AXIS Capital Holdings Ltd (AXS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2006 AXIS Capital Holdings Ltd. earnings conference call. My name is Lauren and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Linda Ventresca, Director of Investor Relations.

Thank you, Lauren. 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, 2006. Our third-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've 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 November 24th. An audio replay will also be available for November 10th. 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 767-86-210.

With me on today's call are John Charman, CEO and President of AXIS Capital, and David Greenfield, our 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 this presentation include information regarding our estimate of losses related to hurricanes Katrina, Rita and Wilma; future growth prospects and financial results; a valuation of losses and loss reserves; investment strategies; impact to the marketplace with respect to changes in pricing models; 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 factor section on Form 10-K. 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 operating income 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 now turn the call over to John.

Thank you, Linda. Good morning, ladies and gentlemen. Thank you for taking the time to join us this morning. I'm going to begin by making some opening remarks. Then, I will turn the call over to David Greenfield to review our financial results. Following David's review, I will discuss market conditions.

But before I start my prepared remarks, I'd just like to take a few moments to remind you of both our bench strength in management and underwriting as well as our geographically diversified operations. Within two weeks AXIS will celebrate its fifth anniversary. We have grown from nothing to a multibillion dollar global specialty business in a timescale never achieved before in our industry.

We sit here today transmitting this broadcast from AXIS House, a building solely dedicated to the AXIS group and housing some 76 professional staff. After five years, we operate globally with around 550 staff. We have offices throughout the U.S., Europe and in Singapore. Our proprietary integrated modern high-tech business platform allows both operating and cost efficiency. This integrated platform will allow us to continue to aggressively expand our business activities without overwhelming us with infrastructure, people and expense.

I believe we possess one of the strongest, most capable and cohesive management and underwriting teams in the industry. We have significantly strengthened that team with the appointment of four key new individuals in the last nine months.

In my view, no other management team is as deeply embedded in the day-to-day underwriting and operational matters as we are at AXIS. Our ongoing dedication to the highest quality of operations and earnings will continue to differentiate us from our competitors. AXIS and its shareholders are extremely well-positioned to prosper from whatever market conditions prevail.

I'm extremely pleased that we've been able to deliver another very strong quarter this year, characterized by excellent overall profitability. We recognize that the industry benefited from benign catastrophe loss activity in the year-to-date. We believe this makes it challenging to distinguish the quality of our disciplined underwriting approach and overall portfolio management against others who may have just been lucky.

Our risk-adjusted earnings at AXIS are among the best I've seen in my 35 years in the underwriting business. It is important to differentiate quality driven, disciplined underwriting businesses from the rest, as risk-adjusted earnings are not readily apparent in the marketplace. In the quarter we achieved operating income of $228.1 million and net income of $226.2 million. These results bring year-to-date annualized return on average common equity to 25.8% and year-to-date diluted book value per share accretion to 17.1%.

Relative to the same period last year, net premiums were up 10% for the year-to-date. Our underwriting results were strong with a combined ratio for the year-to-date of 78.5% and benefited from benign catastrophe loss activity this year as well as ongoing favorable reserve development. Our investment results continue to contribute substantially to earnings with pretax net investment income up over 47% from the same quarter last year, and up almost 60% for the first nine months.

I am particularly pleased that all of this has been produced against the backdrop of a substantially strengthened underwriting portfolio, taking into account our risk adjustments. With that, I'll turn the call ever to David to discuss the financials in more detail.

Thank you, John, and good morning, everyone. As John mentioned, we're pleased with our results for the quarter (technical difficulty) produced an after-tax operating income of $228.1 million or $1.38 per diluted share. Net income for the third quarter of 2006, which includes realized gains of losses on investments, was $226.2 million or $1.37 per diluted share. For the first nine months of 2006, after-tax operating income was $665.5 million or $4.07 per diluted share. And net income for the nine months of 2006 was $644.8 million or $3.94 per diluted share.

Comparisons of the results for the quarter and nine months of 2006 for the same periods in 2005 is not directly meaningful as prior year operating results were significantly impacted by losses from hurricanes Katrina and Rita. However, I'll highlight some of the key differences between the periods in my comments. For complete details on the impact of hurricanes Katrina and Rita on our 2005 operating results, please refer to our financial supplement released last evening.

Turning to the business we wrote, consolidated gross premiums written were $734.9 million in the quarter, down 7.5% from last year's third quarter. This decline was almost entirely attributable to assumed reinstatement premiums during the third quarter of 2005. Taking into account the $58.7 million of assumed reinstatement premiums written in the third quarter of 2005 as a result of hurricanes Katrina and Rita, consolidated gross premiums would have been flat this quarter as compared to the prior quarter.

