AXIS Capital Holdings Ltd (AXS) 2010 Q3 法說會逐字稿

Good day and welcome to the third-quarter 2010 AXIS Capital Holdings earnings conference call and webcast. All participants will be in a listen-only mode. (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 Ms. Linda Ventresca, Investor Relations. Please go ahead, ma'am.

Thank you, Andrea, and 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, 2010. Our earnings press release, financial supplement, and quarterly investment 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 444604.

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, policies, and other loss events; general economic, capital, and credit market conditions; future growth prospects of financial results; the valuation of losses and loss reserves; investment strategies; investment portfolio and market performance; impact of 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.

Good morning, everyone, and thank you for joining us. After providing an overview of the results for the quarter, I will ask David to discuss those results in more detail. Then I will address underwriting activity and market outlook.

For the quarter, operating earnings per share were up 22% to $1.22. Annualized operating return on equity for the quarter was 12.6%, which we view as healthy given current market P&C conditions and the low investment yield environment. The combined ratio was 85.6% and included $85 million in net losses from the New Zealand earthquake.

Operating earnings per share for the year to date were $3.20, and we produced an attractive annualized operating ROE for the first nine months of the year of 11.3%, even taking into account the catastrophe activity this year. We ended the first nine months of the year with a combined ratio of 89.8%.

Our progress in accreting diluted book value per share is a primary measure in assessing our shareholder value creation. Our operating and investment results produced a diluted book value per share of the $39.01 at September 30. That is a 6.7% increase since June 30; a 15.9% increase since year-end 2009; and a 23.5% increase compared to a year ago.

Our capital position is strong, and David will talk more about capital management activities later.

As previously indicated, David Greenfield's last day as our Chief Financial Officer will be November 30. This is David's last conference call, and I know we will all miss David's insightful commentary regarding our financial results.

David has been a valued member of our executive management group for the past four years. During this time he has successfully directed financial strategy of the Company and led the further development of our accounting, control, financial reporting, financial planning, tax, and treasury functions.

We thank David for his many contributions to AXIS Capital during the last four years and wish him well in his future endeavors.

As we announced late last week, Albert Benchimol, who currently serves as chief financial officer of Partner Re, will be joining us on January 17 as Executive Vice President and Chief Financial Officer. We expect that Albert will continue to build on the great work David has done at AXIS, and I am confident that we will continue to have one of the strongest management teams in the industry, equipped to lead AXIS to even greater successes in the years ahead.

I will now turn the call over to David to discuss our financial results for the third quarter of 2010 in more detail.

Good morning, everyone. Before I begin I would like to just take a minute to thank you, John, for those kind words and to extend my thanks to all of my colleagues at AXIS and those in the financial community for your support and assistance over the past four years. We have accomplished quite a lot together and worked through some challenging financial markets. Thank you all.

As John mentioned, we are pleased with our results for the quarter. Our diluted book value per share increased 7% during the quarter, reaching another all-time high above $39. Book value was bolstered by net income as well as further improvements in valuations for our investment portfolio.

In addition, we delivered a strong annualized operating return on average common equity of 12.6% for the quarter. Net income available to common shareholders for the quarter was $239 million or $1.78 per diluted share compared with a net loss of $96 million or $0.70 per diluted share for the third quarter of 2009.

Operating income, which excludes the impact of realized gains and losses on investments, was $164 million or $1.22 per diluted share, compared with $152 million or $1.00 per diluted share for the third quarter of 2009.

For the first nine month of 2010, net income available to common shareholders was $556 million or $4.04 per diluted share compared with $179 million or $1.19 per diluted share in the first nine months of 2009. Operating income was $439 million or $3.20 per diluted share compared to $490 million or $3.26 per diluted share for the first nine months of last year.

Turning to our top line, our consolidated gross premiums written were $751 million for the quarter, a 3% decline from the third quarter of 2009. Reductions in our reinsurance segment were partially offset by selective growth in our insurance segment.

Gross premiums written in our reinsurance segment were $317 million, down 12% from the prior year quarter. Our liability reinsurance premiums decreased primarily due to the non-renewal of one significant contract following a material change to the cedant's business.

Professional lines reinsurance premiums also decreased. This was mainly as a result of the extension of certain third-quarter 2009 treaties for renewal into the fourth quarter of 2010, as well as premium adjustments to prior year treaties that impact the comparable period analysis.

