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Executives

Keith Lennox - Investor Relations

Scott Carmilani - President, Chief Executive Officer & Chairman of the Board

Joan Dillard - Executive Vice President & Chief Financial Officer

John Gauthier - Executive Vice President and Chief Investment Officer

Barry Zurbuchen - Chief Risk Officer

Analysts

Ron Bobman - Capital Returns

Michael Nannizzi - Goldman Sachs

Dean Evans - Keefe, Bruyette, & Woods

Matthew Heimermann - JPMorgan

Ian Gutterman - Adage Capital

Allied World Assurance Company Holdings, AG (AWH) Q3 2011 Earnings Call November 4, 2011 9:00 AM ET

Operator

Good morning, and welcome to the Allied World Assurance Company Third Quarter of 2011 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Keith Lennox, Investor Relations Officer. Please go ahead.

Keith Lennox

Thank you. Good morning, everyone. Our press release and financial supplements were issued last night after the market closed. If you'd like copies of either, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available till November 18 on our website and as a teleconference replay. The dialing information for this replay is included in our earnings press release.

Our speakers this morning are Scott Carmilani, Allied World's President and Chief Executive Officer; Joan Dillard, the company's Chief Financial Officer; and John Gauthier, the company's’ Chief Investment Officer. Also with us to assist with questions, are several other members of our management team.

Before we begin, I will note that statements made during the call may include forward-looking statements within the meanings of the U.S. federal security laws. Forward-looking statements are subject to a number of uncertainties and risks that could significantly affect the company's current plans, anticipated actions and its future financial condition and results. These uncertainties and risks include, but are not limited to, those disclosed in the company's filings with the Securities and Exchange Commission. Forward-looking statements speak only to the date they are made, and the company assumes no obligation to update or revise any forward-looking statements in light of new information, future events or otherwise.

Additionally, during the call, management will discuss certain non-GAAP measures within the meaning of the U.S. federal security laws. For more information and a reconciliation of these measures to their most directly comparable GAAP financial measures, please refer to our earnings press release which was issued last night and is available on our website.

With that complete, I can turn the call over to Scott.

Scott Carmilani

Thank you, Keith, and good morning everybody. The company is reporting an operating income of $86 million or $2.19 per share for the quarter, which equates to an 11.5% annualized return on shareholders equity. The event in this quarter that dampened our operating result was of course hurricane Irene. It did some damage along the east coast and throughout New England. Otherwise we are pleased with our operating performance this quarter.

We often comment on our prudent reserving philosophy. This is again on display this quarter. Not only did our results benefit from over $60 million in reserve releases, but as importantly we did not experience any meaningful creep from the global catastrophe activity which occurred throughout the first half of 2011. Including the massive Japanese earthquake and tsunami.

On a net income basis mark-to-market losses in our investment portfolio are driving a loss of $11 million for the quarter. John Gauthier, our Chief Investment Officer will speak to the specifics of these losses in a moment and about the negative macroeconomic events and the volatility that impacted our portfolio this quarter.

While I am not happy with our investment results for the quarter on an absolute basis, we remain focused on the longer-term performance in our portfolio. We have demonstrated a strong record for managing our assets and have consistently outperformed many peers and our own benchmarks in recent year. We also believe firmly that despite this quarter’s result, the measures that we have taken to shorten the duration of and diversify our portfolio are in the best long-term interests of the company.

On the production front I am very pleased with the growth that we are reporting in all three of our operating segments for the quarter as we continue to penetrate the targeted lines and territories we operate in throughout the world. This is most apparent in our reinsurance segment where premiums were up over 35% from the prior period, due primarily from or Lloyd’s businesses written out of both our Singapore and London offices. This growth includes almost $20 million in increase from our international catastrophe reinsurance business, where we have gotten some payback from the global catastrophe losses experience over the last two years. Rates are up some 40% to 60% from many of the programs where we have participated.

In our reinsurance segment -- sorry, in our U.S. insurance segment, premiums are up over 10% and we are very pleased with the growth in our specialty classes of business, including our defense based liability business and in the marine initiatives. We are also seeing some growth in our healthcare business as our industry vertical strategy has continued to take hold. Healthcare is one of the industries where we have demonstrated expertise, unique service offerings, and a suite of products for that whole sector. Breadth of products and services that we offer to that industry continues to differentiate us in this market.

