AXIS Capital Holdings Ltd (AXS) 2009 Q3 法說會逐字稿

Hello and welcome to the third-quarter 2009 AXIS Capital Holdings Ltd. earnings conference call. All participants will be in a listen-only mode for this event. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions)Please note this event is being recorded.

I would now like to turn the conference over to Linda Ventresca. Please go ahead.

Good morning, ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter ended September 30, 2009.

Our earnings press release, financial supplement, and quarterly investor 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. A replay of the teleconference will be available by dialing 877-344-7529 in the US. The international number is 412-317-0088. The conference code for both replay dial-in numbers is 434229.

With me on today's call are John Charman, our CEO and President, 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 question-and-answer session, which are not historical facts may be forward-looking statements within the meaning of the US federal securities laws.

Forward-looking statements contained in this presentation include, but are not necessarily limited to, information regarding our estimate of losses related to catastrophes, derivative contracts, policies, and other loss events; general economic, capital, and credit market conditions; future growth prospects and financial results; the valuation of losses and loss reserves; investment strategies, investment portfolio, and market performance; 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 Factors section in our most recent Form 10-K on file with the Securities and Exchange Commission. 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 operating income which is a non-GAAP financial measure within the meaning of the US federal securities laws. For a reconciliation of this item to the most directly comparable GAAP financial measure, please refer to our press release which can be found on our website.

With that I would like to turn the call over to John.

Thank you, Linda, and good morning to you all. I am pleased to report that during this third quarter of 2009 AXIS benefited from very good P&C underwriting results, as well as a strong recovery in asset valuations throughout our investment portfolio.

Importantly, our underwriting operations produced a combined ratio of 73.2%. While the combined ratio benefited from a low level of catastrophes, it continues to demonstrate our strong performance for the year and the consistency of our underwriting performance through what has been so far a very challenging phase of the underwriting cycle.

Our results are particularly strong given the impact of the global economic crisis on a number of our important product lines over the last couple of years. Our results this quarter were adversely impacted by an increase in the fair value liability of our only insurance derivative contract. Despite this adjustment we were still able to deliver an increase in diluted book value per share of 10% in the quarter and 22% for the year to date.

For the third quarter our consolidated net premiums written were up 8%, largely due to the continued success of our reinsurance segment in accessing good underwriting opportunities. At this time the reinsurance market continues to remain the most disciplined and attractive area of the global P&C marketplace.

In our insurance segment we have continued to maintain a very defensive posture overall. While rates improved across our insurance portfolio during the third quarter of 2009, this improvement was somewhat muted relative to the first half of this year. As we have demonstrated in the past, when necessary we will sacrifice top-line growth to preserve underwriting profit.

As we work diligently through this challenging phase of the underwriting cycle, we have continued to invest in broadening our franchise's capabilities. This includes the expansion of distribution capabilities and new target markets, including global accident and health. We expect these efforts to generate significant return to the shareholders over time.

And with that I will turn the call over to David to discuss our financial results for the quarter in more detail.

Thank you, John. Good morning, everyone. As John mentioned, we were pleased with the underlying performance of our business this quarter.

As we announced a few weeks ago, this quarter's results were adversely impacted by an increase in the fair value liability for the insurance derivative contract we wrote in 2006 primarily exposed to longevity risk.

Despite this adjustment, which I will cover in more detail in the few minutes, our otherwise strong underwriting results and strong investment results enabled us to achieve an annualized operating return on average common equity for the quarter of 13% and 14.7% for the year to date. This combined with the significant improvement in asset valuations across our investment portfolio contributed to the 10% increase in our diluted book value per share to $31.58 in the quarter.

Since the start of the year diluted book value per share increased 22%.

We recorded a net loss for the quarter of $96 million or $0.70 per diluted share compared with a net loss of $249 million or $1.79 per diluted share for the third quarter of 2008. After-tax operating income, which excludes the impact of realized investment gains and losses, was $152 million or $1 per diluted share compared with an operating loss of $161 million or $1.15 per diluted share for the third quarter of 2008. The main driver of the difference between the operating income and the net loss is the impairment charge on medium-term notes reported this quarter.

For the first nine months of 2009 net income was $179 million or $1.19 per diluted share compared with $220 million or $1.40 per diluted share in the first nine months of 2008. After-tax operating income improved substantially to $490 million or $3.26 per diluted share from $273 million or $1.74 per diluted share for the first nine months of 2008.

