. Benchimol -- President and Chief Executive Officer

Oh, yes those opportunities are absolutely there.

Brian Meredith -- UBS Investment Bank -- Analyst

Got you. And then, I guess another question here for you. When we think about ceded reinsurance program here going forward, and I understand most of the large loss activity this year was some business that was kind of running off, but any kind of thoughts about changing the ceded reinsurance program maybe to protect a little bit against some of the volatility in attritional or other things, which you're thinking about as far as you know cat protection et cetera?

Albert A. Benchimol -- President and Chief Executive Officer

Absolutely. And to be fair, we're always looking to improve our risk funding and our ceded program. And it's probably a good time to identify that we have made many improvements in 2018 and that we will continue to make some more. So I'll just give you a couple of quick examples. You've all heard about how difficult the third party capital market was at the renewal. We think that we should take pride that we're one of the very few companies that actually was able to increase the amount of third party capital support that we achieved at January 1.

We have more third party capital, we have more diversified group of investors in our third party capital. And we continue to expand the number of lines that we share with third party capital. And to your point, Brian, one of the new facilities that we created at January 1 in Alturus is a property sidecar for our insurance book and that obviously increased quarter share participation will serve to reduce or mitigate the volatility in that property book as we look through that.

We've also done a number of additions including buying some aggregate excessive loss to which prevents tail-end exposure and by the way would have been almost fully utilized in an HIM scenario. So these are in the working layers if you would -- if you know what I mean. And we are going to be renewing our various property programs in May and again we will be looking for opportunities to enhance that. So net-net, our ceded protection package is a better package at 01/01/19 than it was last year.

Brian Meredith -- UBS Investment Bank -- Analyst

Great. And then one last question. Just curious about your thoughts on the kind of California flyer and availability of kind of commercial coverage, their pricing and is it a spot that there could be opportunities here or do you have to reevaluate it?

Albert A. Benchimol -- President and Chief Executive Officer

I think that, one of the things that we spoke about, during the year and accentuated in the fourth quarter, is I think that the industry in general has a bit of an issue with property -- in some parts of the property cat. So I think it deserves more study before we jump in at the slightest offer of rate. I can tell you that we already got out of some of the most exposed liability lines in California last year that turned out to have been a good decision. I think again right now, caution is probably the right order. We're doing more studies. We think that we need to continue to make changes in the book that's exposed the California Wildfire. In fact some of the non-renewed business that Pete spoke about had some of that exposure. There are a lot of changes, I think climate change is driving different patterns, different frequencies and I believe that caution and analysis is probably the first order. And then if we can figure out good ways of taking that risk in a profitable way we will do so, but I would caution before jumping in.

Brian Meredith -- UBS Investment Bank -- Analyst

Great. Thank you.

Operator

The next question is from Yaron Kinar of Goldman Sachs. Please go ahead.

Yaron Kinar -- Goldman Sachs Group, Inc. -- Analyst

Good morning, everybody. Albert in your pricing commentary, it sounds like you are taking more aggressive pricing action than the market, and it is somewhat reflected in lower retention rates. So how should we think about the premium growth opportunity into 2019 and potentially its impact on the expense ratio, if growth maybe -- is impacted by these pricing actions?

Albert A. Benchimol -- President and Chief Executive Officer

Well, the good news is that in delivering our plan and of course, we don't share our plan, but I can tell you that in delivering our plan, we already took into account the fact that our pricing actions may result in lower retention ratios and we still believe that we can deliver improvements in our core G&A ratio. So my view is that it's still there. There's still more efficiencies to be a change -- achieved through the Novae and the transformation program. And I do expect that we will have some growth in some areas. So net-net, we're still optimistic as we mentioned earlier that the results in 2019 will include improvements, both in the loss ratio and in the G&A ratio.

Yaron Kinar -- Goldman Sachs Group, Inc. -- Analyst

Okay. Got it. And then with regards to the elevated frequency of non-cat severity and property, you had mentioned, it's an industry phenomenon. So is that something that's addressed through pricing or is that also addressed through the reinsurance programs that you were talking about?

Albert A. Benchimol -- President and Chief Executive Officer

Well, honestly I think it ultimately has to be a ground of pricing issue because I mean there's only so much that the ceding companies can stuff the reinsurers with and not expect at some point, reinsurers, say stop. The job of the reinsurance industry is not to subsidize the profits of the primary insurance company, it's the share-in risk, but the pricing has to be right, both at the primary level and at the reinsurance level.

Yaron Kinar -- Goldman Sachs Group, Inc. -- Analyst

Okay. And then maybe one quick conceptual question on casualty lines. So it sounds like at the end of pricing, there has been relatively stable, maybe a little better in specialty lines. But as we think of possible inflationary trends, especially social inflation, how does that impact the overall profitability inadequacy of those lines? How are you thinking that into 2019? If some of the pricing actions that you are getting tend to be in those lines that have struggled a bit more to begin with.

