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AXIS Capital Holdings Limited (NYSE:AXS)

Q1 2014 Earnings Conference Call

April 30, 2014 10:00 AM ET

Executives

Richard T. Gieryn – Secretary and General Counsel

Albert A. Benchimol – President and Chief Executive Officer

Joseph C. Henry – Chief Financial Officer

Analysts

Amit Kumar – Macquarie Capital, Inc.

Michael Nannizzi – Goldman Sachs

Jay A. Cohen – Bank of Merrill Lynch

Vinay Misquith – Evercore Partners

Brian R. Meredith – UBS

Ryan Clark – Janney Capital Markets

Kai Pan – Morgan Stanley & Co. LLC

Meyer Shields – Keefe, Bruyette & Woods, Inc.

Operator

Good morning, and welcome to the First Quarter 2014 Axis Capital Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Rick Gieryn. Please go ahead, sir.

Richard T. Gieryn

Thank you, Laura, and good morning ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial results for Axis Capital for the first quarter ended March 31, 2014. Our earnings press release and financial supplement were issued yesterday evening after the market closed. If you would like copies, please visit the Investor Information section of our website, www.axiscapital.com.

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

With me on today’s call are Albert Benchimol, our President and CEO; and Joe Henry, our CFO. Before I turn the call over to Albert, I will remind everyone that the statements made during this call including the question-and-answer session, which are not historical facts, maybe forward-looking statements within the meaning of the U.S. Federal Securities laws.

Forward-looking statements contained in this presentation include, but are not necessarily limited to information regarding our estimate of losses relating to catastrophes, policies, and other loss events, general economic, capital and credit market conditions, future growth prospects, financial results and capital management initiatives, evaluation of losses and loss reserves, investment strategies, investment portfolio and market performance, impact to the marketplace with respect to changes in pricing model, and our expectations regarding pricing and other market conditions. These statements involve risks, uncertainties, and assumptions, which could be used, which could cause actual results to differ materially from our own expectations.

For a discussion of these matters, please refer to the risks factors section in our most recent Form 10-K on file with the Securities and Exchange Commission. We undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events, or otherwise.

In addition, this presentation contains information regarding operating income and our consolidated underwriting income, which are non-GAAP financial measures within the meaning of the U.S. Federal Securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release, which can be found on our website.

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

Albert A. Benchimol

Thank you, Rick, and good morning ladies and gentlemen. Thank you for joining us today. Last night AXIS reported its first quarter operating income of a $137 million or a $1.24 per diluted share and annualized ROE of 10.6%. We ended the quarter with diluted book value per share of $47.13 an increase of 3% from year-end 2013. And we returned over $200 million in capital to our shareholders through share repurchases and common share dividends.

Repurchasing over 3% of our shares outstanding at the end of last year. Results are down from last year’s exceptional performance. While both quarters had very low cat activity this year’s quarter was impacted by a higher property losses on the insurance segment. Including attritional and midsize losses and our U.S. property book

In comparison, last year’s first quarter had very low property loss experience. In addition, as we indicated last quarter, we’ve maintained appropriately prudent loss picks for our U.S. D&O insurance business. As we restructure that portfolio. We’re pleased to report that we are making good progress on this front and we expect to see the benefits of our actions gradually reflected in our future results.

Overall, we reported a solid combined ratio of 91.9%. We also continue to make significant progress in optimizing our risk-adjusted returns through portfolio balance and diversification and building new sources of profitable growth. Our accidents and health unit is continuing to import improved profitability getting closer to its goal of breakeven, bringing on significant new business and achieving a better portfolio balance between insurance and reinsurance. And while it’s still early days, other recent initiatives such as our third-party capital management units and weather in commodities market unit, are showing positive contributions to our profitable growth trajectory.

As we’ve mentioned before, we also recently reentered the U.S. primary casualty market and are achieving good momentum in this area. This was our first quarter of underwriting for our new syndicate at Lloyds. This initiative will significantly expand our access to international specialty lines and we are now seeing business we had not seen previously. We’re also recently brought on a new healthcare professional liability team.

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

Joseph C. Henry

Thank you, Albert and good morning everyone. During the first quarter we generated solid results with an annualized operating ROE of 10.6%. In addition, quarterly diluted book value per common share, a key metric in measuring the value we generate for our shareholders, increased by $1.33 per share or almost 3% in the quarter to a record high of $47.15.

Our quarterly results benefitted from a quiet quarter with respect to natural catastrophe and weather-related losses as was the case in the comparative quarter of last year. In addition, the continued growth in our book of business and net favorable prior year reserve development contributed positively to our results. These positive factors were partially offset by higher insurance property loss ratios reflecting among other things, an increase in mid-sized and attritional loss activity. In addition, our results continue to be impacted by higher underlying loss ratios for the professional U.S. Insurance D&O business, which we discussed on last quarters call and which continues to earn in 2014.