Before I move on to a broader discussion of our results for the quarter I would like to cover the operating item in our recent announcement. During this quarter we recorded an adjustment to our only indemnity derivative contract that is exposed to longevity risk. This contract is accounted for on a fair value basis and, consequently, we are required to review the valuation each quarter.

The fair value is determined based on an internal model which incorporates a number of assumptions that are inherently uncertain. Based on a review of the valuation this quarter we recorded a negative fair value adjustment of $136 million. To provide a better understanding of the adjustment in the quarter I will take a few minutes to review the fundamentals and history of this contract.

In 2006 we were presented with an opportunity to invest in a note backed by a portfolio of life settlements. We viewed this new opportunity at the time as also having the potential of creating a new portfolio of diversifying profitable business.

As general background, life settlement securitizations involve pooling and repackaging of cash flows from a group of life insurance policies into a bond or bonds. A trust buys life insurance policies from a group of individuals and assumes the responsibility to pay the policy premiums when due and the right to receive the policy benefit when the covered individual dies.

In our transaction the purchased insurance policies were pooled and subsequently repackaged into one note. The payment of debt service on the note was linked to the projected mortality of the policyholders.

When we evaluated the original block of life policies we simulated expected cash flows based on a range of mortality scenarios and believed we would achieve an attractive return commensurate with the risk. This was particularly attractive given the diversification provided relative to our other enterprise risks.

The fair value of the investment was updated from quarter to quarter and changes in the fair value in the investment were included in other investment income. In the quarters leading up to September of 2007 we experienced volatility in the quarterly valuation due to interest rate movements and to a much lesser extent lag in mortality experience. Given our interest in longevity exposure alone we undertook to restructure the transaction to significantly reduce the interest rate risk we assumed and maintain longevity and exposure.

The transaction was restructured into an insurance policy accounted for as a derivative. Through this insurance contract we agreed to indemnify the holder of a $400 million note with a 10-year term in the event of non-payment on the principle of its investment at maturity in 2017. The restructuring resulted in a reset of the transaction in September 2007 with fair value beginning at nil.

Since that time the actual mortality experience has mostly lagged our expectations. As the policy was in its early stages, we generally held to our original assumptions. The change in valuation this quarter was the result of adjustments to our original life expectancy assumptions for the lives in the pool.

Until this quarter our valuation model maintained life expectancy assumptions in place at inception of the insurance contract. These assumptions were a function of data and information accumulated by certain life settlement industry service providers and reviewed in conjunction with third-party life insurance actuarial support. Because of the high death benefits for the lives in this pool and the small population in the sample at just under 200 lives, the early lag in mortality experience was not believed to be indicative of experience that should be expected for the broader pool.

Because of the persistency of this lag over the last two years, we now believe we should assign statistical significance to the actual experience thus far in the pool. The combination of this lagging mortality experience and recent life settlements market data indicating increased life expectancy in a much larger sample of lives led us to reflect an increase in life expectancy in our valuation model this quarter. This is sometimes referred to as unlocking the mortality curves.

Our latest valuation analysis suggests we can reasonably expect to provide an indemnity close to $400 million in 2017 and a very high probability of providing indemnity in 2017 in excess of $300 million. The fair value of $228 million at September 30, 2009, would represent nearly a full loss to the contract with an indemnity payout close to $400 million in 2017.

Going forward, we can have further fair value adjustments upward or downward on this contract until its maturity in 2017. If our current assumptions hold true, you would expect the valuation to move toward the ultimate expected payment over the next eight years. Of course, it is unlikely actually experience will mirror what has been modeled and the actual adjustments will not be predictable. What I can say today is we do not expect any further significant negative adjustments.

Finally, as noted in our announcement, we continue to review our legal rights and obligations and have reserved our rights under the contract.

Turning now to our top line. Our consolidated gross premiums written increased 7% to $775 million for the quarter and 5% for the first nine months of 2009. Growth in gross premiums written for the quarter and the year to date were driven by our reinsurance segment, which increased 12% for the quarter and 16% for the year to date.

For the quarter growth in our reinsurance segment was 22% after adjusting for the impact of reinstatement premiums. Gross premiums written for the quarter in our reinsurance segment, which totaled $361 million, benefited from selective opportunistic expansion of our business due to market dislocations, improvement in underlying primary business, and a continuing flight to quality. Specifically, we were able to grow our property, trade credit and bond, casualty and professional liability reinsurance lines.

Growth in our casualty reinsurance premiums was driven by an opportunistic capped surplus relief contract for $25 million of premium covering a capital-constrained specialty company.

