AXIS Capital Holdings Ltd (AXS) 2003 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Axis Capital Holdings Limited second quarter earnings call.

At this time, all participants are in a listen-only mode. My name is and I will be your conference coordinator today. If at any time during the call you require assistance please press star followed by zero and the conference coordinator will be happy to assist you.

As a reminder, this conference is being recorded.

I would now like to turn the program over to your host for today's conference, Linda Ventresca, VP of Corporate Development. Please proceed.

Thank you operator.

Good morning ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial result for Axis Capital for the quarter ended June 30th, 2003.

Our second quarter earnings press release and our financial supplement were issued yesterday evening after the market closed, and if you would like copies, please visit the investor information section of our website, www.axiscapital.com.

I would also like to note that we have posted a correction to our financial supplement this morning. The correction is to the pro forma book value on page 19.

We set aside an hour for today's call, which is also available as an audio Webcast through the investor information section of our website through September 5th. An audio replay will also be available from approximately 11 A.M. Eastern today until midnight Eastern on August 15th. The toll free dial-in number for the replay is 888-286-8010 and the international number is 617-801-6888. The pass code for both replay dial-in numbers is 54400632.

Before we discuss the quarter, I'd like to briefly address an administrative matter. While we've been working hard over the past few months to compile a list of analysts, investors and reporters who've requested to receive materials from us, we suspect that there are some additional names that we should have. So if you'd like to receive our press releases going forward, please let us know by e-mailing your contact information to investorrelations@axiscapital.com.

With me today in our Bermuda Headquarters are John Charman, Axis Capital's President and CEO and Andrew Cook, Executive Vice-President and CFO.

Before I turn the call over to John, I will remind everyone that statements made during this call including the question-and-answer session, which are not historical facts, are forward-looking statements within the meaning of the U.S. Federal Securities Laws. Forward-looking statements contained in this presentation include our expectations regarding our future financial performance and market and industry conditions. These statements involve risks, uncertainties and assumptions. For a discussion of these risks, uncertainties and assumptions, which could cause actual results to differ materially from our expectations, please refer to the risk factor section of our latest prospectus. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, this presentation contains some non-GAAP financial information within the meaning of the U.S. Federal Securities Laws. In particular, our presentation of diluted book value per share, pro forma shareholders equity, pro-forma earnings per share and pro forma book value per share may considered non-GAAP financial information.

For a reconciliation of these items to the most directly comparable GAAP financial measure, please refer to our financial supplement, once again, which can be found on our Web site at www.axiscapital.com.

With that, I'll now turn the call over to John.

Thank you Linda and good morning everyone. I'm really pleased that so many of your have joined us for our first conference call as a public company.

I'll be discussing the operational highlights of our second quarter and tell you about how we're positioning Axis Capital to be the world's leading diversified specialty insurance and reinsurance company in terms of quality, sustainability and profitability.

Andrew will discuss our financial performance and then we'll be glad to answer your questions. I'm sure you'll have several, given that we've been in a quiet period since our listing day.

Since this is our first call and many of you are still getting to know us, I'd like to take a few moments to provide a very brief overview of our business, to give everyone listening to our call and Webcast today, a better understanding of Axis Capital.

Axis Capital was the first company formed in response to the significant market dislocation, following the September 11th tragedy. While the idea of Axis Capital was conceived in the spring of 2001, with its launch planned for 2002, the unprecedented dislocation and paralysis of the market in the wake of the World Trade Center disaster, accelerated our plans.

Within six weeks we have raised $1.7 billion in capital, including significant management and employee contribution, and we're incorporated here in Bermuda in November 2001. Since our inception, we've distinguished ourselves from the marketplace, not only with our team of proven market leaders, but also by the model that I referred to as our underwriting machine, our strong balance sheet, out pattern of controlled growth and our global diversity.

Combined, these competitive advantages continue to attract and undoable client base in each of our four major business segments, global insurance, global reinsurance, U.S. insurance and U.S. reinsurance.

Furthermore, we have the flexibility to respond to market changes and a scalable operating model, which we expect will generate higher ROEs and stable returns through the cycle.

We're proud that these characteristics have attracted a diverse investor base since our Initial Public Offering on the 1st of July.

With respect to the market changes I have mentioned, we continue to believe that the insurance and reinsurance markets remain in a state of flux, and that the tradition markets continue to be challenged by legacy issues.

The Axis franchise as defined by its financial strength, client service and capabilities to write business across geographies and product lines. It is because of these defining characteristics, we are benefiting and we believe we will continue to benefit in all of our segments, from the fright to quality, which persists globally.

Now I'd like to take a moment to discuss how the fundamental objectives of Axis Capital and the sustained transformation of the insurance and reinsurance markets continue to manifest themselves in our results and we'll do so by addressing the operational highlights of our second quarter.

