Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Lancashire Holdings Limited Fourth Quarter 2018 Results Call. [Operator Instructions] I must advise you that this conference is being recorded today, Thursday, the 14th of February 2019. I would now like to hand the conference over to your first speaker today, Alex Maloney, Group CEO. Thank you, and please go ahead, sir.
Thank you. Good morning, everyone. Thanks for dialing in. During the fourth quarter of 2018, the insurance industry witnessed another series of cat events with Hurricane Michael making landfall in Florida and devastating wildfires in California. These insured losses will mean that 2018 is an above-average year for losses, and 2018 and 2017 are the highest consecutive level of cat insured losses on record. Against this backdrop, I'm therefore delighted that the Lancashire Group has returned a profit for the 2018 underwriting year with a 92.2% combined ratio and a 2.4% return on equity. The events of 2018 provided another important test of our risk management. We have digested multiple large losses but still generated an underwriting profit. And we've navigated volatile investment markets and still generated a positive return on investments. We have grown our top line premiums by 80% this year, but the real growth is closer to 20% when we adjust for variables such as multiyear premiums, reinstatement -- and reinstatement premiums, et cetera. This has been driven by positive rate increases across the majority of our product lines and the investments we made in 3 new underwriting themes during 2018. We are seeing more new business than we have seen for a long time, some of which is adequately priced and our rate increases have been achieved, but we're still declining a large amount of new business that needs much more aggressive repricing before we are prepared to accept these risks. We have always said that we would adjust underwriting according to the market conditions. The momentum we're now seeing is a clear indication of our view of the underwriting environment, and that has improved. But we are clear that after years of rate reductions, there is still much work to be done to address underwriting profitability. As the industry addresses the sins of the past, we believe that we will see a return to more sustainable returns where the balance of risk and return metrics will enable us to provide better returns for our shareholders. The momentum in our business leaves us perfectly positioned for the next stage of the underwriting cycle and we will look to maximize opportunities. Our strategy will always remain the same. We will continue to demonstrate the underwriting and capital discipline that we have had since the inception of our company. Finally, I would like to thank our shareholders for their support of our company and our people for all their commitment and dedication to our company. On that, I'll pass over to Paul Gregory.
Thanks, Alex. While 2018 has not seen the same loss quantum of natural catastrophes of 2017, it has been an above-average loss year, with natural catastrophes in numerous territories providing another testing year for underwriting portfolios. In addition, there's been a high frequency of risk losses in many of the specialty insurance classes adding to the pressure to deliver underwriting profitability. With this in mind, I'm pleased with the 2018 combined ratio of 92.2%, which demonstrates the quality of our inwards underwriting and our reinsurance buying strategy. 2018 is the first year for many years where we've seen positive rate movement across the majority of our portfolio, albeit there was a clear difference in trend between catastrophe exposure insurance lines and specialty insurance. In general, the reinsurance lines saw better rate movement at the start of 2018, with price rises less pronounced as the year progressed. Whereas in the majority of specialty lines, the rating environment gradually improved as we progressed through the year. Across our entire renewal portfolio, we saw rate increases of approximately 5% year-on-year. It is in the specialty insurance lines that we expect to see continued incremental improvement in rates for 2019. Areas showing the more significant rate rises are those lines that have seen capacity withdrawal, such as cargo, aviation and specific areas of the D&F market. Other lines such as downstream energy and power also have seen rate rises following a number of years of poor underwriting performance and an increase in loss activity. This is all incrementally positive for us. Specialty insurance lines are now approximately 2/3 of our underwriting portfolio. We have a strong track record of producing underwriting profitability in these classes. Even in the past 5 years where rates have been historically low, our combined ratio for specialty insurance has been in the low 80s. Therefore, any positive movement in rate is good for us. Last quarter, we stated we expect a flattish property market for 2019, and that is effectively what we saw at 1/1, with some loss-free territory such as Europe seen flat to low single-digit rate reductions and loss-impacted territories and accounts seen some rate