AXIS Capital Holdings Ltd (AXS) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2004 AXIS Capital earnings conference call. My name is Sean and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session following today's presentation. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host, Ms. Linda Ventresca, Investor Relations. Please go ahead.

Good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter ended December 31, 2004. Our 2004 earnings press release and financial supplements were issued yesterday evening after the market closed. If you would like copies, please visit the investor information section of our website at www.AXISCapital.com. We set aside an hour for today's call which is also available as an audio web cast through the investor information section of our website through March 4th. An audio replay will also be available from approximately 11:00 AM Eastern today through February 25th.

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 793-09482. With me today in our Bermuda headquarters are John Charman, AXIS Capital CEO and President; Andrew Cook, CFO; and Michael Butt, our Chairman.

Before I turn the call over to John I will remind everyone that statements made during this call including the Q&A session which are not historical facts, may be forward-looking statements within the meaning of the U.S. Federal Securities laws. Forward-looking statements contained in this presentation include information regarding our future growth prospects, investment strategies and financial results including the impact of third quarter hurricanes, and our expectations regarding pricing and other market conditions. These statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from our expectations. For a discussion of these matters please refer to the risk factors section of our latest prospectus. We undertake no obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

In addition, this presentation contains diluted book value per share information which is non-GAAP financial information within the meaning of the U.S. Federal Securities laws. For a reconciliation of this item to the most directly comparable GAAP financial measure, please refer to our financial supplement which can be found on our website. With that, I will turn the call over to John.

Thank you Linda. Knowing you're an Eagles fan I am pleased you've recovered so quickly from Sunday's result. Good morning, ladies and gentlemen, and thank you for joining us. We have had an excellent fourth quarter, capping not only a terrific year but also a year that was our most testing so far. I am delighted to be able to report net income of $181 million for the quarter and nearly half $1 billion for the calendar year 2004. Gross premiums were up 36 percent. Net premiums were up 24 percent. Our combined ratio was 79 percent in the quarter.

For all of 2004, gross premiums grew 33 percent. Net premiums grew 27 percent, and our combined ratio was 84 percent. This strong and broad organic growth was achieved across all our major businesses. Couple this with our underwriting discipline and solid risk management, we have delivered our shareholders a return on average equity of over 16 percent for the year, and accretion of diluted book value per share of 14 percent through 2004. We are particularly pleased with these results which have been achieved during a year that has been one of the most challenging in the history of our industry.

Our solid results have been produced against the backdrop of regulatory uncertainty, erratic competitive behavior, and unprecedented industry losses from a series of worldwide natural disasters. In spite of these substantial challenges, our staff at AXIS have been able to generate a return on average equity in excess of our stated goal. The cost of last year's four major hurricanes, 10 Japanese typhoons, and the South Asian tsunami, are currently estimated to be in excess of $40 billion and are continuing to escalate.

During the fourth quarter of 2004, we have modestly increased our previously estimated net losses due to the third quarter hurricanes, from $227 million to $266 million. This increase is attributable to cedants firming up their loss reporting through our reinsurance segments. We regard this change as nominal in the sense that it is almost entirely attributable to movement from our general IBNR estimates for cat activity for that quarter to specific case IBNR allocated for the hurricanes. We remain comfortable that our overall approach in determining our ultimate net/loss position was and remains both conservative and realistic.

I would now like to give you some sense of market conditions as we see them at AXIS and what to expect going forward. First my view of the insurance and reinsurance marketplace has not changed substantially since I spoke to you during the last quarter of 2004. That is to say that we continue to be satisfied generally that the fundamental support underwriting profitability for a company like ours in the markets each of our major businesses addresses. It is fair at this time to say that price increases were unusual and relate to loss producing accounts.

I would characterize the marketplace as erratic and unpredictable. In some instances, the market seems to be both uncontrolled and suicidal, and in others economically rational. This behavior is not inconsistent though with my overall belief that the peaks and troughs of the current cycle will be dampened relative to cycles of the past. The market is experiencing some differentiating softening but I am not anticipating anything like the extreme market behavior of past cycles. Being the eternal optimist that I am, I hope that with improved financial reporting coupled with stronger corporate governance, the absurdity of past and continuing behavior will be revealed more quickly in the future.

