James River Group Holdings, Ltd. (JRVR) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 James River Group Holdings Limited Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I will now transfer the call over to Kevin Copeland, Head of Investor Relations. You may begin.

Thank you, Nicole. Good morning, everyone, and welcome to the James River Group fourth quarter 2017 earnings conference call. During the call, we will be making forward-looking statements. These statements are based on current beliefs, intentions, expectations and assumptions that are subject to various risks and uncertainties, which may cause actual results to differ materially. For a discussion of such risks and uncertainties, please see the cautionary language regarding forward-looking statements in yesterday’s earnings release and the Risk Factor section of our most recent Form 10-K, Form 10-Qs and other reports and filings we make with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. I will now turn the call over to Bob Myron, CEO of James River Group.

Thank you, Kevin. Good morning, and welcome to our fourth quarter earnings call. This is Bob Myron and here with me are Sarah Doran our CFO, and Kevin Copeland our Chief Investment Officer who also heads Investor Relations. I'm going to jump right in. we had a poor fourth quarter because of approximately $30 million of loss reserve development in one large commercial auto account. That became evident during our year end actuarial studies. At this point, we've been riding this new type of commercial auto business for several years and the underlined loss data is more mature. As part of our year end reserve work, we looked at each accident year in this division and with appropriate consideration for pricing and restructuring changes by year and in some instance by contract, we are comfortable with our ultimate loss picked by accident year as of December 31st. I am confident this issue is behind us. The account question grew significantly from 2015 to 2016 in terms of miles driven as well as geographic scope. It is run much better in 2017 than in 2016 as a result of changing changes in pricing and terms and conditions that has been recently renewed effective March 1st 2018 with additional changes to pricing in terms and conditions. As a result of the disappointing fourth quarter, senior management bonuses were significantly reduced and line was eliminated. During 2017, our core book of business was strong enough to generate another year of profitable underwriting even as we put up increased losses works in the account that I just mentioned. We ended the year with a strong balance sheet. Our IBNR as a percent of total net reserves is 65% on a group wide basis which is a level that we are very comfortable with. Our held reserves continued to exceed the point as that of independent actuary. I'm bullish on our 2018 prospects for several reasons. The first is the renewal of the commercial auto account that I just mentioned. We are pleased to have this renewal completed and expect to have a significant relationship with the insured going forward. Second, in core E&S, new business submissions were up 9% in the fourth quarter of 2017 compared to 2016. Also in core E&S, our pricing study showed an average rate increase of 6% in the fourth quarter. This was the largest quarterly increase we have seen in 10 years and rates continue to rise significantly in January. In our workers compensation book, our loss index adjusted rates increased by 4.9% year-over-year in the quarter. In our casualty reinsurance segment, contract terms in our third party closure business improved. Moreover, consistent with our own experience in both E&S and admitted businesses. Underlying rates strengthened by 3.6% in the fourth quarter on the business seated to our reinsurance segment. In a couple of our E&S divisions, we have seen a significant number of large accounts come into the E&S space, had significantly increased pricing relative to inspiring rising in the admitted space. The first, is general liability coverage for certain classes of restaurants. The second, is liability coverage in our allied healthcare division which is comprised of classes such as nursing homes. This business has performed poorly in the admitted market and is being non- verdured and is now aiming up in the E&S market with substantially increased pricing with higher retentions, lower limits and tighter coverage forms. It is clearly a hard market in this division right now and we are capitalizing on it. Lastly, we have seen a steady flow of opportunities for growth in our fronting business within our specialty admitted segment. We expect growth both in the number of accounts as well as in the segment overall. Given these factors, we expect to report in 2018 combined ratio between 94% and 97% and to earn a return on tangible equity of 12% or greater. Happy to give more color on our business during the Q&A session and to answer other questions, but first I'd like to turn the call over to Sarah Doran to provide more insights into our reported results and our plans to react to the new tax regulations in the U.S. Sarah?

