Allied World's CEO Hosts Investor Day - Conference Call Transcript

| About: Allied World (AWH)
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Allied World Assurance Company Holdings, AG (NYSE:AWH) Investor Day November 8, 2011 10:30 AM ET


Jack Sennott – Chief Corporate Strategy Officer

Scott Carmilani – President, CEO and Chairman

Frank D'Orazio – President, Bermuda and International Insurance

John Bender – President, U.S. Reinsurance

Joan Dillard – Chief Financial Officer

Marshall Grossack – Chief Actuary

Barry Zurbuchen – Chief Risk Officer

John Gauthier – Chief Investment Officer

Scott Carmilani – President, CEO and Chairman


Matt Heimermann – JPMorgan

Matt Carletti – JMP Securities

Mike Nannizzi – Goldman Sachs

Dan Farrell – Sterne Agee & Leach

Donna Halverstadt – Goldman Sachs

Jack Sennott

Take you through well out of it quickly, my name is Jack Sennott for those of you who don’t know I am the company’s Chief Corporate Strategy Officer, and for those of you who are all friends of Allied World thank you very much for coming. This is our very first Investor Day and we are very pleased to have you all here today.

We are webcasting this as well for those who couldn’t make the event live, so we are going to – I am going to take you through the format of what we are going to do today, but if you have questions and we will have questions and answer sessions after each speaker, and you are welcome to talk to each speaker directly. We are going to walk around with the mike largely so that folks in the webcast can hear your questions as well.

That’s our forward-looking statement we always like to start with that so make certain that I am sure you will hear things today that talk about our future plans and growth and we want to make certain folks are focused on that as well.

Here is our agenda today and you can see that we have our entire management team here today, our senior management team is you see that are up on the podium or in the audience here and available for you. We haven’t done anything like this before and I am going to take you through our objectives of this meeting in a minute or two, but suffice to say we would like to you to leave today with a very thorough understanding of Allied World, what we have accomplished in our first 10 years of business and where we are going. So we will follow this type timeframe here. Generally there will be five minutes of question and answer time at the end of each person’s session.

We will begin with Scott who’ll make our opening remarks then we will go into each of our business units. I do want to know that Gordon Knight who is the President of our US Operations had a death in the family and had to travel home to Georgia for that. So, I am going to do his presentation you are stuck with me for a longer than the five minutes I had planned, so I apologize in advance for that, and then we will take you through the day.

After the business units we will break for lunch, we have a fantastic lunch for you at the Zakardi Park (ph) right around the corner, and, no, we are not going to go in the card room which is out and down to right if you are facing out the back. That’s also where the men’s rooms and ladies rooms are and also the coat check but I am certain most folks have found that.

At the front door there are boxes, you’ve seen clock and a compass with Allied World’s logo, you are welcome to take one of those with you, and as our gift and thanks to you for coming today.

This, as I said, the management team of the company they are all here for you to speak with. We have tried to keep this to a condense, we realize it’s a lot of information in the short period of time. So we have in addition to the speakers who are up in front of you, David Bell who is our chief operating officer and Wes Dupont is our General Counsel, just raise your hands quickly guys, back here as well.

If you’ve got questions on claims which are under David Bell’s purview or for example our re-domestication which Wes was heavily involved in as well, they will be available. And at lunch each one of the management team will be kind of hosting a table and you will see there are names here and we’ll – you will be able to sit with whoever you want in that regard.

So our objectives in this presentation are, first and foremost to give you full access to this management team. We pride ourselves on transparency, on good disclosure and on our focused vision as an underwriting company, and we would like you to be able to see that and the breadth and the depth of the team. You often hear from Scott and John and John Gauthier on the earnings calls, and Scott and myself largely at investor conferences. But the goal is really to go beyond that and give you a sense of what we have here for a team.

We would also like to take a little credit for our performance, we won’t dwell on that too much but we’ve had a very strong 10 years in business and this is our 10th anniversary, and five years as a public company. We got to ring the opening bell this morning, it was up when we came upstairs so if it’s down now it’s not our fault, and we would like to take credit along that line as well.

I think an appropriate question, we’ve been in the paper a little bit over the last six months for one reason or another and we think may be an appropriate reason to spend time to today is to answer the ‘what’s next’ question. Strategic over view directions where we are going to go, where we are going to go through.

I mentioned that we are an underwriting company first and foremost, and we want to take you through our underwriting segments in detail, we will do that. Wouldn’t be a complete day without a financial update and talking about capital management and we’ve also – we didn’t think one actuary who is enough excitement for you so we’ve brought both our key actuaries, Barry Zurbuchen our Chief Risk Officer and Marshall Grossack who is our Chief Actuary and they are going to take you through our loss reserves and enterprise risk management.

So with that let me hand the podium over to our President, Chairman and Chief Executive Officer Mr. Scott Carmilani.

Scott Carmilani

Good morning everybody and thanks for being here. Let me just make sure I got the logistics right on this thing. Okay, good morning, it’s a pleasure to be here, as Jack said we have the whole team. So, many of you in the share holder community and analyst community have asked for a deep dive on what we do, how we do it and why we do it. So, you are in for a treat in that respect.

We would like start out with a commercial, as jack always puts up here in all of our investment presentations, what we want to show you today is more than that. It’s about the stability of the company amongst the turmoil that we’ve been witnessing in the economy and in the market for the past few years. Our whole industry, and Allied World in particular, doesn’t seem to be getting the credibility or the street credibility for its risk management and capital management initiatives and actions. As all financial institutions are not the same nor are all PMC companies in what they do and how they do it, and how they diversified, and what products they are in, what geographies they are in and the discipline they use in their underwriting.

So, we are going to attempt to show you where and how we are strong enough to be a chosen market. How we have been nimble enough to stay focused when it makes sense, and to shift our mix when it makes sense, how we are flexible enough to take the steps necessary to stay in front of the markets, the market forces and economic events that are shaping our landscape. And there has been quite a few and we’ve certainly – the industry has certainly been tested over the last couple of years.

The state of affairs, from big picture perspective, is – as you can see here this is our key business strategies and how we are structured from a product standpoint and diversity of the products, we are focusing on being much more customer focused from big picture stand point, we are focused very much on geographic and product diversity, which I know a lot of people say that’s an acronym that people use in all of their statements, but action speak louder than words, and I think we have been very successful in doing that. And we’ve been very focused on risk management controls.

We’ve been able to beat that into the rating agencies, have them understand our processes, let them kick the tires and do deep dives on that. I'm going to show you some of the deep dive tools that we have. Having the state of the art risk management tools proves out your volition. We are in the risk management business and our business is really smooth, volatility for our clients and the customers we serve. And today, I hope you’ll get to see that in its entirety.

We are here, as Jack said, to celebrate our 10 year anniversary, but we admit not go through our timeline and show you our history in a graphic form. As you all know we started as a Bermuda startup company in 2001, and we were focused on large account markets. We quickly became a very large excess casualty market replacing much needed capital that was lost during that time and through the events of 9/11.

Remember this was an environment where most of the companies that were started up then were focused on CAT business and on treating reinsurance business. That was the model that existed in Bermuda and that is not how we started the company. We are often brought in by the same moniker but we became leaders in a slightly different way. We were the excess casualty and primary property market and quickly became one of the lead markets in the Bermuda market place.

Post 2006, once we got to the public stage of our operations, we saw weakenings emerge in the excess markets. We started to see shift in our U.S. focus and we started to get more customer focused. We moved some of our reinsurance underwriting capacity and auditing capacity to the United States. We started to physically get closer by location, building out the service capability, the front office and the back office. We made many move during that time. You will see where we – post 2008 after we acquired the Darwin professional liability company, we then began to hire out the front office underwriters to support that framework across the United States and while other companies were pulling back their large and over-weighted exposures to other CAT lies or capacity wise and reinsurance business, we were in a gross and build out mode, and a lot of people question that strategy at the time why we were doing it. It raised our expense ratio for a little bit and hopefully you can see what's happened from there.

Of course we then furthered that with opening up some farther outreaching offices, we opened a Lloyd syndicate platform to get access to more distribution, we opened a Swiss company, we jump started in Switzerland, and here we sit today three months after we terminated our opportunity to merge with the Transatlantic Reinsurance Company.

This is a really important slide. If I can leave you with one or two things this would be one of the key slides I want to make sure everyone in this room and on the web gets a good picture of. This shows you how we really morphed the company. Looking back to this slide from 2006 or the end of the 2006, just as you might recall we went public in the summer of 2006. So really from the early 2007 through today – most important thing I want to point out here, as you see the shifts in business from international insurance from 2007 being 52% to international insurance being 27% of the company, it is not because we dramatically shrunk that business although we did re-underwrite a lot of it and changed the mix of what's in it. There are a lot of other things going on simultaneously.

We really were able to transform the company. Transform the company and we did so in a profitable way, a very measured, very profitable way, and at the same time you can see our gross written premiums in 2007 finished at $1.5 billion and in – or as we sit here today well over $1.9 billion. Not a lot of companies in our space could say they grew over the same time period, a lot of them went flat or what I would like to describe as going turtle and we did their exposures because they had maybe overbuilt in 2004 and 2005 going into 2006, and they didn’t make the same moves that we had made.

So not only did we shift and grow, but we did it in a different way not just using our same tools that we had in our tool kit, something before. We did it in a very, very tough environment and a very tough economy if you think about what's happening in the financial services sector in those same period. I think that really differentiates us within the industry and I think that really differentiates us from the other financial services firms in general.

This slide is really going to drive home that point further. This is a new slide, we have not shown anybody in the public before, but just as I’ve been saying and with respect to transforming the company this shows you the number of policies or the number of customers that we serve, had gone up more than 10 fold over the same period. Insurance wise, Olin Taboot (ph) the largest growth is really coming from our small account business, but you will notice as I pull up this pointer and you look at the Bermuda business which is the large account business by policy count 1500, we only went to just under 1300 and we did some re-underwriting, we did some downsizing, we did some re-underwriting. We didn’t dramatically shrink that business, we improved it. And if you look at the totals we served 77,000 policies today or customers whereas just in 2007 that number topped about 5000. A dramatic overhaul for what we did and how we service the business really just four or five years ago.

The relative premium growth is shown here on the small account slide. This slide shows you really how we have grown the number of accounts in the small business and before anybody asked a question, 69,000 policies are small account policies not the total amount of the policies, and the amount of premium growth that’s gone with that. So we have had a little over $300 million of growth in that huge number of the clients and a lot of those clients are small, middle market businesses, whether they are healthcare, industrial, you name it.

The next three slides is to be very interesting, and I want you to pay attention to this as well. This is data from the CIAB, the Counsel of Insurance Agents and Brokers, many of you in the industry attend the annual conference they have out in Broadmoor, Colorado. So this is their stats not our stats, so we will follow their stats. This shows you the rate progression really since 2000 all the way up till today for both small accounts, mid sized accounts and large accounts, and you can see the ’01-02 period, ’03 even, where the large account business and even the mid sized accounts really witnessed a spike, hundreds percent of rate increases. Again, where we saw that market inflexion, right here. This is where we came in to the market. That’s where we started the business and started to grow through our large account business.

As I said before, on or about ’05-06 you start to see that real precipitous drop, I'm losing my pointer. If you look at the chart you will start to see the precipitous dropping rate, we had a real reason for pull out at that point. That real concern, that’s when we made a move to buy the Darwin Company that’s when we started to build out to U.S. franchise. That’s when we took a small office of 12 people in New York and build out the framework that we – what we have today and I’ll run through that in a bit.

Look at what happened next as you see it. This is where we start – this is where we buy Darwin, you look at the shaded areas, almost an inflexion point at those rates. The reason why we went towards that middle market business, less volatility. Less volatility and a smoother rate environment, better retention, better risk, better clients, stickier business from our perspective. And we had a lot of experienced staff and knew a lot about it from our previous careers.

As you can see that inflexion point proved out to be exactly what we thought it was, and you can see the large account business drop off furthest really than the small account and mid sized business. So, that’s where a lot of that growth is coming from two previous slides before that, and I hope this can show you that that’s where and why we did what we did, not just because we were trying to grow the company that’s because we were trying to grow the company profitably.

The way do we do it, we did it this way. Today we’ve got 16 offices in total, 10 in the U.S. they are all mapped out on that global chart. There is six internationally, and today we – this is how we cover the world, but today we also have two rep offices, one in Scotland and one in Canada as we continue to scout out those territories for opportunities and do so in a very disciplined way.

I'm going to spend a couple of minutes on each of our segments, but I'm really going to leave the detail to the guys who run those businesses and I will have them give you details to what we do, how we do it, and where we do it, but I'm going to leave you with a couple scenes.

In the U.S. our competitive position is simple. We are building a stronger U.S. presence focused on products, focused on industry verticals. If you don’t know what industry verticals is, it’s providing product for a particular industry not just one product at a time, but for the healthcare industry for instance offering them Med Now cover and ENO cover and DNO cover, and environmental liability cover, or a pollution from medical waste, related risk management tools that they can use for their own firms, and packing that up as best we can in cross-selling that across the market place. That’s become a vey important business, so that’s one example.

We are working on the specialties where there aren’t 60 competitors, you know, more like four or five. Sometimes, and more often this means becoming more of a primary market or lead market, tougher to do means more service, more clean handling, more loss control and we have been building that back office out slowly and steadily ever since.

On the international side, well, we are focused on two things really, and what that does for us from a distribution standpoint. We had the Lloyd Syndicate, I mentioned that earlier. Lloyd Syndicate 2232 which happens to be the BA flight number from Bermuda to London. So I think it was appropriate as we were leaving Bermuda and ramping up our London offices. That was an interesting acronym that was catchy in both BA and London, and Lloyd’s liked that.

The other thing I want to point out is our re-domestication with Switzerland. A lot of people thought, well why did you re-domesticated Switzerland, why not somewhere else in Europe, why not back to the US, turns our pretty difficult and almost impossible to re-domesticate to the U.S. from a tax perspective. So you start looking around where other jurisdictions are that are relatively friendly tax jurisdictions, and more importantly Switzerland became the choice not because of its tax domicile but because of its location, in and around the EU, in and around access points to Asia-Pac and everywhere else in that part of the world, and we find that if you are in the London market, you are in the London market. You miss the rest of the EU and U.K. you get a lot of what’s wholesaled into the London market or wholesaled into the Lloyd market, but you miss all the peripheral business around that.