increases. There was an element of dislocation in the retro market at 1/1 with rates increasing and product offerings and structures changing. This combined with catastrophe events in 2018 working their way through the system may provide fresh impetus property cat rates as we move through '19. Albeit at this stage, our expectation remains for flattish pricing in property cat.Given the dislocation in the retro market, we were able to grow Kinesis at 1/1 for the second year in a row. It was particularly pleasing to secure additional support from Kinesis capital providers given the loss events of the past 2 years, as this support allows us to grow our footprint in an area of the market that's seen rate improvement.We've also grown our footprint in the specialty insurance arena, adding 3 new product lines during 2018. Our timing of entry into downstream energy, power and aviation deductible has been opportune as we're entering these classes when the rating environment in each of these products is improving. We were pleased to secure the aviation deductible team in time for 2018 renewal season, which has allowed us to access business a year earlier than expected. This premium accounts for a large proportion of new business seen in Q4. Overall, our 3 new product lines contributed approximately $40 million of gross written premium in 2018. Importantly, these product lines have light capital requirements as the natural catastrophe footprint is relatively limited compared to other lines of business. As Alex mentioned, gross premiums have grown 8% year-on-year, underlying growth is closer to 20%, whilst multiyear premium and reinstatement premium impact has been catered for. The combination of an improved rating environment and new business has delivered this growth.Whilst we're also -- we're always very pleased to see rate improvement and premium growth in our product lines, as always, we are fully cognizant of the base levels from which we are coming from. So we'll continue to maximize risk and return and focus on underwriting profitability and not just top line growth. We remain cautiously optimistic about 2019 given the improved rating outlook in specialty lines and the 3 new teams being fully embedded within the business. I'll now pass over to Elaine.
Thanks, Paul. Following the third quarter's cats, closed the 2018 with wildfires in California. Like last year, the wildfires in isolation would not have had a particularly significant impact on the group, but in another well above average year of losses, they added to the mounting tally.The fourth quarter also included Hurricane Michael, which occurred in early October. Across the quarter's loss events, we've recorded a net loss after recoveries of $48.8 million. The fourth quarter also experienced significant volatility in investment markets and our investment portfolio lost 0.1%. Our RoE for the quarter was, therefore, negative with an RoE of negative 1.4%. However, with lower overall losses for the year, we remained profitable for the year producing an ROE of 2.4%. Our combined ratio for the year was 92.2%, and our investment return was 0.8%. While the RoE we produced has clearly been impacted by the run of losses over the course of the year, we remained pleased with the way our book performed across those events. We've produced an underwriting profit. Our underwriting portfolio performed as expected, supported by our reinsurance program and also had a few nice reserve leases come through this year as some order claims finally concluded. On the investment side of our business, our portfolio structure protected the downside as it's designed to do.Also pleasing with the growth and our gross premium written in the quarter. While we saw some strong new business flow in the property and political risk book, the new underwriters and teams we've added to the business got off to a good start, introducing over $40 million of new business to the group this year. While it will take some time to build those books out and for the premiums to earn through, there's a meaningful impact on our top line, particularly given that the fourth quarter is typically our lowest volume quarter. We also had some favorable reinstatement premium and prior underwriting year adjustments in the quarter, it's only a small offset from the impact of multiyear deals. And as a reminder, the fourth quarter 2017 was negatively impacted by some premium adjustments to prior year worldwide offshore pro rata contracts due to the cancellation of some projects. Our premiums ceded increased this quarter, largely due to increased reinsurance on the new lines of business. We do have a significant quarter share partnership arrangement on our new aviation deductible book. The net impact of all that was an increase in net earned premium relative to the fourth quarter of last year, although lower percentage of earned-to-written given the higher relative volumes in the fourth quarter of this year. Our acquisition cost ratio was high again this quarter. The fourth quarter of 2017 was somewhat artificially low given the adjustments made to prior underwriting year contracts. The fourth quarter this year was also impacted by a small