Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Good day, ladies and gentlemen, and welcome to the Lancashire Holdings Fourth Quarter 2017 Earnings Call. For your information, today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Alex Maloney, Group Chief Executive Officer. Please go ahead, sir.
Okay, thank you. Good afternoon, everyone. Thanks for dialing in to our fourth quarter conference call. After an active third quarter, the fourth quarter didn't offer any respite. We witnessed more events this time in California, which added a further burden to an already challenging year for the industry and the Lancashire Group. We've made a small loss for the quarter and generated a negative return for our shareholders during 2017, which is disappointing.This year's events have been difficult for the industry and the Lancashire Group to absorb due to the high level of frequency we have witnessed and the aggregate estimates of insured losses, which are now in excess of $100 billion. 2017 will now join 2005 and 2011 as one of the costliest years in recent history for insured losses.As a group, we have demonstrated that our risk management, underwriting picks and efficient reinsurance purchasing have minimized the erosion of capital for our shareholders to a level which is well within our stated tolerances for such events. We must remember that cat losses have a history of deteriorating, and I can't see why this series of events would be any different. It's way too early to put a final cost on each event. Previous events have crept considerably and taken many years before the true cost to the industry is known. So the Lancashire Group will continue to learn -- to try to learn from the mistakes of the past and take a cautious view on yet unproven declarations of improvements in the loss positions.I firmly believe that we have turned the corner in the rating cycle and are witnessing positive rate movements in virtually all classes of business that the group underwrites. I wouldn't describe the current market as a hard market as there appears to be enough capacity to service most risks, meaning that pricing can only be pushed so far. But we are traveling in the right direction. But the sentiment is clear, we are seeing a more disciplined underwriting environment than we have seen for a number of years, which we expect to continue throughout 2018 as the true cost of 2017 materializes.We are seeing more underwriting opportunities borne out of years of rate reductions, where underwriters are starting to address unsustainable rating levels with varying degrees of success. It's a patchy market, but if you have the right underwriting talent, you can navigate these waters and carve out opportunities. It's not a broad hard market where the rising tide lifts all boats, and if it was, we would have raised additional capital to service the opportunity. But we have sufficient capital to underwrite the immediate opportunity, and we'll always assess our needs on a regular basis.It's the first time we've been able to grow the size of Kinesis in a number of years. Again, like the overall scene for the marketplace, not as much as we would like to due to the competitive pressures, but Kinesis has grown by 30% at the 1st of January underwriting cycle. So in summary, we're in great shape. We have 3 underwriting platforms, which between them have underwriters positioned in a class of business where we are currently seeing the largest positive rate movements. We are carrying no more net risk levels for 2017 -- then 2017, and has sufficient capital to execute our business plan. And we have access to capital if the opportunity kicks on from here.I now pass over to Paul.