The criticality of risk selection driven by our underwriting machine is at an all-time high right now, as there are still attractive underwriting opportunities to be found. We just have to continue to dig much, much deeper to find them.

In our insurance businesses, pricing, terms and conditions in the main are at or above our adequacy levels. I will begin with global insurance. As expected, the cat activity of the third quarter is having a positive impact on pricing in the offshore energy business, particularly the loss affected accounts in the Gulf.

Pricing pressure on U.S. large account property and onshore energy property persists. The fourth quarter is the important quarter for our radiation business. The hull and liability rating environment appears healthy. Competition appears reasonable largely because of a stable reinsurance market. We were able to hold the account to modest single digit rate decreases. However, we remain extremely disappointed in the ongoing rating inadequacy at the marine lines. There continues to be substantial naive capacity operating in this line of business all driving towards unprofitability.

Moving onto U.S. insurance, submissions are up across all lines and our hit rate is at levels we would expect and are comfortable with. As we enter 2005, we are beginning to experience stabilization in a number of areas. Our FIS business indicated renewal rates for 2004 were down on average 15 percent for the full year. We did see a meaningful deceleration in rate reductions in the fourth quarter, down only 11 percent. Average renewal rates of 2004 in our financial institutions business were down only about 6 percent. So far this year, we are seeing encouraging signs.

As we enter 2005, rates are decreasing even less than they were in the fourth quarter and seem to be moving towards flat with some accounts seeing very modest rate increases. D&O business remains at attractive levels. We expect to see this discipline maintained as reinsurers keep pressure on primary company's margins. We are seeing our E&S casualty business flat to down 10 percent with pricing trends still outpacing loss cost trends. The most precious seems to be in the primary layers and for large accounts. Generally we are not experiencing excessive capacity in the areas we address, but this of course varies by class.

The least satisfactory news in the U.S. is with respect to our retail and wholesale property businesses where rate decreases continued, particularly for larger accounts. We have some early indication though that the situation may be changing in the Southeast and part of the U.S.

Moving onto our reinsurance business. We remain quite satisfied with the overall professional, reasonable behavior and technical approach of the marketplace which is trying to maintain profitability in most areas. The unprecedented claims burden from natural catastrophes this year has heightened risk awareness and appreciation for protection against losses from natural perils, particularly in the U.S. While property reinsurance premium rates are softening, any declines remain orderly in the region of 5 to 10 percent for loss recounts. Loss affected accounts are receiving increases commensurate with the severity of the results on the program.

Outside the U.S. renewals were modestly down, anything up to 10 percent on average. Generally there were few coverage issues and the market competed on price not by broadening policy wordings.

The casualty reinsurance marketplace has proven even more resistant to rating pressures in most areas. Reinsurance terms tended to be flat with some minor variations in both directions. Many primary companies substantially increased their retentions, particularly for non-cat exposed lines of business.

This response was to relatively tight reinsurance renewal terms, primary company's evaluation of the profitability of the original business, and their need to drive revenue for cash flow. Driving this may be a belief that balance sheets appear to have strengthened, and therefore capital is available for increased retentions. However, history has clearly shown that this view has its limitations, as the industry continues to drip feed the never-ending legacy reserve and reinsurance recoverable issues. All that glistens in our view is definitely not gold.

As we navigate the markets in 2005 and 2006, we believe it will be important for reinsurers to keep pressure on primary company's margins. Due to the relatively limited number of quality reinsurance counterparties, I am optimistic that this will happen. For AXIS it is my expectation that the growth we have experienced to date will moderate through 2005 in many areas of our business. We are driving the underwriting machine harder than ever and in the absence of attractive opportunities, we do not and will not sacrifice profitability for continuing growth.

We have entered this year prepared and determined to consolidate our position in the marketplace while continuing to build book value. We're confident we can achieve this through our continued focus on high-quality underwriting in conjunction with the important value drivers we have put in place at the end of 2004. Our strategic reorganization is the important operational driver and the capital management tools we have put in place are the important financial drivers.

Before I pass the call over to Andrew, I would like to address the subject of inquiries into market practices being conducted by the New York Attorney General and other state regulators. As we did last quarter, we will provide as much information as possible at this time in our prepared remarks.