For the quarter, gross premiums written in our insurance segment were $414 million, up 3% from prior-year quarter. The increase was driven by growth from our professional lines business, primarily emanating from new business opportunities in our D&O lines.

We continued to see rate improvement in other parts of our insurance portfolio this quarter, notably our energy and property lines. However, the impact of rate improvement in our insurance portfolio was largely outside by our effort to reduce our pink-zoned catastrophe exposures in favor of deploying CAT capacity in our reinsurance segment where underwriting margins were much more favorable.

Consolidated net premiums written increased 8% in the quarter and 6% for the year to date, reflecting the previously mentioned growth in gross premiums written. In line with these changes, net premiums earned increased 2% in both the quarter and the nine-month period.

Moving on to our underwriting results, total underwriting income for the quarter was $71 million compared with an underwriting loss of $186 million in the third quarter of 2008. While this quarter represented a very light catastrophe quarter, our underwriting results for the third quarter of 2008 included net losses incurred from Hurricanes Ike and Gustav of $386 million net of related reinstatement premiums earned.

The year-over-year underwriting results improved slightly when taking into account the impact of the indemnity derivative contract this year and the hurricanes last year. We believe these underwriting results are excellent when viewed in the context of the extreme competition throughout most of the primary insurance marketplace.

Our combined ratio was 73.2% this quarter compared with 128% in the prior-year quarter. Our consolidated accident year loss ratio in the quarter was 61.4%, which represented a reduction of nearly 52 points from the prior-year quarter. As previously noted, the decline was primarily driven by the absence of major catastrophes this quarter. For the year to date our consolidated accident year loss ratio was 66.4% compared to 83.3% for the first nine months of 2008.

Our insurance segment's accident year loss ratio decreased nearly 33 points to 59.8% for the quarter. Our insurance segment benefited from limited catastrophe and other large loss activity this quarter compared to the prior-year quarter, which included 39.2 points of net loss related to Hurricanes Ike and Gustav.

Due to higher claims activity related to our current and political risk line, there was some upward movement in the accident year loss ratio relative to the same period last year. This is consistent with the first two quarters of this year and in line with our expectations.

Our reinsurance segment's accident year loss ratio decreased 66 points to 62.4%, also reflecting a lower level of catastrophe activity. The third quarter of 2008 included net losses on Hurricanes Ike and Gustav of 73.7 points. This reduction was partially offset by an increase in European windstorm activity together with some crop losses this quarter.

As we have seen in the last few quarters, I will update you on the status of loss activity and reserving for our lines of business impacted by the financial crisis; trade, credit, and bond reinsurance; professional lines insurance; and reinsurance and credit and political risk insurance.

Before I provided the details for the 2009 accident year I would like to note that there was no material deterioration in the quarter for prior-year reserves related to these lines of business. We continue to monitor loss information and default potential closely and believe the information is showing anticipated stabilization in each of these lines and even improvement in some areas. We remain cautious about the outlook for the global economy and therefore we continue to take a conservative approach in our estimates of ultimate loss.

Starting with trade, credit, and bond reinsurance, as a general comment, loss experience in this line continues to remain purely frequency-driven at this point. Our estimated 2009 accident year combined ratio for the trade, credit, and bond reinsurance line now stands at 128%. As far as earlier accident years for this line of concern, I would like to emphasize the fact that this line has primarily short-tail characteristics and therefore we are comfortable that the 2007 and 2008 loss ratios are reasonably well-developed.

For professional lines insurance our estimated 2009 accident year combined ratio stands at 100% for 2009. For professional lines reinsurance our estimated accident year combined ratio stands at 111% for 2009. Finally, in our credit and political risk line, our estimated 2009 accident year combined ratio is 128%.

Loss activity has been in line with our expectations for this year. The impact of credit and political risk loss activity was approximately 11 points on the insurance segment's loss ratio and just over four points on our consolidated loss ratio.

Because the average length of policies is longer in this line of business, approximately five years on average, it's important to consider not only IB&R, but also unearned premium reserves. Together these reserves are approximately $500 million at September 30, 2009.

During the quarter our estimate of net reserves from prior accident years continued to develop favorably with overall reserves reduced by $122 million this quarter. Of this amount $55 million was from our insurance segment representing a positive impact of almost 20 points on the segment's loss ratio. In our reinsurance segment we recorded $67 million in net favorable prior-year reserve development representing a positive impact of 15.6 points on the segment's loss ratio.

Approximately half of the net favorable reserve development this quarter was generated from our short-tailed lines. The balance came from our medium- and long-tail lines and largely from accident years 2004 and 2005. Our own experience continues to become more actuarially significant in the analysis of historical accident year ultimate loss assumptions in certain of these lines.

I do want to continue to emphasize that we have not released reserves for casualty lines with longer tails in any meaningful way.

Moving on to expenses. Our acquisition cost ratio increased three points to 16.1% this quarter. The increase was driven by business mix changes and non-recurring adjustments to prior-year's seeding commissions.

Our general and administrative expense ratio for the quarter was 13%, in line with the third quarter of 2008. I do want to remind you that we are continuing to invest in new initiatives, such as our new A&H division, and this has the potential to introduce some upward movement in this ratio in the near term.

During the quarter we generated $442 million of positive operating cash flows. This, along with significant improvements in asset valuations, contributed to a 7.5% increase in cash and investments during the quarter. We ended the quarter with $11.8 billion in cash and investments.

The total return on our cash and investments portfolio for the quarter was 4.3%. This was comprised of net investment income of $135 million, a positive change in net unrealized gains and losses of $613 million, and net realized losses of $253 million. The investment results for the quarter were aided by the continued contraction in corporate and mortgage-backed yield spreads and the strong equity markets.

Our net unrealized position across all our portfolios is now showing a gain in excess of $100 million. The total return on our cash and investments portfolio year-to-date is 7.5%.

Net investment income for the quarter of $135 million represented an increase of $23 million or 20% relative to the second quarter of this year and an increase of $84 million relative to the third quarter of 2008. Investment income from fixed maturities and cash and cash equivalents was $99 million this quarter. This compared with $103 million in the second quarter of this year and $120 million in the third quarter of 2008. The decrease relative to the prior-year quarter primarily reflects the impact of lower short-term and intermediate maturity interest rates.

The primary driver of the increase in net investment income for the quarter relative to the second quarter of this year and the third quarter of last year is the improved performance of our other investments portfolio. As a reminder, our other investments portfolio is accounted for at fair value with the change in fair value recorded in net investment income. I emphasize this point because this presentation of the income statement is not consistent amongst companies in our peer group and differences in presentations should be carefully considered in any comparable analyses.

Net investment income from other investments was $39 million in the quarter. This represented an increase of $27 million relative to the second quarter of this year and was substantially better than the loss of $66 million reported in the same period last year. The return on our other investments was 7.1% this quarter and 11.3% year to date.

During the quarter we incurred net realized investment losses of $253 million compared to net realized investment losses of $89 million in the prior-year third quarter. Net realized investment losses for the quarter included $279 million of impairment charges primarily comprising $263 million from medium-term notes. While we no longer expect full recovery of the value for the MTN holdings to their original cost, we currently see value in continuing to hold these investments given their current valuations.

During the third quarter our net unrealized position moved from an unrealized loss of $530 million to an unrealized gain of $103 million at September 30, 2009. Excluding the impact of OTTI charges on this movement, we experienced a $354 million positive valuation movement on our investment portfolio this quarter. This was primarily due to tightening of credit spreads on corporate debt and non-agency mortgage-backed securities and to a lesser extent improved equity market performance.

In the first nine months of 2009 we reduced our holdings in US agency residential mortgage-backed securities in favor of investment-grade corporate debt and to a lesser extent US Treasury and agency debt securities. These changes reduced extension risk while taking advantage of attractive valuations in the corporate bond market. This rotation of corporates is largely completed and given current spreads unlikely to increase significantly from current weightings.

We are maintaining relatively low cash reserve balances given current and projected money market rates and expect to continue to redeploy cash into short duration, high-quality liquid investments with higher yields. We believe we are better positioned for the increase in interest rates we expect over a longer period.

At September 30, 2009, we held cash and cash equivalent balances of $1.2 billion or 10% of total cash and investments. Our fixed maturity investment portfolio, which represents 82% of total cash and investments, is well diversified with a weighted average credit quality of AA+ at quarter end and an average duration of 2.8 years. Our other investments represent 5% of our cash and investments portfolio at September 30, 2009.

We are maintaining our limited exposures to alternatives and long-only equity strategies and are monitoring opportunities to carefully increase our exposure to these areas.

With respect to foreign exchange, during the quarter changes in exchange rates and changes in net currency exposure resulted in foreign exchange losses of $7 million compared to a gain of $8 million in the prior-year quarter. However, from a book value perspective these losses were more than offset by the currency-related appreciation of our available-for-sale investments, which is recorded in other comprehensive income.

Total capitalization at September 30, 2009, was $5.9 billion including $500 million of long-term debt and $500 million of preferred equity. Common shareholders' equity increased $489 million to $4.9 billion during the quarter.

Our financial flexibility is very strong with debt to total capital at 8.5%, debt and preferred to total capital at 16.9%, and total capital well in excess of rating agency requirements. We remain strongly capitalized for the risks we hold and the risks we are targeting and continue to prioritize deployment of capital in underwriting opportunities.

We have accreted significant capital this year through our strong underwriting results and recovery of the financial markets and are in the midst of our planning process for 2010. Naturally, as part of that process we will review our capital levels.

As a reminder, we currently have $212 million remaining in our share buyback authorization. If we feel that returning capital is in the best interest of shareholders, we believe share repurchase could be attractive given current valuations.

Critical to our business is the clear understanding that AXIS is a reliable and financially secure partner of our clients. We have decided, therefore, to increase transparency related to major areas of risk at the Company with the intention of supporting clients' efforts to assess our security.

Earlier this year we began providing quarterly updates with respect to catastrophe aggregates at the Company, which represent our greatest risk of shop loss. In our quarterly financial supplement we have updated information with respect to our group PMLs and associated estimates of industry losses as of October 1 at various return periods. We remain within our tolerance levels for these risks.

The European wind aggregate have increased due to inclusion of additional non-modeled losses related primarily to our offshore energy insurance business. These exposures are not included in the third-party proprietary catastrophe models, yet we believe that they should be taken into account when assessing our group-wide catastrophe aggregates.

We adopt a similar approach across all of our catastrophe business to create a more informed view of the risk. In this quarter for the first time we have provided comprehensive disclosures of our 2008 global loss development triangles which correspond to 100% of our reserves and include information from 2002 through the end of 2008.

As you know, under reserving has been a major factor in insolvencies in our industry and we believe our consistent, conservative reserving policies and practices demonstrate a healthy respect that we have for reserving risk. We believe this new disclosure, which we expect to update on an annual basis, provides excellent insight into the reserving classes presented for both our clients and investors.

With that I would like to now turn the call back to John.

Thank you, David. You can breathe out now.

I would like to start my commentary with a discussion of two operational items. First, and as we have discussed regularly over the last several quarters, the past two years have presented understandable stresses to the credit exposed underwriting areas at AXIS. We view this period as a welcome test, not unlike those we have faced time and time again in our catastrophe exposed lines of business.

Our performance continues to be very good when measured against the scale of the global financial crisis. Our emphasis on underwriting emerging market political and credit business was the appropriate one. We continue to believe that our credit exposed businesses offer significant profitability over an economic cycle.

Secondly, our experience with our only life settlements transaction was a direct result of a significant and unexpected shift in life expectancies. As background, an investment opportunity was presented to us in 2006 and the fundamentals of success with respect to this investment needed to be determined by our evaluation of longevity exposure for a group of elderly individuals. As part of this evaluation we delivered our underwriting resources and supplemented this with contracted traditional, life industry, third-party actuarial support.

Of course, since the time we took on this transaction in 2006 we have been monitoring and evaluating the exposure very closely. Our restructuring of the transaction in September 2007, as described by David, capped our downside and we are now in a position to put this behind us.

We are in the risk business and losses must be accepted sometime or another in the various lines of business that we underwrite. They usually don't all happen at the same time, though, but when the few of them do converge we believe we are still well-positioned to deliver a meaningful return to shareholders as we have just demonstrated.

For the first nine months of 2009 we have earned an annualized operating return on average common equity just short of 15%, which is still a great outcome considering the stresses faced by various parts of our business. Now let us move on to more positive areas of our business contributing to this return.

For the insurance segment the story, for the most part, is one of stabilization relative to the prior quarter, but remains unsatisfactory on the whole because of the overall state of the marketplace. Rate change is still largely positive across our insurance portfolio, but rate change is stalled and in some cases weakened in some product lines this quarter relative to the first two quarters of this year. However, this combined with loss costs better than origination expectations and the stable terms and conditions still translates to good levels of underwriting profitability.

I have said for some time now that the market cannot continue to erode primary pricing in the way it is. As a general comment, large accounts remain the most competitive across the board. Also opportunistic business has been slowing.

Property rates have been in flux due to the introduction of updated assumptions with respect to North American earthquake-related loss in industry CAT models. We are characteristically cautious about models and significant model change, and therefore remain conservative with our Californian earthquake exposures.