Thanks, Alex. It's been a number of years since we've been able to talk about positive rating environment. But as Alex has already explained, we start 2018 doing exactly that. Whilst the [ atmosphere ] is more positive than it's been for a while, we must also remember the events which brought the market to this point and the impact it had upon the group's underwriting performance.As we would expect, having a high weighting into catastrophe risk, the group's underwriting result was negatively impacted by the loss events of 2017. For the first time in our 12-year history, we produced a combined ratio in excess of 100%. Whilst this is obviously disappointing, it's not unexpected given the type, quantum and frequency of events, and also when put in the context of the original Lancashire business plan of making an underwriting profit every 4 years in 5.Following these losses, the negative rating trends we've been experiencing in the market over the past few years has stopped. And more encouragingly, in a number of our significant premium-generating classes, the rating is now increasing. Approximately 75% of our 2017 portfolio of managed premiums is now achieving rate increases of some magnitude. As a group, our exposure to lines such as property cat, retro, D&F, energy and cargo, positions us well to take advantage of an improved rating environment and also any new business opportunities that may present themselves. The group has an established footprint in the catastrophe-exposed reinsurance lines via our Bermuda, Lloyd's and third-party capital platforms. By varying degrees, rates across all these reinsurance lines improved at 1/1. Via Lloyd's, we also have access to the D&F market, which is certainly a market where we see a better rating environment and some small pockets of real dislocation, a number of the loss-impacted areas we have retracted from in recent years, so we now have some natural headroom in which to grow back.We have a long-established history in the upstream energy market with access via our London company and Lloyd's platforms. With rates increasing and oil price stabilizing at sustainable levels, we are incredibly well-positioned to benefit from any increase in market premium flows. Our cargo portfolio in Lloyd's is also seeing positive rate movement and can grow should the market conditions continue to be favorable.Our other classes such as aviation, terrorism, political risk and marine, are now all relatively stable as the rating environment is flattening. It's also worth noting that all our major direct insurance lines made healthy underwriting profits in 2017 despite the depressed rating environment.In addition to our existing classes, we've recently added further underwriting talent to the group. We entered the downstream energy market at 1/1 following our hire of a downstream energy underwriter in November and pleasingly has made an encouraging start in this new line. We'll be joined by a new power underwriter later in 2018 to create a new power portfolio within Syndicate 3010. Fortunately, these are also 2 classes of business that are now seeing rates move in the right direction.These new classes are in areas you would expect to see Lancashire, classes that are short tail, niche, sometimes volatile that require genuine underwriting expertise in which to generate superior cross-cycle underwriting returns. If there are attractive opportunities to hire new underwriting talent in other specialty classes in the future, then we'll do so.We were able to renew all of our core reinsurance protections at 1/1 with our long-term reinsurance partners. As it stands today, we have the capital base to support the underwriting opportunities we currently foresee, but we retain the flexibility to act quickly should market conditions shift again. Whilst we're positive about market conditions, we're also realistic. As I've already mentioned, rating is improving in a number of our core portfolios. However, as always, we'll be looking to match risk and return appropriately. So in current market conditions, we would not be looking to add significant amounts of additional net risk, unless it's in areas where we're being appropriately rewarded.We've always said the market will not substantially improve until there is a demand/supply imbalance. And whilst the conditions are undoubtedly better, the shift in demand and supply is not yet material enough to put us into a proper hard market, simply a better market. As we look forward to 2018, our underwriting philosophy remains unchanged. We'll aim to match risk and return appropriately for the first time in a long time. We have large portions of our underwriting portfolio exposed to positive rating movement. And we'll strive to access whatever opportunities manifest in order to deliver the appropriate underwriting return to the market we're in.I'll now pass over to Elaine.