Net premiums written in the quarter of $605.9 million grew 17% from the same period last year. When taking into account the impact of both assumed and ceded reinstatement premiums following hurricanes Katrina and Rita, our net premiums written would have grown by 8.4%. We are pleased with this result in the context of the repositioning of both our insurance and reinsurance portfolios throughout this year along with the increased emphasis on excess of loss business. As we've noted throughout the year, these proactive portfolio changes have impacted the business flows amongst orders. Therefore, consideration of the year-to-date figures is very relevant.

Consolidated gross premiums written of $2.9 billion for the first nine months of 2006 increased 4.9% when compared to 2005. Overall, gross premium (technical difficulty) growth for the first nine months includes both the impact of the assumed reinstatement premiums of $58.7 million in the third quarter of 2005, which I previously mentioned, and the adverse impact of exchange rate movements of approximately $46 million at the January 1st renewal date in our European reinsurance business. Taking into account the impact of these items on gross premiums, growth would have been almost 9% in 2006.

Turning to our insurance segment for a moment, gross premiums in the quarter were relatively flat at $453.1 million and up 8.3% for the first nine months of 2006 to $1.5 billion. Focusing on the first nine months in the segment, gross premium growth emanates principally from professional lines business where we added product capability and expanded geographic presence, and catastrophe exposed property and offshore energy lines which have experienced substantial price improvement. This growth in the insurance segment is offset largely by reductions in terrorism, war and aviation, where we continue to walk away from inadequately priced business.

Turning to our reinsurance segment, gross premiums are down 15.6% in the quarter to $281.8 million and flat for the first nine months at almost $1.4 billion. Much of the decline in the segment in the quarter is explained by the previously mentioned $58.7 million of assumed reinsurance reinstatement premiums in 2005. Considering the impact of reinstatement premiums on our 2005 figures, the reinsurance segment achieved growth during both the quarter and year-to-date periods.

I'd like to focus on the nine-month period as we shifted deployment of cat capacity in our reinsurance segment throughout 2006 to take advantage of the stronger pricing in midyear renewals. For the first nine months of 2006, gross premiums are up in the reinsurance segment approximately 6% excluding the prior year reinstatement premiums. There are other items to note with respect to gross premiums written in our reinsurance segment.

Specifically, the segment's first nine month's gross premiums included upward adjustments to gross premium estimates from prior years of approximately $51 million, principally from the property and professional liability reinsurance lines, compared with upward adjustments of approximately $12 million in the same period last year. Offsetting this, the first nine months of 2006 in the segment included the negative impact of approximately $46 million in adverse exchange rate movements from our European reinsurance business that January 1st of this year.

Fundamentally, growth in our reinsurance segment was due to increased penetration of the U.S. professional lines reinsurance market, increased marketing efforts within our U.S. general liability and umbrella excess reinsurance business, and additional engineering business in Europe. In addition to the quality growth in these areas, we're also able to achieve significant margin expansion in our catastrophe excess of loss business.

Moving on to net premiums written, in the first nine months consolidated net premiums written rose 10.2% to $2.4 billion from $2.2 billion for the comparable 2005 period. This net premium growth is strong when you consider that 2005 included the $58.7 million in assumed reinstatements and the $100 million in ceded reinstatement. Taking into account the impact of these reinstatements, both inward and outward, net premiums written growth for the first nine months of 2006 would have been 8.1%. The $100 million ceded by us following Katrina and Rita breaks down as follows -- $69 million in global insurance; $28 million in U.S. insurance; and $3 million in our reinsurance segment.

Focusing for a moment on our global insurance portfolio, the net premium to gross premium ratio here for the nine months increased more than 4 percentage points as compared with the same period last year after adjusting for the reinstatement premiums. As I mentioned earlier, we recalibrated our overall underwriting portfolio on a gross basis. Within our global insurance portfolio specifically, we buy reinsurance on an opportunistic basis and have deliberately ceded less in 2006 because we recognize there would be little real value extraction from buying reinsurance. Of course we're constantly reassessing our position.

Consolidated net premiums earned in the first nine months of this year increased 7.4% to $2 billion over the comparable 2005 period. The consolidated combined ratio for the quarter was 77.7% and for the nine months it was 78.5%. Before I discuss the loss component of the ratio, I'd like to touch on our consolidated acquisition cost ratio and G&A expense ratio, which have both increased relative to the same periods last year.

