AXIS Capital Holdings Ltd (AXS) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the year end 2003 Axis Capital Holdings Ltd. earnings conference call. If you require assistance press star followed by zero. As a reminder this conference is being recorded. I would now like to turn the program over to your host for today's conference, Vice President Corporate Development Linda Ventresca. Please proceed, ma'am.

Good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for Axis Capital for year ended December 31, 2003. Our year end 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 set aside an hour for today's call which is also available as an audio webcast through the investor information section of our website at www.AxisCapital.com through March 12th. An audio replay will be available from 11:00 eastern today until February 27. The toll free dial in number is 888-286-8010, and the international number is 617-801-6888. The pass code for both replay dial in numbers is 55871645. 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 is available to answer questions in the Q&A period.

Before I turn the call over to Andrew, I will remind everyone that statements made during the 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 future expense related to non-cash compensation, 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, please refer to the risk factors section of our latest perspectus. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. This presentation contains non-GAAP 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 to these items, please refer to our financial supplement which can be found on our website, www.AxisCapital.com. With that I'll turn the call over to Andrew.

Thanks, Linda. Good morning, everyone. I'd like to spend the first part of this call reviewing our financial results with you and then I'll turn the call over to John. This quarter represented a great finish to an already excellent year for Axis Capital. Net income, including realized gains, was $532 million for the year; or $3.42 of diluted earnings per share. Our return on average equity for the year was 22% and 21% pro forma for the IPO back to the start of the year. Our diluted book value per share on an as if converted basis at quarter end was $17.48, an increase of 20% from year end 2002 diluted book value per share, again pro forma for the IPO. Our gross premiums written for the year were $2.3 billion, representing growth in excess of 105% over 2002. This growth includes a 23% growth rate in our global insurance segment and a 48% growth rate in our global reinsurance segment. As a reminder, our U.S. insurance and U. S. reinsurance segments were not fully operational until the end of the first quarter 2003. Despite this late start, together they represented 71% of our overall growth in gross premiums written and will continue to contribute significantly on a going forward basis, as both segments were fully operational for the very important 1/1 renewal date this year.

U. S. insurance contributed $626 million in gross written premium and U. S. reinsurance contributed $204 million in gross written premium. Our total net premiums earned for the fourth quarter of 2003 have increased by 83% over the same quarter last year reflecting the earnings power of all our segments. We expect the momentum gained throughout our business segments to continue through 2004. With respect to trend analysis of gross premiums written, I'd like to call your attention to the change in the fourth quarter premiums in global insurance. They were off about 10%, or $30 million during the quarter. This was mainly due to a one-off shift in premium from the global insurance segment, where it was reported in the fourth quarter of 2002 to the U.S. insured segment where it is reported in the fourth quarter of 2003. Moving on to our underwriting results, I would like to note that the year was marked by generally benign loss activity, as evidenced by the group's overall loss ratio of 51% for 2003. Additionally you will see we continue to drive down our overall underwriting expense ratio which came in at 23% for 2003 versus 28% last year.

With respect to the sequential variance of the underwriting expense ratio, it is important to understand the number of the contracts we write include acquisition costs which are subsequently adjusted based on actual experience. Our shareholders equity at December 31, 2003 was $2.8 billion. This represents almost a 24% increase over the nearly $2 billion at year end 2002, adjusted to include the net proceeds of the IPO of $316 million. At December 31, 2003, we have $992 million in gross loss reserves, of which 82% is related to IBNR. The 2002 accident year continued to develop favorably, and as such, we released $4.1 million of global insurance reserves during the quarter. These were principally related to our aviation, aviation war, terrorism, and property lines. In total for 2003, we released $27.7 million in global insurance and $28.1 million in global reinsurance related to the 2002 accident year. Operating cash flow continues to be exceptionally strong as demonstrated by the $1.3 billion generated during the year. We ended the year with total cash and invested assets of approximately $4 billion, up by 70% from total cash and invested assets at December 31, 2002.