Thanks, Paul. Hi, everyone. As Alex said, following the third quarter's hurricanes and earthquakes, we closed out 2017 with the California wildfires. The wildfires in isolation would not have had a particularly significant impact on the group. Since it's one of the costliest natural catastrophe years on record, they added to the mounting tally. We've recorded a net loss after recoveries of $34.5 million across the northern and southern wildfires. Our ROE for the quarter was negative 0.9%, bringing us to negative 5.9% for the year. Our combined ratio was 119.5% for the quarter and 124.9% for the year. Although we've made a loss for the year, we remain pleased with the way our group performed across the succession of events. Our capital and reinsurance strategies paid off. And while we have a small capital impairment for the year, our balance sheet remains strong.As Paul has said, pricing is improving across a large portion of our portfolio, albeit not as much as we'd like to see. We're well-positioned with provision capital to take advantage of those increases and any other opportunities that come our way.On results, our gross premiums written have decreased this quarter. That's primarily due to some prior year accrued loss of business in the worldwide offshore book, where we saw construction projects and the like canceled. We therefore, adjusted the premiums in line with the remaining exposure on those contracts. While they adjust pro-rata premiums every quarter, it sounds like a bit more this quarter given the fourth quarter is typically our lowest premium volume. As these are prior year contracts, the adjustment has a fairly immediate impact on gross earned premiums also. The effect of those adjustments, plus some additional reinsurance purchase, has also impacted net premiums earned and our acquisition cost ratio for the quarter. For 2018, I would see no reason to change the previous guidance we've given of an acquisition cost ratio around 26% to 27%. As you know, we don't provide premium guidance, however, we do expect to see the benefit of the price increases we've mentioned plus any new business opportunities on our top line in 2018. Bear in mind, we will also have an impact on the timing of multiyear and non-annual deals, plus those non-linear license business, like a political risk group. In 2017, the net reduction on gross premiums written from those types of contracts has been $65 million, and I would expect roughly a similar impact in 2018.On losses. While the individual wildfires are not significant, we've broken out the impact of the combined events in our press release. The net loss of $34.5 million contributed 36.7% to our loss ratio for the quarter. On the third quarter's event, it is purely still very early days, but we did adjust our reserves slightly based on updated information received.We reduced our net loss reserves in the hurricanes and Mexican quakes from $153.8 million to $147.3 million. So much the last quarter, we had a few other losses that I've characterized as largely pure attrition, but not significant enough individually to be carried. Our attrition for the quarter and the year does look like it's running a bit higher than normal, but that's not indicative of a trend and there's no change in further view, our normal attrition in the mid-30s.We had some deterioration on individual claims on prior accident years, but we again had general IBNR releases due to the lack of any reports coming through, and overall net favorable development on prior accident years of $7.4 million for the quarter. As a reminder, Q4 2016 had strong releases from Cathedral on the quarter as the 2014 year began.Investments returned, 0.4% for the quarter, driven by strong returns from our risk asset. Given the modest increase in yields in the quarter, our fixed maturity portfolio generated flat returns. I don't envisage any significant changes in asset allocation or investment strategy for 2018. We'll continue to hedge our interest rate risk through the expected rate hikes.Other income is impacted by the timing of profit commissions from Kinesis, which we received earlier this year than last, and the underlying year of account performance at Cathedral. This season, Cathedral's 2015 year of account were lower than the 2014 year of account, reflecting the relative levels of premium and performance of those years.With the loss events of 2017, we do expect cat collateral releases and no PCs on the 1/1/17 cycle.Our G&A ratio has increased this quarter, primarily as a function of net premiums earned. In dollar terms, it has decreased relative to Q4 2016 as the additional catastrophe event in the fourth quarter impacted variable computation further. Our stock compensation costs were also further impacted by performance with a small credit recorded for the quarter.Lastly, on capital, as stated in our press release, there's no change to our dividend policy, and we're declaring a final ordinary dividend of $0.10 per share or about $20 million. We previously stated that we were targeting around $1.3 billion to $1.35 billion of capital to support the group's expected rate, and that hasn't really changed following the loss events in 2017. As ever, we'll monitor underwriting opportunities and adjust our capital accordingly.With that, I'll now hand over to the operator for questions.
[Operator Instructions] And we will take our first question from Jonny Urwin of UBS.
Just 2. So firstly, how should we be thinking about the growth opportunity for you guys through 2018? On the one hand, you mentioned pricing is going up across 3 quarters if you book or so, which is good, and you see yourself as well-positioned, which is good. But on the other hand, you're still talking about a challenging year. So I guess, how positive are you, guys? And then just thinking a bit more about your comments. So it sounds like you're going to get some margin improvement on a good chunk of the book. But are you also going to increase new business as well to the extent that you got line of sight into that? And then lastly, can you update us on how you're seeing the attritional develop through 2017? Are there any areas that were perhaps better or worse than you expected? I know, Elaine, you said there was no trend in the Q4 deterioration. But just to get a feel for where you're running versus expectations, that will be helpful, and then how you would see that change with 2018 price increases?
