AXIS Capital Holdings Ltd (AXS) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to the AXIS Capital Q3 2012 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity for you to ask questions.

(Operator Instructions)

Please note that today's event is being recorded. I would now like to turn the conference call over to Ms. Linda Ventresca, Investor Relations. Ma'am, you may begin.

Thank you, Jamie. 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 third quarter ended September 30, 2012. Our earnings press release and financial supplement were issued yesterday evening after the market closed. If you would like copies, please visit the Investor Information section of our website, www.axiscapital.com.

We set aside one 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 United States. The international number is 412-317-0088. The conference code for both replay dial-in numbers is 10018984. With me on today's call are Albert Benchimol, our President and CEO, and Joseph Henry, our CFO.

Before I turn the call over to Albert, 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; financial results and capital management initiatives; evaluation 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 10K 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 and our consolidated underwriting income, which are non-GAAP financial measures within the meaning of the US federal securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release, which can be found on our website.

With that, I'd like to turn the call over to Albert.

Thank you, Linda. Good morning, everyone. We are pleased with our results for the third quarter. Our quarterly operating income of $201 million or $1.63 per share represents an annualized operating ROE of 15.2%. Our diluted book value reached a new all-time high of $43.57 per share, an increase of 7.4% in the quarter and 17.6% over the last 12 months. We benefited from the low level of catastrophe activity, and the favorable impact of strong equity markets on our overall investment returns.

But these aside, our various businesses are operating at a high level; underwriting results across substantially all units showed good fundamentals. Where we affected changes in business mix, it was generally to favor lines and markets showing continued improvements. We also sustained progress in a number of initiatives we have been cultivating for some time.

I will now turn the call over to Joe to review the financials. I will comment further on market environment and business activities later. Joe?

Thank you, Albert. Good morning, everyone. This quarter we generated an annualized 16.9% return on average common equity, and operating ROE of --

Hello, Jamie?

Thank you, Albert. Good morning, everyone. This quarter we generated an annualized 16.9% return on average common equity, and operating ROE of 15.2%. In addition, quarterly diluted book value per common share increased by more than $3 per share in the quarter. Our results benefited from a quiet catastrophe environment and a low level of large losses, as well as continued favorable prior-year development. Valuation improvements on our available-for-sale investment portfolio and share repurchases executed at a discount to book value also contributed to these excellent results.

Our strong underwriting results absorbed the impact of US crop losses and Hurricane Isaac during the quarter -- a testament, in our opinion, to the value of diversification by geography and product in our underwriting portfolio. We view this, coupled with the superior risk-selection capabilities of our underwriters, as critical to driving superior returns for our shareholders. This is especially the case given the persistency of the low interest-rate environment and the lack of sufficient compensation for taking additional risk in the investment portfolio.

Moving into the details of the income statement, our third-quarter gross premiums written were up 2.2% to $848 million. Growth emanated from our insurance segment, where premiums were up $36 million, attributable to a number of lines. The real growth story in the insurance segment is impacted by targeted reductions in MGA-produced, cat-exposed business, as we have made a tactical decision to supply the market with cat capacity on a more fungible basis. The reallocation of this capacity, unfortunately, does not occur perfectly in tandem. Partially offsetting growth in insurance was a $24 million decline in reinsurance segment premiums.

Group net premiums written were down 3% in the quarter. Changes in our reinsurance purchasing, affected last quarter, as well as the business mix changes, contributed to a higher-seeded ratio in insurance. Our consolidated net premiums earned were up 3% this quarter. This growth was driven by insurance, including our accident and health line, which has continued to increase production since we lost the product offering in 2010. This growth was partially offset by a reduction in reinsurance, driven by repositioning of our catastrophe portfolio throughout this year.

Our consolidated current accident-year loss ratio improved by 11.4 points during the quarter, primarily due to a quieter catastrophe environment. Also, lower large losses this quarter, including reduced exposure and loss experience related to aggregate property reinsurance of regional companies in the US, benefited the current year. Partially offsetting these improvements were losses of $40 million related to the impact of severe drought conditions on US crops, which I will expand upon shortly.

In the quarter, we continue to benefit from net favorable prior-year reserve development of $60 million reported in the quarter, primarily from short-tail lines. Our acquisition-cost ratio increased 1 point quarter over quarter as business mix changes across both segments continue to earn out.

Let me address the third-quarter increase in general administrative expenses at this point. A large portion of the overall increase relates to performance-related compensation costs, as our annual incentive compensation accruals move in tandem with visibility on our operating results as the year unfolds. Excluding the performance-related accruals, our G&A ratio was up 0.5 points. Taken together, these items produced excellent underwriting income of $155 million, and a solid combined ratio of 85.3% for the quarter.

For the nine-month period, our gross premiums written were down a modest $42 million, or 1%. This reduction was primarily driven by the repositioning of the catastrophe portfolio throughout the year in our reinsurance segment. Insurance gross premiums written for the year-to-date increased. Growth was associated with a more favorable rate environment and new initiatives gaining traction. Net premiums written were down slightly at 4%, driven by the higher-seeded ratio in insurance that I mentioned earlier. Net premiums earned were up 4% for the nine-month period, driven by growth and insurance in recent quarters.

Our consolidated combined ratio of 90.8% includes 5.3 points net of reinstatements related to the first- and second-quarter US weather events, the impact of the drought on US crops and Hurricane Isaac, and 7.1 points of net favorable reserve development. Excluding these items, our nine-month current-year accident loss ratio improved by 2.6 points with improvements in both insurance and reinsurance.

Taking a closer look at our insurance segment, gross premiums written were up 7% for the quarter. This growth came from our new accident and health line, as well as liability and professional lines. Liability growth came from our US Excess and Surplus Lines Umbrella Business. Professional lines growth came from newer initiatives, notably our UK and Irish professional indemnity, and our design professional and environmental initiatives.

A&H premiums were up in excess of 30%, with A&H insurance in the US contributing strongly to the growth. Partially offsetting these increases was a 14% reduction in property premiums. While property insurance was down for the quarter due to the property MGA reduction, it was up modestly for the year as new initiatives such as renewable energy and the improving rate environment offset the reduction. We expect that future MGA-related reductions will be similarly offset as we take advantage of the improving rate environment in our other property classes.

Net premiums written were comparable quarter over quarter, with an increase in gross premiums written largely muted by a 4-point increase in the segment's seeded ratio. A large portion of this increase was driven by the higher session rate on professional lines business after the renewal of our quota-share reinsurance program last quarter. Mix changes also contributed, most notably in relation to the growth in our liability business, where we [seed] a significant portion to our reinsurers in order to manage our exposure to long-tail lines.

Net premiums earned in our insurance segment were up $28 million or 8% from the prior-year quarter, with our accident and health line contributing the majority of this growth. The current accident-year loss ratio in our insurance segment improved 10.2 points in the quarter, primarily attribute to lower cat activity. The third-quarter 2011 ratio included 10.1 points for Hurricane Irene and Tropical Storm Lee, while this quarter's ratio includes only 1.2 points of cat-related losses related to $10 million for Hurricane Isaac and a $5 million reduction in our estimate for second-quarter 2012 US weather-related events.

Net favorable prior-year development in insurance was $32 million or 7.9 points this quarter compared to $33 million or 8.8 points in the third quarter of 2011. Changes in business mix, including the growth of our accident and health business, contributed to the 0.8-point increase in the acquisition-cost ratio for the quarter. Our accident and health business is heavily weighted towards quota-share reinsurance at this stage, and therefore, carries a higher commission rate than the rest of our insurance operation.

For the nine-month period, our insurance segment reported 8% and 5% growth in gross and net premiums written, respectively. Excluding the impact of the catastrophe losses, the nine-month accident-year loss ratio improved by 2.8 points due mostly to a lower level of large loss activity, business mix changes, and rate increases.

Turning to our reinsurance segment, growth and net premiums written were both down 7% in the quarter. July 1 renewals dominate the third quarter, and include significant property renewals in the US, Australia, and New Zealand. Pricing was flat to up 5% during the first renewal, after a full round of increases last year. Our cat premiums were down $18 million for the quarter, with approximately 50% of this amount due to the renewal timing of Japanese business, which was extended into the third quarter of 2011 following the earthquake and tsunami, but renewed this year in the second quarter. Premiums from our property line, which includes proportional and per-risk business, declined during the third quarter as more cedants increased retention of business, and competition increased, driving less favorable economics.

Our reinsurance segment had a net reduction in premiums in the credit and bond line where growth was more than offset by reductions in premium estimates from certain cedants and competitive pressures. Our liability reinsurance premiums increased due to a variety of factors. Premium adjustments on prior-year treaties accounted for $6 million, or almost 50% of this increase in this line of business. The remainder of the increase was attributable to line size increases on certain treaties, and increases in expected writings by certain of our clients. Reinsurance premiums earned were down 1% in the quarter, driven by year-to-date catastrophe repositioning that I highlighted earlier.

The reinsurance current accident-year loss ratio for the quarter was 11.9 points lower than for the third quarter of 2011. The third-quarter 2011 ratio included 10.8 points of catastrophe losses related to Danish flooding, Hurricane Irene, and the aggregate increase in first-half events. Comparatively, our results this quarter included $40 million related to the impact of severe drought conditions on US crops, $10 million for Hurricane Isaac, and a $22 million combined reduction in loss estimates net of reinstatements for the first- and second-quarter US weather-related events. In the aggregate, these amounts contributed 6.1 points to the ratio.

Let me provide some additional information to put our crop losses in context. Historically, we have not been a big player in crop business. We write a small volume of crop reinsurance business internationally, and the 2012 portfolio includes some US exposure. Our Business is primarily written on an excess-of-loss basis. When we write on an excess-of-loss basis, we are being paid to take on severity risk from our clients, and therefore, expect lumpy results from time to time. Our $40 million provision reflects our full exposure for the US drought. There will be no further impact on our financial results for this year from the US drought conditions.

For the accident year-to-date, our underwriting loss for this line, including the impact of the US drought, is $34 million. Since inception, and through the end of this third quarter, earned premiums from our crop reinsurance business totaled $143 million, and had a technical ratio of 67%. In the last few quarters, we indicated we have a new global agricultural reinsurance initiative underway. We expect to continue a track record of success with this line, generated across a much broader global book of business. The timing certainly feels right now to bring our global reinsurance platform and expanded underwriting capability in this area to meet the demands created by prominence of agriculture in developing economies and the recent developments in the US crop market.

Excluding the cat losses and the crop loss, the reinsurance segment third-quarter current accident-year loss ratio decreased by 7.2 points, largely due to the reduced exposure and loss experience related to the aggregate property reinsurance contracts for regional companies in the US that I mentioned earlier. Net favorable prior-year reserve development in reinsurance was $29 million or 6.3 points this quarter compared to $46 million or 9.7 points in the third quarter of 2011.

The reinsurance acquisition-cost ratio was up 1 point in the quarter, largely attributable to business mix changes, resulting in earned premium reflecting a greater portion of quota-share business. The reduction in our catastrophe business this year was the primary driver of this change. Also contributing was our decision to reduce participation in motor excess-of-loss business in the UK, shifting the balance of the motor reinsurance portfolio to proportional business.

For the nine-month period, our reinsurance segment reported a 9% decrease in both gross and net written premium. Earned premiums were down 2%, reflecting the reposition of our catastrophe portfolio. The 83.7 combined ratio includes 5.5 points related to first- and second-quarter US weather-related events, crop losses, and Hurricane Isaac, and 7.2 points of net favorable reserve development. Excluding the impact of catastrophe- and weather-related losses I mentioned, the reinsurance segment's accident-year loss ratio improved by 2.3 points, largely attributable to reduction of losses from regional aggregate property reinsurance contracts.

Net investment income was $104 million for the quarter, up from the second quarter's $74 million and the prior-year quarter's $49 million. Net investment income improvement in the quarter was driven by the strong return from other investments of $34 million, compared to net losses of $2 million and $30 million in the second quarter of this year and the third quarter of 2011, respectively. Hedge fund performance was the major driver of the increase in net investment income from other investments during the quarter. Year-to-date net investment income contribution from our other investment portfolio was $72 million for a total return of 9.3%.

Income from our fixed maturities, cash, and short-term investments was $73 million this quarter, down $5 million from the second quarter of this year and $10 million from the third quarter of 2011, due to lower reinvestment yields. In aggregate, the total return on our cash and investment portfolio for the quarter was 2.1%, inclusive of foreign exchange impact. During the quarter, net unrealized gains on our fixed maturities and equity holdings increased by $149 million to $395 million. Additionally, net gains realized in the quarter totaled $51 million due principally to changes executed in the fixed-maturity portfolio.

Yield spreads continued to contract for investment grade and particularly high-yield fixed-maturity issues during the quarter, while the US Treasury intermediate maturity section of the yield curve was relatively unchanged. In general, the longer the maturity, the more significant the price improvement for these spread sectors. While the decline in yield and spreads positively impacted the unrealized gain position in our fixed-maturity portfolio during the quarter, the result will likely be lower net investment income going forward, as the fixed-maturity book yield of 2.7% converges with the market yield of 1.4%, as most global central banks maintain policies aimed at keeping rates low for a protracted period of time.

The net of all these items and the G&A grants I discussed earlier, was a strong quarterly operating income of $201 million or $1.63 per diluted share, and net income available to common shareholders of $223 million or $1.82 per diluted share. This equates to an annualized operating ROE of 15.2% and a net income ROE of 16.9%.

Moving to the balance sheet, total assets increased 1% in the quarter, driven by growth in our investment portfolio, arising from investment of operating cash flows and valuation improvements. Cash and invested assets totaled $14.2 billion at quarter end versus $13.9 billion at the end of the second quarter. Our fixed-maturity portfolio, whose average credit quality remains at AA-minus, continues to be our largest asset class, comprising 83% of cash and invested assets. The strategy for our fixed-maturity portfolio is to continue emphasizing spread sectors, the largest being corporate's and US agency mortgage-backed securities.

Within non-US governments, we continue to increase our allocation to emerging market, local currency debt, while reducing European sovereign debt. We reduced Euro-zone sovereign and corporate debt exposure in the quarter after a strong rally in these sectors. Our Euro-zone sovereign exposures are now primarily limited to Germany, the Netherlands, and Australia. Further information on our current Euro-zone holdings can be found in our Investor supplement.

In summary, the investment portfolio performed in line with expectations during the quarter and year-to-date, but remains challenged to maintain current levels of net investment income in this historic low-yield environment. Our total capital of September 30, 2012 was $6.9 billion, up 6% from $6.4 billion at year-end 2011. Common shareholders' equity stood at $5.4 billion at quarter end, up from year-end 2011, due to net income and valuation improvement on our available-for-sale investment portfolio exceeding our share repurchase activity and dividends.

We repurchased 5.2 million shares at a discount-to-book value in the third quarter for an aggregate cost of $179 million. Our diluted book value reached the third-consecutive record high this quarter, reaching $43.57 per diluted share. With our strong capital base, our high-quality and liquid investment portfolio, sound loss reserves, and a global diversified franchise in both insurance and reinsurance, it is our belief that we will continue to benefit from available market opportunities and accrete value to our shareholders.

With that, I will turn the call back over to Albert.

Thank you, Joe. Let's begin with a commentary on the rate environment. Overall, we are encouraged by the continued pricing environment in the primary insurance market where we are seeing the most promising increases, particularly in the US. The improvements now extend across most classes and geographies in our insurance portfolio, with a number of lines now seeing great improvement, compounding upon prior-year increases.

[Rate] change across Axis insurance for the third quarter was 5%, with equally encouraging trends in retention ratios. This continues the progress we have seen all year, with an average increase of 3% in the first quarter and 4% in the second. Of course, there remains a wide variation across different lines and markets. In our US division, the overall rate change for the third quarter is 11%, in line with the second quarter. Property classes, which dominate the division, are experiencing their sixth quarter of rate improvement. And our casualty lines are now matching, or in some cases even exceeding, increases achieved on property lines.

The strongest improvement is coming from E&S Umbrella and Excess Casualty. The standard market companies that allowed surplus lines' risk into their portfolios are now re-underwriting that business and generally backing away from accounts they sought to write in softer market conditions. This is all occurring as an increasing number of wholesale carriers are cleansing their own portfolios. These factors are all supporting substantial premium and rate increases for larger, tougher risks moving back into the E&S market.

In our international division, which includes a number of different specialty lines, the overall rate improvement for the third quarter is 4%, but there are wide variations in this highly diversified portfolio. Most property lines are showing high single-digits to low double-digit rate increases. Excess Casualty lines are showing mid-single-digit increases, while terrorism and aviation lines continue to erode.

In professional lines, which have been the slowest to make the turn, we are now seeing more consistent discipline with the overall average price change attaining positive territory in the quarter, with a 1% increase. Almost all classes, with the exception of UK professional indemnity and professional lines in Bermuda, are now indicating flat or increasing rates. The primary D&O market, in the United States in particular, has shown a strong trend of rate firming, while mid- and high-excess layers remain under modest pressure.

We have no reason to believe that pricing momentum in the insurance markets will subside, given the various pressure points for earnings in the industry. And, indeed, we expect continued broad-based improvement. That improvement in insurance markets also accrues to the benefit of our reinsurance operations. For pro-rata business, we are sharing in the primary rate increases achieved by our cedants. Excess-of-loss reinsurance business has generally been stable. There is some upside pressure on loss-affected property treaties, and there is also some give-backs in lines that have shown strong profitability in recent years, and attracted new capacity such as international credit and bond business.

From my perspective, this is an expected development. Over the past few years, in the lines of business in which we operate, we have seen pricing and profitability hold up better in reinsurance than on primary insurance. However, meaningful capacity, historically low loss trends, and increased retentions by primary insurers should bring about a more even balance of relative power between insurers and reinsurers. That should result in some stability in the excess-of-loss markets at reasonable levels of profitability for reinsurers.

For us, generally stable excess-of-loss reinsurance pricing, against a backdrop of a steadily improving insurance market, makes for a good environment. As you know, about 50% our business is primary specialty insurance. As I noted earlier, we expect a continuation of recent favorable market trends. Where we buy reinsurance to protect our own insurance business, we expect our overall costs to be flat or perhaps down a bit. On our global reinsurance business, we are benefiting from the gradual strengthening in the primary insurance market where it's available, while in the excess-of-loss business we expect to be able to maintain reasonably good levels of profitability.

My optimism doesn't rest solely on improving market conditions. We are also making progress on a number of initiatives which should contribute profitable premium in future periods. Our accident and health business, which we have discussed in prior calls, continues to make strong progress, with gross written premiums up 29% on a year-to-date basis.

As you know, we have targeted the diversified portfolio of both insurance and reinsurance A&H business. While our early production was almost exclusively on the reinsurance side, we are pleased that we are now seeing growing contributions from the primary insurance A&H business, which has required a longer start-up period.

We also highlighted the global agricultural reinsurance initiative at Axis, which we expect will become an important specialty area in our reinsurance segment. As Joe noted, we've had profitable history in this line, but it has not been a major area for us. Across Axis Re, we only wrote about $14 million of crop reinsurance business through the first nine months of this year. Our expansion efforts in this line will find us addressing increased demand, almost certain to come from the US and developed markets, as well as growth opportunities in emerging markets. With our recently expanded capabilities harnessed to our global platform, we expect to assemble an attractive global agricultural portfolio.

In addition to these two strategic initiatives, we are also investing in international expansion in Asia and Latin America, and in product development within our recognized areas of expertise to add more value to clients and distributors, and target new market segments. Because we are strategically positioned in both the insurance and reinsurance markets, and have great talent and resources in both areas, we believe we are well-positioned to navigate both markets, optimize our portfolio and, therefore, deliver superior risk-adjusted returns to our shareholders.

Before opening up the call to questions, I would like to address the potential impact of the highly unusual and dangerous Superstorm Sandy. Our thoughts and prayers go out to the victims of the storm and their families. I know many of you on the call are still without power or water, and many homes and offices are not yet accessible. It will be a while before the full extent and cost of the damage is tabulated. But from what we know today, this is likely to generate a meaningful earnings impact, but not one that we believe will have a significant effect on our capital, nor on our ability to serve our clients and partners and distributions, and to grow meaningfully in a market we expect to show continuing improvement. Thank you.

Operator, I would like now to open the line for questions.

(Operator Instructions) Our first questions comes from Matthew Heimermann from JPMorgan.

Hi, good morning, everybody. I guess just a question on -- I guess it's an indirect Sandy question. With some of the changes you made to on the reinsurance portfolio and obviously there's been kind of a reallocation of cat-capacity probably. How should we think about your Northeast Mid-Atlantic exposure today? And specifically, how should we think about where those exposures are -- both in aggregate and then also where those exposures are generated? Regional cat, clients, large national cat clients, per risk, facultative, the direct side of things? And just as things play out, where you think most-likely, from those buckets, you will see losses emerge?

Right. Well, I think when you look at the cat exposures, generally, for Sandy -- and I think it's probably worthwhile talking about the fact that Sandy is a unique and unusual storm. So, making an early predictions with regard to Sandy is probably fraught with risk. But with regard to where our exposures are, in the more cat-exposed, if you would, segment of the loss curves, I would say that a majority would be on the reinsurance side versus the insurance side, and that's because, of course, there is more balance in the insurance book. There is individual per-risk coverage that will apply in the insurance book. We also have, as you know, reinsurance protection in our insurance book.

So, on the low end of losses, it's balanced. As soon as you get to more of a cat-exposed event, the potential losses start to shift more towards the reinsurance area. With regards to our reinsurance book, our book is more towards the national accounts, more towards the commercially-oriented national accounts. It doesn't mean that we do not have regional accounts, but we tend to have a generally -- a national accounts and commercial bent towards our reinsurance book.

Is there much facultative or per-risk we should worry about -- when you said national accounts with commercial bent, was that a catch-all for all forms?

I think that's right. Obviously, there is some per-risk on the facultative side. We don't do a lot of facultative; what little we do on the global wholesale markets out of London tends to be actually more within our specialties that we write out of London. Our reinsurance operation doesn't have a large facultative presence, but it does have per-risk covers. You may have some exposure coming out of individual per-risk covers.

Okay. That's helpful. When we think about where the exposures have come in, in the Mid-Atlantic Northeast, is that across the board or are there some more-targeted exposures that you have pulled in? That potentially -- whether or not they help in aggregate, I'm sure the reduction helps in this type of scenario, but just be curious where those declines occurred?

Matthew, I presume you are asking about the fact that over the last 18 months or so we have made some repositioning of our cat book. Is that what you are referring to?

Yes, and I'm specifically looking at Mid-Atlantic Northeast. That is one of the big impacts, less so with the other regions, more just staying with the topic de jour.

Again, on a background basis, as you know -- and we've indicated this to you now for a number of quarters. We felt that having reviewed our cat portfolio, given the events of 2010,2011, we took a fresh look, and in some cases, we found that our cat book didn't have the kind of balance that we wanted it to have. As you pointed out, we felt that our exposure in the Mid-Atlantic and Northeast was higher than we wanted it to be. As you've pointed out, we've made some meaningful reductions to our exposures, which have translated into some downward shifts in our PML curves in the Mid-Atlantic and the Northeast. Obviously, that speaks to the fact that there is less exposure today in that book than there would have been 18 months ago.

Okay.

That doesn't mean there is no exposure, but there was less exposure.

Then, just on the loss ratio, excluding development and disclosed catastrophes, the beginning of the year you talked about when there was a perceived margin, adverse margin variance, that there were some change to the reserve process for how you were going to establish IBNR, I think especially around the property side of the business, both insurance and reinsurance. Are we starting to see the benefit of that now in 3Q, in the sense that with low attritional losses and that you are actually -- some of that IBNR you might have held in prior quarters is not necessarily being held to the same extent now? I'm curious because obviously there is some mix going on, too. So I'm just trying to discern what is what.

Thank you for raising the question, because I wasn't sure what you meant when I read your report this morning. I think, just for a standard line here, we have not changed our approach to reserving, I think is the important statement. What happened in the first quarter was really a judgment call in the first quarter. And the judgment call we made in the first quarter was that although we saw light experience, we were not yet prepared to change our -- what I would call attritional loss ratios. That is really the only issue. Obviously, we have seen a partial release of that, if you would, over the last two quarters. But that is not a major contributor to the overall improvement in the loss ratios that we have put up in the third quarter.

Okay. That's helpful. Thank you for that.

Our next question comes from Greg Locraft from Morgan Stanley.

Hi. Congratulations on the quarter. Initially, I will just apologize, because I am going to be in the go-forward outlook part of questioning. How do you think about share buy-backs, capital deployment, et cetera in light of the uncertainty surrounding Sandy? [Equi-cat] looks to have just doubled their estimated loss, by the way, for the event in terms of their range. How do you think about that as we are getting our arms around this loss?

The short answer is the uncertainly regarding Sandy is going to be resolved in the next few weeks. I don't think that we need to make more of that than it needs to be. Our attitude towards share repurchases is the same, which is we'll take a look at our capital position, and again, although we are not prepared to discuss what kind of loss Sandy will be, we remain confident that it will not prevent us from having a strong capital position and participating in the markets going forward. The real issue for us is comparing the opportunities going forward. To the extent that we see strong opportunities, my preference is to use that capital to write new business. To the extent that we have less of an opportunity to write it using -- to use our capital to write good business, again, as long as you guys want to sell to us for less than book value, we are a happy buyer.

So I think what I would suggest is let's take a look at what the fourth quarter looks like, let's take a look at what the renewals look like, and I will give you more clear guidance as we get into the first quarter. What I told you generally, at the beginning of this year, was that we felt that we would give back to our shareholders somewhere between 50% and 100% of our earnings this year between repurchases and dividends. Certainly, we are online to do that, to be closer to the 100%. I think at this point in time, because we are expecting an improved market, I would like to believe that opportunities would be such that it will be a smaller range of share repurchases. We are leaning towards continued share repurchases, but the exact amount will be dependent on both our capital and our opportunities.

Okay, great. Thanks, Albert. Then, secondly, how does a Sandy, just in the trenches, how does that impact the Gen-1 renewal discussions? There was a glide path that we picked up at Monte Carlo and Baden-Baden, and then you drop this in the system. At what point does it trigger a different type of discussion as we get towards that Gen-1 renewal date? And obviously, that is a reinsurance question.

Right, and obviously, this is a moving target. But what I will say is this -- the feeling that we had in Monte Carlo and Baden-Baden was, excuse the term, mushy. There wasn't really a lot of momentum one way or the other. Generally, when you have that kind of an environment, it's very likely that the buyers and the brokers would try and push for some further reduction. I think if anything, Sandy reminds people that there is valuable protection to be purchased, and if nothing else, it will reinforce stability, potentially clearly in the Northeast and in some loss-affected accounts and pricing increases. But at the very least, I would hope that it would end any talk of any erosion in excess-of-loss pricing.

Okay. Great. Thanks. Makes a lot of sense.

Our next question comes from Vinay Misquith from Evercore Partners.

Hi, good morning. The first question is on the PMLs, the 1-in-50 PML for Northeast only is about $55 million. Just curious whether that includes primary insurance, as well as reinsurance?

All of our PMLs are group PMLs, so they'll include all of our exposures, whether they come from the primary or the reinsurance side.

That is helpful. And, just looking at Hurricane Sandy, would you think it's closer to 1-in-50 a storm, 1-in-20 a storm. How would you look at that?

I have no idea. I think it's dangerous to try and make guesses right now as to the full extent. Look, the one thing that I think needs to be made very clear is that this is an incredibly unique and unprecedented event. I think that it's dangerous to take a look at Irene or any prior events, and try and multiply the insurance, the loss from Irene and to equate to whatever you believe is Sandy. There is a lot of factors here that probably we should point out. Among the unusual features is we had record storm surge in a highly concentrated, high-value region. This storm was unusual, both in its spread and its slow speed, which increases the area of and the intensity of damage. Obviously, from everything that you have seen, most of the damage has come from storm surge, not that much wind. Obviously, we've seen some wind but not as much as you would in a typical coastal event. If that's the case, I think the distribution of losses are going to be different.

It's very likely that for a number of the personal lines, most of that storm's surge damage is going to be covered by the national flood insurance protection. And therefore, we will likely see a smaller percentage of personal lines contributing to this loss than commercial lines. We did some work here on our own, and we looked at all the major losses going back 11 years or so between -- and the spread of loss between commercial and personal auto. And on average, personal lines are about 60% of the reported insurance cat loss. Commercial is about 40%. However, where you have losses that tend to be predominantly storm surge, whether it's a significant component of federal program protection --. And just to give you an example, Floyd and Allison back in '99 and 2001, in those situations, commercial losses were 70% of the overall cat loss.

So, you're now moving away from what is usually more predictable personal lines to the commercial area. The commercial area, because it tends to be very lumpy, there are some very large treaties or risks covered, there is no standardization. You have got manuscript coverages. You have got different definitions. It's almost impossible to reach a pre-event or a 25,000 foot view of what commercial losses will be. I believe that the variability around estimates here is going to be very high. As I said in my response to Greg, I think we will have that uncertainty resolved over the next few weeks and we will deal with that. But at this point in time, I think it's dangerous, at best, to try and guess where -- and to pin down where the storm will be.

Sure, fair enough. Just one follow-up on that, in giving your PMLs for the 1-in-50, 1-in-100 year event for the Northeast, how large of an industry event will you focusing on for the 50- and 100- year event?

Well, again, I'm not even sure that matters, because when you look at the way the PML curves are drawn, you are dealing with hundreds of thousands of individual scenarios. Again, it's going to -- I'm not even sure that any of those 100,000 scenarios perfectly match what Sandy is. I will say one thing -- the way we visit this area, we think of this as a Mid-Atlantic storm. New York is part of a Mid-Atlantic region. Last summer, when we discussed with you our various approaches to PML modeling, we were clear on providing -- and in fact, it's on our website, our definition of US wind zones. And the Mid-Atlantic, for us, covers Delaware, Maryland, New Jersey, New York, Pennsylvania, Virginia, DC, West Virginia. So, it's somewhere in my mind along our Mid-Atlantic curve, but I wouldn't presume to guess where on that curve it would be.

Okay. That's helpful. Thank you very much.

Our next question comes from Ryan Byrnes from Langen McAlenney.

Good morning, guys. Just to mix it up a little bit, obviously you guys have decided to cut property risk over the past couple quarters. I just want to see how far along the rendering process you guys are for the property and cat books? How much longer should we potentially be looking at to decreases these books?

I think there is two ways to look at this. When you are talking about property, you are very likely speaking about the insurance book. I would go back to Joe's prepared remarks. The issue here is not moving away from property; it's repositioning the way we access the property risks. Let me take this back a little bit. Historically, when we did not have the footprint that we have today, we used MGA relationships to access all kinds of risks, including a significant amount of cat-exposed property risk. Today, when we look at our strategy, our position, we clearly have a much better footprint, significantly better distribution, and access to risks. MGA's continued to be a very important part of our strategy, because they can help us access risks that we do not easily access on our own, either because of the very special nature of the relationships that the MGA has or, in some cases, very unique skill sets that the MGA has. We will continue to use the MGA distribution channel for those risks that -- where we do not have the best expertise or the best relationships.

But for those MGA relationships that were predominantly cat-exposed property, we feel confident that we can now access that risk on our own, frankly, with much better granularity, much better control. So, the first thing that you need to do is to release the MGAs and then replace that with your own business. That's what we are doing now. We are not looking to reduce property, but as Joe put in his prepared remarks, that replacement doesn't happen at the same time. So over time, I would see the property line grow. This is an area where we have a very strong expertise. Again, the events of the last few years, including Sandy, continue to demonstrate the need to have specialized standard and nonstandard property coverages, and we will participate in that space.

Okay, great. Then, quickly, this is my last one. You talked about the European credit and bond market as we approach the one-one renewals. I just want to see if your appetite has changed at all for that business.

Our position on that business hasn't changed, which is that we look at the conditional probabilities and we look at pricing. Certainly, as you know, we have been a very large player in that area. It has been a profitable area for us, and we appreciate being one of the leaders in the global reinsurance markets for credit and bond business. But, the environment that we are in right now is one of higher conditional risks, and we believe that an environment of higher conditional risk, you --A, manage your exposure, and B, require better pricing for that risk. To the extent that we don't know that 2013 will be materially different in outlook, I think a cautious outlook remains appropriate.

Okay, great, thank you.

Our next question comes from Brian Meredith from UBS.

Yes, good morning. A couple of quick questions here. First one, just a quick numbers one. Were there any crop losses in last year's third quarter just for comparability purposes? So how does the $40 million relate in a year-over-year basis?

Brian, it's Joe. I don't have that number to hand, but from recollection I believe we were profitable in crop in 2011. We've got it here. Give us a second and we will pull it out.

Okay. The $40 million number, just to clarify that, that was your total incurred loss from crop or that's your underwriting loss?

That was the total incurred loss on the --.

Okay. And so, while you are looking up that one, Albert, just one other quick question here -- what is currently the breakdown of reinsurance versus primary in your A&H book? And then, as we look out here, the $300 million goal there, what kind of percentage breakdown would you envision that being, reinsurance versus direct or primary?

The goal is to have a book that is a little bit over half, say 50% plus, will be reinsurance and somewhere in the mid- to high- 40%s will be insurance. We are looking for, actually, a reasonably balanced book of business. Where we are right now, it is a substantially reinsurance-loaded. As I look at our numbers right now, I wouldn't be surprised if it's 80-20 but I will calculate these numbers right now.

Okay.

Brian, just to come back to you, in 2011, our crop premium was $15 million, not very different than what it was this year. And our total loss ratio, including IBNR, was 56.7%.

Okay. So relatively small. Great, thank you. Once again --

It stays at 20%. Of the $150 million of written premium that we've had in 2012 A&H, a little over $30 million is currently insurance. The rest is reinsurance, so 20% is the current number.

Great, thank you.

(Operator Instructions)

Our next question comes from Jay Cohen from Bank of America.

Just to follow up on the A&H side, Albert, is that business profitable or do you expect that business to be profitable this year?

Again, I think you need to take a look at it from two perspectives, I would say the technical ratio versus GNA ratio. From a GNA ratio -- from a technical perspective, that business is profitable today. But as you know, we have put up a large infrastructure here that, frankly, the current GNA load is not yet supported by the volume that we have. So, we will continue to grow that, and we believe, as we have said before, that the marginal return on the business will be able to absorb all of the GNA by the end of 2013, such that in 2014, we hope that the combined ratio for A&H will in fact be below 100. But right now, we are satisfied with the technical ratio. It's the GNA load which will, over time, be spread over a larger premium base.

Great. Thank you very much.

And at this time, it's showing no additional questions. I would like to turn the conference call back over for any closing remarks.

Well, thank you for your attention. Obviously, a very strong quarter for us. I think it positions us well for the future. The uncertainty of Sandy will obviously be resolved over the next few weeks, but we are actually looking forward to a very strong 2013. So, I look forward to speaking with you soon with more good news. Thank you all.

Thank you.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.