Building on the substantial market penetration of the Axis franchise, established in global insurance global reinsurance since our inception and the continued ramp up of our two new U.S. segments, U.S. insurance and U.S. reinsurance, we have doubled gross premiums written from the second quarter of 2002 to 551, $551.5 million.

Net premiums written for the quarter were $449,800,000 million. Net premiums earned for the quarter were $335.6 million.

Our underwriting results were strong, with a combined ratio of 81.5 percent.

I would like to stress that it's worth mentioning here that this combined ratio is higher than that of the first quarter of this year, which was at 73.1 percent, due to two factors. The first being the very light loss activity in the first quarter. But secondly, and as importantly, the cost relating to the start-up nature of our U.S. operations in the second quarter.

Net income was $117.8 million.

Our annualized return on equity for the quarter was 23.8 percent.

Operating cash flow was $345.9 million.

We have grown shareholders equity to $2.2 billion, and in doing so, we have grown diluted book value per share since year-end 2002 by 10.6 percent to $15.44 per share.

I will now turn to a discussion of the operational highlights of each of our segments.

In the second quarter, our global insurance segment, one of the two segments in existence since our inception continued to expand as we grew gross premiums written by a strong 27 percent to $207.7 million, and net premiums written by 49 percent to $203.8 million from the same period last year.

Net premiums earned for the quarter were $187.5 million, more than four times those of the same quarter in 2002.

Our net loss for loss expense ratio for this segment in the second quarter of 2003 was 61.1 percent compared to 74.3 percent for the second quarter of 2002.

In this segment, we have experienced positive development of our 2002 underwriting year, primarily experienced in our aviation war property and terrorism lines of business, representing three loss ratio points.

Also material impact in the loss ratio in this segment for the quarter was a notification of loss related to the U.S. tornadoes early May. The industry loss figure for the U.S. tornadoes, as advised by PCS, is currently estimated to be approximately $3.1 billion. We have currently revised this notification in the global insurance book to its maximum net exposure to Axis of $45.5 million, which represents 24 loss ratio points for the segment and 13.5 loss ratio points overall.

This loss is representative of a high severity, low-frequency risk, which characterizes the global insurance portfolio of risk placed with Axis Capital for our valued clients and is well within our expectations of loss within this segment. The fact that even with this loss, we can post the loss ratio in this segment of 61.1 percent for the quarter, underscores the robustness of the portfolio business we have built in this segment.

I'm happy to report that we continue to lead business throughout our global insurance segment, which is characterized by robust rating levels, tight terms and conditions, widely used standardized wordings and extremely tight cash flow. We remain one of the few global leaders who can deliver a broad suite of reliable, value-added products and services to our clients, which continues to translate to the attainment of premium prices for us.

Axis is recognized by clients and intermediaries as a must-have market, and we continue to experience a transfer of business to us and away from weaker or less reliable carriers. We have seen in the second quarter of 2003, strong development in our aviation, energy, property and specialty accounts, but continue to be disappointed by the weak marine market.

In our commercial property book, we are beginning to see competition in the Fortune 1,000 type property markets, which we target in this segment. But we still consider most of the pricing attractive and see additional opportunities to meet or exceed our return hurdles by continuing to access good, quality new business by participating more broadly in existing programs by tapping the European and Australians markets.

Our specialty accounts experienced a slight decrease in premiums over the second quarter of 2002, which was driven by a reduction in terrorism businesses written. Our terrorism book is opportunistic, but given the current uncertainty in having the U.S. Government as a backstop, this account continues to present us the opportunity, although not at the level of 2002, to write profitable business for markets uncomfortable with the retention and co-insurance provided by as well as insures the satisfaction with its breadth of coverage.

The marine market, which is yet to recover to the healthy rating levels seen in the mid-90's, currently represents a strategically selected business line for Axis Capital, and the global insurance team remains poised to enter this market in a much more significant way when the market becomes attractive to us.

Our superior client service throughout this segment continues to distinguish Axis from its competition. Most recently, because of strong client demand for the product, our expertise and our security, we have added a substantial access, D&O capability here in Bermuda to serve their needs.

Moving on, our global reinsurance segment also had a good quarter with $120.1 million in gross premiums written, an increase of 24 percent over the same period last year. Net premiums written were $115.6 million, up 19 percent over the same quarter last year.

Net premiums earned were $97 million in the quarter. Loss activity in this segment was light and our net loss and loss expense ratio for the segment was 45.5 percent for the quarter. The overwhelming majority of which is IBNR. We've reserved for some potential losses related to the U.S. tornado, but in most cases, we participate on excess of loss basis in layers, which are not likely to be impacted. Positive development in our 2002 underwriting year had an impact of 4.2 percent during the quarter.

