AXIS Capital Holdings Ltd (AXS) 2005 Q3 法說會逐字稿

Welcome to the 2005 third-quarter AXIS Capital Holdings Ltd. earnings conference call. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to our host for today's call, Ms. Linda Ventresca, Investor Relations. You may 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 the quarter ended September 30, 2005. Our third-quarter earnings press release and financial supplement were issued yesterday evening after the market close. 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 through December 2nd. And audio replay will also be available from approximately 11 AM Eastern today through November 18th. 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 2888-5231.

With me today in our Bermuda headquarters are Michael Butt, AXIS Capital's Chairman; John Charman, CEO and President; and Andrew Cook, CFO. 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 the presentation include information regarding industry loss estimates; our estimate of losses related to hurricanes Katrina, Rita and Wilma; future growth prospects and financial results; losses and loss reserves and investment strategies; 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 most recent registration statement on Form S3. 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 information regarding dilutive book value per share and net income excluding investment gains and loss net of tax which is non-GAAP financial information within the meaning of the U.S. federal securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release issued last night which can be found on our website. With that I'll turn the call over to John.

Thank you, Linda, and good morning, ladies and gentlemen. As you know from the headlines and our earnings release, it has been an extraordinarily eventful quarter, not only for AXIS but also for the industry as a whole. This last quarter, much like last year's hurricane season, continued to demonstrate the increased frequency of major Atlantic hurricanes and was additionally marked by the unprecedented scale and breadth of the Katrina loss. All of this of course has been accompanied by an increased frequency of typhoons in Asia, costly floods in Europe, and a number of other large individual industry losses. I would not be surprised if these events collectively represent ultimate losses for the industry in excess of $80 billion.

Naturally, our financial results this quarter were significant and adversely impacted by the losses caused by hurricanes Katrina and Rita. As you know from our various disclosures, we immediately established a Katrina net loss estimate range of between $500 and $650 million on the basis of industry losses in the range of $40 to $60 billion. We are now reporting a net loss for Katrina of $724 million based on the $60 billion estimate and a net loss for Rita of $81 million. Net losses for Katrina are approximately 20% of total capital surplus as of June 30th, and this is very much in line with my expectations of loss for AXIS for events of this size and scope.

I have stated many times in the past that I consider my primary responsibility to both shareholders and clients to be the preservation of our capital in a highly volatile business, and that I would achieve this through the following -- the construction of a global and diverse book of business, strongly diversified by both geographic location and breadth of productline coverage; a strong hands-on risk management including real daily peer review of all proposed underwriting activity; and sound coordinated daily an opportunistic purchase of reinsurance protection; and finally, strict avoidance of business lines where we are unable to determine within a reasonable period of time an appropriate return on capital for the risk assumed.

Since AXIS' inception I've always looked at our anticipated annual earnings as an at risk feature. This year's losses demonstrate this risk management strategy. Our initial communication to all of you following Katrina was that we estimated this loss to be within our expectations of operating earnings for the year. Since that time the industry has incurred the additional strain from hurricanes Rita and Wilma that now look together to exceed $20 billion in losses. We continue to analyze our potential net losses from Wilma and, right now, our very preliminary net loss estimate is in the neighborhood of $100 million. Following these additional significant events we believe that we may ultimately have a nominal net operating loss for the 2005 calendar year assuming no other large losses in the balance of the year.

Excluding net losses from Katrina and Rita, AXIS would have earned $868 million during the rolling 12 months ended September 30, 2005. This performance in the face of unprecedented losses is a testament to the diversity and core earnings power inherent in our global portfolio of insurance and reinsurance business. It also demonstrates our focused risk management, rigorous risk selection and realistic cat aggregation management.

I do want to further discuss our loss with respect to Katrina. Immediately following the event we undertook a contract-by-contract analysis of our exposure on the basis of industry losses well in excess of any amount reported by the majority of the modeling agencies at the time. We have at our disposal a detailed client exposure database to work from, that is why I believe our numbers are reliable. Our net loss figure from Katrina has increased only 11% relative to the upper end of the initial range we provided. And this is primarily due to late breaking additional loss information with respect to the $1.4 billion insured loss from Chevron for both Katrina and Rita.