So the reason why we focused on Switzerland is to really get distribution outside of the London market, and that was the major reason for going there versus Ireland or any other jurisdiction that might have had us at that time. So it works.

Jack said we would chart our performance a little bit and here is the slide that states that. What I would like to point out is that ERM is an important part of what we do here. Enterprise Risk Management proves itself out in our result. When your expectations fall within the tolerances you set forth for your capital results neither exceed your expectations. We’ve been able to do that four or five years running now really since 2005 when we put these processes in place and these controls the place.

Prevailing market conditions. Let me talk about that for a minute, because I'm sure that will be part of the Q&A at the end. Listen, the market is very competitive. There are too many companies chasing too few opportunities. I don’t believe there is too much capital. I believe there is too many companies chasing too few opportunities that’s putting pressure on rates in and about itself really. There are plenty of giant companies around the world who need capacity and would buy the capacity. In fact too many companies chasing the same business is giving away that excess capacity for a non-economic outcome.

Rates are really a mixed bag. We will talk about that within each of the segments. But suffice to say we are seeing some signs of improvement, but it’s not a wholesale change of the market. The economic environment, well, we are not expecting that to be an easy pass either solving the U.S. problems or solving the European debt crisis problems, but our methods used so-what, now there is the last three or four years been easy to deal with, and we are not in the business – we are in the risk management business. We understand risk management, we handle risk management from a risk management perspective and our job is to help companies deal with that volatility provided solution for some of that volatility so that creates opportunity as there is volatility out there in the world, and we are focused on that.

We performed well on a relative basis and on an absolute basis, and that I'm going to pass it over to Frank. Oh, I'm going to pass it back to Jack, to go through our U.S. service and issues. Thank you. Oh, we are going to do Q&A now, sorry. There is a mike coming around. If anybody has any questions just raise your hand for a second and we will get one out to you. I'm not surprised if no one ask because everyone wants to get to the meat of the order.

Matt Heimermann – JPMorgan

I'm just curious, when you think about the opportunity that was lost on Transatlantic and the earnings that you just had which were quite good. It seems that the shareholders of Transatlantic sort of misread that opportunity or how do you think you could have gotten that to happen or what do you think they missed?

Scott Carmilani

Yeah. My view is probably a little biased too. But the Transatlantic shareholders absolutely missed an opportunity. We thought of it as a real opportunity to gain strength, size, and momentum in the emerging markets and have a good mousetrap for capital management and other things. We had lost lots of synergies in that deal, a very good cultural fit. We entered it from a position of strength and we are always looking at it as a great opportunity to leapfrog many of our peers and competitors in size and strength, give us leverage in the market and give us strength in the market to do other things with that capital. Which would have included some of the issues we are going forth with anyway but would give us a bigger balance sheet to do it with. So I think they absolutely did miss out, but you pointed out a good thing. Look, we never got distracted from our day-to-day business or what we are focused on as a company. I think a lot of people thought that we would easily be distracted as a relatively small company in a relatively big deal and to the credit of these five folks on my left and many of the people in the room and many of our broker partners who are in here, they didn’t let that happen. We stayed focused and we were able to produce pretty good operating results in a quarter that saw a lot of U.S. calamity and continues to see worldwide calamity.

So we stay focused, we were disciplined in that scenario, that was not a takeover as I think some of the shareholders were treating it and some of the public press treated it, it was a stock for stock merger. I mean there was not a lot of room to really change the metrics of that merger, it was designed as a merger, it was to create upside, where 1+1 could be a lot more than 2 or 3, and that’s how we entered it and that’s how we saw it. When that changed we were disciplined enough to stand down.

Unidentified Analyst

Do you think that opportunity has passed now that you – they are still involved in the saga, is that sort of opportunity gone in your view.

Scott Carmilani

Yogi Berra has said it’s never over until it’s over, and I think it’s never over until it’s over. That’s a football that’s getting bounced around by two or three parties and I think they’re in a struggle to decide what to do. It’s not going to be easy, but one thing I’ve learned from this is shareholders in this environment, and I point out to this environment because not only us but the entire industry is trading at or below book value from a valuation standpoint. Shareholders have a lot of say, and they said so with their vote, and that changed the outcome. So, unless someone is going to show up with $4 billion in cash which there aren’t a lot of people willing to do that it’s hard to get things done right now, and less people want to do it and see the value.

Unidentified Analyst

Thanks. Hey Scott. With respect to your comment on competition you mentioned you think there is too many competitors. I guess how is it that you can find these new opportunities to build out against that kind of backdrop, especially since so many of your competitors are trying to – not necessary do the same thing but are also trying to build out their own platform. So, what about your approach that is different that allows you to kind of identify these opportunities?

Scott Carmilani

Yeah, great question. How do we do, what’s the secret sort for funding new product and new distribution? Well, that’s simple. First, you find the distributors who are focused on that business as well. We do a lot of research on the industry that we feel are under served or improperly served to create opportunity. But, you know, I should point out. One of things we acquired with Darwin, even though we are a relatively small company and they are even a smaller company, was an excellent new product development team, excellent.

The size of the book combined for them even, the amount of resources we put into analyzing, checking the tires, doing risk management ROE metrics on and deciding whether we’re going to be – what territory we’re going to put it in and how we’re going to resource it is really state of the art. We go through – and the entire organization gets involved. From the operations group, to the IT group, to the legal group from a licensing standpoint, we spend a lot of time making sure we’re ready to go when we launch. And that could take months to do so, and we know what we’re getting into when we start. We know if the opportunity sizes and where we’re going to try to get it from based either where we know the distributors are or where we know the affinity groups are, what their relationships are with their associations or their trade groups, and we work those angles very hard in conjunction with our broker partners. Follow-up question.

Unidentified Analyst

So, an easy way to think about summarizing this is perhaps that, when you approach the market you might actually have fewer at bats (ph) but you just make those at bats count?

Scott Carmilani

Yeah, that’s a great point. And I’ll – that could take up too much time, I’ll make this the last question. But, yeah, you know, Bobby Bowden who’s in the room, Bobby raise your hand, he’s the head of our marketing and communications efforts here in the United States. When you look at that last chart that had all the submissions and volume on it we’ve been very focused on having fewer at bats and making sure those bats count, we’ve been focused on that. Because, otherwise, you can get clubbed in minutia, you can get very caught into, wow, with an 80,000 submissions or a 100,000 submissions and how do we get to them all. So you start with triage and then you work very hard to sort of narrow the field of focus so that you ensure that our business development people and our branch office people are going after the right opportunities, the opportunities that we want to get.

Okay. We’ll hold any other questions to the more general session towards the end. Thank you very much.

Jack Sennott

Folks are going to stay up here and I’ll have mikes just so as we’ve got questions and we go through – we’re happy to keep it interactive, but I want to make certain we’re also covering all the material here. So that’s why we’ll keep it move it along. But we’re happy to answer any of your questions as we go. So, as I mentioned, I am not Gordon Knight, but I am filling in for him. I also have here to my right and to your left facing you, Todd Germano, who heads our Property and Casualty Group, and John McElroy who head our Professional Liability and Healthcare Group to correct me when I make frequent mistakes.

So, they will give us the right answer. So the format that we’re going to go through here is, and you’ll see this with all three of our business units. We’ll start with the summary set of financials and here they are for the US business and a couple of points that I think are important to make here as well.

Scott had some great slides I think that talked about the transformation of the company and where we’re going. I think that’s largely the story in the US business here where we have a small, mid market primary product focus. Right? And where if you go back to 2007 it was under $200 million worth of premium and now on a trailing 12 month basis that just gives you 930 or over $800 million of premium.

Some of that came from the Darwin acquisition but a good deal of that came beyond and outside of that place as well. You’ll see and also in our expense ratio where we kind of track our G&A ratio, and you can see if you look at this, 23% jumps to 37% in 2008. What was the major investment that we made there, we pulled 60 plus people from the front of the house out of distressed large national and international carriers beginning with A, and others, and we’re able to integrate them quickly and successfully into the team. And that has started the payoff pretty significantly as you see success of G&A ratios dropping from 37 to 26 to 25 to 21 on the year-to-date basis. And actually if you look at a run rate for the quarter it’s under 20 for the first time.

So, we still have more work to do in the United States as we kind of build out scale and it’s important that we do that profitably, but we’re pleased with the march that we’re kind of going through here.

Despite that we’ve had over a $100 million of underwriting premium on the segments since 2007.

This is the team that Gordon has run, and I introduced Todd and John to you ahead of time. There is really just a couple of points that I want you to have out of this group. Experienced team, averages 25 years of experience if you kind of go across that group, and you can see lots of depth and breadth. Great people most definitely but there are different types of great people and it’s important in an organization that goes from under $200 million to over $800 million in four years that you have builders. And these folks are builders and I think that’s important as well.

This is the book of business as it is today. You can see that it’s a diversified product mix with some core expertise. Healthcare is a major one, and there specifically we’re focused in what I’ll call the facility market place, whether it’s hospitals, miscellaneous medical facilities or specialty physicians groups. We do have some specialty physician practices particularly if psychiatrists and psychologists where we have a meaningful market share to a program partner of ours as well.

But beyond that we have some other expertise. We have public entity and construction expertise in the casualty market place expanded into the environmental place which is one of our new products as well.

We are an approved defense based act underwriter which is our primary casualty business, and largely what that is – is providing services to US company operating outside of US soil under the auspicious of US government organization to business that we’ve grown relatively quickly, it was part of the team that – of that people that we took in 2008 and they’ve built a very strong book of business very quickly as well.

We’ve got new product capabilities that I am going to talk you through that in a little more detail as well. Maybe as interesting as to where we are though is how we’ve gotten here. We call this our waterfall slide and it’s designed to give you a sense of how we got to where we are today. And it’s a sense of where the products have moved and grown to. And I think there is a couple of key things to look through here.

One, obviously, we’ve been in the healthcare business since we started it in 2001 in Frank’s business in Bermuda. But with the Darwin acquisition which was the area that Darwin was focused on you see a significant growth and we’ve continued expand that as well. We contrast that to a D&O public business that both companies were in, but both companies realized relatively early on that the absolute number of companies, and it’s a great I think case of where Scott talks about there being too many companies, competing for the large public D&O market place made it just really untenable for us to write that business in its bigger way as we could go forward. What we liked is the private not-for-profit D&O business whether it’s EPLI or fiduciary that goes with it, low limit primary business generally we are the only insurer, and that’s the business that we’ve grown since we go forward as well.

We have a variety of E&O classes that we write, whether it’s insurance agents, small law firms, or data privacy, data security on technology, and I'm going to take you through each one of those as we go through. But as Scott said in response to Matt’s question, the key aspect of what we have done in the U.S. is trying to bring solutions. So we thought it would make sense to talk a little bit about our new product criteria, what we think about, how we screen new products and the process we go with.

And so, we put some quantitative metrics and criteria up here to give you a sense of what we look through. So when we think about a new product, it starts with research and we are talking to distribution partners, we are talking to our customers, we are obviously doing industry research as well, and we are looking to see where we can meet a market need for insurance. Once we get that list in our broad needs and evolving risk needs that need to be met by the general economy, it’s got to be a specialty product, it’s got to be an area where we have core expertise. Once we make that cut – so you’ll see for example we are not in Worker’s Compensation business, we are not in the auto business, we are not in any personal lines businesses.

We needed to make sense from an economic perspective. Got to breakeven and includes the money that we put into products over a three year basis. We have a mid teens return hurdle, return on equity hurdle. If this isn’t contributing to it doesn’t meet our hurdle. So it’s beyond just a profitability test.

We need to make certain we can cross-sell it without the products, and what does that really mean. It means that it has to be important to our current distribution base. They are important constituents of ours. We really think about them as partners and we need to make certain that the products that we are delivering to them makes sense.

We would like to use technology and expertise to create cost efficiencies in doing it. We’ve got good technology, we use our eye bind system, for example our private and not-for-profit D&O, and we want to make sure that we can leverage that technology in product delivery as well.

Scott mentioned the concept of an industry vertical, and so healthcare is probably our clearest example to it. We started writing medical malpractice and healthcare management liability and managed care E&O. We now offer property products, we now offer inland marine products for some of the equipment, and we also offer environmental products for some of the issues that we go forward with.

We also offer technology data privacy products for HIPAA or other data privacy laws that we work through. So we now have a suite of products for that same group that’s an important industry vertical. We have others whether it’s construction, public entity, services or small business. And then we look at the market environment as well.

So we think about it as a life cycle and I won't go through this in detail, but after we get to the market place we have to test our assumptions, is the basic last point to make here. And I think that that’s important because often what we find out is not what we assumed, and therefore we need to make some changes. But that’s the process we go through to drive new products, and I think the bumper sticker point here is that products that we have created and launched over the last 24 months, and I think that’s a good timeframe to look back for a new launch, have generated over $200 million of premium this year, and that’s a continuing process for us and one we strive to get better at all the time.

The second theme in the U.S. that I would like you to leave you with is a distribution theme. We, as Scott mentioned, we started as a Bermuda platform. We wrote large account access business, we were very important to that client base, build a strong business, and Frank is going to talk to you about it in a couple of minutes. But we were very kind of New York east coast centric, and seem to be that our submission flow was concentrated in areas that had direct flights to Bermuda.

One of the things that I think we were focused on as we build out this small and mid market is to get closer to clients. So we have 10 branch offices including Philadelphia, which we just opened, and we are closer to our clients than ever before. Staff count is significant investment there. We are up to 430 plus people in the United States, and that’s almost two-thirds of the business that we go through.

And then that outcome of that is we’ve got a distributed distribution pie chart here, and we don’t have significant dependency on any of our partners but we are meaningful to many of our partners. And I think that’s the right the balance to strike with distribution.