Thanks, Bob. Good morning, everyone. As Bob noted, despite the fact that we raised, E&S reserves substantially in the fourth quarter to adjust the weakness in a single E&S account, we ended the year with an underwriting profit and a low reserve balance sheet. In 2017, we made underwriting profits a $5.8 million, generated operating profit of $47.4 million and a reporting net income of $43.6 million. Investment income investment results were very strong in 2017. Net investment income increased 16.1% to $61.1 million and invested assets grew 8.7% to $1.4 billion alongside our continued growth in operating cash flow. Our renewable energy partnerships and other private investments generated an exceptional return of 22.4% on the year. Our fixed income portfolio which we report as all other investment income generated 9.4% more income in 2017 than it did in 2016. We did not experience any catastrophe losses this quarter and we did experience modest favorable development on the catastrophe losses experienced during the third quarter of 2017. The approximately $3 million of take downs were within the E&S and casualty reinsurance segment and related to the Florida and Texas events. We pay a great deal of attention to our expense ratio, you can imagine, which decreased from 31.2% in 2016 to 24.3% in 2017. The reduction reflect a few things, including lower acquisition costs on our growing commercial auto book and the growth of our fronting business and our specialty admitted segment that comes with fee income which is booked as an offset to the expenses. We this quarter, made a refinement to certain accruals related to the change in business mix in the E&S segment and that resulted in a $4.5 million or 2.2 point reduction to the groups expense ratio in the fourth quarter. Finally, we mentioned in our press release last night, because of our disappointing underwriting results, we reduced bonus accruals by approximately $5 million. Also as we mentioned in our press release last night, we've made some changes for our corporate structure which we believe will minimize the impact of the new U.S. tax law on our results. The outcome of this is that we anticipate our effective tax rate in 2018 will be in line with our effective tax rates over the last five or so years or more specifically in the low double-digit range. Effective at 1:1, we will restructure our internal quota share to seed to a newly formed fully owned Bermuda Class 3A reinsure which we have named Carolina Re. Through the end of 2017, our internal quota share had been reinsured to our Bermuda-based reinsurance company. Instead, Carolina Re will be owned by our U.S. companies and will make a 953 de-election to be a U.S. tax payer. Our Bermuda-based reinsurance company through which we also rate our third party casualty reinsurance business will write a stock loss policy for Carolina Re to provide it with an additional layer of support. Carolina Re will pay the casualty reinsurance business a market rate premium for this cover. We do not expect these structures to impact the location of capital within our group. And earlier this morning, A.M. Best issued a press release confirming that our ratings are unchanged for the restructure. As our expectation that over a period of years, the groups tax rate will creep up. We will continue to write our third party book of casualty reinsurance business but premiums in the segment are likely to be scaled down as compared to 2017 as we look to optimize our return on capital thorough what is generally been a better returning business in the U.S. However, if conditions change, we will be opportunistic. We expect moderate growth and growth written premiums across the group in 2018, growing in insurance and shrinking in reinsurance. Turning back to the past year, our tax rate for the 2017 year was 21%; considerably higher than our five year historical average of 10.5%. Our lower underwriting process in our E&S and casualty reinsurance segments led to a higher than average tax rate. Because of our historical internal quota share, a portion of any loss generated onshore is actually realized in Bermuda. As a result, we are into a much larger percentage of our earnings in the U.S. and they were taxed at a higher corporate tax rate. While the fourth quarter tax rate was exceptionally high, keep in mind we're taxed on an annual basis making the quarterly tax rate less relevant. The Tax Cuts and Jobs Act of 2017 as everyone knows reduced the U.S. federal corporate tax rate from 35% to 21%. In reaction to this, we reduced our deferred tax liability to reflect a lower rate which resulted in a reduction of $3.5 million to our deferred tax liability and a commenced rate increase in operating income. We continue to enjoy strong increase in cash flow from our businesses driven by our growth. Operating cash flow for 2017 was $218 million as compared to a $154 million for the prior year. We ended the quarter with tangible shareholders' equity of $474.5 million; basically unchanged from the $472.5 million we had at the end of 2016. We paid $50.6 million of dividends and special dividends during 2017. Our assets are being put to effective use as premium or operating leverage rose to 1.56 times at year end as compared to 1.09 times at the end of 2016. I think that covers everything on my list. Let me turn it back to you.

Alright, thank you, Sarah. Operator, we are ready for the Q&A session. Can you please open the line for questions?

Thank you. [Operator Instructions] Our first question comes from the line of Mark Hughes of SunTrust. Your line is now open.

Yes, thank you, good morning.

Good morning.

Good morning. Could you give a little more detail on the new terms and conditions on the renewal on the large account and is there any change in the geographic scope of the business in 2018?

Yes, sure Mark. This is Bob Myron. It -- because of the fact that it's for an individual insure date, I don’t want to get into a tremendous amount of detail here on particular around pricing and the like. I can tell you from a geographic perspective that going forward as of March 1st, 2018, we're expecting to write approximately 40 states within the U.S. we know that this is the largest insurance relationship that this client has and will be on a going forward basis and we expect that our premium gross written premium from this account is going to grow in the 2018 policy relative to the 2017 policy year.

Just talk about the 2017 losses or how you set your losses in 2017 for the same account. If we think about both the updated pricing for 2017 and then your loss picks presumably your loss picks were higher in 2017 on this seeds of business. Could you give us some sense of how much more careful or compare reviewer in 2017 versus 2016 on this business?

Yes. I think that it's again I don’t want to talk about specifics of pricing changes and the like. But I'll talk that there were pricing changes, there were also changes to terms and conditions and how this contract, the deal was structured. And I think we found ourselves in with respect to the 2016, you're aware obviously the we know now the contract did not have enough premium with respect to the ultimate underlying loss activity. But there were significant changes made again to pricing terms and conditions, how we structured and how where booking is going forward. And I would go back to my earlier comments or my prepared comments which is that we went through every year for this commercial auto division and in some instances looked at it by contract. And we feel comfortable where our ultimate picks are booked as of the end of the year. And that we are comfortable from managements review, our IBNR percentages comfortably high and we've got shared reserves about our third party actuarial point estimate which is another point of validation for us in terms of reserve adequacy.

And final question. When you think about loss fix for 2018 and E&S, you're were at about 74% excluding the past adjustments. Is that a good place to start for 2018?

I don't know that we want to tie to a specific action loss pick for 2018, Mark. I think we wanted to stick with the guidance that we've given from a combined ratio and ROTE perspective.

Is there, let me just ask this ready factors that should -- given your flow of business, given the pricing the appeared pricing for this particular account, is there any reason it should go up?

Not that we see right now. No, I don't think. We wouldn't be expecting a substantial change but I think we want to verbalize guiding to a specific number.

That's helpful, thank you.

Thank you. Our next question comes from the line of Matt Carletti of J.P. Morgan -- I'm sorry, JMP Securities. Your line is now open.

Hi, thanks. Good morning.

Good morning.

Hey, Bob. Sorry to go back to the large contract but I think it's really important thing to understand and for the street to get confident that it is behind you and then clearly your confidence comes through on that. Can you, I know you don't want to touch on pricing or things like that too much but can you go into little bit about, in 2016 was it the strong growth of that client in terms of whether it's miles driven and geography that was that the surprise and that the premium was relatively fixed compared to that or can you help us a little bit with, I'm just trying to get a better feel for the specifics around 2016 that wouldn't apply to '17 and '18.

Yes. So, I think it's a combination of the businesses new to the insurance market place and obviously new to us. We had some limited loss history because of the geographic expansion and miles driven. In terms of the premium that we wrote there, it was about 300% plus higher than it has been in 2015. So, substantial growth for us and then I think as the geographic expansion occurred, not all states end up performing exactly the same way. And so, we took some corrective actions in that respect in 2017 and we continue to refine that going forward. But that's really the reasons behind it.

Okay. And then, not on pricing but more on terms of conditions. Can you give us a feel for kind of the sorts of things that might have changed there; is it loss corridor or is it what sort of things changed over the last couple of renewals to kind of help balance out the risk? I think that would be of help. Thanks.

