AXIS Capital Holdings Ltd (AXS) 2014 Q1 法說會逐字稿

Good morning and welcome to the first-quarter 2014 AXIS Capital earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Rick Gieryn. Please go ahead, Sir.

Thank you, Laura, and good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the first quarter ended March 31, 2014.

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 an hour for today's call, which is also available as an audio webcast in the investor information section of our website. A replay of the telephone conference will be available by dialing 877-344-7529 in the United States, and the international number is 412-317-0088. The conference code for both replay dial-in numbers is 10042444.

With me on today's call are Albert Benchimol, our President and CEO, and Joe Henry, our CFO. Before I turn the call over to Albert, I will remind everyone that the 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 relating 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 be used -- which could cause actual results to differ materially from our own 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 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.

Thanks, Rick, and good morning, ladies and gentlemen. Thank you for joining us today. Last night, AXIS reported first-quarter operating income of $137 million, or $1.24 per diluted share, an annualized ROE of 10.6%.

We entered the quarter with diluted book value per share of $47.13, an increase of 3% from year end 2013. And we returned over $200 million in capital to our shareholders through share repurchases and common share dividends, repurchasing over 3% of our shares outstanding at the end of last year.

Results are down from last year's exceptional performance. While both quarters had very low cat activity, this year's quarter was impacted by higher property losses in the insurance segment, including attritional and mid-size losses in our US property book. In comparison, last year's first quarter had very low property loss experience.

In addition, as we indicated last quarter, we've maintained appropriately prudent loss picks for our US D&O insurance business as we restructure that portfolio. We're pleased to report that we are making good progress on this front, and we expect to see the benefits of our actions gradually reflected in our future results.

Overall, we reported a solid combined ratio of 91.9%. We also continue to make significant progress in optimizing our risk-adjusted returns through portfolio balance and diversification, and building new sources of profitable growth. Our accident and health unit is continuing to report improved profitability, getting closer to its goal of breakeven, bringing on significant new business and achieving a better portfolio balance between insurance and reinsurance.

And while it's still early days, other recent initiatives, such as our third-party capital management units and weather and commodities market unit, are showing positive contributions to our profitable growth trajectory. As we've mentioned before, we also recently reentered the US primary casualty market and are achieving good momentum in this area.

This was our first quarter of underwriting for our new syndicate at Lloyds. This initiative will significantly expand our access to international specialty lines, and we are now seeing business we had not seen previously. We also recently brought on a new healthcare professional liability team.

While the market is generally getting more competitive, there still remain opportunities to write attractive business in our established lines of business. I will discuss market conditions in more detail after Joe covers our quarterly results. Joe?

Thank you, Albert, and good morning, everyone. During the first quarter, we generated solid results with an annualized operating ROE of 10.6%. In addition, quarterly diluted book value per common share, a key metric in measuring the value we generate for our shareholders, increased by $1.33 per share, or almost 3%, in the quarter to a record high of $47.13.

Our quarterly results benefited from a quiet quarter with respect to natural catastrophe and weather-related losses, as was the case in the comparative quarter of last year. In addition, the continued growth in our book of business and net favorable prior-year reserve development contributed positively to our results.

These positive factors were partially offset by higher insurance property loss ratios reflecting, among other things, an increase in mid-sized and attritional loss activity. In addition, our results continue to be impacted by higher underlying loss ratios for the professional US insurance D&O business, which we discussed on last quarter's call, and which continues to earn in 2014.

Moving into the details of the income statement, our first-quarter gross written premiums were up 4% to $1.8 billion, with growth emanating primarily from our reinsurance segment. In the reinsurance segment, our top line was up $70 million, or 6%. Our quarter one 2014 gross premiums written were significantly impacted by the level of contracts written on a multi-year basis, specifically in the property, catastrophe, and motor lines.

After adjusting for the portions of the written premium that relate to future underwriting years, gross written premiums were comparable to the premiums written in the same period in 2013. After excluding future-year premiums, increases were noted in motor, reflecting growth in our European business written on a proportional basis, and agricultural lines, which reflected timing differences of certain renewals in our continuing initiatives to grow this line of business.

These increases were offset by decreases in our professional, property, and catastrophe lines, primarily due to higher cedent retentions, treaty restructurings, and non-renewals due to pricing. In our insurance segment, our top line was up $5 million, or 1%, compared to the same quarter in 2013, and primarily reflects growth in the liability and credit and political risk lines.

Our liability lines continue to contribute positively to our top-line growth, primarily due to new business opportunities in the US wholesale excess casualty markets, which also benefited from increasing rates, and the continued growth of the US primary casualty market, which the Company reentered during 2013.

Credit and political risk growth reflects new business written during the quarter. These were partially offset by decreases in property lines, which were impacted by timing differences for renewals of certain contracts, and increasingly competitive marketing conditions and modest decreases in accident and health, driven by the loss of a large cedent, which was largely offset by new business and increased shares of existing programs.

Our first-quarter consolidated net premiums written were up 6%, exceeding the growth rate per gross premiums written. This is similar to what we reported over the previous three quarters and reflects the changes we made in the reinsurance purchasing program in our insurance segment.

These changes in our reinsurance buying program included reductions in the quota share session rates for significant parts of our professional lines and liability books, a reduction in the cost of our property per risk and cat protections, and higher retentions for both property and marine. Our net premiums earned were up 8% to $946 million for the quarter with growth in both the insurance and reinsurance segments.