As previously disclosed, our U.S. holding company has received subpoenas from the New York Attorney General's office seeking information regarding incentive commission agreements, bid rigging, fictitious and inflated quotes, conditioning direct insurance on the placement of reinsurance, and related matters. In addition, our U.S. insurance companies have received subpoenas and requests for information from various state insurance regulators regarding these same matters. These inquiries are industrywide, and we continue to cooperate fully with these investigations.

The business practices of both brokerage firms and risk bearing entities whose entire business purpose is maintaining the confidence of their customers, have been called into question. In the case of certain brokerage firms, confidence in the advice and services provided by them as fiduciaries has been severely affected. Insurers' and reinsurers' financial security, willingness to respond, and ethical operating procedures have also been strongly questioned.

We believe this industry's future well-being lies in eradicating all potential conflicts of interest, not merely disclosing them. We at AXIS have deliberately chosen to outsource acquisition of our portfolio of business to the broker channel and the vast majority of our business was and will continue to be driven through this channel. We believe the broker network has the appropriate information, expertise and infrastructure, not only to provide quality advice to its clients, but also to provide critical service to its clients and the insurance industry overall.

In order to help achieve the elimination of potential conflicts, and appropriate compensation for brokers, we believe that brokerage firms over time should solely receive commissions from their clients. We will work diligently with brokers and regulators to transition to meaningfully improved and completely transparent industry standards.

As stated in last quarter's call, we have ceased entering into and have suspended making payments under incentive commission arrangements. At this time, both the outcome of regulatory guidance and the future structure of producer compensation are still uncertain. Legal, regulatory and contractual certainty is broadly backing with respect to payments for 2004. We are in the course of reviewing the recent settlement between the New York Attorney General and Marsh, and its implications for AXIS, as well as the rest of the industry.

Given the high-level of uncertainty surrounding the estimation of our liability under those arrangements, we have continued to accrue amounts due under incentive commission arrangements in the fourth quarter. As I have said before, we have relentlessly pursued real underwriting profitability since our inception, and as such have not only properly managed risk across our portfolio of business, but also driven acquisition costs and other expenses to what we believe are industry-leading low levels for the portfolio we assume.

Risk by risk, my colleagues and I have always analyzed, negotiated, and managed acquisition costs in their totality and we will continue to do so. For now we are assuming levels of total acquisition costs in 2005 for AXIS to be broadly in line with 2004 levels. Against this backdrop of fundamental change, we believe that AXIS remains well-positioned. Last quarter we told you that we did not believe that we engaged in any of the improper business activities being investigated by the New York Attorney General. We still believe this is true.

We also told you that we believed that it was in the best interest of the Company, our shareholders, and our employees to conduct an internal investigation lead by outside counsel to examine issues raised in industry investigation. Counsel is reporting to our Board of Directors and to management. Our internal investigation has been an exhaustive one, in my opinion. Our outside counsel has received completed questionnaires from approximately 230 persons representing well over half of our entire staff, and also representing all of those who touched the underwriting process at AXIS worldwide including all underwriters, underwriting assistants, and senior personnel in the claims, operations, finance, legal and human resources departments.

Approximately 70 persons including Michael Butt, Andrew Cook and myself, as well as all senior underwriting staff in our U.S. insurance operations have been individually interviewed by outside counsel. Finally, outside counsel is now in the process of reviewing e-mails across our entire employee base worldwide. I'm happy to report that to date our internal investigation has uncovered no evidence indicating that we have engaged in bid rigging, fictitious or inflated quotes, conditioning of direct insurance on the placement of reinsurance or related matters. We expect that the final phase of our internal investigation will conclude by the end of the first quarter of 2005.

Finally, I would like to say that the easily achievable stability in the marketplace is only threatened by the continuing fundamental disconnect between shareholders, their CEOs and their underwriting businesses. Shareholders need to be more demanding of management. The embedded smoke and mirror practices of the industry need to continue to reform and the pace needs to accelerate.

2005 at AXIS will emphasize stability in the overall quality and composition of our portfolio, as well as organizational stability. All of us at AXIS remain dedicated to creating and sustaining a strategically important and highly profitable Company. Thank you. And now I will hand the call over to our newly converted fair-weather fan of the Patriots, Andrew Baldrich (ph) Cook.

