AXIS Capital Holdings Ltd (AXS) 2003 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2003 Axis Captial Holdings Limited earnings conference call. My name is Kellera and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If you require assistance at any time during the call, please press star followed by 0 and a coordinator will be happy to assist you. As a reminder, the conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Linda Francesca (ph), Vice President of Corporate Development, please proceed, ma'am.

Thanks, Kellera. Good morning, ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial results for Axis Capital for the quarter ended September 30,2003.

Our third 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. We've set aside an hour for today's call which is also available as an audio webcast through the investor relations section of our website at www.axiscapital.com. through December 5th.

An audio replay will also be available from approximately 11:00 a.m. Eastern today until midnight Eastern on November 21st. 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 341-563-78.

With me today in our Bermuda headquarters are our speakers, John Charman, Axis Capital's President and CEO and Andrew Cook, Executive Vice President and CFO. We also have with us our Chairman, Michael Butt, who will be available to answer questions during the Q&A period following Andrew and John's prepared remarks.

Before I turn the call over to Andrew, I will remind everyone that statements made during this call, including the Q&A session, which are not historical fact 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 growth and financial performance and future 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 diluted book value per share and pro forma shareholders equity may be 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 which can be found on our web site, www.axiscapital.com.

With that, I will now turn the call over to Andrew.

Thanks, Linda and good morning, everyone.

This is an excellent quarter for Axis Capital on all counts. Net income was $147 million for the quarter or 90 cents in diluted earnings per share. Our annualized return on average equity for the quarter, pro forma for the IPO back to the beginning of the quarter, was 23%. Our diluted book value per share, on an as-if converted basis at quarter end was $16.72, an increase of 15% from year end 2002 diluted book value per share, a gain pro forma for the IPO.

Our gross premiums written for the quarter were $634 million and for the year-to-date, totaled $1.8 billion representing a growth of over 130% over the same nine-month period last year. This growth in comparable nine month periods includes a 45% growth rate in our global insurance segment and a 51% growth rate in our global reinsurance segment.

During this very important quarter, for our newer U.S. Segments, they contributed significantly. U.S. Insurance contributed $188 million in gross written premium and U.S. Reinsurance, $82 million in gross written premium. Our net premiums earned have more than tripled in the nine months ended September 30th to $1 billion and continue to gain momentum as our new segments ramp up. The earnings power of the U.S. segments which came online during the first and second quarters of this year, is gaining momentum and Axis will show the full financial impact of these earnings as we enter 2004.

With respect to our underwriting results, I would highlight that the benefit of diversification inherent in our portfolio of risks has come through in the group's overall loss ratio of 46% for the quarter and 51% for the year-to-date. This quality underwriting, coupled with our highly efficient infrastructure, is highlighted in our combined ratio for the quarter of 69% and for the year-to-date of 74%.

Our shareholders equity at September 30th, 2003, has grown to $2.7 billion. This shareholders' equity, excluding the net IPO proceeds of 316 million, represents a 29% increase from the $1.8 billion at the same time last year and a 21% increase from year end 2002. When you consider that this growth excludes the proceeds of the IPO, this is an outstanding achievement for the company.

Loss activity for the quarter was generally marked by the absence of severe losses. The quarter included losses from Isabel, Fabian, Typhoon Maime, the blackout in Northeastern United States and Japanese earthquakes. With respect to these events, reported claims to date have been limited but we continue to reserve conservatively. At September 30th, 2003, we have $785 million in gross loss reserves of which 81% is related to losses incurred but not reported.

We continually check the adequacy of our reserves. As part of that process, our external actuaries also undertake an analysis of any potential surplus of those reserves. This analysis is performed in a consistent manner each quarter. In the event that we, together with our external actuaries, feel the reserves are more than sufficient to meet our ultimate exposure, we will make an appropriate release.