During the third quarter of 2005, we reduced our estimate for amounts due under incentive commission arrangements with brokers from 2004. This reduction represented 4.5 percentage points on the acquisition cost ratio in the 2005 quarter. Adjusting for this, our acquisition costs were in line with those in the same period last year both for the quarter and nine-month periods.

With regard to our G&A expenses, much of the difference between periods can be explained by actions taken during the third quarter of 2005 following the hurricane Katrina and Rita losses. Our compensation policy ties incentive compensation to operating results and, in response to lower profitability in 2005, we recorded lowered incentive compensation costs in the last half of 2005. In addition, we have a higher accrual for the current year given our improved operating results in 2006.

Moving on to the loss ratio, our net loss ratio was 52.8% for the quarter and 54.7% for the nine months. Our net loss ratios were 167.8% and 91.2% respectively for the quarter and nine months ended September 30, 2005. Hurricanes Katrina and Rita represented 130.4 loss ratio points during the third quarter of 2005, and 43.1 points during the first nine months of 2005. During this quarter, our consolidated accident year net loss ratio, which excludes prior period reserve development, was 61%. This quarter's consolidated accident year loss ratio compares very favorably with those of the first two quarters of this year and benefited significantly from good experience so far this year.

Favorable prior period reserve development in the quarter totaled $56.6 million and relates entirely to short tail lines from the 2002 through 2005 accident years. This quarter's favorable development is net of adverse development from hurricanes Katrina, Rita and Wilma, of $37 million primarily related to energy accounts potentially exposed to excess liabilities for removal of hazardous debris and pollutants. The majority of this reserve increase is IBNR.

Moving on to the investment portfolio, total cash and investments stood at $8.9 billion and have increased by 14.6% from year-end. Cash generated from operations was $1.2 billion for the first nine months, consistent with the same period last year. During the quarter, we continued to allocate the majority of our positive cash flows into short duration instruments as we continue to believe the risk return profile is better in the short end of the yield curve. Our overall duration is 2.5 years including operating cash and other investments.

We currently believe there is an equal chance of U.S. interest rates rising or falling during the remainder of the year. Therefore, we continue to maintain ample flexibility to opportunistically extend portfolio duration given our net cash position of 19.6% of total cash and investments at quarter end. Our pretax net investment income increased in the quarter over the comparable 2005 period by 47% to $98.8 million. The increase is due to both larger investment balances and higher yields. Other investments resulted in investment income of $3.4 million during the quarter, compared to $6.4 million in the same quarter of 2005.

Realized losses for the quarter were $1.7 million reflecting portfolio turnover of securities and unrealized loss positions. For the first nine months of 2006, our pretax net investment income increased by 59.8% over the comparable 2005 period to $284 million also for the reasons noted previously. The yield earned on our fixed-income portfolio increased from 4% to 4.6% over the period in line with increases in U.S. fixed income yields.

The allocation to other investments produced income of $22.4 million for the first nine months of 2006 compared to $10.6 million for the comparable 2005 period. While we expect to earn higher returns from these investments, they tend to have a less stable earnings pattern and we would caution against extrapolating this income over extended periods. Our allocations to other investments have produced an annualized nine-month return of approximately 6.5%. Realized losses for the first nine months of 2006 were $22.4 million reflecting portfolio turnover in a rising interest rate environment.

We had $2.7 million in foreign exchange losses during the quarter and $25.4 million in foreign exchange gains in the year-to-date. These were primarily results of movement in the interest rate exchange rate between Sterling and Euro versus the U.S. dollar during the year. While we attempt to minimize the impact of foreign exchange movements on our income, we do maintain exposure to Sterling and Euro from business written and assets held in those currencies.

Returning to the balance sheet, our total net reserves stand at $3.6 billion. Adjusting for the impact of Katrina, Rita and Wilma reserves, 77% of these net reserves are IBNR reserves. Total shareholder's equity increased 17.9% to $4.1 billion since year-end. Diluted book value per common share increased 17.1% during the year to $22.48. Total capital to deploy in our franchise stands at $4.6 billion. With that, I'd like to turn the call back to John to discuss our view on current market conditions.

Thank you, David. And I will open by discussing what we're seeing in the insurance marketplace. The third quarter saw market dynamics similar to those of the second quarter. Trading conditions in the property and offshore energy markets remain strong, especially where natural perils comprise the dominant risk. Pricing for U.S. catastrophe exposed business appears to be reaching a plateau even against the backdrop of continued southeast wind and California earthquake capacity shortages. Meanwhile, non-cat exposed property business remains competitive and international property business continues to experience severe pricing pressure as competitors have, in my view, wrongly been provided incentive to diversify away from U.S. natural perils.