Thanks, John, and good morning everyone. This quarter represented a welcome rebound from the cat-plagued third quarter. Net income, including realized gains, was 181 million for the quarter, or $1.09 per diluted share, up 13 percent over the $160 million in net income or 97 cents per diluted share during the fourth quarter of last year. This took our net income for the year to 495 million, even with the impact of record-breaking cats. Our total assets increased by 75 percent to 9 billion at year-end.

We continue to drive shareholder value ending the quarter with over 3.2 billion in shareholders' equity. Diluted book value per share on an as-if-converted basis of $19.85 represents a 14 percent accretion in book value through 2004. Consolidated gross premiums written at just over 3 billion were up 33 percent from 2003 including a 19 percent increase from our insurance operations and a 64 percent increase from our reinsurance operations. Net premiums written for the quarter were 475 million, an increase of 24 percent over net premiums in the same quarter of 2003. This brings net premiums for 2004 to 2.4 billion representing an increase of 27 percent over 2003 net premiums.

With respect to consolidated underwriting results, our combined ratio for the year was 84.4 percent as compared with 73.6 percent in 2003. The hurricanes accounted for 13.1 percentage points of the 2004 combined ratio. Our combined ratio for the quarter was 79.3 percent as compared with 72 percent in the fourth quarter of 2003. As discussed by John earlier, during the quarter, we raised our estimate for our net losses for the third quarter hurricanes to 266 million from 227 million. This increase represented 7.1 percentage points of the quarter's combined ratio and 1.9 percentage points for the year.

After taking into account inbound and outbound reinstatement premiums and tax affecting the loss, we estimate the net economic impact of these cats at approximately $250 million to the Company. Apart from these cats our combined ratio continues to reflect the continued diversification of our portfolio of business, ongoing conservative reserving, better than anticipated profitability in non-cat exposed short tail lines and our focus on maintaining a leading underwriting expense ratio. Now I would like to highlight a few items for each of our segments.

I will begin with global insurance. As we have noted previously, there will always be changes in the mix of business from quarter-to-quarter. This is based not only on our valuation of the relative opportunities in a given period, but also on timing issues for certain classes of business. As we noted in our last earnings call we refined the method of estimating gross premiums written in our property line of business in the fourth quarter of 2003. This impacted a comparative analysis of premiums for both our property account for both the third and fourth quarters; therefore, the full year written premium growth is the more relevant measure.

During the fourth quarter global insurance participated actively in the aviation renewal season. While we did let some business go due to pricing on the hull and liability side of the book, we were very successful in consolidating our participation in the AV52 war market. This stems from our ability to offer clients sustainable and meaningful capacity with excellent security. Hurricanes had the following impact on the segment for the quarter -- sorry -- for the year. Outbound reinstatement premiums, 5.6 million, net losses, 50.3 million.

As you know, the fourth quarter is a very low production quarter for global reinsurance as our team gears up for the important January 1 renewal season. The hurricanes had the following impact on this segment for the year. Inbound reinstatement premiums, 15.9 million, outbound reinstatement premiums, 6.1 million, net losses, 135.7 million.

Our U.S. insurance segment continues to increase its market penetration. We are very pleased with the quarter-over-quarter growth of 30 percent with moderate growth of 11 percent in property lines and 43 percent in the balance of the book where pricing was under less pressure. The hurricanes had the following impact on the segment for the year. Outbound reinstatement premiums, 3.9 million, net losses, 46.8 million.

Much like global reinsurance our U.S. reinsurance segment had a quite production quarter. The hurricanes had the following impact on this segment for the year. Zero reinstatement premiums, net losses, 33.5 million.

Getting back to the group's overall performance, consolidated net premiums earned for the fourth quarter of 2004 were 549 million, representing a 37 percent growth over the same quarter last year. Net premiums earned for the year ended December 31, 2004 were $2 billion, an increase of 41 percent over last year.

The quarter also included favorable reserve development of 40.3 million for the group. This is consistent with releases in prior quarters. By segment this breaks out as follows. Global insurance includes a release of 23.9 million or 11.9 loss ratio points from the 2003 underwriting year. Global reinsurance includes a release of 13 million or 7.4 loss ratio points also from 2003. U.S. insurance, a release of 3.5 million or 3.4 loss ratio points from the 2003 property account.