We believe this development very much represents the exception to the rule given our conservative and detailed estimation of net losses defined by a contract-by-contract review and we have now reserved this loss to full policy limits. In my 30 odd years in this business I have been more than well aware of Gulf of Mexico energy exposures and I have always understood the size and scope of potential losses from a Katrina type event. Indeed Lloyd's was very nearly destroyed by major hurricane activity in the mid to late 1960s from offshore energy losses.

Having been heavily involved in underwriting the energy account throughout my career I have watched the development and growth of the offshore industry infrastructure accelerate over the last 30 years with the corresponding huge increases of values and business risk. This significant exposure critically is something the models did not fully reflect or take into account.

With respect to the performance of the ay models an extremely event like Katrina underscores where straightforward and strict old-fashioned risk management and peer review should have been applied more rigorously in conjunction with utilization of the models in the industry. The models have difficulty quantifying the extent of insured damage for some perils and fully dealing with mobile assets, sub sea pipeline infrastructure and business interruption as well as other complex coverages.

While I began underwriting over 34 years ago, we did not have models and in AXIS I have tried to enforce the application of a very basic underwriting principal. Very much a commonsense approach, an experience realistic determination of risk backed by intelligent peer review leading to a more sensible risk aggregation. The frequency and severity elements of events are ones which we now must address explicitly and more strongly in our pricing and exposure management.

As with the hurricanes last year, we will learn from our losses. We will hone our underwriting skills and be much more demanding of the market in terms of data and pricing going forward. We intend to be at the forefront of evolving the models to reflect the real paradigm of risk. A substantial portion of our gross loss estimate of $1.3 billion for Katrina was covered by reinsurance from diverse counterparties of high-quality.

Our insurance segment contributes 61% of the Katrina gross loss but only 34% of the net loss due to the protections we so diligently constructed. This is consistent with the strategy we have outlined to date. We prefer to take severity in our reinsurance segment where we have the ability to better control aggregate exposure in any one event and to mitigate severity in our insurance book through the purchase of reinsurance protection.

With regard to the Katrina loss, while some areas have greater available protection than others, I am comfortable with the overall available cover that remains in our insurance segment. Within the week following Katrina I visited nearly all of AXIS' underwriting centers and I told my underwriting colleagues that Katrina, and at that time Rita, together through their potential losses could represent an industry-breaking events. This meant that every single risk or portfolio of risk that in the future would be offered to us must, on a gross basis, be much better defined, have much improved data quality, and must show, especially on property-related business, substantial increases to pricing and attachment points as well as a tightening of coverage.

Regardless of the diminished Rita loss, our strength and underwriting strategy remains in place and our appetite for catastrophe risk remains strong. However, all of the changes I've discussed must be implemented for us to deploy similar capacity as previously. Right now that means something around 20 to 25% of capital and surplus, but obviously with substantially increased assumptions regarding frequency and severity of major events.

With that I will now turn the call over to Andrew, our CFO, to discuss quarter's financial results in more detail. Following Andrew's commentary, I will update you on the marketplace.

Thanks, John, and good morning, everyone. As you know, our results this quarter are heavily influenced by the impact of hurricanes Katrina and Rita. In order to help you better understand the specific implications of these events on our results, we have included a detailed analysis of the losses within our financial supplement which is posted on our website. We encourage you to review this at your convenience.

All in, including net losses, inbound and outbound reinstatement premiums, acquisition costs and taxes, the third-quarter catastrophes had a net impact on third-quarter results of $831 million. With that said, I would like to walk through our financial results. Our dilutive book value per common share at September 30, 2005 of $17.59 decreased 7.4% over the last 12 months. This decline includes the impact of this third-quarter's hurricanes and our $350 million share repurchase in the first quarter of this year.