Yes. I think that it's a number of things without getting into exactly what they were but we know what they could be. It's what share of the risk that we are on, the various types of risks and sort of the various periods in terms of the coverage that applies during the rise, its retentions, it is state specific, it's a number of different factors.

Okay, right. And one more if I could, away from that topic. Could you just on the tax commentary and specifically around kind of implications going forward. Sarah, I appreciate your comments on the expecting casualty reinsurance maybe to shrink a little. Can you help us with two things? One is, what order of magnitude maybe should we think about in casualty reinsurance in terms of what is more offshore versus onshore or you view is core profitable versus a little more not meeting your return hurdles. And then, kind of as we think further ahead, can you help us with why write casualty reinsurance, why keep it if it's not needed for kind of offshore tax purposes and along those lines to longer term. What is the attraction of staying in Bermuda if it's not tax and you're primarily a U.S. player, so at least in my view the flexibility of capital is a little less of an issue?

Sure. I'll kind of take those questions in various order if that works and then come back up and clear.

Sure.

But I think, on casualty we did see we wrote topline of almost $240 million in that business which was almost 30% growth over last year. I would expect this to be significantly down from that. I don't want to obviously avoid your questions. I just don't want to get into the game of giving topline guidance on any of the segments. But if we think that our GPW as a whole as a group, we'll grow modestly this year. I would expect to see all of that growth in insurance and significant insurance pitch in casualty rate.

Okay.

One thing to point out though is that business earns over more than a year. So, we'll see some lag in the earn coming in from the growth of 2017. So, it's one point.

Okay.

On the tax piece, so there are two pieces to the tax piece. A) it's setting up the new Carolina re-company which will be owned by our U.S. companies and that quota share or quota share going into that company rather to the -- rather than to the JRG Re our standalone Bermuda reinsurance company. But the other pieces as is important is the capital support that stop loss policy that JRG Re our third party casualty business will write for that. And that helps not only for capital, it also has as in side towards the tax benefit just given the premium that will be written out of that segment. We couldn't enjoy the capital benefit or the slight tax benefit that comes through that; we didn't have the third party business. So, that's one thing just to kind of address. The other though is that in our Casualty Re business over the last few years, I do think it's very fair to say that the business has improved; I think we continue to take some hits from earlier business. But I think we believe what achievement we have if we pair down that business we can really optimize for better returning business and make that make sense for our overall group return hurdles. So, you're right. We –- I could not argue differently that we make better returns generally in our U.S. business but I do think there are some well performing pieces of our Bermuda reinsurance business and that business will continue to add the benefit. The last thing I'd say is that, as of today we hold most of our capital in Bermuda and if we -- that obviously provides a significant capital flexibility as well as an add-on tax benefit. And not having that any longer, not having the Casualty Re business and the ongoing ability to write business there would likely impact that. So, to get to a low double-digit tax rate, which is a very effective and efficient structure for the group and a really solid outcome from the tax changes that came out of U.S. at the end of December. This is the best structure for us to move that forward as a group.

Okay, great.

Let me.

Sure.

Let me just strike it on that. Just a couple of business thoughts. We really like the team that we have here. They've done a really much improved job for us in the few years that they've been here. And I think, for the first time we are seeing improvement in terms and conditions and given that it's a quota ship of this is mostly it's almost completely manifested in lower seeding conditions, in terms of how reinsurance cost price get priced on a quota share. On a quota share basis. And we're also still continuing to see underlying rate increases. And I think the refinement of the book is not certain but it's going to likely be moving more and more towards underlying E&S general liability type of business which we are is already a material portion of the book as it is. And so, we had good experience with that in this team's tenure. So, that's my true sense as well as why we're still positive about the Casualty Re segment.

Okay, great. Thank you very much for the answers. I appreciate it.

Thank you. And our next question comes from the line of Randy Binner of B. Riley. Your line is now open.

Hey, good morning; thanks. I have a few on reserve. So, did -- and I apologize if I missed this but did you break out what the reserve activity was in the quarter in E&S outside of the commercial auto?