Okay, Jonny, I'll take one, and then I'll hand over to Elaine. So I mean, clearly, we've got a big percentage of that portfolio. We're well-positioned for the product lines that are seeing the biggest rate increases. So clearly, we've got growth there on our existing book. I mean, new businesses are always a little bit more hard to calculate by definition. But obviously, we are starting to see opportunities where product lines or even business within product lines is finally being reunderwritten, and that could be an opportunity for us. But what I would say is, and I think it's just consistent with what other sensible people have said, is demand seems relatively flat. It doesn't -- well, it's a huge demand at the moment. And maybe with growth in the U.S. and the oil price stability, we're going to see more of that come through towards the end of the year and into '19. But I think anyone who thinks there's huge amounts of new business around is probably kidding themselves a bit. So there's definitely opportunities. We will clearly take advantage of those opportunities. It's quite hard to gauge. But equally, as Paul said in his script, people have reloaded capacity at the same -- as it was in '17, really. So I wouldn't want to put a number on it, but as usual, we'll maximize when it comes through the door if it makes sense.
On the attrition side of things, yes, you're right, there's going to be a trend there. We did see a little bit more in terms of smaller loss at Cathedral. Nothing really significant there that's individually worth commenting about really. On the line of sight, we picked up a few business PCs in the energy portfolio and some stuff around pricing down as well, but nothing I would see as indicative of any kind of change in terms of the makeup of the business, how we are underwriting it. And still pretty comfortable with the mid-30s range that we've been kind of guiding to over the last little while, if anything, and price improvements in 2018 will improve that.
Cool. And just to follow up on the growth. I mean, can you give us a steer on the 2018, just given as always, there'll be some multi-year effects?
Yes, I think net earned, it depends how much extra new business we'd like to put on. But if we managed a good chunk there, then I wouldn't expect it to be farther than what we got for 2017. Generally, about half of our net earned comes from the current year's underwriting portfolio, and then the rest is made up from prior year stuff coming through. So all those multi-years that we had in previous years will still give us some benefit to our earnings there. And any new business that we write this year, there will be a lot of net earned premium into next year, so we'll get the benefit of that coming through there at a better pricing.
We will take our next question from Kamran Hossain of RBC.
Two questions. The first one is just coming back to, I guess, January renewals. Could you give us an idea of what you achieved at 1/1? And any thoughts on whether this should improve as the year goes on? And secondly, in terms of the business plan, I guess you said that you expect to deploy all your capital this year. What does that kind of seem on for an ROE? I know you're probably not going to give a number, but kind of, I guess, direction year-on-year would be helpful.
So you're correct, we're not going to give you a number.
I'll try later.
So just to give you a sort of background. I mean clearly, after the events, the first thing we would try -- we probably had about 6 business plans on the go at once at one point, and we come up with various different scenarios. Some of that was based on, should we raise capital? What is the opportunity? But where we actually got to in the end, I think we called it right. So we talked about capital in September. We talked about capital again in probably mid-November. But where we got to in the end was we didn't need additional capital to support our business plan, and that was the right call because that's where we're at. So I think, as I said in my script, if something happens in the year and there's opportunities, we probably haven't got tons of excess capital, I would love to be in that situation where we had to go to market and raise capital, and I'm very confident we could do that. But we've got enough for the current opportunity. And actually, remember, for us, it's cat that drives your capital needs. So if the -- we're still quite heavily specialty line focused. So if we see better improvements in those lines, that doesn't show up as much capital, so we should be fine this year.
One other thing I'd just add to capital side of things is that we talked last year quite a lot about the excess bumper that we were carrying. And so we still got plenty of hedge, and some of that was loss absorption, if you like, but there's still plenty of hedge left there for us to use.
And then, Kamran, one other thing I said was we bought exactly the same reinsurance for '18 as we did in '17, so we haven't dropped any cover. The position to do that is the same.