The 2002 underwriting year continues to develop favorably and, as such, we have released reserves during this quarter. The reserve releases for the quarter amounted to $9.3 million in global insurance or 4.7 loss ratio points for the segment. These are related to our aviation, terrorism and property lines. The reserve releases in our global reinsurance segment amounted to 21.9 million or 18.6 loss ratio points for the segment related to our crop and CAT lines. For the year-to-date, we released $23.6 million in global insurance or 4.2 lost ratio points for the segment and 28.2 million in global reinsurance, 9.2 loss ratio points for the segment.

Operating cash flow continues to be exceptionally strong as demonstrated by the 375 million generated during the quarter and nearly $1 billion for the year-to-date. We ended the quarter with total cash and invested assets of approximately 3.7 billion, up almost 43% from total cash and invested assets at December 31, 2002 a gain, net of the proceeds of the IPO. Net investment income for the quarter was 19.3 million. We also recorded net realized losses for the quarter of 5.7 million as we rebalanced some of the portfolio in response to the higher interest rate environment.

Overall, pretax investment income on the portfolio was 13.6 million for the quarter. As a reminder, we invest for a total return and the total return for our portfolio was 3.1% for the nine months ended September 30th. We continue to maintain a conservative AAA rated investment portfolio with high cash balances and an overall duration of 3.1 years.

While our net investment income is down 10% from the same period last year, it is up 22% from the second quarter of this year as we have started to benefit from the defensive posture we took going into June of this year. When interest rates began to spike during the third quarter, we began to aggressively invest the IPO proceeds and increased operating cash flows at higher yields and because of this, we expect interest income to continue to pick up over the balance of the year. And very importantly, the management of our portfolio has accreted the book value over the quarter and our unrealized gain position at the end of the quarter was $39.6 million.

Other insurance related income for the quarter amounted to 8.5 million, primarily representing the mark to market increase in the value of a political risk contract accounted for as a derivative.

Our foreign exchange gains for the quarter were 4.6 million reflective of the weak U.S. dollar in relation to Euro and sterling. The general consensus in the market is that the U.S. dollar will continue to weaken and therefore, we have not put in place any currency hedges. However, we will continue to monitor the situation and manage such exposures accordingly.

Finally, in keeping with our philosophy of open and transparent financial reporting, we will begin to expense stock options under the transitional provisions of FAS 148 in the fourth quarter. We do not believe this will have a material impact in our 2003 financials as the fourth quarter charge will be less than a cent. As always, we urge you to refer to our financial supplement posted on our web site at www.axiscapital.com, for further detail on the individual segments.

I would now like to turn the call over to John.

Thank you, Mr. Cook. Good morning and welcome to you all. As Andrew so rightly put it, we have had a great quarter measured on all counts and our numbers bear testament to this. Everyone one of us at Axis is pleased to be able to deliver an annualized return on average equity for the quarter of 23% pro forma for the IPO.

I'd like to take the time now to comment on the development of our books of business in the quarter and our outlook on the market, as these will be the key drivers of shareholder returns going forward. Our underwriters at Axis relish transacting our business 24/7 in a global marketplace which is in the process of being fundamentally transformed. The insurance and reinsurance markets remain in a state of flux and traditional markets continue to be substantially challenged and impaired by legacy issues.

Against this back drop, the Axis franchise is extremely well positioned and defined by its financial strength, client service and capabilities to write business across geography and products. Because of these defining characteristics, we are benefiting and believe we will continue to benefit in all of our segments from the irresistible and irreversible flight of quality to quality, which persists globally.

Going back to the time when we embarked on raising our initial capital, we set out to establish a global specialty insurance company with a strong reinsurance arm because of the unique opportunity it presented at the time. Within 18 months, we were able to construct a high-quality portfolio seldom achieved in the industry. This portfolio is marked by its diversification by product and geography and its ability to provide us comfort that the balance sheet we produced for you and our clients, is real.

Our portfolio would have taken something like five to seven years to assemble during a normal trading cycle. That, with the unique opportunity that presented itself during the last quarter of 2001, continues to present itself today.

At the time of our IPO, we identified a number of issues that remained unresolved in the industry. Namely, that the failure to fundamentally reform the torte system, especially in the U.S., continues to place great strain on the industry's solvency through the never ending emergence of liability claims.