Our net loss, excluding investment gains and losses net of tax, was $462.2 million compared to net income of 2.8 million for the comparable period last year. Consolidated gross premiums written of 795 million were up 15.5% over the third quarter in 2004. Of this increase about half is due to an increase in inbound reinstatement premiums within our reinsurance segment. In our insurance segment gross premiums written decreased by 4.3%. Our U.S. insurance sub segments showed growth in all lines. The most significant growth was in professional lines where we have added new classes during the last year.

In our global insurance sub segment most lines saw premiums decline with the exception of political risk and professional lines. Overall the declines offer evidence of our discipline in what was an extremely competitive marketplace. As we have noted in prior quarters, the political risk book has an irregular renewal pattern and the third quarter was another active quarter.

Professional lines growth stems from our successful integration of our London-based underwriting team and the attractive rating environment for excess business in Bermuda. Excluding reinstatements, growth in our reinsurance operation in the quarter was due to favorable 7-1 (ph) renewals. Total net premiums earned for the quarter were $617 million, an 18% increase over the third quarter of 2004. This increase reflects the strong growth in our underwriting business throughout 2004 and 2005 and included $39 million in net outbound reinstatement premiums.

With respect to consolidated underwriting results, our combined ratio for the quarter was 185.4% as compared with 109.6% in the same period of last year. The differential is predominantly due to an increase in Atlantic hurricane losses of 585 million for this year's quarter over last. Our net loss ratio was positively impacted by the favorable reserve development of $96 million during the quarter or 15.5 percentage points. 66.1 million of this came from our insurance segment and 29.7 million from our reinsurance segment. This level of reserve releases is due to the lack of significant loss activity impacting our short tail lines in prior accident years.

Our net loss ratio excluding cat losses and favorable reserve development is roughly comparable to that in the same period of last year. Our consolidated acquisition cost ratio excluding the impact from third-quarter cat losses was down 5.5 percentage points to 9.5%. This was primarily due to our reaching agreement on a number of 2004 PSA agreements during the quarter. With respect to the financial impact of PSAs Broadway for the Company, there continues to be business that was written last year which is being earned in this calendar year and the associated expense amortized with it.

Our G&A ratio fell to 7.2% from 9% in the third quarter of 2004 primarily due to a reduction of 2005 bonus accruals. Total cash and invested assets ended up the quarter about 6.8 billion due to strong cash flow from operations. For the nine months ended September 30, 2005 operating cash flow was $1.1 billion. Total pretax investment income on our investment portfolio for the quarter was 61 million, up 38% over the third quarter of 2004 and included 67 million in net investment income and 6.4 million in realized losses. This increase was primarily due to increased invested assets and was also the result of increased yield.

Since our portfolio was concentrated in the short end of the yield curve our yield has been pretty consistent for the last two quarters at 4%. With the retrenchment in a three-year treasury yield during the quarter we experienced an unrealized loss of 54.5 million on the market value of our portfolio. We believe that our short duration portfolio, either investments focusing on floating-rate instruments and cash holdings limit the downside to our capital base during periods of market volatility.

We continue to believe U.S. interest rates at the short end of the yield curve will continue to rise and that it's highly likely that cash will outperform intermediate fixed income during 2005 on a total return basis. With this in mind we are focusing on shorter maturity investments and others that will outperform as short-term rates rise. This is coupled with our requirements to have significant cash balances on hand to settle our expected loss payments relating to the season's storm activity.

Our allocation to other investments is beginning to contribute to quarterly net investment income and in this quarter we added 9.3 million of income from other investments. The average annualized yield for these investments for the quarter was about 7.91%, about 390 basis points higher than our fixed income portfolios. Please note that any changes in market value in our hedge funds will flow through investment income and this may add some volatility in this contribution going forward. For this quarter hedge funds contributed $3.8 million to our investment income and the average balance invested in hedge funds during the quarter was only $102 million.

During the quarter we experienced net foreign exchange losses of 1.7 million. Overall the euro and sterling were essentially flat during the quarter and the loss for the quarter represents the frictional cost of trading in and holding balances in non-U.S. dollars.