Further, at AXIS because of primary industry pricing deficiencies we have derisked US wind exposure in our insurance segment. In the aviation business third-quarter renewals did see positive rate movement, although not as high as warranted, and we expect this trend to continue through the fourth quarter. The oversupply of unprofessional, naive capacity in the aviation market is slowing the recovery of pricing.

In professional lines, the market for non-financial institutions commercial business remains competitive and increases in security concerns around certain market participants have abated. Traditional D&O, Side A, and DIC remain highly competitive with newer markets quoting aggressively to win business. The financial institution business rate increases have for the most part stabilized at attractive levels.

The most competitive area remains casualty insurance business. Productions and exposure due to the current economic conditions is resulting in fewer new business opportunities and lower available renewal premium. This effect is compounded by the competitive pressures around this weakened premium base. We have been extremely defensive in casualty insurance lines for some time with premium levels tracking well below the peak level in 2005.

Overall, rate in the reinsurance lines we target is at a minimum stable and in the best case is increasing meaningfully. As David noted earlier, business flowed through our reinsurance segment has been increasing steadily and we continue to find good opportunities with quality cedents.

We continue to directly benefit from the concerns over the financial strength of distressed reinsurers or dislocation in the wake of our competitors derisking activities. We expect the reinsurance market to remain disciplined and positive as we enter 2010 and our early indications from the various industry forums in the last week supports stability and consistency.

Also, the January 1 renewable date will be our first major renewal date for our continental European reinsurance business with the A+ financial strength rating from S&P in hand. We expect this will enhance our position as an even more desirable counterparty.

Some of the strongest areas in the reinsurance market will be those affected by dislocation or loss activity, such as trade credit reinsurance business and financial institutions exposed professional liability reinsurance, as well as catastrophe-exposed business. Starting with catastrophe-exposed business, rate reductions for North American earthquake exposure should be roughly in line with exposure reductions indicated by changes in two of the major catastrophe vendor models. These should result at a minimum in expected margins in line with expectations.

We believe the market dynamics around US wind support stable margins going into 2010. These factors include stable to increasing demand for wind coverage, also the depopulation of larger Florida insurance companies, the increased fragility of Florida wind-exposed companies due to inadequate capital and premium for attritional losses, and the Florida hurricane catastrophe fund pushing limit into the private reinsurance market.

In Europe the few CAT-exposed placements have been biased downwards, but wind margin has remained stable.

While proportional property business is suffering from rate decline in underlying primary business, our limited proportional property reinsurance account has a strong catastrophe bias and therefore is holding up well. For a property risk renewal business we expect higher attachment points and pricing as the reinsurance market has been exposed to relatively high frequency experience over the last couple of years in both the US and Europe.

For the US casualty reinsurance market the July 1 renewal period showed modest improvement in reinsurance terms. Reinsurance rates and terms were hardest for professional liability reinsurance business with the financial institutions exposed components up significantly.

I have said before that it is blindingly obvious that pricing needs to firm across most parts of the primary marketplace. Investment income potential is at all time lows and loss costs are poised to increase as they have remained at relatively benign levels in a number of lines over the last several years. The insurance industry has continuously sacrificed underwriting margin over the last three years, but importantly the reinsurance industry has not subsidized its margin erosion.

Also compounding this issue is the introduction of explicit government support to certain industry balance sheet where those parties should have been allowed to fail. The dramatic improvement in the capital market has also bailed out substandard businesses. Absent a global industry catalyst, we are not at all optimistic about a meaningful hardening of the markets.

We believe that stabilization at these pricing levels is just not appropriate given the amount and severity of risk that is being retained. Our greatest potential against an even greater challenging backdrop is to continue to use our well-placed business structure to exploit opportunity wherever and whenever it arises. Let the most capable survive and prosper.

As always, our focus will be on underwriting discipline and margin preservation which often comes with the sacrifice of some growth. We believe we have demonstrated ample willingness and ability to do this.

In addition, we continue to seek opportunities in areas less correlated to the most cyclical parts of our P&C business. We have, in fact, invested significantly over the last couple of years in attractive areas including global accident and health and small specialty commercial business. These are areas with a lead-in time, but ultimately we expect significant returns to shareholders from these initiatives.

In summary, we are confident in the strength of our balance sheet and the success we have had positioning ourselves to be the beneficiary of any market opportunities that may arise. Thank you. We are ready to open the line for questions.

(Operator Instructions) Vinay Misquith, Credit Suisse.

Good morning. On the credit insurance and the political risk business, thanks for your updates. Could you give us a sense for what trend you are seeing in terms of the claims? And since we have seen a stabilization in the credit market, should we see a lower impact on the loss ratio next year?