number of contracts with high brokerage and commissions, which skewed the ratio. I would anticipate the ratio trending back to around 27% next year. As in previous years, we don't provide top line guidance. However, we do expect to see the benefit of the new teams we've hired in 2019, a continuation of the rate increases in our specialty lines, plus the new business opportunities across the rest of our book. As ever, we'll have some impact from the timing of multiyear and nonannual deals plus nonrenewing lines of business like the political risk book. In 2018, the net reduction and gross premium written for the multiyear and nonannual contracts is about $60 million, and I would expect the impact in 2019 to be slightly lower than that. On losses for Hurricane Michael and the individual wildfires are not significant. We've broken out the impact of the combined events in our press release. The net loss of $48.8 million contributed 45.5% to our loss ratio for the quarter. Offsetting those losses, we had net favorable prior year development for the quarter of $39.9 million. We had a 2009 accident year energy claim settled in our favor, some favorable development in last year's cat events, plus some general IBNR releases due to a lack of reported claims coming through. The succession of losses this year again made me book some losses under aggregate covers. These are not individually significant, but I would characterize them as larger than pure attritional losses.There is a slight uptick in attritional and Cathedral book. Our attrition appears to be running higher than we've been guiding. When those are stripped out, we remain comfortably in the mid-30s for attrition. We may see that tick up a little bit next year though, as the new lines of business we're adding are a bit more attritional in nature. As I mentioned, investments produced the 0.1% loss for the quarter, driven primarily by widening credit spreads and the sale of equities impacting our risk assets. The fixed maturity portfolio performed well, though, and the overall portfolio structure mitigated the downside impact of the volatile quarter. While we expect volatility to continue and further rate increases, we remain well positioned for both of those. We will also have the benefit of reinvesting at higher rates, and we'll gradually increase the duration levels to get bonds of those higher rates. No changes in our investment strategy for 2019 though. Our G&A ratio has reduced due to reduction in variable compensation and consulting fees in the quarter. And financing cost for the quarter increased largely due to the mark-to-market, and our interest rate swap had also some LOC cost.Lastly, on capital, we're comfortable with the level we're carrying, and we still have plenty of capital to underwrite the book we expect to underwrite this year while maintaining our usual buffer for other opportunities that may arise. The new lines of business we've been adding are certainly not capital-intensive, so we don't need more capital to grow those. We're declaring our normal final ordinary dividend of $0.10 per share or about $20 million. And as ever, we will monitor underwriting opportunities and adjust our capital accordingly. With that, I'll now hand over to the operator for questions.
[Operator Instructions] Your first question comes from the line of Kamran Hossain of RBC.
Two questions for me. First one is, talking about new business, obviously, it's great news that business is coming back and you're seeing it. Could you maybe give a flavor or a sense of where that business is coming back from? Is this kind of your estimate, the price, et cetera, where that's coming from? And the second question, you're probably unlikely to give me an exact answer there. But if we think about Q1 pricing, is it safe to say that the Q1 RPI probably gets a bit of a bump from marine numbers given kind of wasting of things that -- just any kind of color on that would be helpful.
So I think on the new business front, I think what's happening at the moment in the market is, as people are pulling that lines of business or just reassessing profitability and just generally cutting back, we are seeing new business opportunities. So a real-life example would be cargo. So our cargo team will see a lot of new business. And some of those -- some of that new business with adjusted rate increases will hit the metrics we need. But there's still a lot of business that needs much more aggressive repricing. We are modestly, sort of, confident about rates going in the right direction, and that's great, but we can't forget where we're coming from. So I think that what the industry needs and what everyone needs to do is just look at where rates are. And some product lines need probably multiples of where they are or some individual risks need huge rate hikes to get to some of this adequate. And other businesses is better priced, so yes, we are seeing new business. There's still an awful lot that wouldn't hit the metrics that we need. But it is a clear indication that things have changed and the industry as a whole is trying to increase the profitability after 2 very tough years. Paul, do you want to talk about this?