Albert A. Benchimol -- President and Chief Executive Officer

You know, that's an excellent question. But I think there's both an industry comment and an AXIS comment. So I will tell you that our primary casualty and our excess casualty, we only play in the excess and surplus world. That's number one and so they tend to be highly structured and analyzed. We are actually quite satisfied with the profitability that we see in both our casualty and our access casualty books. We've achieved an average price increase of 5% on the primary casualty, which is certainly ahead of lost trends. I mean there's always the risk if you would of run off inflation. But I can tell you that when we price it and when we reserve, we don't reserve to the most recent inflationary trends, we reserve at what we assume to be the longer term trend. And frankly one of the things that is driving our reserve releases is that these longer term loss trends that we reserve with haven't developed.

So that's why we're getting reserve releases, but we will continue to reserve at what we believe is a reasonable, prudent long term trend, and the 5% for the moment on the primary casualty we feel very good about. The issue that we have on the excess casualty, where -- I believe we've got one of the best E&S access in umbrella casualty books out there, and we have very low exposure -- net exposure to the auto liability, which has been one of the worst drivers of losses. We're achieving 11%, 12% pricing increase. The issue for us is that we believe that the definition of excess needs to change. 20 years ago you know excess was above $2 million, well, $2 million is a working layer today and we think that where we're pushing is that excess needs to attach closer to $5 million to really be considered excess. And I think that speaks to your point, you're on of inflation, but where we insure, where we participate, we're comfortable that we've got these issues of inflation and frequency covered. But we believe the industry needs to change the definition of access to something closer to $5 million.

Yaron Kinar -- Goldman Sachs Group, Inc. -- Analyst

Thank you very helpful color. Good luck in the year ahead.

Albert A. Benchimol -- President and Chief Executive Officer

Thank you.

Operator

The next question is from Kai Pan of Morgan Stanley. Please go ahead.

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

Thank you and good morning. First question and Peter, you mentioned that the quarter was impacted by 2.5 points about large losses. If you take this out, the underlying combined ratio about 96% in the fourth quarter is still higher than the average about 94% previous three quarters. I just wonder what's the sort of base to starting weights running into the next four quarters?

Peter Vogt -- Chief Financial Officer

Yes. So, Kai probably a better way to look at it. As I said in the quarter you had some noise, especially on the reinsurance property book and in that with the dam loss. So I would probably tell you if you're steering toward next year, maybe look more toward how our full year 2018 numbers were, and then as we mentioned earlier we do think that even when you look at the full year, given some of the portfolio actions we've taken, you should see improvement. So you should be able to see the combined ratio coming down from there, not only on the ex-cat and loss ratio, but also on the G&A ratio.

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

And I think what you're refreshing to is at that point of runoff --

Peter Vogt -- Chief Financial Officer

Yes, the point of runoff business that should go away, but also as we noted in the quarter we had -- just in the quarter on the reinsurance side, we had almost a point hit due to moving up the dam loss for the year. So I think when you start to normalize some of those things Kai, I would say start at the full year look of '18 and then with the actions we've taken we think that you should be able to see improvement as we get into 2019.

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

Okay. Just on that, besides the runoff business, what exactly you're doing try to reduce some of the volatility and improving the results?

Peter Vogt -- Chief Financial Officer

I'd say a couple of things, building on what Albert said. One is, we have seen a positive rate and trend in 2018 -- rate over trend and that's now going to start to earn in as we go into 2019. We've seen better terms and conditions for our underwriters on the primary side as they've seen what's going on with losses there and moving up on layers to get out of some working layers. And on the reinsurance side, they continue to restructure the book, to actually get pricing improvements, which we've definitely seen in broader, that will continue as we go into next year and probably lastly, on the volatility side as Albert mentioned, we've actually put more ceded and retro programs in place on both the insurance and reinsurance books as we go into 2019.

Albert A. Benchimol -- President and Chief Executive Officer

Let me add a little to that Kai, because I think you raised a very important point. We're not going to improve the numbers simply by canceling business and there are a number of areas that we are focusing for improvement. And let's speak to property first, one of the issues with property is that we can always take a look at a number of programs that just are not working for us. Some, honestly we knew early on that we would want to not renew, but 01/01/18, excuse me was just too late to act on some of them. So we took some opportunities to deal with that. That will have two factors, one in terms of the profitability, but also the truth is that, a number of these programs also add significant impact on volatility. So they will have that issue.