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

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

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

Our liability lines continue to contribute positively to our top line grown primarily due to new business opportunities in the U.S. wholesale excess casualty markets, which also benefited from increasing rates and the continued growth of the U.S. primary casualty market which the company reentered during 2013. Credit and political risk growth reflects new business written during the quarter.

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

Our first quarter consolidated net premiums written were up 6%, exceeding the growth rates for gross premiums written. This is similar to what we reported over the previous three quarters and reflects the changes we made in the reinsurance purchasing program in our insurance segment. These changes in our reinsurance buying program included reductions in the quarter share cession rates for significant parts of our professional lines and liability books, a reduction in the cost of our property per risk and cat protections, and higher retentions for both property and marine.

Our net premiums earned were up 8% to $946 million for the quarter with growth in both the insurance and reinsurance segments. Insurance increased by 12% primarily driven by professional, accident and health, and liability business written in recent periods as well as the positive impact of the reductions in the seated reinsurance programs discussed earlier.

Reinsurance growth of 5% primarily reflects business written in prior periods in the professional lines, growth in the motor proportional book and the continued expansion of the agriculture business. This growth was partially offset by decreases in catastrophe and credit and surety lines. Our first quarter 2014, consolidated current accident year loss ratio increased by 5.7 points from 56.4% to 62.1% compared to the same period of last year and was driven by increases in both the insurance and reinsurance segments.

Our insurance segment current accident year loss ratio increased by 9.3 points to 64.8%. This increase was driven by the following three key drivers, first an increase in the current accident year loss ratio in the property lines, which were impacted among other factors by a higher level of mid-sized and attritional losses during the quarter ended March 31 2014.

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

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

Turning to loss reserves established in prior years we continue to benefit from net favorable loss development which aggregated to a net $43 million this quarter. Short-tail classes in both segments contributed $29 million of this balance, primarily reflecting better than expected loss emergence. During 2013 we began to give way to actuarial methods that reflect our actual experience for liability reinsurance business and this resulted in a release of a further $6 million of favorable development in the first quarter of the current year.

Other notable movements include net favorable development in the reinsurance professional lines of $6 million and in the insurance credit and political risk lines of $4 million.

During the first quarter of 2014 our acquisition cost ratio increased by 1.6 points quarter-over-quarter from 16.6% to 18.2% and the increase was primarily driven by our reinsurance segment. The increase in the acquisition cost ratio for the reinsurance segment was primarily due to variances in accrual or loss sensitive features in underlying contracts and higher acquisition cost paid on certain lines of business. Accruals related to loss sensitive features reduce the segments acquisition cost ratio in the first quarter of 2013, however these features had a lesser impact on the first quarter of 2014.

The insurance segment noted a modest increase in the acquisition cost ratio this driven by a change in the mix of business and the reduction and commissions earned due to lower seeded commissions excuse me premiums, lower seeded premiums. The increase in the general and administrative expenses were primarily due to personnel related expenses driven by a higher headcount as well as professional and business cost related to various growth initiatives across the company. The increase in the general and administrative expenses was offset by the growth in net premiums earned resulting in a comparable G&A expense ratio relative to the prior year quarter.

Taken together, these items produced underwriting income of $109 million in a combined ratio of $91.1 for the quarter. Net investment income was $83 million for the quarter, down from $114 million in the fourth quarter of 2013, and down from $109 million in the first quarter of last year. The most significant driver of the decrease was the contribution to net investment income by our other investments portfolio. Other investments contributed $17 million during the quarter versus $41 million in the fourth quarter of 2013 and $43 million in the first quarter of the prior year.

The decrease in net investment income from other investments was primarily due to a decrease in the income form hedge funds, which benefited from the strong performance of the equity markets during the fourth quarter and the first quarter of last year. Income from our fixed maturity portfolios including cash and short-term investments was $74 million for the quarter compared to last quarter $78 million and $71 million in the prior year quarter.

In aggregate, the total return of our cash and investments portfolio for the quarter was 1.1%. The positive total returns for the current quarter were due mainly to price improvements on our fixed maturities portfolio as a result of falling U.S. and Euro interest rates and continued spread tightening. We continue to hold a high quality, well diversified portfolio with cash and investment assets totaling $15.4 billion at March 31, up approximately $0.6 billion from December 31 and $0.9 billion from a year ago.

The increase is primarily due to proceeds from our new senior note issuance which I will discuss later. The duration of our fixed maturity portfolio was 3.0 years at March 31, down slightly from 3.2 years at December 31 and 3.1 years at the end of March 2013. Our fixed maturities weighted average credit rating remains unchanged at AA minus. Our total capital at March 31, 2014 was $7.3 billion including $1.5 billion of senior notes and $600 million of preferred equity, an increase of $500 million from $6.8 billion at December 31, 2013. The increase is primarily driven by our first quarter issuance of $250 million of 2.65% senior unsecured notes which are due for repayment in 2019 and the issuance of $250 million of 5.15% senior unsecured notes which are due in 2045.

