AXIS Capital Holdings Limited (AXS) Q3 2016 Earnings Report, Transcript and Summary

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] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference call over to Ms. Linda Ventresca, Investor Relations. Ms. Ventresca, 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 supplement were issued yesterday evening after the market closed. If you would like copies, please visit the Investor Information section of our website, www.axiscapital.com. We set aside an hour for today’s call, which is also available as an audio webcast through the Investor Information section of our website. A replay of the teleconference will be available by dialing 877-344-7529 in 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 and 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 involves 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 10-K 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 reflects strength in 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 $157 million in capital to our shareholders through share repurchases and common share dividends, repurchasing 2.5% of our shares outstanding at the end of last quarter. Through nine months, we've returned 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 period last year, benefiting from light cat activity and continued favorable prior year reserve development. Each of our three major businesses, insurance, reinsurance and accident and health reported solid underwriting profits and year over year improvements. We are highly encouraged that the various metrics that we are monitoring to measure our progress reaffirm that Axis is 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 and strengthened market presence, we are well-positioned to find attractive business, even in a challenging environment and to drive superior shareholder returns and a transforming 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 to $59.77 was driven by net income and an increase in 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 of 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 return 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 and 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 with a restructuring of three large quota share treaties affected 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 and a 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 retrocessional 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 expectation has been that on balance our reinsurance net premiums written would show mid-single digit growth and 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 programs. 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 in pre-tax 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 year 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’s loss ratio was impacted by adverse rate and trend, largely offset by a decrease in the mid-size loss experience, particularly in our marine lines. Our reinsurance segment current accident year loss ratio, ex-cat and weather, increased slightly by point four tenths 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 long-tail lines of business. Year-to-date, our current accident year loss ratio increased by 2 points to 67.8 compared to the same period in 2015, driven by a two 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 mid-size 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 predominantly 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 four-tenths of a point, compared to the same period in 2015. Our reinsurance segment’s ratio increased to 26.1% due to the impact of retrocessional contracts, an increase in the amount of business being written on a proportional basis, together with 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 G&A expenses in 2016. Decreased acquisition costs in our insurance segment were driven by the higher ceding commissions following the expansion of our professional lines reinsurance programs and lower acquisition costs 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 expenses in the quarter and year-to-date. Overall, we reported underwriting income of $104 million, and a combined ratio of 92.6% for the third quarter. On a 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 month results as meeting our expectation 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 the 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 purchase pursuant to our board authorized share repurchase program and $1 million relating to shares purchased in connection with the restricted stock awards. At October 26, 2016, the remaining authorization under the repurchase program approved by the Board of Directors was $375 million. And some 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 of 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 $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 events 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 seeding in Florida, where losses may arise from lower layers of reinsurance programs. Overall, accessory is underweight, the sources of loss expected for the reinsurance market and our estimates are indicative of this. And 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 than 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 of this year and the third quarter of 2015. Casualty lines in the US were the strongest, particularly in 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 digit range. While international specialty lines remained 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 in the quarter as positive and casualty lines were offset by reductions in property. This compares to market rates that were down 2% in the second quarter this year and down 4% in the 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 risks that remain attractive, pushing for greater balance in our portfolio and shrinking of those areas where we are 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 consider to build the 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 marine 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 mid-size business, lower net lines, lower volatility and improving profitability metrics. Moving onto reinsurance, the major themes in the market remain the same as in recent periods, as we consider to see competition across most lines and geographies. However, as we've discussed with you in recent calls, we’re observing a number of positive indicators. We’ve begun to see pockets of resistance to further softening in rates and terms. In particular, recent quarter share renewals had difficulty increasing ceding commissions and we are seeing with slowing rate reductions and excessive loss placements, driven by abundant market capacity and generally good underlying experience. Nevertheless, we also see some large seasons 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 [indiscernible] indicates that 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 our seedings, providing a broad set of solutions to help them succeed. We’re managing micro cycles across portfolios, while expanding our products and opportunity set, including mortgage insurance, where we’re also a good start and expect to see positive contribution in 2017. We are observing a number of our clients continue to view reinsurance as a vehicle to strengthen their capital position via the rise of the risk transfer. This is especially true with certain insurers subject to solvency 2. 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 centric approach, delivering a full spectrum of reinsurance solutions. Overall, we are pleased with the progress we’re making and the cornerstones of our accessory 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 a vehicle through which we match a longer duration asset portfolio with medium to long tail 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 as 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 a permanent and growing capital base and third, additional fee income to overwrite the profit commission. It's an important part of our strategy to assemble a 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’ position as a leader in specialty insurance and reinsurance. Our path forward remains organized around delivering a differentiated value proposition, characterized by underwriting expertise, responsiveness, creativity and outstanding claims service, a risk appetite and portfolio construction informed by disciplined application of data and analytics, a solid balance sheet, complemented by a broad team of high-quality capital partners and an effective platform staff for 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, please open the lines.