We also reinforced our initial view that many lines of mainstream casualty business written in both the insurance and reinsurance markets and often these days associated with heady, dramatic and apparently irresistible price increases had not yet been sufficiently re-engineered to the point where such lines would be consistent with our philosophy of writing ultimately profitable business. There is no smoking gun at Axis.

Having said this, we have identified some lines of business generally characterized in the marketplace as casualty which have progressed to the point we are comfortable pursuing them. A good example of this at Axis is the substantial restructuring of policy terms and conditions in the professional lines business and our subsequent strong entry into these lines early in 2003.

In our pursuit of long-term value creation, we have resisted and continue to resist chasing rates without consideration for exposure or shareholder value. It is just not part of our underwriting culture. Buyers of insurance and reinsurance are subject to ever increasing doubts about the reality of many companies’ balance sheets in our industry as well as their commitment to the business going forward. Meanwhile, Axis has become a market leader needed for our broad-based expertise, our level of service, reliability and consistency in the marketplace.

Do not underestimate the transformational state our industry is in, nor the staying power of this hard market, let alone the premium value of a strong balance sheet for our global clients. We fully expect significant continued deterioration of the balance sheets of legacy players. I am satisfied that we will not only talk about the hard market for the rest of this year but also we'll be able to continue to participate in one for 2004 and beyond.

I would now like to provide some brief commentary on the outlook of each of our four segments. For the specialty lines of business, we write in the global insurance segment which contributed 39% of year-to-date gross premium, rating levels terms and conditions remained attractive and profitable. Our global insurance underwriters continue to outperform the market. We are seeing rating moderation, a few classes particularly where there's been low lot activity over the past 24 months, or so. However, we have generally seen little or no reduction of deductibles across all classes or broadening of contract terms and conditions which are the leading indicators of the soft market.

Some product lines, such as marine hulls, have still not reached the required rating levels for to us strongly participate. However, the rates there do continue to rise. 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 consistent carriers. As planned, we have seen in this third quarter of 2003, strong development across our product lines, especially our aviation, property, political risk and terrorism accounts and we expect more of the same in the coming quarter.

In our highly successful global reinsurance segment, which contributed 25% of year-to-date gross premium, we expect to continue to grow through book building, the expansion of existing relationships and new opportunities in Europe including diversification into the nonproperty CAT business.

By now, you have likely heard about the modeling software changes which have brought, and we expect will continue to bring, new high layers to the market at attractive prices as the model shift lost costs from frequency to severity oriented tranches. Clients are continuing to look for reliability security, which again, is to our benefit. We expect property CAT pricing to hold and in many cases increase at prices which continue to generate attractive returns.

As discussed in last quarter's call, we are taking advantage of the fundamental changes in the European insurance market to grow our portfolio there. We are also selectively growing our property pro rata book where we have noted more rigorous and more professional underwriting standards by our seedants (ph).

We announced during the quarter that we were putting in place a reinsurance team in Europe, led by Carl Meyer, to take advantage of opportunities presented by the substantial dislocation there. As an update of our expansion into Continental Europe, we now have an office in Zurich staffed with experienced professionals accepted by the Continental European marketplace as a team of the highest quality. We enjoyed an excellent reception at the recent reinsurance meetings of Baden-Baden and, following those meet meetings, we are even more convinced of the substantial quality of the opportunity in Continental Europe and our ability to build a franchise there with our team on the ground being fully operational for first of January renewals.

Moving to our U.S. Insurance segment, which contributed 25% of year-to-date gross premium, we have had a strong quarter for our second full quarter operating in the U.S. market. We continue to see ongoing opportunities across all our major business units arising from our long-term strategic relationships, the experience level and an excellent reputation of our staff as well as the shift to place business with strongly capitalized, higher quality companies. The mix of business continues to be similar to that of the second quarter with property representing 41%, professional lines representing 36% and casualty 23%.