Finally, the premiums in our international insurance segment are also up for the quarter by 8.7%. This increase is due to the increased traction in our small market professional liability business, and our international trade credit initiatives that we started earlier in 2010. We are also seeing some growth in our general casualty line, where we are seeing some positive rate movement as well. In fact, up about 8% to 10% year-to-date in our Bermuda and European platforms.

Overall, the market is showing some signs of improvement. The capital is still robust for many of the carriers and claim trends are still at favorable levels. We are encouraged with some of the price changes that we are seeing in the market but recognize it’s still not a full-blown market turn. Except for our general casualty business, most of our other specialty casualty lines continue to see competition and rates are flat or down slightly.

On the other hand, property rates are now starting to see double digit improvement. But I still think we need to see a bit more before our risk appetite changes in a much more meaningful way. Given the current interest rate environment, rates more generally need to be going higher for the industry to start seeing sizable returns.

Before I turn it over to Joan, I would like to briefly address the termination of our merger agreement with Transatlantic. To say the least, it was a rollercoaster ride this summer and although we were disappointed with where we ultimately not able to complete the merger that we planned, I am grateful for the time and effort that everyone in the process and everyone involved put forth, including our friends at Transatlantic. From an Allied World perspective, we were entering into that transaction from a position of strength. I believe we represented ourselves well throughout the entire process and have actually emerged as a stronger company.

Our shareholders should recognize that we stuck to our guns, never wavered from the economics of that transaction that we agreed to back in June. I would compare this discipline to that what we have employed in managing our company over the last decade. And I believe it has continued to show in our results. I am also heartened that this experience puts on display the professionalism, strength, and resolve of our management team and really all of our employees. Many hours were put into the planning and the integration, yet we stayed focused on our daily production and servicing efforts and that’s showing. I believe these efforts are reflected in our third quarter results and our year-to-date operating results.

With that I’m going to turn it over to Joan.

Joan Dillard

Thanks, Scott, and good morning everyone. The company is reporting a net loss or $11 million or $0.29 per diluted share in the third quarter 2011, which compared to net income of $254.5 million in the third quarter of 2010. Driving our results for the quarter were $130.8 million or realized investment losses resulting from mark-to-market losses of $139.2 million and gains from the sale of securities of $8.4 million.

As a reminder, you will note that we have moved largely to a trading portfolio and these mark-to-market adjustments which formally went through AOCI, are now reflected as realized gains and losses in our income statement. Offsetting these losses were $60.1 million of underwriting income, $47.9 million in investment income and $35 million of other income from the termination fee that we received from Transatlantic. We consider this termination fee to be non-recurring so it’s not factored into our calculation of operating income.

For the first nine months of 2011, we recorded of net income of $91.4 million or $2.30 per diluted share, and that’s down from $572.2 million in the first nine months of last year. This decrease in the nine months results is primarily driven by a $311 million swing in realized investment returns for the period. And that’s from a gain of $289.3 million last year, to a loss of $21.6 million this year. Also contributing to this reduction in net income for the first nine months of the year was the increased catastrophe activity, lower reserve releases compared to last year, and lower investment income due to declining interest rates.

We recorded operating income of $86.2 million or $2.19 per diluted share for the third quarter of ’11, compared to operating income of $143.6 million or $2.94 per diluted share in 2010. This decrease is mainly driven by lower reserve releases of about $40 million less in the third quarter this year compared to the prior period. Nevertheless, we are reporting a healthy $61.5 million of reserve releases for the quarter and these releases are pretty evenly split across each of our segments.

For the first nine months of 2011, we recorded $89 million of operating income or $2.24 per diluted share, down from $300.5 million in the nine months of 2010. That’s also due to the increase CAT activity, lower investment income and reduced prior year reserve releases. During the quarter we recorded $33.5 million in catastrophe losses, and that includes $27 million from hurricane Irene and $6.5 million in adjustments from the earlier 2011 catastrophes, including $5 million from the second quarter mid-western U.S. storm activity.

Our reported loss ratio was 55.4% for the third quarter of ’11, which was adversely impacted by 9 points of CAT activity but did benefit from 16.6 point of net positive reserve development. Absent these items, our accident year loss ratio for the quarter was 63%. Our total investment return for the third quarter 2011 was a negative return or $88.9 million or a negative 1.1% of average invested assets.