Moving on to the marine market, pricing remains stable though still challenging. The aviation market has still experienced substantial downward pressure on rates due to increased verticalization of rates and the entry of what I believe is naive new capacity. Against this backdrop, we continue to substantially reduce our exposure to this sector of the market. You will recall that we began to cut back heavily during the last quarter of 2005 and the irrational and unmonitored competition prevails today.

In our stand-alone terrorism business rate reductions have continued for international business and nonaggregate sensitive U.S. domicile business. This is driven by excessive negative behavior by a few players leading us to withhold capacity and aggregate. In our global professional lines business, price is stable and still attractive overall, with terms and conditions generally strong. During the third quarter we have seen increased competition for U.S. D&O, in particular on side A coverage, and we are seeing downward pressure on European commercial D&O business.

We're also experiencing some pressure on errors and omissions business, but pricing still remains at very attractive levels. We commenced the strategy of diversification into small to middle sized accounts globally, just over two years ago and this has proven a good strategy. The U.S. casualty business, there has been some downward pressure in broader segments of the market, which until now have not affected the more select niche areas in which we participate. During the quarter, however, we did start to see some increased competition in these niche areas, but rate levels remain favorable and our underwriting remains focused, disciplined and demanding.

Moving on to our reinsurance business. Before I discuss the marketplace, I'd like to take a moment to update you on our standing in the global reinsurance community. AXIS, as I previously mentioned, is five years old and is now regarded as being part of the incumbent, quality reinsurance marketplace. This has particularly impact on our participation on treaties, our acceptability in a very conservative European marketplace, and our acceptance as a stable consistent quoting marketplace globally. These are significant positive differentiators to cedants.

On the topic of reinsurance market conditions, you're all well aware that we were of the opinion that cat pricing did not harden enough at the 1st of January of this year for U.S. catastrophe exposed business. We expect an element of catch-up taking place at the upcoming 1st of January renewals. Pricing for U.S. accounts with coastal hurricane or California earthquake exposure will adjust upwards to around midyear levels. We believe pricing for continental European reinsurance renewals, or our cat exposure in particular, will have a positive bias. But the quantum of that change is difficult for us to determine at this time.

In our view, property non-cat in Europe continues to suffer from competitive pressures on the primary side, exacerbated by an abundance of soft reinsurance capacity from two major reinsurers. Outside the property reinsurance we are seeing mildly competitive pressures in the reinsurance sector globally, some of which stem from the apparent level of profitability experienced by cedants. The rating environment for the reinsurance business that we write, however, is still attractive. We expect accounts with deteriorating loss experience to renew at higher prices and all with more restrictive terms and conditions.

There is marginal downward pressure on better performing accounts, but we expect most to renew near expiring. We are not as mature a reinsurance market as many of our competitors and we have been having success this year in increasing our participations on desirable accounts and broadening our marketing activity to obtain targeted, new business. Our reputation, rating and balance sheet strength has presented us with good opportunity, which we will continue to exploit.

In summation, we have worked diligently over the last five years to establish a very selectively diverse global underwriting portfolio and to build an appropriate infrastructure to extract quality profitability from an increasingly complex and competitive global marketplace. Following our tactical position going into this year, we are achieving growth from better quality, better rated business while substantially reducing exposures.

We are exactly where we set out to be. That is, with a substantially strengthened underwriting portfolio. We are not aggregate constrained because of our early and substantial actions in both our insurance and reinsurance segments to restructure our property portfolio and we can continue to participate in opportunities that may present themselves as the year progresses.

We believe that few, if any, of our insurance competitors are pre underwriting business as we do in our mandatory peer review processes. We also believe that the likely impact of catastrophe modeling post binding is that many markets will find themselves somewhat surprised to discover that they have surpassed their own aggregate limits.

Stress is building in the insurance sector and we continue to tactically position ourselves for the moment that tension releases. We have relentlessly pursued underwriting profitability since our inception. And this remains our singular focus as we enter 2007. Against the backdrop of increasing competitive pressures going into 2007, there is no doubt that there is continuing good profitability to be accessed in the marketplace, but our risk selection and our franchise focus will be key.

Opportunities continue to present themselves during this fourth quarter and we expect to continue to deliver on our promise of franchise optimization for this year. We have a number of opportunities available to us which we can take advantage of by flexing an allocation of risk capital between insurance and reinsurance business. Conclusions with respect to our capital base are not necessarily more apparent because of a quiet cat season.

As always, our overall capital management incorporates thorough diligence of potential opportunities ahead of us for deployment of capital, and our rating agency's view of our capital base as well as the industry's capital base. At this time, we believe we will fully and effectively deploy our capital through 2007. And with that, I would like to open the lines for questions.