As always, these releases only related to short tail lines and to prior years. We have maintained that same high standard of conservative reserving using the same methodology every quarter including this one. As of December 31st, this philosophy has resulted in nearly 2.4 billion in gross loss reserves of which 76 percent is related to IBNR.

For this quarter our expense ratio came in at 24.6 percent, 4 points higher than that of the fourth quarter of 2003 but consistent with the third quarter of this year. The quarterly acquisition cost ratio increased year-over-year due to the impact of increased amortization of outward reinsurance costs which reduces net premiums earned, our mix of business in all segments and positive adjustments to acquisition costs made in the fourth quarter of 2003 not repeated in the fourth quarter of '04. The G&A component of the quarter's expense ratio has remained consistent year-over-year. The fourth quarter includes costs related to year end compensation, Sarbanes-Oxley and our internal investigation which contributed to the increase in general and administrative costs over the third quarter of this year.

Operating cash flow continues to be exceptionally strong as demonstrated by the 1.6 billion generated during the year. We added the quarter with total cash and invested assets of approximately $6 billion, an increase of 50 percent over last year. This includes the proceeds of our $500 million Senior Notes offering which closed in the fourth quarter of 2004.

Total pretax income on our investment portfolio for the quarter was 51.7 million which increased 80 percent from the same quarter last year, and 9 percent over last quarter. For the year it was 166 million, representing a 72 percent increase over last year. These increases are due to both strong operating cash flow combined with the proceeds from our debt offering, and increased earned yield.

As everyone on the call is aware, 2004 was rather unpredictable in the fixed-income markets. We have deliberately positioned the portfolio for an expected rise at the short end of the yield curve which means we have been and continue to be overweight cash and are moving some of our assets to floating-rate instruments.

As of December 31st our investment portfolio had an average duration of 2.8 years and a rating of AA+. We believe that our very conservative strategy with respect to positioning of our portfolio limits our downsides during periods of rising interest rates, particularly at the short end of the yield curve where rates are generally forecast to increase this year. We expect that this strategy will allow us to increase our portfolio yield as we experienced this quarter.

As we discussed last quarter, we are taking steps to enhance investment returns by beginning to diversify away from U.S. high-grade, fixed-income securities. This strategy should reduce asset class correlation to interest rate movements and increase return without increasing volatility. To date the majority of these investments have been limited to collateralized loan obligations and floating-rate medium-term notes. At year's end we made our first allocation to hedge funds with a $25 million commitment to a fund of funds.

As of December 31, 2004, either investments approximated 4.5 percent of total cash and investments. We will continue to evaluate these classes and expect to make more of these investments as we identify attractive opportunities.

Other insurance related income was 3.6 million in the quarter. As discussed in previous calls, this amount principally represents the mark-to-market movement in the value of a political risk contract accounted for as a derivative. During the quarter emerging market spreads rallied driven by institutional demands for high yield and improving fundamentals.

During the quarter we experienced net foreign currency gains of 18.6 million driven primarily by the weakness of the U.S. dollar when applied against our net long euro and sterling asset balances. With respect to Sarbanes-Oxley our process is proceeding according to plan. We're finalizing the testing of our internal controls while our auditors are completing theirs. The process will run until the completion and filing of our Form 10-K as this is the last step in the overall testing of the controls of our financial reporting. Our report with respect to our internal controls and our auditor's opinion thereon, will be included in our Form 10-K.

Finally, I would like to let the investment community know that we will be changing our financial reporting segments starting with our next earnings release. This will better reflect the organizational management changes made in conjunction with the implementation of our recent strategic reorganization. These reporting changes, like our strategic reorganization, took effect on January 1, 2005. As a preview our reporting for global insurance and U.S. insurance segments will remain largely unchanged with the exception of some nomenclature.

Our reporting for our global reinsurance and U.S. reinsurance segments will be merged to reflect our worldwide reinsurance operations. We intend before the end of the first quarter of 2005, to release a pro forma financial supplement that will restate our historical segmental results to reflect the updated reporting segments. We will, of course, provide the investment community ample and appropriate notice for review of the financial supplement before we report our financial results for the first quarter of 2005.

That concludes our prepared remarks and we will now take questions from those on the call.

Thank you. (OPERATOR INSTRUCTIONS). Dave Sheusi from J.P. Morgan.