But what -- we just included it one.

Yes, we did not.

The total number.

Yes, we did not.

Can you share that?

We did not and then we take down from the core business this quarter. That's where your question is coming from, Randy?

Right, okay. So, the core E&S book was just flat, is that right?

Yes. And I can see you could have -- you can get that from the fact that the large account of 30 million and settlement and face of equation segment has 30 million of development. Right, yes.

Okay.

So, the core take down was flat.

And so, and then to your comment, Bob, about being above the point estimate. Are you -- was that in reference to the commercial auto book or it was the E&S book overall?

It's the entire group.

Can you scope that a little more for us kind of where you're sitting in that and that -- in that range and how that conversation went outside of the single account?

I'm not sure exactly what you're getting at but --.

I'm just trying to get a sense of how. So, the story of James River has been one of reserve redundancy in your core E&S area over the years that commercial auto segment it was already -- it was deficient last year. So, there was already some indication it could be deficient but I guess what I am getting to is how I should think about how the rest of the business would do from a reserve perspective based on kind of what we're seeing as a result of your reserve review.

Yes, that's right. Yes. I don't think we've ever broken that down relative to where we are booked relative for example to the third party actuary by segment by division and so on and so forth. I think that what I would say is that as you pointed out, we've had a historical track record of reserve redundancies. That in part has been framed by in prior periods we have general -- management has generally sought to be above the carried loss pick of the independent actuary. And this is a large internationally well-known actuary, old and consulting firm. And so that gives us some -- that makes us feel good about where management has selected its reserves and I think that really well we could provide a break down and we haven't; the overall is what matters.

Well, what I would say to them is that I think not to get into the details, is that the geography of it hasn't changed materially year-over-year, Randy.

That's right.

Yes, that's correct.

It's where those pieces are coming from.

Yes, I guess.

We're comfortable disclosing that. I mean, we're not seeing any substantive swing in where when you look at by segment or division where the deficiency or redundancy and so on and so forth, that it's not materially changed from where we've been historically.

Okay, that's helpful. And then just you mentioned in your opening comments that some restaurant in allied healthcare, liabilities were shifting to the non-M&A market.

Yes.

Can you kind of share with us just briefly kind of what went wrong with those items or those risks or how they're in. What kind of term and pricing flex do you get on those when you get a fresh look at them?

Yes. I think what went wrong is they've been in the admitted space for some period of time. I think that is has been either between loss cost inflation or just underlying performance and I think in particular nursing home, some of these accounts had been in E&S. They went or it had been in E&S several years ago went to the admitted market and are now coming back in the E&S. And I think, it's a just a pretty simple situation of being pretty well by going to the admitted market, they got substantially lower pricing and much better terms and conditions, a much better rate and form and broader coverage. And four to five years later as the business has not performed well, it's getting non-renewed in the admitted space and then it's coming to us up without a lot of options so to speak and coming through late and it needs to get placed and therefore there is significant price flexibility on our behalf and be able to set not only appropriate pricing but terms and conditions and about things like that. I mean, what's the size of the divestible and so on and so forth that really make a big difference. And so, those are two areas where we're seeing strong flow coming out of the admitted space that had substantially increased pricing. And it's really just it's because of performance in the admitted market.

One more on that. Is that, are these like litigated claims? Is that the problem or is it more of just a general underpricing problem?

I think its general underpricing. I think the loss ratios are just well in excess of what or were sustainable based upon the pricing that was being received for them.

Okay, I'll leave it there. Thank you.

Thank you. Our next question comes from the line of Meyer Shields of KBW. Your line is now open.

Thank you, good morning. Just couple of small questions. One, Bob you talked about having 40 states with this large corporate account in 2018, how does that compare to 2017?

Yes. Its 2017 was 49. We have all but Texas, previously.

Okay.

But I think the important thing to note here is that we are still the largest insurance relationship and we are and we expect the account to grow from a premium perspective because of while it's driven pricing so on and so forth.

