AXIS Capital Holdings Limited (AXS) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the AXIS Capital Fourth Quarter and Full-Year 2016 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn conference over to Linda Ventresca, Investor Relations. Please go ahead.

Thank you, Kate, 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 fourth quarter and the year ended December 31, 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 the United States, and the international number is 412-317-0088. The conference code for both replay dial-in numbers is 1009-8770. With me on today's call are Albert Benchimol, our President and CEO; and Joe Henry, our CFO. Before I turn the call over to Albert, I will remind everyone that the statements made during this call, including the question-and-answer session, which are not historical facts may be forward-looking statements. 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's 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 our 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 fourth-quarter operating income of $101 million, or $1.14 per diluted share, bringing our full-year operating income to $4.48 per share, an 11% increase in year-over-year operating income per share, an improvement in operating ROE to 7.9%. Our core operating performance strengthened in both the quarter and full year, as the improvements we've put in place allowed us to absorb both higher industry cat losses and negative market conditions, and still deliver for our customers, partners in distribution, and our shareholders. We entered the year with diluted book value per share of $58.27. Adjusting for dividends, diluted book value per share grew 10% over the last 12 months. This is a satisfying rate of growth, considering the significant sell-off experienced in the bond markets in the weeks following the U.S. election, which impacted the value of our fixed income investments. We also continued our practice of managing our capital for the benefit of our shareholders. During the year, we increased our dividend by 9% and returned $644 million to our shareholders through common dividends and share repurchases. Over the last five years, we returned to our shareholders in excess of 100% of aggregate operating income, including the breakup fee earned from PartnerRe in 2015. We've been able to do that while we grew our overall business by optimizing our portfolio and reducing volatility for enhanced capital efficiency, as well as more strategic use of reinsurance and third-party capital. Again this quarter, we demonstrated that our efforts to reposition our portfolio are bearing fruit. In a year with higher global catastrophe losses, our combined ratio for the full year was only up about 1 point, despite the cat loss ratio being up about 3 points over the prior year. I would also note that while observers report that 2016 was an above-average year for the 10-year average, let me rephrase that. That the cat losses for 2016 were above the 10-year average, our own cat loss ratio was actually 3 points lower than our 10-year average. In 2016, we took bold the steps forward, taking significant tangible actions to strengthen our market positioning and profitability across our businesses. We extended our geographic reach by expanding our presence in Dubai and setting up the launch of our Miami office to address the Latin American market. We increased our scale and market relevance in key sectors. This included organic growth in many of our initiatives, bringing on new market leaders and teams, and the recent announcement that we're acquiring Aviabel, a premier European specialty aviation insurer and reinsurer. By acquiring Aviabel, we're absorbing a portfolio that complements our existing airline business while extending our physical presence into Brussels and Amsterdam on the continent. We also built on our strengths. We invested in and committed to lines and markets that are consistent with our objectives of relevance, profitability, and scale, and where we have the best opportunities to drive possible growth. A recent example was our decision to redirect our U.S.-based resources and key personnel to the U.S. wholesale ENS market for property, primary casualty, and excess casualty lines, where we have historically held a very strong market position. I hasten to add that this is not an exit from retail markets. We're still very successful in covering U.S.-based property and casualty lines to retail program and facilities in the U.S., as well as through our London platform. And, of course, we continue to deliver a wide range of professional lines through all retail and wholesale channels. We made significant progress in developing strategic capital partnerships and positioning access as the Company that best matches risk to the most appropriate capital. We now have over $1 billion of additional capacity available through our strategic capital partners. An important component of our third-party capital strategy was the creation of Harrington Re, a $600-million specialty reinsurer launched together with the Blackstone Group. These partnerships allow us to do more for our clients and partners in distribution, share risk with knowledgeable long-term investors, and earn attractive fee income. For the full year, we reported fee income of $22 million, and we expect that this is just the beginning, as we see fee income as a steady and growing source of attractive revenue for AXIS. Through these initiatives and others, and the hard work of our dedicated employees across the globe, we are reinvigorating our brand and laying the foundation for a differentiated leader in global specialty risks, achieving intelligent growth in selected markets, optimizing our portfolios, matching risks with the right capital, and delivering solid and stable profitability. I'll report more on market conditions on our outlook for 2017 after Joe covers the highlights of our financial performance. Joe?