Overall, market conditions have not changed significantly from the last quarter. There is some moderation in pricing in the property market but pricing in selected casualty lines continues to be strong. Professional lines pricing continues to show strong increases. Generally, terms and conditions remain favorable. We are off to an excellent start in the U.S. and we expect this momentum to continue.

In our U.S. Reinsurance segment which contributed 11% of our year-to-date gross premium, the most attractive opportunities to date have been in the reinsurance of property high risk business and professional lines with the latter representing approximately 65% of our business mix. We continue to keep a close eye on liability business, particularly umbrella, which is showing strong rate increases following the adverse developments experienced by the primary companies on their underwriting between 1997 and 2001.

We remain resolutely focused on the alignment of our financial interests with those of the insured and we have and will continue to walk away from business which does not have terms and conditions which support this alignment. U.S. Reinsurance has gained good momentum and we intend to continue to grow the segment conservatively but strongly in the coming renewal season.

In summary, we at Axis Capital have an extremely focused strategy dictated by underwriting profitable business. We know what it is, where it is, who has it and when it's about to come to the market. We are then very successful at penetrating and optimizing our participation on quality business. We are confident now, that the diversification of the group and the quality of our underwriting machiine will allow to us grow without sacrificing profitability.

I hope you all would agree that we have demonstrated our continuing significant earnings potential with this quarter's results. We are an underwriting machine, a new age business. From the inception of our company on the 20th of November of 2001 to the end of this third quarter, in just under two years, we have increased shareholders' equity by nearly $1 million per day.

Finally, with respect to future guidance, we will not be providing such guidance at this time and I'll now hand you back to Linda. Thank you.

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

Yes, ma'am. Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touch phone telephone. If your has been answered or you wish to withdraw your question, please press star followed by two. Again, to ask a question, please key star one on your touch-tone phone. Your first question comes from Vinay Sake of Morgan Stanley, please go ahead.

Good morning, just a couple of quick questions. First, John, if you could just touch on, given what you're seeing in the marketplace today on the casualty side, if you changed your outlook in terms of mix of business for Axis heading into 2004 whether you will be writing more casualty or not?

No, we haven't changed our outlook for 2004. We continue to be extremely conservative in our approach and very selective in our approach to that book of business and we consider that there will be fundamental change continuing to occur.

Is it fair to assume that about 20 to 25% of your book will be casualty versus property?

Vinay, it's Andrew, if you look at the nine month numbers to September, the property book is 74% and the casualty book is 26%. I think, you know, based on what John just said going into '04, I don't think you are going to see a material change, you know, a couple of points either way in terms of that overall ratio.

Okay, two other quick numbers questions. One, can you give us a sense of what you are reserving your professional liability book at in terms of loss ratios? And second is, in terms of the duration of your investment portfolio, it has gone up to 3.1 years, given what you are seeing in the interest rate environment today, do you think that will move up to four to five years or do you think it will be in the three to four range.

I think I'll pick up the first question which is the fact that I won't answer specifically but we have a philosophy of reserving conservatively throughout all of our product lines and that will apply equally to the professional lines business as anywhere else.

Yeah and on the investment portfolio side of things, as we said in the call, a couple things we did in the quarter. We obviously took the proceeds of the IPO and invested those at or near the peak in terms of what was happening to the yield curve during the quarter, and we also moved some of our funds from cash, which we had been holding very defensively during the second quarter of the year and invested some of those proceeds. So right now, we're about 3.1 years. You know, barring material change in the leading aggregate, I don't see us taking that duration out over the next couple quarters of any material nature.

Okay, thank you very much.

Thanks.

Your next question comes from Mark Silverman of Neuberger Berman. Please go ahead.

Good morning and a great quarter.

Thank you.

I just had a quick question. In terms of your IB&R you put up in this quarter, what was the dollar amount on a net basis?

Well, where we stand at the end of the March from a balance sheet standpoint, Mark, is we've got total reserves of $785 million and of that, $637 million of that is IB&R and I guess, just going back to June, those numbers were 569 of which $450 million of that was IB&R, so, I guess just shy of $200 million we put up in IB&R for the quarter.

Great. Thank you.