Insurance increased by 12%, primarily driven by professional, accident and health, and liability business written in recent periods, as well as the positive impact of the reductions in the ceded reinsurance programs discussed earlier. Reinsurance growth of 5% primarily reflects business written in prior periods in the professional lines, growth in the motor proportional book, and the continued expansion of the agriculture business. This growth was partially offset by decreases in catastrophe and credit and surety lines.

Our first-quarter 2014 consolidated current accident year loss ratio increased by 5.7 points from 56.4% to 62.1%, compared to the same period of last year, and was driven by increases in both the insurance and reinsurance segments. Our insurance segment current accident year loss ratio increased by 9.3 points to 64.8%.

This increase was driven by the following three key drivers. First, an increase in the current accident year loss ratio in the property lines, which were impacted, among other factors, by a higher level of mid-sized and attritional losses during the quarter ended March 31, 2014.

Secondly, higher loss ratios in our professional lines relating to certain parts of our D&O business written in the United States established during the fourth quarter of 2013 following recent loss experience. This increase primarily relates to business written during 2013 which continues to be earned during 2014. And thirdly, a change in the mix of business written by the segment.

Our reinsurance segment current accident year loss ratio increased by 2.5 points to 59.7% during the first quarter of 2014, primarily due to a change in the mix of business written by the segment relative to the comparative quarter of last year. This was partially offset by a decrease in the level of attritional losses incurred across most lines of business in this segment.

Turning to loss reserves established in prior years, we continue to benefit from net favorable loss development which aggregated to a net $43 million this quarter. Short-tail classes in both segments contributed $29 million of this balance, primarily reflecting better than expected loss emergence.

During 2013, we began to give way to actuarial methods that reflect our actual experience for liability reinsurance business, and this resulted in a release of a further $6 million of favorable development in the first quarter of the current year. Other notable movements include net favorable development in the reinsurance professional lines of $6 million, and in the insurance credit and political risk lines of $4 million.

During the first quarter of 2014, our acquisition cost ratio increased by 1.6 points quarter over quarter from 16.6% to 18.2%. And the increase was primarily driven by our reinsurance segment. The increase in the acquisition cost ratio for the reinsurance segment was primarily due to variances in accrual or loss sensitive features in underlying contracts and higher acquisition costs paid on certain lines of business.

Accruals related to loss sensitive features reduced the segment's acquisition cost ratio in the first quarter of 2013. However, these features had a lesser impact on the first quarter of 2014. The insurance segment noted a modest increase in the acquisition cost ratio, driven by a change in the mix of business and the reduction in commissions earned due to lower ceded commissions -- excuse me, premiums, lower ceded premiums.

The increase in the general and administrative expenses were primarily due to personnel related expenses driven by a higher headcount, as well as professional and business costs related to various growth initiatives across the Company. The increase in the general and administrative expenses was offset by the growth in net premiums earned, resulting in a comparable G&A expense ratio relative to the prior-year quarter. Taken together, these items produced underwriting income of $109 million and a combined ratio of 91.9% for the quarter.

Net investment income was $83 million for the quarter, down from $114 million in the fourth quarter of 2013, and down from $109 million in the first quarter of last year. The most significant driver of the decrease was the contribution to net investment income by our other investments portfolio.

Other investments contributed $17 million during the quarter versus $41 million in the fourth quarter of 2013, and $43 million in the first quarter of the prior year. The decrease in net investment income from other investments was primarily due to a decrease in the income from hedge funds, which benefited from the strong performance of the equity markets during the fourth quarter and the first quarter of last year.

Income from our fixed maturity portfolios, including cash and short-term investments, was $74 million for the quarter, compared to last quarter's $78 million and $71 million in the prior-year quarter. In aggregate, the total return of our cash and investments portfolio for the quarter was 1.1%.

The positive total returns for the current quarter were due mainly to price improvements on our fixed maturities portfolio, as a result of falling US and Euro interest rates and continued spread tightening. We continue to hold a high quality, well-diversified portfolio with cash and investment assets totaling $15.4 billion at March 31, up approximately $0.6 billion from December 31 and $0.9 billion from a year ago. The increase is primarily due to proceeds from our new senior note issuance, which I will discuss later.

The duration of our fixed maturity portfolio was 3.0 years at March 31, down slightly from 3.2 years at December 31 and 3.1 years at the end of March 2013. Our fixed maturities weighted average credit rating remains unchanged at AA minus.

Our total capital at March 31, 2014, was $7.3 billion, including $1.5 billion of senior notes and $600 million of preferred equity, an increase of $500 million from $6.8 billion at December 31, 2013. The increase is primarily driven by our first-quarter issuance of $250 million of 2.65% senior unsecured notes which are due for repayment in 2019, and the issuance of $250 million of 5.15% senior unsecured notes which are due in 2045.

The net proceeds from these offerings are expected to be used towards the repayment of $500 million of our 5.75% senior unsecured notes, which mature on December 1, 2014. As such, the increase in our debt-to-capital ratios is expected to be temporary.

The change in our capital position also reflects the net income generated during the quarter and the increase in unrealized gains on investments, due to the downward shift in sovereign yield curves and the tightening of credit spreads during the quarter. These were almost totally offset by the continuation of the share repurchases under our Board authorized share repurchase program, as well as the payment of common dividends.

During the quarter, we repurchased 4 million of our common shares for a total cost of $179 million. As of last night, we had purchased an additional 0.8 million of our common shares for the month of April for a total year-to-date cost of $216 million. We currently have $550 million still available under the repurchase authorization limits set by our Board, and expect to continue to be active in this area throughout the second quarter.

Our strategic expansion opportunities continue to progress and we remain optimistic about our prospects. During the quarter, we commenced the operations of our new syndicate at Lloyds, AXIS Syndicate 1686, which we believe will provide us with exciting new opportunities through the access to Lloyds' worldwide licenses and extensive distribution network.

Our new third-party capital initiative, AXIS Ventures, commenced business on January 1, 2014, with the writing of a fully collateralized catastrophe cover. The first-quarter results of their operations have been included in our consolidated statement of operations. We expect this vehicle to enter into additional reinsurance transactions throughout the rest of this year.

We believe that our diversified global franchise and strong balance sheet will continue to allow us to take advantage of market opportunities as they emerge. With that, I'll turn the call back over to Albert.

Thank you, Joe. With respect to market conditions, after three years of attractive pricing improvements in the industry, we've seen a leveling off of pricing overall, with modest decreases across some of the property and specialty lines.

However, despite a slowdown in pricing, there remain good fundamentals and opportunities for profitable growth in many insurance lines of business. Within our insurance segment, for the overall AXIS insurance rates change for the first quarter of 2014 was plus 1%, flat with last quarter's plus 1% level but down from the 5% achieved in the first quarter of last year.

Rate changes across US lines were generally stronger than changes in international lines, and rates overall are still at or ahead of loss trends for US business. In our US division, overall rates continued in a positive direction for the 12th consecutive quarter, and we also maintained strong renewal retentions across all lines. The overall rate change was plus 4%, down slightly from plus 5% last quarter.

In property, E&S and the middle markets were essentially flat, while the large accounts in risk-managed property experienced modest declines in the low single-digit range. The weakening of property pricing reflects abundant capacity and a lack of recent cat events.

Other US business experienced positive rate change. Casualty continued strong with US excess casualty up in the range of plus 10%. This was one of our stronger growth businesses in the first quarter.

In our international division, the overall rate change was down 3% for the quarter, which is consistent with the rate decline achieved last quarter. But this represents only the second quarter of rate declines after three years of sustained rate increases.

As usual, there were wide variations in rates depending on the line of business or geography. Of the 14 separate lines we monitor, 8 were down, 1 was flat, and 5 were up.

Lines with rate reductions included global property, with an average 10% rate decline, and energy with close to 5% decline. These conditions are consistent with the general pricing cycle, as these lines have experienced strong pricing activity in the last few years and few major market losses, in addition to new incremental capacity.

Aviation and terrorism are continuing their long decline in the face of low loss activity. While we've seen a couple of large aviation losses in the last few months, including the Asiana incident in San Francisco and the recent disappearance of Malaysian flight 370, there remains substantial overcapacity. And absent further significant loss activity, we do not expect any noticeable reversal in these trends.

Areas showing strong positive rate movements include marine liability in the Canadian property. In our professional lines division, the overall rate change was plus 1% for the quarter, equal to last quarter's rate activity. US and Bermuda business achieved a plus 2% rate change, while international professional lines rates were flattish in the quarter.

Across almost all products, rate increases on primary layers continue to be meaningfully higher than rates on excess layers. For example, in US financial institution products, primary D&O achieved double-digit increases while overall primary business averaged plus 3%, but excess business was down 1%.

Within commercial D&O, we achieved rate increases in excess of 10% on the US primary book. Excess layers were relatively flat and side A coverages remain soft, such that the overall US D&O book averaged rate increases of about 4%. Our E&O lines produced about a 2% positive rate change on aggregate, the larger commercial E&O accounts are seeing increases in the low single-digits, but are relatively flat on excess layers.

To conclude, the insurance business still has plenty of opportunities to write attractive business. But access to the business and risk selection are increasingly an important differentiator. And AXIS is very well positioned in that regard.

Moving on to reinsurance. As you know, our first quarter is dominated by the significant January 1 renewal date. Excluding agriculture, approximately 56% of our expiring 2013 reinsurance premium renewed during the quarter.

As we discussed in our February conference call, our January 1 renewals delivered approximately a 6% increase in premiums on the expiring portfolio. Overall, abundant capacity, strong balance sheets, and consolidation of programs led to lower reinsurance pricing across most regions and lines of business. This started on January 1 and continued through the quarter into the April 1 renewals.

The three key themes so far this year are greater retentions from our stronger cedents, consolidation and restructuring of programs, and substantial increase in supply coming from both established players and alternative capital. While I am optimistic that over time the industry will both develop new products and markets as well as right size its capital, it appears that in the near term at least there is pressure, as many reinsurers try to protect their top line and providers of alternative capital attempt to fully deploy their new capacity.

We continue to maintain discipline in our underwriting and have pulled back from certain opportunities when they no longer meet our return requirements. That said, we are starting from a strong base of profitability and we continue to write and renew business with acceptable levels of profitability.

Agriculture renewals occur across both the first and second quarter. During the first quarter, approximately $80 million of crop premiums expired and were up for renewal. And we wrote about $100 million on renewals and new business. More is being written in the second quarter and we will report final numbers on our next conference call.

Meanwhile, this business is proceeding in line with expectations. Primary premiums for the industry are down year over year, as lower commodity prices are reducing values at risk. On excess of loss programs, we're seeing reductions of up to 10% on loss-free accounts.