We expect to continue to grow through book building, the expansion of existing relationships and through new opportunities presented by the substantial dislocations taking place in Europe.

We also continue to diversify the non-property cat business, including excess workers comp, PA and life.

Our cat premiums during the second quarter were up 17 percent over the same quarter last year. In our property cat business in the U.S. we have seen pricing on large national accounts flat to modestly down.

That's still representing attractive returns through Axis nonetheless. And pricing on both regional cat exposed and regional non-cat exposed business still trending upwards.

Within the cat book, we have growth non-property cat premiums, which includes excess worker's comp, PA and life, as this market has represented a great opportunity for Axis.

Sophisticated Bermuda cat players have rationalized pricing in the non-property cat business to property cat levels. Data has improved since the 11th September tragedy for use in these models and demand has increased, especially with rating agencies consideration of the event risk faced by carriers.

As for our property per risk business, we believe the opportunity to write business is increasing as there is a trend in the reinsurance proportional market to restrict covers.

Certainly in Continental Europe, as the old guards prorated treaties dissolve, ample opportunity exists to write high-quality risk access of loss business.

Finally, changes to deductible structures and much more rigorous underwriting are proving to be very good for our property pro-rata book for the 2002 underwriting year.

And Axis will continue to entertain the business as long as it leads our internal return hurdles.

Before we move onto our newer U.S. insurance and U.S. reinsurance segments, I'd like to spend some time discussing our recently announced major expansion into Continental Europe.

The transformation of the reinsurance industry in Continental Europe presents us with the unique opportunity to quickly build a substantial business and franchise there. As a consequence of heavy losses through the existing major carriers, caused by years of undisciplined underwriting, coupled with huge investment losses, the European market is witnessing a fundamental re-evaluation and realignment of business partnerships.

We believe the market will move to transacting more business on the excess of loss basis, thus increasing demand for both risk excel and cat reinsurance.

Our policy at Axis Capital is to employ the best and to that end, we are delighted that Dr. Karl Mayr agreed to lead a European expansion as President and COO of Axis re-Europe.

Karl most recently served as CEO of , the reinsurance company in Munich, and is widely acknowledged as one of the most able leaders of the European reinsurance market. His profound knowledge of the industry and its clients, coupled with his outstanding reputation, will be a tremendous asset to Axis Capital as we establish ourselves as a major force in Continental Europe.

Moving on to our U.S. insurance segment, the approach here is somewhat similar to that, of our global insurance segment, with products tailored to the client's needs and the results of long-term relationships.

Our commercial property unit writes both cat exposed and non-cat exposed business on a primary and excess basis for medium to large accounts and on both an admitted and non-admitted basis. Our commercial liability unit writes general liability and product coverage on both a primary and an excess basis. Our primary casualty business is written on both a claims made and accounts form with a $1 million limit, while our excess business is written over at least a $1 million attachment point and has the benefit of a substantial reinsurance program to limit volatility. Our professional lines unit primarily writes D&O and related coverage for private, non-for-profit and public companies on the excess basis. This important account has been completely re-underwritten by the market over the last 18 months and with the benefit of much tighter coverage makes it a much more medium-tail type business, which fits our book perfectly.

In the second quarter, our U.S. insurance segment began to ramp up with the Sheffield acquisition, now renamed Axis Surface Insurance Company, which we completed during the first quarter of 2003, the execution of a very successful rewrite plan through the renewal rights deal with Kemper and the integration of teams from both combined specialty and Kemper FIS. Total gross premiums written in the segment for the quarter were $171.1 million, representing an increase of 86 percent over the first quarter of this year. The renewal rights deal with Kemper contributed $31.9 million in gross premium during the quarter. Our net premiums written in this segment were $79.4 million. Due to our startup nature in this segment and the desire to reduce volatility in our catastrophe exposed classes of business, we have put in place a reinsurance program with top quality reinsurance that impacts the premiums, but is advantageous overall. Our net loss and loss expense loss ratio in our U.S. insurance segment was 63.5 percent for the quarter and 62.4 percent for the six month period ended June 30th, 2003.

Structurally, we have built the operation to include the core businesses we feel not only have the greatest profit potential, but also deliver long term strategic value. At this point we will continue to penetrate and expand in these markets from both a distribution and product offering standpoint. In our commercial property book, price increases have slowed but continue at acceptable levels with good terms and conditions. We are confident that we will continue to benefit from the flight to quality in the U.S. and our ability to begin writing on admitted basis.

In our primary and excess casualty business, pricing is strong and continues to trend upward and terms and conditions are extremely favorable. In our D&O book we are experiencing rate increases in our public company business near 70 percent on top of substantial increases over the last two years. We continue to see strong opportunity in the professional lines as the need for capacity continues and terms and conditions remain attractive.

Finally, I'd like to discuss our U.S. reinsurance segment which emphasizes excessive loss severity-driven reinsurance business sourced in the U.S. We began ramping up this segment in early 2003 and in the second quarter wrote $52.5 million in gross premium written and earned net premium of $14.1 million, but expect this to increase significantly as the book matures. We have recorded a net loss and loss expense ratio of 94.8 percent for the quarter and 79.2 percent for the six month period ended June 30th, 2003, but we have not experienced any material losses to date. Due to the startup nature of the book, we have reserved conservatively and as we spend more time, the book--sorry, as we spend more time, we will give more weight to the experience of Axis Capital itself in our reserving process. With the completion of the ramp up of operations in this segment during the first half of this year, coupled with the increase of our unencumbered capital base in the U.S. to over $500 million, we expect to grow the book in this segment substantially going forward. Our capitalization in the U.S., our ratings and our reputation distinguish us from the competition in the U.S. reinsurance market and thus continue our Axis widespread acceptance there.

The most attractive opportunities to date in U.S. reinsurance have been in the professional liability, casualty and property risk areas. Liability business, particularly umbrella, is showing strong rate increases following the trend experienced by the primary companies. We have also been very successful on U.S. reinsurance in writing property business which is complementary to our book of business in the global reinsurance segment. This property business represents an opportunity to better serve clients who desire local service for higher frequency property lines.

And with that, I'll turn the call over to our CFO, Andrew Cook, who will review our financial progress during the second quarter. Andrew?

Thanks John, and good morning everyone.

The key message that I'd like you to take away today is that we remain committed to the financial strength that Axis Capital represents for both our clients and shareholders. Our shareholders equity at June 30th grew to $2.2 billion, a 29 percent increase from the $1.7 billion at the same time last year, and a 13 percent increase from year-end 2002.

Beyond the substantial net income of $117.8 million we've added to shareholders equity in the quarter and the 22.4--$224.9 million for the six months ended June 30, 2003, we raised $316 million to net proceeds from initial public offering, including the net proceeds from the exercised the underwriters over-allotment option subsequent to the quarter end. Our shareholders equity figure pro forma for the total proceeds from the IPO at June 30th is $2.5 billion.

Our operating cash flow for the quarter continues to be extremely strong at $345.9 million and coming in at $610.4 million for the year-to-date. We ended the quarter with total net invested assets of approximately $3 billion, up almost 37 percent from December 31st, 2002, and that's excluding the proceedings of our IPO, which came in subsequent to the quarter end. Our diluted book value per share on an asset converted basis at the quarter end was $15.44, an increase of 10.6 percent from year-end 2002. Our diluted earnings per share for the quarter were 81 cents. As a matter of housekeeping, I should mention that the 15.4 million new shares from our IPO, including the exercised the underwriters over-allotment, are not reflected in our reported EPS, our book value per share figures during the quarter or for the year-to-date. These shares begin to weigh in those calculations going forward as the IPO closed on July 7th, after the end of the second quarter. For EPS and book value per share calculations pro forma for IPO, please see pages 16 to 19 of our financial supplement.

With these highlights, let me turn to the income statement. Again, we have more than doubled our gross premiums written in both the three and six months ended June 30th to $551.5 million and $1.16 billion respectively, and are satisfied that we have substantially completed the build out of our infrastructure to further support our plans for continued controlled growth in businesses which generate our return requirements. Net premiums written for the quarter were $450 million. Premiums ceded for the quarter were $101 million related to programs we have in place for our global insurance and global reinsurance segments, together with a comprehensive program that came with our U.S. insurance segment. Our net premiums earned for the quarter have more than tripled to $336 million over the same period last year as the global insurance and global reinsurance businesses have grown. We expect earned premiums to continue to ramp up as our U.S. insurance and U.S. reinsurance books continue to develop.

Net investment income for the quarter was $15.9 million, an increase of 13 percent over the same period last year. The annualized effective yield for the portfolio in the quarter was 2.5 percent, down from 3.4 percent in the same period last year. We would like to note that we invest our assets in order to achieve a total return, which we believe is the best method of accreting book value to our investors. With this in mind, our net realized gains for the quarter were $15.7 million, bringing the total pre-tax income on the portfolio to $31.6 million, an increase of 39 percent over the total pre-tax $22.7 million in the second quarter of 2002. This resulted in the total return of 2.8 percent for the six months ended June 30th.

During the course of the year, we have increased our invested asset base over that of comparable periods last year. However, somewhat mitigating this was the dramatic fall in U.S. interest rates which impacted our invested earnings for the quarter and six months ended June 30th. To put some parameters around this impact of each factor for the quarter, the higher invested asset base contributed an additional $7.7 million, while the lower interest rate environment reduced income by $5.8 million, resulting in a net increase to investment income of $1.9 million. We held high cash balances and our overall duration is 2.4 years. We have taken a very defensive posture with the portfolio in response to the current low interest rate environment. However, we believe that with the recent backup in interest rates from mid-June lows, we will look to invest some of our existing cash balances and the proceeds of the IPO at generally higher yields and, as such, expect that our interest income should start to pick up over the balance of the year. Our overall portfolio was rated Triple A and we do not hold any non-investment grade securities in the portfolio.