But more importantly, we're doing more work around geospatial modelling to make sure that we are looking at our microtonal concentrations. We've taken significant actions around, especially tornado hail (ph), the kinds of occupancies that we're looking at, the kinds of rules or the kinds of deductibles that we're looking into. So this is not just -- this is not just canceling business and saying everything stays the same. Every part of our business is being reviewed and when property is job number one for us right now and there are significant changes both in the risk appetite, in the structures, in the deductibles and in the distribution of that portfolio on top of price.

And so, we obviously don't want to make any promises, but we're working hard to make sure that we see significant improvements in that book. With regards to other books of business, the truth is that if you look at professional lines -- you know what, I think, we were early. I mean you know we spoke to you about some of our concerns, professional lines in '13 and '14 (ph), we acted aggressively on that. We've taken a significant number of loss ratio points off that book. Our exposure to cat's actions is much lower than it's been in the past and we continue to be releasing reserves because we realize that last year, the year before, the year before that we're actually better than we reserved.

So from our perspective, while we're always cautious, I think that's an area where we've got proof positive that we can identify portfolios and we can fix them. So that's working well. Casualty, as you know we're being very cautious. We're looking to elevate attachment points. With regards to reinsurance, we are making sure that we're supporting only those customers, who have good long term relationships with us. So we're taking actions across the entire book to ensure that, the continuing book is improving, not simply through the removal of bad programs. I hope that helps you understand what we're trying to do.

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

Yes, they're very helpful. But if you're putting everything together -- my last question, is that, you've been getting close or above 10% already in the first three quarters of the year and, so, if you consider normalized environment, consider all the improvements you're making in your business, do you think in the normalized cat environment in 2019, you could get to 10%?

Albert A. Benchimol -- President and Chief Executive Officer

Absolutely. I thought we were going to get it in 2018, and it's a real disappointment to us that it isn't. And one of the reasons that the incentive comp is down is because we didn't achieve our target, it's that simple. And I fully expect that everything that we're doing will deliver double digit ROE assuming reasonable cat activity next year.

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

That's great. I -- I'd been now assuming your internal target is 10%?

Albert A. Benchimol -- President and Chief Executive Officer

No you should not assume that.

Peter Vogt -- Chief Financial Officer

I guess it is 10%.

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

All right. Thank you so much.

Albert A. Benchimol -- President and Chief Executive Officer

Thanks Kai.

Operator

The next question is from Meyer Shields of KBW. Please go ahead.

Meyer Shields -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Thanks. Good morning. Albert, you've talked, think a fair amount about reducing volatility and we're seeing lower P&Ls in most zones, does that imply the potential for investment portfolio duration lengthening?

Albert A. Benchimol -- President and Chief Executive Officer

That's a very good question. So there are two things that this will address. One, believe it or not the longer term is that you're prepared to take a little bit more equity volatility risk, since you've got less volatility risk around the cat. But the two factors that will affect are our duration is both our liability duration, but also our view with regard to interest rates and spreads. And so right now, we're cautious, I don't know if -- I forget if Peter mentioned it, but we were about 2.8 is our average duration and I think certainly the pressure in the near-term is to slow the rate increases, but our view is that longer term, we're probably still in an increasing rate environment. So we are currently below our liability duration and in the near term I expect that we will remain below our liability duration, but there's opportunity to extend at the right time.

Meyer Shields -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, that's very helpful. And second question just in terms of -- I guess trying to forecast reserve development, clearly your picks have been very conservative in light of the accelerating loss cost inflation that we're seeing. Are you sticking with the same level of picks or you actually dialing them up so that the delta is constant?

Albert A. Benchimol -- President and Chief Executive Officer

It's not the picks that stay the same, its the underlying assumption that stay the same. So by definition, you're working with different -- have an issue of loss ratios. You're reflecting the trends for the mix of business, but when it comes to long term inflation and long term trends, we're keeping those at the higher levels that we've used in the past.

Meyer Shields -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, perfect. Thanks so much.

Peter Vogt -- Chief Financial Officer

And Meyer, I'll just build on that for a second. One thing that I did not mention in my remarks that impacted the prior period development in the quarter was on the reinsurance side, we have acknowledged that the ADNOC loss that occurred in 2017, that very tragic event, the industry loss estimates now up to $2 billion and so we've moved our reserve up expecting it to be a $2 billion event. I don't know if everybody else in the industry has done that yet, but we felt that that was very prudent to do and that kind of weighed on some of the prior period development for the reinsurance segment.

Meyer Shields -- Keefe, Bruyette, & Woods, Inc. -- Analyst

And that's fair. Is there anyway of quantifying that?

Albert A. Benchimol -- President and Chief Executive Officer

Yes, I'd call it -- probably about a little over the industry. Yes, there was a 30% increase for the industry, so for us (multiple speakers) it is about the same, yes. Dollar wise it was -- got about $8 million, about $6 million to $7 million.