Most premiums for us in the first quarter were US MPCI business, and we plan and expect to balance that with more non-US business over the rest of the year. The US reinsurance market experienced rate reductions and increased ceding commissions in response to significant competition and abundant market capacity.

Clients are consolidating programs and changing structures in order to lower reinsurance costs. Nevertheless, as I noted, US reinsurance business has generally been reasonably attractive, and while margins are compressing, many lines and programs are still generating adequate margins and meeting hurdle rates.

For US property reinsurance, commercial insurance rates began leveling off at January 1 with increasing downward momentum through April 1. Capacity for prorisk reinsurance is abundant, but some discipline remains for Gulf Coast and Southeast to win in flood exposures.

For US professional lines, clients are generally retaining more business on their balance sheets. We're seeing increased competition from new entrants offering smaller lines as following markets. Our position as an established lead market in many of these areas has helped with many of our longer-term client relationships.

Reinsurers are sometimes paying more ceding commissions on professional lines and liability business. However, this is generally offset by primary rate improvements in the low- to mid-single-digits in several of these lines, such that technical profitability is staying reasonably stable.

Our April 1 Asian renewals were mostly dominated by Japanese property reinsurance business. Market conditions and rates generally deteriorated faster than expected. Many clients consolidated their programs and combined previously separate wind and earthquake XoL covers.

We also observed significant new capacity from both existing and new competition. As a result, ceding commissions on prorata programs increased, wind and flood excess of loss rates decline 10% to 15%, and earthquake excess of loss rates declined in the mid-teens. You will recall, of course, that pricing in these lines were much stronger post the tsunami and earthquake.

Despite these difficult market conditions, we believe rates in Asia are generally still adequate and meet our requirements. AXIS Re Asia-Pacific continues to make strides in boosting our strategic profile in the Asian market.

Looking forward to the upcoming June 1 and July 1 renewals, which are dominated by US catastrophe excess of loss renewals, we expect continued softening of rates. We expect to see reductions in the range of 10% or greater and continued strong showing by alternative capital providers. Florida is not a large part of our book and we have excellent relationships, so I expect we will fare better than most.

AXIS is very well positioned to outperform in a transitioning market. As a hybrid insurer and reinsurer with a wide range of products, strong relationships, superior ratings, and a global platform, we see a wide variety of opportunities. We are not dependent on any one line or market and can afford to remain disciplined, and pursue only that business which we consider to be profitable and additive to our portfolio.

While we are seeing some pressure on reinsurance margins, we also get the benefit of better terms on the reinsurance that we purchase. So we have excellent balance.

Before I close my prepared remarks, I would like to update you on recent management changes at AXIS. We continue to attract high-quality talent. David Phillips recently joined us as our new Chief Investment Officer. I have worked with David in the past and am confident that given his proven track record, he will contribute significantly to the success of AXIS going forward.

In addition, as most of you are aware, we recently announced the retirement of Dennis Reding as Chief Operating Officer. Jack Gressier has assumed this position, while Peter Wilson, who was formerly President of US Insurance and has extensive management experience operating global insurance platforms, will succeed Jack as CEO of AXIS Insurance.

These management transitions highlight the deep bench of talent at AXIS, and I have great confidence in the abilities of both Jack and Peter to succeed in their new roles. Of course, I have to mention that Dennis Reding's contributions to AXIS have been invaluable.

Since Dennis joined us in 2002, he has established our US operations and has been an integral part of our growth. We are fortunate that he will continue to maintain an important presence at AXIS as a senior adviser and member of our executive committee.

With that, let's open the call for questions. Operator?

Thank you. At this time, we will begin our question-and-answer session.

(Operator Instructions)

Our first question today will come from Amit Kumar, Macquarie.

Thanks and good morning. Did this issue clarifications on the US D&O book. Would it be possible to quantify that number, what you mentioned in the three key drivers?

And what I was trying to do was also looking at your global triangles and trying to figure out what is the reserve base for the US D&O separately, and what might be the initial loss pick for that piece? Could you maybe let's help us put this issue to bed and give some of those numbers? Thanks.

Let me jump in first, Amit, on the loss ratios for the CMS business. As you recall, in the fourth quarter last year we strengthened our loss reserves for the 2012 and 2013 accident years. We bumped the loss ratios for 2012 to 93%, and we bumped the loss ratio for 2013 to 90%.

Got it.

Despite the fact we have had excellent experience in the first quarter of the year, we've kept the loss ratio for the 2014 year at 89%. So what you have is you have the unearned premiums from 2013 earning through at those higher loss ratios, and the new business we kept at a higher loss ratio despite the fact that the underlying business behaved very, very well in the first quarter.

As a matter of fact, I can jump into just a couple of metrics along those lines. Our attachment, and this is related to the restructuring of the business, our attachment point on the business that we discussed on CMS has actually increased about 11% to $20 million. Average limits have decreased about 7% to $7 million, specifically on the public D&O business. Our average attachment point has increased 80% to $45 million, the average limit has actually stayed flat.

Public D&O represents about 34% of our portfolio today versus 51% of the portfolio at the first quarter of 2013. And as far as rate changes are concerned, Albert mentioned this, but I will just say in terms of primary public D&O and primary ancillary lines, our average increase was 13.4% in Q1.

Okay, got it. On the last call, when looking at the transcript, you mentioned that the US D&O premiums at that time were $50 million. Was that for 2013, or what was that $50 million number which was given on the last call?

Yes, that was basically the CMS book of business, the US primary public D&O business within that.

Amit, within the US professional lines book, the CMS book is actually a much broader book. We write both excess policies, fiduciary policies, ancillary lines, a number of businesses. But the book that really caused us the biggest problem was really the primary portion of that book, which we said that was approximately $50 million annually, and that clearly is the book that's given us the most trouble, which we have been working through.

And as you can hear from Joe's statistics, our people have worked hard to make immediate changes in that portfolio. And I think also interesting is the fact that the reported losses in the quarter versus expectations were also quite good. But the reality is we're not going to react very quickly to that from a reserving perspective.

I think we believe the prudent thing to do is to continue to book that business at the higher loss ratios, make sure that we've got it right, make sure that we've got it contained. And notwithstanding some early indications, make sure that the trends are sufficiently powerful that we can then comfortably reduce the ratios. So that's a policy decision we've made to be prudent in booking this business as we're going through this restructuring of the portfolio.

Got it and that makes perfect sense. The only other question and I will re-queue, were there any additional uptick in the claims activity? I know we talked about that in the last call.

I think what you're saying is that you had been conservative and that's why you see this, but beyond that, has that book been silent in Q1? Or has there been any other changes in terms of loss cost trends?

No, Amit, it was very silent in Q1. As a matter fact, we only had one claim over $5 million and that actually related to prior years. So the straight answer to it is, no, we've had very low loss activity in the first quarter.

Oh, that's great to know. That's all I have and congrats on that, thank you.

Thank you.

Our next question will come from Michael Nannizzi of Goldman Sachs.

Hi, thanks. Just work with Joe, I missed the buyback since April 1. What was that number? Joe?

Yes, I'm here.

I'm sorry, I missed the buyback number since April 1. Do you have that number handy?

Right. It's $37 million.

$37 million. Okay, great. And then did you quantify or could you quantify how much of an impact the non-cat property losses had in insurance in the first quarter?

Yes, just bear with me a second.

Sure.

So what I'm going to do in answering the question, Mike, is just lead you from last year's accident year loss ratio to this year's accident loss ratio, we talked about it in the script, it was 9.3 points. Remember again, that we had a very good quarter in the first quarter of 2013.

But at 55.5, the major changes were two factors. First, as we just covered, the professional initial expected loss ratio increase was about 3 points of that change.

Okay.

The property was about 6 points in total, and that's a combination of experience, the losses that we actually incurred, as well as trying to be a little bit more conservative on the reserving side for those losses. So that's 6 points plus 3 in professional.

There were a couple of other factors; mix impacted it a little bit, with liability and A&H having a larger portion of earned premium, that ticked it up a little bit. And then we also had the Malaysian air loss in our aviation book of business, which ticked it up about another half a point. So that's the components of the increase from Q1 2013 to Q1 2014.

Got it. Thanks, that's really helpful.

I'm trying to figure out, I went back and looked at the last few quarters, and very often mix has been a factor in talking about the change in the underlying on a year-over-year basis. And it's been, it's definitely been volatile and I know when more pronounced initiative on the crop side, with the expense and loss ratio composition different than a lot of the other business created some noise, as well. But I'm just trying to figure out is this a good snapshot, maybe adjusting partially for some of those items, maybe to get a normalized large loss load in insurance?

And then in reinsurance, I didn't really see anything specifically cited. Are these close to where you expect to be running these businesses at least in 2014 until some of the professional liability catch-up wears off?

Let me address that. I think that there is going to be just normal volatility, and let's talk about property. I think on the professional lines, I think as you've got it Michael, we're going to book it high for a while, and as the UPR runs off over the rest of the year, that will have a smaller impact, but I think you got that piece.

I think on the property, we actually will break it up into four different areas. We've got small attritional, mid-sized attritional, weather related cat, so we really look at in terms of different versions. And to be fair, in both last year's first quarter and this year's first quarter, there really wasn't any true weather loss or cat loss. So it really relates to the small attritional and the mid-size attritional.

If you look at the last three years say, the average of small and mid-size attritional is approximately 45, mid-40s, and the range quarter over quarter has been anywhere from the low 30s to the mid-50s. And in fact, the highest quarter was 56, it was the first quarter 2012, the second highest quarter was this quarter with 54.

In comparison, the first quarter of last year was a 37, so it really reflects the volatility that you're going to have with these events. So plus or minus 10% from the average of 45 on attritional, small attritional and mid-sized, these were really unrelated fire events.

We look very hard for trends, and so -- it's very difficult to find them. So in this case I think that it's just the normal volatility that you would expect to see within these small attritional losses.

Okay.

This quarter was an unusual quarter in terms of frequency, and the first quarter of last year was unusual in terms of favorable. So there's clearly some, I would say probably 3 points plus of just volatility year over year just on those events.

Got it. I know when you set out to make some changes and improve the business, you talked about reducing volatility, looking for areas of profitable growth. I'm just trying to -- looking now backwards, I look at the -- if I compare AXIS to other companies I cover, the volatility in the underlyings from quarter to quarter has probably been more here than almost anywhere other than maybe the pure reinsurers.

And I'm just trying to understand, where are we in that progression? And is this volatility in underlying, has it been somewhat surprising to you? Or is it just -- there's noise every quarter and when you look at the numbers, you feel comfortable that you are moving towards the path that you outlined a couple years back? Thanks.

Michael, that's an excellent question, and let's take it from the broader perspective that you're putting in place. There's no question that we wanted to move our book to a less volatile book and we have made a number of changes to move it in that direction, including bringing on some less volatile business. Admittedly, some of that less volatile business does have higher combined ratios, but let's put this on the table right now.