Lauren, we'd like to open the lines for questions.

(OPERATOR INSTRUCTIONS). Matthew Heimermann, JPMorgan.

Hi, good morning, everyone. A couple questions. One was just a quick numbers question. I may have missed this, but did you give an explanation for why the corporate expenses were up so much?

I did mention in my comments, Matt, the increase relates to incentive compensation accruals this quarter.

Okay, so -- oh, I'm sorry. Go ahead. And that relates to even the -- because you have two lines where you break it out, there's the other underwriting and then there's the corporate? And so that affects both lines?

Yes.

Okay. All right, that's fair. And then the U.S. insurance, the loss ratio excluding development seemed pretty consistent with 2Q, but it looked like there was a much bigger increase in the IBNR component of the loss ratio this quarter versus last quarter. And I wonder if there was anything unusual going on there.

Nothing unusual that I can recall, Matt.

Got it. And then, in terms of -- is there any way you can help us understand kind of the loss ratio components in the reinsurance segment? And I guess just maybe thinking about what the loss ratios in the quarter may have looked like on the catastrophe line, the property line and then everything else that's in that book of business just to give a sense of how the various lines run?

One second, Matt. I'm not sure if I fully follow which ratios you're looking at, but the experience this quarter is certainly obviously a lot better given the fact that there was not a level of catastrophes that everyone was expecting. Breaking it down by lines, I don't have that information here and we normally don't provide that information externally. But we benefited this quarter from the favorable experience or lack of experience in the catastrophe lines this quarter.

Okay, I may follow-up on that one then. The last question was -- and this goes to your comment, John, on fully deploying your capital in '07. Can I put words in your mouth, I guess? Is it fair to think about that as being equivalent to you have appetite and capacity and to increase property writings in '07 and that's your plan if the market allows?

Well, that's one of our plans obviously, as long as the market conditions prevail. But we're not only property cat underwriters, you're well aware that we have broadened our underwriting activity substantially since start up five years ago. And we're a global business and we expect to continue to find opportunities, and we will find those opportunities through 2007 to efficiently deploy our capital. So I'm pretty comfortable about our position next year.

Okay, not meant to be a property only comment, in other words?

Absolutely not.

Okay, excellent. Thank you.

Joshua Shanker, Citigroup.

Good morning, everyone. Nice quarter. Nice quarter. There was a statement you made, John, that rate pressure on better performing accounts was now being seen. Does that mean that better performers are getting worse and that some of the accounts that were once more attractive might be more attractive to you on a comparative basis? I'm trying to understand if there's a mix shift considering in your [calculus] right now?

I'm sorry; I didn't quite catch the question. But if you could slow it down and speak a little bit more clearly, Josh.

I apologize. You made the comment that there's rate pressure on better performing accounts. Can I take that to assume that there's not as much rate pressure on the accounts that were previously thought to be unattractive? I'm trying to unpack that line.

Yes, there's always -- in any competitive commercial marketplace, good businesses always differentiated from less good businesses and so there will always be pressure on that good business activity. But then you have other factors that get taken into account by the cedants or clients about business continuity, quality of security, efficiency of service, all of that stuff that then wraps around a pricing adjustment.

Contrarily, do you see your competition having moved away from accounts that were previously thought to be unattractive and now have been ignored to some extent and perhaps there's an opportunity there?

I think the competitive end of the marketplace always goes on a feeding frenzy in the bigger ticket wholesale surface lines market stuff. And we see it pretty regularly every two or three years and it's beginning to happen again in certain lines and we work around it. We let them go fill their aggregates. They under price these chunks of business. They end up normally catching a cold and life moves on.

Not that you're giving away the secret sauce or anything, but are there some areas that are still magically coming under the radar screen that nobody is noticing are a great bonanza for underwriting?

I'm not sure about the use of the words that you've just used, but without a shadow of a doubt, it's our job to maximize our underwriting penetration throughout all of our business lines on a global basis. And because of the management structure and the way that we have an integrated underwriting operation on a global basis, we can optimize our underwriting efficiency. I think you understand the way we operate. And we have a track record, a proven track record over many years of extracting value from the underwriting business.

Sure. And the final question involves the renewal season and the need for extra coverage. One year ago, before the rating agencies were really on top of companies to be adequately prepared for the storm season, the industry had probably about 12 to 15% less capital than it does today because it grew its capital obviously over the course of this year. Does that mitigate the need for risk management solutions in terms of catastrophes?

Not in the slightest. I think it enhances it. You've got more capital at risk; you should be even more sensitive to risk management.