So, we talked about – again to one of Matt Heimermann’s questions about looking at pitches here. It’s a 120,000 pitches coming through the door here in 2011, a significant number for the 430 people. If you look at the nine month numbers in the bottom, of 84,000 that have come-through through nine months we only quote less than half, all right, that means we have to do a lot of triage, we kiss a lot of frogs as I sometimes say, and then from there we are quoting – so we are quoting 43% and will only bind about 8000 of them which is about 22% of what we have quoted.

Discipline, sometimes the best way to not get something is to put a quote out where the price need it to be as to where the price is going to settle, and so you see some of that in our underwriting discipline as well. And we’ve been able to get that throughput done efficiently to help effectively grow the business.

So, now, I’m going to go through a couple of slides, each one on our lines of business here. I have a couple of key points and would be happy to answer any questions on each one. So let’s start with our Excess General Casualty Business here, which what we provided for you is, in the last four full years of financial statements and the year-to-date number as well as the policy counts. You can see average attachment point, what we’re providing here from retention rate and a submission flow. It’s been a competitive business in excess casualty, we are gratified to see that there is some rate that has come through on a year-to-date basis of just under 3%.

These are accounts that you’ve seen we shrank that business in 2010. We had a transportation book of business that we pulled back in here and we continue to be disciplined in this book of business. It’s not around broad industries, it’s around areas where we have defined expertise like public entity.

In our property business, again, this is our property insurance business. We write this only on an E&S basis in the U.S. We try to – Barry Zurbuchen is going to take you through our PML analysis later on. We managed that well in coordination with the Chief Risk Officer making certain we think about our PMLs globally, but we also look at them locally as well.

We’re an RMS shop, you know, RMS and models don’t drive everything that we do but they’re an important aspect of what we do and that’s where we’re working through. This is a blend of both, what are called CAT and non-CAT business and that price of being up 2.7% is kind of that blend result as well. Directionally better we would feel like – the industry and we’d like to see more.

Public D&O, you saw this in the waterfall chart. This is an area where we’ve made significant pull-back particularly in financial institutions and some of the other areas where there was significant price decreases, and you can see that that’s the business that we are managing as tightly as we can. We’re an important marketplace to D&O and to our broker partners and we will continue to be there, but we’re focused on Side A only coverage wherever possible, and so that’s where you get the term Side-A Commercial. And again, particular class as a business, small cap commercial and avoiding others like financial institutions.

Rate here still remains under pressure there I think. John, 65 markets in public D&O in the U.S?

John Bender

Right, yeah.

Jack Sennott

Right. So, it’s hard to differentiate when you’ve got that many quotes that you can get. Healthcare, we talked about this a lot. This is an area where we’re significantly proud of. One of the reasons why we’re a leading healthcare franchise in the business in facilities is that, our focus has always been on service, risk management up front. Sue Chmieleski who heads our Risk Management Group, is an integrated part of the business, she does for – all of our hospitals does a pre-underwriting screen walkthrough, and this is one of the areas where we get to make direct connections with our insured customers.

Our clients have risk management professionals. Budgets are tough in hospitals. They love to get access to Sue and her team resource wise and exchange information about best practices. And that’s helped us well with retention rates, brand building and again, building this business over time. We offer a suite of products, we become more and more important to the healthcare space every day. I mentioned that earlier on, and we continue to grow this business. There are others getting into this marketplace and it’s getting more competitive, but we still think that this business has been very strong.

We’re very pleased with not-for-profit and private D&O. If you look at the – going from 1000 to 11,000 policies in a couple of years here, is a herculean task that Christian Gravier in John’s group runs. He came and joined us in 2008 as well, joined up with the Darwin i-Bind’s team to use the technology to first leverage this as well. And I think two key points here, right? Upfront cost to put 11,000 $2500 policies on is substantial, but the volatility is low, the loss costs are predictable, the retention rates are generally very high and we think that the ultimate profitability in these are very significant as well. Rates are down only 2% here as consistent with Scott’s CIAB slide, much less here than they were elsewhere.

E&O, I mentioned the classes that we’re in; we’re not in all things to all people here. It’s insurance agents, law firms, municipalities, we write a school board liability, we write a board of selectmen, although mine in Simsbury is going to get an E&O suit from me, I still don’t have power, but other than that, it’s a good book of business. It’s a strong low-limit large account business, miscellaneous professional liability, a number of consultant’s classes as well. And again, rates relatively flat, down 1.6%.

We’ve got a select program business. Most of them are actually healthcare-related but we do have some others as well. The major program we have is a psychiatrist and psychologist program where we have nearly one-third percent in the market of the U.S. psychiatrist marketplace. Again, $1 million limit policies on average, very strong book of business for us and has performed well, really since day one.

This line here is a couple of our newer initiatives that don’t – aren’t worthy yet given the time that they’ve been in place of the time charts, but we’ll have them there in future years. Primary General Casualty is the defense-based act business, I mentioned what that was. It’s been a significant growth and driver for us in an area where we have demonstrated expertise and limited competition, because you need a federal – essentially purchase approval to get there and to be approved by them.

Environmental business, we’re not a broad environmental writer. We have those capabilities, but again, this is a product that’s been designed out of a couple of our particular industry verticals. Healthcare first and then public entity second. In the marine, same way, as we think about products, liability and movement of products between hospital facilities, an area for us and we’re starting to grow that as well.

Let me close with this slide and then open it up to your questions on the U.S. What do we need to do in the U.S. going forward? We need some rate. Market needs some rate; we’d like some rate as well. I would add, we’re competing just fine in this marketplace and I think this is a great market to differentiate strong companies from weak, but we could do with some rate and we’ll continue to be focused on it. We will add new products, not with a buckshot approach but more with a laser approach, staying focused on what our clients are and where we want to be. And that will be around the concept of industry verticals where we could be more important to clients as we go through.

We’ve got 10 offices. If we see opportunities where we can penetrate better with another geographic opening we will do that. They are not cheap and so we don’t do that lightly. Driving expense efficiencies, we talked about the G&A load ahead of time, we will go through that. Part of the way we’ll do that is through technology.

The second thing that we get out of technology which I think is really the most important weapon that we have is the utilization of the results of technology to make better decisions with the tech. I think as you go through each of the businesses we’d like to leave you with a thought that this is a company that’s actively managed its underwriting portfolio, out of public D&O, pulling back of energy, throwing – moving away from financial institutions, growing in certain areas – healthcare, small business. We do that because we have good access to information, something we think is a competitive advantage for us.

We try to use that again to ultimately outperform the group. So with that, let me – before I introduce Frank, see if there’s any questions on the U.S. Mike Nannizzi has got a question? We’ll start here and then we’ll go to you next.

Mike Nannizzi – Goldman Sachs

Mike Nannizzi from Goldman Sachs. What are the assumptions you’re using or how should we think about the pieces for that 15% ROE target. So combined ratio, yield on investments, premium to surplus.

Jack Sennott

Yeah, so we talk about it over the cycle, right, and over the last five years we are 17.3 I think on average, I get that right Keith, right around 7, it’s in the back of the book, so we will correct it if I am wrong by the end. And it’s – we are first and foremost an underwriting company. That’s I think been our driver on a go-forward basis. Our investment portfolio has been a strong contributor to it. But at the end of the day ROE is your – one minus your combined ratio times your underwriting leverage, and your investment return times your investment leverage, and that’s what we are focused on is driving those two results and delivering greater results.

Second thing we measure ourselves on is growth in book value. You get to add in capital management at that point in time. But from the perspective of an ROE target, it’s the first two.

Mike Nannizzi – Goldman Sachs

Okay. I guess, how does that change? Because yields have come down. I mean, has your requisite combined ratio target you need fallen?

Jack Sennott

Sure. Can we – Barry.

Barry Zurbuchen

(Inaudible) a bit later, but as we are having a perspective view of what we think the ROE will be for a particular line of business, yes, the current investment environment will play a role in that in our capitalization. So we are allocating capital down to product, come up with E in ROE and then in terms of return, it is going to be impacted by what we think we can make on our investments going forward.

Mike Nannizzi – Goldman Sachs

Great, and then just one follow up if I could. So, now you have three years behind you, I guess, for most of the Darwin book. So if you were to exclude development from the prior – pre-’08 years, how has the specialty business you put on in the US including Darwin performed on that sort of 15% ROE target up to this point?

Jack Sennott

Let me make sure I am getting the question you are asking. Excluding – since ’08, the years result, is that what you are asking?

Mike Nannizzi – Goldman Sachs

Effectively, or even if you want to include development on ’08 and since years, but just excluding the stuff from before ’08.

Jack Sennott

Oh yeah, okay. The accident year result developed from ’08 forward.

Mike Nannizzi – Goldman Sachs

Sure, yeah.

Jack Sennott

I would suggest to you that we are pleased with all of our accident years, in total we have got some – there has been a significant amount of CAT activity, we are not troubled with that stunt through the losses. But I would say, as mostly casualty writer, this has been an extended period of favorable claims environment, right. There has been an absence of a frequency of severity of claims on the casualty business and it’s accordingly performed well. There is some isolated incidence to that, financial institutions is a great one, the deep water loss would be another one. Marshall I don’t know if you have any that would jump out. But by and large that’s the case.

Now, when you go through a little later on, and hear Marshal talk about our reserving, you will understand kind of where we’ve our mind set as to where we are booked, what our confidence level is and how we get to kind of 100% confidence on ultimate economics, and that happens over time as well.

Marshall Grossack

I’ll add a couple of additional points to that. First, we are very pleased with how both – how the Darwin business developed, in other words the 2008 and prior losses, they developed very favorably for us, actually better than we had originally thought. But then I think the other key point in what Jack was saying was that the business going forward has also been good for us, given us a good platform to grow, kind of our – we don’t call it Darwin business anymore, it’s just our US platform business, it’s performed well. I think the one area that has been important that we are bringing down is – the loss ratio has not been the problem, I mean the expense ratio, as Jack pointed out has stepped down nicely over the last three or four years.

Unidentified Analyst

Kype Hamwees (ph) Morgan Stanley. Jack, we saw like rate increase only in like two line which is kind of about a quarter of the total premium rate like year-to-date or trailing 12 months. So, yet your total premium growth this year have been pretty healthy, like high single digits. So, how do you exactly balance the rate change with the top-line growth?

Jack Sennott

If you look at that waterfall chart I would say we have had some rate in some of the lines of business. But I think all in the US is probably between the up lines and the down lines, not a lot of movement from our rate on a combined segment basis, did I say that right Marshal?

Marshall Grossack

Yeah, I would say that’s fair to say. US, especially second quarter and third quarter maybe even up slightly.

Jack Sennott

So it’s the new product in that case, right, defense based act, environmental and marine, growth in healthcare, growth in some of our new E&O initiatives that have driven that compost, and private not-for-profit E&O. Okay. Let me get one question from Dan, and I want to make sure I got to police myself here, it would be the worst thing in the world if I am the one who runs us over, I mean given everybody such a hard time about it earlier. Go ahead Dan.

Dan Farrell – Sterne Agee & Leach

Dan Farrell, Sterne Agee. Thank you. Just looking at some of the retentions in the various clients, they have improved quite a bit of over the last few years and I was wondering if you could just comment on that if it’s the client mix shift, if it’s just strategy to focus more and retain the client that you like versus going after new business and that’s obviously probably a contribution to your growth as well.

Jack Sennott

Tony, do you want to take a run at it, let me walk down here.

Tony Kashuba

All of the above. Quick answer is all of the above. The smaller account business has been sticker as we pointed out in that chart, meeting higher retention rates, and the accounts that we have kept in the larger account of Bermuda business, we spend a lot more of time coddling, meeting with, having them understand the rate position and trying to sort of mediate the rate decline. Our industry is one of the few industries that you can name where it’s probably cheaper or you probably pay less from what you bought today than you paid for it four or five years ago.

Unidentified Company Representative

Yeah, I mean, just going from product line by product line real quick, our excess casualty business we do a lot of client facing meetings, like what Scott was talking about with the Bermuda business. So there is a lot stickier relationships there and there is a reason why we are on those programs. Property, however, we have a lot of fall off in our property business. We don’t have a high retention ratio there. And then you go through programs, the original retention on that’s been really, really high, just small and sticky like Scott is talking about. And then some of our newer lines, DBA very high renewal retention, our primary GL, very high or no retentions. So the newer things that are small are stickier and the cases where we are in front of clients we show fairly well and we do very well under norm.

Jack Sennott

Okay. I am going to stop here, so we can stay roughly on time. I want to introduce Frank D'Orazio who is the President of our International Business.

Frank D'Orazio

Thanks Jack. Good morning and I look forward to going through the next 12 slides on international insurance segment. I thought before I did that, let me change slide. Before I did that I should take a few seconds to just explain how we define international insurance at Allied World, and it’s really driven by the underwriting office in which the business is written. So if you stand back and look at it, then really any business insurance that is, that’s written outside of United States falls into the international insurance segment.

Now, before I take this slide off the screen, I will just point to a couple of key metrics which I think are worth mentioning. Certainly, one, the profitability of the segment has been very good, certainly over the time period that we are illustrating here, the $468 million in underwriting income is actually tops in terms of division for the company over that time period. I would also mention as you kind of look at the premium levels dropping off from 2007 to current, we have been very active in terms of portfolio management as we look to call some of the underperforming or more volatile segments of the portfolio, but I just didn’t mean our underwriting criteria are profitability initiatives as Scott had alluded to in some of the earlier slides.

And then the last point I’ll make is just the very attractive acquisition cost-ratio that we have that is certainly aided by our re-insurance structures that when coupled with the hub and wholesale nature of business of the platform, afford just some operating efficiencies in helping managing our expense-ratio.

Okay, this is the management team of the International Insurance Segment. We have five product line managers who are industry experts in their respective product lines. They are residents of Bermuda. They oversee portfolios of business in Bermuda, Europe and Asia. We also have administrative managers who are residents in Europe as well as Asia who are – they act as regional heads and help provide support on the ground and help set strategic direction there. And I’d also just mention as well, the manager of our Lloyd Syndicate, our active underwriter, Darren Powell who sees the day-to-day business at 2232 or oversees the day-to-day business at 2232 for us.