Finally, and importantly, we were active in raising capital this quarter. Prior to the major events of this quarter we were considering introducing additional leverage into our balance sheet. Therefore we were prepared to access the retail preferred market immediately following Katrina and Rita. In doing so we strengthened our balance sheet by issuing 250 million of preferred professional (ph) stock with a 7.25% dividend. This provides us with 100% equity credit from A.M. Best and S&P and 50% from Moody's.

We continue to maintain a strong capital position as evidenced by our absence from credit watch lists following the events of this quarter. Our net IBNR stands at a strong 83% of total net reserves. We continue to retain significant financial flexibility in our capital structure following the perpetual preferred capital raising. It is clear that, as I speak, rating agency requirements are increasing the industry's cost of capital in tandem with what is only now broadly perceived to be a risk year environment. We are mindful of this as we assess the opportunities in the marketplace. I will now return the call to John to discuss the pulse of the markets.

As I said, I'm not sure what the part is, but let me try to explain. With that, as I'm to try to address the marketplace in which we currently operate and, as importantly, the undercurrents that seem to be at work. Certainly prior to hurricane Katrina, as I reported in our last call, we were experiencing deterioration in the rating environment across all lines with extreme and irrational competition in many primary lines. For obvious reasons, this state of affairs seems like ancient history today. I'm pleased that the response of the market has been broadly so positive in the areas where they should pay. I am making reference of course to the wholesale P&C insurance business which is significant for both our London-based specialty lines business and our U.S. wholesale P&C insurance operation.

The wholesale property business accessed in London and the U.S. market, capacity has been cut back substantially and accounts with catastrophe exposure are experiencing dramatic rate hardening. California earthquake exposed accounts are included in this, but we do not yet see rate increases coming through on the order of those we have seen for wind exposed business. Accounts are being reengineered and we are reallocating capacity within these accounts where we see the best rated opportunities.

However, we have continued to exit business post Katrina where the market is not reacting appropriately. We have considered and continue to consider this type of opportunity to be one of our core competencies in extracting return from the property business. Whilst the retail property business has been a bit slower to respond, I am comfortable that it will ultimately do so.

In our offshore energy book we are seeing rate increases of up to 400% and market capacity cut back substantially. This varies by geography and loss experience and is most dramatic for loss affected Gulf of Mexico exposures. There is much heightened risk awareness at long last being shown by Lloyd's as well as their maintaining a deafening silence over their overall huge hurricane losses. For onshore energy the market's reaction has not yet caught up to that on the commercial property book. The direction, however, is positive and the gap is narrowing as I see. Frankly, this and the Californian earthquake property situation will have to change as I expect the battered and bruised reinsurance market will remind capital providers at the very dear price of capital these days.

In the terrorism market North American exposure, which has been under intense competitive pricing pressure, is capacity constrained and the rating environment for this business is improving dramatically. If TRIA is extended for only one year that means another year of uncertainty. If non certified TRIA is excluded from reinsurance treaties at renewal, as I suspect it might be and importantly should be, we will be presented with new opportunities in our stand-alone terrorism insurance book of business.

In our umbrella line of business, before Katrina rates were beginning to slide by single digit and that is now moving back towards flat. We expect that reinsurers will continue to keep the pressure on primary carriers to maintain underwriting discipline in this line of business. In the primary casualty area, unlike umbrella which tends to be more heavily reinsured, there will be a temptation by the primary market to attack for increased market share as they are forced to move away from the more volatile productlines.

Those professional lines where capacity is required like in our Bermuda high access operation have been positively impacted, but we are not seeing improvement outside of this at the moment. Logic dictates that we shouldn't (ph) see improvement more broadly in this area.

As you should know by now, aviation renewals are very much a fourth-quarter occurrence. I am quite frankly appalled and dismayed that the message that capital is becoming more and more expensive following these losses has not reached this illogical and senseless market. We have seen rate decreases on the order of 20 to 50% on an exposure adjusted basis and therefore we have declined nearly all of our renewal book. With rate decreases like this on a substantial portion of the worldwide aviation exposure it is virtually impossible to maintain an appropriately diverse account which has any return characteristics whatsoever. We have acted prudently on behalf of our shareholders.

We can only believe that aviation is in the back of the queue as management thinks about capital allocation in this changed environment. This behavior certainly seems to be at odds with their born-again proclamation of underwriting discipline. While it is a long way off, we expect that the fourth quarter of 2006 will represent a banner year for aviation. In our reinsurance segment there is very strong consensus that material price increases and important structural changes are in the offing for property reinsurance of 1-1 due to the combined impact of increased demand surge assumptions, hurricane frequency and severity assumptions and enhanced capital requirements.

Our early read is price increases ranging from 20% plus for Midwest cat exposure to 100% plus for national writers. I believe that any new capital in the industry, if it is able to be effectively deployed by 31-12, will not dilute this. Those cendents seem to be reacting with underlying price increases; however, consistent with what we are seeing in our insurance business, this response could be somewhat spotty. Risk excessive loss covers are definitely moving towards removal of cat in upper layers and limiting cat exposure below. With these risk programs changing and greater exposures being more clearly defined, insurance companies must buy more cat protection. The remaining non-cat element is also being fundamentally reevaluated. This dynamic is intensifying a classic supply and demand imbalance at play in the U.S.

The impact of the huge losses this quarter is not limited to the U.S. In Europe this renewal season is progressing more slowly than last year's. At a same time there is a recognition of both a capacity issue and a continuing flight to quality. We believe momentum is building toward a harder property market. Certainly at last week's Baden-Baden conference we sensed a very different tone than that at the outset of Monte Carlo. There is now an acute awareness of the reality of global syndication of capital. It is too early to tell whether this sentiment is filtering through the casualty reinsurance lines globally, but there are plenty of reasons for this to happen. Now more than ever clients will be focused on counterparty security and diversification.

In my opinion, but against recent market rhetoric, the reinsurance marketplace has been more disciplined, more technical and more professional in its orientation over the last decade or so. I believe the magnitude of these losses will force it to evolve even more strongly and therefore to demand and set new and higher standards that can only drive the primary market in a similar direction.

In the face of all of this our balance sheet and capital position remain strong and we remain in good stead with the various rating agencies who evaluate this adequacy. We at AXIS are operating from a position of strength and every one of our major businesses stands to gain in this ensuing 12 to 36 months. The overwhelming majority of our business is in areas where the industry is clearly broken and where we can be even more opportunistic and the light of the changing environment.

We have always understood real, true exposures whether they are far out on the tail or not. In the face of ever-increasing pressure to return capital in the last year to 18 months we resisted and have shown that we in fact have a good understanding of the tail which is not adequately represented in industry models. We will continue to evaluate the speed and magnitude of transformation in the marketplace and our ability to deploy any additional capital for the substantial benefit of shareholders.

In any case, we have significant financial flexibility and our absolute focus is on continuing to build book value in the most efficient nondilutive fashion. We look forward to reporting much, much, much better news in the coming quarters. We now invite your questions. Thank you.

(OPERATOR INSTRUCTIONS). Joshua Shanker, Citigroup.

Good morning, gentlemen, Linda. A couple questions. The first question, noting you said that net losses for Katrina were about 20% of the capital surplus and that's in line with your expectations for a loss of this magnitude. What is a "loss of this magnitude"? Is this in your mind a 1 in 25 year event, a 1 in 50 year event? How do we get our handle around that idea?

I note that in my own simplistic way I that look at the magnitude of the event itself, the fierceness and the scale of the hurricane and the expected damage. I think that people are rethinking all of their prior assumptions. But in my basic underwriting function I look at a major disaster in that way. It's not -- you can't really characterize it specifically, but in my personal view I have always taken that outlook on it.

What I'm saying -- do we think that we'll see a Katrina event in the next 30 years or do you think that this is an exceptional event that comes only once in a generation?

The great thing about our business is about fortuity not certainty. And if there had been certainty about the way these events occur we would either be out of the business or be a lot wealthier. I'm afraid that you can't anticipate it.

All right. Of the 700 million in reinsurance recoverables that got added to the balance sheet this quarter, what is the average rating on those, and do you think you'll have to field any capital charges from them?

The average rating on those is A, and certainly from our standpoint the recent state of capital raising, particularly from the Bermuda-based entity, certainly gives us comfort the respect to the overall credit quality of those reinsurance balances. And we don't believe we will take any capital charges as a result of our reinsurance balances recoverable.

Very good. Noticing also, it might just be a coincidence from the quarter, on a quarterly basis, ceded premiums written went up dramatically from what has been previously to about 35% of your (indiscernible) premiums were ceded. Is that part of a reinstatement ceding or --?

It is open reinstatement premiums, and if you check out the supplement you can see the exact implications of the outbound ceded premiums on a segmental basis.

Going back to your earlier comments, everybody admits that these losses are unprecedented, but whilst the industry has struggled to really find modeling that can have some accuracy and detailing the scale of this loss, I think those of us within the industry have always been as conservative as we can be and mindful that a situation like Katrina can occur. And I think that these earnings that have been produced over the last two or three weeks will show the more conservative and the less conservative, but I have been extremely mindful of a Katrina type event occurring and its impact on our industry for all the years that I have been in the business. I have been schooled in it.

I understand, thank you. Then finally, in terms of the rating agencies becoming more strict about their capital amounts, particularly Moody's and particularly in terms of there might be a great opportunity out there, are we going to say any more capital raising from AXIS this year or in the near future?

I think the best way to answer that, Josh, is we are watching the market opportunities that John talked about for us to be opportunistic there, and obviously we are in continual dialogue with the rating agencies with respect to any changes in their models. If we do see the necessity to access the capital markets, I think it is very important to point out that with respect to the various buckets at the rating agencies -- debt, hybrid and super hybrid -- we have not tapped out any of our buckets with the rating agencies. So from that standpoint, I think we could access the market in a very efficient way for our current shareholders.

As I said, Josh, in my commentary, I believe that the business opportunity available to us is much broader than the market is indicating at the moment.

Very good. Thank you for your commentary and good luck in 2006.

Vinay Misquith, CSFB.

Great quarter. On the accidental loss ratio I just noticed that the accident year loss ratio ex cat was down about 15 points from quarter-to-quarter. Would you have some color on that, please?

Vinay, actually if you disaggregate the loss ratio on a segment-by-segment basis and year-over-year and you take the cat into account in then you back out reserve releases and then you obviously have to factor in an expected cat load in each of the individual segments on a third-quarter basis. The base in our calculations, we feel that global insurance current action year ratio is pretty consistent around 62%, U.S. insurance is 57 last year versus 67 this year, and reinsurance about 65 versus 55. And last year's ratio in global insurance -- reinsurance bid higher because we had some storms up in Canada and we also had Typhoon Songda I believe last year. So from our standpoint, when you disaggregate it, the year-over-year loss ratios are fairly comparable.

All right. And in terms of the business mix, and I guess this is a question for John. Do you plan on increasing your exposure to offshore energy and the southeastern U.S. property business? And if so, how will you manage your concentration of risk? Will you put in more reinsurance?

Because that business has been subjected to some pretty fierce competitive pressures over the last 12 to 18 months, we know that business well both wind-exposed onshore as well as offshore business. We know the client base well. I told you the way we go about an old-fashioned way of monitoring our aggregates and determining what I consider to be realistic PMLs. And if the rating is sufficient and if there's a restructuring of the terms and conditions within those offshore contracts -- and I'm talking about the cat element within a full value policy being restrained and not having full values at risk, then I think that we would be very likely to increase our portfolio in terms of the onshore property wind-affected business.

Again it comes back down to, I believe, the property market reevaluating the PMLs that they've used for a large number of these clients that were exposed down there. And actually these silly rates outside of the PMLs that the industry has been prepared to accept which have been blown away -- and ably demonstrated have been blown away by the spike losses that have occurred down there. The one (indiscernible) rates that the industry has been prepared to accept have actually been completely rethought. That's why the underlying data is going to have to be much better, much stronger, and much more questioned (ph).

So if we see the right structural changes and we can underwrite it and we can get our pricing, yes, there's no reason why we shouldn't increase our portfolio, but it will still be within the balance of our overall diversified book. And we fine-tune that on a daily basis, as I've said to you before.

That's great. And in terms of your primary insurance, that business is heavily reinsured. I was curious as to how the higher reinsurance pricing would affect the profitability in that line?

Andrew will give his thought in a second, but I have to bring you back a bit. All of our business that we underwrite, I insist that it has to be able to stand on its own two feet and in its own right. The fact that we use reinsurance on an opportunist basis for our primary reinsurance is a different matter. So just as we've proved during 2002 when we bought very little reinsurance, as long as the pricing of the primary business is sufficient and we can get the spread and the diversity, then we're happy to actually run a gross book and, with our aggregates monitoring as well as the daily fine-tuning of our portfolio, we can do that. We've proven that many times before.

In your IPO I thought management mentioned that the PML was about 10 to 25% of capital depending upon the size of that loss. Would you be able to increase exposure to these areas while maintaining the same PML?

Well, as I said that we have historically -- I have historically looked at -- if you look at our earnings profile that we've delivered over the last four years and then look at those PMLs that we would -- that put at risk for the different perils -- natural perils it's not dissimilar. And I probably wouldn't expect much difference going forward.

Thank you.

Adam Klauber, Cochran Caronia.

Good morning, thank you. What's the environment in Europe catastrophe and what's your appetite? And I guess inset within that question, how rational are Munich and Swiss behaving?

Well I won't comment about the Munich and Swiss, but in terms of cat pricing in Europe, it has been extremely competitive and we have not been able to participate in -- we've actually been reducing our aggregate substantially over the last 12 to 18 months by pulling back from us certainly a lot of the UK major accounts. But we believe, as we said, this is a loss that will substantially impact all lines of business. And when the major companies ultimately realize the extent of their Katrina and other hurricane losses, they will be forced to look more carefully at a pricing of cat whether it's in the U.S. or in Europe. It's a timing issue in Europe. Europe always reacts much more slowly than the U.S.

Thank you. And as far as the cat business in the U.S., have you changed the risks you'll take? Let me put it differently. Are you going to cut down the amount of business you'll write in Florida, the maximum wind-exposed area?

If you remember, we reacted immediately following Katrina and Rita and substantially adopted a very conservative and more defensive posture to any cat exposed programs that we were being shown. I think it would depend upon what our capital base is going to be. It's going to depend on what the rating agencies require us to carry against any cat aggregates. And it's going to depend on the restructuring and the pricing of the underlying product for cat. And out of that basket, which we're actually trying to get our minds around now, we'll develop our business plan through next year. But I think it's going to be quite positive for us.

Thank you.

Steve Shapiro (ph), SFSF (ph) Investments.

Thank you. My questions have been answered. My compliments on the level of insight on the call. Thank you.

Sam Hoffman (ph), Omega.

How should I calculate the amount of debt and preferred capital that you have available to raise before you need to raise additional equity?

Well, the standard buckets from A.M. Best and S&P I think you can use as a starting point. But you can have up to 50% debt to total capitalization, 10% in the hybrid bucket, another 10% in the super hybrid bucket in terms of your overall capitalization. Pretty much the same ones over at S&P. And then generally the same at Moody's. Although, depending on the underlying structure of your preferred, you can get anywhere between 50 and 100% credit for it depending on your underlying terms and conditions.

Okay, thank you.

Steve Lund (ph), Morgan Stanley.

It's Guy Lund from Morgan Stanley. A quick follow-up on the capital question. I think last quarter we were debt to capital, the target you guys had was 20%; is that still operative following the hurricanes, what you were talking about, Andrew, about the rating agency bucket?

I think the official bucket at the rating agencies is 15%. But I would suggest that, given what's happened in the quarter and with expectations for 2006, I think you could eclipse that ratio over the short-term as long as over time you got that ratio back in check with that in light of the overall rating agency capitalization.

Okay, thanks. And then in terms of how you guys manage the debt to capital number -- think about it I should say. Do you view the preferreds as 100% equity when you do your capital budgeting?

As I said on the last question, Guy, in terms of A.M. Best and S&P, certainly we get 100% credit for that, up to 15% of the total capitalization. And at Moody's we get 50% credit of the preferred capital.

Very good. Thanks a lot, guys.

Ernest Jacob (ph), Longnook Capital Management.

I have a couple questions. Did I understand you correctly that the upward development from your initial estimate of the Katrina loss to the number you're publishing now of 723 million was due either entirely to or largely to Chevron?

It was pretty well all due to Chevron. And I am -- it's a good question because it was really late breaking and I'm not sure that the rest of the industry has really factored it into their third-quarter numbers. But because of the scale of the loss that Chevron has put into the market, which is $1.4 billion of insured losses over the two hurricanes, Katrina and Rita, obviously it was a material event that we wanted to get into our numbers straightaway and we reserved to full policy limits.

I'd also be interested in how much of the 723 is offshore and marine.

In terms of the overall loss on a net basis about 15% of the loss comes from offshore and marine.

And could you give me that percentage for Rita, please?

For Rita specifically?

Yes.

Offshore is a little higher in Rita; 58% of it comes from offshore in Rita.

And would I be correct in assuming that of your very preliminary estimate for Wilma of 100 million that there won't be any offshore and marine or that it will be insignificant?

Yes, we don't consider it to be a material loss offshore at this moment.

Okay, thank you.

Bill Wilt, Morgan Stanley.

Apologies if this is a repeat. Could you comment on trends in U.S. professional liability whether claims and claims reserves and premium rates?

In terms of claims development, our claims development has been pretty reasonable in terms of we haven't experienced any adverse significant claims development since we've taken on the portfolio. I think the market, especially the D&O markets -- I really don't understand where some of the excessive competition really comes from because it's a pretty limited marketplace. It tends to be more driven by the primary carriers who are driving the initial rating for these programs and then the brokers obviously will do their work to try and continue to drive down pricing on excess there.

But we have witnessed that there is a capacity issue that's building which has led to a much more stabilized approach to pricing. I would expect that -- the reinsurance market, Bill, is -- the casualty reinsurance market is not going to soften this year end. If you think of the professional lines reinsurance market, that has continued to harden over the last two years. So even if the primary carriers wanted a break and wanted to be overly aggressive they're not going to be able to. They're just going to destroy their margin even more quickly than some of them have been doing over the last 18 months. I actually see it moving in a different direction and I look forward to it hardening.

That's helpful. Thanks very much.

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Okay.

Ron Baughman (ph), Capital Returns.

Not so fast, I thought I queued up early.

Don't take it personally, please.

No, I understand. (multiple speakers) There's going to be an exciting 9:00 call unfortunately. It's amazing to me that, John, you're the only executive on the -- we've had quite a few calls this quarter so far, you're the only executive that's said he's directed the entire underwriting team to get more rate across all lines, let alone the only one who's told us he's met with all the underwriters. It's just mind-boggling to me given the losses and what's been learned and suffered here.

I entirely agree, Ron. You hear me banging on time and time again about the disconnect between the CEOs of companies that are supposed to lead their businesses. You have to be amongst the troops. It's critical in a post Katrina type event where there is fundamental uncertainty about the industry and its solvency. You have to get in and sit with them, talk to them, allow them to be able to trade forward more strongly. It's not about recrimination, it's about learning well from the past and actually then learning those lessons and very clearly making sure that future underwriting decisions are impacted from those lessons. But I was as surprised as you are about the lack of penetration shall we say by those people in their own businesses.

I have two quick questions. I think the answer is no. Did you sell any third event covers in the wake of Katrina coming in or did you stay on the sidelines?

No, I think it was very minimus.

And then the other question was the four storms of last year hitting basically Florida, did you have any reserve creep or drawdown from those initial estimates?

No, we're still comfortable with our estimates. They haven't moved this year.

Thanks a lot, guys, and good luck.

Again, no further questions at this time.

Linda, am I allowed to close the meeting up now? Thank you all very much for joining us today. As I said, I hope that the next quarter we'll be able to come out with some much, much more better financial results. Thank you again.

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