From an ROE perspective, these higher combined ratio businesses are highly accretive to the book of business. Because they require much less capital and provide a more steady stream of underwriting profitability going forward. And so, we think that is absolutely a right move.

When I look at volatility, Michael, I look less at the quarterly volatility than I do with the annual volatility. And every year you go through, especially on the property and the specialty lines that can be affected by individual risk losses, you can have a situation where you have all of your losses in one quarter. And yet, end up with the same kind of average on an annual basis.

I can tell you from the analyses of the books that we have built over the last three years, in all cases, our risk management analyses' distributions and curves all show that the curves are actually getting less dispersed, therefore, reducing the volatility around each of those portfolios.

And so, it's that confidence in a more steady profit stream, lower volatility, and lower cat exposure, that have really allowed us to embark upon an aggressive stock repurchase program, because we can actually afford to be much more efficient in the use of our capital, higher premium to surplus leverage, all of which are resulting in a better ROE longer term.

But in our business, I think we have to accept that there is going to be quarterly volatility. Everything that I'm seeing here is generally consistent. The one thing that we have not yet seen to prove out our strategy is demonstrating to you and the rest of our investors that over a period of two or three, four cats in the industry, will our percentage of book value lost to those cats be as high as it was in the past? I'm confident that it will not be.

And so what we're seeing is the higher attritional loss ratios that you would expect from the more stable business, but you don't see the expected improvements that we expected to see. When, in the large cats, we should lose less of our book value than we have in the past. I hope that's helpful in making you understand where we're going.

No, that's great, thank you. Just one, on the cat side, that is one area, that is also an area where you have grown the last couple years. And with pricing declines, I would imagine that exposure is potentially higher now, as well, than a couple years ago, or is that not right?

No, Michael, actually it's not.

Okay.

One thing that you might be looking at is the fact that we've grown in the Southeast. And the reason we've grown in the Southeast is because we were underrepresented in Florida, in particular.

I see.

But if you look at almost all of our exposures, there's always going to be some random volatility on a quarter-to-quarter basis because you take a look at the portfolio you have and you move that up or down. And I know that in a couple of lines we showed some increases in this quarter versus last quarter.

But again, if you go back on an annual basis comparing the end of the first quarter to the end of the first quarter of last year to the end of the first quarter of the year before, you'll find that consistency overall as a percentage of our shareholders equity, the exposures are coming down. The Southeast went up a little bit, again, because we felt that we were underweight in what is recognized as one of the most attractive markets.

But let me give you another piece of data here. We look at not only our individual PMLs by loss events, but we model things like what's our aggregate annual cat result over 100 -- over a 1 in 250 period? So you take all of the cat events, you model what they would do to the you as a Company for that year, and you say how much would we lose of our book value in that model?

In the last three years alone, we have reduced that exposure by over 30%. The modeled 1 in 250 aggregate cat loss has been, and this is aggregate, not just individual PMLs, so there's actually more balance in the portfolio, and again, we're doing all of this to generate a more consistently profitable book of business over time.

Great, thank you for answering all those questions. Appreciate it.

And your next question comes from Jay Cohen of BofA.

Thank you. Albert, if you could talk about the third-party capital management business? What is the plan there, and is that showing up in your numbers at all this quarter? And if so, where is it?

Yes, the plan is, as you know, we've said this, we've just started this last year. We are starting slow, we want to make sure that we don't create capacity that we can't use. And so I think what we're doing is very, very targeted. We have -- you can see in the minority interests of our book that there is both a $50 million slug of minority equity. And you can also see in our net income that there is a minority interest, which is basically that share of the underwriting profits that are being ceded to our partners on the third-party capital side.

We are looking at two or three different ways of utilizing third-party capital. One is through individual transactions, B is through quota shares of portions of our business, both on the cat side as well as on AG side. And Jay and Ben and the team are also speaking to a number of parties about potentially other lines of business that could be of interest to third-party capital. So you should expect that over -- as the year continues, that there will be greater capacity provided by third parties, and we will be ceding to them various portions of different books of business in ways that make sense to them and make sense to us.

Joe, you wanted to add something?

Yes, Jay, just geography, it's in other income. We are including our weathering commodities business and AXIS Ventures as other income in our income statement.

That's perfect. Appreciative it, thanks for the thoughts.

You're welcome.

And next we have a question from Vinay Misquith of Evercore.

Hi, good morning. The first question I just wanted to get some clarifications on the mid-sized property loss. So I believe the net impact was 6 points higher this quarter versus the year-ago quarter.

But you said that the year-ago quarter was an abnormally low quarter. How much would you say this quarter was higher than normal? So would that be about 3 points higher than normal?

Yes. Vinay, I'd say 3 points is good.

Okay, great. So if I just want to normalize the numbers, it's 3 points, great. The second point is on the professional liability. You mentioned that the difference was 3 points this year versus last year.

Looking at 3 points on the earned premiums in the primary insurance operation, that's about $12 million. And I believe that the premiums earned, I mean since you said that the professional lines premiums was about $50 million per year, so that's about $12 million per quarter. So it seems awfully high, so that's a 100% loss ratio? I'm trying to just square these numbers?

We write -- actually what we talked about was $50 million was the primary book. We write about $200 million in the US and we probably write $800 million, $900 million all in on a gross basis.