Thank you, Albert, and good morning, everyone. During the quarter, we generated strong results featuring net income of $131 million and an analyzed ROE of 9.9%. Our net income this quarter benefited from continued good underwriting performance, including a decrease in our current accident year loss ratio ex-cat and weather, together with continued favorable prior-year reserve development, strong investment income, and foreign exchange gains. These positive factors were partially offset by a higher level of catastrophe and weather-related losses in the quarter, primarily related to Hurricane Matthew and an increase in general and administrative expenses. Our book value declined by $1.50 in the quarter to $58.27, principally driven by unrealized losses on our available-for-sale investment portfolio due to higher U.S. Treasury rates. Moving into the details of our income statement, our fourth-quarter gross premiums written decreased by 9%, with decreases reported by both segments. Our insurance segment reported a decrease in gross premiums written of $6 million, or 1%, in the fourth quarter, compared to the same period in 2015. After adjusting for the impact of foreign exchange movements, our gross premiums written increased by 1% in the quarter. An increase in new business written in our property and professional lines was attributable to growth in our London book, including MGA and program business, and growth in our liability lines was attributable to our U.S. primary casualty book. These increases were partially offset by decreases in our credit and political risk, as well as our accident health lines. The decrease in credit and political risk was due to timing, and the decrease in accident and health was largely due to the non-renewal of a treaty in our North American reinsurance division in a low volume quarter for that operation. I would note, however, that our A&H book grew by almost $80 million, or 22%, on a year-to-date basis. Our reinsurance segment reported a decrease of $64 million, or 34% in gross premiums written in the fourth quarter of 2016, compared to the same period in 2015. The decrease was primarily driven by timing differences in our professional liability and liability lines of business, partially offset by an increase in our agricultural lines. After adjusting for the impacts of multi-year contracts and timing differences, gross premiums written decreased by $13 million, or 7%. Further, it is worth noting that our fourth quarter is not a meaningful production period for our reinsurance segment. Consolidated net premiums written decreased by 22% in the fourth quarter of 2016 compared to the same period of 2015. Insurance net premiums written were down 8%, reflecting lower premiums written in the quarter and increased premiums ceded in our professional and liability lines. Reinsurance net premiums written were down 52%, reflecting the decrease in gross premiums written in the quarter, as well as the impact of retrocessions to Harrington Re on our liability and professional lines. On a year-to-date basis, reinsurance gross premiums, gross and net premiums written were up 11% and 2% respectively compared to 2015. As we discussed with you in previous quarters, we have been ceding more of our reinsurance premiums to our strategic capital partners in recent periods, particularly in our liability and professional lines, due to the launch of Harrington Re in the third quarter, as well as increased retrocessions of our catastrophe and property business throughout the year. Consolidated net premiums earned in the fourth quarter of 2016 are comparable to the same period in 2015 in both segments. Our fourth-quarter consolidated accident year loss ratio increased by 8/10 of 1 point to 66% compared to the same period in 2015. During the quarter, we incurred $59 million, or 6.4 points in pretax catastrophe and weather-related losses, primarily attributable to Hurricane Matthew and U.S. weather-related events. Comparatively, we incurred $10 million, or 1.1 points primarily attributable to U.S. weather-related events during the same period in 2015. With regard to Hurricane Matthew, we incurred pre-tax net losses of $52 million, with our insurance segment contributing $39 million and reinsurance segment contributing $13 million to these losses. After-tax net losses attributable to Hurricane Matthew are at the low end of the range we indicated last quarter. Our fourth-quarter current accident year loss ratio ex-cat and weather decreased by 4.5 points to 59.6%. Our insurance segment's quarterly current accident year loss ratio ex-cat and weather decreased by 6.4 points from 62% to 55.6%, primarily due to a decrease in midsize and attritional losses in our property, marine, and liability lines, partially offset by the adverse impact of rate and trend, and changes in business mix. Our reinsurance segments quarterly current accident year loss ratio ex-cat and weather decreased by 2.5 points from 66.1% to 63.6% due to a decrease in midsize and attritional losses in our credit and surety lines, partially offset by increased loss experience in our agricultural lines and the ongoing adverse impact of rate and trend. Year to date, our consolidated current accident year loss ratio increased by 1.8 points to 67.4%, driven by a 2.9 point increase in the cat loss ratio. During the year, we incurred $204 million of pretax catastrophe and weather-related losses net of reinstatement premiums compared to $100 million in same period in 2015. After adjusting for these events, our current accident year loss ratio decreased by 1.1 points to 61.8%. Our insurance segment's year-to-date current accident year loss ratio ex-cat and weather decreased by 1.9 points from 62.5% to 60.6% due to a decrease in midsize and attritional losses in our marine and property lines, partially