With respect to our allocation to mortgage backed securities, we had 35.3 percent of our invested assets in this sector at June 30th. I might point out that this allocation is underway to limit intermediate aggregate benchmark. We are confident of our manager's ability to manage both pre-payment and extension risk when one considers the current spread differentials available in the corporate bond sector. These can be up to 100 basis points lower than mortgage backed security spreads. With that in mind, as always, we have run our VAR and yield curve analyses. In relation to other companies in our industry, we continue to believe that in terms of overall portfolio volatility, we are at the low end of the spectrum. As of June 30th, a one-time 100 basis point parallel in the yield curve would result in a total market value change in the portfolio of approximately $67 million of which the portion would account for $21 million.

Consistent with our conservative and prudent accounting principles and in conjunction with our independent third party actuaries, we have recorded approximately $342 million in net loss and loss expenses in the year-to-date, of which $283.3 million is related to IBNR. We urge you to visit page 14 of our financial supplement which provides reserve analysis by segment for more details. Additionally, other insurance related income for the quarter amounted to $10.1 million, representing the marked to market increase in the value of an individual political risk contract accounted for as a derivative. Our foreign exchange gains for the quarter were $12.9 million, reflective of the weak U.S. dollars in relation to euro and sterling.

I'd also like to highlight our expense ratio, which is comprised of 16.7 percent in acquisition costs with underwriter's salaries loaded into this measure, and a 6.5 percent general and administrative expense ratio for this past quarter. We intend to continue to drive down our expense ratios as we grow our premiums, leveraging our core moderate technology based infrastructure, and diversify our business mix.

Finally, we have determined that we will not be providing earnings guidance for the year ended December 31st, 2003. However, we will continue to evaluate this policy on an ongoing basis.

That concludes our prepared remarks for today's call. We would now like to open the lines for your questions. Operator?

Ladies and gentlemen, if you wish to ask a question, please press star, 1, on your telephone. if your question has been answered or you wish to withdraw your question, please press star, 2. Again, please press star, 1, to ask a question. Please stand by for the first question.

And our first question comes from Mark Silverman with Neuberger Berman. Please proceed.

Well, good morning. I want to congratulate you on a great quarter.

I just had two quick questions. One is just related to the other insurance related income; how should we think of that on a go forward basis? Was this a one-off and we really shouldn't extrapolate?

And two, I just wanted to know in terms of the current ownership structure on a diluted basis between MMC, management, the equity investors that are still there, the private equity investors, and the public.

OK. Morning, Mark. With respect to other insurance related income, there was an unusually large movement this quarter and there's a couple of factors behind it. And just by way of a little background on the individual transaction, it represents the marked to market increase in a value of underlying sovereign risk as required by the provisions of FAS 133. The main drivers of the value of this overall contract are the recovery rate of each sovereign risk in the basket , value of money and the credit default swaps spreads which effectively drive the probability of default. And what we had in this quarter were three very favorable factors. First of all, we had the end of hostilities in Iraq, one of the particular underlying securities was upgraded, and we had the cessation of civil unrest in another country. So you combine all these together we had an overall 17.4 percent decline in the weighted average default rate on the book. So what I would say, Mark, is we obviously can't forecast global economic or political uncertainties, but certainly we believe this quarter was an unusually large positive movement in this transaction and I think on a going forward basis, I'd assume that the general movement we had in the first quarter of just over a million dollars would be a little more representative of what we'd expect in this transaction.

Great. Thank you. And related to the ownership now?

On the ownership side of the equation, we still had, we sold 360 million new shares plus about 2 million shares in the secondary as well. So, the vast majority of the company is still owned by the initial shareholders in the company. I think one of the questions you had was and the MMC Capital, and they're still coming in at about 18% ownership in the company, and I think the management ownership in the company is approximately 4%.

Great. Well, thank you very much.

Thank you.

And our next question comes from Charlie Gates with CSFB. Please proceed.

Good morning. A couple of questions. One, I know that you spoke to reductions and reserves for earlier losses for your two most important lines. Could you aggregate what that dollar sum was during the quarter?

Yeah, sure, Charlie. The total amount released so far this year is $20.6 million, and that's pretty much been split, $10.2 million in Q1 and $10.4 million in Q2.