[Operator Instructions] The first question we have will come from Jay Cohen, Bank of America. Please go ahead.

Yes. Thank you. Two questions. I guess first on Harrington Re, with Harrington, you mentioned one of the benefits is 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 are always responsive to the opportunities that we have and so if there is an opportunity to grow for and utilize more capital than is released by third-party capital partners, then we won’t do that. If we find that there is less opportunity, then certainly we would. 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 is 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 is 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 generated, really two step question. How do you determine what percent of those fees come in the form of fees and what come in the form of offsets to expenses? And then the second part of that question is, can you give us some advice on how to model those fees going forward?

I could try. So, the way we look at it is that those revenues that are overwrite specifically tied to the premium that we are 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 say belong in other income and that is generally the way we look at it and this is something that we're 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 are a portfolio of third-party capital partnerships, so you will get a consolidated number. Historically, I think it’s going to be approximately two-thirds of the fees are going to be considered offsets to G&A and a third 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.

Next we have [indiscernible] of Wells Fargo.

Hi, good morning. First on Harrington Re as well, there was about 100 million sourced for them in the quarter, I believe you guys said that they were going to be writing about a 0.25 to 0.3 premium for surplus. Was there an element that we saw higher premiums this quarter since this vehicle was launched later in the year? I guess how do we just think about the premium reduction for that vehicle as we go into 2017?

That is fair. I think it’s particular to our own accounting standards in which we recognize all the written premium upfront. I know that on quota shares, there are some companies that choose to recognize the quarterly amount in each quarter. We recognize the production on day one and then setup a UPR and then earn it over the period, which is by the way why our accounting for multi-year treaties has generated a perceived increase in our gross written premiums compared to some others, because others are not recognized in other premiums upfront 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 seek to Harrington somewhere in the area of a 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 with that renewal shifted to another quarter, how should we think about that for modeling purposes?

Well, we kind of explained that in the first half of the year, we still view that the growth that we were showing was accelerated by some timing factors by the end of the year, it would balance out. And so what you are 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 are saying.

Okay, great. And then just kind of more high-level margin question, year to date, your underlying margins hover about flat overall with last year, some improvement in insurance and reinsurance, what about a year into the margin improvement plan that you guys laid out at this time last year I guess. Are you - where you kind of thought you would be on an overall basis and by segment, and then given the still competitive insurance and also reinsurance market and I know you are making still some shift in your business mix, but how do you think about the level of margin improvement you can see between now and the end of 2017?

Actually, we are very pleased with the progress that we have, and as I said, the measures 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 four points in the third quarter, versus the third quarter of last year, down five points year-to-date versus ‘15. However, the mix of business in A&H changed and therefore there is 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 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, it improved by two 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 are concerned show very good progress. The mix of business is what’s causing some of these ratios to look at different and, of course, as we are also growing more fee business, which is improving the results, that contribution from the 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.

Alice, it’s Joe. The only thing I would add to that is that, if you wanted to get in to specifics of the insurance current accident year loss ratio, 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 the insurance segment, it’s about 1.8 points of a headwind this year. On reinsurance, it's about 0.7 and the fact that we've held our ex-cat and weather loss ratios on a year-to-date basis even with what I just referred to with respect to A&H is reflective of 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 can just give us a little bit of an updated view on what type of transactions you might consider for Axis?

Well, 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 am not sure it's appropriate to discuss the conversations that we're having.

Charles Sebaski of BMO Capital Markets.

Good morning. I guess the first question on just give some clarity to understand on the fee income, why is the offset to G&A as opposed to sort of as a ceding commission overwrite, which would come through the acquisition expense ratio, why isn't that being captured in the reinsurance division as all other reinsurance would be?

Yes. Charles, it's Joe. So last year, as you know, we offset those types of fees against our acquisition costs. This year, when we implemented Harrington Re, we took a hard look at how we were accounting for the costs 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 overwrite fees, we’ve got management fees. We've got profit commissions, performance fees. There are a lot of different type of fees and frankly, we just went through all of them and determined that part of them would be better off shown as other income. So it really is just reflective of a new view and 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 Albert said before, about two-thirds of those, we would expect to be offset against G&A going forward and about one-third of them would be other income in our income statement.