Yes. Kamran, in Q1, there will be some loss impacted marine business. So on the marine RPI, that will obviously, come through the numbers, and you'll see that on next earnings call. As an overall comment though, at 1/1 across the portfolio, you've taken everything into account because, obviously, everything is premium-weighted. You're kind of in the mid-single-digit rate rises across the whole portfolio. So that's kind of what we're seeing at the moment. Obviously, we've got some more Q1 business to go, but that's what we're seeing at the moment. And basically, I think in line with commentary, you'll see in terms of the specialty lines, same rate increases, reinsurance lines outside of retro are broadly flat. So that's kind of where you'll get in the balance. Also, remember that in some of the new lines of business, particularly power and aviation deductible, albeit aviation deductible isn't really a Q1 issue, not all the business we want will come for in the RPIs because it's new business. RPIs are only basically renewal business.
You our next question comes from the line of Thomas Fossard of HSBC.
Two or 3 questions on my side. The first one would be on the PML. Looking at the changes in your PML exposures, could you explain what has driven the 2025 reduction in the U.S. and European hurricanes and windstorm risk for 100-year return period and a bit more for -- to 50 years? And connecting to -- connected to that, second question could be -- would be on the capitalization of the group. So could you please update us on the current capital position of Lancashire at the end of the year on the S&P model, which remains your binding constraints? I think that S&P, in its last report was pointing to the fact that you had a 10% redundancy over the AAA confidence level. So any update on that would be useful. And the last question will be on the credit quality of the investment portfolio. It is slightly down from the AA- to A+. So anything specific to mention here?
Okay, Thomas. So just one thing on PML, so I just want to make very clear and then I'll hand out to Paul and then Elaine will clearly answer the questions is that when -- our PMLs can move around at any time and Paul will explain why the move is about. When we look at PMLs and the way we think about PMLs is one measure of how we look at our business. And we have pretty much exactly the same reinsurance program as we have done year-on-year. So there's not massive material change there, although the PMLs have moved. So the PML, for us, when we think about our business, is one measure we look at. And I just want to be clear, clear on that. Paul, would you explain?
Yes. I mean, there are some movements as you say Thomas, and some of that relates to inward changes in the inward book at 1/1. There were some areas where there was some opportunity to write more business and others where we decided to write a little bit less and that was mainly driven by the rate environment that we saw there. As Alex said, reinsurance across the group is broadly the same, but there are some changes in some areas, which also kind of feeds through to the PMLs. So there's a number of moving parts.
On the capital side of things, S&P wouldn't be primary measure that we look at. We look at a lot of different models and a lot of different measures are in capital. AM Best is probably the one that we pay the most attention to. And generally, when we're thinking about capital, we look at where we are in the AM Best model, stress and then put some hedge on top of that. And that generally means that we're comfortable under the other models as well. So I wouldn't expect any material change in the S&P model. And then on the course of the investment portfolio, Denise is here, so I'll let her take that one.
Thomas, essentially, there's not much difference, like there's a fine line between the AA- and A+. And we just liquidated more agency debt than treasuries for defend some of the payments we have going on in Q4 with the volatility. We chose to take less risk -- take the quality security route, but it will rebalance and probably jump back up to AA- Q1, Q2.
And your next question comes from the line of Edward Morris with JPMorgan.
First, I just -- I know you won't give sort of a proper guidance on premiums, but I wondered if you could just help us a little bit thinking about the trajectory going forward because you've talked about there's 20% underlying growth. Obviously, we have this dynamic to think about with the multiyear effects. Can you just sort of give us a feel for what you think is realistic to expect over the next few years? Given the teams that you've added, presumably we should expect growth to continue, but some sort of range would be helpful. And secondly, a question on dividends, please. For the last 2 years, your dividends have been -- DPS has been higher than EPS. And actually, I think, if I go back for the last 4 or 5 years, that's been the case. Looking ahead, if the growth outlook changes, can you just give us a feel for what we should expect in terms of dividends? Should we -- I mean, I usually pencil in something close to 100% payout ratio. But if we stop growing, is this too optimistic? Or just a feel for where we are on the dividend outlook? It would be good.