Gross premiums written in our insurance segment were $434 million this quarter, up 5% from the third quarter of last year. The increase was primarily driven by our credit and political risk line. As we previously discussed we ceased underwriting this class of business in early 2008 due to concerns about the global credit markets.

We are carefully re-entering the market with underwriting guidelines reflecting all of the lessons learned from the financial crisis. This re-entry is also coinciding with increased demand for the product as global lending activity resumes.

Our consolidated gross premiums written for the first nine months of 2010 increased 3% over the same period in 2009. This was driven by a 9% increase in gross premiums written in our insurance segment, led by targeted opportunities in the US property market and the energy market.

Consolidated net premiums written increased 5% in the quarter and 8% for the year to date due to the previously mentioned increase in gross premiums written and the reductions in reinsurance purchasing on the renewal of certain programs which we discussed last quarter. In line with these changes, our consolidated net premiums earned increased 7% in the quarter and 5% for the nine-month period.

Moving on to our underwriting results, total underwriting income for the quarter was $127 million compared with $71 million in the third quarter of 2009. Underwriting income in the third quarter of 2009 included an adverse $136 million fair value adjustment related to an indemnity contract exposed to longevity risk. The contract was canceled in the fourth quarter of 2009, resulting in no further impact to underwriting results this year.

Our combined ratio was 85.6% this quarter versus 73.2% in the prior year quarter. Our current accident year loss ratio increased 3.7 points from 61.4% in the third quarter of 2009 to 65.1% this quarter.

The most significant loss event in the quarter was the 7.1 magnitude earthquake near Christchurch, New Zealand. Our estimated net losses for this event are $85 million. In the comparable quarter last year, catastrophe losses were not significant.

Partially offsetting the catastrophe-related increase in the current accident year loss ratio were reductions in the loss ratios for our credit and political risk insurance and trade credit and bond reinsurance lines of business. Loss activity on these lines were elevated in 2009 as a result of the global financial crisis, and we are now returning to more normal loss expectations for these lines.

Our consolidated current accident year loss ratio for the year to date was 69.7%, 3.3 points higher than the ratio for the first nine months of 2009. In addition to the New Zealand earthquake this quarter, the first quarter of 2010 was impacted by a high level of natural catastrophe activity including the Chilean earthquake, Australian storms, European windstorm Xynthia, and winter storms in the US.

The most significant of these events was the Chilean earthquake, for which our current estimated net losses are $121 million net of related reinstatement premiums of $9 million. There was no significant change in our estimate this quarter.

The other first-quarter catastrophe events resulted in aggregate net incurred losses of $49 million. As with the Chilean earthquake estimate, there was no material change in this aggregate net loss estimate during the quarter.

Our estimate of net reserves from prior accident years developed favorably during the quarter, with prior year net reserves reduced by $72 million. Of this amount, $28 million was from our insurance segment, representing a positive impact of 8.7 points on the segment's loss ratio.

In our reinsurance segment we recorded $44 million in net favorable prior period reserve development, representing a positive impact of 10 points on the segment's loss ratio.

Approximately $32 million of the Group's net favorable reserve development this quarter was generated from our short-tail lines. A further $25 million relates to our professional lines insurance and reinsurance businesses.

As discussed in prior quarters, we are continuing to incorporate our own experience into our ultimate expected loss ratios for accident years 2007 and prior, with less weight given to industry benchmarks. We have yet to do this in any meaningful way for reliability lines with longer development tails.

Net favorite reserve development of $11 million from our trade credit and bond reinsurance business was also reported in the quarter in recognition of better-than-expected loss experience primarily from the 2009 accident year.

Moving on to expenses, our acquisition cost ratio was comparable to the prior year quarter. Although our insurance segment's ratio increased by 1.6 points due to reductions in our ceded reinsurance purchasing, this impact on consolidated results was muted by the impact of business mix changes.

Our G&A expenses increased 12% over the prior year quarter but were comparable with the second quarter of 2010. As I have noted in previous quarters, strategic initiatives such as the buildout of our A&H business have resulted in some upward movement in these expenses. However, the previously discussed increase in net premiums earned this quarter mitigated the impact of the increase on our G&A ratio.