And Kamran, in terms of what we saw at 1/1, I'll just go through the kind of RPIs we saw on the major lines of business. So if you look at the reinsurance lines out of Bermuda, which is things like Cat XL, cat on D&F, retro, et cetera, the blended RPI was about a 10-point rate increase across that portfolio. I would caveat that with there was some loss-impacted business renewed at 1/1. If you look at our Cat XL work, it was about plus 7, which is pretty consistent with the commentary you're seeing in the market. And in Cathedral, that reinsurance book was around plus 8, so again, pretty consistent. Energy, we've been seeing just below plus 5 at 1/1. And things like D&F was around plus 6 at 1/1, albeit, I would again caveat that D&F book at 1/1 is only about 25% of the portfolio, most of which is binder, which is a much steadier book of business, and there's a lot of backward-dated risks to renew through Q2. So they're the kind of major lines of business that are seeing the rises, obviously, a big part of our portfolio. All the other lines, terror, aviation, marine, et cetera, are all broadly flat.
We will take our next question from Nick Johnson of Numis.
Just on the new hires you mentioned, so downstream energy and power. Can you talk a little bit about the origins of that? Is that what you've seen the opportunity to hire some really good people? Or is it in response to market opportunity? And perhaps you could just add whether there are any other areas that you may also be looking -- you may also hire into.
Sure. I'd like to say it was foresight on our part when we saw the market rates about to improve in both those lines, but it wasn't. We just identified some individuals that could come and fit within the group well that we had a lot of respect for. They're obviously areas, as I mentioned in my script, they are niche, short-tail specialists kind of things that we do, areas of our portfolio really we should have a presence in. So we were just fortunate we were able to identify some what we think to be really good individuals that would fit in the team well. So it was more about the individuals and their availability. And then we've just benefited from the fact that it looks like those lines are now experiencing positive rate movements. In terms of other lines, we -- as always, we're always looking at other lines of business we can be in, and we'll continue to do that. There's nothing imminent on the horizon, but as always, we're having conversations with various people and something -- sometimes they come to fruition and sometimes they don't.
Okay. And on the downstream energy and power, is it possible to perhaps quantify the sort of premium income numbers that might be achievable in '18, possibly '19, for those 2 segments?
Yes. I mean, we're not ready to give guidance on that just yet given -- well, power won't really -- the power guy won't turn up until mid-'18. So '18, there's not going to be really any impact. It all depends where the market ends up going. At the moment, they're not going to turn into significant classes of business, but they're going to be nice additional premiums. Obviously, we have the ability of those markets with change dramatically for the better and we can ramp up quite quickly.
[Operator Instructions] Our next question comes from Andreas van Embden of Peel Hunt.
Just a few questions from my side. First of all, your outwards reinsurance program, you mentioned you're going to invest -- buy the same amount of reinsurance in 2018 as in 2017. But could you maybe comment on the mix? I know that in your press release, you've put more cover for your energy book and additional limit within Lloyd's. Are you trying to protect more of your big risks into 2018? And it also ties in with your PMLs, I just noticed that your PMLs came slightly down in January. It seems you've lowered your risk profile, so I assume you're putting capital work in 2018, but for the same risk or lower risk? Could you maybe comment on that? And then finally, on classes, could you comment on what's the level of assets under management at year-end 2017? And whether the 30% increase at 1-Jan, was it just a start of further sort of increases in assets under management in 2018? Do you have some sort of target AUM for Kinesis by the end of the year?
Okay, Andreas, so I'll start now. So just excluding PMLs and modeling, and won't actually comment on that at the moment, we had exactly the same reinsurance program for the group, whether that's at Cathedral or a Lancashire as we did in 2017, and I suppose one that's a clear indication of our view of the opportunity for '18 and a clear view of the availability of reinsurance for '18 as well. So we are disappointed that rates didn't go higher at the 1st of January. But clearly, the opportunity -- the sort of benefit of that is available to reinsurance. So our retentions are actually the same. We're not retaining any more risk at the bottom, and we're buying the same cover. As we head onto '18, we do know, going through some of the transcripts in the conference calls, that some people have retained more risk for '18. And we don't think the market is moved enough to do that, otherwise, we would have done that ourselves. I think on the PMLs, that was just probably modeling change noise. I wouldn't take too much notice of that. And clearly, the PMLs can move around any way on the portfolio. The Q4 reinsurance one, I don't know what is that.