Your next question comes from David Sheusi of JP Morgan. Please go ahead.

Good morning, everyone.

Good morning.

Just a couple quick questions here. On the professional liability side, can you add some granularity in terms of what you are seeing in terms of opportunity in the market, both on the Fortune 100 versus the small end market where your appetite lies? And then second, on the opportunities in the European markets, you seem to be far more optimistic today than you were even three months ago and some of the commentary coming out of Baden-Baden has been, you know, very favorable, you know, adding greater capacity constraints in the market and underwriting discipline. Can you just round out some of your comments on that side of it?

I'll let Michael take the question on Europe but I'll answer the first one and Andrew can chip in. You said Fortune 100. We do actually have a few Fortune thousand clients, but that's not the emphasis we have within that portfolio. So, we have been cautious since the inception of the profile of that client base but we, as I said in my commentary, we continue to see substantial rate increases throughout our portfolio of business and we expect that to continue through 2004. Michael, do you want to talk about, I'll hand you over to Michael to talk about Europe.

Thanks, John. Good morning, all. Yes, I think you're right. We are more optimistic than the last quarter on the road show and I think with good reason. The first reasons are internal, namely that we now have Carl Meyer, Stephan Clipper on board and they are being received, as we believe they were, outstanding business leaders in their sector.

Secondly, the points that John and I were making on the road show, namely the dissertation in the European market and the opening of attitudes to changing their buying habits have now been substantially confirmed. I was in Europe for the last two weeks going around the main reinsurance centers and in Baden-Baden. There is no doubt that the major buyers are now looking for quality capacity but as importantly, they are looking for companies who are prepared to commit to have the best people on the ground that they know servicing their business. And I think therefore, that our strategy of going down that route has already been rewarded and we believe, it will be a significant shift in the method by which business is being placed in the next six months in Continental Europe. Yes, we are more optimistic.

Would you expect far more consolidation of book to business or?

Consolidation and deconsolidation , it can start with deconsolidation to pick up your word, namely the taking away from and reduction of those markets where there are concerns without going into specifics, and probably a concern of not being too dependent on too few major companies and therefore that is creating an opening for new capital like ourselves who have the people on the ground that they trust. So, it is going to be deconsolidation, reconsolidation and, by the way, picking up John's point in his introduction, this is by no means finished. The damage to legacy is as great in Europe as it is in the United States at the moment, in terms of balance sheet damage. So, this is not a sort of static finished position, this is going to continue.

It's a very strategic positioning for us within Europe and we are benefiting from, as Michael has said, from a reweighting of the portfolios of business.

Thanks so much.

Thank you.

Your next question comes from Mike Hallett from Fox-Pitt Kelton. Please go ahead.

Good morning. I have a couple questions for you. Firstly, could you give us a sense of the tail on your current loss reserve portfolio? And secondly, as it relates to reserve releases, it looks like they accelerated in the third quarter. Given your current reserve position, is this a sustainable level of quarterly releases if loss experience remains favorable?

Good morning, Mike. In terms of the detail on the losses, I think you've got to break that down by quarter and I think, if you flipped to the segment, you'll see how we've broken out IB&R and case reserves by segment. Certainly on the U.S. Insurance side and U.S. reinsurance side where we put up IB&R for professional lines and other casualty lines, that's naturally going to have a longer tail than some of the property risks but, I think as John and I have been saying from day one, it is more of a medium tail type of business so we should have some certainty on that in a few years.

With respect to reserve releases, that's strictly limited to the 2002 year and again, I think it's safe to say that from inception, I think, we have been exceptionally conservative with our loss reserves, we have an independent actuary review each and every quarter. In the 2002 year, based on information that continues to come through, particularly as we go through the renewal season, pointed to the fact that certain reserves weren't going to develop so we released those. Going forward, I think it would be inappropriate for me to say that level would continue but I would add to that that we haven't changed our methodologies so we continue to reserve conservatively and if, you know, one quarter, two quarters down the road, the results don't come through then certainly, there will be additional reserve releases.

At what point will you start to review your 2003 accident year reserves?

Well, constantly.

Yeah, we do that every single quarter, Mike, but I think at this stage it would be inappropriate to release 2003 accident year numbers until we've got more certainty as to where they are going to develop.

Okay. That's useful. Can you provide just a little more insight into the reserve releasing in the global reinsurance business and what lines specifically that came from and just any more flavor on that, please?

Yeah, sure. A big chunk of what came through in the quarter relates to the 2002 crop results. I think as you know, we talked about it in the past, it was a particularly bad year for crop in the States and Canada and also in Europe. So we put very conservative reserves up. As I said, when the renewal information started coming through to Bill and his team, the contracts just didn't attach but it does take a while for that information to flow through. So, the majority of that release came through on the crop. Then there’s, you know, other CAT losses in 2002 year, we put reserves up for that again, the claims aren't coming through and you are seeing the release come through in this quarter.

Okay, thanks. I just have one other question, I wanted to follow up on the European expansion opportunities. I wanted to get a clearer sense of the Continental European business. Is the focus there on insurance or on reinsurance? I know you are the leader.

The focus is on reinsurance to start with and, as you rightly say, Continental Europe. If you want to narrow that focus even more, it's effectively Germany, France and the Netherlands and Belgium, that's the focus. There are also opportunities in the large risk segment and some of that may come through reinsurance or facultative reinsurance. That, we may also will be looking at in terms of doubling our underwriting operations for business opportunities there.

Don't forget that actually we currently underwrite European insurance business the large risk business and as that has been breaking out, just as there's the fundamental change in the way that reinsurance relationships are being adjusted, we have been taking advantage of that situation quite strongly out of our Dublin underwriting office. But undoubtedly, that will increase as we progress through 2004 and as Michael said, that we may shift some focus more locally to out of Zurich.

We see that as an opportunity.

Okay. Just one follow up question on that point. You've started several new operations in 2003 that are on pace to generate in excess of $150 million certainly of written premiums through you U.S. Reinsurance or U.S. Insurance businesses. Is this that same sort of opportunity with the U.S., or with the Continental European?

The European? I would say it would be at least that. I'm not sure your first figure's right, by the way, but let's leave that on the table. I would think following the earlier question, are we more optimistic, yes. Would that figure therefore be in the range of our expectation, I would think so. We look to build a substantial business in Continental Europe.

Okay, great, thanks and then, finally, would you be breaking out the results of that business out on a bi-line basis going forward?

What we're going to do on that, Mike, is we've got four segments right now for external reporting. We're going to keep that in global reinsurance but if you go to the supplement, you'll see for each of our four segments, we break down the subclasses of business they are in. So while the European segment is coming online, it will be part of global reinsurance but you will see detailed breakdown in the supplement of the type of business they are producing.

Great. Thanks very much.

Thanks.

Your next question comes from Jay Cohn of Merrill Lynch. Please go ahead.

Most of my questions were answered. Just more of a technical one, the other income that mark to market from the political risk contract that you mentioned. Any way for us to model that going forward? Will those gains continue into next year or should they moderate?

That's a tough one, Jay. I mean, unfortunately given the FAS 133 requirements of that, we've got to mark that to market. I think it's safe to say that quarter in, quarter out there is a pure time value of that, that you know is about $1 million and $2 million as the contract moves to its fruition but it's really a basket of emerging market sovereigns and I think if you track it against JP Morgan or the Merrill emerging market bond indices, you’ll see those are up between 20 and 24% for the year. While it's not an exact tracker, it really does show that that's generating positive returns for us but like I say, the only part you could really model with any kind of certainty would be the time value of money on that and as I say, that's between a million and 2.25.

Okay, that's helpful, thanks, Andrew.

Your next question comes from Marco Pinzon with Smith Barney. Please go ahead.

Hi, I'm sorry if I missed this earlier but going back on Europe, could you give us a sense as to, you know, exactly maybe what product lines you are targeting there? I think you gave us the geographic breakdown. And then, do you have an early read as to what you are budgeting for that segment for 2004? And as a second follow-up question on the political risk, did you write any new derivatives business in the quarter and kind of what are you thinking going out over the near terms of that business?