Good morning everyone. Thank you. Dave Sheusi from J.P. Morgan. Just a couple of quick questions here. First I wanted to deconstruct some of the expense side of the equation. I wanted to get an idea of, first, what the amortization of outward reinsurance costs were in the quarter; and secondly, what the accrued incentive comp was that was part of the acquisition costs; and then possibly some of the Sarbanes-Oxley and legal costs for the quarter?

Sure David, the premiums ceded during the quarter were 176 million for the quarter; and for the year, $588 million. In the supplement, Dave, you can see exactly how much per segment was the amortization of ceded premium. I think with respect to year-end compensation costs, obviously in line with our expected targets for the year and approved by the compensation committee and included as part and parcel of G&A. Sarbanes-Oxley in the quarter, including both our auditors' work, D&T, and our outsourced partner who is doing a lot of the testing on our behalf, KPMG, was $935,000. And just to give you an idea for the year, Dave, SOX and 404 costs were about 3.8 million for the 2005 year -- sorry, 2004.

Okay. Thank you. I guess the second question surrounds the ownership structure. Obviously, we have a lot of matters surrounding the Marsh Mac Holding. Can you give us an update on where we fall out there and what the expectation is in terms of the ownership structure and governance and Board of Directors?

I guess as a general point, we would place the Marsh shares in the same category as our other founding shareholders. We've pointed out on prior calls that their diluted ownership position is just over 4 percent. So with that said, I think it's one of our general goals for 2005 and beyond really to reduce the overhang of all our founding shareholders in this stock. Does that answer your question, Dave?

It does, thank you. Lastly, if we could just have kind of an update on where we fell out on the January renewal cycle. I think you gave some great color on the fourth quarter. Is it consistent with that commentary and can you provide us an update on that please?

It's John. We were very pleased with all of our operational units. As I said, there is some pretty stupid competition out there. But we are able to navigate most of it pretty successfully and find areas where we can actually achieve the prices that we need. So I think it is pretty well steady as she goes actually. But I do reiterate, we are not going to chase premium that we don't believe can deliver the returns that we require in our business. But all in all, it was a good renewal season.

In your formal commentary you noted uncontrollable or suicidal underwriting habits or something to that effect. Could you expand on that a little bit by either line of business or geography?

I think that my Chairman won't allow me to name the people, therefore, I sort of stuttered because he kicked me under the table with his good leg. But the reality is it is pretty well still within the property, the onshore energy lines. And you know the bandits out there as well as I do. I am just astounded that these companies proudly talk about their price monitoring. And the reality of the risk by risk that I see on a daily basis, I don't know how they could get through it. But I'm sure it will come out in their financials eventually.

Can I comment there, John. I think they put into context, John's context of suicidal with the other things he said, which is that we are optimistic that there are different factors at work in the market in this cycle from previous cycles that will make this cycle a more controlled one. I think it is important, therefore, the context of the comment not just the comment on its own.

Just to expand on that, Dave, the reality is the reinsurance market, as I have said over a number of quarters, has pretty well held firm. What I don't understand is that the primary carriers are giving away huge percentages of their retained margin in a way they were not able to -- that they were less able to do so in previous cycles. And I am not sure how they are reserving, but it just doesn't stack up to me.

Thank you.

Ron Bobman (ph) with Capital Returns.

Good morning. If it weren't for these great results Andrew's preference for the Patriots might have me doing something with my stock. I am sure you'll put it in his personnel file. I just had a couple of questions. John you made some comments, and I'm sorry if it wasn't clear to me whether you were speaking -- you were commenting on the January and sort of early February market discipline, some flattening of the decline in rates. I'm not sure you were talking about the financial institutions book, the D&O book. Could you set me straight there on sort of what market you were talking about, a bit of a U-turn or a stabilization of rates that had been going South?

We saw most of it in the FI book, which we were very pleased to see.

Is that professional liability?

That really came about, I think, because the reinsurance market held firm.

What you refer to as FI, is that professional liability to financial institutions?

That's correct.

Thanks. My other questions were, of your gross loss estimates for the four Southeastern U.S. storms this past year, I am wondering what portion of that have you paid so far, approximately?

Paid losses to date are actually fairly limited, 146 million on a gross basis we paid to date. And actually we have recovered in on that as well from our reinsurance capacity of about 36 million to date.