Meyer Shields -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, perfect. Thanks so much.

Operator

The next question is from Josh Shanker of Deutsche Bank. Please go ahead.

Joshua Shanker -- Deutsche Bank -- Analyst

Yes, thank you very much.

Albert A. Benchimol -- President and Chief Executive Officer

Good morning, Josh.

Joshua Shanker -- Deutsche Bank -- Analyst

Excluding the commentary about the dam -- by the way, thank you very much. How are we looking at past year cats and other man-made losses and how does that impact the reinsurance net prior period developing numbers?

Albert A. Benchimol -- President and Chief Executive Officer

So, the prior year losses on the cats -- overall have been very solid. We've done very well on that. I think the last time we had some really bad surprises was in New Zealand. I won't say this about our HIM losses, is that we got the total number, right. We were a little bit high on the insurance number. We were a little bit low on the reinsurance number. Net-net those reserves actually developed favorably for AXIS. And so our reinsurance book as you might imagine was not immune to some of the adverse development that we saw Irma. And so we had some modest deterioration in the reinsurance book, but that was more than offset by favorable development in the insurance book.

Joshua Shanker -- Deutsche Bank -- Analyst

And so -- and when we look at the -- I mean look you did have favorable development in reinsurance here in the fourth quarter. It was lower than it usually is. And obviously HIM aren't all the losses, there were some man-made events too. Can we sort of go through a catalog of what's -- whether there were offsets, whether there was a quarter like previous others with some one offs or whatnot?

Albert A. Benchimol -- President and Chief Executive Officer

Look, I think to Peter's point I mean, if you look at the favorable development in the fourth quarter, the bulk of the reduction over longer term trends, really related to both the ADNOC that we've just discussed and the thing that, it was a little bit surprising is we got some adverse development for non-cat property, which we thought was a bit late in terms of the reporting in the fourth quarter of '18 for losses that apparently occurred in '17. So we're digging into that, but those are the two reasons why the favorable development in the fourth quarter for reinsurance is lower. Anything you want to add to that Peter?

Peter Vogt -- Chief Financial Officer

No, those are the two major drivers both on the property line, one is the increase in the man-made loss as we mentioned earlier as well as some late reporting on 2017 property per risk losses.

Joshua Shanker -- Deutsche Bank -- Analyst

And just to put a bow on this, the previous cat picks, have they been accurate or they've been redundant?

Albert A. Benchimol -- President and Chief Executive Officer

For the most part, Josh we've been redundant. We tended -- I believe to a conservative view is what we do for the cats. Overall, we've been -- overall our history, other than New Zealand and the specific event of Irma, but when you look at HIM altogether it's been redundant. We've been pretty conservative as we've put our initial estimates up.

Joshua Shanker -- Deutsche Bank -- Analyst

Okay, thank you for all the questions.

Albert A. Benchimol -- President and Chief Executive Officer

Thank you. And as you know with regard to the fourth quarter, we've -- we do announce the large losses. We had two press releases in the quarter, one for Michael and then one for the wildfires, which updated Michael. And net-net, our final number you know came in within the range that we reported in those press releases.

Joshua Shanker -- Deutsche Bank -- Analyst

Well, good luck. Lots of changes coming, I see. Good luck with them.

Albert A. Benchimol -- President and Chief Executive Officer

Yes. Thank you very much Josh.

Peter Vogt -- Chief Financial Officer

Thanks, Josh.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Albert Benchimol for closing remarks.

Albert A. Benchimol -- President and Chief Executive Officer

Thank you, operator, and thank you to everyone on the call this morning. So as I said at the beginning of the call, '18 was a year where we took steps forward, both in terms of underwriting profitability and organizational progress. Look, we're not happy with the fourth quarter results, but we do remain confident that we have the right strategy and that our pace of progress will continue as we execute that strategy.

Before we conclude, I'd like to take a moment to express my appreciation to our employees. We have a great team and they've extended some really substantial amount of work and delivered strong progress in '18, for which we expect to see some tangible results in '19. And to everyone, we look forward to reporting to you on that progress in future calls in the year. Thank you very much.

Operator

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

61 minutes

Call participants:

Matthew Rohrmann -- Global Head of Investor Relations

Albert A. Benchimol -- President and Chief Executive Officer

Peter Vogt -- Chief Financial Officer

Elyse Greenspan -- Wells Fargo -- Analyst

Brian Meredith -- UBS Investment Bank -- Analyst

Yaron Kinar -- Goldman Sachs Group, Inc. -- Analyst

Kai Pan -- Morgan Stanley & Co. Incorporated -- Analyst

Meyer Shields -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

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