The net proceeds from these offerings are expected to be used toward the repayment of $500 million of our 5.75% senior unsecured notes which mature on December 1, 2014. As such the increase in our debt to capital ratios is expected to be temporary. The change in our capital position also reflects the net income generated during the quarter and the increase in unrealized gains on investments due to the downward shift in sovereign yield curves and the tightening of credit spreads during the quarter. These are almost totally offset by the continuation of the share repurchases under our board authorized share repurchase program as well as the payment of common dividends.

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

During the quarter, we commence the operations of our new syndicate at Lloyds, Axa syndicate 1686, which we believe we’ll provide us with exciting new opportunities through the AXIS to Lloyd’s worldwide licenses and extensive distribution network. Our new third-party capital initiative AXIS Ventures commence business on January 1, 2014 with the writing of a fully collateralized catastrophe cover.

The first quarter results of their operations have been included in our consolidated statement of operations. We expect this vehicle to enter into additional reinsurance transactions throughout the rest of this year. We believe that our diversified global franchise and strong balance sheet will continue to allow us to take advantage of market opportunities as they emerge.

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

Albert A. Benchimol

Thank you, Joe. With respect to market conditions after three years of attractive pricing improvements in the industry, we are seeing leveling off of pricing overall. With modest decreases across some of the property and specialty lines. However, despite a slowdown in pricing they remain good fundamentals and opportunities for profitable growth in many insurance lines of business.

Within our insurance segment, for the overall AXIS insurance rate change for the first quarter of 2014 was +1% flat was last quarter +1% level or down from the 5% achieved in the first quarter of last year. Rate changes across U.S. lines were generally stronger than changes in international lines and rates overall are still at or ahead of loss trends for U.S. business.

In our U.S. division overall rates continued in a positive direction for the 12 consecutive quarter, and we also maintain strong renewal retentions across our lines. The overall rate change was +4%, down slightly from +5% last quarter. In property, E&S and the middle markets were essentially flat, while the larger counts and risk manage property experience modest declines in the low single-digit range.

The weakening of property pricing reflects a abundant capacity and a lack of recent cat events. Other U.S. business experienced positive rate change. Casualty continued strong with U.S. AXIS Casualty up in the range of +10%, this was one of our stronger growth businesses in the first quarter.

In our international division the overall rate change was down 3% for the quarter, which is consistent with the rate decline achieved last quarter. But this represents only the second quarter of rate declines after three years of sustained the rate increases. As usual, there were wide variations and rates depending on the line of business or geography. Of the 14 separate lines we monitor, eight were down, one was flat, and five were up.

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

Aviation and terrorism are continuing their long decline in the phase of low loss activity. While we’ve seen a couple of large aviation losses in the last few months including the Asiana incident in San Francisco and the recent disappearance of Malaysian flight 370, due remain substantial over capacity. And absence further significant loss activity we do not expect any noticeable reversal in these front.

Areas trend positive rate movements include Marine liability and Canadian property. In our professional lines division, the overall rate change was plus 1% for the quarter equal to last quarter’s rate activity. U.S. and Bermuda business achieve a plus 2% rate change while international professional lines rates were flattish in the quarter.

Across almost all product rate increases on primary layers continue to be meaningfully higher than rates on access layers. For example, in U.S. financial institution products primary D&O achieve double-digit increases while overall primary business average plus 3%, but access business was down 1%.

More than commercial D&O, we achieved rate increases in access of 10% on the U.S. primary book, access layers were relatively flat and side in coverage’s remain soft. The overall U.S. D&O book average rate increases of about 4%. Our E&O lines produce about of 2% positive rate change and aggregate. The larger commercial E&O accounts were seeing increases in the low single-digits, but a relatively flat on access layers.

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

Moving onto reinsurance, as you know our first quarter is dominated by the significant January 1, renewal date. Excluding agriculture approximately 56% of our expiring 2013 reinsurance premium renewed during the quarter. As we discussed in our February conference call, our January 1 renewals delivered approximately at 6% increasing premiums on the expiring portfolio.

Overall, abandoned capacity, strong balance sheets and consolidation of programs let to lower reinsurance pricing across most regions in lines of business. This started January 1 and continues through the quarter into the April 1 renewal. The three key themes so far this year our greater retentions from our stronger Stevens consolidation and restructuring a programs and substantial increase in supply coming from both established players and alternative capital.

Well I’m optimistic that overtime, the industry will both develop new products in markets as well as right size of capital it appears that in the near term at least there is pressure as many reinsurers try to protect their top line and providers of alternative capital attempts to fully deploy the new capacity. We continue to maintain disciplinary and are underwriting and a pullback from certain opportunities when they no longer meet our return requirements. That said, we are starting from a strong base of profitability and we continue to write and renewed business with acceptable levels of profitability.

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

Meanwhile, this businesses be receding in line with expectations, primary premiums for the industry are down year-over-year as lower commodity prices are reducing values at risk. On excess of loss programs we’re seeing reductions of up to 10% on loss-free accounts. Most premiums for us in the first quarter were US MPCI business and we plan and expect to balance with that with more non-U.S. business over the rest of the year.