offset by the adverse impact of rate and trend, changes in business mix, and increased losses in our insurance, credit, and political risk lines. Our reinsurance segment's year-to-date current accident year loss ratio ex-cat and weather decreased by 3/10 of 1 point from 63.3% to 63% due to a decrease in midsize and attritional credit and surety lines, and partially offset by the adverse impact of rate and trend. Turning to loss reserves established in prior years, our results continued to benefit from net favorable loss reserve development, which amounted to $68 million during the fourth quarter. Short-tail classes in both segments contributed $31 million of this balance. In addition, our professional insurance and reinsurance reserve classes reported $16 million, or motor reinsurance reserve class contributed $15 million, and our liability reinsurance reserve class contributed $12 million of the net favorable prior-year development during the quarter. Our year-to-date favorable prior-year development was $292 million compared to $243 million in 2015. During the fourth quarter, our acquisition cost ratio increased modestly by 7/10 of 1 point compared to the same period in 2015. Our reinsurance segment's ratio increased by 3/10 of 1 point to 25.9% due to the impact of retrocessional contracts. The impact was partially offset by changes in the business mix and a decrease in adjustments related to loss-sensitive features. In 2015, the ratio included the benefits of fees from strategic capital partners which are now included in other income or offset against general and administrative expenses. Our insurance segment's ratio increased by 1.1 points to 14.5%, driven by an increase in variable acquisition costs primarily related to our MGA and broker portfolio business and the absence of favorable federal excise tax adjustment, which benefited 2015, partially offset by increased ceding commissions on our professional line ceded reinsurance programs. Our G&A ratio increased by 2.6% in the quarter compared to the same period in 2015. Focusing solely on dollars, expenses in the quarter have increased by $23 million. We did, however, have some unusual expenses in Q4 2016, including severance and transition costs related to the closure of four U.S. retail business unit, costs associated with the introduction of a new retirement provision in our equity plan, and stock compensation expenses which reflected the higher Company share price on cash-settled awards. In addition, incentive composition expenses increased in the quarter compared to 2015, reflecting our stronger 2016 performance. Adjusting for unusual items and timing, we believe that our run rate in the quarter is consistent with the full-year adjusted ratio in the mid 15s. Overall, we reported underwriting income of $66 million and a combined ratio of 96.7% for the fourth quarter. On the year-to-date basis, our underwriting income was $279 million with a combined ratio of 95.9%. Net investment income was $96 million for the quarter, driven by the strong performance from our fixed-income portfolio, attributable to an emphasis on longer spread duration assets and our alternative investment portfolio driven by hedge funds. Overall for the year, net investment income met our expectations, as strong performance in the last three quarters offset negative volatility in our hedge funds reported earlier in the year. In the aggregate, the total return on our cash and investment portfolio for the quarter was negative 1.1%, including foreign exchange movements, or 0.8 of 1% -- negative 0.8 of 1% excluding foreign exchange. The total return in the current quarter was primarily driven by unrealized losses on fixed income securities as a result of the increase in the U.S. Treasury rates and the strengthening of the U.S. dollar against the pound sterling and the euro. For the year, our total return on investments was 2.5% including foreign exchange movements, with 3% excluding foreign exchange. The total return for the full year was primarily driven by contributions from net investment income and unrealized gains as a result of the tightening of credit spreads, particularly in high yield, and strong equity markets. During the quarter, we issued $550 million of 5.5% Series E preferred shares and repurchased $49 million of our 6.875% Series C preferred shares using a portion of the net proceeds from the Series E issuance. We intend on using a portion of the remaining net proceeds from the Series E preferred share offering to redeem the remaining $351 million of our Series C preferred shares outstanding. Until the redemption of our Series C preferred shares in April, our preferred dividend expense will be temporarily elevated. During the quarter we repurchased an additional $123 million worth of common shares pursuant to our 2016 Board-authorized share repurchase program. In addition, we announced the share repurchase authorization program of $1 billion of the Company's common shares effective January 1, 2017, through December 31, 2017. At February 1, 2017, the remaining authorization under the repurchase program approved by our Board of Directors was $975 million. In conclusion, I'd to reiterate our strong underwriting performance this quarter, and to note that we continued to make progress towards achieving and realizing the benefits of the strategic goals we have discussed with you in prior quarters. Finally, I'd like to remind you of the additional will see you disclosure we introduced in our financial supplement last quarter relating to our activities with our strategic capital partners, which includes details of premium ceded by our reinsurance segment to our strategic capital partners, as well as details of fee income generated as a result of these arrangements. With that, I'll turn the call back over to Albert.