So, let me turn the call over to, John, our Chief Investment Officer, to give us some color on the market and on our investment results for the quarter. John?

John Gauthier

Thank you, Joan, and good morning everyone. In previous calls we have talked about our concerns regarding the fiscal situation in United States. And you will recall that we had decreased our interest rate risk accordingly. But we did not anticipate with the market reaction to the downgrade of the U.S. government debt, which when coupled with the continued concerns over European debt and some less robust economic news, caused investors to increase purchases of U.S. treasury, driving yield to all time lows.

Over the long term, less yield for higher credit risk just doesn’t make sense to us and we have maintained our short duration position. At the same time investors sold any assets perceived to have exposure to economic risk. European stocks were down 23%, the S&P 500 down 14%, the high-yield market was off 6%, and a broad set of hedge fund indices were down 4% to 5%. Within the context of these very negative market returns, the Allied World portfolio was down as well for the quarter, with a return of minus 1.1%, bringing our year-to-date return to just over positive 1%.

Looking at the various components of that return, our fixed income portfolio was essentially flat for the quarter, as spread widening in credit sectors offset most of the rally in rates. Our distress mortgage portfolio lost 6% for the quarter, actually in spite of marginally positive news on the housing fundamentals. The inception to date return on that portfolio is 16% annually, though. Our alternatives portfolio is down about 5% for the quarter, inline with broad indices. We made modest additions to our private equity assets and we decreased our hedge fund exposure modestly.

Our equity portfolio is down 9% for the quarter, well above the minus 14% we returned for the market, but still a negative 9%. We made additions to this portfolio during the quarter and now on approximately 89 individual securities of companies around the world with decent growth prospects and paying dividends averaging more than 4%. While the equity markets may, and most likely will, stay volatile for a while, we are comfortable with the long-term fundamentals of the companies we own, and we expect to maintain that equity allocation.

Lastly, with the sell-off in the senior secured bank loan market we began to invest in this sector, adding a small allocation at quarter end which we expect to grow over the fourth quarter. We have been entering this market at prices in the low 90s and expected yield of 7%. Overall, while disappointed with the results of the quarter, we remain convinced that a diversified portfolio is more appropriate than ever in these uncertain economic times and volatile capital markets.

As evidence of the benefits of this patient strategy, we note that we have already seen meaningful reversal in our portfolio valuation in the month of October, as the portfolio recovers. As always, we provide complete transparency into our portfolio including new disclosures on the geographic spread including European exposure, and as usual CUSIP level details. We feel well positioned to avoid some of the headline risk that we are seeing especially in Europe and are happy to address any questions you have on this topic or others in the Q&A.

And with that I will hand it back to Joan.

Joan Dillard

Thanks, John. Wrapping up our results. Our expense ratio was 28.5% for the quarter, down from 32.9% from the third quarter 2010. He decrease is being driven by our general and administrative expense ratio which was 17.8% for the quarter, down from 20.6% in the prior period. This decline is due to the increase in our earned premiums for the period of 9.4%, coupled with a decrease of almost $4 million in expenses, primarily from a reduction in our performance-based incentive compensation. Our combined ratio for the third quarter 2011 was 83.9%, compared to 70.3% for the same period last year, again primarily due to the quarter’s CAT activity as well as the reduction in prior year reserve releases.

Lastly, I am happy to announce the resumption of our share repurchase program, which has been suspended because of our merger discussions with Transatlantic. We have just over $200 million remaining under the share buyback authorization, and given our current valuations we are eager to resume the program this quarter.

With that let me turn it back to Scott.

Scott Carmilani

Thanks, Joan. Let me close by saying that despite the global catastrophe activity and investment losses for the first the nine months of the year, I am pleased to report that we have been able to grow book value on a diluted basis by $2 or 2% since the beginning of the year. Premiums in each of our business segments are up year-over-year and all three of our operating segments were profitable in the third quarter.

While the events of last summer are behind us, Allied World is moving forward to our global operating platforms, offering our customers a broad array of insurance and reinsurance solutions, strong ratings and a strong capital base. Lastly, I’d like to mention that we are excited to be celebrating our tenth anniversary this month, and our first Investor Day which will be held this Tuesday, November 8, at the New York Stock Exchange.