Okay. As you’ve probably surmised at this point in time, the segment really consists of three distinct operating platforms. The Bermuda Operation and the European Operation and the Asian Operation gives us great diversification and scale in terms of geography as well as product, having the three legs to the stool. In Bermuda which accounts for roughly two-thirds of the platform, we underwrite our large North American Fortune 500 P&C business. We are a leader in this space. We are either number one or number two with the top three brokers on the island relative to premium volume. This business is a 100% wholesale on casualty lines, it’s generally high excess and property is predominantly primary layers.

Our European platform consists of about 30% in terms of the written premium, argument of the overall segment. The focus is predominantly on upper-middle markets through larger accounts, some of the same types of risk characteristics that we’d find in the Bermuda portfolio. It is UK business, continental European business and rest of world business, we achieved some Latin American business and some Asian and Australian business there as well. Although there has been a real focus within the European platform to add diversification relative to platform, relative to Lloyd’s and relative to new products and we’ll talk about those in a later slide.

And then finally, Asia which is our least mature platform, we entered the Hong Kong market in March of 2009 and subsequently the Singapore market in October of that same year. We’re offering professional liability, healthcare and general casualty at this point in Asia. Although small at this point, it also has certainly the most pronounced growth rates in the overall segment.

Okay, I think most of the slides in this deck really speak to where we’re going as a segment. I think this slide which we’re calling the waterfall slide is unique in that, I think it does a nice job of illustrating where we’ve been and some of the strategic steps that we’ve taken relative to portfolio management over the last few years. So if you take a look at that energy segment that is a property energy segment that we got out of that business segment altogether and at the same time we also downsized our energy casualty writings.

Not so coincidentally, that timing actually coincides with the time period that Scott referenced, I think on Slide 13, relative to the period of time where large account business was under some of the most significant rate pressure over the last few years.

At the same time or around the same time actually, by late 2008, early 2009; we de-risked our professional lines portfolio pretty significantly. We cut about $1.4 billion in FI Aggregate out of the portfolio and redirected some of that capacity into some other segments of the portfolio that we thought were more attractive like European PI as well as W&I insurance.

Now at the same time though, we grew our healthcare operation which we were very pleased with the adequacy of those rates and the margin in that business. We’ve been steadily growing that over time. And if you take a look at the very end of that curve, you see a modest upward trajectory which represents the fact that we’ve added some new product lines over the last, let’s say 12 months or so, in terms of SME and trade credit. And I’ll certainly suggest that the business forecast for these new product lines is fairly modest at this juncture but what we’ve done is out of diversification of product we’ve made ourselves much more important and meaningful to our clients and brokers, and I think we’ve positioned ourselves well in these two product areas for market turn in the future.

Okay. These next few bullets I think represent some of the more significant initiatives that the international insurance national team have worked on over the last 24 months. The launch of the UK SME platform, and SME stands for small and medium enterprise business, is significant in that it was our first foray into small client account underwriting within Europe. This business is all primary, it is retail in nature and it was an opportunity to deal with a whole new set of distribution partners that had not dealt with Allied World in the past.

2011 represents our three-year anniversary of our Asian platform. Again, I think I referenced the fact that we’re pleased with the growth in the Asian platform although the premium volumes as well as the transactional premiums are very small relative to some of the other platforms. But those folks are doing a nice job relative to gaining traction. In fact, I think through three quarters this year we are at about 80% growth year over year.

We’re very proud of the fact that we gained entrance into Lloyd’s in June of 2010. At a time really, where Tom Bolton and the Franchise Board were not letting a lot of new entrants into Lloyd’s, and we’ll talk more about Lloyd’s in a later slide. We also just about a year ago launched an export-trade credit and political risk capability specializing in Latin America. We partnered with an MGA by the name of LAU, Latin American Underwriters, because of their expertise and experience with the product line as well as the region. And again, just another opportunity to diversify a product but also gains some additional synergies with our existing Latin American client base.

We expanded our healthcare platform by adding teams in London as well as Asia to complement the large North American business that we’re writing out of Bermuda. We put business development professionals in two key UK locations as well as Singapore to expand our marketing reach and we’ve been very selectively looking at working with MGAs to help us access business in territories that we would not otherwise be able to access because that business stays in the local regions.

In the last 12 months we came to agreements with two Scandinavian MGAs, the first being a property based SME-focused property MGA in Stockholm, small clients, small limits, very little CAT exposure or correlation with our existing portfolio. The second one was a Copenhagen based private and small lines D&O MGA. So again, you’ll see that we’re looking at these vehicles as a way to gain further access and broaden our reach and brand and territories that would be difficult otherwise and we’re doing so without making major investments in terms of infrastructure.

Okay. Our entrance into Lloyd’s, clearly a very significant and strategic step in the development of the international capabilities of the company, and there’s a couple of points on this slide, I’ll just make to you now. First one, I think it’s a flexibility of the platform. We were approved by Lloyd’s to write direct insurance as well as facultative reinsurance and treaty reinsurance. So, the syndicate supports not only the international insurance platform but also John Bender’s reinsurance platform. So there is certainly efficiencies there and flexibility.

And then secondly, I’ll note that this is just another syndicate right hand North American business, we don’t need the syndicates to do that it is focused on Latin American opportunities and Asian opportunities. So it’s clearly a licensing and distribution play for us allowing us to reach and access markets that we wouldn’t otherwise be able to without dipping into the Lloyd’s infrastructure and licenses, and we’ll continue to explore tapping into the Lloyd’s infrastructure, provide additional market efficiencies or access where that makes sense.

This next slide really speaks to the breadth of our distribution partner network and the fact that we are literally doing business with over 500 brokers around the world in 43 countries and also points to the fact that we are adding new brokerage relationships really on a monthly basis through some of the new initiatives that we’ve added over the last 24 months.

One point that I would make here to start contrast to some other slide for the US operations which again is more focused on middle market business is the representation of the big three brokers here. It is certainly hand-in-hand with their market share for large account business, which again is certainly core to the overall platform and I would suggest to, you know, based on my comments earlier we enjoy very strong relationships with all the brokers represented here in each of our geographic platforms.

Now, I’ve got brief overviews of our four largest product lines. I’ll try to go through these fairly quickly and then have some wrap up comments. So first one is general casualty.

We underwrite general casualty literally from just about every international office that we have including our new Swiss operating company in Zug, we are what I refer to as a mezzanine excess player, which means we’re not primary, we’re not top of the program, average attachment points in excess of a $150 million which may seem high. Some of our larger clients buy as much as about a $1 billion in liability limit, just to put things in perspective.

This is a line of business where we have very significant capacity as noted in the slide. It gives us a little bit more negotiation room in our discussions with clients and brokers. But on an average line deployed we’re looking at closer to about $25 million, we further net that down with some significant reinsurance treaties as well.

We mentioned the downsizing in energy, relative to casualty, we also did a similar exercise relative to Life Science business, which again is a very volatile segment of the overall portfolio.

Just touch on rate, very simply rates are up which is great, really now two years where rates are up, so it’s great to see it going in the right direction. A lot of this is effective rate change where premiums have not necessarily changed although exposure units are down. We’d like to see more improvements in this product line before I think we get too excited. I think there's still profitability within general casualty, but you need to be very selective relative to the industry sectors that you go after and the individual risk selection.

Next step is – healthcare has been perhaps our most profitable line of business with the company, and again we had been steadily growing this operation. We pursue HPL business as well as managed care miscellaneous facilities, but the business is really driven by the HPL opportunities and the large hospital change. We’ll operate with $25 million in capacity on a gross basis which uses both a lead and an excess basis. Better the differentiator for us in the Bermuda market place having a lead capability in excess of retentions. You’ll see we show rates down between 5% and 10%, but this is a line of business where we are still okay with the rate adequacy and the inherent margin that we believe is still in the business, so we will continue to grow this business.

Next step is professional lines, which is a product line that just by its very nature has quite a spectrum of diversification relative to product from D&O to E&O as well as various management liability products. We operate with $25 million in gross liability limits there, although on an average limit deployed basis we’re below $9 million. Again this line of business is also netted down significantly with treaty reinsurance. It’s a class of business where the rate is concerning, you’ll see rates down double digit this year and have been actually on a compounded basis for a couple of years. I think this is really driven by commercial D&O.

Some of the segments that fall under professional lines, EPLI W&I business, etcetera, seem to be performing a bit better and we are focusing our efforts in that regard. But it has made us defensive relative the D&O space. I talked about the de-risking relative to FI. We’ve also relied very heavily on our slide eight placements, which accounts for roughly 50% of what we do on a D&O basis and have also used the cashing point as a buffer relative to rate environment.

And last, and probably appropriate this year is property just based on the amount of CAT activity that we’ve experienced in the intentional space from Australia to New Zealand to Japan. Obviously US exposures and currently what’s going on in terms of Thai flooding situation. We operate with $10 million of capacity on a gross basis between net down, but on an average limit deployed basis it’s working with about $4 million or so, and we operate out of both Bermuda, as well as London. Clearly, this is a sector that’s been pretty hard hit with losses this year. I just mentioned some of the CAT scenarios.

The $64,000 question remains, how the market response relative to the rate environment. We are seeing rate increases of about 10% or so on CAT exposed US business, that’s fairly clean business. Those accounts that have had their day in the sun of taking losses are seeing obviously much more significant increases in that.

The international side is a bit more of a mixed bag. In areas that have taken losses you see increases upwards of let's say 60%, even then you really have to kind of question whether not those rates are adequate. But in other international territories that have not had the CAT losses, let’s say France or Germany etcetera, we’d expect to see flat to even possibly some slight rate reductions there.

Okay. So, this is my summary slide where I'm supposed to tell you about the direction of the product line in this segment and what to expect from us over the next 12 months. I'm not going to go through each one of these bullets, but hopefully the presentation illustrates that we’ve been prudent portfolio managers and stewards of capital, and we will continue to keep our hand on the hand break as necessary moving forward. But it does not suggest that we won’t continue to look for new product opportunities or platform ideas, glimmers of a dislocation where there may be an opportunity for us.

I would expect just to continue to be a leader certainly in the Bermuda space while at the same time continue to get additional traction in some of the new initiatives that we introduced over the last 24 months while at the same time identifying what that next wave of opportunities would be, so that we can continue to keep that trajectory going in the right direction over the next 12 months.

That’s summation of my prepared comments and I’ll take any questions.

Matt Carletti - JMP Securities

Matt Carletti of JMP Securities. On the – I guess second to last slide on the property segment, you talked a little bit about the RMS model change. In particular, Europe, the model change there, can you comment on what you’re seeing so far and what you might expect to see?

Frank D'Orazio

You’re going to actually get a presentation actually from our Chief Risk Officer, I believe he is just going to touch base on that in probably some more detail. So I’ll just defer that to Barry if that’s okay, and unless Barry, if you’d like to jump in at this point?

Barry Zurbuchen

It’s okay. Thanks.

Jack Sennott

All right. If there are no other questions, we’ll keep moving. Let me introduce John Bender who heads our Reinsurance Business.

John Bender

Thanks Jack. Good morning. Lucky me I get to stand between you and the meal, so I’ll try to make this as painless as possible. Continue on the theme of showing you our five-year operating results. Much like our insurance operations, we’ve had five years of profit. The underwriting results continue to be profitable throughout the cycle. Even this year which was a painful year, about $141 million in CAT losses, we’re still turning an underwriting profit through three quarters which compares favorably to our internal risk tolerances and our peers in the marketplace we operate in.

The other point I’d like to make on this slide, as you can see, our acquisitions costs are down through three quarters this year. A large part of that is unfortunate because we’ve had the CATs, we don’t have to pay the profit commission, so this will offset there. And number two, there’s a little bit of shift in the mix of the business from proportional business to excess loss business for which the acquisition costs are cheaper.

I won’t spend a whole lot of time on this. What I will say is when I joined on board in 2007, Scott gave me marching orders to build out a team and he wanted an experienced team that had expertise in all the lines of business we’re going to operate in. So the team we’ve put together has an average experience of about 28 years, and one of the things that we’re very conscious of is matching our exposure to experience. We don’t dabble; if we don’t have the experience to do a line of business we won’t do it. That follows through in all of our platforms, the average years of experience on our team in the international reinsurance side, is about 24 years. So you can see it’s a pretty seasoned team and we have all lines of business covered with the teams we have on board.

This slide we talk to our product diversity. As you can see, and it’s a theme that’s again gone through the entire company. We’ve got about 46% casualty, the remainder being property. You’ll start seeing the theme here of getting close to our customers. You can see the international pieces where we’ve expanded over the last couple of years. The brown slice I believe, my eyes aren’t that good, it might not be brown – is the global property – excuse me, regional property we started in 2009, has really started to take hold and grow nicely. And again, this mix of business, we view ourselves in the reinsurance side as really portfolio managers, and over time this picture will change as the opportunities in the marketplace change.

So, if I look out next year, I’d say we’ve had some CAT losses and some opportunity to take advantage of some pricing in that area. If that goes another way and the casualty business picks up we’ll go to that. But the mix of business will shift over time and will always go to profitability.

All right. This is our approach, how we do the business. Picking partners is important. We like our partners to have risk alignment in the game. We don’t want people to get in the business, put all their risks on our balance sheet and not have any skin of the game so that’s very important to us.

We need to have a fair to midland shot every year of having a targeted return made each year. We like specialty players, whether it be class of business, line of business, divisions of a company that have the talent and the resources invested in the products they’re writing. It’s important to pick our partners, and down at the bottom here we talk about it kind of making very simplistic. Do we like the business? Do we like the people? Do we like the deal? All three questions are important. The last one is the most important, “Do we like the deal?” To that end through nine months this year, we’ve non-renewed over $100 million globally based on the economics of the deals you’ve seen. And while we’ve done that, we’ve also been able to expand the overall portfolio because we found other profitable opportunities to get involved in.

This talks to our strategy. As you can see, we’re not afraid to shrink the business if it’s not profitable. We are profit-driven; we’ve been able to leverage what was built in 2002 in the Bermuda reinsurance operation. To cross-sell as we’ve built out moved our teams closer to where the business are being conducted.

Again, we don’t dabble in the business, if we don’t have the expertise we won’t get involved in it. You can see when we got into the U.S. in 2008 our target was really the regional business, multi-line, some E&S business. We still think there are opportunities in that area. We’re not cornering the market in any one line of business. We’re more spot pickers than trying to get an overall basket of business. And then you can see from our expansion, we’ve tried to go closer to our customers whether it be in Europe, Asia and we’re moving to Latin America as well.

This is kind of a graphic depiction of what we’ve just talked about. You can see a little bit, being our origins in Bermuda, around 2007-2008 the decision was made to move to the U.S. and you can see that’s developed nicely. 2008-2009 you’ve seen us kind of get into Europe, continental Europe with our office in Zug. That started off very nicely and developed. IN 2009-2010 we’ve kind of grown up our Asia portfolio and that’s gone nicely. Unfortunately we’ve taken it with CAT's net book, but we’ve also been able to take advantage of the pricing after the CAT.

This speaks to our initiatives in some of the things that I just mentioned. In 2008 we brought a team of property underwriters well-known in the industry. They’ve been involved for almost three years now in our portfolio, the portfolio has matured and they recognize it as a lead quoting market in that market. Significant relationships with small companies and that gives us a great diversity of reinsurance customers who really need their reinsurers. They’re not using it as just a kind of “The market’s right, we’ll use them.” These people need to buy reinsurance and we’re involved in their structures, their plans and it’s become a great book of business.

This year we introduced a new product team, Marine and Aviation and Agriculture. That team has done very well. I’m happy to say that in 2011, they’ll have met their plan both in production and profit which is exciting, first-year operation. The initiatives we’ve talked about internationally moving to Zug in 2008 has really taken a hold in our continental European efforts. Singapore in 2009 has also taken hold especially after the pricing after the events this year. The Lloyd’s Syndicate, Frank has mentioned quite a bit, we will use that for both Latin America and Asia-Pac and we will use it strategically in other places as well, as time goes on working with Darren Powell.

Okay. This kind of – slide gets to a graphic depiction again of our product diversity on expanding globally. So you can see here, and not coincidentally when you’ve heard about professional liability earlier, our professional liability book has shrank over time. That’s largely due to what you’ve heard earlier. We just don’t’ think the opportunities are there, so we’ve shrank that portfolio. We’ve added new lines of business. You can see our global expansion. So over time, this slide as well will shift and you’ll see over time as profitability changes in the market and opportunity changes in the market, we’ll mix the portfolio to kind of go towards the profitable areas of the market.

Production, we’re largely a brokered market. Unlike what you’ve heard from our insurance brethren, we have a pretty narrow channel for production. It’s a big three controlled awful lot of the market, in our portfolio that’s about 80% of the book. I’m happy to report we have excellent relationships with the big three. This business remains largely a relationship business, relationship service and claims payment. As you can demonstrate to your brokers and you see that you can do that. You will have an opportunity at their business.

Secondly, we do want to kind develop relationships with the smaller brokers, the up incoming brokers to diversify our production where possible. We also want to expand internationally and to international producers and specialty producers. So that’s our production slide right there, and we will continue to develop and expand our relationship as time goes by in production.

Moving forward, again, I won't go through these like Frank did as well, but what I will say is, what you will see from the reinsurance operation is our active portfolio managers. We will always lean towards profit and move our portfolio resources and talent capital to the profitable areas of the market. Diversity of the book will change over time to match that profitability. We will put our people as close to where the business is being traded on a regular basis. That gives us advantages about the relationship type of business we are involved in. If we are in front of our brokers and our clients on a regular basis we can cross-sell it gives us opportunities in a lot of different areas. It’s a global business and as long as we continue to talk to our customers and brokers on a regular basis that helps us.

Expense efficiencies, is part of the culture. We know we have to treat the company’s money as it’s our own money because it’s shareholders money and we need to spend it wisely which allows us when the time is right to make investments in new teams and new products, and then again we are going to leverage technology as we go. I guess that’s it. Questions?

Unidentified Analyst

Bob Glass, Spiegel (ph). I see that you rate U.S. property risks in three different lines. It sounds like it’s mainly out of Bermuda International, but it also picks it up in the U.S. and now reinsurance. I know you are going to probably be talking about how you aggregate risk, but I'm more interested in how you aggregate underwriting? Do you work together in these product lines across business segments where you are exposed to one business line and – let’s say Florida property, how do you work together with the primary?

John Bender

Well, we don’t typically work together with primary. We have a strong Chinese law between our reinsurance and insurance operations. But we do it corporately through our Chief Risk Officer, Barry Zurbuchen, works through those issues. We also have best lead meetings on what we believe in different areas that we report up through corporate on that area, not in any specific cedent but on what we believe in any one market, any one product line and we kind of manage that and aggregate that through our chief risk officer and chief actuary.

Unidentified Analyst

So do you know, I mean you are in different segments, yeah, underwrite – do you work together and say these are trends we are seeing or is each business…

John Bender

So on the insurance side for D&O we have line of demarcation between the U.S. and the international business, right, so it’s large accounts, excess business, Fortune 1000, in the international business. And below that in the U.S. business. On the reinsurance side, again, underwriting platforms in many cases competitors of Allied World, risk aggregation were focused on using our economic capital model and our enterprise risk management tools to make certain that we are not aggregating risk exposure there. So, you will see as consistent theme in practice in the example you just gave, right? So, we look at rate, we look at trend, we look at price for volatility, and we say, number of competitors not a great business to be riding public D&O in a great way right now. Therefore, less growth there, you know, shrinking that business there, shrinking that business here, shrinking that business here, as an example. That’s practically how it works.

On the property side, again, risk selection on the insurance between the two platforms has a line of demarcation, property CAT rate, book of business profiled working within the aggregate.

Unidentified Analyst

So, Jack you could like Florida and they could not like it. I mean it’s possibly you are on different sides of the same tree.

Jack Sennott

I think it would be probably highly unlikely at the end of the day. The advantage we have in reinsurance is we get to look down at a lot of our season’s result. So we at Allied World on the insurance side is writing insurance business. We get to see the portfolios of every one of our cedents over a long period of time, but it would professional liability of property and we see what the advantages are. We can kind of look at that business, take trends, take development and build that into our thought process of what we think in the market.

We are also out in the market place on a regular basis. We have, what I would like to say is, “A trust that verify culture at Allied World Reinsurance Company.” So we get submissions in all day long and they tell us what they do and what they believe and stuff like that, and it’s always great to hear. But we are very odd eccentric culture, so we audit our new business, pre-quote audit, we got to audit existing customers on a regular basis both on a claims underwriting side and if necessary transactional side. So, we end up getting real close to our customers and it’s one of the reasons we want to move closer to our customers in the U.S. because it allows us to get their and we actually ended up with excellent market intel on any line of business or any geographic region we are operating, because we are very close to the business on multiple cedents not just our own business.

Unidentified Company Representative

Directly on that question, Florida win, let’s use that example. The property insurance group is underwriting individual risk in how many locations Wal-Mart has in that, and that wouldn’t expose (inaudible). And they are putting every account through the model and their entire portfolio through the model every time they accept risk. So they know every time they bind an account that’s got 10 locations in Florida or a 100 locations in Florida, just how much aggregate exposure is getting added to that portfolio. Corporately, we absolutely know every month and every quarter, how much the reinsurance business and their aggregate portfolios is being added to that. One plus one doesn’t necessarily equal two, because on the reinsurance business when you are managing a portfolio it depends on what your attachment is, what your deductibles are, what layer of the program you are on. Remember on the insurance side we are predominantly in primary layers and we manage it to a limit, how much limit we’ll put up in any individual risk or how much individual risk limit that client will have reaching their locations.

On the portfolio side we may be attaching at a $100 million in the second layer or the third layer or may be down and dirty in the primary layers. It really depends on how much aggregate exposure that has for the whole portfolio, and then actuarially we do match them up, and on a monthly basis we do a run on what our PML looks like and what our aggregate exposure looks like in each of the 20 zones we aggregate it to. You’ll see an actual bar chart graph during various presentations about that.

John Bender

We can take probably one more question?

Unidentified Analyst

I guess this is one general question. You mentioned you are pursuing some specialty business from a reinsurance perspective and obviously like in the U.S. that’s a big part of the franchise you are looking to build. Just trying to understand, if for example on the reinsurance side if there is a particularly good book of business that you see, I mean is that something that at some point at some high level can be part of a due diligent process for the primary side or how does that dynamic work?

John Bender

Well, we would basically our operation we do our due diligence on the products we want to operate in. From a high level I talk to Scott all the time. I’ll get to hear the opportunities and his thoughts and concerns. So you have noticed some consistency through the portfolio about what we like, what we don’t like. We can share general trends and views on different products and things, but we can’t share the specifics on anyone who is doing this or who is doing that. So there is communication between Scott and I and other members of the management team on general trends on lines of business, but not customer specific thoughts at all.

Unidentified Company Representative

There are some lines of business where you can use the knowledge you have on the primary side to influence the outcome of what you are going to underwrite on the portfolio side from reinsurance perspective. There are also other lines of business where you can be (inaudible) you can do both. And the market would frown against that dramatically. Crop and health comes to mind as an example of one you can't be both a reinsurer and an insurer on. By the very nature of couple of reinsures recently buying up their insurance businesses or books that do crop and health business is unfortunately taking them out of the reinsurance business and that knowledge has created a big opportunity for us on the reinsurance side.

Unidentified Analyst

Thank you.

Jack Sennott

Okay, one more question if you have it. Okay, good.

So, we are going to break for lunch now which is in the Card Room and lounge which is out into the right. And then we come back, we have John to go through capital, we have Barry and Marshall to go through – you are going to get our PMLs in detail, our reserving and John Gauthier to go through investments. So we look forward to seeing you again after lunch.

Jack Sennott

Okay. We are going to start back up again. I just got a note from one of our investors who appreciated the Santana tunes during the break, so we are going to take credit for that as well. So, we’ve got lots of good stuff in the afternoon here as well. We are going to take you through as I said capital. Joan is going to come up here and start with that. We are going to go through our enterprise risk management and our PMLs with Barry Zurbuchen, our Chief Risk Officer, Marshall Grossack, our Chief Actuary is going to come and talk about our triangles and our reserving philosophy, and then John Gauthier is going to talk about our investment portfolio and performance and strategy there.

Then Scott is going to come back and we’ll make some closing comments. Our goal would be to get you folks out of here in the next hour and 15 minutes. So, thank you very much for staying with us, and without further adieu then let me turn it over to Joan Dillard, our Chief Financial Officer.

Joan Dillard

Thank you Jack. I guess I have the dubious honor of being a welcome back from lunch speak. So thanks for being here. As you heard this morning we started off with an overview of our strategies, of our various business lines, new products and initiatives that we’re undertaking as an organization. And actually, I enjoy my role very much because ultimately, these business decisions and strategies and the outcomes of those strategies usually make it across my desk in terms of our financial results and improvements in shareholder value.

So, how did we do? Well, we stand here today as a company with a total capital base of $3.8 billion with moderate and conservative leverage. We’ve delivered strong operating income and in fact over the last five calendar years, our average operating ROE is over 20%. My colleagues, Marshall and John Gauthier will be talking more in detail about reserves and investments, so I will pass on two of my favorite subjects.

But just to note that every year, since 2002, we have experienced favorable reserve development and that comes from certainly a conservative reserving posture but the real driver of that positive development have been the good solid profitable underwriting decisions that we’ve been making throughout the years.

Our diversified portfolio, our investment portfolio, regularly ranks in the top quartile of our group of peer companies turning in a 6.1% total return in 2010 and 1.1% so far this year. We have strong operating cash flows and strong book value growth which since we went public in 2006, has well more than doubled over that period of time.

Some of the highlights, I’ll touch a little bit on the first nine months of this year. Our net income and operating income at $91 million and $89 million respectively translates into a net income ROE of 4.1% for the nine months and 4% operating ROE for the nine months.

Combine ratio just a shade over 100 at 100.7%, our cash flow from operations for the nine months, just for those nine months has already exceeded the 12-months cash flow of $451 million that we had in 2010 and our ending book value per share at $75.82 is a 2.1% increase over the year end book value per share. And in spite of some of the CATs we’ve had and the financial turbulence, you know, we’ve turned in a positive increase in diluted book value per share just as we did in the turbulent times of 2008 where we experienced an 8% increase in our book value per share. Just a little bit more on our history of our consistent operating earnings and we have turned in some solid results with the full year combined ratios of the past five years, from 2006 through 2010, at a combined ratio of 85% and consistently better than our peer group. And within this peer group, there are Bermuda companies in the peer group but we also include U.S. specialty carriers as well.

And for the full year operating income in those five years, comfortably in the $400 million range and if you took an average of those five years, it’s in excess of $450 million. So we’ve had strong full year operating ROE.

Now, if we take a look at our nine months there is our $89 million of operating income for the nine months and I think you’d probably agree that so far this year it has been one of the more difficult years for the industry in terms of catastrophes, and we’ve experienced $233 million of CATs that impacted that number and as I look back I think we’ve had almost one of everything. You know, we’ve had – let’s see, we’ve had earthquakes, we had a hurricane, we’ve had flooding, we’ve had tornadoes, we had a tsunami and, oh by the way, I think as we speak, there is an asteroid that’s hurdling dangerously close to the earth.

Nevertheless, even through the nine months we have turned in with our 100.7% combined ratio, we are still below our peer groups in terms of combined ratio.

Now, the strength and the consistency of our earnings have really helped us to propel our financial strength and our balance sheet strength. As we’re here today, we have $8.4 billion in cash and invested assets representing 7.3% compound annual growth since 2006 and at over $11 billion in total assets. We’ve grown that asset base at a compound annual rate of about 8%.

Our financial leverage in the low 20s is at a very comfortable place for us and our operating leverage at – if you measure it in terms of premium to surplus, it’s 0.5 to 1 and has been roughly in that area in the years that you’re looking at. Then overall operating leverage is at 191%.

As I said, I’m not going to get into too much detail on some of the bigger aspects of our balance sheet like the reserves or the investment portfolio, but I did want to stop on one number which is our reinsurance recoverable. And those recoverable are supported by a cadre’ of high quality reinsurance partners and we currently have just over $1 billion in reinsurance recoverable. 98% of these recoverable are with insurers that are rated A or higher, by AM Best, or A minus or higher by S&P.

Internally, we use a scoring matrix in order to rank and to develop the acceptability of various reinsurance partners. For example, some of the considerations are size, could be the reinsurer or its group, their leverage, their property CAT volatility. We also develop a score internally on their willingness to pay and of course we look at financial strength ratings.

We then create a scoring matrix and this helps us determine the acceptability of a reinsurer either for short-tail lines like property or for our casualty longer-tailed lines. It helps us develop the limits per insurer per program and then of course we look at concentration risk by insurer or group of companies. And then occasionally, you know, if a reinsurer is in a deteriorating position or in some distress, we may request collateral to back those reserves. Finally, we have a reinsurance security committee that approves the standards and the limits for our acceptable reinsurers.

Just before we leave while we’re talking a little bit about ratings, it’s really nice to be validated for our good business decisions and financial results and financial strength, and this year S&P has upgraded us, upgraded our financial strength rating from A minus to A, and our debt rating to BBB plus.

Liquidity, another important financial strength factor, we have significant dividend capacity from our Bermuda operating company and currently it is at $736 million and that’s based on the statutory limits that we can take from the company without regulatory approval of 25% of statutory capital and surplus.

We also maintain an $800 million syndicated credit facility. Half of that is unsecured and that’s available for general corporate borrowings. The other half is secured and we currently use that for letters of credit which our Bermuda Company will supply to U.S. cedents and clients in order for them to get the Schedule F credit.

The term of the facility, it was originally a five-year facility and it terminates a year from now, next November. So, we’ll be busy in 2012 looking at renegotiating the facility. Current utilization, nothing is outstanding under the unsecured portion, and under the secured portion we’re utilizing that now for $162 million in letter of credit capacity.

So, I think liquidity, consistency and strength of earnings and the strength of our balance sheet are really key factors to efficient and active capital management. And indeed we have been pretty active. Since 2007, we repurchased $563 million of shares from one of our founders, AIG. In 2010, we repurchased $505 million of shares and warrants from founders, and you will note on this chart, in 2010, you can see the increase in the debt where we issued, just about a year ago now, $300 million of 10-year senior notes at a very attractive rate, at a 5.5% coupon.

In the first quarter of this year, we repurchased the last founder’s warrant for $53.6 million. And as I look at the chart and you think about the growth in our retained earnings, as we combine the capital base of the company, we have been able to increase our diluted book value per share by more than double since 2006 from $35.26 to $75.82. And then as you combine that with the dividends that we’ve returned to our shareholders, as Scott mentioned and Jack mentioned, this is a 10-year anniversary for us and we’re really pleased to be celebrating that.

When you think about it, you know, 10 years ago our founding shareholders gave us $1.5 billion to take advantage of some turmoil in the marketplace. You looked at how we started the company with the products that we started and how we’ve built that, and I’d like to point out here that if you look at the bottom of the chart, we have more than returned the $1.5 billion. In fact, we’ve returned $1.6 billion.

Now, finally, as you know, we have a $500 million share repurchase authorization in place that was put in place in May of 2010. And since then, we’ve repurchased $299 million under that program. You can see it starting on the left in quarter two of 2010. It started in about the middle of that quarter and we’ve had steady repurchases through quarter one of 2011 where we suspended the program because of our merger discussions with Transatlantic.

I also want to point out, if you look at this chart and you see the – we added in here the repurchase of the founder shares and the founder’s warrants and it’s interesting to note that in 2010 alone, just with those purchases which were outside of our $500 million program authorization, we have exceeded the total size of the $500 million authorization. We bought back outside that program from our founding shareholders in shares and warrants $505 million of share repurchases.

We now have $201 million remaining in that program and we’re very anxious to resume the share repurchase program this quarter as we get into an open window, and we’ll do that through a systematic purchase through a 10D51 plan which will give us sort of the steady as you go, consistent purchases through May of 2012.

Now with that, we’ll take any questions. We did have a great table at lunch and I wanted to thank everybody at lunch for their great questions. I think I’ve heard them all by now, thank you Donna.

Mike Nannizzi – Goldman Sachs

Mike Nannizzi, Goldman Sachs. So just kind of looking at your slide here, 68 balance sheet. So portfolio leverage two and a half times, maybe 2.8 times, something like that – somewhere between 2.5 and 3, and you mentioned operating leverage of about 0.6 times, 0.5 times.

Joan Dillard

Point five.

Mike Nannizzi – Goldman Sachs

So, in terms of thinking about ROE from here, what sort of math on – given where yields are on combined ratios gets you to where you want to be from a performance perspective?

Joan Dillard

You mean from an ROE perspective?

Mike Nannizzi – Goldman Sachs


Joan Dillard

Well, as we’ve said, you know, we look at a 15% ROE across the cycle. And if you look at the earlier pages on that too, you’ll see some 20 plus ROEs. So on the five-year average, you know, we’ve been turning in an operating ROEs just in excess of 20%. From a lot of your views as well and other analysts and industry spectators, right now, you know, it’s pricing where it is. We’re looking at an industry ROE about the high single digits. As we manage our capital though, we do look at all opportunities that are on the table. So that includes share repurchases, and of course you’ve seen us active n the merger market. But those are all options that we do keep on the table.

As you’ve looked at some of the slides, we call them these waterfall slides, and we’re very targeted in terms of the products that we select and we do have that criteria. Then on a product by product basis, we want to see that over a three-year time frame that that product will give us the target ROE that we’re looking for.

But, it’s a broad answer to your question but we do look at a variety of tools in our toolkit to continue to improve and give us the right level of ROE.

Mike Nannizzi – Goldman Sachs

I guess you could, through buy-backs you could see that premium leverage rise. I mean is there a cap to where you’d feel comfortable seeing that at 0.6 or does it just depend on the mix of business that you have?

Joan Dillard

I think I’d say it depends on – it depends on the mix of business and as you know, I mean there are various factors that we look at when we think about leverage. For example, I can relate it easily to our financial leverage. It’s been as high as 25% to 26%. But we’re comfortable in the low 20s and we also – we do pay attention to the rating agencies and their comfort levels as well.

Mike Nannizzi – Goldman Sachs

All right.

Joan Dillard

Good. Thank you very much.

Jack Sennott

Thank you Joan. So as I mentioned we’re going to give you two actuaries for the price of one here. And so I – we’ve got Marshall Grossack, our Chief Actuary and Barry Zurbuchen, our Chief Risk Officer. Barry’s going to go first and then I’m going to slide over here Marshall so you can sit right here and get up whenever you want as well. Marshall’s also suffering through a lack of power, he just moved to Simsbury, his family’s going to run out of there I think. But without any further adieu, Barry and Marshall.

Barry Zurbuchen

Thanks Jack. Marshall and I are going to spend about 20 or 30 minutes talking to you about various risks and actuarial topics. So we’ll go through our risk appetite, some of the controls we have around risks, some of the modeling we do with regard to risks, and Marshall will talk about pricing and loss reserving practices, methodologies, philosophies, et cetera.

When we think about our risk appetite, it really has several dimensions. So this one on the top, the return goal which has come up many times today, we’re trying to achieve a 15% ROE across the cycle. So this becomes an important metric within our risk appetite and it’s important because it gives us a benchmark against which to assess a variety of risk reward decisions that we’re faced with as a company. So it really becomes the benchmark that we want things to clear before we’re willing to go forward and take on that risk.

Obviously, we have risk limits and tolerance with around the capital that we want to hold, so we want to make sure that we are there to pay for policyholder obligations even if things go horribly wrong. So we’re doing internal modeling in addition to obviously the regulatory requirements that we would have and any rating agency constraints that we work within, we’re doing our own internal assessment of how much capital we think we need to withstand adverse times.

So we’re looking at the 99.6 percentile metric, or the 1 in 250 of all-in, all-risks aggregated across the year. We want to make sure we have at least 50% more capital than the amount we would need to satisfy that type of scenario.

Likewise, sort of within one of the things that would drive is catastrophe losses, and again this is something that’s come up a number of times today, obviously a matter that’s of interest to this group. So we certain have a limit around the amount of catastrophe risk that we’re willing to take, we try to manage our – we do manage our insurance and reinsurance property portfolio so that our estimate of the 1-in-250-year even loss or 1-in-250-year wind storm, or earthquake, or really any kind of peril in any region around the world, we want that event or that estimate of that event to be less than 20% of our total capital.

And again, the big capital metric, we have well in excess of what we view as our model that amount of capital we would need likewise with the catastrophe risk metric, we are within our stated tolerance. And I’ll talk more in future slides about catastrophe risk in particular.

So, those two metrics are really extreme tail metrics, things that could go wrong but only very un-frequently, once every 250 years. We are also worried about the more short-term volatility in earnings in capital. So we have a metric that we work within, so we’re trying to make sure we manage the makeup of our insurance and our investment portfolio such that there is less than a 5% chance that will lose more than 15% of our equity in a given year. We put that – in other terms, we want the all-in risk aggregated. Across the year we want the 1-in-20-year volatility of that to be less than 15% of our prior year’s GAAP equity. Presently, that stands at 7%, so gain, well within the tolerance.

As a subset to that, we are also managing our investment portfolio so that the volatility in our investment results across any one-year period will be less than 10% equity at the 95th percentile or 1 in 20 years, and currently that stands at 5%. So you can see we’re well within our risk appetite in our stated risk limits and risk tolerances in all these areas. We have the appetite and the capital base with which to take on more risk but only where and when we’re adequately paid to do so.

We talk about our enterprise risk management. It really all starts with the tone at the top. And Scott made some comments about the importance of enterprise risk management in his opening remarks, and it really – we do really have a CEO on the board that’s engaged in this topic. So this exhibit is trying to express the breadth and depth across the organization, the ways we are focused on risk.

So, the red boxes represent the board level committees while the black boxes are various management groups, committees, and meetings that happen on a regular basis. It’s important to note that Scott Carmilani, the CEO sitting on all the board committee meetings and he is also a participant in most of these other committees, management committees that are happening on a regular basis.

And really, throughout these committees there is a broad cross section of people within the organization at all levels across all functional areas and geographies involved in these committees, focusing on a myriad of different risk that we face with the company.

Now, as promised let me spend a little more time talking about the risk controls specifically around catastrophe risk. So, I stated earlier what our risk appetite is with regard to CAT risk and the fact that we’re within it. Now the question also that’s been a popular topic of discussion, the last several months has been the change in the RMS model, which is one of the more commonly used vendor models for assessing CAT risk.

The model itself from version 10 to version 11 which is the current model there was a dramatic shift. I mean, it was incredible how much RMS changed their view of CAT risk. But it’s important to note, to remember, keep in mind the actual underlying exposure didn’t change, just RMS’s view of what the risk has changed.

There are, of course, other professional firms out there, AIR and Eclicat (ph) to name two of the bigger ones that are making their own independent assessment. They’re using sophisticated techniques to try to come up with its estimate of what the potential catastrophe losses are for in particular regions or from particular perils, and the one that changed a lot in RMS version 11 is really Atlantic based hurricanes. So that’s a peril that’s pretty well understood, there are a lot of Atlantic hurricanes. It’s very thoroughly researched, perhaps more so than any other CAT risk there is, but yet you have these independents firms that have widely divergent views on what the risk is. And currently RMS’s view is by far the most conservative.

So, it’s important as you look at our PML statistics to keep in mind that we’re using the most conservative model as we’re assessing these PMLs, and yet we’re still within our stated risk tolerance. The PML you can see there has gone up from 541 million in RMS version 10, which represented about 14% of capital, has gone up above 25%, now stands at $676 million or about 18% of our total capital.

Then in terms of how we actually go about managing that. So you have this overall CAT tolerance; and as it was pointed out earlier we write property insurance in various offices around the world. We write property reinsurance in various offices around the world. So, how do you control the management of making sure you stay within that limit.

Well, we take that overall limit that we have at the corporate level. We disaggregate it, cascade it down to individual business units, individual geographies. So, each business unit is managing within their own PML. And every time they write a risk, they can see what the marginal impact is on the corporate PML from this particular policy or treaty that they are engaging in their underwriting.

So they can see it real-time, and then on a monthly basis we provide reports that will show a variety of statistics around catastrophe risk. Total exposed limits in various regions, countries, for different zones within countries, we provide PMLs and tail value statistics with regard to gross versus net of reinsurance, aggregate cedents probabilities versus occurrence of cedents probabilities at different return periods, obviously a different combinations of business units, region’s peril. So, the list of ways you can look at PMLs is almost endless.

So this slide then shows, for the first time a more granular view of where we really have significant CAT risk as a company. So this is the top three region perils that we’re exposed to catastrophe losses. So, the prior statistics that we were talking about, the 1 in 250, was really all regions, all perils, anything that might go bump in the night anywhere around the world. This is really focusing in then on, okay, well, the top three places where we’re exposed to risk is really US for hurricanes or earthquakes and European wind storm would be number three on the list. So here you could see the PMLs and these are expressed as of – in-force portfolio as of October 1st. So it includes business written up through October 1st. I feel like I should use this pointer, it looks like so much fun.

So the far left bar, the blue bar, that’s the 1-in-250-year PML for US hurricane in total. So, regardless of where the hurricane might happen, which is another distinction which I think is important to keep in mind. Sometimes companies will talk about “This is my PML in Florida” or “This is my earthquake PML in California”. Well that’s obviously not the same thing as “This is my PML to hurricanes anywhere in the U.S. or anywhere in the world.” That’s a difference measurement.

So you have to be careful when you’re comparing it across firms, that you’re comparing like-for-like and obviously, you know, as important or more important to make sure you have the right combination of regions and perils in the comparison. Are you comparing the same model because as pointed out, if you’re using the RMS version 11 model, it’s a lot different than the RMS version 10 model or the AIR model or the Eclicat (ph) model or some blended model or proprietary model that a company might be using. So you want to make sure you’re comparing apples to apples to the extend you can.