Thank you, Joe. Before opening up the call to questions, let me provide an update on market pricing and our January 1 reinsurance renewals. As with the rest the market, we observed continued pricing pressures in most lines and markets in the fourth quarter. Although, we are seeing both pockets of stabilization and increases what are warranted. The overall average price change for our insurance book was minus 2% in the fourth quarter. This is a lesser decline than the negative 3% experienced in the third quarter of 2016 and the fourth quarter of 2015. Consistent with prior quarters, the greatest pressure is on catastrophe exposed property and London-based global specialty lines. Large accounts continue to be more competitive with its smaller risks. There U.S. property and casualty marketplace closed 2016 on a positive note for us. The overall rate change for our U.S. division was up 3% in the fourth quarter. Casualty lines continued on the path of positive rate movement, while property lines witnessed a slowing of rate declines as compared to previous quarters. In property, we are seeing glimpses of carriers taking corrective underwriting actions, which we hope will translate to improving rate in 2017. In our international division, we saw an overall rate change of minus 5% for the quarter, which, although disappointing, is a deceleration of market pressures. In London too, we are seeing the very first tentative signs of results to improve market rates. Energy, property, and aviation represented the most competitive conditions, but we are managing our book carefully, reducing our business volume when necessary and increasing our writings of smaller, less volatile risks. The aviation market in particular has shown some encouraging signs of late, and many feel we may be approaching a bottom. In our professional lines division, overall rates declined 2%, in line with the rate change experienced in the third quarter. Aggregate E&O rates were flat for the quarter, although, with some softening seen in excess cyber coverages. D&O lines declined 4%, with primary layers slightly down, while excess and side A experienced more significant declines. As I mentioned at the beginning of the call, our resources and efforts are focused on businesses where we have competitive strengths, and feel the market offers us opportunities for profitable growth. We continue to make great strides in our accident and health business, growing strongly again and reaching underwriting profitability in 2016. And we are committed to building on that milestone in 2017. We continue to build our resources to better serve our clients and partners in distribution, and are excited about new opportunities to expand our footprint, including our new office in Miami, which will allow us to reach further into the Latin American market. Moving on to reinsurance, our client-centric efforts at positioning Axis Re as a more relevant core reinsurer continued to bear fruit. Clients are increasingly consolidating panels and differentiating between core reinsurers and secondary carriers from whom they are prepared to opportunistically purchase coverage. And we are pleased with our enhanced positioning. At January 1 renewals, we saw good submission flows across many lines and markets. Although pricing continues to soften year on year, we were encouraged by increased discipline from some competitors in certain lines and regions. The magnitude of price declines were generally lower across the reinsurance portfolio at January 1. Governments and non-governmental agencies are increasingly concluding that private industry is the right partner for the transfer of risk, which is a very positive trend for our business. We also saw growth opportunities in motor, where clients are addressing pressures from Solvency II. There was increased interest in combined programs, consolidating across similar lines of business and geographies, and we proactively work with clients to find solutions in many cases. The January 1 period represents approximately 55% of our global reinsurance book, excluding our agriculture. We grew gross premiums by approximately 10% on expiring business. Although, we expect that this will be somewhat offset by increased sessions to our strategic capital partners in 2017. We maintain our core disciplined and focused on key relationships, looking for the best deals with clients where we add value. We made some changes to our overall mix of business to protect our profitability, including getting off certain programs. As we look further into 2017, we will conservatively expand our reinsurance product and geographic scope into areas like mortgage, floods, regional multi-line, and using our Lloyd's syndicate to better serve our clients. Throughout our Company, both insurance and reinsurance, new initiatives and existing business alike will be approached with discipline, but we feel there are still good, profitable opportunities to pursue. Our relationships with key partners and distributions are stronger than ever, and we are increasingly confident of our ability to build well-balanced, profitable portfolios. We will continue to expand our ability to match the right risk with the right capital and generate a growing stream of attractive fee income to enhance our overall returns. In closing, I'm very pleased with our progress across the organization in 2016. While our results do not yet reflect the full benefits of the actions we have taken, and there is more work to do, our team did a great job of driving our Company forward, and I am excited about our Company's trajectory into 2017 and beyond. With that, I would like to open up the call for questions. Operator?