Over the last ten years, Allied World has transformed itself from a class of 2001 from year to startup, to an organization with almost 700 employees located in 16 offices in eight different countries. I hope to see many of you who are on this call in person at the exchange on Tuesday. There we will introduce to you and you will hear from a greater cross-section of our senior management team and what's happening in their business environment.

With that, I will open it up to questions to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Ron Bobman of Capital Returns. Please go ahead.

Ron Bobman - Capital Returns

Well, it’s rare I get to go first. Thanks a lot and congrats on the quarter and continued results. Scott, I think it was in the first quarter, Allied was early to highlight the reserve addition that you took -- not gigantic mind you, for on the PE club deal, sort of collusion losses. And some other companies in the wake of your action have taken some losses for that same, I guess risk or loss.

Is Allied sort of -- are you at limits so to speak on that matter or could it get worse from here perspectively? Thanks a lot.

Scott Carmilani

Great question. And as I did say in the first quarter call and I have been saying for a while now, the financial institutions professionalize all these business has slid the wrong way. We have been downsizing that portfolio since 2008 and been moving away from a lot of those risks, and I think it’s starting to show. As you correctly pointed out, other markets are seeing reserving increases to that. We have reserved for a good portion of it. I won't say a hundred percent of it but a lot more than half, without being too specific because I don’t know what you know about those club games. I don’t want to jeopardize the position they are in with their mediators and the plaintiff’s accounts right now. But suffice to say, we are well on top of it and well accounted for.

Operator

The next question comes from Michael Nannizzi of Goldman Sachs. Please go ahead.

Michael Nannizzi - Goldman Sachs

Thanks. Just trying to get an understanding on the expenses. It looks like premiums were up but expenses were down, not just a ratio but on a notional basis. G&A and acquisition expenses. I am trying to get an understanding of that trend, whether or not the current quarter is a reflection of where you expect that to be, or should we look at that more on a year-to-date basis? And just a follow-up, thanks.

Scott Carmilani

Yeah. I will give you a general answer and then maybe Joan can rattle off some specific stats if you want. It’s a tough market place and we have known that for a while and the whole company has been very focused on controlling expenses. That’s something the underwriters and the underwriting departments can control. So we have been very diligent on focusing on expenses itself. We have been targeting sub-30 for a long time. We have been saying it for a long time and we have been actually able to achieve that now. It’s no secret, it’s simple math. Not rocket science that the earned premium growth helps that if you can keep it fixed, the expenses fixed.

So we have been able to keep a lot of our general and overhead expenses fixed. We have been working hard to diversify the distribution channels. So we are not reliant on any particular kind of market. Whether it’s retail, wholesale or particular broker. So some of that is diversification and some of that is diversification by product. So, yeah, the acquisition expenses are slightly down to, but that’s more of some switch from wholesale to retail and some mix of business switch.

Michael Nannizzi - Goldman Sachs

Okay.

Joan Dillard

Yeah, the only I could add to that too in terms of specifics, as Scott mentioned, we have had some diligent expense initiatives and just as an example at this time last year we had 706 employees, and as we sit here today we are at about 685. And also additionally on the -- you know we have been reimbursed for some of our Transatlantic merger related expenses. And coming through in quarter three, the reimbursement was basically awash with the expenses that we booked in quarter three. So that was completely wiped out. But it has been more along the lines of our expense initiatives.

Michael Nannizzi - Goldman Sachs

Okay. So when you say then that, the kind of the expense line, the way it looks from the third quarter, that’s a kind of a fair representation of a run rate?

Scott Carmilani

Hard to say it’s a run rate. It’s directionally in the right position but it’s going to be a big factor of rate improvement and what we can do strategically on the production and earned premium side too. We are holding the expenses as flat as we can relative to the size and shape we are at.

Michael Nannizzi - Goldman Sachs

And then, just a question on reinsurance. So you had some growth there, you mentioned Lloyd’s. Can you talk about the profile of that book in the business you are writing and growing in right now versus kind of the legacy book, how it’s different? Or maybe it’s not.

Scott Carmilani

Well, Lloyd’s gives us license and access to lots of Asia and Pan-Asia markets, where we wouldn’t otherwise have license to. So a lot of that is in the treaty book where we handle Singapore, Japan, New Zealand, Australia related business, and as you are well aware, there has been a lot of major losses in that part of the world in the last couple of years. And while we haven’t really increased exposure much, as I mentioned rates are up 40% to 60% on many of those treaties and many of the layers -- the different layers in those treaties. So a lot of that is payback or I should say rate increase on the existing businesses that we started to write over the last 18 months. And as we renewed it in the spring and in this latest quarter, we are booking a lot more premium.