I think, picking up Europe first, you are right on the geography on the product line, obviously, in our first year we wrote a book of some substance actually on the high level property catastrophe area here in Bermuda. We would be therefore generating from that at the lower levels in that class of business. We're also looking at some more specialized lines in motor.

We're looking at credit and bond which is a very different structure and type of product in Continental Europe than it is in the States an altogether different market with different dynamics, Stephan Canetbury is a leader in that business. Those are basically we are looking at coming in at lower levels than we would only underwrite primarily in Bermuda and that is the base.

Secondly, we're looking at broadening the client base because only a limited number of clients in Continental Europe would require the type of limits that brought them to Bermuda. So, we are now looking at a much broader base of clients and therefore, better balance of book within the Continent. There was a second part to that question, could you remind me?

There was a second follow up, I guess, on the derivatives?

I'll hand you over to Andrew.

Hey, Marco. I guess in general, what we're seeing on the political risk side, as I said earlier, a general stabilizing of some of the emerging market economies and what you are seeing there is then an expansion into those marketplaces for an infrastructure of other projects which necessarily need insurance or reinsurance to support those. From our standpoint, if we see transactions coming our way that are in the form of a derivative and make economic sense, we'll look forward to write those but certainly, it would be our preference to try to write those types of contracts on an insurance basis.

Yeah, as the global economy recovers, infrastructure projects are increasing. So it's perfectly natural for the financing of those projects to require confiscation, appropriation, nationalization and deprivation coverage which is essentially where we are in our main book of business. It's on a global basis as well.

Okay and then maybe one more question, if I might. Maybe I was being too optimistic here, but on the U.S. Reinsurance side, I was looking for, I guess essentially more premium volume in the quarter than actually came in and then I think, John, in your earlier comments, you had said something to the effect of that you were expecting I think conservative but strong premium growth in U.S. Reinsurance.

I think, actually, if you don't mind me saying so it supports what I was saying in my commentary which is the fact that we still have concerns about the underlying mainstream casualty business and 65% of the U.S. Reinsurance business essentially comes through the professional and financial lines business. So, we have been very conservative during the course of this year but we've built very good relationships with a core group of clients and will continue to do so but we will not sacrifice conservativism for premium growth.

Okay. That's helpful. That's fair. Thank you very much.

Okay.

Your next question comes from Adam Klauber with Cochran, Coronia. Please go ahead.

Good morning.

Good morning.

The U.S. Insurance business continues to grow at a very nice pace. Do you foresee needed additions in infrastructure such as claims, underwriting, administration?

No. Obviously, what, it comes back down to the more modern platform that we've established which we use on a global basis and that allows us extraordinary efficiency in being able to deliver our skills electronically wherever we're underwriting business. Of course, we will grow our staff numbers through the U.S. as we grow our business but there will not be a proportionate increase in staff or infrastructure. You know, it brings me out in spots when people go on about large infrastructure and large numbers of staff and therefore, the flow through to high expense. We are not that sort of business.

Through a combination of highly skilled and talented underwriting staff, connected to good, smart technology and then using outsourcing at the back end, we are able to keep the infrastructure itself very lean and very mean but very efficient and very focused. It is a fundamentally different business structure than you will see across the rest of the industry.

Thank you. One follow-up question. Within the global reinsurance, you'd mentioned we've heard the catastrophe business is holding up relatively well throughout pricing meetings. Could you talk a bit about how are pricing and conditions within the property per risk and property pro rata looking?

Well, as I said, I think that we've been comfortable with the pricing within our portfolio and I think there's an awful lot of smoke that gets blown, quite honestly, almost on an hourly basis by people who are trying to destabilize the market but we would consider them to be firm to improving.

Thank you very much.

Ladies and gentlemen, once again, if you would like to ask a question, please key star one on your touch-tone phone. There do not appear to be any further questions at this time.

Well, thank you all again 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. But thank you all very much again for taking the time to join us this morning. Thank you.

Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect.