AXIS Capital Holdings Ltd (AXS) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the AXIS Capital Holdings limited fourth-quarter 2005 earnings conference call. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Ms. Linda Ventresca, Investor Relations. You may proceed please.

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 and the year ended December 31, 2005. Our fourth-quarter earnings press release and financial supplement were issued yesterday evening after the market closed. 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 March 3rd. An audio replay will also be available from approximately 11 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 40817394.

With me today in our Bermuda headquarters are Michael Butt, AXIS Capital's Chairman, John Charman, CEO and President, Andrew Cook, CFO and other members of management. 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 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 diluted book value per common share and net income excluding investment gains and losses 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 will turn the call over to John.

Thank you, Linda. Good morning, ladies and gentlemen. I am delighted with our results in the fourth quarter which capped a year otherwise overwhelmed by the impact of unprecedented insured catastrophe losses. In the quarter we recorded $233 million in net income including net losses incurred from Wilma of $172 million and an additional $43 million from Hurricane Rita. This $43 million from Rita represents a 5% increase over the third-quarter net losses reported for both Katrina and Rita. We remain comfortable with our Katrina net loss position.

Overall with respect to our estimation of 2005 hurricane losses at AXIS we believe we have been as thoughtful and detailed as possible in recognizing industry modeling data limitations. We have applied the same rigor and logic to our reserving process that we applied to our underwriting and we will evolve this even more strongly in the actual underwriting process. While it is always disappointing to report major loss activity, I am very proud that in a year of catastrophe losses AXIS was able to produce net income of $90 million and finished this year with $4 billion in total capital. This is capital that was preserved by our focused core underwriting discipline and further strengthened by our capital raisings during the last half of 2005. Our skillfully diversified portfolio and experienced realistic risk management has demonstrated the ability to withstand extraordinary losses.

Getting back to the quarter, our gross and net premiums written were down 3% and 2% respectively due to declines in our insurance segment. There are two reasons for this. First, we indicated to you in our third-quarter call that for aviation and aviation war renewals we were seeing rate decreases on the order of 20 to 50% on an exposure-adjusted basis, and therefore we declined to renew a significant amount of that business.

Also we began to proactively address very early on in the post Katrina environment our prospects for improved expected returns on equity in all of our catastrophe exposed business. We made material adjustments in our model and analyses to recognize the increased frequency and severity capital requirements and expected underwriting margins. While the overwhelming majority of our catastrophe exposed business is in areas of the market that have the ability to respond quickly and decisively to the new reality, the U.S., E&S market, the London wholesale market in the reinsurance marketplace, the primary market did not respond as strongly and as broadly as necessary. In the transitional fourth-quarter and even into this quarter there was a good amount of business we declined because the primary market has not yet incorporated the impact of catastrophe risk modeling changes for all perils.

As an example we are not yet seeing California earthquake exposed accounts come through with rate increases we expect will be demanded when model changes are enforced more strongly across all perils. That was the fourth quarter and that was the primary insurance market. The momentum is absolutely in the right direction and there are many forces at work which will sustain and accelerate this trend through the year. I will now turn the call over to Captain Hook, our CFO to go through our financial results in more detail. Following his commentary I will update you on the current state of affairs in the marketplace.

Thanks, John. Good morning, everyone. Following the significant impact that Hurricanes Katrina and Rita have on the third quarter this quarter represented a welcome return to profitability even after the effect of Hurricane Wilma are taken into account. With that said I would like to walk through our financial results.

Our diluted book value per common share at December 31, 2005 of $19.19 represented a 3% decline over the last twelve months. This decline reflects the combined impact of this year's catastrophes, our $350 million share repurchase in the first quarter of this year and the $200 million common equity offering executed in November. Our 2005 net income excluding investment gains and losses net of taxes 105.2 million or $0.67 per diluted common share and compared with 482.2 million or $2.91 per diluted common share in 2004. The principle driver for the decline in net income was $1 billion in losses from Hurricanes Katrina, Rita and Wilma or KRW for short. All in, including net losses, inbound and outbound restatement premiums, acquisition costs and taxes, these three events had a net impact on the annual results of $1.01 billion which compared to $229 million for the hurricane events last year.

In order to help you better understand the specific implications of the KRW events we have included a detailed analysis of cat losses within our financial supplement which is posted on our Website. We encourage you to review this at your convenience. I will briefly discuss now some things to keep in mind with respect to our determination of net losses following catastrophic loss events. Most importantly we undertake a ground-up contract-by-contract analysis of our potential exposure and layer this analysis over our own rigorous interpretations of available industry loss information.

Our net losses from US windstorms are evaluated constantly and in totality. In evaluating our performance on this basis we recognize that one, models are very limited in determining actual losses. Two, the loss adjustment process in seasons marked by frequency can be complicated and therefore lengthy. Three, in our reinsurance segment we are slightly further removed from the loss adjusting process than we are in our insurance segment and attempt to be as prospective as possible in recognizing data limitations. And four, there may be increases or decreases in individual event loss estimates due to the interplay among storms. On this last point a good example is the determination of losses related to catastrophe aggregate contracts. For these contracts losses must be apportioned back over event contributing to the overall loss and therefore will naturally contribute to variability in previous estimated net losses.

Moving on from the losses consolidated gross premiums written for the quarter were 633 million, a decline of 3% from the same quarter in 2005. For the year consolidated gross premiums written were 3.4 billion, up 13% from 2005. With respect to consolidated underwriting results our combined ratio for the quarter was 73.2% as compared with 79.3% in the fourth quarter of 2004. This quarter's combined ratio included 31 percentage points attributable to the combined impact of net losses from Wilma and the increase for Rita. Our combined ratio for the year was 101.8% as compared with 84.4% in 2004. KRW net losses accounted for 40 percentage points of the 2005 combined ratio versus 13 points from Charlie, Francis, Ivan and Jeanne in 2004. So our combined ratio for the year excluding net losses from KRW would have been 61.9%.

In our insurance segment gross premiums written decreased 20.4% in the quarter and 2.3% for the year. This was primarily driven by the decline in gross premiums of 21.4% for the year and 48% for the quarter in our global insurance segment. As we noted in our third-quarter call and as John has already noted this morning we did not believe that the aviation market would meet our underwriting standards during the fourth quarter. This was indeed the case and was the primary reason for the year-over-year decline in gross premiums. Having said this most lines in global insurance 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 for most of 2005 and what became a transitional marketplace in the fourth quarter.

Offsetting this decline somewhat what was our US insurance subsegment which showed growth in all lines for the year with overall growth of 23% and for the quarter of 24%. Largely through product expansion. The most significant growth came from our professional lines unit where we expanded our E&O capabilities. Our reinsurance segment showed year-over-year growth of 39%; we experienced growth in all lines and from each of our three producing offices. Included in the year-over-year premiums are reinstatement premiums of $88 million versus 18 million in 2004.

Total net premiums earned for the year were 2.5 billion, a 26% increase over 2004. This increase reflects the strong growth in our reinsurance in US insurance underwriting businesses throughout 2004 and 2005. Our net loss ratio was positively impacted by favorable reserve development of 383 million during the year or 15 percentage points. 269 million of this came from our insurance segment and 114 million from our reinsurance segment. This level of reserve release is due to the lack of significant loss developments impacting our short-tail lines from prior accident years. Our underlying accident year of net loss ratio excluding net losses and favorable reserve development compares favorably with that in the same period of last year.

In terms of IBNR as a percentage of overall year-end loss reserves it looks as if it has decreased to 57% of total reserves from 76% last year. However if you backed out the case in IBNR for KRW of 1.6 billion the ratio moves up to 79%. The same exercise in 2004 for Charlie, Francis et al results in a ratio of 85%. So overall our IBNR is consistent year-over-year.

A substantial portion of our gross loss estimate of 1.8 billion for KRW was covered by reinsurance from diverse counterparties of high quality. Reinsurance recoverables have increased by 922 million from the last year end 1.5 billion. This increase is largely attributable to the recoverables from the major loss events of the third and fourth quarters. For more detail regarding our reinsurance recoverables please see our financial supplement where we have included additional disclosure regarding our recoverable balances.

Turning to investments, total cash and invested assets ended up the year by 29% at about 7.8 billion due to strong cash flow from operations of 1.6 billion and our capital raising activities in the latter part of the year. Total pretax investment income on our investment portfolio for the year was 240 million, up 45% over last year and included 257 million in net investment income and 17 million in realized losses. The contribution from net investment income increased during each quarter of 2005. 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 to maturity increased throughout the year ending the fourth quarter at 4.9%. The three-year treasury had three separate peaks and valleys during the year ending the year at 437 versus an opening level of 338. Due to this volatility we experienced a $92 million movement in the unrealized loss position of the portfolio.

Our short duration portfolio, other investments focusing on floating-rate investments and cash holdings limited the downside to our capital base during the past year's market volatility. We continue to believe US 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 at least during the first half of 2006 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 this season's storm activity.

Our allocation to other investments is beginning to contribute to quarterly net investment income. During the year they contributed 17 million versus 2.5 million last year. Importantly this contribution is increasing rising from 2.2 million in the last quarter of 2004 to 6.4 million this past quarter. The average annualized earned yield for these investments for the quarter was 6.5%, about 216 basis points higher than our fixed income portfolios.

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 US dollars. Finally we were active in raising additional capital during the fourth quarter. Prior to the major events of last 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 so doing we strengthened our balance sheet by issuing 250 million of perpetual preferred stock with a 7.25% dividend. Following on from this we raised an additional 250 million of perpetual preferred stock with a 7.5% dividend. We did this offering in conjunction with the common equity offering of $200 million. Each of the preferred securities provide us 100% equity credit from both A.M. Best and S&P. And with that I will turn the call back to John.

Thank you, Andrew. Another magnificent delivery. With that I would like to address current market conditions. We are currently operating in a marketplace that within our appropriate risk selection can offer us favorable pricing, terms and conditions throughout most of our business segments. The story of this market is still very much transitional and strongly influenced by the reinsurance marketplace. At AXIS we are heavily involved in our target areas of both the insurance and reinsurance businesses. Wherever the underwriting opportunity, whenever it occurs, we expect that we will benefit meaningfully in this transitional environment. We operate globally in areas of the business where we are in control of our own destiny. Wherever we see profitable opportunities at any given time, we have the nimble daily operating structure, speedy reporting and decision-making process as a group to readily allocate capital between these two segments.

Business production flows during the first quarter of any year at AXIS are heavily biased towards the first of January renewal date for the reinsurance marketplace. So far this renewal date for our reinsurance segment suggests that the portfolio strengthening and important recalibration exercise in this segment is executing positively and very much as expected and planned. We believe that this will continue throughout the year. The name of the game for AXIS has always been and will always continue to be margin outperformance. With respect to property reinsurance model change in 2006 has been focused on the US market. Several changes are likely to occur outside the US as well but these are changes that will not be as material as those in the US.

Model vendors will be releasing updated models in mid 2006. However immediately following Hurricane Katrina we incorporated material adjustments to our pricing metrics; specifically we have already increased assumed Atlantic hurricane frequency and demand surge, all post-loss inflation in anticipation of vendor changes. We are addressing increased capital requirements and we are demanding more appropriate underwriting margins to improve expected returns on equity.

Outside the US the property catastrophe reinsurance market was flat to up 10 to 15%. However, we expect that going into 2007 with explicitly recognized model changes the European marketplace will react positively to increased assumptions regarding loss costs. From a portfolio perspective the property casualty business in the UK, Northern Europe and Continental Europe is still rational and we were able to target core accounts successfully. Please keep in mind that our property reinsurance business including that in Europe has always been very deliberately weighted toward excessive loss business allowing us more control over our own destiny.

In the US national account pricing was up in excess of 100% and we expect that it will continue to firm. Small regional business with coastal exposure was up in the neighborhood of 30% and small regional loss-free business was up 10 to 15%. As I mentioned earlier for primary business, California earthquake-exposed business has not moved sufficiently for us yet. It is around two-thirds of where it needs to be in our view.

We see demand for global catastrophe reinsurance continuing to build as cat models are updated and improved during the year. And rating agencies continue their diligence. Throughout 2006 we expect pricing to continue to tighten in the US market and in fact foresee a market dislocation event in the late spring where demand fundamentally outstrip supply for US wind. This despite any new capital which has entered the marketplace recently. We have anticipated this scenario occurring in our portfolio exercise the first of January and have deliberately allocated capital to deploy for opportunities that we believe will arise as the year progresses.

As I noted last quarter many cedents seem to be reacting sensibly with underlying productline increases. However, consistent of what we are seeing in our insurance business this response can be somewhat spotty across lines. Renewed risk excessive loss covers are having limitations regarding coverage of catastrophic exposure imposed on them. A remaining non-cat element is also being fundamentally reevaluated and repriced more appropriately.

On to the casualty reinsurance market in the US which is where we write most of this business. This market with the exception of medical malpractice reinsurance was firm and the starting point for most accounts was renewing as expiring. We have noted here a general continuation of higher cedent retentions and a modest reduction of limits purchased for larger clients. All told we continue to find opportunities which meet or exceed our requirements and a continuing strong reception for our balance sheet, ratings and underwriting skills. We also continue to maintain a core base of primarily specialty underwriting operations in the US that demand strong reinsurance partners. We expect that the developing increased capital requirements coupled with a better and more professional determination of risk could reverse or at the very least suspend the current behavior of larger primary companies who retain more business in the wake of their perception of increased profitability coming their way.

Now I will move onto the insurance marketplace. In AXIS insurance our strengthened and more demanding underwriting strategy is in place. Every single risk is expected to satisfy greater data requirements. On property related business substantial increases to pricing and attachment points as well as tightening of coverage are demanded. Individual accounts are selectively being reengineered and we are proactively reallocating capacity where we see the best rated opportunities.

For wholesale property business accessed in London and the US market, capacity in North America was cut back substantially immediately following Hurricane Katrina regardless of our reinsurance availability. Accounts with catastrophe exposure continue to experience dramatic rate hardening. Non US accounts however remain under significant pressure from the normal irrational competition. The April 1st and July 1st renewal dates are significant for large individual risk business and represent better opportunities for us in being able to reallocate the freed-up capacity created over the last four months as pricing allows.

Offshore energy business continues to show appropriate price and descriptive condition momentum with the most dramatic occurring obviously in loss effective Gulf of Mexico exposures. For onshore energy where primary underwriter still have remaining coverage, reinsurance coverage, the market's reaction has not yet caught up to that on the commercial property book. We expect that situation to change in our favor as we progress through the year.

Frankly, this and the California earthquake property situation will have to change as the reinsurance market continues to steadily harden and becomes more demanding of primary underwriters. As I told you last quarter those professional lines where capacity is required as in our Bermuda high-excess operation have been positively impacted. Outside of this the pricing environment appears to be stabilizing with pricing changes up or down single digits.

Our E&S casualty and umbrella lines of business also seem to be stabilizing in a similar way. Overall for casualty insurance business prior to Katrina there was downward pressure on rates and a sense that further rate decreases were imminent. That pressure has subsided and given way to an expectation that rates will be at a minimum flat in 2006. Our talk about firming of the reinsurance marketplace of course plays a role in our insurance operations. We are looking to strictly enforce pricing and exposure management in the same way we are in our own reinsurance operations. We believe there is little reason for concern.

Our reinsurance purchasing strategy for our insurance operations has not changed and coverage is aggressively negotiated and placed throughout the year. Our historical approach to mitigating volatility in these businesses, managing our aggregates and conserving our capital continues to apply.

With respect to catastrophe cover that we purchase for our US insurance operations our major renewal dates are in the spring and we can only give you early indications at this point of what we generally expect. We have already implemented changes to manage down our gross exposures. We have modified our models to reflect the increased potential for loss and are demanding more premium per unit of exposure. We do expect that our retentions will increase, by how much we do not yet know. This will be an economic decision we will make once we get more clarity with respect to reinsurance pricing. The evidence over the last few months would suggest that we have reacted ahead of the market in this regard. Our loss experience in 2005 would also suggest that we not only understood but properly managed our exposures as we still have ample cover remaining in our insurance segment for the 2005 catastrophes.

All of this gives us confidence that our reinsurance cost will be appropriate and manageable in the context of our overall diversified portfolio and uncompromising risk management strategies in place as they have been to date. As a Company we expect to be a net beneficiary of the hardening reinsurance marketplace.

Before I conclude my commentary, I want to remind you not to assign too much significant to growth in any particular quarter, particularly during this year as the transitional nature of this year demands that we act prudently, not hastily to ensure allocation of capital to the very best opportunities. We still expect to see growth overall for the year and expect this to come largely through pricing, not material exposure growth. Remember we have modified our assumptions regarding potential for loss and commensurate capital allocation while simultaneously increasing our demanding underwriting margins. If we have done this well that means increased expected profits.

Going forward, we expect that market hardening will continue throughout 2006 and impact the insurance and reinsurance markets more broadly due to the following. The incorporation of catastrophe modeling changes more broadly in the global industry and by peril; the impact of greater reinsurance costs; mitigating the competitive behavior of insurance companies; wider recognition and enforcement of increased capital requirements; and continued contraction of capacity, so catastrophe exposed business despite new capital entering into the industry.

In the face of all of this, our balance sheet and capital position remains strong. We remain in good stead with the various rating agencies who evaluate this critical adequacy. We at Axis are operating for a position of strength, and every one of our major businesses stands to gain in the ensuing 12 to 36 months. Our underwriters have a proven track record of bringing opportunities to fruition quickly and decisively in an intelligent peer review environment, and in the aftermath of Hurricane Katrina have been rigorously applying remedial action. Our absolute focus remains on building book value meaningfully over the long-term.

Thank you. Operator, I would now like to turn the call over to Michael Butt.

Thank you, John. Good morning all. Before we hand over to questions, just make a brief comment about the second press release that we issued last night stating that John will not be extending his current contract as CEO, which expires in December of 2008. John has, of course, kept me advised of developments in the personal matter of his up coming divorce proceedings. On the issue of his succession in 2009, the Board has since inception, obviously, seriously reviewed management succession annually every December in detail. We have, as you know, also developed a deep bench strength.

Of course, happily 2009 is some way away. Meanwhile, John remains totally committed to the Company as you have just heard and the strategy that we have developed. I particularly look forward to continuing to implement the Company's strategy with John. I am sure also that you will understand that it is not appropriate for us to comment further on a matter that is both personal and will also shortly be coming under judicial consideration.

Thank you, and with that I'd like to open it up for questions, operator. Thank you.

(OPERATOR INSTRUCTIONS) Matthew Heimermann, JPMorgan.

I had three quick questions. One, with regards to the favorable development you experienced in the year and in the quarter, I was just curious if you could give us a sense of how much of that came from the terror and aviation lines in particular? Secondly, if I was doing my math right, it looks like DAC relative to the unearned premium reserve declined in the quarter sequentially and year-over-year, and I just wanted to know if there was anything unusual driving this?

Then finally, I guess if we step back, some of your comments with regards to how you're thinking about the market evolving over the year are similar to how other companies are thinking about it. I guess I was really interested to see or understand what could go wrong that might make the market not strengthen as we go through the year.

I'll do the first two, and then let John answer the last one. In terms of the reserve releases, we don't specifically break out how much comes from the individual lines. But I think as we've said all along, all of our releases, be it in global insurance, reinsurance or U.S. insurance, come from our short-tail line of business. But I think if you take a look at the premiums written and the losses developing over the last couple years, you can see that a large chunk of that would have come from the aviation war and the terrorism lines of business.

With respect to the fallen DAC, I think it is 12.8 versus 11.1 year-over-year. The big difference is from the fact that last year, as you know, we had a significant amount of PSAs accrued in the accounts that we have since settled during the year. We've talked about each of the settlements over the past several quarters. So when that comes out of the equation this year, it brings down the ratio.

The other part that comes into it ties back to what John said with respect to the aviation renewals. Obviously, the premium that is unearned on that and the expenses associated with that is significantly lower at year-end 2005 versus 2004. So those two factors combined bring the overall DAC under premium ratio down accordingly.

Okay, thanks.

As far as I'm concerned there are probably three things. One is the rating agencies relieved their capital pressure that they have been exerting since Katrina over businesses. And if that is combined with a reinsurance market which softens overall that will have a very negative impact. But I don't expect either of those to occur. And then thirdly the CEOs in my industry if they took their -- if they move from looking at quality of earnings which they have been fortunately moving towards during the course of 2005, if they moved away from quality of earnings to just scale of earnings, that would be a material change. To the detriment of what I believe is an appropriate move in the industry where we are taking it.

Is it fair to say that really the first chance we will get to see, to confirm your views is that large account renewal 4 1, 7 1?

I think first of July is going to be an interesting time for the industry as a whole. As I have said that we believe there could be a substantial shortage in US wind, Florida-based wind and as the reinsurance market continues to demand much greater adherence I suppose from the primary market and higher standards of underwriting, I think it is going to be a good test. I believe it will be very positive not only for the reinsurance market but it will also impose some very positive constraints on the primary market which need to be there because the primary markets consistently over the last two or three years have shown very weak discipline.

Greatly appreciate it. Thank you.

Dan Johnson, Citadel Investment Group.

First, Andrew, can you talk a little bit about the global insurance segment and the reserve releases that a year, actually I think I have got them totaling about 240 million. Can you give me a sense as to what -- I am presuming that is all from 2004 and prior? Can you give me a sense of what the starting reserves were that balance pertains to?

Yes, sure. If you look at it on an annual basis and then we can go through it on a quarterly basis if that is helpful for you but the reserves for global insurance at year-end '03 which is obviously the starting 1/1/04 reserves were 481 million and we released just over 92 million or 19%. The starting reserves this year at 12/31/04 or 1/1/05 were 881 million and we released 242 million so about 27%. But if you look at it on a quarterly basis we have been fairly consistent throughout the year of releasing about 3 to 5% of opening quarterly reserves each year. And a couple of things there, it is not just 2004, it is 2002, 2003 and 2004 accident years that we would have released this year versus last year, it would have just been '02 and '03. So we have another full year of accident year reserves that we could take a look at at year-end this year to release.

I just also want to because obviously people will be looking at these numbers because they're looking at the industry earnings and the components of those earnings. There has been no change in our approach or methodology to our reserving process. This is a quarter-by-quarter evaluation. The numbers will be whatever they are going to be. If they are going to be there. But there has been no change in our methodology. Let me assure you of that.

And the other part of that first question, Andrew, is if I do this right and look at the fourth-quarter global insurance loss ratio excluding the cats and excluding the reserve release, I get a loss ratio in the '40s which is probably 15 to 20 points better than maybe what I had been assuming or what we had seen recently. Is there anything unique about fourth quarter that would --?

I mean realistically not a lot -- other than KRW, not a lot really happened in the segment. As you know we were at a fairly high level book of business for individual accounts. And at the end of the day there was really a limited number of individual large losses that occurred during the fourth quarter and the global insurance book as you know continues to be a property-oriented book of business and the non hurricane losses were very quiet during the fourth quarter and as such the loss ratio was down for the quarter.

Hopefully our risk selection was pretty good as well.

John, for January 1, renewals, a lot of the Europeans sort of, and even partner Re break out their renewal performance in terms of what was available to renew and how much of that renewed. Can you give us some color in terms of general statistics and how that compared to what you had been hoping for a few months earlier? Thank you.

As I said despite the fact that we have adjusted our models and we adjusted them immediately for both frequency and severity, we I think have worked very hard led by Karl Mayr and Stephan Knipper in Europe to establish very strong relationships with European cedents. And I think that we were very comfortable, we achieved our business plans and we expect to be marketing aggressively through Europe in a very specific and deliberate way. And we will continue to build our brand and company within the European reinsurance marketplace.

Does that same hold true for the January 1 renewals in Bermuda?

I can't comment on the individual companies but you have to really look at the people who are playing in the European marketplace and look at the split between proportional and excessive loss business. I said in my comments that from the very outset that AXIS on the reinsurance side, we have been largely an excessive loss Company. Where we can choose our spots we can take a view on the cedents, we can decide whether we want to be primary, in the middle or at the top end of their programs. We have a lot of flexibility moving around and we can decide also on the extent of the coverage for providing them. We have very fixed views on that. If you are writing a proportional account it is very much more lose and certainly has been up until last year-end when event limits were being introduced much more appropriately. But we like to be in the line of business we are in. We think it has a much greater long-term value to the Company.

Thanks for taking the questions.

Joshua Shanker, Citigroup.

You mentioned that you modified your taste for risk of losses and you're hoping pricing is going to give you grow. My question I guess the first of two is, why? The industry endured $80 billion in loss from cats and given your risk management skills you still had a 7% ROE this year. What needed to be changed from prior years?

I am surprised that the fact that the industry lost $80 billion, unless I am missing your question that we have to learn our lessons from that loss. It was obvious there are fundamental failings within the industry models.

Oh, no, no, the question -- the industry may have failed but you seem to have done pretty well. You are a property underwriter --.

I don't like underperformance. I think the Company has demonstrated everything that we have been telling you as an investment community since we established AXIS about our procedures, our aggregation, our peer reviews, all of these things. But at the end of the day the industry and investors should demand -- you've have heard me say this before -- I think one of the greatest problems in the industry is the fact that investors do not demand more appropriate return on average equity from people like me. And for the risks that are being accepted. And I don't care whether my CEOs in the industry are not pretending of saying that they are low volatility. As an investor I believe the return on equity requirements for an investor should be substantially enhanced.

Well John I am going to let you know that 7% ROE, high single digits ROE in a year like this is a great performance.

I say that to my people but at the end of the day I still demand a great deal more of them.

Very good. The next question, prices will rise when the models change as you said. And you think that this is going to be better enforced across all perils as time goes on. But you said you have already made severity in frequency adjustments to your book, I assume this includes insurance. I'm just curious why you think your competitors haven't made similar changes in their books yet?

Perhaps they got a lot more business at the first of January. I don't know. I can't comment individually on them but what we did you know in the last quarter earnings call, I said very clearly that within days of Katrina occurring we had moved substantially our approach to underwriting both insurance and reinsurance business and started to recalibrate our models. That is a discipline because we had day-to-day control over our underwriting globally. We can impose that and we can actually see the results move very quickly through. I think that just as a personal comment, I think it may have been helpful for some of our competitors to not adjust their models as strongly in order to be able to gain a short-term advantage from revenue going into '06. We did not do that.

And in terms of going forward purchasing retro to protect yourself are there individuals you bought from a year ago that you crossed off your potential suppliers' list?

No, as long as they have good quality capital and good ratings we will talk to our good friends out in the reinsurance market.

Very good. Despite your feelings on that I still think congratulations on a good year.

Thank you.

Dan Farrell, Fox-Pitt, Kelton.

My first question I wanted to get into a little more detail on the movement in the acting year combined ratios after the cats and the improvement that was seen in the quarter and even the full year. I think you mentioned that some of it is due to some favorable loss trends ex cats, but I think last quarter you had also mentioned that you're going to start or maybe have started using your own underwriting experience to set initial loss picks. Has that started to have any impact on what you're setting for initial picks?

I think we started that or we mentioned that either in the year-end '04 call or the first call this year that we have got four years of full experience now so in terms of our actuarial models we can rely more on our data than the pure industry data as we had to in our first couple of years. And again our actuaries are much more familiar with our book of business and a lot of the lines write particularly within global insurance. Our high visibility lines of business either an event happens or it doesn't and we have started to take our line size and attachment points into account in setting our overall loss picks. And I think definitely throughout all four quarters of this year we have seen the impact of that coming through in the current year loss picks.

My next question can you just give a little more detail on the US insurance segment and it looks like the loss ratio there increased in the quarter versus the year ago if you ex out cat and reserves -- (inaudible) look at trends in the quarter basis and any color you can add there?

Yes, it really gets down there to business mix and as John said in the last couple of conference calls we have been building out our US platform and in particular during '04 as we said, we had a pretty successful year with respect to expanding our E&O and other liability lines. And necessarily we are reserving those at higher overall loss ratios than our property book excluding cats obviously. So as the earned premium on that starts to ramp up and overtake the overall property book you would expect to see an uptick in the overall loss ratios.

Lastly, can you tell us roughly how much of this year's reserve release came from each accident year '02, '03, '04? Ballpark numbers on that?

We have been given the clearance to give you that. Overall it goes as follows the '04 year about 236 million; '03 about 115 and '02, 32.

Thanks a lot. Nice quarter.

Vinay Misquith, Credit Suisse.

Good quarter. It will be sad to see both John and Andrew leave in the future. A question for you on your flexibility to write new business especially in the loss affected areas, considering plenty of capital and to the size of the loss last year. Do you propose to lower your exposures and the loss (indiscernible) or do you propose to have them at the same level?

I think we are just reacting appropriately. We immediately reacted to -- I wanted us immediately post Katrina because I felt that we would be moving into a different near-term environment where reinsurance capacity would become restricted or become more expensive or become more demanding. And so from an insurance point of view I wanted all of our operations to immediately act as if they were pretty well uninsured or underinsured, sorry. So we rebalanced, recalibrated our insurance portfolio to be able to in a worst circumstance continue to trade strongly in that marketplace. Because don't forget we have got the diversity by productline and geographic location of our business lines.

I think that as pricing moves based on the insurance side and the reinsurance side and as we get comfortable we can look to either reinsurance protection or greater exposure to our capital to see whether the opportunity that is presenting itself is meaningful enough to expand our portfolio. We actually do expect that will happen but it will be incremental as we go through this year. I have said before that I'm looking forward to the first of July. And I expect the market will continue to harden through this year. I'm not sure if I answered your questions though.

Would it be fair to say that you would be willing to increase exposure as the year goes on if you find pricing to be appropriate?

Absolutely. I'm always willing to take risk as long as we can get paid for it and get paid for it in a way that will satisfy our shareholders.

The way that it sounds right now it appears that maybe the first quarter premium growth may not be really strong because the reinsurance renewals was mostly a European event. And I believe the primary insurance market as you said before has not reacted fully to the hurricanes. So would I be wrong in assuming that the premium growth in first quarter would be more muted and might start to pick up in the second, third and fourth quarters?

I can't obviously give you any guidance but what I can tell you is what I told you in my script that we were pleased with the first quarter and it actually was in line with our plans. And our budgeting. So and I expect as we go through the second, third and fourth quarter to see hardening from there.

On the mix of the business since the opportunities right now seem to be more on the reinsurance side, would you build the business mix balance more in favor of reinsurance in the near-term?

I think I have said to -- which was completely contrary to where the market seemed to be going two years ago -- we took a view in our business that we felt that the best near-term opportunities and that was within the next three years, I had not realized quite the impact of '04 and '05 from hurricane activity point of view then. But nonetheless we thought that the reinsurance market would offer much greater near-term opportunities to us than the primary market. We have exceptional people as underwriters trading in those markets on a daily basis. But the market conditions are fiercely competitive and I still look to the reinsurance market providing us with better opportunities within the near-term than the primary market. But don't forget we are pretty efficient and pretty effective traders on the insurance side. So whatever is out there we will get and we will do it properly and it will be profitable.

What percentage of your business on the reinsurance side is now US based versus non US?

I guess for the end of the year I would imagine (multiple speakers) overall I would say probably 55 to 65% of our book of business emanated from the US marketplace.

Thank you very much.

Then I think is a pretty typical if you look at most global businesses. That is a pretty good snapshot of give or take five points to either side that is where you would expect it to be.

And that is for the reinsurance segment only, correct?

That is correct.

Thank you.

Jay Cohen, Merrill Lynch.

In the past I guess the past year or so you had been pulling back from the energy market. Obviously things have changed pretty noticeably there. In your mind have they changed enough where you can actually go after this business now and start to grow that line?

I think it is a good question, Jay, because again if you're talking about we concentrated on the primary side, we didn't write energy reinsurance because risk selection is critical in this business. Especially this line of business. You have to differentiate between offshore and onshore. Offshore energy and as I said I have been involved in these businesses for 34 years so I think I have a pretty good understanding about them and their volatility.

On the offshore side we were very careful about our risk selection, the types of contractors we would do business with, the way that the liability was being covered within the policies of insurance, the way that business interruption was being thrown in -- all of these ancillary coverages and without real effective pricing mechanism or any real understanding of aggregation especially in the Gulf of Mexico. We were just as we would normally expect to be and will continue to be very selective in our offshore portfolio.

On the onshore portfolio the real problem is that it can get mixed in with a lot of primary companies' property business and it gets into their reinsurance programs in that way. It doesn't receive the same sort of immediate attention that the offshore market has attached to it. The offshore market reacted very strongly and very appropriately and has moved I believe appropriately since Katrina and Rita. It is still a bit spotty because you have got brokers out there who are desperate to place business and they will compete and if they find weak underwriters and the limits of insurance are not great than that is what a competitive marketplace is all about. But overall I am very happy with the way the offshore market has moved and will continue to move especially as reinsurance is not freely available over the next couple of years.

The onshore market as I have said has taken greater time to react, it is still varied, we are still very, very disciplined in our approach to that market. We are very demanding of the coverages that are being provided within those policies and we want to be paid for them. And if we can't get paid for them we will just not provide our capacities to them. But I do believe that the onshore market will strengthen and solidify and be an attractive marketplace for us over the next two or three years.

My other questions were answered so thanks.

Sam Hoffman, [Omega].

I have a couple of questions. In 2005 you grew premiums by 13% and with book value of only 8% because of the hurricanes, where are you in terms of rating agency capital requirements for 2006? And with the increased capital requirements how much growth do you think is feasible with your current balance sheet?

We can't go specifically into the details of the rating agencies but I guess what I can tell you about the agencies (indiscernible) to note throughout the entire windstorm season of last year we were never put on negative outlook or credit watch at any time. We ended the year with more capital than we started the year with. As John said during his prepared remarks we have reduced our overall catastrophe exposure in wind prone areas during the 1/1 renewals. And I think most importantly the losses we discussed with the agencies at the start of the year weren't too far off what our actual losses were. I would say we are in good stead as we stand with the agencies and we're coming up in the second quarter for our overall annual renewals and I think we will be in good shape.

Do you think you could grow premium on the current balance sheet?

I think based on everything that John has said today during the call and our capital base as it stands at the end of December 31, that we have adequate capital to realize our 2006 business objectives.

We will. We believe the opportunity is there and we will use our balance sheet, we will maximize the use of our balance sheet.

Also in terms of debt to capital and preferred, have there been any changes in rating agency capital ratios that would enable to use more or less debt as a percentage of your overall capital?

No, I think overall both or all three S&P, A.M. Best and Moody's have kept their ratios in line with what they were throughout 2005. So no change to the overall acceptable debt to total capitalization ratios are expected to move into '06.

My last question is what percentage of your reserves or IBNR as of the end of the year?

As we said during the call 57% but when you back out the KRW reserves it goes up to 79%.

Adam Klauber, Cochran Caronia.

Good morning. Thank you. With not only pricing going up in a number of lines but also risk exposures with catastrophes going up or getting more favorable would you expect accident year loss ratios to drop in 2006 versus 2005 if you x'd out cats and reserve development?

If the frequency catastrophes doesn't accelerate, Adam, it would be logical to assume that there will be a downwards pressure on accident year loss ratios. I would have thought logically. We will just have to wait and see whether the wind blows, the ground shakes or whatever else it does.

Also are you seeing somewhat of a shift from quota share to [excessive] loss? And if you look at your reinsurance book could you give us some idea of how much is quota share versus excessive loss?

As we have said since we set up AXIS and its reinsurance underwriting that we believe that the most advantageous way to approach the reinsurance market long-term in providing value to our shareholders was by way of writing excessive loss business. And we believed that the market itself would move away from its traditional way of procuring reinsurance by way of proportional reinsurance to more of an excessive loss purchasing marketplace. That is a trend that has been continuing to happen, certainly and accelerating substantially especially in different geographic regions. In Europe it was pretty well nonexistent I would have thought up until 3, 4, 5 years ago and yet the trend has been moving substantially towards excessive loss protection as opposed to pro rata. I think we positioned ourselves well internationally to pick up from that. We have the expertise, we know the seasons and as I say it gives us much greater flexibility in terms of positioning ourselves with regard to revenue exposure than we believe we can get out of pro rata business. Let alone profitability.

Thank you.

Susan Spivak, Wachovia.

John, I was just hoping you could go through a couple of things for me. In terms of the global markets do you see similar forces at work putting discipline into that market similar to what you talked about in the US? Then my second question has to do with a lot of the -- with the succession issues. I'm very sorry to see you and Andrew go but could you give some insight into the timing of perhaps when you would name someone. Would it be before you go, would it be someone at this point from within the Company or would you seek to look outside?

I will let Michael discuss the second issue but as far as your first question, it is inevitable that non US business will be treated and will react in the same way that US business has done both on a primary and on the reinsurance side. A fortress Europe and let alone the Asian marketplace, with Western capital especially in the Asian marketplace going in there and better understanding of risk management, there will be a greater discipline imposed as risk modeling becomes much more endemic shall we say in that region. So little of the data that we can extract at the moment is we are comfortable with. But without a shadow of a doubt those markets will move in our direction because they were just strengthened. Otherwise the capital from the West will not flow there. Because you cannot get the returns. So Europe will strengthen more quickly than Asia, Asia will follow on the heels of it.

Susan, on the questions you ask I can't be specific. We have the advantage of three years at least notice of John's decision to retire. That gives the board ample opportunity to develop alternatives which could be external and internal. It would be obviously totally premature to make that judgment at the moment other than I can assure you the board and I will be addressing this with great intense and seriousness as the time approaches. It is over three years away so we will do so in a structured, professional, careful manner knowing fully well that we have an outstanding underwriter as our leader at the moment.

The only downside is Michael has always had aspirations of being an underwriter.

You have done everything else, so.

You can say that again.

Thank you.

(OPERATOR INSTRUCTIONS) There are no further questions at this time, I would like to turn the conference back over to management for any closing comments.

Thank you everybody for taking the time to listen to us. I would just like to take the opportunity on behalf of the Company and myself to thank Andrew. As you know he is leaving on the first of April, and Andrew was one of our few founding employees. I think there were seven or eight of us at the time and he has made an invaluable contribution to making AXIS the wonderful company that it is. On behalf of the Company and myself I would like to thank him for that.

Thank you, John. Just from my standpoint it has been a pleasure working with everyone on the call and obviously doing the conference call every quarter and the follow-up questions and I just like to say thank you very much, it has been a real pleasure working with all you. And also to John and everybody here at AXIS it has been a tremendous experience and I just want to thank everyone here for working with me over the last four and a bit years.

You are very lucky because I had a whole range of names I tried to call you but Linda Ventresca stopped me from calling them. Thank you very much again everybody for listening in and much appreciated.

Once again ladies and gentlemen thank you so much for your participation in today's conference. This does conclude the presentation and you may now disconnect. Have a great day.