Operator

The next question comes from Dean Evans of KBW. Please go ahead.

Dean Evans - Keefe, Bruyette, & Woods

Yeah, thanks, and congratulations on the strong quarter. First wondering, why don’t you touch a bit on the capital management side. As you mentioned you did announce the resumption of the share repurchase program. I was just wondering if you could give us a feel for may be the pace at which you would be using that? I believe that $200 million expires May 2012, if I am not incorrect there. Is it something we should think about kind of a steady state between now and then or could it be bulky and may be a refreshment of the plan. Any color there you can give would be helpful.

Scott Carmilani

Joan, you want to take that.

Joan Dillard

Sure. So, I think you will see more of the same. As we had a 10-D5 program in place, we would expect steady state repurchase of those shares through May of next year.

Scott Carmilani

You know, Dean, there are limits that are imposed, that how much you can buy on the floating stock through rules, SEC rules as such. So we will be aggressively buying as much as we can subject to those rules.

Dean Evans - Keefe, Bruyette, & Woods

Okay. If you do exhaust it before then would you look to a renewal plan and put a new one out there?

Scott Carmilani

As a Swiss company there are also shareholder rules so we would be filing a proxy and having a shareholder vote to change the plan. And it’s certainly a tool that it’s in our tool belt as you have seen we have executed on many times before. And given the market state, when we get into the January timeframe, the first quarter, we will evaluate that as one of the major tools we can use, along with the rest of our strategic plan for 2012.

Dean Evans - Keefe, Bruyette, & Woods

Okay. Next question. I was wondering, and maybe I missed it, but did you give the current PML, or do you have that number available?

Scott Carmilani

We did not, but I do have Barry Zurbuchen here, who is our Chief Risk Officer, and I am sure he has got that at his fingertips. Right, Barry.

Barry Zurbuchen

I do. We have reassessed our PML with the latest release of RMS version 11. I think it’s important before I give a number to understand that the actual exposure to losses hasn’t changed. It’s just one modeling terms view of the estimate of losses that has changed. So with that when we reassess our portfolio from version 10 to version 11, we see the PMLs going up about 25%. We are still within our stated risk tolerance for CAT risk, which as you probably know, is 20% of capital. So we still have room to grow our CAT book, it and when we see rates get to the level where we feel like there is a reason to grow and it’s profitable enough.

Dean Evans - Keefe, Bruyette, & Woods

Okay. Sorry, what is the exact number of it? Do you have that?

Barry Zurbuchen

Exact U.S. -- for U.S. hurricane, which is of course the number that would have moved the most, has gone from just under $500 million to about $650 million.

Dean Evans - Keefe, Bruyette, & Woods

Okay.

Scott Carmilani

For those of you who want to see --

Barry Zurbuchen

1 and 250.

Dean Evans - Keefe, Bruyette, & Woods

1 and 250, Okay.

Scott Carmilani

Dean, if you want to see pretty charts and graphs and more explanation of that, stay tuned for our Tuesday event in person.

Dean Evans - Keefe, Bruyette, & Woods

Yeah. It’s on the calendar, I am looking forward to it.

Operator

The next question comes from Matthew Heimermann of JPMorgan. Please go ahead.

Matthew Heimermann - JPMorgan

Hi, good morning, everybody. I have a couple of questions. The first one, Joan, the G&A ratio, I get that the reimburse -- that in 3Q, the merger related expenses are awash with the reimbursement but I believe you had a $2.6 million expense in 2Q. So I was curious if you actually got an equivalent benefit in 3Q and recaptured that as well.

Joan Dillard

No, we didn’t recapture that. There were some expenses that were not reimbursable. So that $2.6 that we had in Q2 is simply there in Q, that was not offset in Q3.

Matthew Heimermann - JPMorgan

Okay. That’s helpful. And then for Scott, I guess on the -- with respect to business interruption, my sense is, if we go back five, seven years ago when the insurance portfolio was much more focused to kind of the Bermuda based writings and much more large account. I think your international business interruption exposure probably was greater than it is today. So that’s kind of my first question, is to tell me if that assumption is right. But just curious, with AXA and now AIG this morning talking about expected to see some DI losses out of Thailand. Just curious on your thoughts there with respect to Thailand and then also just whether or not we are seeing anything come out of the Japan event.