Is that in the ballpark of about a third?

Not too far off, 25 percent probably.

My last question, if you will comment, what appears to me to be sort of a perversity of this Marsh Mac matter and the settlement is that the contingent payments paid, and as you sort of talk about the most recent period accrued but not paid, contingent amounts due to Marsh for example, are actually the funding mechanism for the settlement. And I am wondering what your take on that is? That just seems to be, if I was in your shoes and I guess as a shareholder I am, it would sort of really piss me off that in some respects the funding mechanism is coming out of my pocket and not as painfully out of the brokers' market -- pocket.

The settlement is the settlement and there is no point in commenting, but we will meet our obligations under whatever arrangements are due.

Okay, thanks and continued good luck.

Si Lund (ph) with Morgan Stanley.

Good morning. Si Lund (ph) from Morgan Stanley. Just a question on capital management for '05. Can you give us an update of the timing for the share repurchase plan which was announced in December, and also target for debt leverage by the end of the year?

Sure, I guess on the share purchase, we have publicly announced a share repurchase plan that we intend to utilize as and when we see fit. I would say we're somewhat more predisposed to this than we have been in the past based on our most recent review of the opportunities we see in the marketplace, our understanding of the rating agency models, and our analysis of a risk-adjusted capital and really, finally, the most recent valuations for our stock. With respect to our debt releverage, from a general standpoint, I think we said in the past, we want to keep that below 15 percent. And I think as of the year-end we're about 13.5 to 14 percent and we want to try to keep it in that same type of ratio.

Thank you. A quick follow-up, if you guys could just comment generally on the state of the M&A market on the Island because we're hearing rumblings about consolidation here and there and just wondering what your position on it is as of now?

That has been going on since I think September -- sorry -- November '01. As you have gathered, nothing has happened. We have not heard anything, actually, we just get on with our business day by day.

Okay, thank you very much.

Joshua Shanker.

Hi there. John, almost a year ago to the day you told us that a significant increase in earned premium was going to result in a drop in the expense ratio going to '04. And we haven't really seen that in any of the segments, actually it's been the opposite. Andrew I guess mentioned Sarbanes-Oxley and the internal investigation, but maybe is this lower expense ratio going to be a 2005 phenomena? Or is there anything different, maybe, in the next year's expenses we should be thinking about?

I think from an expense ratio standpoint we came in at 9.1 percent I think for the year versus 9.2 last year. So on a percentage basis it is consistent. And obviously to get the ramp up in gross written premium in corresponding earnings earned as you said, we've had to increase our staff particularly in our expansion into Europe and our expansion into the states where you have seen some significant growth during the year. I think there is more earning powers coming through in 2004.

So from a pure G&A standpoint, I think you're going to see a fairly consistent level of expenses there. I think as we said during the call on our outbound acquisition costs, I think given all of the uncertainty in the marketplace about acquisition costs, it's difficult for us to really make any kind of forward-looking forecast with respect to where they are other than it would be our hope that they would stay broadly in line with our costs in 2004.

The underlying portfolio of productlines is moving. It is a pretty dynamic marketplace, and that can affect the assumptions that we made a year ago as well.

Okay, very good. I'm also trying to wrap my head around the paid to incurred ratio, particularly in the global reinsurance segment. It seems I guess, maybe you booked some hurricane claims that you paid out in global reinsurance. I'm not really sure exactly what's going on there.

That is exactly right. It is outbound payments on the hurricane losses.

So can we expect that paid to incurred is probably going to stay consistently high if you've only paid about 25 percent of those losses out anyway at this point?

I think what you probably are going to see is a ramp up in the paid to incurred in the first and second quarter of next year as all four of the hurricane losses are finalized and settled. And then obviously the paid to incurred moving forward from there is really going to depend on the overall level of catastrophic activity during 2005.

Okay, finally along those lines, case reserves were nearly flat between this and last quarter in terms of ascribing the bulk of the 160 million or so in paid losses. Do they come out of case or do they come out of IBNR?

It's going to be a combination of both; but I think at this stage it is really more of a coming out of the case side, because as you know we reserve very conservatively and not a significant amount of our losses haven't gone from IBNR indication, they're still in the case. So the real movement there is from case to paid.

Very good. Thank you both. Great quarter, guys.