All right. So I'm absolutely not going to give you any kind of range whatsoever. So...
Well, perhaps maybe if I just rephrase slightly then. The 20% underlying growth that you talk about for the year, is there any reason why we should expect on an underlying basis that not to continue going forward? Will the new teams that you've added, is it purely the reflection of adding those new teams? Does that imply anything for the trajectory going forward?
We've had some growth on those teams this year. There's also our kind of normal new business run rate, if you like. So we said, we got about $40 million of premiums for the year, $40 million, $45 million for the new teams. There's probably about 55-or-so that's just kind of our normal run rate. Now those new teams have come in early. We've got them in and managed to get some premium in this year. That will renew into next year, so there would be an element of new business, but probably not the same kind of magnitude as we've seen this year. Does that help?
A little, yes.
And then the dividends, I'm not going to give you any guidance on that either.
But one point on that is it will always depend on what line of businesses we invest in because the lines that we have invested in, in 2018, as I said in my commentary, are relatively capital-light. So you don't need additional capital, particularly to underwrite the specialty insurance lines of business. So it's always worth bearing that in mind. Obviously, if opportunities come up in capital-heavy lines like retro or property cat, then that's a different story.
And your next question comes from the line of Andreas van Embden of Peel Hunt.
Two questions, please. One is on the attritional loss ratio. Could you maybe describe the difference between the attritional loss ratio on the new business that is being put on the books relative to your sort of 35% which is sort of your mid-30s run rate? And the second question is, I see that the Lancashire Holding has become group supervised by BMA on the 1st of January and now your tax resident in Bermuda. Does that change anything at all?
So Elaine will answer the first one. On the group supervision, Andreas, it doesn't actually change anything for us. I mean, we are -- we've always had a big presence in Bermuda and that continues. So it doesn't change anything really. I suppose the Bermuda model fits the way we think about our business. So it's probably easier for us to sort of translate when you think about the way the -- a regulator will look at Lancashire, it's just a bit more relevant the way we think about our business. But there's no changes that would be obvious or necessary. So it's pretty much business as usual.
In terms of attritional loss ratio, the new lines are a little bit more heavy in attrition. And if we've been guiding to kind of 34%, 35% before, then I would nudge that off a little bit. So maybe you're looking to something more like 36%, 37% going forward.
And Andreas, on that, every product line has a different profile. And some of the new lines that we've invested in are a bit more volatile and heavier on the claims experience. So if we add new product lines or the business mix changes, we'll always reassess where we're at. And in the same way that if we -- if there was an opportunity to write more alternative business, then obviously that would move our numbers around again. So it just depends on the business mix of where we're at.
And with that mix area -- sorry, as a follow-up, would that mean that your attritional -- the volatility of your attritional claims is going to increase as well so -- particularly man-made losses?
I wouldn't say the volatility increasing. I think it's just acknowledging that there is high attrition that comes through generally on those lines of business.
Yes.
Your next question comes from the line of Ben Cohen of Investec.
It was really just a point of clarification at this point, just to come back in terms of the growth that we can expect next year. I think, Elaine, you said that there is $45 million coming from new teams. I wonder how much of that was in 2018. And of the sort of the new business in Q4 that you had from those new teams, how much -- if we go forward a year, how much would you expect that will sort of naturally be a growth just from the fact that they are sort of further bedded down when we're a year further out or maybe it's really just a clarity about where that $45 million splits between the 2 years that I haven't quite got a hold of.