Well, what if it --?

Regardless of activity, that you evolve all of your risk management techniques. One thing that I don't think that people have really understood is just how substantially we have restructured our underwriting portfolio and strengthened it over the course of a nine-month period to make sure that we are absolutely in line with best practice in terms of a risk assessment of our overall portfolio of business.

And that seems to be coming clearly through to me in the marketplace. When I see a large number of our competitors, who are still exposing substantial amounts of their capital in what I can only consider to be not taking into account the latest RMS 6.0 model. And that's why it's so confusing for you guys to actually understand some of the earnings that are coming out.

I do understand it, John. My concern is I'm trying to mete this out a little bit. That there's a number of companies buying back their own stock at a very high premium to book value and at the same time, there's a number of other (technical difficulty) saying hey, look, your capital is very much at risk. If you have the excess capital to be doing these share repurchases, doesn't that mean that compared to one year ago you might be -- had had the opportunity to say we don't need as much risk management as we needed a year ago. We have the excess capital pushing to protect us this year?

Josh, you should know me by now in the fact that my mantra is making sure that the we maximize our earnings from the marketplace at any given moment in time. And you know that what we do is we put at risk our estimated annualized earnings and preservation of capital is a critical mantra to me and it has been in all my 35 years in the business. What we try to do is to maximize the return on average equity that we've built. And we're still growing our business and we will continue to grow our business strongly in 2007.

Well, I think that's great, John. That's what's made you successful in an industry that's not been very successful over history.

That's very kind of you.

But I'm trying to figure out -- you still think the need for more risk management tools are going to put (indiscernible) even though there's an increase in capital for the industry?

Yes, I believe from an investor's point of view it is critical that investors and analysts keep substantial pressure on the industry to enhance and evolve their risk management techniques.

Very good. Thank you very much.

Dan Farrell, Fox-Pitt.

Hi, good morning. I apologize if you touched on this. I got on the call a little late. But can you talk a little bit about the premium growth we saw this quarter versus second quarter? You had 8.5% net; you had roughly 33% in the second quarter. The pricing conditions don't appear to have changed that much. I just want to understand what the dynamic was, why you wouldn't have shown a higher growth number. Is it a change in the mix of the business?

Well, I think, Dan, that I tried to explain it. We tried to explain it at the end of last year when we actually said to you guys, look, this year is going to be a year of change following the hurricanes and our assumptions that we made at the end of last year about the modeling changes that would naturally follow. And so our business flows have changed throughout the year. We made substantial assumptions, that's why for the first half of the year, for the first four months, we were lagging behind market expectations about growth in terms of property and marine. And then, the market caught up with us. And then with the introduction of RMS 6.0, which we embraced immediately.

We have moved in the third quarter substantially our portfolio and recalibrated, as I just said. And the thing that surprises me, it's not that you should be questioning our portfolio, but questioning other people who may have shown much greater growth because they may not have actually, and it seems evident from the day-to-day stuff that I see, both in primary business and reinsurance business that a lot of our competitors are not embracing 6.0 in the way they're going about their underwriting activity. So we have recalibrated, but as we said at the beginning of the year, judge us on the year overall and not quarter-by-quarter.

Okay, that's helpful just to understand that. Thank you.

Josh Smith, TIAA-CREF.

Hi, thanks for taking the call and congratulations on an excellent quarter. I did want to ask a question. If we strip out the -- I guess you haven't really had significant cats this year. If we strip out the development from last year's storms and the favorable development, it looks like you're running at about a 19-ish, 20% ROE. Is that your target given the current environment that nothing has changed to the point where -- that that's what we can expect in any benign cat season, or something else afoot?

You know, sorry, forgive me. You know over a cycle that we try to earn north of 15% on ROE which, if you actually looked at the industry history, is a pretty reasonable return. But that doesn't mean to say that we set our standards at that. We would try to optimize our earnings regardless of what's taking place within the marketplace at any given moment in time and if they're there to be had, we'll go get them.

You've obviously had an excellent track record and no one can dispute that. If I could just follow-up on the accident year combined ratio ex the development, it seems to be running a bit higher than it has in the past. And I know you typically do have a -- that does come back down in the second half -- probably more in the fourth quarter. Is that something we can expect this year, or is there something changing in terms of business mix that's leading you to have higher sustained combined ratios ex favorable development?

I think part of it is a change in the business mix that's driving it up. Actually that's probably driving most of that increase over the historical numbers.

Okay, thanks a lot.

Ron Bobman, Capital Returns.