And so what we spoke to was the problematic book, but we have been increasing, just given the fact that the loss trends are moving in a direction and pricing and professional liability has generally been flat for the last couple of years. You have both a normal trend of pricing increases -- sorry, of loss ratio increases, as well as the corrective action that we're doing in the primary D&O book in the US.

But we are clearly booking the primary D&O book in the US at very, very conservative loss ratios right now.

Sure, so the subject premium is not $50 million?

No, it's not.

It's more like a couple hundred million dollars?

That's correct.

Okay. And so just looking forward in the future, I understand that this year is going to be a higher loss ratio for the business. And so you'll probably see the 3 points higher maybe for the next couple of quarters, but should we expect the full 3 points lower next year once you've repriced the business, or is that too optimistic?

I think we should look at two things. As I am thinking about this right now, obviously, the comparison is to the two quarters that had the very best ratios last year, so the toughest comparison is going to be in the first and second quarter.

Because we started to raise the ratios in the third quarter and, of course, we had the corrective action in the fourth quarter. So you wouldn't see that bump up in the fourth quarter because it's already been taken, so just to give you a sense of the geography of the comparisons.

The second issue is that as we work through the UPR from last year, that's going to be affecting our results this year. I think we have to be realistic and expect that we are not going to take the book exactly to where we want it in a single renewal. My guess is that as we work through this, it will take us probably two renewals to get the book ideally to where we want it.

So I think that you're going to see progression through 2014 and through 2015, and the ideal numbers, if you would, would be in 2016, but that you should see progression in terms of the ratios starting on a comparative business from the second quarter of this year, because we already booked them higher in the second quarter -- I'm sorry, the third quarter of last year, fourth quarter of last year.

We're running through the heavier numbers in 2014, and then in 2015, you'll start to see the improvement through the better quality book that we're writing in 2014 into 2015, and then through a second layer of renewals to really get the book to where we want it, providing more progress in 2016 from the book that we write in 2015.

Sure, that's helpful. And then just one last question. You talked a lot about remixing the portfolio into low volatile business, and I think I'm trying to look at my model and saying, well, I have the same level of cats in there. So when you look in terms of budgeting for your cats, what's the normalized cat number you have for the Company as a whole, or if you want to give it by segment, that's helpful? Thanks.

I'm sure it would be very helpful, but we've never disclosed it before. So obviously, I always have a hard time disclosing cat loads in this because of the differences in the book of business. I would say that we are expecting that, as a percentage of premiums, cat losses would be lower going forward than they have in the past, but we're not prepared at this point in time to disclose cat loss for each of our books.

Okay, thank you.

And next we have a question from Brian Meredith of UBS.

Hello, Albert, a couple of quick questions here for you. The first one, just with respect to the comments on your Southeast wind and increasing exposure there. Should we expect you to continue to balance that portfolio maybe even increase it mid-year renewals?

Well, there are two things here. One is it really will depend on the conditions and the opportunities available to us in the mid-year renewals. So I think it's very much a reaction to will the business available to us optimize our portfolio, or actually make it worse and more peaky?

I don't think that we have any appetite for any significant growth in any of our PMLs, but would there be a few million dollars up or down based on opportunities? That kind of volatility would be normal volatility in terms of optimizing each renewal. But we do not have a strong appetite for any significant increase in any of our PMLs.

Great, and then my second question on the A&H business, what's the near-term outlook for that, given the 5% reduction in gross written in the first quarter?

Don't make too much of this decrease because as Joe pointed out, there was a significant quota share that was non-renewed in the first quarter. And to their credits, our A&H team was able to replace a substantial amount of that non-renewal. And I have no doubt that the very, very successful new business generation that our Company has had in the past and into the first quarter will continue through the rest of the year. So we're still projecting meaningful premium growth through the rest of the year.

Okay. So there was an unearned premium that went out in the first quarter that hurt it?

Yes, as you know, when you start the business you end up with relatively lumpy large contracts. This was a large reinsurance contract, and I have to maybe give a little story here because I'm actually quite proud of what happened here. This is a perfect example of how we add value to our clients.

This was a privately held company that had grown perhaps a little too fast, had some surplus stress. We provided significant advice in terms of the way to renew it. In terms of the mix of business and so on, and we prepared to offer, and we were able to offer them a quota share.

As that business grew, they actually -- and improved, they actually offered us a larger quota share, which we took. They were successful to the point where they actually grew and needed some incremental capital, and we made a small investment in that company to help them grow, to fund that growth.

Subsequent to that, they were sold. In fact, the transaction just closed this week or last week. And the new owners are keeping the book essentially net. And although we are losing some premium, we are actually going to make a significant gain on the investment that we made in that company.

So over the short life of our A&H division, they were able to help at least this one company significantly improve their profitability and outlook. They made underwriting profits on the reinsurance treaty for a couple of years, and they made a significant capital gain on the investment that we made in that party.

So it is actually a very successful story for us. And I have no doubt that by the end of the second quarter, the disappearance of that reinsurance treaty will not be noticeable in our numbers.

Great. And then, Albert, just one last question here. Are there any parts of your business you think you can strengthen through M&A right now? Or I mean desire to?

Yes, you know it's interesting. I've said this before, we're actually very fortunate in that we already have a very wide range of products and a very good geography, so we have absolutely zero need of M&A to achieve our strategic goals.

That said, there may be opportunities where there are opportunities for scale or to increase in one area or the other, but I can very easily see our strategy as moving forward and succeeding without an acquisition. Just as I can also easily see an opportunistic acquisition that makes us perhaps a little bit bigger or a little bit more efficient in one or the other books. It's purely opportunistic.