Scott Carmilani

We are not seeing anything coming out of the Japan event. I know, for instance though, that the airlines are trying to make it a business interruption event, but it doesn’t qualify for one. Because there is no actual physical loss but there was cancellation of flights. So there is bit of a, I should say situation going on there that’s continued to be debated I guess by the legal beagles in that space. Thailand -- let me start by answering the question first. Yeah, we do have a less large account exposure in relative speaking to overall portfolio and less in general, just year-over-year on the larger property account business out of our Bermuda platform. Thailand, however, is a pretty serious event. I don’t know what do you guys know about it yet, but it’s a pretty big loss. Or I should say a pretty big storm and lot of flooding. And there are lot -- in today's there are -- you know, most Fortune 1000 companies have global operations everywhere. We are expecting to see four or five claims out of that part of the world that are related to large property accounts that we participate on. We have been able to identify four or five. We don’t know the numbers yet because I don’t think they are in a situation to report accurately. But we do know that we have at least four or five companies that we support that have real exposure there.

Matthew Heimermann - JPMorgan

Can you give us a sense maybe without -- just what the sub-limits are on the DI on a typical account?

Scott Carmilani

Well, it varies dramatically. But what I can tell you is our average line is less than $5 million on each of those companies.

Matthew Heimermann - JPMorgan

Okay.

Scott Carmilani

Whether it’s all or a partial for us, the max would be $4 million or $5 million per account.

Matthew Heimermann - JPMorgan

No. That’s perfect. Okay. The last question I had was just, kind of strategic, I mean I don’t agree with your comments about kind of how you handled yourself in -- around the whole terminated merger. I guess, but one of the things, strategically, I think you were trying to advance was really the reinsurance operation which -- when I think about your company, I would say I think the most recognized franchise piece of the company is really the insurance platform and reinsurance is kind of a work in process and if we think historically, I would say there has been kind of fits and starts with respect to focus and emphasis on that business. So with that kind of meandering preamble, I guess the question is strategically is that still something may be where you need to think about potentially doing a deal to make that a more formidable business and kind of increase the franchise value to the company. And if not I guess, I just an curious about just how you think about the strategic value it adds to the business?

Scott Carmilani

Sure. Good question. I will start by saying that internationally, I do still believe that reinsurance is a pretty good vehicle to touch a lot of countries you wouldn’t otherwise put big infrastructure in and worry about licensing 130 different countries and what not. Unless you are going to put boots on the ground and make a huge investment in infrastructure. Which would not be, in my opinion, very prudent in this economy or in this side of the cycle. So without rambling I would tell you that we are focused on making additional investment strategically in the reinsurance space internationally.

Now what I will say though is that doesn’t necessarily have to be a company but it might mean more people or different people and more firepower to the existing team that we have. For instance, we have a great team in Singapore but it’s a small team. Asia Pacific is a huge territory and to service it well you need more than a few people. So we will be putting more focus and emphasis on that. We are also moving some of our resources that we have currently in our reinsurance department to be focused -- help to focus more on the CAT space globally and the international reinsurance space globally. And the products and services that are best suited for those places.

Operator

(Operator Instructions) Our next question comes from Ian Gutterman of Adage Capital. Please go ahead.

Ian Gutterman - Adage Capital

Hi. First of all thanks again for doing the right thing for shareholders on the deal. Moving on, I just wanted to follow up on the expense ratio. Joan, I think the press release also mentioned the incentive comp coming down due to the cash this year, can you give some sense of how much that was and how it differed from first half?

Joan Dillard

Yeah. I think, I had mentioned before, there was $4 million difference just in the quarter on the incentive comp. And if you recall one other piece of the difference is, last year with the strength of our results in the latter half of the year we did increase our accruals in anticipation of those good results in 2010. So by comparison then, this year we are off in the quarter by the $4 million. And then on a year-to-date basis, the change in the incentive comp is $6.9 million.

Ian Gutterman - Adage Capital

Okay. So the $4 million was the year-over-year impact?

Joan Dillard

$4 million was the quarter-over-quarter. And we are almost $7 million on a year-to-date basis, year-over-year.