Now turning to our investment portfolio, our total cash and invested assets have grown by approximately 10% or $1.2 billion during 2010 to $12.8 billion as of September 30, 2010. This was driven by our strong operating cash flows and a further increase in the fair value of the investment portfolio, partially offset by negative movement in foreign exchange rates, mostly the euro against the US dollar. Total return on our cash and invested assets, our primary measure of performance in our investment portfolio, was 5.9% year-to-date. We continue to maintain a well-diversified portfolio with a duration of three years and a weighted average credit quality of AA.

Net investment income for the quarter was $112 million, up from the second quarter's $83 million, due to strong performance from our alternative investments. However, net investment income was down $23 million from a year ago primarily due to lower reinvestment yields and lower returns on our alternative investments.

As a reminder, our alternative investments portfolio is accounted for at estimated fair value, with the change in fair value reported in net investment income.

Our pretax annualized investment yield on our fixed maturity portfolio was 3.6% for the current quarter, down 54 basis points from a year ago as lower new money rates continue to pressure our portfolio yields. During the quarter, our net realized investment gains were $77 million compared to net realized investment losses of $253 million for the same quarter in 2009. The 2009 amount was driven by $279 million of impairment charges primarily related to our holdings in medium-term notes and compares with only $2 million of impairment charges during the third quarter of 2010.

We anticipate short-term interest rates will remain at or near historical low levels for the foreseeable future. To mitigate declining yields our current strategy for our fixed maturity portfolio is to continue to emphasize corporate debt and other credit spread sectors while maintaining a high-quality, shorter duration portfolio.

With respect to foreign exchange, our income statement gains and losses are primarily the result of a revaluation at each balance sheet date of our net insurance liabilities required to be settled in foreign currencies. This quarter, significant appreciation in the rates of exchange for the euro and Australian dollar against the US dollar drove the $25 million FX loss. In comparison, we recognized $7 million in FX losses in the prior-year quarter.

From a book value perspective, these foreign exchange losses were offset by corresponding foreign exchange movements on our available-for-sale investments, which are largely recognized through other comprehensive income.

Our March 2010 Senior Note issuance drove the increase in interest expense for the quarter and for the year to date. We continue to remain strongly capitalized for the risks we hold and the risks we are targeting. Our total capital at September 30, 2010, was $6.8 billion, including $1 billion of long-term debt and $500 million of preferred equity.

Our financial flexibility remains very strong with a debt-to-total capital ratio of 14.5%, a debt and preferred-to-total capital ratio of 21.8%, and total capital in excess of the various rating agency requirements.

In August, we entered into a three-year revolving $500 million senior unsecured credit facility. This was in addition to the $750 million secured LOC facility we put in place in May of this year. Together, these two facilities serve to replace the $1.5 billion unsecured facility we had in place since August 2005.

Our capital management approach balances the obvious rating agency and regulatory capital requirements with plans for reinvestment in our business and opportunistic capital requirements. We moderated our share repurchase activity this quarter as we monitored Atlantic hurricane activity.

In anticipation of increased share repurchase activity following this third quarter, our Board recently authorized an additional $750 million for common share repurchases. Given depressed market valuations for the industry and lack of attractive investment and underwriting alternatives, we continue to believe that share repurchase currently is in the best interest of our shareholders.

We will continue to monitor market valuations and execute further share repurchases as we deem appropriate. At October 29, 2010, we had approximately $870 million of remaining repurchase authorization.

In our quarterly financial supplement, we have updated information about PMLs as of October 1 for the AXIS Group at various return periods for peak industry cat zones. We have also provided estimates of industry losses at these return periods.

The most significant change in our PMLs relates to our European wind exposures. This change is primarily due to an update of a vendor model which we use within our reinsurance business and our Group aggregation process. The changes resulted in reductions to our European wind PMLs in the higher return periods.

Within the tables we also show the industry loss estimates from a vendor model. During this quarter these figures were impacted by updates to the industry databases and currency movements.

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

Thank you, David. The market during this second half of the year does not look substantially different from what we have seen in the first half of this year. The market continues on a steady, broad competitive track.

The overall rate change for our insurance segment during the third quarter is estimated at minus 4%, which is in line with the change in the prior quarter. Because of differences in mix of business between the two sequential quarters, the rate changes are not directly comparable. However, the trend is negative across most insurance lines, and we expect to see a continuation of this negative trend through the balance of the year, absent a major catalyst.

This modest decline in pricing across the portfolio was relatively consistent across most classes. The only class of business which has experienced meaningful positive rate change, as expected, is the offshore energy class following the Deepwater Horizon loss.