Great. Thank you.

And our next question is from Ryan Clark of Janney Capital.

Hello, thanks for taking my question, guys, most of them were taken away. Just quickly with the small A&H transaction, were you guys interested in pursuing that as well, or was that a price issue? Or just trying to figure out why that wasn't attractive for you guys to look at?

Well you know, we see a lot of opportunities and they've got to go through a filter. And they need to make sense to us. And there are always some businesses that seem to make sense to somebody else more than it does for us.

And you know, we're interested in growing, we're interested in making acquisitions to grow our A&H business, but it's got to be a transaction that makes sense to us and ultimately creates value for you, our shareholders. Sometimes we can do it and we pursue them, and sometimes it doesn't look as attractive to us and we choose to pass.

Okay. And then, again, just from a broader perspective, obviously there's been some news down on the island of some potential mergers and acquisitions. Just want to get your thoughts broadly about consolidation in Bermuda? And maybe the potential willingness to look at potentially dilutive book value deals?

You know we get paid for growing book value. At the end of the day, that's the only thing that matters. And growing book value ideally at a very attractive rate with relatively low volatility.

And as you know, that's been the essence of our strategy for the last two, three years in terms of the volatility, although it's always been the core of our strategy to grow book value.

I think that as a general guideline, acquisitions can have a, quote, a one-year dilutive impact. As you go through pay fees, sometimes it takes you a year or two to achieve all the efficiencies, but at the end of the day it's got to make sense on an MPV perspective from day one.

And there are some acquisitions that might be okay if they're dilutive in the first year, if you can make it up by the second year or so. But a transaction which is long-term dilutive is really hard to reconcile.

Great, thanks for the questions guys. Or answers.

And the next question will be from Kai Pan of Morgan Stanley.

Thank you so much for taking my questions. First, just a follow up on the A&H, and do you have -- is the $300 million to $500 million annual premium still the target that you can achieve your targeted profitability in that business?

Yes, that's right. I think that as we've said before, we think an earned premium basis north of $300 million is what's required to achieve underwriting profitability. Not because of the losses or the acquisition expense, but basically to pay for the platforms that generate those premiums.

So, I do believe that an earned premium base in excess of $300 million is that magic level for underwriting profitability. And then $500 million and so on for achieving your running rate target ROEs in the mid-teens, that continues to be our view.

Now, the market has changed significantly, especially in the US, in terms of the nature of the opportunities with the Affordable Care Act and so on and so forth. And we're always modifying our tactics on the ground, but the $300 million and the $500 million levels that you've discussed are still good benchmarks.

Great. Then on the investment side, so with the new hire, David Phillips, will there be any change in terms of your asset allocation, as well as the investment process?

No, I think to be fair we should give David an opportunity to review what there is, but you might expect that we would not have hired a CIO who had philosophies and risk appetites that were meaningfully different than what we had. So I think that the core of the strategy is essentially the same.

Will there be changes here or there? I would expect that we would have some new ideas and some new insights, but I would think that these would be changes at the margins, as opposed to a fundamental change in our reserve -- in our investing processes or risk appetite.

Lastly, do you have any sort of exposure to the Ukraine situation?

I presume that what you're referring to would be political risk or credit risk?

Yes.

We have a very, very small amount of exposure in terms of our credit and political risk book in our credit risk solutions. We've reviewed those, we think those are continuing to perform well. They are key and core to the Ukrainian economy, and we don't believe that we are at any noticeable risk at this point in time.

Thank you so much.

And the next question will come from Meyer Shields of KBW.

Thanks. Two I think unrelated questions. First, when we look at AXIS Ventures, should we expect that to be a sharing of the historical AXIS book? Or are there lines of business or accounts that would go there that maybe wouldn't fit as well on AXIS paper?

Both. Jay likes to, Jay Nichols, who is the CEO of our reinsurance division, has an expression that I adore. And that is that we are the juncture where risk meets capital.

And there are multiple sources of capital that we have. One is our own capital, some of it is our reinsurance capital, some of it may be third-party capital. We have an outstanding distribution platform here using both insurance and reinsurance.

And there are a number of risks that we have access to which may be too much for our own equity. And so it would be very easy to take the benefit of our ability to access that business and share that business with reinsurers or with third-party capital.

There may be third-party capital providers who have a very specific risk appetite with whom we would be sitting down and we'd say, you know what, this is not business that we have historically pursued, but if it's business that you're interested in, let's see if we can find some of that for you. So it's really a combination of the two.

It's a partnership between ourselves and our third-party capital providers, and we will share with them both business that we write on our own and that we have written historically. But there is a very good possibility that we could sit down with them, identify lines of business that are attractive to them, and help them access that business.

Okay. Thanks. Is there any way of teasing out the fees that you collect versus your ownership share of the actual performance?

Obviously, is not material right now, but over time I think we're going to have to find a way to provide those kinds of insights to you.

Okay, fantastic. Thanks very much.

And with that question, we will conclude our question-and-answer session. I would like to turn the call back over to Albert Benchimol for any closing remarks.

Thank you very much, operator. Well to all, thank you for your time. And we will continue on our strategy and our stock repurchase programs. And as always, if you have some additional questions, please feel free to call Joe or Roger and we will answer your questions. Thank you.

The conference is now concluded. Thank you for attending today's presentation, you may now disconnect