Ian Gutterman - Adage Capital

Okay. Got it. So I just (inaudible) sort of Q3 versus the first half. So maybe it’s a couple of million less in the first half, run rate sort of. Is that about right?

Joan Dillard

Four.

John Gauthier

No, no...

Ian Gutterman - Adage Capital

I think it was the first half, first half of last year.

Scott Carmilani

Third over second, or?

Ian Gutterman - Adage Capital

Right, third over second, right.

Joan Dillard

We can do that for you. We will be at our Investor Day next week.

Ian Gutterman - Adage Capital

Okay. No, that’s okay. It doesn’t sound like it’s that big a deal anyway.

Joan Dillard

No, really isn’t.

Scott Carmilani

That’s not the main driver.

Joan Dillard

Quarter three.

Ian Gutterman - Adage Capital

The other one. You mentioned some growth in property out of Lloyd’s, historically, let me back up a little bit. The lines where pricing seems to be moving first are lines that historically you have been under weighed in and I think for good reason. But in the lines you are -- that you are in as you said aren’t moving as much yet. Does that indicate any interest in trying to move your focus a little bit to do some more property or do some more long tail stuff. Or so you really just kind of want to stick to where you are under the premise that pricing will just come there and there just might be a little bit of a lag.

Scott Carmilani

Yeah. Let me use that as a chance to emphasize what I said and what Barry said. Prices are up, starting to go up double digits in that space but still low double digits. And yes, we have deemphasized property per risk and a lot of the property cap business because we didn’t think there was enough rate to justify the volatility or exposure. Well, better to be lucky than good sometimes. I don’t think you can name a property market or a property book of business that’s making money in 2012, or 2011 rather. There has been over $12 billion of losses in the U.S. between the storms in the mid-west, these hurricanes, the floods, the droughts out in Texas. So just a lot of little stuff happening. You add that to what's going on around the world in property markets despite the fact that economic capital model show it to look nice on a model format.

The rates just not pretty enough. So as it’s gone up 10% or going up 10% on the property effected business, more so where there has been directly effective losses and I mentioned the 40% to 60% in New Zealand, in Asia, and places like that, Japan. That’s enough for us to stay on those accounts and get some of the payback for that loss from a CAT perspective. Not necessarily enough yet for us to radically change our appetite, by what Barry said was we have capacity today if we wanted to write more. And take on more risk without hitting our threshold for tolerance. But I am not sure yet that’s enough to make us want to take on more. We are actively watching it, we are hopeful that January 1 proves to be a more significant double-digit rate increase environment today. And it should be. I think it should be in order for it to be excitable. And it would be nice to see it go up 45%-30%, but I am not sure it gets there.

Ian Gutterman - Adage Capital

And outside property and more of like the E&S pipelines?

Scott Carmilani

You know E&S will account business in the U.S. It’s not as directly affected unless you are in one of those spots like Alabama or where those tornadoes were in the spring this year. Or in the northeast, if are a skier and like Killington lodge I think you are in for a surprise. So it seems in those areas where people have dramatic exposure. E&S on the persona lines business is going to be drastically effected. It’s sort of a hit and miss as to whether or not it effects corporate insurance and habitational on the E&S market. Some of it has been greatly affected and some of it has been completely missed. So it’s all over the map.

Operator

(Operator Instructions) Our next question is from Ron Bobman of Capital Returns. Please go ahead.

Ron Bobman - Capital Returns

Hi thanks, again. I know you are not Olympus but how did you spend $35 million as part of the proposed TRH deal?

Joan Dillard

We didn’t.

Scott Carmilani

We didn’t spend $35 million, that’s what they paid us as the breakup fee component of the transaction.

Ron Bobman - Capital Returns

I thought that represented all reimbursement of cost, so that was in excess of cost?

Scott Carmilani

Yeah, that was in excess of cost.

Joan Dillard

That’s correct.

Ron Bobman - Capital Returns

Okay. I apologize, excuse me. Thanks a lot.

Scott Carmilani

They paid us that plus $13 million of expenses.

Operator

(Operator Instructions) This concludes or question and answer session, I would now like to turn the conference back over to Scott Carmilani for any closing remarks.

Scott Carmilani

Okay. Thanks everyone for participating in the call. We look forward to celebrating with those who are there on next Tuesday and hope everyone has a great week. Thank you very much.

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