Second question, what portion, roughly, of your sales in the second quarter, were casualty lines?

cook I guess in terms of overall percentage that are casualty in the quarter, for the most part, that comes out of our U.S. operations and total U.S. insurance premiums were $171 million of which, I think 40% of that relates to casualty line. And Charlie, I think it's important to not there that that's a little skewed this quarter because we had the cancer rewrite provisions on the DNO book we bought from Kemper, which had a one-time effect on he quarter, so that increased the casualty lines. And then on the U.S. reinsurance side, total premiums for the quarter of $52.5 million, of which about 30% is coming through on the casualty side.

Basically the balance of the company is property?

Yeah. Charlie, it's John. Good morning to you. And you know that we're much more favored to it remaining in that way for the foreseeable future, because, unless there are fundamental form changes, the attraction of higher premiums is only part of the solution. And as I've said to you before, I've sat back for the last 35 years and watched each decade, the casualty account come in and crucify the industry with regular monotony. So, we will still remain largely a property-based company.

You announced your tornado losses, I believe, for the insurance. Did you break that out for reinsurance?

Well, I actually did deal with the reinsurance side. You obviously missed it a bit. But we put up some conservative reserves at the beginning, but they're not material.

OK.

On the reinsurance side.

Yeah, Charlie, on the reinsurance side it's actually fairly immaterial loss to the company. It's less than $4 million and right now that's just booked as pure IBNR because we haven't had any case reported to us yet.

But you know that our loss reserving philosophy in any major event is to immediately put up conservative loss reserves and then look at the early development over the next two or three quarters, and either rent would draw them down.

When does the next, I mean, I know that some of your stock, I believe, comes out of lockup after 180 days and some after 270 days. What amount of stock, basically, is freed up after 180 days?

Charlie, none. The entire lockup for existing shareholders, director holders and for the employees of the company is fully locked up for 270 days.

OK. Thank you. And so, that's all private equity investors as well.

That's correct.

OK. And here's my last question at this time.

That's not a bad two-question one, Charlie, but I'll forgive you.

I'm sorry.

That's All right.

This is my last question. Did you see the CNA announcement this morning that they were adding some $300 million to reserves after tax for accident years prior to 2000 for worker's compensation, DNO in construction defect? What do you think is the impact of that?

Let me just clarify, when I said we were writing excess worker's comp, essentially what we're talking about is that we're writing cap covers that require multiple lives or injuries to be involved. And the primary driver of the claims likely to be large, natural catastrophes. We're not in the worker's comp business per se. It's still a cap-related approach. But I just keep coming back, Charlie, as I've been saying for so many years that the casualty account is not just an issue about pricing. It is actually a complete reevaluation of the product itself.

Thank you.

And our next question comes from Adam Klauber with Cochran. Please proceed.

Good morning. Returns on your capital are already quite substantial. As we move forward next year, several factors. Obviously you can leverage your capital more with premiums and assets, but on the other hand, some of your key markets are seeing softer prices. So, could you talk about the return bubble we're seeing today? Do you expect that to go up, stay level or go down?

I just deal with, as we keep on emphasizing, while you may see some softness in some parts of the segment that we underwrite, we are continuing to book build throughout our entire business and throughout all of our four segments, let alone the book building that will take in continental Europe. There is a wholesale business, attractively priced, conditions that have been amended, that continues to take place to us and from weaker or less reliable carriers. So, the outlook for us, in terms of our growth, still remains attractive. And that's for the foreseeable future. There is a fundamental redistribution of business taking place within the industry. Andrew, if you want to comment on the second thought.

You know, Adam, I think, obviously the returns this quarter annual has been very strong. I don't really want to give you too much guidance on that because, as we said during the script, that we're not prepared to give guidance on 2003, but I think it is safe to say that obviously, very attractive returns. We'd like them to continue at this level, but obviously that's going to be reflective of, as John said, our continued growth and also reflective of lost activity going forward.

Thank you. And one follow up. Which one of two segments should we watch for the fastest growing segments in 2004:

Well, I can understand why you might want the set, but my competitors probably also listen to these calls as well and we like to keep a compe -- I love them dearly, but I like to keep an edge over them. They can carry on chasing us.

Understandable. Thank you very much.

Thank you.

And our next question comes from Vinay Saqi with Morgan Stanley. Please proceed.

Good morning. Just a couple of quick questions. One, John, if you could just comment on the European expansion. What percent of your current global insurance in Europe, what percentage of your global reinsurance business comes from Europe and where do you think that's headed over the course of the next couple years?

Second question for Andrew. If you could just give us a sense of, if your duration on your investment portfolio has increased significantly or slightly given the backup in rates and your mortgage-backed exposure and how much that has been so far.

And then finally, if you could just give us a sense on what the duration on this political risk contract? Is this just a one-year contract? Is it three years, five years?