Nick Pirsos, Sandler O'Neill.

Good morning. Question on reinsurance trends. John, I guess you changed the degree of use of reinsurance. And I guess how much of that was just because of the pricing attractiveness in the market? How much of it is because as your book changes you want to control risks?

I think that I have always said that we will react to market conditions. And certainly on the global insurance side, we purchase reinsurance on a more opportunistic basis then we do -- we have a more structured approach in our U.S. operations. And we have been building the portfolio of reinsurance protection through '04. As I said, we are in the market day by day. We don't just go in there once a year, and we take opportunities when they arise. And we have been able to build more strongly in '04 than we were able to in '03. But it is a very determined daily penetration by us.

Great, thanks. Also, within global insurance looking at the specialty risk growth year-over-year, if you could just add some color as to how much of that is just the expanding platform? Is it a comparable numbers? Was there anything offset in either of the periods?

The two things that really drove the growth, Nick, in the quarter were as I said during the script, the AV52 market. We had excellent penetration and consolidation of existing line sizes during the year which drove that. The other thing as well is our D&O book within Specialty was really just forming last year, but our team down here in Bermuda and our team in London has had a full year to put that book into place. So you have seen a significant growth in the D&O lines. The last thing as we mentioned on the call as well, that property adjustment '04 versus '03 of $34 million that we took it down in the fourth quarter of last year.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS). Adam Klauber, Cochran, Caronia.

Good morning. With pricing coming down on most lines, what type of accident year deterioration -- I'm sorry -- accident year loss deterioration could we see next year?

I am not sure I said that pricing was coming down on most lines, but there is certainly pricing pressure across the portfolio just as there has been in the 35 years that I have been around. It ebbs and flows and it ebbs and flows between all of the different product lines. And our ability lies in being able to move within those product lines, move within the range of pricing, move within the layers that are applicable to an individual contract, and maximize the earnings potential out of any one given situation.

I think just from a logistical standpoint, Adam, we've talked about it on calls in the past, we've got a very detailed price monitoring system in place in each of our four segments; and obviously our external actuaries that we've talked about before have access to that price monitoring. And the loss picks for each individual line of business within each segment will be determined using the most up-to-date data that we have available to us based on our internal price monitoring. So as John said, in some lines there will be deterioration in the going forward loss ratio pick; in other lines there will be stable loss ratios depending on the underlying book of business.

Adam, just importantly, I know I quipped a bit during my prepared statement about the price monitoring of some businesses. We do base renewal and new business and we are very conservative in our assumptions.

Okay. Another question. As far as reserve releases, obviously you cannot predict those for this year. In '04 you had approximately 180 million of favorable reserve development. Do you think you'll see more or less in 2005?

Adam, I think I have to reiterate the comment I make every time I get it either on a conference call or an investor day, etc. Our reserves are reserves as they are, based on the most up-to-date information in our quarterly actuarial study as done by E&Y. If during any particular quarter we should see positive development based on discussion with our actuary and analysis of their results, we will release it. But until such time as we go through the quarterly process, it would just be inappropriate for me or anyone else at AXIS to forecast reserve releases going forward.

Okay. Finally, on a competitive note, did the European reinsurance environment get noticeably more competitive in the last three to six months?

I will take that, John, thank you. In certain sectors, yes. I think what we have to understand about the European marketplace is there are maybe six or seven major players who have full marketshares including one or two who are based on the Island and have done very good jobs in obtaining those marketshares. We are in a more formative stage at AXIS. We are in our third year now. It was our second major renewal year. And a lot of clients wanted and were seeking better balance of their credit risk. I believe that we were able to take advantage of that significantly in developing our portfolio in Europe without taking the same pricing pressures that others might have had to do with an existing portfolio.

But broadly, in answer to your question, there were some markets, particularly in Southern Europe, Spain and Italy, or in Greece, where it was more aggressive and where we participated to a lower extent than I would have hoped had it not been so. And others, like France and Germany, which were more stable and there were better opportunities for us to gain quality market share.

Thank you very much.

(OPERATOR INSTRUCTIONS)

Okay, well, thank you all. A great pleasure as usual. We look forward to talking to you again at another quarter’s time and producing some pretty strong results as well. Thank you again.

Thank you.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect your lines. Have a great day.