The U.S. reinsurance markets experienced rate reductions at ceding commissions and response to significant competition and abundant market capacity. Clients are consolidating programs and changing structures in order to lower reinsurance costs nevertheless, as I noted U.S. reinsurance business is generally been reasonably attractive and while margins are compressing, many lines and programs are still generating adequate margins and meeting hurdle rates. For US property reinsurance, commercial insurance rates began leveling off at January 1 with increasing downward momentum through April 1. Capacity for prorisk reinsurance is abundant, but some discipline remains for Gulf Coast and Southeast to win in flood exposures.

For U.S. professional lines clients are generally retaining more business on their balance sheets we’re seeing increased competition from new insurance offering smaller lines as following markets. Our position as an established lead market in many of these areas has helped with many of longer-term client relationships. Reinsured are sometimes paying more ceding commissions on professional lines and liability business.

However, this is generally offset by primary rate improvements in the low to mid single digits in several of these lines. Such that technical profitability is staying reasonably stable. Our April 1 Asian renewals were mostly dominated by Japanese property reinsurance business, market conditions and rates generally deteriorated faster than expected many clients consolidated programs and combined previously separate wind and earthquake XoL covers. We also observed significant new capacity from both existing and new competition.

As a result ceding commissions on pro rata programs increased wind and flood excess of loss rate declined 10% to 15% and earthquake excess of loss rates declined in the mid teens. You’ll recall of course that pricing in these lines were much stronger post that tsunami and earthquake. Despite these difficult market conditions we believe rates in Asia are generally still adequate and meet our requirements. AXIS Re Asia-Pacific continues to make strides and boosting our strategic profile in the Asian market. Looking forward to the upcoming June 1 and July 1 renewals which are dominated by U.S. catastrophe excess of loss renewals.

We expect continued softening of rates we expect to see reductions in the range of 10% or greater and continued strong showing by alternative capital providers. Florida is not a large part of our book and we have excellent relationships. So I expect we’ll fair better than most. AXIS is very well positioned to out perform in a transitioning market as a hybrid insurer and reinsurer with a wide of products strong relationships, superior ratings and a global platform we see a wide variety of opportunities.

We’re not dependent on any one line or market and can afford to remain disciplined and pursue only that business which we consider to be profitable and additive to our portfolio. While we’re seeing some pressure on reinsurance margins, we also get the benefit of better terms on the reinsurance that we purchase. So we have excellent balance. Before I close my prepared remarks I would like to update you on recent management changes at AXIS.

We continue to attract high quality talent David Phillips recently joined us as our new Chief Investment Officer, I’ve worked with David in the past and I’m confident that given his proven track record he will contribute significantly to the success of AXIS going forward. In addition as most you are aware we recently announced the retirement of Dennis Reding, Chief Operating Officer. Jack Gressier has assumed this position, well Peter Wilson, who was formerly President of U.S. Insurance and has extensive management experience operating global insurance platforms will succeed Jack as CEO of Axis insurance. These management transitions highlight the deep bench of talent at Axis, and I have great confidence in the abilities of both Jack and Peter to succeed in their new roles.

Of course, I have to mention that Dennis Reding’s contribution to Axis have been invaluable. Since Dennis joined us in 2002, he has established our U.S. operations has been integral part of our growth. We are fortunate that he will continue to maintain an important presence at Axis as a senior adviser and member of our executive committee.

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

Question-and-Answer Session

Operator

Thank you. At this time we’ll begin question-and-answer session. (Operator Instructions) And our first question today will come from Amit Kumar of Macquarie.

Amit Kumar – Macquarie Capital, Inc.

Thanks and good morning. Did this issue sort of clarifications on the US D&O book. Would it be possible to sort of quantify that number, what you mentioned I guess in the three key drivers? And what I was trying to do was also looking at your global triangles and trying to figure out what the reserve base for the US D&O separately, and what might be the initial loss pick for that piece? Could you maybe let's help us put this issue to bed and give some, come with those numbers? Thanks.

Joseph C. Henry

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

Amit Kumar – Macquarie Capital, Inc.

Got it.

Joseph C. Henry

Despite the fact we’ve had excellent experience in the first quarter of the year. We’ve kept the loss ratio for the 2014 year at 89%, so what you have, as you have the unearned premiums from 2013 earnings through at those higher loss ratios. And the new business we kept at higher loss ratio despite the effect of the underlying business was behaved very, very well in the first quarter.

As a matter of fact, I can jump into just a couple of metrics along those lines. Our attachment in these business related to the restructuring of the business. Our attachment point on the business that we discussed on CMS is actually increased about 11% to $20 million. Average limits have decreased about 7% to $7 million and specifically on the public D&O business. Our average attachment point has increased 80% to $45 million. The average limit is actually stayed flat. Public D&O represents about 34% of our portfolio today versus 51% of the portfolio in the first quarter of 2013. And as far as rate changes are concerned Albert mentioned this, but I’ll just say in terms of primary public D&O and primary ancillary lines, our average increase was $13.4% in Q1.