Okay. Ben, so the $45 million was all in '18. And if you take a look at the premium page in our supplement, you can see the aviation deductible lines below. So there's a little bit of it under lines, a little bit is done in Cathedral. And you also see the onshore energy line of business under lines, which is the new stuff. And then within both marine and energy under Cathedral, there's some new business coming through, and there's too also a little bit more in the aviation line of business. So we'd expect that business to most of new and also top -- a bit more new business on top of that, most definitely the aviation deductible line of business.
Yes. So Ben, if we think about it, we went into onshore energy at the start of the year, so we have had a full year on that class. But we would expect to see some modest growth in that through the year because the rating environment has improved. And we're year-end, so we'd expect to see some new business. Power, we started halfway through the year where we may, so pretty much halfway through the year. So, again, we would expect to see some modest growth in that as we have the first half of the year renewals to go through. That is a smaller line of business. We were able to get the aviation deductible team into Q4 renewal season, which, as you know, is the big aviation renewal season. So we've picked up a lot of that growth a year early. There should still be some growth on that class next year. But you wouldn't expect to see that until Q4 '19, which is the big renewal season for aviation. Does that help?
Yes, it does absolutely. Could I just ask -- just as a follow-on question on the aviation deductible. You mentioned a relatively big quota share on that book. Could you just talk us through why you do that? Is it kind of just be very volatile? How does it fit in to the use of the overall sense of risk, if you like?
Well, for every line of business, we obviously look at what's the most appropriate reinsurance structure. And for that class, we deemed the quota share option to be the most appropriate. We were able to do that with some existing reinsurers that we have that know that team and know the Lancashire Group well. And that class of business is just more suited to that type of arrangement. It's obviously a new class of business for us as well. So when we get around to next year, we'll obviously review if it's still appropriate. But at the moment, that's the most appropriate reinsurance structure for that class.
Your next question comes from the line of Paris Hadjiantonis of Crédit Suisse.
The first question will be on dividends. Basically, you historically have been paying a special after Q3 mainly because you were quite exposed to hurricane risk in the U.S. As the portfolio is changing, as you're buying quite a lot of reinsurance right now, do you think there's any rationale around changing those specials into year-end? And just double check, knowing what you know today about the level of large losses that you have incurred in Q4, would you still have paid the dividend that you did last quarter? And then the other question would be on Kinesis, you have said that you have ordered new business there, can you give us an update on AUM or additional AUM for 2019?
Okay. Elaine, do you want to cover dividend?
Sure. In terms of the dividends that we paid last quarter, and absolutely, would still have paid it. When we look at or how we think about dividend is the capital that we need to underwrite the portfolio, a buffer on there for any other opportunities and then kind of what's left or not. So we had capital in excess the dividend that we paid out and that we're more than comfortable with that. And in terms of timing, I think timing of dividend -- special dividends is always going to be dictated by outlook. If we think that we can better underwrite the opportunity at 1/1, then it would delay special. If we think that we have a really clear outlook, then maybe we would stick with the normal timing.
I'm Darren from Kinesis. So regarding the AUM, our colleagues at Lancashire will never give you guidance because AUM base gone up 20% year-on-year.
Your next question comes from the line of Joanna Parsons of Canaccord.
Couple of questions from me. Just in terms of your gross premium written split going forward, now that you've added these new teams on, is there going to be any notable shift in the timing of the premiums being written? Because obviously, as you say, aviation deductible is a fourth quarter. But do the teams that you've added elsewhere in the book, do they change that at all? And then on Kinesis, you talked when we met in January a bit about the potential improvement in the outlook and especially on the retro, but there has been comment about more of that to come. Could you give us a bit more of a feel for what you are expecting through the rest of this year for Kinesis?
Joanna, I think, typically, our first half of the year, we would write about 63%, 64% of our book. And it kind of moves a little bit this year with the new lines of business. It will still stay in that kind of 60% to 65% range for the first half going forward. And obviously, with the aviation deductible team, that's a big Q4 renewal, but we do expect to see some more new business coming in through the rest of the year.