This year I believe it was 11 points on the insurance and four points on the consolidated. So should we see a lower impact next year?

Well, I take that we said, Vinay, that we believe that stabilization has impacted our portfolio fortunately, which we expected. And I have said really over the last year to 18 months that the years that would be affected were 2007, 2008, and hopefully with 2009 that will be the end of it and we would return to a much more stabilized pattern of losses.

So I am pretty comfortable with what I said in the last quarter and the quarter before that and the quarter before that about the outlook for this line of business. I don't think it is quite the plague that some people think it is. But I am as comfortable today as where we were in terms of the level of round reserves and the loss activity we have experienced.

So what is the normalized combined ratio that you would normally write this business to that we could maybe expect in the next few years?

Well, as I have said to you before, Vinay, many times, I don't expect a significant amount of loss ratio from this underlying business in normalized years. I won't go back how far I have been writing this business, but if you look at AXIS from 2002 through to 2007 there was hardly any loss activity at all in those years.

As the economic crisis started to develop, naturally we saw loss activity increasing in 2007 through 2008 and peaking in 2009. And as liquidity has increased globally and as the global crisis has abated, we have seen a dramatic impact on that portfolio. So we don't expect a lot of loss activity during normalized years.

Okay, that is great. Second question, a more basic question on capital management. I was curious as to what your view is to your -- for next year.

Well, I think I would just remind you of the comments I made earlier, Vinay. We do have an authorization available to us of about $212 million. Where we find the opportunities are there -- aren't in the markets in terms of growing our business, we might deploy our capital in terms of repurchasing shares. Obviously we think that is the most attractive way to manage our capital, as I said.

In terms of 2010, I am not going to comment on our plan for '10 at this point.

All right. I mean, it's just because with your stock trading at 91% of book it seems that the most attractive opportunity in this market would be repurchasing stock. So I think then right now with pricing not improving I was hoping that you would maybe be more willing to buy back your stock at these levels.

That is certainly going to weigh heavily on our minds.

I wouldn't take away that we are not willing. I think you have to go back to the comments I made.

Okay, that is great. Thank you.

Brian Meredith, UBS.

A couple of quick things here for you. First, on the structured settlement loss, going forward if everything is going to remain stable here, does that mean we should see about an $8 million hit from that contract per quarter up through 2017?

No, that wouldn't be correct. A couple of things, and I already went through quite a lot in the prepared remarks, but it is a fair value accounted for contract. So it is not a discounted valuation model; it is fair value. So you can't just normalize and amortize the number today to the 400 in the future.

Secondly, the amount of loss that we have reported to is not a full loss on the contract. It is nearly a full loss, but not a full loss, and we wouldn't amortize to a full loss unless we viewed changes in the underlying assumption.

Having put all of that aside for a moment, and I know a lot of you are trying to figure out what might happen in the future, if you think about your discounted models or discounting models, all else being the same and no change in our view on the loss, and on markets moving in a very straight-line fashion, you would get a much smaller adjustment on a quarter-to-quarter basis. But again, that is not the way we are going to account for it. We are accounting for it on a fair value basis.

Okay. Then second, John, your alternative investment strategy, obviously things have improved nicely the last couple of quarters. And I guess, given the volatility we have seen in the alternative investment strategy, what is your kind of thoughts on that going forward? You have got enough volatility in the liability side. Do you really need the volatility in the asset side?

Brian, I think on the alternatives, they are a small portion of our overall portfolio, roughly about 5%. We do monitor it very, very closely and carefully. We do believe that the investments we are holding are appropriate for our overall company. And as I said in my remarks earlier, we will continue to look at opportunities there if we think that they make sense relative to our overall Company's exposures.

But Brian, you're on the right track in terms of the fact that we take risk on the liability side. And we want to make sure that whatever risk we are taking on the asset side is acceptable in the light of the totality of our balance sheet. And I do not want to go through another year like last year and this year, if that gives you an indication.

Great. Thank you.

(Operator Instructions) Ian Gutterman, Adage Capital.

Good morning, John. How are you?

Morning, Ian.

I wanted to follow up I guess on Brian's question on the settlement. If I am just doing some quick math here, if you are recognizing the liability at 228 and if that is being discounted from something in the high-300s, I am getting at about a 7% discount rate. A) is that right and B) why is it so high given that interest rates are so low today?