Okay. That's helpful and that makes sense. In the past, I guess you've been the quota share arrangement, there was at least an understood minimum premium requirement in terms of actual third party premium volumes. Does that concept still matter based on the new operating structure?

Well, that's how it's been I would say an indirect kind of frame of reference in there but it does matter obviously to be able to write the stop loss.

Okay.

Yes, it still matters?

Okay. No, thanks, it's helpful. And two other questions. One, you talked about the price increases in core E&S. Can you give us a sense in terms of how much of the excess in surplus fine segments you're considering to be in core E&S and what's not included in that?

Oh, sorry. Yes. Maybe that's just our defined term. We're defining cores everything that's not commercial auto. So, this is all our legacy business before we started doing commercial auto. So, it's manufactures and contractors and general casualty for -- condominiums it's professional liabilities, valid healthcare book, energy all of that stuff. Everything all the other divisions.

Okay. That's just very helpful and clarifying. And the last question. I apologize for trying to from my convenience in phrasing it. But I am assuming that the premium volumes that are going from U.S. taxable entities to non-tax entities are going to go down on a year-over-year basis. Does that mean that the mix of underwriting profit and investment income is going to shift to where it has been? In other words, since more premiums will say on paper tax under the U.S. that the net tax rate on investment income will be -- yes the net tax rate on the investment income will be higher and on underwriting income will be lower. Is that a reasonable way of thinking of it?

Yes. It's really just a stop loss, it's a doubt there is right now there because that's the only piece that's changing in that. I think what you're saying is a lot of part of it is over time I think it's fairly likely that we'll have more premium in the U.S. and relative to what we have in Bermuda. So, that's where I talk about the tax rate kind of creeping up over time.

And investment income. -- Yes.

But which will drive invest income as well as to kind of draw that line. So, that is not an overnight feature but that's likely the dynamic over multiple years.

Okay. No, that's very helpful. I think I've got it and thanks so much.

Thank you.

Thank you. Our next question comes from the line of Brian Meredith of UBS. Your line is now open.

Yes, thanks. Couple of quick questions here. First, sorry to beat on this large contract but a couple of other questions on that one. I guess the first question is, did the experience you have in this contract make you or cause you to make any changes with the rest of your commercial auto write share type business to recognize something that maybe you should be doing?

No, it has not. I think a lot of those accounts are smaller and in some respect more regional, not as geographic spread. They can be structured very differently. So, but it's a good question but it really hasn't caused us to change, haven’t thought about anything else. And I -- that's an opportunity to say for me to say our performance on the rest of the commercial auto book has other than this one year from this one insurance has been very good. It's this is really on. So, years prior to '16 and subsequent two for the insurance have been fine and all the rest of the commercial auto has performed very well.

Got you. And I'm just curious that the reduction in color of nine states, was that by kind of your own doing saying listen these are states that we're uncomfortable being in or was it just ended up going to admitted market or different carrier just ended up going to admitted market or different carrier, just a more competitive quote?

I just think it's natural from a diversification standpoint and given how large the overall account is and so but probably don't want to say anymore than that.

I mean, as you can imagine it was negotiation but I think we can't say that they're outstay in the E&S market just given the nature of the risk. I would imagine we don't know for sure but.

Yes.

Got you, okay. And then Bob can you talk a little bit aside from what happened with this contract, just what are you seeing with respect to loss trend right now on your E&S book and then maybe also kind of what's happening with workers compensation insurance right now?

Sure, yes. So, more with the first question was loss trend on?

Loss, just loss trend under E&S business, acts this whole commercial auto thing. What are you seeing right now, I mean it has been fairly benign I think you both talked about, are you seeing any pickup?