Overall, our renewal retention rates are amongst the highest we have seen, as we remain focused on maintaining business that we know well. Aside from lines of business which are new to our overall portfolio, such as Accident & Health, new business in our existing lines is limited.

The greatest challenges ahead for the reinsurance market stem from the underwriting activity of primary companies where there is continued pressure on rate and changes in terms and conditions.

While there is a general negative tone in the reinsurance marketplace, the tone naturally seems to be driven the loudest by intermediaries. In our view there is nothing particularly unhealthy about the current state of the reinsurance marketplace.

We are operating in a marketplace where it is extremely challenging to find new opportunities in existing lines of business. But we remain satisfied with the portfolio that we have assembled.

We have not had to reorient the portfolio in any wholesale fashion, given our heavy bias since our inception towards nonproportional reinsurance business. We are an excellent counterparty to our cedants in terms of both service and financial strength. We have been successful in maintaining a carefully selected portfolio which we believe will deliver above average returns.

For our portfolio at the next major renewal date of January 1, we expect that pricing will come off modestly across most lines with some minor exceptions. We are operating on the basis that we may not see a broad turn in the market until 2012.

We are working very hard to maintain a high-quality diversified underwriting portfolio that will continue to generate significantly positive cash flow and real market-leading underwriting profits. Further, as we review our underwriting portfolio, we are focused on remaining well capitalized and well positioned to grow strongly and quickly following any hardening that may occur within both the insurance and reinsurance markets.

We do not currently anticipate significant growth from the underwriting portfolio, and we do not see significant opportunity in the investment markets at the moment, particularly given our conservative posture with respect to investment risk. Meanwhile, current market valuations for property and casualty insurance and reinsurance companies, including our own, remain at historic lows. And in our view, share repurchase represents a compelling return to shareholders.

We estimate our repurchase activity over the last year alone at discounts to book value has resulted in book value accretion of approximately 3%. Therefore, we are likely to continue to prudently return capital to shareholders as long as the market continues on its current track.

Ladies and gentlemen, with that I will open a call up to questions.

(Operator Instructions) Vinay Misquith, Credit Suisse.

Hi, good morning. John, could you give us a sense for what the status is on the buildout of your platform? I believe you were (technical difficulty) build out more there last year and earlier this year.

Sorry, did you say the A&H business?

Yes, the A&H, and just wanting to build out your platform in total. So has that nearly been completed now?

Well, we have -- sorry -- let me deal with A&H first because we said it was probably a two, two and a half year build. We are now coming -- we started in early 2009 to build this business; and by the end of 2009 we had around about 30 staff working for us, dedicated to A&H, which is a separate division.

By the end of this year we will have around 60 people dedicated to the A&H business. It is a pretty significant investment, which I signaled at the very onset of this initiative. We will probably invest between something like $40 million to $50 million, which shows you how important this strategy is to us.

It will probably have a run rate once it gets going of around $40 million. We would expect it to have just over 100 people as a normalized run rate business.

We will have all of our domestic licenses in place, give or take one or two, by the end of this year. We are now pretty operational within Europe from an insurance standpoint and a reinsurance standpoint.

We expect a little bit of premium written this year, maybe $13 million, $15 million, not much; but then it will begin to ratchet up quite substantially we expect during 2011. And that will begin to offset some of the costs that we have incurred.

But it was a five-year build, Vinay. I have said it is an extraordinarily good business once you can get into it. There is a very good opportunity for us because all of the businesses that are currently in this space that are material businesses are mature. They are legacy businesses, hiding behind modern fronts but are overwhelmed with costs which -- we can actually build systems and processes which will be materially different.

So we are coming to the end of the build stage, and I would expect us to start showing some meaningful premium growth during 2011.

As far as the rest of the Company is concerned, we have been busy building out our Canadian operations and our Australian operations as well as our Singaporean operations. We have been concentrating on that during the course of the year. Everything else is ticking along pretty smoothly. Does that answer your question?

Yes, thank you.

No problem.

The second question for David. The net investment income yield remained relatively flat this quarter versus last quarter, despite significantly lower rates. Can you give us a sense for why that has happened?

Well, I think you have to look at the positioning of the portfolio. So when you look at the portfolio composition we are looking at areas where we can maintain our yield as best we can without sacrificing duration and quality. We do expect the yield is going to continue to come down, as I made comments earlier today in the call.

But for now, the yields are holding at about the 3.6% level. But I think as we get into next year, given our pessimistic view on rates and the overall environment, we are going to expect that that yield is going to trend down to the low 3s, into the 2s.

Okay, that's great. Thank you.

Matthew Heimermann, JPMorgan.

Hi, good morning, everybody. I guess just with respect to the political risk, trade credit business, can you give us a sense of where that business is being booked this year versus last year? Just so we can better understand what it might mean going forward.

Well in terms of -- we obviously -- let me give you a flavor of just how many policies we have written this year. Year to date we have actually written 25 policies with an average exposure of around $23 million. And the average tenure in years is just under five years; it is 4.6 years.

We actually have written on a gross written premium basis at the end of the third quarter just over $20.5 million. So it is still relatively modest.

But obviously we have got the earned coming in from prior years' writing, still. So again we are just growing back into the market quite carefully. Does that help?

That helps, but I guess I was thinking more just some color into the -- you mentioned both in the commentary and the press release that the accident year picks came down, and I would suspect that is disproportionately being affected by the -- that is on the earned from prior year. So I was just trying to get a sense.

Matt, before David jumps in I want to just drop back to what I said to you guys three years ago as a result of the financial crisis and the activity that we had. We started to elevate our loss picks on this line of business, which we would normally expect to have pretty minimal activity, back in 2007. Then through 2008 and 2009, being the highest loss level of activity that we had.

This is a sort of business that we are very proactive in monitoring activity, including potential default activity. So we moved pretty quickly and we know very quickly whether there are any issues with any of these contracts. And we reserve very early on.

So the reaction that we have taken to look at the loss pick is a reflection of the fundamental change that we thought would come into 2010, which is a substantial improvement in the global economic climate which has had a direct impact on the sort of claims activity that we have seen. Which we anticipated. But, David?

That makes sense to me, yes.

Yes, let me just add, because I provided these numbers or some numbers along these lines in the previous calls. In terms of combined ratio for political risk business we are now trending to below 100% combined from the elevated levels that we were a year ago, and substantially lower loss activity. And particularly with regard to the loss ratio in the current year, the accident year, much of the losses that were -- loss ratio is really being put up into IBNR as opposed to in case reserves.

So I think what you do -- when you look at this line and you put that together with John's commentary and think about this business, don't forget about our conservative reserving posture. So I think as this continues we will see those loss ratios and combined ratios come down even further as we have more and more experience in the current market.

Yes, Matt, we said in our commentary that we are now seeing a much more normalized -- what we would consider to be a much more normalized portfolio as the global economy has settled.

Okay, that's helpful. Then, David, do you have the same number or give us the same sense for the trade credit?

A very similar story. We are down below the 100 on the combined ratio; and again we are seeing very positive results in that business.

That business has gone through a couple of years of repricing now, so it is pretty much in line with what we have said on several of our calls in terms of the trends in this particular line of business.

And Matt, just on that point, because we held meetings back in September with all the three large trade credit businesses. And I think during the financial crisis, which was really rolling fast into '09, they really became very conservative about some of their estimations for the '09 accident year.

I think that fortunately those estimations tended to be a bit more on the conservative side. So as we are getting better information now and as that year develops more fully, we feel a lot more comfortable with the ultimate outcome of it.

Okay, that's helpful. Then I guess just one thing as I -- more related to capital. If I look at the PML you put in for US wind is just under $1.5 billion, and then your stated threshold for loss is 25% of total capital, so if I just took a look at where that was today, it would suggest that you have got an additional like $250 million in round numbers of capital room.

Is this -- I just would be -- rather than validating the number conceptually, is that a reasonable way to think about your capital flexibility today?

That is one way to look at it, Matt. Obviously, we are still in an environment with great pressure on earnings. So we look at these numbers very regularly in terms of putting our books together. But I would agree with you, that is one way we can look at that.

Okay, that's helpful. Then other than that, best wishes, David.

Thank you very much.

Greg Locraft, Morgan Stanley.

Hi, good morning, guys. I wanted to just get some color on the New Zealand quake. How did you come to be 85 million estimate?

How do you feel relative to the Chile exposure in the first quarter, and can you just give us some thoughts there?

Yes, I am happy to do that. I think that the New Zealand quake is fundamentally different from the Chilean earthquake in the fact that it is pretty predominantly residential exposures that have been affected, where the Chilean loss happened to be a very substantial commercial loss as well as residential.

Then there are also practical issues, Greg, with the Chilean loss, if you remember. Because they didn't have enough loss adjusters that could speak Spanish. Trying to get loss adjusters into that part of the world is a huge logistical issue, and that has been why it has taken much longer for the Chilean loss to emerge into the international market.

The New Zealand quake is slightly different. It is a much more mature market. We are involved with many of the local companies who have been very long-term buyers of cat business. They have got very good reputations.

And it's an important part of our effort in the Asia-Pacific region to build out our business there, especially given the data quality issues and the competitiveness in the rest of Asia. So we probably have a slightly higher than expected loss than we expected; but that was really as a result of one per-risk program that performed worse than we had modeled or we had expected.

But what I want to do is to put New Zealand in the context of our global portfolio. That is very important to understand and very important to understand how that global portfolio fits into our overall portfolio.

So far this year we estimate that industry cat losses have been around about $26 billion. We estimate our total exposure -- and we believe that we are conservatively reserved -- but our total exposure will be around about $315 million which is just around about a 1.25% market share.

Which is actually there or thereabouts of where we would expect. We would expect to be somewhere, depending upon the geography, between 1.25% -- somewhere between 1.0% and 2% market share.

But I think you need to think about the New Zealand loss not just as New Zealand but as part of our global cat exposures.

Okay, thanks. That's helpful. Just shifting gears, in the commentary, John, you mentioned that you were thinking 2012 is kind of how you're planning the business for a potential change in the market. What decisions are you making today to adjust for that? Is that a shift in your thinking from six months ago?

We started planning for a change in the market a couple of years ago. The way that we started planning that was actually looking at transforming our efficiency as an underwriting business in both our insurance sector and both our reinsurance sector. Trying to make sure that we were as best equipped as we could do to react immediately and positively and strongly and especially efficiently to any change in the marketplace.

And you can't do that overnight. It has taken two, two and a half years for us to get into a position where today we are very well I think structured to take advantage of the market.

I think that the market turn in honesty we thought might come a little earlier, but not much earlier. So we have been patient. I think we have been disciplined.

But we are very well positioned globally. Don't forget AXIS is a fantastic, diversified global business in both insurance products and reinsurance products by product and by geography. When we see -- when we smell the recovery, we will take full advantage of it.

Okay, great. Then any magic to 2012 in terms of your thinking as to why that might be a year when the odds are in favor of the market turning? Or is that more or less just far enough out where --?

Well, my instinct is that you still have some stupid outliers, but I won't tell who I think they are, because otherwise Linda will get very upset with me.

But my instinct tells me that on the primary side things are getting to the bottom in terms of the downward pressure. So much has been cut out of the account generally in terms of price that there really isn't a lot more give in it. But for the general market, and that is why I think it will be 2012.

Okay, great. Thanks and best wishes, David.

Thank you, Greg.

Alan Straus, Omega.

Good morning. Just wanted to ask on the share repurchase program what type of time frame you have for that. Is that a one-year time frame assuming that there are no major cats?

Number two, I just want to congratulate David on doing a great job and good luck on his next endeavor.

Thank you, Alan. A couple of comments on this lead. The program that the Board authorized has a two-year time frame for us to execute on it. That doesn't necessarily mean we are going to take two years or wait for two years, or do it all quickly.

I think the way that it is best to look at it is, given the current market conditions, our view is we are going to try to keep our capital levels somewhat stable. So essentially we are going to try to be aggressive in repurchasing shares when we think that the valuations are in our favor, as we might think they are now.

And we are going to try to maintain repurchases at the levels of the earnings that we are accreting or the capital that we are accreting over the course of the next couple years.

So is it safe to assume that all earnings basically are free cash flow, just not including the capital gains?

That is one way to look at it. I don't want you to pin me down exactly how we are going to do it.

But essentially I think the view is we have a very strong capital base and we are going to try to keep it steady in these market conditions.

Okay, thanks.

Brian Meredith, UBS.

Yes, good morning, everybody. Two questions for you here, John.

First, could you give us a sense of what the aviation renewal looked like here at October 1?

Then the second one is could you comment on what your thoughts are about the trade credit reinsurance renewal coming up at 1/1?

Yes, I think the aviation market is still pretty barmy, which is an English expression for pretty dopey. I think that the signs of hardening that appeared towards the end of last year and the early part of this year have been significantly dampened.

I just remind you, Brian, that we pulled out of this class of business at the end of 2005, and since 2005 I think 10 to 12 dedicated aviation businesses have been set up at a time when no underwriters have been making -- well, I don't know of any underwriters who have been making any money, real money, on that portfolio of business over the last four or five years.

So because of the number of participants -- and don't forget that aviation is what we call a verticalized marketplace. You have a leader that sets the price; the price is at 100%; and then the following market will be discounted by as much as 30% to 40% of the premium in order for them to access shares on that particular renewal.

So when people tell you about their aviation portfolio, you really need to dig in, to ask them just what the average reduction off the leader's price is that they are writing this business at; and exactly how much their reinsurance is costing. Because they are probably running the first $300 million in terms of a 100% loss before their reinsurance programs can kick in.

But I hope -- I am afraid been frustrated by the market and its failure to recognize the huge exposures that the market is taking on and the lack of appropriate premium pricing relative to exposure.

One only has to look at the new Airbus 380s and the number of passengers and liabilities involved with those passengers, as well as $300 million values, see that just how minimal the premiums that are being charged by the market.

So I am afraid I don't expect a great deal. I would have thought overall it would be pretty flat to up a little bit, but not much. Not enough to correct the rate reductions that have been taking place over the last five or six years.

The trade credit, I am a bit more optimistic. Because as I said, I personally met with all of the major trade credit companies in September. I meet with them two or three times a year.

And I believe that the global economy has stabilized significantly. The vast majority of their business is being transacted within Europe because it is a very traditional product that is purchased throughout Europe. They really became very conservative during the financial crisis.

They trimmed their portfolios. They look much more closely at the credit quality of their clients. They restricted the amount of credit that they were providing for them. They took out a lot of the toppy exposures that they had.

So it is a much better balanced portfolio. I don't expect significant price increases for that portfolio going forward, because I believe it has returned in 2010 and 2011 to a much more normalized pattern, which would be a profitable one.

They've made the corrective action.

Good. Then one last question. Could you give us your thoughts on the marine and energy reinsurance renewal at 1/1? Could that cause some further upward pressure on the primary rates do you think in '11?

Yes, it's going to be interesting, because it depends on -- without a shadow of a doubt the energy market has been knocked by the Deepwater Horizon loss and there will naturally be some reaction to that, which will either be by way of increased retentions or coupled with increased pricing.

We actually will negotiate our renewal pretty hard, because we have had a very good record with our reinsurers in this line of business for many years.

As far as the marine account is concerned I regard that in the same way I regard the aviation account. It is substantially underpriced; underwritten by underwriters who really don't understand the business and have had no real length of time.

You know, I worked for a shipowner for five years and bought insurance for him a long, long time ago. So I think I understand that business pretty well. And I look with dismay at the way that companies assemble their underwriting talent to write that class of business, let alone report it.

So for the reinsurance of the marine market, it tends to be loss-driven rather more than exposure-driven.

Okay, thank you.

Beth Malone, Wunderlich Securities.

Thank you. Good morning. I have a couple questions. How do you view shareholder dividends as a way to manage your excess capital?

Well, I think we much prefer share repurchases over any sort of special dividends or one-time dividends. We think the dividend yield on our stock is an important measure of shareholder return, and we have a good track record paying dividends and increasing our dividends. And I would expect that to continue in the future.

But I think all else being equal, if we have options we would prefer share repurchase to any sort of special type dividends.

Okay. Then on the earthquake exposure, should we assume that pricing for earthquake risk is going to be rising?

Yes, especially in some of these outlying areas. I think that for California and Japan I still think there will be a lot of commercial pressure to suppress that pricing.

But I think you will find significant changes in the approach to the industry to some of these more peripheral earthquake-exposed regions.

Does that suggest that you all will be writing more of that risk going forward?

No; I think we're going to get paid better.

Okay, but not increase your exposures?

I don't see that, not in a material way, Beth. But I see that there will be a restructuring of a lot of these, as I said, secondary exposure geographies in terms of -- the data we get out of them is pretty good. The modeling, by and large, has been pretty good.

But I think that there has been a greater recognition of frequency and severity. So we're going to have to deal with it. And the market is dealing with it.

And you mentioned that --

It's adopting a very disciplined approach to it.

Okay. Then you mentioned that you don't see a lot of opportunities from an acquisition standpoint because of pricing of those potential acquisitions. But if your assessment of the pricing environment for insurance stretching out until -- no recovery till 2012, do you anticipate that opportunities will -- you will get that opportunity in 2011?

I still don't see a lot of -- forgive me; I don't mean to be disrespectful to my peer group. I don't see a lot of value out there which is transformational to us from an acquisition standpoint. We will still look at specialist businesses to see which would complement our existing portfolio. But in terms of trying to find something that is transformational for us, every man and his dog is trying to do the same thing out there. Some better than others.

But I think we would rather substantially increase -- if we saw rating increases coming through, with the operating efficiency we have, with the market penetration we have, I would rather throw our capital at expanding our existing portfolios than actually look to buying in a mediocre business that has got volume.

Okay, thank you very much.

Great pleasure.

Ian Gutterman, Adage Capital.

Hi, good morning, John. Two questions if I can. The first is, as I am looking at the improvement in loss ratios, when I look at the accident year ex-cat loss ratio year-to-date for both insurance and reinsurance, they're now actually slightly better than '06 and '07.

I understand why they would obviously be better than '08 and '09 given what was going on with the trade and political risk stuff. But why should they be better than '06 and '07 given what has happened in pricing in the last four years?

Maybe I will start, John, and you can jump in. But I think it is very difficult to compare today's mix of business with the same mix that we had back in '06 and '07, and John can talk more to that specific point.

But more importantly, when you just look at our reported ratios and the way you are doing it, you have to also factor in the point that I have been talking about for several quarters now -- which is, we are a incorporating more and more of our own experience at the time we are writing the business, as opposed to letting it develop and using market-based data.

So when you look at '06, '07 data, a lot of that is market-driven factors that we were using in the initial reserving whereas we are now incorporating more and more of our own experience in our businesses today.

Okay. That makes sense.

But what we do have, Ian, is a pretty robust -- you have heard me bang on before about our price monitoring system. I hear my peer group who are just recently discovering that they also -- they ought to price monitor new business, which I find absolutely astounding. We have had a continuous process which has been very stable and it is audited regularly, regarding the price monitoring of all our business that we undertake.

That is on a pro forma basis. It is very consistent for both new and renewal business. Not only taking into account any price reductions or price increases, but also any changes in conditions.

And that has to be peer-reviewed. It is not just the ability of an underwriter to optimistically choose a loss pick.

That then immediately is fed into our current accident year loss picks. So it may look a bit odd, but it is pretty robust, and it represents I think the way that we underwrite our portfolio and where we have to squeeze margin in a different way from a lot of other people.

Okay, that makes sense. That's clear. Then just my last one, John, just a follow-up on when the market may turn. I guess it strikes me as optimistic to think 2012 could be the turn just given -- when we talk about your peers, a lot of your peers seem to be very content with single-digit accident year ROEs and rationalizing why that is okay. And they are showing no signs of broad-based adverse development or any of the other pain we usually get associated with a turn.

So while I will agree that the market needs to turn --

Forgive me, Ian; forgive me. They are looking at price to book values of between 0.6 and 0.8. When they are at 0.5 and 0.7 and they are still pretty comfortable earning a single-digit return, and their investors have walked away from them, I expect their management will do something about it.

I hope so. I keep trying, John.

So do I, Ian. So do I, as you know. And I think that it will happen.

Okay. Fair enough. I guess my concern is just it doesn't seem like the urgency is there when I have these similar conversations, that maybe we don't get there till we actually see balance sheet holds develop; and that might be two or three more years.

But the point is, Ian -- which I don't think it will happen. But say it did happen. I think we are extremely well positioned to squeeze whatever margin we have, and we have proven that time and time again.

We have a great portfolio, balanced geographically and by product. We have great underwriters. We're a very, very efficient Company. We will have Accident & Health coming onstream next year, which will be great.

So I am not fussed about the future. You can bring on whatever you like. We will be at the top of the earnings stream for whatever the market conditions are.

Very fair. Thank you, John.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to our speakers for any closing remarks.

Ladies and gentlemen, thank you again for taking the time to listen to us this morning. We all very much enjoyed the discussion.

And once again I would like to thank David for his service and his friendship over the last four years. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect.