AXIS Capital Holdings Ltd (AXS) 2016 Q3 法說會逐字稿

Good day and welcome to the third quarter 2016 AXIS Capital earnings conference call and webcast. All participants will be in a listen only mode.

(Operator Instructions).

I would now like to turn the conference call over to Ms. Linda Ventresca, Investor Relations. Ms. Francesca the floor is yours ma'am.

Thank you Mike 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 third quarter ended September 30, 2016.

Our earnings press release and financial supplements 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 web cast 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 and the international number is 412-317-0088. The conference code for both replay dial-in numbers is 10092851.

With me on today's call are Albert Benchimol our President and CEO Joe Henry our CFO. Before I turn the call over to Albert I will remind everyone the statements made during this call including the question-and-answer session which are not historical facts may be forward-looking statements.

Forward-looking statements involve risks uncertainties and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors including the risk factors set forth in Axis' most recent report on form 10K filed with the SEC on February 25, 2016. We undertake no obligation to update or revise publicly any forward-looking statements.

In addition this presentation may contain non-GAAP financial measures. Reconciliations are included in our earnings press release and financial supplement which can be found on the investor information section of our website. With that I'd like to turn the call over to Albert.

Thank you Linda and good morning ladies and gentlemen. Thank you for joining us today. Last night AXIS reported third quarter operating income of $161 million or $1.78 per diluted share with annualized operating ROE of 12% for the quarter.

The continuous improvement that we're seeing in our results reflect strengthen both our underwriting and investments. Adjusted for dividends diluted book value per share grew 4% in the quarter and 14% over the past 12 months. During the quarter we returned over $167 million in capital to our shareholders through share repurchases of common share dividends repurchasing the 2.5% of our shares outstanding at the end of last quarter.

Through nine months we've return to shareholders $490 million or 158% of year to date operating income in the form of dividends and share repurchases reducing our share count by 8.8%.

Overall we reported a consolidated combined ratio of 92.6%, a four point improvement relative to the same family last year, benefiting from like cat activity and continued favorable prior-year research development.

Each of our three major businesses insurance, reinsurance and accident health reported solid underwriting profits and year-over-year improvements. We are highly encouraged by the various metrics that we are monitoring to measure our progress, reaffirm the accesses on a strong path forward.

This quarter demonstrates tangible results of progress in our key strategic initiatives. With a more focused business model improving sourcing and underwriting operations a solid balance sheet to strengthen market presence, we are well-positioned to find attractive business even in a challenging environment as we drive continue shareholder returns in a forming insurance marketplace.

With that I will turn the call over to Joe who will walk us through the results. Joe?

Thank you Albert and good morning everyone. During the quarter we generated strong results featuring net income of $177 million and an annualized ROE of 13.2%.

Our operating income for the quarter was $161 million and annualized operating ROE of 12%. Both our net income and operating income this quarter benefited from continued good underwriting performance, a low level of catastrophe and weather-related losses, continued favorable prior-year reserve development and excellent performance from our investment portfolio.

The strong growth in book value per share in the quarter of $59.77 was driven by net income and an increase of unrealized gains on our available for sale investment portfolio which primarily reflected the tightening of credit spreads, partially offset by strengthening of the US dollar against the pound sterling.

Moving into details in the income statement, our third quarter gross premiums written increased by 2% with growth in our insurance segment offset by a decrease in our reinsurance segment. Our insurance segment reported an increase in gross premiums written of $69 million or 11% in the third quarter compared to the same period in 2015.

Increased premiums were largely driven by new business written in our property and A&H lines. The increase in our property lines was driven by growth in our London book including MGA program business. The increase in accident health was due to new health business written in North America and in the Middle East.

Our reinsurance segment reported a decrease of $45 million or 14% in gross written premiums in the third quarter of 2016 compared to the same period of 2015. The decrease was largely due to timing differences which impacted premium growth in our professional liability and property lines where the restructuring of three large quota share treaties effected the timing of premium recognition.

Adjusting for timing differences of $51 million, reinsurance gross premiums grew 2%. Net premiums written decreased by 12% in the third quarter of 2016 compared to the same period in 2015 with an increase in our insurance segment offset by a decrease in our reinsurance segment.

Insurance net premiums written were up 14% driven by growth in premiums written any decrease in the ceded ratio. The ceded ratio decrease was due to changes in our accident and health programs partially offset by increased quota share premiums ceded in our liability and professional lines.

Reinsurance net premiums written decreased by 45% reflecting the decrease in gross premiums written in the quarter as well as the impact of new retrosessional cover entered into with Harrington Re. which increased premiums ceded in our liability and professional lines. On a year to date basis reinsurance net premiums were up 7% compared to 2015.

As discussed in Q2, we have been ceding more of our reinsurance premiums to strategic capital partners in recent quarters. Our expectations has been that on balance our reinsurance net premiums written would show mid-single-digit growth an our year to date figures are consistent with this.

Net premiums earned increased by 2% in the third quarter of 2016 compared to the same period of 2015. The increase in net premiums earned reported by our reinsurance segment was largely driven by strong premium growth in our liability, Marine and other as well as our catastrophe lines in recent periods together with the favorable impact of premium adjustments in our credit and surety lines recorded in the quarter.

The growth was partially offset by increased premiums ceded in our catastrophe and property lines as well as the impact on our liability and professional lines of the new retrocession to Harrington Re. Net premiums earned reported by our insurance segment in the third quarter were comparable to the third quarter of 2015.

Growth in premiums written in recent periods primarily in our accident and health lines was largely offset by an increase in our professional lines ceded reinsurance program. Our third-quarter consolidated current accident year loss ratio decreased by 0.8 points to 65.1% compared to the same period of 2015.

During the quarter we incurred $22 million or 2.3 points and pretax catastrophe and weather-related losses net of reinstatement premiums, primarily attributable to US weather related events. Comparatively we incurred $43 million or 4.7 points primarily attributable to the Tianjin explosion and US weather related events during the same period in 2015.

Our ex-cat and weather current accident year loss ratios increased by 1.6 points to 62.8% with increases in both segments. The insurance segment current accident loss ratio, ex-cat and weather, increased by 2.8 points from 60% to 62.8%.

The increase was largely attributable to growth and change in mix of business within our A&H line of business where we responded to opportunities in international markets and wrote more business that carries a higher loss ratio but a lower acquisition expense ratio. We consider this to be attractive business and we are pleased to report that our A&H business reported a positive contribution to our underwriting results for the quarter.

In addition, the insurance segment loss ratio was impacted by adverse rate and trend, largely offset by a decrease in the midsize loss experience particularly in our Marine lines. Our reinsurance segment, current accident year loss ratio, ex-cat and weather, increased slightly by 0.4 of a point from 62.3% to 62.7% due to the ongoing adverse impact of rate and trend, partly offset by the recognition of better than expected recent attritional loss experience across our longtail lines of business.

Year to date our current accident year loss ratio increased by two points to 67.8 compared to the same period compared to the same period 2015, driven by a 2 point increase in the cat loss ratio. During the year we incurred $145 million of cat and weather related losses compared to $90 million in the same period of 2015. After adjusting for these events our current accident year loss ratio was 62.5% in both years.

The adverse impact of rate and trend together with business mix changes were offset by a decrease in the midsize loss experience in our insurance Marine and property lines. Turning to loss reserves established in prior years, our results continue to benefit from net favorable loss reserve development which amounted to $76 million during the quarter. Prior-year releases came from all lines of business in both segments and predominately recent accident years for short tail lines and older accident years for medium and longer tail lines.

Our year to date favorable loss reserve development was $224 million compared to $166 million recognized during the first nine months of 2015. During the three months ended September 30, 2016, our acquisition cost ratio increased modestly by 4/10 of a point compared to the same period in 2015.

Our reinsurance segments ratio increased to 26.1% due to the impact of retrosessional contracts, an increase in the amount of business being written on a proportional basis together was slightly higher acquisition costs associated with certain lines of business. In addition, the 2015 ratio included the benefits of fees from strategic capital partners which are now included in other income or offset against SG&A expenses in 2016.

Decreased acquisition cost in our insurance segment were driven by the higher ceding commissions following the expansion of our professional lines reinsurance programs and lower acquisition cost for the A&H business which had a higher loss ratio.

Our G&A ratio for the third quarter was 15.3% compared to 15.7% in the same period in 2015. While foreign exchange and higher earned premium contributed to that improvement, we continue to see the benefits of expense initiatives that we put in place.

That combined with the benefits of strategic capital partner arrangements and lower performance-based compensation have resulted in reduced expense in the quarter and year to date. Overall we recorded underwriting income of $104 million in a combined ratio of 92.6% for the third quarter.

On the year to date basis, our underwriting income was $213 million with a combined ratio of 95.7%. Net investment income was $117 million for the quarter, an increase of $71 million from the third quarter of 2015.

The increase was attributable to our alternative investment portfolio and is primarily due to the strong performance of the equity markets which positively impacted both hedge fund and credit fund performance. We view the nine months results as meeting our expectations for the period.

In aggregate the total return on our cash and investment portfolio for the quarter was 1.1% including and excluding the impact of foreign exchange. The total return in the current quarter benefited from a downward shift in the sovereign yield curves and tightening of credit spreads on investment grade and high-yield corporate debt.

During the quarter we repurchased an additional $126 million worth of our common shares comprised of $125 million purchased pursuant to our Board authorized share repurchase program and $1 million related to shares purchased in connection with the vesting of restricted stock awards. October 26, 2016 to remaining authorization under the repurchase program approved by the Board of Directors was $375 million.