Hi, good morning and congrats. John, what you have built is -- as you lay out some of the metrics, are really amazing. I just had one question not on the most pleasant of subjects, but nonetheless, I was wondering -- you announced earlier in the year your plans to resign at the end of '08 and I basically sort of wanted just to -- you're probably same sort of status. Is that still contemplated or planned by you?

This is Michael Butt speaking. The answer is the same as I gave when asked this question at the last quarter. The Board has understood John's position and has taken it into account and we'll be reviewing our succession strategy next year in due time. Fortunately, we have a great pair of -- a good deal of time to go through that process and I assure you that our Board is taking it extremely seriously and will do so and continue to do so.

All right. Thanks for your thoughts. Best of luck.

I'm still -- forgive me. I'm still substantially involved in the litigation process which won't end until the spring of next year.

Best of luck there as well.

Jay Cohen, Merrill Lynch.

Good morning. I've got I guess one clarification and two questions. The clarification, you mentioned there was some adverse development from the storms from last year of $37 million. Was that in the quarter or was that for the nine months?

That was in the quarter, Jay.

That was in the quarter, okay. Next question, just getting a little bit bigger picture on this one, you -- clearly one would suspect --.

Sorry, forgive me. Did you pick up in the commentary about the majority of that was due to the offshore energy side?

And much of it IBNR?

No, some excess liability claims that we believe may be emerging as a result of the higher connectivity last year, and so as a matter of prudence we've tried to assess that in advance of that emergence. That's the vast majority of it.

That's great.

I'm not sure the rest of the market has caught up on that. But if you remember what we did earlier in the year with another major oil company that hadn't reported its losses and we put our loss estimates in early. We do try to pre-empt these things.

And this $37 million, the bulk of that is IBNR?

Yes, right.

Great. Next question. Clearly the risk you're taking in the portfolio has been reduced, obviously returns are good, so as you point out, risk-adjusted returns have gone up. Unfortunately, with a quarter where nothing happened, it's hard to measure that obviously, which is fine. Can you help us get a sense of how you view that? How much improved is your risk-adjusted return in your portfolio now?

Firstly, let me tell you that I think there are a lot of people in our industry that have been very lucky. And it's very difficult for you guys to work that out because I'm sure every CEO is spouting this quarter in the same way that I hope I'm not. But the way I look at it, there are such broad measures when you really look at a portfolio, but I can only just say that when I look at a portfolio coming past my screen on a daily basis, and indeed you know I see most of the specialty business on a daily basis, and I look at our repositioning of our underwriting within a layered account, I also look at the fact that we've adjusted to RMS 6.0 and embraced it since it came out.

I also look at the way we continue to work strongly within the marketplace to optimize any underwriting -- beneficial underwriting position within a portfolio. So there are a whole raft of different judgments that I personally make with my 35 years of experience that absolutely convince me that our risk-adjusted business today is so much better than it has done previously.

But tough to quantify for us.

It is very difficult to quantify, but I hope you're as detailed in your questioning with my competitors as you do with us, and I would love you to be able to differentiate between businesses like AXIS who have a consistent track record of equality based approach to its underwriting and those people that I see in the market that are exposing their capital and their shareholders to excessive risk in a way that is very inappropriate and you've got to go route them out.

Understood. Next question. You had alluded to -- and correct me if I'm wrong -- but a shift to excess of loss and presumably away from pro rata that would have a negative effect on premiums. Is that something you could quantify and will that continue in 2007?

Well, you know that we've differentiated ourselves as an underwriting business. I'm not writing a huge amount of pro rata business. That's why our reinsurance business continues to strengthen. We're primarily an excess of loss underwriter throughout our portfolio. We've just been positioning ourselves within the excess of loss layering, repositioning ourselves to get optimum earnings.

So it's more staying within the [XOL] but playing different layers rather than taking whatever -- okay.

Absolutely, that's it.

Got you.

Like a lot of the more mature competitors that we're up against, we actually deliberately sent our underwriting focus on excess of loss business, so that's why for the reasons I said also in my script -- we will continue to grow our reinsurance business through 2007.

Actually some of your less mature competitors do a lot of pro rata as well. Thanks a lot.

Vinay Misquith, Credit Suisse.

Hi, good morning. In the past, you expanded your primary insurance and your reinsurance operations through greater marketing and I believe greater penetration among clients. Preannouncing growth starting to taper off as those initiatives have run their course, but then I circled back --.

Well, I tend to agree with that. Those initiatives -- that's constant. I've just come back from spending just over a week with my colleagues in the U.S. reinsurance business, traveling through the U.S., visiting cedants in the broker distribution network. Next week, I'm going to be spending a week in continental Europe traveling around, seeing cedants. It's part of an ongoing marketing strategic effort that we have. It won't stop. Then it just becomes more and more focused.