Total pretax income on our investment portfolio for the year was $97 million which includes realized gains of $23 million. As a reminder we invest for total return and the total return for our highly rated portfolio in 2003 was 3.5 %, which outperformed our benchmarks. As discussed on our last call, we repositioned the portfolio in the third quarter to take advantage of the higher rate environment. With this repositioning, net investment income in the fourth quarter showed an increase of 41% over that of the third quarter. In response to the uncertainty regarding the fixed income markets and the expectation in the marketplace that rates will rise in the last half of 2004, we are underweight in our bench marks corporates; and significantly low in terms of mortgage backs, an area that has served us well in prior periods. We have also reduced our duration to 3 years concentrating on the front end of the yield curve, not only to protect our capital base but also to position ourselves to take advantage of the expected rising rates. Overall we think the current market situation will lead to a challenging year in terms of total return, but we firmly believe that the preservation of capital is paramount; and that our strategy will serve us well in this uncertain environment.

Other insurance-related income for the year amounted to $25 million. As discussed in previous calls, this amount principally represents the mark-to-market increase in the value of a political risk contract accounted for as a derivative. Our FX gains were $32 million, reflective of the weak U.S. dollar in relation to the Euro and sterling. As we announced last quarter, we have commenced expensing options under FAS 123. The impact of this charge in the last quarter of 2003 was immaterial to our results. However, we would like to provide some guidance with respect to it's impact for 2004. We expect the expense for 2004 related to non-cash compensation, which includes both options and restricted stock, will be approximately $60 million or 10 cents per diluted share based on year end share count. Finally we suggest you refer to our financial supplement posted on our website www.AxisCapital.com for further detail with respect to our financial results. Now I would like to turn the call over to John.

Thank you and good morning, ladies and gentlemen; and welcome to you all. This was a year of continuing significant and strategic achievement for Axis. We more than doubled both our gross premiums written and our net income, and delivered our shareholders a return on average equity of just over 22% for the year. To achieve these results we have built on the strong and diversified leadership positions previously established throughout our global insurance and global reinsurance segments, and rapidly expanded our business model in the U.S. marketplace with the establishment and development of U.S. insurance and U.S. reinsurance segments. Our absolute commitment to a quality based, but demanding approach to underwriting remains. You will recall that many looked at 2003 as a likely inflection point for the underwriting profitability of the last few years. At this point we expect the relentless directoration of balance sheets of legacy players either, from old latent liability issues I knows or the crass underwriting carried on between 1997-2001, to extend the duration of the hard market; and we remain confident that the premium value of our strong and transparent balance sheet to our global clients.

With the important first of January renewal season largely behind us, I'd like to take the time now to comment on our recent experience, and our outlook on the markets we address on a daily basis. As a general comment, while we may see the usual odd, senseless pockets of competition, we continue to experience reasonable discipline in most major markets; as well as benefitting from the ongoing flight to quality. Competition, which does exist, seems to be in the area where the loss experience of the last two years or so has been particularly favorable. Having said this, we continue to believe that there's plenty of business for us to access across our highly diversified product lines, which satisfy our exceed our requirements. We have always focused on the fundamentals of underwriting, and addressing our global markets in 2004 is not back a basics exercise for us. We are one of the very few underwriting businesses that is able to focus, direct, and control it's operations on a daily basis.

The specialty lines of business we write in the global insurance segment contributed 43% of gross premium in 2003. The rating levels, terms, and conditions remain attractive and profitable. Pricing in some areas softened slightly, particularly in classes that experienced benign loss activity. Energy, aviation, war, terrorism and the property classes fall into this category; although, after the losses, the energy market has regained it's positive momentum. Political risk business saw increased activity throughout the year, as flows of foreign direct investment picked up globally. Again, the most disappointing markets were space and marine hull. Although rates continued to increase in these areas, they were still not at a level that would entice us to participate in a meaningful way. We did, however, see an improvement in marine liability and cargo and specie business, and we expect these, along with professional lines, to be strong areas of continuing growth for us in 2004.

In our global reinsurance segment, which contributed 20% of our gross premium written in 2003, we performed well during the critical 1/1 renewal date, and are satisfied that pricing levels are satisfactory and conform to our pricing models; despite being off in some cases in property/cat by single digits. We are also pleased to report that our strategy of leveraging strong local relationships in our expansion into Europe is crystallizing as planned. The combination of continued global book building and our expansion into Europe should translate into strong growth in 2004 for the segment. Additionally we continue to selectively grow our property per risk business as we have added key resources in both the U.S. and Europe to access and service this business.