Alright. Next is on the accident and health, Albert, I think you mentioned that you kind of said in our three businesses and I think highlighting that accident and health as kind of a third business, yet it’s incorporated into the operating results of the insurance business and you kind of gave some detail that was helpful on the performance there and what insurance would look ex-A&H. If it’s a third business and you want us to look at it ex-A&H, why wouldn't that just be stripped out, like 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 materiality issue and certainly always was expected that once it reached a certain amount of materiality, it would be appropriate to split it out. So I think it's simply a question of timing scale.

Alright. I guess finally on currently what you guys are doing, I guess in the quarter and what you're seeing here in the fourth quarter, what would you say that the current accident year, what are you writing business at in current accident year ROE perspective, I guess maybe on an allocated capital basis, obviously the operating ROE and ROE were really strong in the quarter, but there is a lot of things that went 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 that the current year is generally written in the mid-to high single digit ROEs, which is where we continue to see the 2016 business being written.

Next we have Meyer Shields of KBW.

Thanks. Good morning. Albert, one big picture question. I think you’re clearly doing the right thing with Harrington Re, but I’m wondering in your view, how vulnerable is medium or long tail pricing, medium or long-tail lines pricing to the introduction of alternative forms of capital compared to what happened to property cap rates?

I think that there are two components to it, one is supply and demand and the other is the, of capital pursuing any kind of business and the other is the ultimately is the rights price because whoever provides the capital at some point is still going to need to be paid for their fees and their expenses and the claims that go forward. And whether the capital is alternative or industry capital, interest rates always have a significant impact because long tail losses are obviously generated over time, more investment income and so we've always had this allegation of or this connection between available investment returns and available - and the pricing on casualties. 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 third-party capital in the industry and the successful companies are going to be ones that make money in whatever market conditions result as a result of the capital condition and optimize their sourcing opportunities and their portfolios in the best way possible. I tend to believe that because of the capital that there is out there we're 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.

The second question just with regards to the insurance segment makeshift, does that have any implications for either trend or capital requirements?

A&Hs requires a lot less capital than the insurance, the rest of the insurance line, the property casualty insurance line, 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 P&C business. And again that’s why sometimes it’s difficult when we think of and ROE perspective from an outside perspective to look at a higher combined ratio, the initial reaction to a higher combined ratio might be that this is negative but if that higher combined ratio is attached to a lower capital requirement, you can actually achieve a very ROE which is why we are very pleased with the development that we’ve seen in the quarter and the year-to-date notwithstanding the fact that it had at a modest negative impact from the insurance combined ratio.

And on the loss trends?

I think the loss trends are going to be dependent on the individual line, 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.

Next we have Amit Kumar of Macquarie. Please go ahead.

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 Amit, for the most part this is normal leases from ‘14 and ‘15 action years and shot tail lines property in marine and older actions years 2015 I’m sorry 2010 and prior on the longer tail lines, nothing unusual in the release themselves. As I mentioned in the script, it really came from all lines of business in both segments and for the most part from our old action years. So there is no unusual item in the reserve release itself.

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? Kind of just update on that front.

Currently, the capital Harrington [indiscernible] which we consider very satisfactory for what we need right there right now. My response from the Harrington and frankly on all of third-party capital is we’ll file these things over time as they are necessary. We will continue to increase the amount of capital that we partner with but not necessarily with Harrington.

The third and final question and maybe this ties Harrington to Elyse’s question on size. Earlier today we were discussing the same thought process on other 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 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 that caused that - that interview and article I think we’re taking things out of context. I went back and re-read the article and again it was very clear that what I was 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 or an acquisition that on a theoretical basis, I said well given our size, given our capital, these are the things that we theoretically could do and that was not an indication that we were planning to do an acquisition of that type and other than a theoretical question that if AXIS where 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 all kind of 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.

Next we have Ryan Byrnes of Janney.

Most of mine have Artie 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 do you think that can get to in maybe the next I guess 3 to 5 years.

Thank you for that. And as you know we started the Lloyd's platform about two and a half years and the reason for that fundamentally is that we wanted to be able to leverage the licenses that Lloyd 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're 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.

The only thing I will add to that is just for the record here we have 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 is business we haven't seen before.

[Operator Instructions] The next question we have comes from Kai Pan of Morgan Stanley.

Just follow up on a question on the reserve, we have seen some sort of slowing reserve releases or some taking some charges on the primary care side. I just wondered how closely are you with your [indiscernible] 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 spend - and you’re referring here to the reinsurance I believe since you're talking about seats. We do as part of a 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 or 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 go and identify if something that we had already booked 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.

[indiscernible].

Just wanted to follow-up a little bit on some of the insurance group and just get a little more context. The growth in the property business, I think you said it was London, can you just talk a little bit more about what that is and I guess, I would've thought London property would be pretty tough business right now.

So Ian two things, one, we have a MDA 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 just seen better opportunity. So this is just natural growth of an initiative really started up two or three years ago.

I would Ian that this is very consistent with going after smaller insurance and small accounts. And so in fact your absolutely correct in expecting that for the large accounts that are most at risk to the rate 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're 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.

[indiscernible] And then on A&H growth, did you say how - was that sort of the core insurance clients growing or was there was a big reinsurance going into that?

It’s actually mostly reinsurance in both our international operation and our US operation Ian. We've done some additional business in the Middle East and frankly we written some new business in 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 I 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 is other strategic partners mean is that other third-party capital and am I right adding this all of 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 is a very observant of you, what you see on that slide is only people with whom we have an underwriting relationship and we share our risk with them. We do have other retro that we purchased but that is not reported on that page it's reported in the sessions I believe.

I just want to add up I think the net premium just showed here were equal to the net premiums for the reinsurance segment, so it looked like it was 100% of it.

Okay I'm sorry but that's my mistake.

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

And then just to clarify Elyse's question earlier, obviously you said you booked the quarter's share upfront, 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 guess how much bigger than normal this was [indiscernible]?

My recollection is that there is both a small amount of retro but not much to it. I think the way to look at it is on an annualized basis. When you think about the annual premium that we're ceding to Harrington to be the best 25 to 30% of their capital and what you’re seeing here is what we’ve you got for the six months reflecting what we're going to need to for the year, you should not expect that there would be a similar amount in the fourth quarter because most of those contracts were written upfront, these are quota share contracts so they tend to be recognized upfront. There may be a small amount in the fourth quarter but you will see those, the written numbers being very frontloaded and then those written premiums being earned over a period of time.

And maybe let me word it a little bit better I worded that poorly. If I think about what I think the annual session to Harrington will be, should it be about that divided by four each quarter or it is going to be biased towards Q3 and Q1 when the book of normal renewals are? Just I wanted to model it better.

So I would suggest that if we're saying that 30% of 600, you’re 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 four quarters on 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 won't be 50 per quarter, if we should think of sort of normal seasonality of reinsurance do you think and do more in Q1 and Q3 and less in Q2 and Q4. It's okay I can follow up off-line.

That makes sense.

Next we have Michael Hennessey with Goldman Sachs.

Most of my questions have an answer. I guess I had one part industry part access question on reserving if I could. So if I look hear 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 someone commented indicated on the call we've seen development trends slower favorable development trends slow. I would look to the more recent action year for the industry, they don't look as good as the older years did a few years out and there haven't been that many property losses at least in the last few years which has been good for action year results. And then when I look at your results for the last few quarters generally at least relative to my estimates they have 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'm just trying to square of all that together and maybe there are something about your book that's a little different or something that I am missing there just in terms of how your repositioning, so if you could help me sort of square those things that would be really helpful.

Mike if you don't mind, I’ll ask you to kind of restate your question, there was a lot in what you said and I'm not sure how much of that was an observation versus question, if you reframe the 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 than the industry overall.

I guess, I would take exception for the fact that our earnings are dependent on reserve development. I think that what you're saving with regards to AXIS, I can’t speak for anybody else is our reserving philosophy, we’ve always said that no matter what the estimate is in any one year we will book a higher number than that because we think it’s the 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 been considerably applied for a long time. One of the results of the strategy is that if you only compare current year results and then by definition we are going to book a higher number than the industry that's not that we are less profitable it’s that we choose to book a higher number than the rest of the industry in the current year results, it'll be consistent. The second issue is that as far as we're concerned reserve releases are simply a question of timing of profits. It doesn’t create profit, the profits are created on the day that you underwrite the policy and what we choose to do is to simply recognize some of that profitability in the current year and wait until we are more sure of the result to recognize the balance of it. And so our strategy and approach to reserving by definition will mean that if we do it consistently there should be reserve releases going forward. And there are two components to reserve releases, the first is what is the midpoint of the actuarial estimate and the second is what are you booking above the midpoint of the actuarial estimate. In the absence of change in the actuarial estimate and then whatever you book above the midpoint of the actuarial 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 which I have seen in reserve releases is that change is the midpoint. They 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.

Well at this time we are showing no further questions, we will go ahead and conclude today’s question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well 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.

And we thank you sir and to the rest of the management team for your time off today. The conference call is now concluded. At this time you may disconnect your lines. Thank you. Take care and have a great day everyone.