[Operator Instructions]. The first question comes from Elyse Greenspan of Wells Fargo. Please go ahead.

First question in terms of looking at the margins within the insurance book, you saw the strong improvement in the fourth quarter and also for the full year and you mentioned a couple times the benefit of that size losses. Was at a relatively low year in 360 or a high year in 2015 and how do we know to lies in the benefit that you might not expect going forward 2017? I'm just trying to get what kind of margin profile do you see on the underlying -- of a loss alongside to a loss I two book in 2017.

What I would say is that yes, $0.20 -- 2015 did have as we discussed in that year higher frequency of energy losses in particular and certainly less so in 2016. But although the word less event that affected us in 2016, I would say that it is more than just a lot. Part of the reason that we have a lower number of large losses is that we have changed the construction of our portfolios. We've reduced our limits available. We've changed our Reinsurance program. Swaddle we've had some losses, they have affected us last in 2016 than they did in 2015. Our business will always have volatility a large losses but we believe that we constructed our portfolios to be less full marble than they were in the past.

Okay and then on the reinsurance side, you mentioned in your commentary some areas that you are looking to expand in in 2017 like mortgage, flood and a few other areas. What is that due to the margin profile is as ago in that business for margin profile of your reinsurance book?

Well it depends on each one of them. So if you look at the mortgage business with a blood business, those tend to have generally lower technical ratios. The regional multilane business would tend to have were up an average technical ratio. Expanding by offering a products into Lloyd's should have no impact.

Okay, did you guys have any losses from the New Zealand earthquake in the quarter?

De minimis

Okay and then one last question. In terms of the reserve development, with accident did a favorable develop meant, from in the quarter?

Elyse, it is Joe, as it really came from all accident years if you want to characterize the reinsurance development prior year development it came from all lines of business and all accident years and on the insurance side it was almost all lines of business and most accident years. So really across the whole spectrum. I can give you more specifics if you want, but basically it is all accident years and all lines of business.

The next question comes from Jay Cohen of Bank of America Merrill Lynch. Please go ahead.

A couple questions. You mentioned on the insurance side that you did have some increase in agricultural related losses. I guess I'm wondering where that happened because it seems like the U.S. crop business was particularly good this year.

Right, Jay, we actually had some adverse experience in our European bulk. We had one large claim due to the French floods and droughts that occurred in that country. So for the most part our U.S. business was good as was the rest of the industry but he had a large loss in Europe.

Then on the G& A expense that it go up early due to some severance expense. Those charges that you took, will that result in savings going forward and if so, I don't know if you can quantify it or not?

Yes, let me give you some specifics here, Jay come on the G&A because without we're going to get that question. First, they may then we say that we will deliver by the end of 2017 on the promise we made two years ago to eliminate if you million dollars with of expenses which has and will help offset increases in other areas. So we had $25 million in all recall a one-time or timing related items in the fourth quarter and they were three major components. Severance as Albert mentioned most of which related to the decision to redeploy capital to the today in to the [indiscernible] also market. We reduce staff in the fourth quarter as result and that was about $9 million of the 25. I would say that's more one-time. Share-based compensation as we explained part of our restricted stock awards payout and cash with the significant increase in a stock price in Q4 they increased our expenses that was $7 million and frankly it was a catch up in the fourth quarter for the whole year. And third, we had from his-based compensation, our fourth quarter results caused us to increase our year-to-date performance which resulted in higher compensation they is also that was the catch catch-up adjustment is also I would say severance was more one-time in and these are based conversational and performance-based conversation were more catch ups and that was about $4 million if I did not mention that.

The next question comes from Kai Pan of Morgan Stanley. Please go ahead.

First question, Albert, on the ROE profile for the business. Looking back for the last for years, you made Greg progress as we is reshaping the business portfolio and that's showing up in low volatility but on the other hand the underlying margin is that you combined ratio shift higher and you are we was told% and 2013 and now down to close to 8% in 2016. I just wonder if is that as this portfolio at a steady-state and what are the drivers for our we improvement going forward?

I think the word couple of factors one of which is the -- suffered from lower investment income so that just part of the conservative but focusing on the portfolio, were actually confident that the portfolio although it might deliver higher tech technical ratios with the mix it has its it more capital efficient portfolio therefore positive on the ROE. [Indiscernible] would we look at our economic analysis we see that the portfolio in 2016 had a better -- the 15 and we certainly are expecting that in 2017 it will have a better -- Richard on risk-adjusted capital than 2016. As far as we are concerned what matters is making the most efficient use of capital, we believe the changes that we have made are going to deliver improved -- in the separately the quality of the underwriting is improved and as I indicated in my comments we do not believe get that our results fully reflect some of the changes that we have made. As you know part of our reserving policy is to ensure that we get us of indications time to mature before we reflect them in our reported loss ratios as we believe that the progress will be achieved in a loss ratio which also we will reflect them better ROEs going forward.

Okay. Then on the share repurchase, -- you returned more than you earned including some breakout these for the PartnerRe deal. I just wonder given that you are disruptor file now is suitably reduced, what -- can you sustain a share buyback that above -- earnings.

As you know we start our year assuming that we're going to give back to our shareholders all of our operating income in the form of share repurchase and dividends and that then we adjust up or down based on how the year develops and that continues to be our expectation.

To have as estimates of your current AXIS capital position?

We would not disclose our estimates on access capital position.

Lastly on -- tax reform some argue that U.S. player's tax rate of lower and some global players tax rate could go higher. Do you think that could actually change your competitive position in the marketplace?

Kai, let me answer questions little bit Tivoli then you ask that. First with respect to tax reform it is early days and I think it is very difficult to predict where tax reform a go. As you would expect we monitor closely all the proposals regarding tax reform. With respect to the border just the proposals to gotten a lot of attention in the last couple weeks, the House Republican blueprint House Republican blueprint for tax reform does not provide much specificity as to how this adjustment would apply -- to me, it is unclear whether a U.S. ceded would be considered to be importing a service or exporting a risk reform reinsurer. If it is viewed as an import, we support efforts to carve out financial service payments including insurance and Reinsurance payments from the border -- and also note this only applies to U.S. source business and have a submit an amount of our business which is sourced from outside of the United States. Against the backdrop of a shifting landscape we believe the flexibility built into our organizational structure investments and platform such as Lloyds will allow us to react reasonably Emily Tullis rate Slate of changes in and to approximately profitably optimize outcomes once we have more clarity.

Let me add so I think Joe gave you a good view of how we look at the situation right now in our preparedness to respond but I also want to response to either comments which is how does this affect your competitive position. I think there's a difference between where we get our income where we pay our taxes and are competitive position, our competitive position has been nothing but approved over the last several years. We continue to focus on service, we continue to -- on agility, claims payments, those things will not change. And as I said earlier our relationship with our producers and client was good as they've ever been. We will continue to do that then when we get clarity around taxes and other factors we will do what we need to do to optimize results at that point.

The next question comes from Charles Sebaski of BMO Capital Markets. Please go ahead.

The first question is kind of on capital philosophy and the new preferred issuance that you did. A note to you said you are going to retire this series the series see -- Series C but I believe you still end up with a net increase in preferred equity and given the changes in the book to a more capital efficient profile, why do need more capital?

It is not that we need more capital is we want to have more efficient Apple, Charles. As you know what of the factors we look at is ensuring that we have acted on reaching from the rating [Indiscernible] we think that's appropriate in our marketing. The rating agencies give full credit to a certain amount of perpetual preferred capital so if we are going to get the same 100% credit for -- the cost of Bice 15 versus our equity which has a higher cost of equity of you think we should maximize the amount of that cheaper deferred shares. So we will maximize the amount of preferred shares that we can really get full credit from the rating agencies and then within manager total capital. It is not that we need more capital, as we've said we bought back a lot of stock but we think that this allows us to replace equity of with lesser cost for equity.

Okay. So that's what -- maybe I did not ask a probably, is it I thought that due to the changes in the book the total capital need because of the new capital efficiencies of changing the portfolio that the Reinsurance buying would have meant that you just needed less equity, less shareholder equity in general for the book of business so it would not necessarily be that you need to be replaced but that would be a free up of capital to the restructuring of the overall portfolio ?

I generally agree with what you are seeing which is why we've been able to return all of our operating earnings what we've been growing the book and we will continue to its capital appropriately to balance capital efficiency on the one hand but also financial strength ratings on the other and the opportunity for profitable growth or we find it. So it is a balancing act ago we think that we have been very strong stewards of capital and we will continue to pursue down that path.

Okay. I guess then on the insurance book or insurance business overall, and how you did about it going forward to generate the returns necessary -- if we are looking down the road one year, two years down the road, how do you view the contribution of earnings in the insurance business relative to the Reinsurance does this as these changes take place regarding underwriting and other? Is still overall higher contribution from the Reinsurance business, do you expect that to maybe not parity but to get closer in the future or do you expect the relative contributions from the business to remain at the current balance levels?

Charles, I would refer to answer the question by saying that have a very high level of confidence that the Prophet profit can fusion from assurance will increase over time as the various actions that we have put in place start to be reflected through the goal ultimately as you know the severity out of things that affect the contribution from one area or the other, the location of cat and so on and so forth, but what I can tell you is that the team is very committed to delivering stronger financial returns and my expectation is that we would have stronger returns coming out of the insurance book

On the strategic partners and the seed that you've done from the Reinsurance side and I believe there's also a seed from the insurance side has not included in the disclosure of in the supplement, but I guess I'm just try to get a better understanding of what is your thoughts or what's the full scope of what can be seated, provided when you think about how you use those facilities and those partnerships, it is couple hundred million dollars here, can it be a multiple of that? Or is it mostly there, I'm just trying to understand to what level that can get not even necessary 17 over a multiyear period work.

Charles, that's an excellent question and from our perspective strategic capital partnerships are really about funding the totality of our portfolios. It is not necessarily limited to cap business or two liability business on the Reinsurance side, Julie about getting into partnerships with our -- with investors revenue appetite and we've got a broad range of products and we're happy to share any one of those products with them so as we walk down this path with our capital partners, we would be very happy to continue to is cede to them any kind of insurance business, A& H as us, is, Reinsurance business that fits their appetite. From my perspective, I see nothing wrong with growing the top line of this Company and having a greater proportion of our risks shared with strategic capital partners because I believe that that is the best way to manage and insurance and Reinsurance Company in this market. If we have the capital available to us we can do more for our clients and our partners and distribution. We've gotten knowledgeable is just partners who are willing to work with us and except risk and we have the ability to earn fees 20 at our capital efficiency and improve our ROE. So you should expect us to continue our efforts to gather and corner more third-party capital and to creatively find the structures where we can share more risk with third-party capital. We think that is the right way to go.

How should we think about the component of that relative to an earnings perspective? How much is expensed offset versus profit -- to get a handle on what if I think of this go going over time from a 22 million-dollar feet in $216,240,000,000 in 2017, how is that contribution from an earnings versus just an offset of the expenses of expenses that are currently undergoing in your business? Is trying to get some--

I think that we've estimated that about 2/3 go to offset G& A. Pick up is obviously some profit in that that to but from an accounting perspective, those go to offset G&A and then 1/3 of these will end up another income because the reflect profit contributions and other forms of revenues that don't fully offset G&A.

The next question comes from Brian Meredith of UBS. Please go ahead.

A couple questions for you. The first one, Albert, can you talk about your exposure to the potential changes in the Ogden discount organ discount rates?

Sure. So some people on the investment community may not be familiar with them. But in the UK there is a methodology to calculate lump-sum payment for large claims and Ogden discount rates are utilized for that.. Be on the discount rates are currently an approximately 2% and the -- chance Chancellor will reduce those rates. Of a see reduce those rates that would make the lump-sum payment higher. So it only affects one small part of our overall book of business and that's the motor book ago what I will say is that I hope you already know from the discussions we've had with the way we set reserves, we prudently set reserves with -- assumptions with regard to a number of areas and we are set with the expectations of that not every trend that we have in place will continue and so you said our reserves to be able to absorb unexpected changes whether they be frequency, severity or discount changes ago we are comfortable at this point in time that are reserved can properly reflect the risk of lower Ogden rates.

Can you of a general sense of how much of your reserves would be exposed to it? Because I completely agree that you guys set reserves very competitively -- payroll development actually going forward given the discount rate

What I would suggest is when we told by that with the Ogden rates are and then we can provide you with more specifics of the at this point in time you would just be guessing and I'm not sure that's helpful.

Albert, next question, can you give us some views on what you are seeing with respect to loss trend, public companies purchase adverse development covers and kind of thinking about that is maybe a year your loss trends are starred pickup start pick up, are you seeing that?

There's only to get up and so minds. You've heard about motor liability trends going up. Deferred about passenger would reliability we don't do any real motor business in the U.S. so that's not affecting us. Also seeing in the window world a significant increase in the Endo cases. So that's the industry. I'm pleased to say that in our book we've been following our book in great detail for a number of years and we have taken action where we needed to win we needed to and not necessarily repeat some of these issues but we address that B6 book back and in preventing and we discussed positions with you and I'm pleased to say that notwithstanding the fact that class-action names are probably the highest level within in a long time our participation in those claims is as low as it is ever been and that speaks to the cost structure for both ago always been cautious about our liability so we do not have a large but exposure -- although today we are taking advantage of the opportunities that are coming out of motor liability. With regards to some of the casual casualty claims, you about last year we've got out of excess casualty globally, not in U.S. but in the global facilities. So I think that we were to date quite good at reacting to the early signs and have been shifting our book such that we feel very good about where our book is and we do not have any of the concerns today that have been expressed by others.

The next question comes from Meyer Shields of KBW. Please go ahead.

Two questions if I can. First sitting aside the impact of rates and trends is the project of shifting your business next to lower volatility and higher CAFD richer lines, is that impact -- is that basically done ?

I'm sorry, can you expand on your question, I want to make sure I understand and in response what you are looking for.

Redeposits of the past three years was to focus on lines of business with both less volatility and maybe smaller margin because the overall return on capital were better so is into over but it does imply lower Tetco margins compared to the pseudo-code of that business mix shift has basically played out

The entry that is generally us but what I would say is that it is not simply a mix from a Shortell or a catastrophe lines will longer tail or a general liability line. Certainly we've done that but that the real hard work has actually been in shifting the way we risk into it of these individual portfolio so it me give you an example. We are still very strong participants in the energy world. That is a very good business but we've changed the way that we are building our portfolios. We've grown we are now very large leader in the renewal does different renewable energy work and doing less on the Marine side ago we are taking smaller limits which can again reduce the volatility so none of those things affect, if you would, the gross line by line change in technical ratio. Same thing in terms of our risk selection of in terms of managing micro- so no concentrations and so on so I do want to leave you with the impression that we've given up on both technical ratio, volatile lines and shifted the book entirely into a long tail lines been a combination of that shift, yes, of course, but also some significant improvements in the way that we are selecting risks in and building our portfolios. That has gone very well and will continue.

Second question and this is really naïve, if there is a change in U.S. tax rate let me ask this Tivoli. How much global Reinsurance demand reflects arbitraging prints and tax rates between would let's say the U.S. and Bermuda?

There are different views on that one, Meyer. I don't know how to answer it because when we are doing business in the U.S. we charge the same rates as U.S.-based reinsurers so how do you respond to your question? I think that it is a market clearing price as you know so the market clearing price is not necessarily set by people who have one tax rate or people web different kind of Patrick, there's a discover process. I think as we see the tax environment changing we are all opposite going to see how different companies react and we will do whatever we need to do at that point in time to optimize our portfolio.

[Operator Instructions]. The next question comes from Jay Cohen of Bank of America, Merrill Lynch. Please go ahead.

I just had a follow-up for Joe. Joe, if you could talk about the new money yields you are seeing in the market relative to our portfolio -- Duxton, side?

The new money yield is about 2.8%, Jay, so it is spiked up actually in the third and fourth quarter. We have else in frankly some rate increases into our 2017 plants so this is not necessarily going to dramatically change what we've forecasted our income to be going forward, but definitely increase in interest rates as having a beneficial impact on the net investment income of the portfolio.

There are no additional questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Albert Benchimol for closing remarks.

Thank you Operator into and thank you all for participating in our call. As we discussed, we're confident that we are on the right path for differentiated growth and profitability. We encourage we've made great progress but we know we still have more work to do to deliver on our goals. I can promise you that we are fully committed and focused on delivering further progress in 2017 and beyond. Have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.