As of final comment on our results I'd like to reiterate our strong underwriting performance this quarter including continued strong performance by our reinsurance segment and improved performance by our insurance and A&H businesses. In addition we continue to make progress towards achieving and realizing the benefits of strategic goals that we have discussed with you in prior quarters. In this regard I would like to direct you to the additional disclosure we have provided in our financial supplement relating to our activities with our strategic capital partners including details the premiums ceded to Harrington Re. by our reinsurance segment as well as details of fee income generated.

Finally we would like to take this opportunity to provide you with an update on hurricane Matthew. While it is still early days we currently expect our after-tax net losses in the range of $45 million to $60 million related to hurricane Matthew. Industry losses for the event range from $3 billion to $7 billion. The wide range is indicative of the recent nature of the event and the significant flood element which is not considered in all industry estimates.

We have exposure in both our insurance and reinsurance segments. Our estimate of insurance losses are heavily influenced by expectations of loss from commercial flood coverages primarily in the Carolinas. Our estimate of loss from our reinsurance segment primarily derived from cedents in Florida where losses may arise from lower layers of reinsurance programs.

Overall access Re. is underweight the sources of loss expected for the reinsurance market and our estimates are indicative of this. With that I will turn the call back over to Albert.

Thank you Joe. Turning to market conditions, they remain very competitive and challenging. But we also believe we are seeing signs that corrective action is starting in some lines that needed and the pace of rate reductions is generally declining.

We're not predicting an immediate recovery but more of an approaching stabilization. For example, our insurance rates on average were down 3% overall for the quarter as compared to down 4% in both the second quarter this year and the third quarter of 2015.

Casualty lines in the US for the strongest, particularly and wholesale markets with positive rate change in the mid-single digits. Professional lines are flat to down modestly and property related lines down in the mid to high single digits range. While international specialty lines remain weakest with reductions often in the double-digit category.

Overall, market conditions were best for us in our US division with rates flat on average for the quarter as positives and casualty lines were offset by reductions in property. This compares to market rates there were down 2% in the second quarter this year and down 4% in the second -- third quarter of 2015.

We are managing our insurance activities to optimize outcomes under these conditions, emphasizing service, responsiveness and claims management as our key differentiators. We're targeting risk that remain attractive, pushing for greater balance in our portfolio, and shrinking in those areas we're not satisfied with the risk-adjusted returns.

Our insurance segment gross premiums written in the quarter were up 12% over the prior year on a constant currency basis. Over half of that increase came from our accident and health operations where we continue to build to scale that will allow us to deliver consistent profitability.

The remaining insurance business was up 5% as growth in property, professional and liability lines more than offset reductions in Merida and energy, terrorism and aviation as well as our last year's exit from the Australian retail markets. Our risk appetite which continues to be increasingly data-driven continues to deliver a portfolio comprised of more small to midsize business, lower net lines, lower volatility and improving profitability metrics.

Moving on to reinsurance. The major themes in the market remain the same as in recent periods as we continue to see competition across most lines of geographies. However, as we discussed with you in recent calls we are observing a number of positive indicators.

We've begun to see pockets of resistance to further softening in rates an terms. In particular, recent quarter share renewal had difficulty in increasing ceding commissions and we are seeing slowing in rate reductions in excess of loss placements driven by abundant market capacity in generally good underlying experience.

Nevertheless we also see some large cedents becoming more opportunistic in their buying behavior which will require our underwriters to continue to demonstrate smart and disciplined underwriting. The talk at Monte Carlo, CIAB and currently in [Baden-Baden] indicates the reinsurers are more intent on holding the line. The next few weeks will be telling.

We continue to enhance our position in the reinsurance markets, getting closer to ours cedents, providing a broad set of solutions to help us succeed. We're managing micro-cycles across portfolios while expanding our products and opportunity set including mortgage insurance where we're off to a good start and expect to see positive contribution in 2017.

We're observing a number of our clients, continue to view reinsurance as a vehicle to strengthen their capital position via risk transfer. This is especially true with certain insurers subject to solvency too. Our team is working to provide unique and tailored solutions for each client. There also continues to be a trend across reinsurance buyers to consolidate programs across lines of business and geographies and often smaller panels.

We believe these trends will bode well for our client [central approch] delivering a full spectrum of reinsurance solutions. Overall, we're pleased with the progress we are making in the cornerstones of our access Re strategy.

Getting closer to the customer utilizing analytics to improve the portfolio and accessing multiple sources of capital and distribution. As announced earlier this year, we established Harrington Re, a new Bermuda-based reinsurance company sponsored by AXIS in partnership with the Blackstone group.

We've begun to place risk with Harrington Re which represents the latest installment in our strategic capital partnering activities. Harrington is the vehicle for which you match a longer duration asset portfolio with medium to longtail business.

This transaction is an integral part of our larger alternative capital strategy which is designed to match the right risk with the right capital. In this context we view Harrington is a great opportunity to share premium with the asset portfolio can be better aligned with the underlying risk. It represents a win for all stakeholders involved.

For us Harrington Re provides first a broader platform to underwrite risks, support key clients, and grow relationships with our clients and distribution partners. Second, capital flexibility through our permanent and growing capital base and third, additional fee income through over [writing] the proper condition. Is an important part of our strategy to assimilate broad portfolio of third-party capital partnerships and over time we will look to increase the portion of our business that we share with our partners.

In conclusion, we're pleased to see the continued improvements in our operations and results demonstrating our progress and further strengthening AXIS's position as a leader in specialty insurance and reinsurance.

Our path forward remains organized around delivering the differentiated value proposition characterized by underwriting expertise, responsiveness, creativity, outstanding claim service and risk appetite and portfolio construction informed by discipline application of data and analytics, a solid balance sheet complemented by a broad team of high-quality capital partners, and in the sector platform staff of professionals who are among the best in our business.

We are encouraged by recent metrics and committed to execute the strategy to position AXIS as a stronger, more profitable company, providing outstanding products and services to our clients rewarding careers to our employees and superior returns to our shareholders. With that let's open the call for questions. Operator?

Yes sir.

(Operator instructions)

The first question comes from Jay Cohen, Bank of America. Please go ahead.

Yes. Thank you. Two questions, I guess first on Harrington Ray with Harrington you mentioned one of the benefits it capital flexibility and not just Harrington I guess, but your other capital partners, third-party capital partners.

Should we expect because of that flexibility buybacks to remain above earnings as we've seen over the past year or so?

I think in that area we're always responsive to the opportunities that we have. And so if there's an opportunity to grow for -- and utilize more capital than is released by third-party capital partners then we won't to that.

Of refined that there is less opportunity eventually we will reduce our capital. I think to that effect Jay, our track record with regard to capital management I think is among the best in the industry.

We've been increasing the efficiency of our capital through lowering the volatility, which as you know it's very capital heavy, through the growth of third-party capital partnerships and through the way that we have changed our portfolio and we will continue to do that. But I think our view is obviously there's an opportunity to grow capital at a strong return for our shareholders that would be our preference and if not we will reduce the equity that we have if we can't use it.

But we will continue to grow third-party capital as a percentage of our overall capital that is utilized to support the risk that we produce.

That's helpful Albert and then I guess also on Harrington the fees that you generate, really two step question. How do you determine what -- what percent of those fees come in the form of fees and what come in the form of offsets to expenses? The second part of that question is can you give us some advice on how to model those fees going forward?

I can try. So the way we look at it is that those revenues that are override specifically ties to the premium there were generating we view those as appropriate to offset against our G&A expense.

Those components that are more volatile and responsive to profitability, profit shares and so on, we think long and other income that's generally the way we look at it and this is something that we are doing not just for Harrington but for the totality of third-party capital; and in fact we are unlikely to provide any details about those because they're a portfolio, a third-party capital partnership so you will get a consolidated number.

Historically I think it's going to be approximately 2/3 of the fees are going to be considered offsets to G&A and 1/3 are going to be considered in other income but again the other income number is likely to be more volatile because it really depends on profit commissions and performance which by definition will move around up or down based on actual activity.

Got it. That's very helpful. Thanks, Albert.

You're welcome.

Next we have Elyse Greenspan of Wells Fargo.

Hello, good morning. First on Harrington Re as well there was about 100 million force for them in the quarter I believe you guys said that there are going to be writing about a 0.25 to 0.3 premium surplus. Given that was there an element that you saw higher premium this quarter [given this] vehicle was launched later in the year. I guess how do we just think about the premium production to that vehicle as we go into 2017?

That's fair. I think it's particular to our own accounting standards in which we recognize all of the written premium upfront.

I know that on order shares there are some companies that choose to recognize the quarterly amount in each quarter, we recognize the production on day one and then set up a UPR and then earn it over the period; which is by the way why our accounting for multiyear treaties has generated a perceived increase in our gross written premiums compared to some others because others are not recognizing all the premiums up front and we are. So what you're seeing is the totality of the written premiums that are expected to be earned over the next 12 months in the quarter so it's not a quarterly number it's the upfront number. We continue to anticipate that on an annual basis we will see to Harrington somewhere in the area of the quarter to a third of their capital. So that has not changed.

Okay. Thank you and then in terms of the reinsurance premiums also, you guys mentioned about $51 million due to timing in the quarter. When should we see -- the renewalship to another quarter? How should we think about for modeling purposes?

Well, we kind of explained that in the first half of the year we told you that the growth that we were showing was accelerated by some timing factors in that by the end of the years it would balance out and so what you're seeing here is really the other side of the growth that we showed in the first half of the year so we always indicated our growth for reinsurance for the full-year would not be at the level indicated in the first half and this is what you're seeing.

Okay, great and then just kind of more high level margin question. Year-to-date your underlying margins are about flat overall with last year with some improvement in insurance and [continuation] of the insurance.

We are about a year into the margin improvement plan that you laid out at this time last year I guess. Are you where you kind of thought you would be an overall basis and by segment; and then given the still competitive insurance and also the reinsurance market and I know you're making still some shift in your business mix but how do you think about the level of margin improvements that you see between now and the end of 2017?

We're very pleased with the products that we have and as I said there's a metrics that we are following are giving us the right details. So I know that Joe will provide some additional details with regards to mix of business but let me tell you the way I look at it. Each of our three businesses is doing better year over year than we've had and I know that the insurance numbers have been affected by a mix of business with regard to [A&H] but let me give you some additional color.

The combined ratio for A&H is down 4 points in the third quarter versus the third quarter of last year, down 5 points year-to-date versus 2015 however, the mix of business in A&H changed and therefore there's a higher loss ratio there and overall, by the way, the A&H loss combined ratio is higher than the insurance combined ratio. And since A&H is now a bigger part of the premium base of insurance it's had a mix impact; so A&H is doing better.

If you look at insurance excluding A&H the loss ratio for ex-cat for the current calendar year is flat. The combined ratio ex-cat for the current calendar year is flat for the quarter and on a year-to-date basis improved by 2 points. So we're comfortable with the fact that insurance is also improving on a going forward basis.

Reinsurance is optimizing the portfolio in a difficult market, it's doing all the right moves with regard to the shift in the portfolio with regard to the use of third-party capital and here again, we're comfortable with the improvements that we've seen in A&H. So each of those three numbers as far as we're concerned show very good progress.

The mix of business is what's causing some of these ratios to look different and of course as we're also growing more fee business which is improving the results -- that contribution from fee business is not making its way in the combined ratio so the combined ratio is also not reflecting the full improvement that we're doing in our operations as reflected in the fees.

Elyse, it's Joe. The only thing I will add to that is that if you want to get into specifics of the insurance current [asking] loss ratio including ex-cat and weather it was [62.8] in the quarter it was 60 a year ago. Of that 2.8 point increase 2.5 points relates to the mix issue that Albert just talked about for A&H.

If you want to look at rate and trend within insurance segment is about 1.8 points of a headwind this year, on reinsurance is about 0.7 and the fact that we've held our ex-cat and weather loss ratios on a year-to-date basis where they are, even with what I just referred to, with respect to A&H is reflective in the progress that Albert was just referring to.

Okay, that's great and then just one last question. We've seen a little bit of heightened M&A activity in the space of late if you could just give us a little bit of an updated view on what type of transactions you might consider for AXIS.

First and foremost our strategy is based on organic growth, organic development, new business generation, and continued improvement in our mix of business and that has to be our core strategy and I'm pleased with the way we're executing on that. Obviously every company receives business from bankers with big books with every single possibility around, we of course listen, but beyond that I'm not sure it's appropriate to discuss the conversations that we're having.

Okay that's great. Thank you very much.

Charles Sebaski of BMO Capital Markets.

Good morning. I guess the first question on -- just for some clarity to understand on the fee income. Why is the offset to G&A as opposed to -- sort of as a [seeding] commission override which come through the acquisition expense ratio. Why isn't that being captured in the reinsurance division as all other reinsurance would be?

Yes, so Charles, it's Joe. Last year as you know we offset those types of fees against our acquisition cost. This year when we implemented Harrington we took a hard look at how we were accounting for the cost and just said it would be a better representation to offset them against the actual expense that we were incurring. So we have underwriting fees, we've got override fees, we've got management fees, we've got the profit commissions, performance fees there are a lot of different types of fees and frankly we just went through all of them and determined that part of them would be better offset against G&A in part of them would be better shown as other income. So it really is just reflective of a new view and in effect of a more accurate view of where the original expense is incurred. So we reflect, if you will, the offset against those specific line items and as Howard said before about two-thirds of those we would expect to be offset against SG&A going forward at about one-third of them would be other income in our income statement.

All right. Next, on the Accident and Health I think you mentioned that you kind of said in our three businesses -- and I think highlighting that Accident and Health is kind of a third business yet it's incorporated into the operating results of the insurance business and you are kind of gave some detail that was helpful on the performance there and what insurance would look X- A&H. If it's a third business and you want us to look at it X- A&H, why wouldn't that just be stripped out?

Why don't we have a third operating reporting line that we can just see and track actual A&H business and then insurance as insurance?

That's a good point it's a immateriality issue and certainly always was expected that once it reached a certain amount of materiality would be appropriate to split it out. So I think it's simply a question of time and scale.

All right. I guess, finally currently which you guys are doing, I guess in the quarter, and what you are seeing here in the fourth quarter what would you say that the current accident year -- what are you writing business at current accident year, ROE perspectives? I guess maybe on an allocated capital basis obviously the operating ROE in ROE were really strong in the quarter but there's a lot of things that went on -- on favorable development.

I guess, what the current writing -- where are you thinking or would you ballpark the current underwriting?

Yes, I think we've given that indication before and we believe the current year is generally written in the mid to high single digits ROEs which is where we continue to see the 2016 business being written.

Okay. Thank you very much for the answers.

Next we have Meyer Shields of KBW.

Thanks, good morning. Albert, one big picture question. I think you are clearly doing the right thing for the Harrington Re but I'm wondering in your view vulnerable is medium or longtail pricing -- medium or longtail lines pricing to the introduction of alternative forms of capital compared to what happened to property cap rates?

I think that's there are two components to it, one is supply and demand and the other is the act of capital of pursuing any kind of business and the other is the ultimately is the right price because whoever provides the capital at some point is still going to need to be paid for their fees and their expenses of the claims that go forward.

And whether that capital is alternative or industry capital, interest rates always have a significant impact because longtail losses are obviously -- generate over time more investment income. And so we've always had this allocation of -- or this connection between available investment returns and available -- and the pricing on casualty, so I think those things don't change. My view on this is that whether we like it or not there is going to be a growing amount of a third-party capital in the industry and the successful companies are going to be the ones that make money in whatever market conditions result.

As a result of the capital conditions and optimize their sourcing opportunities in their portfolios in the best way possible. I tend to believe that because of the capital that there is out there we are going to have less of the old cycles of up and down and so people who just wait for the pricing to improve to make money may wait a long time.

I think we need to make money under the current market conditions and at AXIS that's what we're doing. We are organizing ourselves. We are selecting the right risks and we're building portfolios that will make money in the current market conditions.

Okay. Thanks that's really very helpful. The second question just with regards to the insurance segment mixshift of that have any implications for either trend or capital requirements?

Well, A&H as you know requires a lot less capital than the insurance -- the rest of the insurance lines of property-casualty insurance lines which is why it delivers a very acceptable ROE or even better a very attractive ROE even with a higher combined ratio than you would have in the normal [PNC] business.

And again that's why sometimes is difficult when we think of an ROA perspective from an outside perspective to look at a higher combined ratio, the initial reaction to a higher combined ratio might be this is negative. But if at higher combined ratio is attached to a lower capital requirement you could actually achieving the very nice ROE, which is why we are very pleased with the development that we've seen in the quarter to year- to-date notwithstanding the fact that had a modest negative impact on the insurance combined ratio.

Okay. And on the loss trend?

I think the loss trends are going to be dependent on the individual lines, I think we follow those. For the moment we don't see any significant difference in the loss trends that we see across most of our lines.

Okay fantastic. Thank you so much.

Next we have [Meg Kamar] of Macquarie. Please go ahead.

Good morning and congrats on a good quarter. Just a few follow-up questions. The first question I have is on the level of [reserve] for leases. I was wondering if there was any release which came from a prior large loss or large cat?

No, Meg, for the most part this is normal releases from 2014 and 2015 accident years and short tail lines, property and Marine, and older accident years 2015 -- I'm sorry, 2010 and prior on the longer tale lines. Nothing unusual in the releases themselves. As I mentioned in the script it really came from all lines of business in both segments and for the most part from all accident years. So, there's no unusual item in the reserve release itself.

Got it. That's helpful. The second question I had was again going back to the discussion on Harrington. I think the capital was $600 million at that time you had said that you look at adding to the capital down the road and maybe do other things.

Has that thought process changed or are we just looking at the $600 million for now and any other additions in 2017? Can you just update on that front?

Currently the capital at Harrington is $600 [million] which we have said very satisfactory for what we need right there right now. My response on the Harrington and frankly, on all the third-party capital is we'll size these things over time as they're necessary.

We will continue to increase the amount of capital that we partner with but not necessarily with Harrington.

Got it. That's helpful. The third and final question and maybe this ties Harrington to Elisa's question on size. Earlier today we were discussing the same thought process on another conference call as to what level of size makes a difference.

I recall at Monte Carlo you had made a statement that you would look at anything in the $3 billion to $5 billion range in terms of partners. Has that thought process changed with sort of Harrington picking up speed or is that the same thought process as we head into 2017?

I think that interview and article I think we are taking things out of context. I went back and reread the article and again it was very clear that what I said was that our strategy is focused on organic growth and that continues to be what we want to do.

The question was what kind of size would a company like AXIS -- what kind of size would an acquisition, on a theoretical basis, I said well given our size -- given our capital these are the things that we theoretically could do.

That was not an indication that we were planning to do an acquisition of that type other than a theoretical question that if AXIS were to make an acquisition, what kind of size acquisition would be comfortable for AXIS. But I repeat the core statement that I made in that interview which is that our strategy is based on organic growth, recruiting new teams, developing our staff, opening up new markets and lines of business. We are of course, going to review the various options that are available in the market but our strategy is an organic one.