OK. Well, Vinay, good morning to you and nice to hear from you. As far as Europe is concerned, it is a major strategic expansion of our business in the fifth business segment. So, that gives you some understanding of the scalability that we expect to occur within that segment. We currently have, again, definitions of reinsurance can fall between insurance and reinsurance. But we currently have around about $60 million worth of European reinsurance business, which we expect to substantially grow.

Vinay, on the next question, let me give you some sort of parameters around that. As I said, the duration on the portfolio is 2.4 years and that includes the cash component. If you back up the cash assets, the duration of the portfolio at June 30th is 2.79. And again, if you think about that 100 basis point parallel shift in the yield curve, our total duration on the portfolio would only move out to 3.13 years, and that's assuming a one-time parallel shift. So, given that the rise has been somewhat gradual, I would say now, X to cash component of the portfolio. Our overall duration to the portfolio would still be pretty short at about three years. And was there a third question, Vinay?

On the political risk contract.

Duration

Oh, right, sorry. Duration of that contract, it's a five-year deal. It's now 18 months into it so we have the balance of the contract to run.

OK, great. Just a follow up on the European question. John, what type of lines are you looking to write out there? If you could give u a sense of property, some casualty. And then you mentioned $60 million of reinsurance premium. Do you know how much of the global insurance premium was from Europe?

We do. We try not to be too specific again about that sort of information, I'm afraid. I want to go back to the reinsurance question, sorry. I want to pick up your thread. What were you saying?

You mentioned that $60 million of reinsurance premium is from Europe. I was just wondering, do you have a similar number for the insurance side?

Yes, we do, but it changing Because you've got to look at, if you look at the spread of products that we have throughout our insurance business, we have weather lines, whether they're ship banners, whether they're property owners. We have a pretty substantial book of European business. But the reality of the fundamental change that's taking place in Europe is not only just reinsurance. There is a fundamental knock-on effect of the dislocation of huge amounts of insurance business that will be freed up and will come out to a very closed marketplace. So, there is a significant follow on opportunity that will occur in continental Europe for an insurance site as well. But at the moment, we're concentrating on establishing our foothold from a reinsurance standpoint. saqi: All right. Thank you very much.

But we will grow the insurance side.

Great, thank you very much.

But we will grow the insurance side.

Great, thank you.

Thanks.

And our next question comes from Mike with Fox-Pitt Kelton. Please proceed.

Good morning. Nice quarter. Thanks for the added disclosure in the supplement. I hope, John, your competitors follow your lead in that one at least.

Thanks Mike.

I have -- I have several questions for you. Firstly, in light of the changing composition of your books, some of the things that you've talked about on the call, can you comment on what you think is a comfortable equity ratio, how that -- that target may be changing over time? Secondly, can you comment on where you stand on your seated reinsurance program and the credit quality of the recoverables on the balance-sheet today, and finally, you mentioned your terrorism book and how much of your '03 written premiums will have terrorism exposure embedded in them.

OK, Mike. I'll take the first two and then turn the terrorism one over to John. In terms of premiums to equity, certainly as you ramp up the book and take into account the proceeds of the IPO, I think it's safe to say that our premiums to the surplus ratio is always going to below 1 and then I think our long term goal is be .75 to 1, to 1 to 1 given some of the severity in the underlying book of business. But you should see that coming into play as we move through 2003 and into 2004. In terms of the credit quality on the reinsurance balance-sheet recoverable, as you can see, it's $51 million from the face of the balance-sheet. About $40 million of that is based on the IBNR we're booking on or underlying book of business, so which recoverable and IBNR as opposed to reported and the credit quality of that is A or above and there's about $11 million which is actually recovery for known event, and given that those known events are short tail, we'll be paying those fairly shortly. So those recoverables should be coming back into us in a pretty short time frame.

I just want to go back to the question of reinsurance, Mike, which is very important. Because fundamental to our business practice is that any business we take on at Axis has to be profitable and can stand up on it's own two feet. We then use reinsurance to either enhance profitability or reduce the potential for loss. We do not create profit out of reinsurance. So, we are in the reinsurance markets -- Axis reinsurance markets on a daily basis discussing opportunities with reinsurers to lay out parts of our portfolio. Unless there is a proven advantage to us, we will not do so. Because of our emphasis on a quality based approach at the front-end, unlike a lot of other business, we do not need reinsurance in order to continue to underwrite our portfolios of our business. Just going on to the terrorism side, I get pretty tedious and boring about all this stuff but, I've been involved in terrorism business for 25 years. That terrorism book, as I said, is one of our opportunistic books. When we first set up access at the end of 2001, I immediately strategically positioned access alone side and as one of the three dominant underwriters of this line of business, individually graded, individually assessed, individually aggregated. It continues to be an important part of our business. As I said to you before, with the government -- U.S. government intervention, we took a very conservative approach to our 2003 budgeting. I'm pleased to say that we will substantially exceed that to 2003 because we have noticed the client base come back to us because they value our products. Again, it's individually written. We know -- we have broad geographic spread, we're diversifying the type of property that we're insuring, and we are very careful in terms of the way that we aggregate our product. But it is -- it is a beneficial business to us. It's highly specialized, and as I say, that we're one of three carriers who really do, I think, drive this market. There are others who the product, but their earnings and their acquisition costs fundamentally differ from what we're able to extract from the market.

Can you give us a sense of the size of your business or aggregate exposure, however you want to think about it, from either premium or exposure perspective? And, in light of what you're saying about your last comment right there, can you give us a sense of the outlook for -- for the sustainability of those premiums going forward?

When we -- let me just deal with the aggregate exposure first. When we were on the road show, Andrew, myself and Michael talked extensively about exposure of our capitals, a major event. So one of those events was a substantial re-creation of the World Trade Center type tragedy. And if you think of the scare of the World Trade Center tragedy of 20 acres, we increased that by 50% to a 30 acre site. We took out Central Manhattan, and I regret to say, most of the investment bankers were there. And, we maximized our aggregate exposure over that 30 acre site. Just as a matter of interest, there is no non-nuclear capability to take out a site of that scale. But nonetheless, we did it because we wanted to see what potential erosion of our capital could take place. And the aggregate that we came up to was similar to the $50 billion event -- North American event which was in the mid $500 million range.

500?

In the mid $500 million range. And then if you think of annualized earnings of the company, you can see there's not a substantial potential erosion of capital for the balance of the earnings.

Mike, just to give you some grammars around the numbers there and tomorrow, there's a full table on the break of specialty lines. But in terms of the specialty section of that, gross written premiums for six month ended June are $161.3 million and for the three months, their $75.3 million, and it's safe to say that the terrorism specific amount of that is about 40% of that total.

Great. Thanks very much.

Thanks.

And our next question comes from Dave with J.P. Morgan. Please proceed.

Good morning everyone.

Good morning.

Hi, Dave.

Just a couple quick questions here. First, in terms of infrastructure costs, kind of going forward here, we got to build out here and, you know, the European reinsurance side, you know, what can we expect going forward just from people, technology, you know, infrastructure on that side as we kind of move ahead over the next several quarters?

used to Andrew and I budding in which each other, but it's not going to be the standard industry model. Now Andrew, you can say it.

Dave, right now, we've got about 250 people in total worldwide. I think when Carl comes on stream and builds out his team, we'd expect about another dozen people in Europe and then, you know, plus or minus a couple of headcounts in each of our operations. We're not expecting, certainly for '04 ...

OK.

... to really exceed 300. And if you look in the financials today, you can see we're about $21.7 million in total G&A. I think you'd expect to see a minor ramp-up in that as we complete the balance of this year. But we would expect to go into a pretty steady state in 2004 in terms of our G&A costs.

So, we should -- we should see that just slowly ramp-up as we move ahead. It looks like we're on a run-rate of 6.5 to 7.5% of ...

That's right, but the other thing too to bear in mind, and I think John touched on it in the call is that our own premiums are going to continue to ramp-up this year as well. So in terms -- our G&A in terms of a percentage of earned is going to continue to fall and particularly as we stabilize both costs, you shouldn't see those going down, particularly in '04.

OK.

And Dave, as you know, it's an absolute to have heavy infrastructure and heavy costs. I am just totally opposed to the stead of industry model.

Next, on the -- on the quota share side, can you remind us what is -- is fed back to the Bermuda piece of it from the European and U.S. markets?

We've got various quotas here. As you say, both with Bermuda and with Ireland.

Ireland. Right.

We discussed those with the regulators and we feel they're at appropriate levels given our capitalization in both Ireland and the United States and that's about all we'd like to say on that.

OK. No major changes on that.

No, absolutely not.

OK. And last, on -- just some perspective on the retro markets, John. What's kind of the update on that?

Well, we dare to anticipate and so it's an area that we -- again, that a lot of people see easy money from time to time. We tend to be slightly more purest about looking at the product lines themselves. So, ...

Is that just your pricing or is it terms and conditions or just mix?

Well, I think that we would prefer to -- you know, we have a view about what long term strategic value products that we need within our portfolio and that's more of an opportunistic play and we believe that we can get better value out of other product line. It's a matter of choice selection.

Great. Thanks for your comments guys.

Thank you.

Thanks Dave.

There are no further questions at this time. Mr. Charman, please proceed.

Well thank you again to everybody for joining us this morning. Any Analysts, shareholders, or other members of the investment community should contact Linda with any additional questions you may have at area code 441-297-9513. And once again, from all of us at the Axis team, thank you for your support and thank you for listening to us.

This concludes your conference call. Thank you for your participation today. You may now disconnect.