I would say overall not a lot. I think it's still reasonably benign and I think we're happy with loss emergence. On workers compensation, what we have we saw was we had several really strong years from our well reported loss ratio perspective. The first nine months of the year were would have been higher than what the run rate has been for five years and then it moderated pretty significantly in the fourth quarter. And so, all of that when put together because that sort of ends being a multi-year analysis but the trend on underlying loss cost continues to go down. And that is impacting pricing and therefore that's why we like to look at pricing on a loss cost index adjusted basis and trying to look it and say "Okay, how much margin do we think, where is margin expansion going relative to where loss cost are going" and that's what I cited earlier that's what I was talking about but I don't know the 4.5% or 5% net increase that we saw. So, I think workers compensation is in a fine spot from the margin perspective. We made a decision to go out in place 50% quota share that business effective October 1st, I think that was a bit of an opportunistic play because we had the ability to place a quota share with an attractive seeding commission relative to what our own acquisition cost were. And furthermore, we've got some on this individually written workers compensation book that we had, we had some state expansion, we are having some modest stage expansion into some of the neighboring states that we have been in and when you do that it's never a bad time to buy a little bit more reinsurance. And so, we got some attractive pricing and we thought we could take a little of the potential volatility about moving into new places and that's what we decided to do.

Great. And then just curious on that quota share, was there a other premium that went with it or was it just quota share just on go forward business?

There was not.

Okay, great. Thank you.

Thank you. [Operator Instruction] Our next question comes from the line of Mark Hughes of SunTrust. Your line is now open.

Yes, thank you. And looking at your current exiting your loss pick in E&S, you started about 69% in early 2016 and then in the fourth quarter that stepped up to 74% and then the subsequent quarters sort of 74% 75%. Were you starting to see this already in the fourth quarter of '16 and can we assume that sort of stepped up loss ratio through late 2016 early 2017. Is that one of the reasons you are a little more confident in the 2017 reserves?

Yes?

The outlook.

So, I think the movement of the exiting the loss of share market is really the mix shift with the growth of commercial auto and I think that you saw that pick up a fair amount obviously over the last 18 months and we are likely at a point of stabilization there. So, I think that's really what that's reflecting throughout the whole book as well as on mix.

Yes. Understanding, you're putting the 2016 business on the books. Your earned premium growth really accelerated in Q2 and Q3. But your loss pick was still 59, 70. That is only in the fourth quarter where you had a similar rate of growth that it stepped up to 74%. So, things like the mix was already shifting earlier in the year than it was later in the year that we saw the loss pick go up. So, I hear what you're saying that the mix shift and timing maybe influencing all this but it seems like perhaps there were some recognition that you needed to put some extra reserves against that business and that carried over into 2017?

No, I'm just looking through the loss picks in the E&S business and or the exiting the loss ratio in there. Pretty consistent at this kind of low-to-mid 70s number with the exception of the third quarter which obviously had the care events in it.

Yes, I know that's right. I'm going back to 2016.

Yes. With, I mean the growth in this account was material towards the end of 2016, which is obviously what we are reacting to now.

Yes. And I guess what you're getting at is yes I mean we have we do as we mentioned before we do book this that division at a higher loss ratio because as a book did in the rest of the E&S business. So, that unquestionably is a consideration when we look through the reserve adequacy at the end of the year. Obviously, where we had those to see at the end of the year. Obviously, where we had those years booked at those higher loss ratios that are waiting in was a consideration there. Right, no question.

And then the 6% increase in pricing, is that mix driven or some mix impact and that if you look at renewing accounts sort of similar risk similar end markets is pricing up that much or a little bit less?

Are you asking if it was, let me answer the question this way. I would say that it was pretty broad across the divisions in terms of where we getting rate increases and part of this is what we know with the what's the mark will bear and also because we are out there seeking those rate increases as well. Right now, I think that further to the comments that I had, right now we're seeing the largest increases if it's a renewal in the allied healthcare area. But there are several divisions that are driving a significant number of the divisions that are of the core divisions that are driving that overall rate increase without allied healthcare leading the way but it's not that it's not like one or two divisions waiting that to that higher number; if that's what you are getting at.

Yes, that was the question. Thank you.

Thank you. I am showing no further questions at this time. I'd hand the call back over to Bob Myron for any closing remarks.

Thank you, operator. And thanks to everyone for your participation on this call and we look forward to talking to you again next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. That does conclude today’s program, you can all disconnect. Everyone have a great day.