Got it. That's actually very helpful. That's all I had. Thanks for the answers and good luck for the future.

Thank you.

Next we have Ryan Byrnes of Janney.

Great thanks, good morning. Most of mine have already been taken but I just had one, when you guys were talking about focusing on organic growth going forward.

We can't really dig into it but I just want to get your thoughts on your launch of your Lloyd's platform, obviously it's been a pretty tricky market over there the last couple of years but just wanted to see where that is and where you think that can get to in maybe the next I guess three to five years.

Thank you for that and as you know, we started the Lloyd's platform about 2 1/2 years ago and the reason for that fundamentally is that we wanted to be able to leverage the licenses that Lloyd's had all over the world and to also see some business that we were not necessarily seeing.

We don't think of Lloyd's as a separate business. We've always had a large international business out of London and in fact a lot of the growth that we saw at Lloyd's was really our transferring our own business to the Lloyd's platform and we also have seen some new business opportunities.

So when we think about what we are doing internationally we are not going to be reporting or talking about Lloyd's as a separate business but simply talking about it in the context of our international specialty lines which use a number of distribution channels including branches and balance sheets in Ireland, in Singapore, and elsewhere in the world.

Lloyd's should be really viewed as a very efficient use of regulatory licenses.

Great, thanks.

The only thing I want to add to that is just for the record here we written about $120 million in business through nine months in Lloyd's and as Albert said we've seen some new business approximately $20 million of that $120 million is business we haven't seen before.

Got it. Great. Appreciate that.

( Operator instructions )

The next question comes from Kai Pan of Morgan Stanley.

Thank you and good morning. Just follow up on a question on the reserve, we have seen some slowing reserve leases or some taking some charges on the primary care side, I just wonder how closely are you (inaudible) and because you have very strong reserve leases in the past and I just wonder do you see any sign that it would cause any concerns.

Short answer is no. We obviously spent -- you are referring to the reinsurance I believe since you were talking about RCA's. When we do as part of our normal monitoring of our business as part of our every renewals we go back we evaluate the conditions, the underwriting, the book of business.

We are very satisfied that we have the right understanding and the right reserving for the books of business that we write. You can rest assured that when we see individual companies either reduce their reserve releases or take a charge, the first thing we do is, I go and identify if it's something that we had already looked for or if not, are we on the account.

I can tell you that as part of our normal process and to date we are very comfortable with the way we are staying on top of our business.

That's great. Thank you so much.

I just wanted to follow up a little bit on some of the insurance growth and get a little bit more context. The growth in the property business I think you said that it was London. Can you just talk a little bit more about what that is?

I would've thought London property would be pretty tough business right now. So Ian two things, one we have and MGA operation basically in London, it started up a couple of years ago with Lloyd's and we've added resources in that area and frankly we've just seen better opportunities. So this is just natural growth of an initiative really started up two or three years ago. ( Multiple speakers )

I would add, Ian, that this is very consistent with going after smaller insurance and smaller accounts and so in fact you are absolutely correct in expecting that for the large accounts that are most at risk to the rates pressures, we've seen reductions in that area. But you've also heard that we were shifting our book of business to smaller accounts that were less prone to the competition, that were less volatile, and we are seeing that and we're pleased with the progress that we're making in the transition of our property book to smaller insurance, smaller lines, and less volatility.

That's what I was trying to get at, okay. And then on the A&H growth -- maybe I missed, did you say -- the core insurance clients grown or was there a big reinsurance component to that?

It's actually mostly reinsurance in both our international operation and our US operation in -- . We've done some additional business in the Middle East and frankly, we've written some new business in the US on the reinsurance side, most of it is coming on the reinsurance side.

Got it, and then on [Harrington], I'm looking at I guess page 8 of the supplement where -- think that's a newer slide about strategic capital partners and it looks like essentially everything your seating out of the reinsurance segment either shows Harrington or other strategic partners. Can you just explain first what evolution partners mean? Is that other third-party capital and am I right adding this all up that basically you're not buying any retro, I guess if you will, from any traditional company that is all either a partner or Harrington?

That's very observant of you. Which is in that slide is only people with whom we have an underwriting relationship and we share our risk with them. We do have other retros that we purchase but that is not reported on that page it's reported in the sessions, I believe.

Okay, I just when I added up I think the net premium to show were equal to the net premiums for the reinsurance segment, so it looked like it was 100% of it.

Okay, I'm sorry about that's my mistake.

It's not a large piece of it though the other normal retro business that we do.

Got it okay. And then just to clarify Lisa's question earlier, obviously you said you booked a quarter share of funds so we shouldn't expect it to spread out for this quarter? But was there sort of an upfront bigger than normal quota share session this quarter because you are getting started and we shouldn't expect $100 million going forward the next two quarters because of their capacity? I'm trying to get to how much bigger than normal this was -- was it just an upfront load to it?