Amit Kumar – Macquarie Capital, Inc.

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

Joseph C. Henry

Yeah that was basically the CMS book of business help the U.S. primary public D&O business within that.

Albert A. Benchimol

With in the U.S. professional lines book the CMS book that's a mosque broader book. we write both excess policies fiduciary policies and ancillary lines a number of business but the book that really caused biggest problem was really the primary portion of that book which we said that was approximately $15 million annually and that clearly book as given us the most trouble, which we have been working through.

And as you can hear from excuse me as you can hear from Joe’s statistics. Our people worked hard to make immediate changes in that portfolio and I think also interesting is the fact that the reported losses in the quarter versus expectations we’re also quite good but the reality is we are not going to react very quickly to that from our reserving perspective. I think we believe prudent think to do is to continue to book that business of the higher loss ratios make sure that we’ve got a right.

Make sure that we’ve got it contains and now was standing some early indications make sure all the trends or sufficiently powerful but we can then comfortably reduce the ratios. So that’s the policy decision we made to be prudent in booking this business as we are going through this restructuring of the portfolio.

Amit Kumar – Macquarie Capital, Inc.

Got it and that makes perfect sense. The only other question and I will re-queue; were there any additional uptick in the claims activity? I know we talked about that in the last call. I think what you're saying is that you had been conservative and that's why you see this, but beyond that, has that book been silent in Q1? Or has there been any other changes in terms of loss cost trends?

Joseph C. Henry

No, I mean it was very silent Q1 as a matter fact we only had one claim over $5 million and actually related to prior year so the straight answer no we’ve had very low loss activity in the first quarter.

Amit Kumar – Macquarie Capital, Inc.

That’s great to know, that’s all I have and congrats on that. Thank you.

Joseph C. Henry

Thank you

Operator

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

Michael Nannizzi – Goldman Sachs

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

Joseph C. Henry

Yes I’m here.

Michael Nannizzi – Goldman Sachs

Oh I’m sorry I missed the buyback number since April 1 do you have that number handy?

Joseph C. Henry

Right, $37 million

Michael Nannizzi – Goldman Sachs

$37 million okay, great. And then did you quantify could you quantify how much of impacted the non property losses had in insurance in the first quarter?

Joseph C. Henry

Yep, could you stay with me a second?

Michael Nannizzi – Goldman Sachs

Sure

Joseph C. Henry

So what I’m going to do answering the question Mike is just lead you from last year’s accident year loss ratio to this year, accident loss ratio we talked about in our script was 9.3 points remember again that we had a very good quarter in the first quarter of 2013. But at 50.5 the major changes were two factors first as we just cover the professional initial expected loss ratio increase was about three points of that change the property it was balance six points in total and that’s a combination of experience the losses that we actually incurred as well as trying to be a little bit more conservative on the reserving side for those losses.

That’s six points first three in professional there are couple of other factors mix impacted is a little bit liability and ANH having a larger portion of earn premium that ticked it up a little bit and then we also had the Malaysian air loss in her aviation book of business which picked it up about another half of point. So that’s the components of the increase from Q1 2013 to Q1 2014.

Michael Nannizzi – Goldman Sachs

Got it. Thanks, that's really helpful. I'm trying to figure out, I kind of went back and looked at the last few quarters, and very often mix a been a factor in kind of talking about the change in the underlying on the year-over-year basis. And it’s been – it’s definitely been volatile and I know more pronounced initiative on the crops side with the expensive loss ratio composition different and a lot of the other business created some noise as well.

But I just trying to figure out like what is this a good snapshot maybe kind of adjusting partially for some those items maybe to get a normalized large loss load. An insurance and then in reinsurance I didn’t really see anything specifically decided, are these close to where you expect to be running these businesses, at least in 2014 until some of the professional liability catch up where is off?

Albert A. Benchimol

Let me address that. I think that there is going to be just normal volatility and let’s talk about property, I think on the professional lines I think as you got it Michael, we are going book it high for awhile as the UPR runs off over the rest of the year that will have a slightly smaller impact, but I think you got that piece, I think on the property, we actually we will break it up into four different areas, we’ve got smaller attritional, midsize attritional weather related cat.

So we’ve really look at it in terms of different version to be fair in both last year’s first quarter and this year's first quarter there really wasn't any true weather loss or cat loss. So it really relates to the smaller attritional and the midsize attritional. And if you look at the last three years, the average of small and midsize attritional approximately 45 mid-40s and the range quarter-over-quarter has been anywhere from the low-30s to the mid-50s.

And in fact the highest quarter was 56 was the first quarter 2012 the second highest quarter was this quarter was 54. In comparison the first quarter of last year was a 37. So it really reflects the various the volatility that’s you are going to have with these events. So plus or minus 10% from the average of 45 on attritional, small attritional and mid-size, these were really unrelated fire events. We look very hard for trends, and so it’s very difficult to fine them. So in this case I think that is just the normal volatility that you would expect to see within these small attritional losses

Michael Nannizzi – Goldman Sachs

Gotcha.

Albert A. Benchimol

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

Michael Nannizzi – Goldman Sachs

Got it. I know when you set out to make some changes and improve the business; you talked about reducing volatility, looking for areas of profitable growth. I'm just trying to looking now backwards, I look at the – if I compare AXIS to kind of other companies I cover, the volatility in the underlying from quarter-to-quarter is probably been more here than almost anywhere other than maybe the pure reinsurers. And I'm just trying to understand, where are we in a progression? And is this volatility in underlying, has it been somewhat surprising to you? Or is it just there's noise every quarter and when you look at the numbers, you feel comfortable that you are moving towards the past that you've outlined a couple years back? Thanks.

Albert A. Benchimol

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

From an ROE perspective these higher combined ratio businesses are highly accretive to the book of business because they require much less capital and provide a more steady stream of underlying profitability going forward so we think that is absolutely a right move when look in volatility and Michael I look less at the quarterly volatility then I do with the annual volatility and every year you go through especially on the property and specialty line that can be affected by individual risk losses you can have a situation when you have all of your losses in one quarter and end up with a same kind of average on an annual basis.

I can tell you from the analysis of the books that we have build over the last three years of all cases our risk management analysis distribution and curves also that the curves are actually getting less dispersed and therefore reducing the volatility around each of those portfolio. And so that confidence in a more steady profit stream lower volatility and lower cat exposure that have really allowed us to embark upon and aggressive stock repurchase program because we can actually afford to be much more efficient in the use of our capital higher premium for surplus leverage all of which are resulting in a better ROE longer-term.

But in our business I think we have to accept there is going to be quarterly volatility everything that I’m seeing here is generally consistent the one thing that we have not yet seem to prove out our strategy is demonstrate to you and the rest of our investors that over a period of two or three, four cats in the industry will our percentage of book value loss to those cats these are high and little well in the past.

I’m confident that it will not be and so what we’re seeing is the higher attritional loss ratios that we would have expect from the more stable business but you don’t see the expected improvement that we expected to see when in the large cats we should lose less of our book value then we have in the past I hope that’s helpful and make you understand where we’re going.

Michael Nannizzi – Goldman Sachs

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

Albert A. Benchimol

No, Michael actually its not and one thing that you might be looking at is the fact that we grown in the Southeast and recently in the Southeast because we were under represented in Florida and particular but if you look at almost all of our exposures there is always going to be some random volatility on a quarter-to-quarter basis because you take a look at the portfolio you have and you move that up or down. And I know that in a couple of lines we showed some increases in this quarter versus last quarter. But again if you go back on an annual basis comparing the end of the first quarter to the end of the first quarter of last year to the end of the first quarter the year before. You will find a consistency overall as a percentage of our shareholders equity the exposures are coming down.

The Southeast went up a little bit again because we felt that we were underweight in what is recognized as one of the most attractive markets. But let me give you another piece of data here we look at normally our individual PMLs by loss events, but we model things like, like what’s our aggregate annual cat result over a 100 and 250 period so you take all of the cat events and you model what they would do the you as a company for that year and you say how much would we lose, of our book value in that model in the last three years alone we have reduced that exposure by over 30% the modeled one and 250 aggregate cat loss has been and this is aggregate not just individual PML’s so there is actually more balance in the portfolio and again we are doing all of this to generate a more consistently profitable book of business over time.

Michael Nannizzi – Goldman Sachs

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

Operator

And our next question comes from Jay Cohen of Bank of Merrill Lynch.

Jay A. Cohen – Bank of Merrill Lynch

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

Albert A. Benchimol

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

We are looking at two or three different ways of utilizing third party capital, one is through individual transactions B is through a quarter shares of portions of our business, both on the cat side as well on the Ag side and Jay and Ben in the team are also speaking to a number of parties about – potentially other lines of business that could be a interest of third party capital, so you should expect that over as the year continues that they will be greater capacity provided by third parties and we will be ceding to them various portions of different books of business in ways that make sense to them and make sense to us. Joe you want to add something?

Joseph C. Henry

Yes Jay, just geography is in another income we are including our weathering commodities business and AXIS ventures as other income in our income statement.

Jay A. Cohen – Bank of Merrill Lynch

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

Albert A. Benchimol

You’re welcome.

Operator

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

Vinay Misquith – Evercore Partners

Hi, good morning. The first question I just wanted to get some clarifications on the mid-sized property loss. So I believe the net impact was 6 points higher this quarter versus the year-ago quarter. But you said that a year-ago quarter was an abnormally low quarter. How much would you say this quarter was higher than normal? So would that be about 3 points higher than normal?

Joseph C. Henry

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

Vinay Misquith – Evercore Partners

Okay, great. So if I just want to normalize the numbers, it's 3 points, great. The second point is on the professional liability. You mentioned that the difference was three points this year versus last year. Looking at three points on the earned premiums in the primary insurance operation, that's about $12 million. And I believe that the premiums earned, I mean since you said that the professional lines premiums was about $50 million per year, so that's about $12 million per quarter. So seems awfully high, so that's 100% loss ratio? I'm trying to the square these numbers?

Albert A. Benchimol

We’re right actually, we talked about it was $50 million, it was the primary book, we’ve right about a couple of $100 million in the U.S. and we probably write $800 million to $900 million all in on a gross basis. And so, what we spoke it was the problematic book, but we’ve been increasing just given the fact that the loss trends are moving in a direction and pricing and professional liability is generally been flat for the last couple of years.

You’ve both a normal trend of pricing increases sorry of loss ratio increases as well as the correct of actions that we’re doing in the primary D&O book in the U.S. But we’re clearly booking the primary D&O book in the U.S. at very, very conservative loss ratios right now.

Vinay Misquith – Evercore Partners

So, the subject premium is not 50 it’s more or like a couple of $100 million.

Albert A. Benchimol

That’s correct.

Vinay Misquith – Evercore Partners

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

Albert A. Benchimol

I think we should look at two things, as I am thinking about this right now, obviously the comparison is to the two quarters that I had very best ratios last year. So, the toughest comparison is going to be in the first and second quarter, because we started to raise the ratios in the third quarter and of course we’ve the corrective action in the fourth quarter so you wouldn't see that pump up in the fourth quarter because it's already have been taken.

So, we just give you sense of the geography of the comparisons. The second issue is that as we work through the UPR from last year, that’s going to be affecting our results this year. I think we’ve to be realistic and expect that we’re not going to take the book exactly to what we want it in the single renewal. My guess is that as we work through this it will take us probably two renewals to get the book ideally to what we want it.

So I think that you’re going to see progression through 2014 and through 2015, kind of the ideal numbers if you would we’ve been in 2016, but you should see progression in terms of the ratio starting on a comparative basis from the second quarter of this year. Because we already book them higher in the third quarter of last year, fourth quarter of last year we’re running through the heavier numbers in 2014.

And then in 2015 you’ll start to see the improvements to the better quality book that we’re riding in 2014 into 2015 and then through the second layer of renewals to really get the book to where want it providing more progress in 2016 from the book that were writing in 2015.

Vinay Misquith – Evercore Partners

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

Albert A. Benchimol

I’m sure, we are very helpful. But, it was never disclosure before. So, obviously I always at a hard time disclosing cat loss in this because of the differences in the book of business, I would say that we are expecting that as the percentage of premiums cat losses would be lower going forward then have in past, but would not prefer those point to time to this growth catalogs for each of our books.

Vinay Misquith – Evercore Partners

Okay. Thank

Operator

Next we have a question from Brian Meredith of UBS.

Brian R. Meredith – UBS

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

Albert A. Benchimol

While the two things here one is it really will depend on the conditions and the opportunities available to us in the mid day renewals. So I think it’s very much a reaction to – will the business available to optimize our portfolio were actually make in worse than what peaky.

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

Brian R. Meredith – UBS

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

Albert A. Benchimol

Don’t make too much of this decrease because as Joe pointed out. There was a significant quarter share. That was non renewed in the first quarter and to their credits our A&H team was able to replace a substantial amounts of that non renewal and I have no doubt that the very, very successful new business generation that are company has had in the past and into the first quarter, we will continue to the rest of the year so we are still projecting meaningful premium growth through the rest of the year.

Brian R. Meredith – UBS

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

Albert A. Benchimol

Yes, as you know when you start the business you end up with relatively lumpy large contract. This was largely insurance contract and I have to – maybe give a little story here because I am actually quite proud of what happened here. This is a perfect example of how we add value to our clients. This was a privately helped company that had grown perhaps to little fat had some shapeless stress, we provide significant advice in terms of the way we renew it. In terms of the mix of business and so on and we prepare to off and we are able to offer them a quarter share.

As that business grew they actually had an improve they actually operate offered of a larger quarter share which we took. They were successful to the point where they actually grew and units some incremental capital and we made a small investment in that company, to have them growth, to fund that growth. Subsequent to that they were sold in fact the transaction just closed this week or last week and the new owners are keeping the book essentially net.

And although we are losing some premium, we are actually going to make a significant gain on the investment that we made in that company so over the short life of our A&H division they were able to help at least this one company significantly improved the profitability in outlook. They made underwriting profits on the reinsurance treaty for a couple of years.

And they made a significant capital gain on the investment that we made in that party, so this is actually a very successful story for us. And I have no doubt that by the end of the second quarter the disappearance of that reinsurance treaty will not be noticeable in numbers.

Brian R. Meredith – UBS

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

Albert A. Benchimol

Yes, it’s interesting I’ve said this before we’re actually very fortunate and that we’ve already have a very wide range of products and a very good geography. So we have absolutely zero need of M&A to achieve our strategic goals. That said there maybe opportunities where there are opportunities for scale or to increase in one area or the other, but I can very easily see our strategy as moving forward and succeeding without an acquisition. Just as I can also easily see an opportunistic acquisition that makes us perhaps a little bit bigger or little bit more efficient in one or the other books, it’s purely opportunistic.

Brian R. Meredith – UBS

Great. Thank you.

Operator

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

Ryan Clark – Janney Capital Markets

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

Albert A. Benchimol

Well, we see a lot of opportunities and they’ve got to go through a filter and they need to make sense to us and always some businesses that seems to make sense to somebody else more than it does for us and we’ll, we’re interested in growing, we’re interested in making acquisitions to grow our A&H business, but it got to be a transaction that make sense to us and ultimately creates value for you our shareholders. Sometimes we can do it and we pursue them and sometimes it doesn’t look as attractive to us and we choose the path.

Ryan Clark – Janney Capital Markets

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

Joseph C. Henry

We get paid for growing book value, at the end of the day that’s the only thing that matters and growing book value ideally at a very attractive rate with relatively low volatility. And as you know that’s been the essence of our strategy for the last two, three years in terms of the volatility although its always been either core of strategy to grow book value. I think that as a general guideline, acquisitions can have a quote a one year dilutive impact as you go through pay fees, sometimes it takes you a year or two to achieve all the efficiencies. But at the end of the day it got to make sense on an NPV perspective from day one, and there are some strategy or some acquisition that might be okay, if they are dilutive in the first year, if you can make it up by the second year or so, but a transaction which is long-term dilutive is really hard, it’s hard to reconcile.

Ryan Clark – Janney Capital Markets

Great, thanks for the questions guys. Or answers.

Operator

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

Kai Pan – Morgan Stanley & Co. LLC

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

Joseph C. Henry

Yes, that’s right. I think that as we’ve said before, we think in earned premium base in north of 300 is what’s required to achieve underwriting profitability not because of the losses or the acquisition expense but basically to pay for the platform to generate premiums. So I do believe that in our premium base in excess of $300 million is that magic level for underwriting profitability and then 500 and so on for achieving your running rate target our release in the mid teams, that continues to be our view our market has changed significantly especially in the US in terms of the nature of the opportunities with the Affordable Care Act and so on it so far and we are always modifying our tactics on the ground, but the three and the five level that you discuss are still good benchmarks.

Kai Pan – Morgan Stanley & Co. LLC

Great, then on the investment side recent new higher David Phillips where there be any changing in term your asset allocation as well as the sort of investing process.

Joseph C. Henry

No I think to be fair we should give David an opportunity to review with the risk but you might expect that we would not hire CIO who add philosophies and risk appetites that were meaningfully different that what we had. So I think that the core of the strategy is essentially the same will there be changes here or there, I would expect we would have some new ideas and some new insights. But I would say these would be changes at the margins as suppose to a fundamental change in our reserve in our investing processes or risk appetite.

Kai Pan – Morgan Stanley & Co. LLC

Lastly, do you have any sort of exposure to your current station?

Joseph C. Henry

I presume that what you are referring to would be political risk or a credit risk we have a very, very small amount of exposure in terms of our credit and political risk book in our credit risk solution we review those we think those are continuing to perform well they are key and core to the Ukrainian economy and we don’t believe that we are any noticeable risk at this point in time.

Kai Pan – Morgan Stanley & Co. LLC

Thank you so much.

Operator

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

Meyer Shields – Keefe, Bruyette & Woods, Inc.

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

Joseph C. Henry

Both, Jay likes to Jay Nichols who is the CEO of our insurance division as an expression that adore and that is that we are the juncture were risk meets capital and there are multiple sources of capital but we have one is our own capital, some of it is our reinsurance capital, some of it may be third party capital. We have an outstanding distribution of platform here using both insurance and reinsurance and there are number of risks of that we have access to which may be too much for our own equity.

And so would be very easy to take the benefit of our ability to access that business and share that business with reinsurance or with third party capital there may be third party capital providers who have a very specific risk appetite with whom we would be sitting down and we say this is not business that we have historically pursued but if the business that you are interested in let see if we can some of that for you.

So it’s really a combination of the two it’s a partnership between our selves and our third-party capital providers and we will share with them both business that we write on our own and that we’ve written historically, but there is a very good possibility that we could sit down with them identify lines of business that are attractive to them, and help them access that business.

Meyer Shields – Keefe, Bruyette & Woods, Inc.

Okay. Thanks. Is there anyway getting out the Steel that you collect versus your ownership share of the actual performance?

Joseph C. Henry

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

Meyer Shields – Keefe, Bruyette & Woods, Inc.

Okay, fantastic thanks very much.

Operator

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

Albert A. Benchimol

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

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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