Ian, a couple things. I am trying to go with pains to say this is not a discounted cash flow model, it's a valuation model. Your numbers are not off by much, but I don't think you would discount a long-term liability like that, an eight-year liability, based on today's spot rate. So even though interest rates are low today that doesn't mean that would be the rate for the next eight years.

I guess what I am wondering, if rates stay low for a while is there a chance you are going to have to take that discount rate down over time and that could -- what I am calling the discount rate that that could lead to in a given quarter maybe it gets marked up by more than we expected because if rates stay low?

Sure, a persistent low rate environment has all kinds of problems for the industry, not only this contract. But the one thing you are probably also keeping out of the equation is that we do have in flows on this contract as well, future premiums that are expected to be received which are probably not modeled.

Okay. No, that is fair. So from now until maturity then is that sort of $150 million to $175 million difference between where it's marked currently in the limit. That going to show up in the income statement over time, it's just a matter of how much shows each quarter depending on where the underlying assumptions are? Is that fair?

Correct.

But the whole amount will show up over time, it's just a matter of what the timing is?

That is correct, assuming that the conservative assumptions that we have now moved to hold up.

Exactly.

And the actual performance meet. As I said in my remarks, if the actual performance actually meets what we have modeled today, which is likely not to be the case, then your theory is correct.

(Operator Instructions) Mr. Gutterman.

I am sorry. I was trying to ask a second question and I got cut off.

That is okay, but it worked.

On the medium-term notes I am showing in the investment supplement that you have an amortized cost now of $361 million, which I assume is what it was written down to. Can you tell me what par is?

It's about -- $625 million I think was the original par.

Okay. I was just trying to get a sense of how much upside there is. And what is the risk -- how much concern should I have that the $361 million might need to get written down further in the future?

Well, I mean I can't -- as we were just talking, we can't predict where rates and everything are going to go in the future. But that is based on today's market, so we have seen quite a lot of activity in the last several months and spreads coming in and interest rates staying very, very low. I can't tell you we won't have any further deterioration in the price there, but I have got to believe it's highly unlikely that we will see much give (multiple speakers).

Default rates haven't moved in Europe to the extent that they have been model in so --.

Okay, guys. That is what I was concerned about is where the default rates are going.

Then my last one. David, I am looking at the -- this is I guess page 15 of the financial supplement -- you show your top financial holdings and you break it out by government guarantee and non-government guarantee. I look at things like BofA or Citi where most of it is non-government guarantees and then you also show somewhere else that those are essentially at par right now.

I guess I am wondering for institutions that aren't necessarily in the greatest shape and you don't have a government guarantee on most of the debt and they are trading near par, why would you keep holding those at this point? Or at least reduce them so they are not such a large part of the portfolio.

Those investments are mainly at the very high-level, very senior debt level so we think that they provide good potential or good profit for the portfolio. And I think that they are worth holding. That is our current view anyway.

Okay. And you don't worry about concentration? You have a lot of -- I know any individual position isn't large, but if you add up where you are in sort of the too-big-to-fail-banks it becomes a meaningful position.

Yes, we do look at that in terms of our overall risk management. And I would say, no, we are not that concerned about that concentration at this point.

Okay, that is all I had. Thank you very much.

Steven Labbe, Langen McAlenney.

Good morning. Recognizing that the absolute numbers aren't large, can you elaborate on the lines of business you are writing in the liability insurance and liability reinsurance segment where you had premium increases this quarter?

Well, I am pleased that you explained it in the way that you did because we have historically been very consistent in our approach to casualty business in both the insurance markets and the reinsurance markets. And just to put some color around our current casualty writings which are -- if you take out professional lines, the peak casualty writing we had were in 2005, which was just over $285 million. Just to give you a flavor for year-to-date, we are just under $160 million.

So we are averaging around about $50 million per quarter in our casualty business and this quarter's increase was really due to some MGAs coming online. There was nothing special about it.

We remain extremely conservative about the casualty lines. It is heavily reinsured. We approach it with caution and we will continue to approach it with caution.

On our reinsurance segment, again excluding professional lines -- we are excess underwriters don't forget. And again that we have been very cautious in our approach; we look very carefully at cedents. We audit their underwriting; we audit their claims.

The reinsurance portfolio was affected this quarter by a one-off opportunistic reinsurance contract, as David mentioned, which was for $25 million. There was nothing to read into at all this quarter the increase in the liability premiums.

Okay, thanks.

This does conclude today's question-and-answer session. At this time I would like to turn the conference back over to management for any closing remarks.

I would just like to thank you all for taking the time to listen in to us today and I look forward to addressing you with the fourth-quarter results. Thank you all.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.