Another important thing to note is even within RMS version 11 or any of these vendor models, there are a variety of options that you can turn on or off in the software. When we’re showing our PMLs here, we’ve got all the most conservative assumptions turned on, so we’re including things like fire following earthquake, storm surge, loss amplification and an important one that people don’t often mention, RMS has a mid-term view of hurricane frequency and there’s a long-term average view of hurricane frequency.

Most people believe we’re in a climatic period now when hurricanes are more likely to happen than they are over a longer-term period. So we’re running the model with the mid-term frequency which is almost 40% higher than the long-term average. So that assumption which is often unstated in and of itself makes a huge difference.

So just to – that’s a graph and obviously you can kind of draw a line across and figure out pretty closely what the PML is, but just to point out a couple. So US hurricane in 1 in a 100, that’s a $520 million PML and if you look at that just as the hurricane PML for Florida, one in a hundred is $385 million, in Texas it’s $355 million. So again, kind of highlighting the difference between whether you’re talking about a PML across a whole country like the U.S. which is a big country or if you’re just talking about in a particular region within that country.

Now let me touch a little bit about risk modeling more generally. So catastrophe risk is obviously just one of the types of risks that we face as a company. We’ve built an internal economic capital model which we then use to try to aggregate all the different risks that we face as a company, not just to CAT risk obviously, but the investment risk, the risks on casualty business, risks that sit within our reserve portfolio, it’s really the idea is to try to get all the risks in there, make sure you have the proper dependencies across risk, the correlation and/or diversification that exist between risks, now you can come up with an assessment of the overall capital you need for the company for one years, but then we can take that and allocate it down to particularly risk types of particular business units which then gives us the ability to make better judgment calls about where we should grow, where we should shrink, how we can optimize the portfolio.

So, this schematic is trying to show the various risks that are modeled within the economic capital model. On the left hand side of the page you could see where modeling scenarios around what the economy, what various economic factors might look over time. So, things like the term structure of interest rates or inflation rates or credit spreads or equity indices. So we are modeling thousands of scenarios around what the future economic conditions might look like. That then obviously drives our evaluation of investments that we hold in our investment portfolio but you can also see there’s a dashed line then that goes across to the right side of the page implying that there’s also some connection between what happens in these general economic factors especially inflation and interest rate that changes the way we value the business on the insurance side of the house, the underwriting risk and the volatility that exists within our reserve portfolio are to some extend linked in with those other economic factors.

One of the ways that I started to hint at that we use the model is to assess how do we adjust the size of our bet at various points in the cycle or for different products given what we view the profitability of those products to be. So, obviously, the goal, again 15% ROE over the cycle recognizing you can’t make 15% ROE in every market environment. We don’t think we can necessarily make 15% in a lot of the products we’re making today in 2012. So we need to vary the size of our bet over time in order that we can maximize the ROE that we are able to achieve over the cycle.

So, having good modeling gives you a better ability to vary the size of your bet appropriately so that you can maximize that profitability and really optimize the portfolio, and I think there’ve been examples of how that has played out historically within the company.

Just a couple of words on underwriting before I turn it over to Marshall. Obviously, we consider one of the core strengths and the backbone of the company is really excellent underwriting. So it’s no surprise that there’s a great focus on controls around risks involved in underwriting.

So we have an underwriting risk policy that would really just set out the overarching principles that we operate within. Certainly there are underwriting guidelines that then go into more specifics around how we would view particular lines of businesses or classes of business, and then each underwriter will have letters of authority that dictate the parameters within which they’re expected to work.

One quick word on pricing and then I’ll turn it over to Marshall. Certainly an integral part of strong underwriting is robust technical pricing models and I can say with certainty that we have very good, very robust pricing models throughout Allied World. I know this because I used to be the Chief Pricing Actuary at Allied World, and now that I’m no longer in that role, they’re really good.

Marshall Grossack

Thanks, Barry. Yeah, just really quickly and the pricing models were good when Barry handed them over to me a couple of years ago. But just to touch a little bit more – Barry’s been covering some of the basic risks in the insurance industry. I want to give just a little more color on some of the risks that the Chief Actuary touches on a day-to-day basis. The first is going to be pricing risk and then the second I’m going to talk a little bit about reserve risk. I’m sure all are interested members in this audience.

And so for pricing risks, we kind of go over here to some of the key points for pricing, and I think a lot of these are kind of motherhood and apple pie. We could certainly say that we have pricing models for all of our lines of business and we monitor our rates and all those type of things. I’m sure other people do as well. But I think it’s important to realize why you do that and Barry was kind of touching upon it. It’s very important to kind of have that technical rate to know what the right rate is to charge because you have to know when you should walk away from a risk and when you should put that risk on your books, so you’re not taking on things blindly. So it’s very important to have these models that you rely to the extend possible.

I think a couple of the key points on this slide that are particularly interesting are under pricing, the last check mark there is that our large accounts are reviewed by more than one actuary. So not only do we have these large accounts be on the direct side or on the reinsurance side being priced by actuaries, but when they get beyond a certain threshold, they’re required by our own internal guidelines to be reviewed by second actuary which frankly is often me when it’s something that’s my area of expertise and I’ll make sure I ask tough questions, and I know actuaries want to make sure they come prepared to those meetings and they can explain why the account is priced the way it’s priced.

The other thing that I think is really interesting on here is the last bullet point, which is data analysis. I think we’re really trying to move to the cutting edge here. So, when we get dealed in, not only are we pricing them and doing the basic blocking and tackling, but we’re also taking all the data from the submissions and – so not just deals that we write which would be bound and quoted but we’re taking the submission and we’re gathering loss and exposure data from those and we’re building this enormous database that will allow us in the future and it has allowed us so far to price things better.

So, a great example is in healthcare which I think Jack kind of talked a little bit with the U.S. We have a database of that – that is larger than AOM’s (ph) database as far as the number of claims and data in it, and AOM (ph) I would argue probably has one of the best known databases in the industry.

So it really allows us to horn in on what frequency and severity trends are, what the right – what’s probably the loss, you know, giving above $1 million or $2 million and all these various things that are very important when you’re pricing accounts. So I think that gives us a – I think, kind of a competitive advantage.

Okay, this slide, I think two things should hit you right away when you look at this slide. The first is that it’s a triangle shape and the second is that it has a lot of numbers in it. So those are both kind of cues that you’re talking to the Chief Actuary of the company now. So, this slide goes over strong underwriter result and it’s a very useful slide because it gives you kind of I think three really important things in looking at Allied World.

First, it gives you a little idea as to where we’ve been. Second, it gives you a view possibly as to where we’re going and then third, it does allow you to see what our – a little bit of color as to what our reserve and philosophy is.

So we picked one of the years and my eyes aren’t all that great, but if we take the 2005 year for example, what this exhibit does is it takes the calendar year numbers at the very top. So for 2005 there’s 103 loss ratio there. That’s the calendar year number. So if you went back to 2005 and looked in our reports you would see that or you would if you’d maybe adjust it for Darwin on kind of problem forma basis. And that’s kind of Joan’s piece of the world. And then just kind of strips it down to get to kind of the actuaries view of the world, that’s where we kind of try to take that and get to an accident year.

So if you take a look at it, the first thing we do is we adjust it for a prior year development. So we did have – as Joan mentioned, we’ve had favorable development pretty much every calendar year since 2002. So we did have 3.6 points favorable development for 2005 during calendar year 2005 on 2004 and prior, so that was 3.6 points. That gets you to the 106.7. And then what you can do is, the next year’s numbers show our reserve changes, either releases or additions since 2005 and that 2005 year.

Then you can see the $8 million there in 2006, if you kind of read across the row, it shows that we released $8 million on 2005 in the following 12 months and then I won’t bore you with all the numbers, but in 2006 we released another $6 million. But then you can see we started to actually put some real numbers in there. You can see in 2008 we released $74 million. And this is where you kind of get a feel or color for our reserve philosophy. That’s one point, you have to walk away with one thing after listening to me talk, this probably is the point, is that we don’t like to release reserves on longer-tailed casualty lines of business until we’re sure, or pretty sure as you can be in this line of business, that the year deserves some releases.

So we tend to wait three to five years depending on how excess the casualty lines of business are before we start to release those (inaudible). So I can clearly see there for this 2005 year and 2008 when we finally said, “This year is actually looking pretty good.” So we then proceeded to release $74 million in 2008, another $103 million in 2009 and so forth. So you can see so far as of the third quarter of 2011, we’ve released $415 million which relates to – which adds up to about 30 points of loss ratio having been released on the 2005 accident year.

So then the rest of the graph, the rest of the charts then gets you – then there are development accident loss ratio pick right now for 2005 is 76.2 of which 28 points is CAT losses, so our x CAT losses is 48. And then to give a little clarity on that. When I say CAT losses that means big CAT losses, not just every single little tornado or even hurricane. Those are the big ones that were really for that year, Katrina, Rita and Wilma. KRW as many people call it.

And then the final couple of numbers there show that our – so far our reported loss ratio, so you take that 76.2, the reported loss ratio is 59.3 and we still have 16.9 points of IBNR.

So this is how it kind of reads, so it really kind of gives you a view as to how things change over time for us. It takes that calendar year number it gets you to kind of develop it backwards if you will. And then the far right hand column shows our releases over time, again (inaudible) once they kind of sum up. So, you can see we’ve been releasing since 2002 and so far, since the inception of the company it’s about $1.47 billion.

The next slide, again, I’m not going to go through everything on here, but it just kind of talks about our reserve philosophy. I talked about that to some extend but I think a couple of kind of key points that you should take away on this slide, I think, are first, the third bullet point. 72% of our reserves are IBNR. What does that mean? It really means that we’re carrying a pretty good chunk of money for events that we don’t really have recognized, that really are still unknown to us, and it’s a pretty conservative way to do it. You could look at our peers I would suggest 72% is probably on the higher end compared to most of our peer companies or not all of them.

And you know, we’re at 72% and that’s despite releasing that $1.47 billion over the last nine years I guess is what it adds up to. So, we’ve kind of maintained that pretty high level of IBNR ratio to total reserves despite those releases. The next point, the other kind of interesting point here are these kinds of bar charts in the top right hand quadrant there. And they kind of show our ranges.

So the red bar in the middle kind of shows what our cared reserves are and then the blue and green bars kind of show what a reasonable actuary might be able to book it at. So if you’re really conservative maybe you’d book at the green bar, if you were really maybe not conservative, it might be at the blue. So it gives you some idea as to kind of possible outcomes and more about it. In the bullets here on the left were about 4.6% above the mid-point of our range.

Next point, loss reserve and procedures. Again, people can read these, so I’m not going to go through each point because I see the clock ticking down in front of me. But if we kind of hit a couple of the key points and this was asked at my luncheon table which was a good conversation there. The first checkmark is internal review on a quarterly basis. That means what it says. It means every quarter we do an analysis from ground up of every single line of business for every single segment of our company which must by now add up to more than 80 different kind of pieces of the pie, actuaries like the flip things and they are pretty small homogenous chunks. So it is quite a bit to look at, but it really let's us stay on top of trends and what’s going on. So I think it’s important to do it even though it is time consuming.

The other point which I’ll touch on briefly is the last bullet which is in-depth discussions with claims department and underwriting segments. We do tend to have a lot of lines of business that are low frequency high severity. So, what that means is we often can’t really use the large numbers like maybe an AllState or State Farm can do. We really have to rely on knowing our individual claims that are out there. So, we spent a lot of time going over with our claims department. Pretty much every single claim that is out there on the casualty side, not necessarily that it has a reserve on it, but it might have some characteristics in it that might get to our attachment points.

Now, Frank mentioned early on that our average cash return points could be a $100 million or $150 million. So it does have to have special characteristics often to get to that. So, we can identify those claims fairly early on but there is sometimes uncertainty whether they are going to get to those attachment points or not. But we are tracking them and we are very aware of those claims.

I want to briefly go through some triangles. People in this room I'm sure know we do release our global triangles, now on an annual basis we did that for the second time this past year. These triangles are aggregated a little bit higher level, we are going to have three of these. One for the US segment, one is for the re-insurance and one is for the international segment. actuaries would never look at it that way, but still because it’s not totally homogeneous, but it is useful sometimes when you stand back and look at these things, because you can see some trends that maybe you lose when you really look at things at a very, very granular level.

So, if I kind of just pointed out a couple of quick things, and I have got obviously arrows pointed at. What are some of the key things. But we kind of tend to look at things in kind of three dimensions. We look at the horizontal dimension, the vertical dimension and the diagonal dimension. So if you look at kind of the horizontal dimension, I think one of the important points in here, and I'm going to only detail these on the US side is looking out on the tails, that’s obviously in the far right quadrant, and if we kind of look at it, if we kind of look at the 2003 year you can see at 81 months, which would have been at the end of 2009, you can see the loss ratio, the loss ratio is 39.5%, you can see at the end of 2010 it ticks up to 39.8, and you can see here at the – in September it’s still a 39.8. What does that tell me? And then you can see the far right is projected to 44, so that’s kind of what we are caring on our books for that year.

I mean that tells me that the emergence in the tail hasn’t been too bad so far. People are always worried about the tail, actuaries are worried about the tail. You can look at this and you can see at least so far the tail really hasn’t been problematic. So that helps me sleep a little bit at night. As far as other things that are interesting kind of looking down the column, so kind of looking more on a vertical basis it’s very – it’s hard to compare years on the far right, but if you look down the column all of them are at the same age. So we pick like at 33 months, you can see at 33 months the 2002 year had a 20% loss ratio, I don’t have to read out the numbers, 2003 is a 38.5, and so on and so forth. You can see that 2009 is 28.3. What does that tell me? That tells me that’s not so bad. You know, if I look at some of the other years it kind of looks in line. So, you hear a lot of people that market has gotten soft, and some people say 2009 it was getting soft and it was, rates were going down, Scott showed the charts on it. But, the bare question is, is there still margin in it, are we still making money.

When I look at that 2009 year, 33 months, that actually looks pretty good. It’s still got ways to go that’s why we are still carrying this 60 plus loss ratio on it. But, so far, it’s off to a pretty good start, and the same with the 2010 year.