Okay, so you're saying that you have some more opportunities to broaden your client base and to increase --?

We have a lot more opportunities. Not only to broaden our client base, Vinay, but to maximize our penetration of our existing client base.

All right, that's great. On the ceded reinsurance in the global reinsurance segment -- and I understand that things move around from quarter-to-quarter, but it dropped this quarter 25% and there was some comments earlier that you have bought less reinsurance and the global reinsurance segment. Should we expect sort of the same level of reinsurance per cases in '07 as in '06?

Well, it depends. In global insurance we tend to buy reinsurance on an opportunistic basis. We've made no secret of that. Having completely repositioned our underwriting portfolio, to better reflect the new modeling information that was coming through, we could be more aggressive and, don't forget, we are comfortable to eat the business that we underwrite, but if we see opportunities within the reinsurance market to either enhance our profitability or further protect our position then we'll take it, but we will not -- we do not have to buy reinsurance. It is a judgmental thing and we do it on a daily basis and we'll continue to look at that situation. But we decided that we couldn't see value accretion appreciation -- accretion, sorry, forgive me. During that period so we didn't.

Okay, that's great. And I think one last question. I think this is for David. On the G&A expenses, I believe you mentioned that there were some bonus accruals or some higher compensation accruals this quarter. So should we expect to see the proper G&A at the $20 million level going forward or is it just a third quarter item that's causing the bump?

I think you'll see a similar in the fourth quarter impact, but I wouldn't project that out indefinitely into the future.

All right, thank you.

Alain Karaoglan, Deutsche Bank.

Good morning. It's Alain Karaoglan with Deutsche Bank. A couple of questions. John, you mentioned in your comment that some were given incentive wrongly to go after international property business. Who's giving the incentive, is it the rating agency, the management, the CEO? What were you referring to there?

Well, I have to be very careful because Linda is grimacing at me if I say too much, but I think it's a very important issue that you should not be deflected from. Because not only -- well, there aren't many rating agencies, but there is encouragement from that particular sector for companies to diversify, in my view, into businesses that they're ill-equipped and do not have the expertise or the experience to be underwriting.

And that will in certain areas fuel competition, which will be short-term and will cost those shareholders a lot of money. But don't forget, they have to be aided and abetted by the boards and the management at those individual underwriting businesses. So I lay it firmly at the feet of two players. I think it is a destabilizing characteristic of the market.

Okay, the other question -- you mentioned that competitors have not embraced 6.0 or some of them have not. Were you referring to the reinsurance competitors, insurance, or to both?

I actually look at primarily the insurance competitors, but a number of reinsurance competitors as well.

Okay, and is there any way to quantify the benefit of the lack of catastrophes this quarter or for the year?

We don't look at it that way in terms of trying to quantify it. And I couldn't offer you any help with that. Sorry.

Okay, thank you very much and congratulations on a very strong quarter and year-to-date results.

(OPERATOR INSTRUCTIONS). Dan Johnson, AXIS (sic).

Dan Johnson with Citadel. Good morning.

I was just to about to amend my staff numbers.

Yes, well hopefully my employer hasn't called you today. Anyway, a couple quick questions. European Motor, what's the outlook for the renewal season in January from where you see the market right now?

Well, you know that in our European portfolio we underwrite it on excess of loss basis. And I think we timed our entry into that market very well as a result of substantial loss activity emerging from years about '96, '97 through to 2002 -- 2001 and 2002. And so the market started to turn in I think it was about 2003 substantially. And we caught it for the 2004 year. And it has strengthened considerably year after year. And we believe it will continue to be positive.

Is your book --?

The momentum there certainly is -- certainly there for French motor business.

Yes, I was just going to ask on a --.

We're not heavily involved in the German motor. Those are the two major motor markets in Europe and we're not involved in Germany because of a profitability issue.

Understood. And then, within the U.S. professional lines area and getting into D&O specifically, what are you seeing in the way of inflation trends and how does that -- what sort of assumptions are we using when we look into pricing that business? So I guess this would probably be larger corporate D&O would be the focus of the question.

We don't give that level of detail away, but on the bigger ticket stuff, on the financial institution stuff, you know, it's a very mixed position on that. I think that market overall has been generally stable in those areas because of the previous loss activity that's been produced.

Great, thank you very much.

There are no further questions in the queue at this time.

Well, thank you very much, ladies and gentlemen. And we look forward to talking to you again once we've had another quarter. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.