Yes. So this is stuff that's in the treasury that is backwards looking, so that's stuff that we did in Q4. So a little bit in Lloyd's, mostly through core share, and the rest is on the energy side. That's a replacement [ part from you guys ] and did some cover in place for them.
Andreas, it's Darren from Kinesis. As Alex mentioned, we grew the limit sold from 1/1 to 1/1 worth 30%. We still have more money to utilize if we want. At the moment, we haven't -- we might give some of that back to investors, but we will be looking at opportunities during the year. One of the things I would say that's going to be mentioned as a general thing, yes, rates are up but not as much as we anticipated. So that's -- we would like to grow more than 30%, but to date, we haven't.
And what is the AUM right now at Kinesis?
Yes, at the moment, the limit sold, it's 30% more than last year, so you can work that out. But we haven't finalized at what limit we'd sold for the year, so we're not going to comment on that.
We will take our next question from Faizan Lakhani of Bernstein.
I just have one question, and it's regarding the reserve releases. So you benefited from lower cat claims from the hurricanes from about $9 million in quantum. And then stripping that out, it seems like the reserve releases were actually $1.5 million strengthening. Is that a change in reserve philosophy? Or have you changed your reserve losses?
There's no change in our reserving methodology. The change in the reserves for the hurricanes is kind of current accident year stuff. If you look at the prior year development, it's not going to impact that, it's in the prior quarter developments. And quarter-on-quarter, I mentioned there's just a little bit more of an uptick in attrition. We saw some stuff come through in 2016 year on both line Lancashire and Cathedral sides. And if you look at Q4 last year, we did have some big releases from Cathedral, and that was some specific claims being released after closeout of 2014 and just the lack of report coming through. I think we've said in the past not to pay too much attention to what happens within an individual quarter as it can be lumpy. Some quarters, we get more reported; some quarters we get less.
We will take our next question from Edward Morris of JPMorgan.
Two questions. First one is actually just coming back on reserves. One of your peers is explaining that when they end the year with less surplus in the short-tail classes, then they typically expect lower reserve releases for the next couple of years. Can you just explain whether that might be the case for Lancashire? Or should we expect a similar situation to any other year, perhaps for 2018? And the second question is on tax. Can you just confirm, no expected change to your tax rates as a result of the tax reform?
So again, we haven't used our reserving methodology. We don't give any guidance on where we expect reserve releases to go purely because of the nature of our book. It's pretty hard to predict. But sometimes, we get some nice releases, sometimes we get lower releases. So we don't speculate our surplus and what value for future profit. So you can work your numbers out in the same basis that you have been previously. And in terms of tax, there's obviously a lot of stuff changing in the tax world, but we don't expect to have any significant impact to it. And we'll probably get a little bit less group relief going forward, but nothing too significant. We've got pretty small tax from there anyways, whether it's a charge or a credit.
We would take our next question from Thomas Fossard of HSBC.
Two questions on my side. On the range front and retrocession program, so obviously, you mentioned that everything was almost left unchanged compared to 2017. Can you still quantify how much more you have to pay in order to get that cover in place for the year? And second point, I think that, Alex, in your introductory remarks, you explained that you were expecting some loss reporting on the HIM to go higher or potentially to have some deterioration. Have you got any early sign of this since the start of the year? Or overall, what is your feedback around the loss reporting, especially in Q3 and Q4? Have you, is there any worries you've got around that?