My recollection is that there's both a small amount of retros but not much to it. I think the way to look at it is on an annualized basis.

You can think about the annual premium that we are ceding to Harrington to be about 25 to 30% of their capital and what you're seeing here is what we've got for the six months reflecting what we're going to need to do for the year; you should not expect that there would be a similar amount to the fourth quarter because most of those contracts were written up front, these are [quarter share] contracts so they tend to be recognized upfront; there may be a small amount in the fourth quarter but you'll see those are written numbers being very frontloaded and then those written premiums being earned over a period of time.

Maybe let me word a little bit better, I worded that poorly. When I think about what I think the annual session to Harrington will be should it be about that divided by that for each quarter or is it going to be biased towards Q3 and Q1 when the bulk of normal renewals are?

( Multiple speakers )

I would suggest that if we are saying 30% of 600 your thinking about an annualized number of 200 of written premium and depending on when the contracts are written it might differ by quarter but they should add up at the end of four quarters on a 12 month basis to be around that number. It will be less than that of course for 2016 since we only launched Harrington half-year.

Yep, of course. Yes, I just want to make sure it wasn't in that 200 example it would be 50 per quarter if we should think normal seasonality of reinsurance (inaudible) -- and do more in Q1 and Q3 and less in Q2 and Q4. It's okay I can follow up off-line.

That make sense.

Next we have Michael Hennessy with Goldman Sachs.

Thanks so much. Most of my questions have been answered. I guess I had one maybe part industry, part access question on reserving if I could.

So if I look here more of your underwriting income is reserve development this year versus last year and overall development is up in notional terms as well, for a lot of folks as some comments indicated on the call, we see development trend slower favorable development trend slow. I would look to the more recent [actions] for the industry they don't look as good as the older years do a few years out. There haven't been that many property losses in the past two years which has been good for (inaudible) year results.

Then when I look at your results for the last few quarters generally, at least relative to my estimates, they've come in a bit light; pricing is not improving which would seem to imply that future earnings altogether are becoming more reliant on development at a time when these industry trends don't look great.

So I am just trying to square all that together and maybe there's something about your book that's a little different or something that I am missing there, just in terms of how your repositioning -- if you could help me sort of square those things that would be really helpful.

Mike, if you don't mind I will ask you to kind of restate your question there was a lot in which you said and I'm not sure how much of that was an observation versus question. If you would frame a question I would be happy to answer it.

Sure. So if reserving trends are becoming less favorable and your earnings are more reliant on reserve development, can you give us some indication of your comfort that those reserving trends are going to continue to come through, and if so I guess from where, given that would sort of imply that it would be sort of different in the industry overall.

Okay. I guess I would take exception to the fact that our earnings are dependent on reserve development.

I think that what you're saying with regards to AXIS, I can't speak for anybody else, is our reserving philosophy and we've always said that no matter what the estimate is in any one year we will take -- we will book a higher number than that because we think it's a prudent thing to do. And the reserve release -- and we've also said that we would take bad news early and that we would be slow in releasing good news.

That is our philosophy it's consistently applied for a long time. One of the results of this strategy is that if you only compare current year results then by definition we are going to book a higher number than the industry.

It's not that we are less profitable is that we choose to book a higher number than the rest of the industry in the current year results.

Okay.

We will be consistent. The second issue is that as far as we are concerned reserve releases are simply a question of timing of profit. It doesn't create profits, the profits are created on the day that you underwrite the policy and what we chose to do is to simply recognize some of that profitability in the current year and wait until we are more sure of the results to recognize the balance of it. And so our strategy and our push to reserving by definition will mean that if we do it consistently there should be reserve releases going forward.

Now there are two components to reserve releases, the first is what is the -- what is the midpoint of the actuarial estimates and the second is what are you booking above the midpoint of the actual estimate. In the absence of change in the actuarial estimate then whatever you book above the midpoint of the actual estimate should come down over time as a reserve releases.

The change in the actuarial estimate up or down is another component of the change and I would say that for most of the industry, most of what you have seen in reserve releases is that change in the midpoint.

Okay.

There may be other companies that book more than the midpoint, I can't speak to that. But I will tell you is we have two components to our reserve releases. One is the change in the midpoint and the second is the release of that additional number that we chose not to take on day one.

Our strategy should result in a more consistent pattern of releases but of course there is no guarantee of that.

Got it. Okay. Thank you so much.

At this time we are showing no further questions we will go ahead in concludes today's question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you very much for participating in our quarter we are obviously very pleased of the improvement in our performance. We are especially pleased of the large growth in our book value in the quarter and year-to-date and we look forward to reporting to you further progress as we move forward. Thank you.

We thank you, sir, also to the rest of the management team for your time today the conference call is now concluded. At this time you may disconnect your lines. Thank you, take care. Have a great day everyone.