Moving to our U.S. insurance segment which contributed 28% of 2003 gross premium, we continue to see ongoing opportunities across all of our major business classes as we deliberately strengthen our infrastructure and expertise. Overall, market conditions have not changed significantly from the last quarter; with pricing, terms, and conditions broadly remaining attractive. There continues to be moderation in pricing in the property market, with pricing in larger accounts under the most pressure from the established markets who continue to overreact from their individual budgeting failures. Having said this, there are still plenty of opportunities for us in a number of customer segments. Pricing in selected casualty lines is moderating, again with pressure in the larger, tougher primary casualty accounts; and, where again, the established markets are looking to make up or increase their market share. However, there are plenty of opportunities outside of the radar screen of the major companies.

In our excess casualty business, we continue to see rate increases. Professional lines pricing continues to show strong increases with our overall D&O book experiencing a 39% rate increase in 2003. We continued to expand within our current business units by adding strong teams. As an example we have recruited expertise to write selective E&O and in the marine business; and both were fully operational during this first quarter of 2004. For the first fully operational 1/1 renewal date for our U.S. insurance segment, it was a successful one. In our U.S. reinsurance segment, which contributed 9% of our 2003 gross premium, the most attractive opportunity to date has been in the reinsurance of professional lines; which represented approximately 65% of our 2003 business mix. The risks covered here include: D&O, medical malpractice, lawyers, architects and engineers, and employment practice liability. In a market characterized by historically high losses, resulting in diminished capacity, we have been able to capitalize on increased opportunities presented by complete underwriting of the underlying product and we expect to continue to do so.

The general casualty reinsurance market improved during 2003, but not to the degree we had anticipated or yet feel comfortable with. We were highly conservative in our approach to this book of business. Significant, unrestrained, and largely dumb competition, and capacity in this area of reinsurance slowed positive trends in terms and conditions; and thus the attractiveness of this class. The good news, however, is that the trend is now moving toward a more positive position, and we expect to see improvements during 2004 that will allow us to write more business in this class. One notable exception in 2003 was casualty class reinsurance, where clients placed more emphasis on market quality, expertise, and creativity than solely price.

For Axis overall, our 2004 year will drive strong and focused growth. Disciplined global risk management and capital deployment, as well as organizational stability. We will maximize the opportunities that present themselves to our more fully established global network. Our daily underwriting focus, market penetration, product diversity, and global presence will allow us to continue to take full advantage of the substantial high quality business available to an underwriting machine like ours. With that I'll turn the call back over to Linda.

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

Ladies and gentlemen, if you wish to ask a question, press star 1 on the telephone. If your question has been answered or you wish to withdraw your question, press star 2. Once again press star 1 to ask a question. Please stand by for the first question. And the first question comes from Charlie Gates with CSFB. Please proceed.

Good morning. In your prepared remarks you made reference -- budgeting failures, among selected companies causing issues in the property market. If you could elaborate on that. And then my other question was, I believe you indicated pressure in some larger casualty accounts. Could you elaborate on that?

I think they're both interlinked actually, so forgive me for expressing it in a pretty open and strong way. We're a business that manages itself hour by hour, day by day. What we find are the major legacy businesses, and I exclude Exxon Partner from that; but most of the other major legacy businesses, as they progress through the quarter, there is an acceleration of their activity towards the end of each quarter. If you are really looking at excessive stupidity in the underwriting, that mad Texas scramble that continuously occurs, this has been going on for the last year; tends to occur at that time and it is largely confined to the major premium accounts. That is where we are seeing on both property and casualty, excessive and dumb competition; and we will not play those games. We don't need to. As I said to you, there are plenty of other areas of activity that we focus on and they're below the radar screen of these businesses. I remain appalled. You know, Charlie, I've said to you before about the disconnect that there appears to be between the CEOs of these businesses, who continuously I see on platforms expressing their born again business attitudes and structures and the reality of the day-to-day underwriting in their businesses.

And that's because they have sales objectives basically that they wish to meet during a specific period?

To me, I continue to-- this is a personal comment. I continue to see businesses that are solely driven by revenue. The reality of the management penetration and the day-to-day quality of the business that is actually being underwritten still is terribly lacking.

The other question I had was, Andrew, you mentioned a one-time, I believe, shift in premium from one business to another. Would you go through that again and what was the amount of premium we are talking about?

Sure, Charlie. Before we closed out the Sheffield transaction last year, there was a quota share of $32.3 million from Sheffield into Axis in the fourth quarter of last year. Obviously, we didn't have our U.S. segment set up, so that was recorded within the global insurance segment last year. The other thing we did that affected this quarter, a one-time adjustment as well. As you know, and as John has said, we write property premiums both out of the U.S. market and out of the London market as well; and we've just trued up our accounting policies between the two to book some of our commercial property risks on an as reported basis. So we backed out $34.5 million from our global insurance segment in this quarter, but it's important to note that will be gross written premium in 2004. If you take those two items, combine them, actually global insurance was up about 13% for the quarter.

Thank you.

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

Good morning. Just a couple quick questions, John. One following up on Charlie's comments. When you're referring to the excess competition, are you referring to insurance or reinsurance.

Largely insurance. There are pockets that are actually occurring on reinsurance as well now. Essentially it's still an insurance issue.

The second part of that question then is, if we are seeing this competition in the large accounts, are you confident as you go into 2004 that you won't see it in some of the other accounts where you are participating today? A couple other follow-up questions. One is can you also give us some more detail what you are seeing in Europe? Other competitors have said that the conditions weren't as robust as they would have expected going into the renewal season. And then finally, on the capital position, if Andrew could touch on potentials for future dividends, debt, and all that kind of stuff.

Well, I'm glad you only asked two questions. [Laughter] Just to go back to your following on from Charlie's question. The market availability to us is still huge. We are still benefiting strongly from the flight to quality. It is quite interesting that even though you have such absurd activity taking place from time to time, clients aren't totally stupid either, and the distribution network can be concerned. That sort of activity fluctuates wildly, and can go up as quickly as it can come down. I think that clients do look for a more consistent approach, because they need a consistent and persistent solution to their long-term strategic relationships; so we do benefit, continue to benefit substantially from our relationships with both the client distribution market. As I said to you before, if you go to property business, we can actually play around way below the radar screen of the multi and major national, international risks. We do that pretty effectively. Michael, do you want to talk about Europe, Michael?

Sure. If you're on the underwriting side, terms are never as robust as you would like or expect. It's just the rule of the game. Having said that, John and I were in Zurich last week reviewing the season from our perspective, and I think it's fair to say that the market as a whole remained firm and in Europe has been a habit in prior years, for major players to concede to broker pressure. That did not happen this year. The two market leaders remained firm and disciplined. What was clear is that once a price was established and was acceptable, then there was plenty of capacity. So once there was a clearing price, there was no problem finishing anything. I think from our perspective, what we saw was almost exactly what we expected. There was a wee distribution of market share from, shall we say the more disruptive market to higher quality capacity; that was what we expected and it happened. And broadly we achieved almost spot-on what we had expected in the renewal season and are very enthusiastic about it.

And, Vinay, with respect to your capital question, certainly we've had a fantastic year and we established a pattern of paying dividends over the last two quarters. It certainly would be our recommendation at our upcoming March board meeting that the results would indicate that we could increase the dividend. That's obviously a board decision, but certainly as management we're going to recommend an increase in the dividend going forward. With respect to debt in the financial statement, obviously we're always trying to have the most efficient utilization of capital, and certainly as John and the team see underwriting opportunities, our next logical step to raise the capital for that would be through the debt markets.

Just looking at your returns of 22%--or above 20% for the year, utilization of that capital going into 2004, increasing the dividend and if you raise debt, what would be the use of the debt at that point in time? It seems like you have enough capital to write the business already.

That's what I said, if we see opportunities that need additional capital, our first step would be to the debt markets. At the present time, we believe our capital base, as it stands at 12-31, is more than sufficient to support our underwriting goals.

Thank you very much.

And the next question comes from Mike Halas with Fox-Pitt, Kelton.

Good morning.

Hi, Mike.

I have two questions that I promise will be no more than three parts. [Laughter] John, in your global insurance segment, you mentioned you're seeing increased competition in energy, aviation, war, and terrorism. Can you broadly quantify the rate changes that you're seeing across those lines, and can you give us a better sense of what your exposure to those lines, how much those lines make up of your total premiums for 2003?

I'm not going to go into average details. You have heard me say before that the way that we underwrite and the quality based approach to it, we've been doing business with most of the clients in those sectors certainly throughout my 34 years in the industry. You have heard me talk about people in our industry trying to buy into those product lines. By buying into those product lines, they actually come in with cheaper pricing than us, and sometimes share exactly the same liability; but get much less bang for their buck than we do. And, you know, we benchmark every risk we underwrite to make sure that we are maximizing our earnings potential from any risk we are involved in.

The energy side was beginning to weaken in the last couple of months before Christmas, as I said. There were two major losses, in Australia and in Algeria. That has actually knocked that silly competition and taken it aback, and what's happening now is there's a much more positive approach coming back to the energy business than was developing that last couple of months. One thing that I would reiterate, it's been pricing, largely the conditions of insurance and the deductible levels which are critically important in terms of the attritional losses in those lines has held very firm.

It's only been a pricing issue and that comes back down to my earlier comments about some of these legacy businesses not knowing the reality of what their underwriters are doing on a daily basis. In terms of our penetration, we're global leaders, we're respected in all those lines. We know the client base, we know our distribution network, we're in the markets way before that business comes into the market; and our penetration, our bang for the buck continues to be very good. I see no change during 2004.

Okay. In light of those comments, do you expect to be able to grow your global insurance business in 2004?

Yes. We will continue to diversify and grow our business, because we're benefiting still from our global leadership position as well as the fight to quality.

Okay. And you mentioned the several large energy losses, can you quantify your exposure to those events?

Yeah, we weren't involved in the Algerian loss. On the Santos loss, this is another interesting thing you guys really ought to question. We have a loss of just over $20 million, and that is based on 100% reserve, U.S. dollars, that we put up of $250 million. It won't surprise you there are some global markets, that reserve in that loss at $100 million. I would say that the $250 million comes from a loss adjuster, so it's not a figure we plucked out of the air. So I remain surprised at how some of the industry still continue to treat some of their losses.

Interesting. That speaks to my next question, you maintain a very high percentage of your current loss reserves in IBNR. Can you give us a sense of what the tail is on your loss reserves, and at what time might you be reevaluating the potential redundancies in those reserves in a more aggressive way, similar to the third quarter?

I'll let Douglas answer that, but I'll comment at the end.

Hey, Mike. With respect to the loss reserves, you really have to break it down between the segments. If you look at our gross premiums written for the end of the year, we're 75% property short tail business and about 25% casualty. As John has said before that's medium-term casualty. If you look at the 2002 year of account, we've released those reserves throughout the course of this year so that points to a tail of 12-18 months, there is still some, particularly on the energy side, some construction risk that will last the next 6-12 months, end of this year. So, overall for the entire business if you blend it on the short-term side, you're looking at 18-24 months in terms of the tail.

With respect to the casualty, as you look through our financial supplement you'll see that, for the most part, our U.S. reserves are almost entirely IBNR; and I would say that those will be there for the next 3-5 years as that book continues to develop. With respect to evaluation of our loss reserves, we go through a very detailed process each and every quarter with our external actuaries, on a by segment, by line within each segment to determine the loss ratios and we book to what we believe is the most prudent estimate at any time; but we review them every single quarter, and if we do see there is redundancy we will release it. But as of 12/31 we are confident with the size and scope of our reserves across all four segments.

I think, Mike, that there really is a constant evaluation--that we have a hyperactive claims department led by a hyperactive claims director. The reality is we don't like surprises. We've said from the onset that we are very conservative in our initial reserving of losses, and I just demonstrated that with the Santos loss. But we constantly evaluate and it is the senior management of the company. We don't sit there and wait on a quarterly basis. You know, we believe that we're the only business that actually, not only has it's own internal daily review of claims activity, but we have external actuaries in with a direct feed into our database monitoring and calculating our ultimate loss ratios.

Interesting. And the last question, Andrew, I may have missed it. Did you just provide what your approximate split between property short tail and casualty long tail is for the overall book?

Yeah, and, Mike, you can derive that from the supplement; we break down the individual segments, but at the end of the year, it's 75-25 in terms of short tail versus the casualty book of business.

Thank you very much.

And the next question comes from Jay Cohen with Merrill Lynch. Please proceed.

Good morning. I missed some of the earlier comments, you may have mentioned this. I apologize. The yield on the portfolio seemed, on a consecutive quarter, to jump up in the fourth quarter and wondering what's behind that. Didn't look like the duration got was shorter and there weren't major changes in the portfolio.

Sure, Jay. If you remember from last quarter's call, there was that spike of rates right after we completed the IPO; and what we had done after the IPO was held a significant cash balance and we started to invest that as the rates spiked. For the most part we had the entire portfolio invested right at the peak of that spike, and what you're seeing in this quarter is a rise in investment income quarter-over-quarter due to the repositioning of the portfolio we put in place during the first part of this quarter. What you'll see going forward is we've got an awful lot of cash right now which has brought the duration down and that's just, for the most part, we're trying to be conservative given the uncertainty in the markets going forward; and we've also seem some compression in the spreads in terms of corporates and mortgage backs so we've moved more into treasuries. Overall we're expecting the interest income to pick up quarter-over-quarter in 2004.

Given your good cash flow and cash position, a rise in rates benefits you more than most companies, I would assume.

Definitely, and there's always a tradeoff between current net investment income and capital preservation. I think as I've said in every call since the first one, capital preservation is paramount to us. We are working very closely with our managers, watching the interest rate environment; and as we see rates starting to pick up we will redeploy our cash into longer dated securities to try to get our yield pick up.

Thanks, Andrew.

And the next question from Dave Sheusi with JP Morgan. Please proceed.

Good morning, everybody. Just wanted to touch base on the derivative contract and the volatility around that number, and just the duration of that business. Can you hit on that a little bit, add some color?

Yes. Let Andrew flavor it.

That contract is a five-year contract. We're about 20 months into that contract now. As I've talked about on previous calls, it's a basket of underlying sovereign securities, and the best benchmark we can give you is the JP Morgan emerging market indices. It was up 26.5% for the year. It's not a one to one corelation with the securities we have in our basket, but it gives you a pretty good idea of what's happened during the course of the year. Going forward we've seen that fairly stable during the first six weeks of this year. In terms of the pure time value of money, as that works it's through to the end of it's life, we'd expect between $1.5 and $2 million of actual time value premium coming through each quarter; and then the positive or negative around that is based on spread compression or spread widening in the individual underlying securities.

Thank you. That clears that up. And I guess if, as we look forward in the ROE expectations over the next 12-24 months; and some of the luck we had with catastrophes this quarter, have your hurdle rates changed--

Sorry, what was the loss we had?

The absence of catastrophe.

Okay.

Assuming a little bit more normalized operating environment in 2004 have your ROE expectations significantly changed from the Bermuda angle, or are we still thinking in the 16-18% range for '04 and beyond?

I just want to remind you that 2003 was the third highest cat year in the last ten years. So it still $13.5 billion, something like that, of losses. So they were out there, but through I hope selective underwriting and a little bit of luck, as you said, that we managed to avoid them, or most of them. You know we said to you at the angle about what we would expect on our earnings over the cycle and we remain committed to that.

Great. Thank you.

Again, star 1 to ask a question; and the next question comes from Ron Frank with Smith Barney. Please proceed.

Good morning. Two things. One is since it's the style this morning to do followon questions, I'd like to follow on to Vinay's. In particular, the competitor who indicated that Europe was somewhat disappointing was one for whom you expressed respect earlier John, Partner Re; and what Pat said was, that although he found rates and terms to be disciplined, there was not a break of price discipline consistent with what Michael said. He found that the incumbents were simply better at hanging on by virtue of the entrenched relationships, and Brian O'Hara said Score in particular was successful in playing on a little bit of "defend the home team", if you will, sprit in France. I was wondering if you could comment specifically on your observation of that phenomenon.

And my second question, is absolute price increases as we all know can mean very little depending on what's going in lost costs and terms and conditions. Could you comment for us on what the totality of circumstances is, pricing terms and the underlining claims trends that gives you real confidence you're going to make a lot of money in D&O and profession liability as you've made a significant strategic thrust there.

Okay. Michael and I are going to do the Europe. I'll just quickly give you my read on it. It's obviously more difficult if you're an established player in Europe to benefit from any dislocation that may or may not be taking place. Michael said quite clearly, I believe firmly that dislocation is taking place. There is a reevaluation of strategic partnerships and relationships. The people we have within Europe are excellent. They have long standing strategic relationships, and we've benefited significantly at the year end from our new position within the European markets; and we would expect to continue to book build throughout the different product lines we had.

I think in a subscription market you get to a point where the line that the established markets have is largely filled. Therefore, if you are filling a book from zero, as we were, and the market is looking to upgrade the quality of it's reinsurers, then the new boy is able to fill his book better than the established players. I'm not going to comment about Partner Re or Excel other than they are both fine companies with excellent European operations. The Bermuda companies are the ones that are most indigenously European, so it doesn't surprise me at all.

And, Ron, going back to your second question, as a general comment, I'm pretty comfortable about the trading environment for 2004. The reason why I remain so, it was beginning to slip through September and October last year and accelerating into November. Then I think we witnessed a very quick turnaround and a leveling off of what I would consider to be that dangerous slide into excessive competition. I would still say that the conditions of insurance and the excess points remained strong. That is critical because if markets are competing both pricewise and on deductible levels and dropping deductible levels and broadening conditions, you suddenly have all those attritional losses creeping back in; which I consider to be operating losses for our clients.

They are not insurance or reinsurance losses. They are their own operating losses. We don't price for that, and I don't want that in my business. As far as the professional indemnity account is concerned, the professional risk business; 2003 was again a strong year, conditions have held up well. We expect to see continued, but more selective increases in premium throughout that account. We have a good team now, they're settled, we've added E&O, we've got D&O coming onstream in Europe; so we're in good shape. We monitor the hell out of that business, just as we do with all our other business; and we expect it to make a significant contribution to our profitability.

John, in terms of your expectation of profitability, is what makes you most comfortable that you're far enough away from the loss right now?

If you look at the business we've been talking about, our average excess point in 2003 was close to $50 million.

Okay.

For 90% of the business. And, again that is very important to us.

Okay. Thanks very much.

Thanks.

Once again it's star 1 to ask a question and the next question comes from Adam Klauber with Cochran, Caronia. Please proceed.

Good morning. Your expense ratio dropped from the last couple quarters. Could you walk through why it dropped and if that's sustainable going forward?

I took all their salaries away.

Apart from that, Adam. On an absolute dollar basis, our expenses have increased as we've ramped up. We are adding teams of people to drive the topline production. You're seeing an absolute dollar increase, but was you're seeing is our earned premium starts to ramp up, from that production you're starting to see it drop down in terms of the expense side. Going into 2004, Adam, we'll see more absolute increases in our expense ratio as we round out our teams and finalize some of our infrastructure build. What your'e going to see is a significant increase in earned premium, so what you'll see going into next year is a drop down in the expense ratio going forward; so we don't want to give any projections for next year, but we'll see a drop in the expense ratio going forward.

We've come from a staff of seven people at the end of 2001 to now 304 people. And that's why we are looking at a year of more consolidation and squeezing the infrastructure that we have, adding individual new business lines as we go through. This is a year where we're really going to squeeze the infrastructure that we've got and maximize our penetration within those business units in the marketplace.

Thank you.

Go on.

One follow-up question. The pay to incurred levels are very low. How are they compared to your target, number one, and, number two, as the book seasons, would you expect those to ramp up next year and into 2005?

Like everything, you have to look at it on a segment by segment basis. I would say that on our global insurance and our global reinsurance side as some of our losses move from outstanding loss reserves in IBNR into actual paid, you'll see that ratio coming down a bit. As we said earlier on the call, particularly on some of the U.S. insurance and U.S. reinsurance lines, that's IBNR that we posted that's going to take three to five years before it starts turning. I wouldn't see a material change in the two U.S. segments, but you'll see it dropping a bit on the global insurance and global reinsurance probably during 2004 as OSOR moves into the paid side of the equation.

It's an important point. If you look at, traditionally, what the industry has been prepared to live with in terms of underwriting loss ratios on the business that it's accessing, I believe that the last two years is where the industry really ought to be. Because if you're going to commit capital to this business, you should expect a return. I think it's incumbent on the industry not to express wonder and surprise and bewilderment at the loss ratios, but to actually make them standard.

I agree.

Thank you very much.

Thank you.

And there are no further questions at this time. Ms. Ventresca please proceed.

Thanks very much for joining us. Any analysts, shareholders or other members of the investment community should contact me or Andrew with additional questions you may have. The number is 441-297-9513.

Thank you, everybody, again for joining us this morning and wish you well.

Thank you.

This concludes your year end 2003 Axis Capital Holdings Ltd. earnings conference call. You may now disconnect.