Sure, okay. So I think what I was trying to explain on the HIM losses were -- we haven't had significant cat losses for a number of years in this industry. And when you look at prior cat events, if you look at the life of a cat claim, we've got cat claims on our books that were moving for 5 years. So I think there has been some commentary and there's been some movements in HIM losses that, just from my personal point of view, seem a bit strange that at such a short period of time off those events, some people are reducing those HIM losses already. And I would like to be -- or we are, as a group, more conservative. We have lived through these losses before. There's still not a huge amount of information coming through the system. We have seen some Irma deterioration from a number of clients recently. There's still not a lot of Maria information coming through. So look, reserve is, is notoriously difficult for these classes of business. If you're publicly traded, you have to go to the market with virtually no information. So I don't want to be sitting on one of these calls with a HIM loss going out. That could happen. It could happen to anyone. But clearly, we're trying to be as conservative as we can to stop that happening. So I suppose our reserves haven't moved much. We don't play games with our reserves. We're a little bit surprised that some of the HIM losses are coming down so quick. And if you look at any of the original PCS numbers on every single cat claim, no cat claim has ever got better. So there is varying different degrees of how close the sort of PCS guys or within those agencies get to where they think the funnel is going to be. But probably, these series of events are a little bit more complicated as well just because you had so many. So I just think it's early days. I'm usually the one complaining about nothing happens quick enough in insurance. And I think this time I'm saying, let's wait and see where these claims get to, and we'll have a much better view of that in the next 12 months.
In terms of the outwards at 1/1, Thomas, it really did vary per program. I mean, we have a number of non-cat, non-loss effective programs. And you were seeing anything between flat to plus 5 on those kind of contracts. If there were cat renewals, then obviously, you were seeing a bit more of that. And if there were loss-impacted layers, then again, you would see a bit more on that. So it really was varied depending upon the program, but all in line with our expectation and broadly in line with what you're seeing around market commentary for certain lines of business.
And then clearly, if you look at HIM with rates and how much of that HIM was premium we spend on reinsurance, we're net positive even after the reinsurance increases apply this year.
[Operator Instructions] We have a follow-on question from Jonny Urwin of UBS.
A really quick one, just on the investment return outlook. Can you just give us the Stig, given we've got slightly higher yields?
Yes, sure. I mean, we're still pretty short duration, and our yields have been up over the course of the year as rates have gone up. And we expect it to increase a little bit again. We'll obviously have some mark-to-market impacts to that. But I think we could fix the current yields. This is something we can maintain throughout 2018, if not increase a little bit with all the rate hikes.
We will take our next question from Nick Johnson of Numis.
I'm just struggling a little bit to square the comment that the markets turned the corner with the other comment you made that it's going to be another challenging year for the industry. I think you sort of said something that perhaps you could explain, but perhaps if you could just clarify on that a little bit, please?
So I suppose, Nick, we've turned the corner because we're not getting reductions anymore. So that is a completely true statement, and a number of classes of business are in positive territory. But everyone just needs to be a bit realistic about where we're at in the rating cycle. And yes, rates are up, and that's brilliant, and I'm really happy about that. But if you look at where you're coming from, it hasn't really moved at all massively has it? So I think everyone wants a hard market, everyone wants rates to go up, no more so than Jonny Creagh-Coen. But the fact of the matter are it's great to be in positive territory. But we're just not -- rates need to go up to a more sustainable level over a period of time. Now clearly, everything can outweigh this year with enough capital and the returns that we need to give to our shareholders. And all the time, there's plenty of capital that we can match a low return, maybe that's okay. But I suppose it's just a realistic comment of, yes rates are up, but you just got to appreciate where we're coming from. So I still think '18 will be a challenging year, and most classes are still difficult to make money. So I think we're just being incredibly honest about our view of '18, and we're not sort of getting ahead of ourselves.
We appear to have no further questions in the queue.
Okay. Thank you for dialing in, and we'll talk to you next quarter.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.