Joanna, it's Darren. Yes, We said we grew our AUM about 20%. We think, as Paul touched on earlier, we've seen good opportunities with respect to the Kinesis underwrites. We've seen pricing up 10%. We've actually taken chance to derisk our portfolio a little bit. Regarding opportunities during the year, yes, we think there'd be a few. Hopefully, the market keeps on its positive trend. Florida will be a fascinating sector. But we'll look to, if you like, deploy more capital if we see the opportunities during the year.
[Operator Instructions] Your next question comes from the line of Luke Stratford-Higton.
Just one quick one from me, please. On the fixed income portfolio, please, could you just confirm the current reinvestment rate?
Sure. Our market yield is about 3% right now.
[Operator Instructions] Your next question comes from the line of Joanna Parsons.
So one last question from me. Coming back to the dividend, obviously you've had stated policy of the low base dividend and then special. Could you ever consider increasing the base dividend a bit and then bringing back the size of the special that you pay out? And if not, could you explain a bit your philosophy behind your dividend policy?
Sure, Joanna. I guess, the approach to the ordinary dividend has always been to do a small amount so that we're in complete control of our capital. I mean, arguably, we could you increase a little bit, but we like to have the ability to make a decision on the special. So if we want to keep more capital for underwriting, then we're not tied down to a committed dividend at the moment.
Yes. Joanna, I think our current policy just gives us the maximum flexibility and that's fairly what we like.
[Operator Instructions] Your next question comes from the line of Darius Satkauskas of KB Woods.
Two questions, please. First of all, I'm not sure if I missed it, what kind of rates did you achieve on the new business at 1/1? And secondly, can you talk about your insurance spending for 2019? And is there any changes to the structure?
So on -- yes, on the first question that was asked, we talked about the RPIs at 1/1 across the portfolio, they're broadly in the mid-single-digit range as in positive. Specifically, with regard to the new business lines, in areas like onshore energy, we've seen rate increases in the double-digit range. That market is starting to move, but again coming from a very low base. In the power class, we've seen rate rises in the mid-single-digit ranges. And in aviation deductible, albeit there's not a huge amount done at 1/1, but what we saw in Q4 was pricing improvements in the double-digit range. So on the 3 new classes of business, that's what we're currently seeing in the market. I'm sorry, what was the second question?
Reinsurance spend. So as Alex said, we've kind of broadly renewed our reinsurance program as there were a few changes around the hedges. And we should expect to see reinsurance spend go up a bit next year given the new lines of business that we've got and the reinsurance for those, particularly given the aviation deductible we mentioned as a significant quarter share on that.
And your next question comes from Nicholas Johnson of Numis Securities.
Just very quickly, I wonder if you could just give a bit of an update on what you're seeing in the offshore energy market? Obviously, the oil price has come down a bit since the last quarter. I just wonder if you could update on what levels of demand you're seeing as you go into the April renewal season?
Nick, I'll take that. So you're right, the oil price has been reasonably volatile through '18. We are still seeing increases in demand from our clients. And the tone from our clients remains more positive than it has been in recent years. Adjusting with the volatility, some of that demand coming through may take a little bit longer. But we are seeing some of our clients going back to work, drilling more wells. It's just maybe a little bit slow given the recent volatility in oil price. But the trend is positive, which is good. And then in terms of rating environment, the upstream energy market continues to be positive. It's low single-digit rate rises, which is the second year we see in that. But that effectively because we haven't seen any significant capacity leave the upstream energy market, but we are seeing demand increase incrementally. And as I've said, rates are slowly improving. So it's a better story, but it's just a slow burn.
[Operator Instructions] There appear to be no further questions at this time, sir. Please continue.
Okay, thank you, everyone. Thank you for dialing in, and thank you for your questions, and we'll talk to you next quarter.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.