You know, I'm knocking again, time is up, but I'm not going to go through these incredible details because I think the pointers and everything kind of faded, what I would tell you anyway, but they kind of tell the same story, you know, these one again, the tail again this is the international, the tail again looks fairly benign, and again 2007 and 2009 look like pretty strong years. 2010 does have a couple of issues, we did have three large casualty claims which we discussed in our quarterly calls and of course everyone knows about the CAT events. But, all in all looking pretty strong.

And then if we get the last triangle, the re-insurance, the one difference on this just to point out, this one is on a treaty year basis, the first two are on a loss year basis, this is on a treaty year basis. But, again, the tail doesn’t look scary at this point. We’re building impact, there will still be a tail when I taken that to the bank, but it looks good so far. And these year ’06, ’07 and ’08 really don’t look that bad. Again, anything about treaty year 2008 that’s why we are actually covering a lot of 2009 kind of loss year business especially for our risk-attaching business.

So, go to the final slide here. So I can tell you what I told you. If we kind of go through the conclusion, as Barry kind of mentioned we have a well-defined risk appetite and kind of (inaudible) and the more important part is we’re well within all stated risk tolerance. Even with our RMS 11.0 turned on full throttle, we’re still within our tolerance and we could write more CAT-exposed business. For example, should we see business that meets our other hurdles such as pricing hurdles and ROE hurdles.

We do have a strong risk controls, very good modeling capabilities, Barry was modest about that, but he has really built – since he took it over I think really a state-of-the-art economic capital model.

And then my points that I wanted to walk away with are the waiting three to five year before we’re releasing kind of our long-tail casualty reserves. And we’re using our pricing models to really help us gather data, which makes us not just a good company but a smarter a company because it give us the ability to really analyze what’s going on.

So with that, I’ll open it up to question. Of course, Barry is also available for questions.

Donna Halverstadt – Goldman Sachs

Donna Halverstadt, Goldman Sachs. I had a question back on the loss reverse and procedure slide. You talked about using historical experience and I’m curious how far back you go with that history? And to the extend that you’re covering periods of time where there was not a lot of inflation and then you think forward over the remaining time horizon of some of your long-term casualty exposures, how are you addressing the potential for inflation through your reserving procedures?

Marshall Grossack

Yeah, that’s a good question. I’m first, in full disclosure, we’re using historical experience – I would – in no way are we using that on a standalone basis for any line, except maybe our property CAT line and property lines. For any casualty line we are – I focus more on – your analysis are a study – John Bender talked a little bit about how we get a lot of data from a reinsurance submissions and we kind of roll all those up and so we see that which is a little bit like the RAA to be honest. So we have data that we’re using to set our loss development patterns that really go back, I am sure they go back to at least – I am sure, before 1990 the RAA study must go back into the mid-80s. So, we do have definitely some periods of higher inflation than we’re seeing today.

Jack Sennott

Great. Well, thank you Marshall very, very much. And we’ll move to John Gauthier, our last full speaker and then Scott will be back with some closing remarks.

John Gauthier

Thank you all for sticking around for the conversation with the other side of the balance sheet. Given the volatility in the markets, we thought we’d give you a little more in-depth transparency into kind of how we manage the portfolio with the governance, with the structure around the decisions we make, talk about our philosophical approach to actually managing the asset portfolio.

Look at our track record talk about what’s going on in the market, our view of the current market condition, and give you a little more in-depth view of what’s actually in the portfolio today.

Well, first, on the corporate governance, you should know that the investments are overseen by the Investment Committee of the Board of Directors, who are very specific investment committee charter and investment policy statement. That board-approves investment policy statement, states the primary objectives of the portfolio, preserving the company’s capital position to provide adequate liquidity and prompt payment of claims.

It targets things like and limits duration credit quality, country, currency sector, issuer, it really constraints in a reasonable way what the portfolio can look like and the amount of management bandwidth we have to actually maneuver the portfolio. It limits the type and size of alternative investments as a percentage of the portfolio, not only as a percentage of assets but as a percentage of our GAAP book equity.

Management has a responsibility to make tactical shifts within the capital markets and within the investment policy. For the most part, we use external managers for that. We actually get very good kind of execution on asset management, a lot cheaper than we could actually build in internally, and portfolio risk you got some sense from Barry, and I can tell you from my standpoint, measured on daily basis. We’ve got full transparency into the portfolio. We get not only value of risk statistics but a whole a bunch of pre-determined statistical scenarios, which give us a pretty good sense of the risks in the portfolio.

How do we philosophically approach to portfolio? At its base we believe that a total-return to philosophy will generate higher book value growth over time. We fully understand that investment income is a critical component of book value growth of total return over time, but in the short run you have to be worried about price fluctuation, and therefore we are concerned about both of those.

Starting in 2009, we move the portfolio from an available for sale, typical of most of our peers to a trading account. Why? Because we thought it was important to report all our investment returns, both income and capital movements in one geography on our income statement. We wanted to have similar accounting treatment to both cash securities and anything we may use to hedge the portfolio in terms of derivatives. We currently use interest rates futures to do that. We wanted those all in place.

We also wanted to have our accounting in line with management compensation plan. On an annual basis and on a long-term basis, the change in the market value of the portfolio has a direct benefit or detriment to the bonus pools or the long-term incentive plans, and therefore we wanted a perfect alignment between how we reported the investment returns and we were rewarded.

And lastly, we wanted to focus on the economics, and not on the accounting. Therefore, we report our investment results on a total return basis. We do it in our press release, we do it in our financial statement supplements, and we do it in the earning call. As importantly, we want to provide full transparency. We do that on a quarterly basis. We give you a CUSIP level detail. We’re even going to go a little bit further today.

So how have we done? You can see here that lot of datas, I don’t have a waterfall slide, so this is my closest thing, all right. But you can see here we show the moving of the duration in the portfolio by the line graph there. And you can see the various boxes. Those are actually the sector exposures on a market-value basis. So I’d say two things. One is you can see an active build-out of the non-core fixed income portfolio, but at the same time from a risk management standpoint, you can see the declining interest rate exposure.

Within rates, as I said, we are actively managing. This is a chart of a 10-year treasury back from the beginning of ’09 through the third quarter of 2011. You can see places where we shortened up the duration of the portfolio in anticipation or more worry about interest rates moving higher. We did that in early ’09. We did that again late in 2010, 2.8% and 2.5%. We also extended duration in March of 2010. You remember, May was the – I remember our earnings release where for the first time we saw literally blood on the streets in Athens and you had a massive rally and race, we were well positioned for that.

We’re out of shortest duration exposure now. Truth in lending would say that we are a little early in that duration trade. But as we were talking about at lunch, we’re trading interest rate risk for more diversified set of risks and we think adding interest rate risk and having a long duration profile just doesn’t makes sense. As I said in the call, the US stock got downgraded. The fiscal situation deteriorated and you’re getting paid a lot less to own US treasury at some point in time that trade has to reverse.

On a non-core fixed income portfolio basis, we measure here the total return of our fixed income portfolio, and then the overall contribution of the non-core fixed income portfolio to the total return, and we also show on the top, the movement of the market value of that positioning.

You can see in – we took it down. We took down that non-core exposure in 2007 going into late 2008, and you can see that that had a – you know, it would have had a much greater detrimental effect had we not taken that exposure down. You can see the benefit as we added exposure to hedge funds, equity distressed mortgages through 2009 and 2010, modest benefit earlier this year, and obviously as we reported on the call, with the volatility in the third quarter, and mostly the equity markets in the hedge fund universe, that obviously was negative at least in the short run, we’ve recovered a lot of that in October.

So, what do we think about the markets? Quick review. We all know government was downgraded. We’ve had ongoing weakness and concerns about both European sovereign and its impact on the European banking system and contagion in the global banking system, and early on in the year we had weaker economic data. So what happened? Well, volatility increased. This is the measure of the VIX, the CBOE’s implied volatility index. You can see from most of year it traded in the 15 to 20 range, it’s now up in the 40s and stayed there. This is the quantitative assessment of volatility.

Our friend, Rick Reeder over at Blackrock has a chart that I’d like to talk about. It’s the more anecdotal or emotional. From the middle of 2003 to early 2007 there was not one day where the S&P traded down more than 2%. In the last three months there has been 21 days of more than 2% market movement. So while this is measured quantitatively, I feel like we measure it emotionally every day when we look at the charts. We expect volatility to remain high, especially in the equity market.

We also think we’re getting paid well for that volatility. This looks at the implied earnings yield of the S&P 500 versus the actually treasury yield. You can see we’re at all-time high with 7.3% spread. We can argue if the forward earnings are going to be as estimated, right, S&P has projected $100, but the difference in evaluations here give us a lot of downside protection to being wrong. So we think you’re getting paid, if you’re patient to take some amount of equity risk here.

We think on the credit side you are also getting paid. Now, you may not be getting paid if we’re going into a depression or a meaningful double dip. We think we are in the muddle-along kind of economy. So therefore, we think you’re getting paid very well for what our view of current default risk. We are going to have some volatility, and we know do we need to withstand that. But if you look and high-yield spreads or investment-grade credit spreads, we think you’re getting paid pretty well to have minimal treasury exposure, and if you’re going to have core fixed income portfolio, have a diversified credit exposure.

Lastly, where we think we’re not getting paid is in interest rates. This is right out of our queue, the top three rows, and you can see the third row, the change in price appreciation and depreciation on a minus 200 basis point movement or a plus 200. When we first put this together, I mean we’re thinking there is got to be something wrong, right? Forever, if you have a modestly positively conducted portfolio and you use the math right, it’s kind of linear, right, if rates go up 200 basis points you have a two-year duration. You lose 4%, rates come down 200 basis to again 4%. But why did this go up minus 4% with upward bias and rated down, because you can’t go to zero, right, there is only so much room for rates to rally and spreads to contract here.

So we don’t think – we could stay at these rates for a while, but in the long run we don’t think having a long duration position is a meaningful and an appropriate bet for this portfolio. We’d rather take a more diversified set of risks.

So what are they? You can see the portfolio summary here as of September 30th, a little over a third of the portfolio is in structured product, and about half of that is in agency mortgages, but you can see the asset-backed CMBS and non-agency RMBS up on the top there, about a third.

About 30% is in corporate bonds, pretty well diversified. As you know, we put out our CUSIP level exposure in our investment supplement. You can also see the top 10 credit exposures there in that table, largest position of 80 basis points, about $70 million position to JPMorgan; hedge funds at about 5.5%, equities at about 5%, private equity coming up a little over 1%.

We have a fair amount of European exposure. Again, a new slide. We’ve got some questions from this audience about, well, Europe is obviously pretty topical, right, we see it on the news every day, what’s your exposure? The headline numbers is actually pretty big. So when you get into the detail, which we spend a lot of time on, we feel very confident. If you think about the – let’s start with the risk.

First of all, economies that are in the Euro zone, when you think about the United Kingdom – have euro monetary exposure, United Kingdom, Netherlands, Norway, Sweden, Switzerland, not in the Euro zone, right? And then if you look under the hood, we’ve gotten some decent financial exposure, most of it’s in the UK, very little in any of the peripheries at all and no direct exposure to any of the peripheral countries. So we feel very good about the fact that we’ve got a very diversified, and we think reasonably risk averse portfolio even for a big headline number in Europe.

We have a distressed mortgage portfolio that we put on – we’ve had on for a couple of years. We have talked about it before. It’s probably we are just going through what this is and why we are comfortable with it. Lot of numbers on this, so we will start with the 41%. That’s the amount of serious delinquencies, right, late payers in the underlying pools of collateral that we own. And so 41% of the mortgages under the securities we own are late, right? The good news is that trend has actually bottomed and the last six months is pretty flat.

We expect the underlying collateral to take a bunch of losses for people to default, so those default will turn into foreclosures and those foreclosures to turn into short sales, right? You can see we expect cumulative losses to be around 31% versus a 12.7% current cumulative loss. So we expect losses to continue, right? But if you take those losses away from the par amount of the bonds we own, what you are left with is a 69% kind of recovery. Those securities which we bought in the 30s and low 40s are trading below 50. We think there’s going to again be a lot of volatility in this sector, right, as the liquidity is not robust. So we think the yield, the implied yield is almost 10% and we think there is a lot of price appreciation here.

Next kind of non-core fixed income allocation of the equity. We talked about 5%. We own exposure to 89 individual companies diversified by sector, by domicile, by capitalization, and by issuer yielding about a 4.24% return at the end of the quarter. We lost almost 9% on this portfolio versus an S&P being down 14¼. As I mentioned in the call we gained about 7.3 of this back in the month of October.

Lastly, we have got a modest hedge fund and private equity allocation. Again you can see diversity across the type of strategy, multi strategy, event driven, credit distress and equity long short and you can see the allocations exposure to 14 different funds. On the private equity side we are talking about a lunch. We don’t have much primary private equity exposure that you kind of put in the ground and over five years you get the money back.

We’ve got secondary private equity, we have got mezzanine and we have got the stress of the key categories. We think you get some decent returns, but also you get most of it back in short order and you get in the investment income line which doesn’t hurt. Summing that all up, we were very disappointed with the third quarter returns. We hate being negative, but we are confident in our active management approach, and most importantly I think for this audience, the diversification of the portfolio.

We generated returns in top quartile (inaudible) over the last several years. We expect to do so again, and we are committed to providing leading edge transparency on our investment portfolio. If there is something you would like to see, ask. And with that I will open up to questions.

Jack Sennott

Thank you. You were pretty thorough.

John Gauthier

Yield my time back.

Jack Sennott

Okay. So we are going to close, to Scott.

Scott Carmilani

Okay, thanks. Well, today we celebrate 10 years of operation, but more importantly today we tried to showcase for you all of our risk management controls. Management team that you see here today, their depth and expertise, who knew that actuaries were so brilliantly predisposed to present. We talked about the framework of our risk controls, how we have used them to validate our actions and we proven them with the results.

In the end you can see from our performance that whether it’s against the industry or our peer group, this company has grown most and even prospered in otherwise what was very volatile times. As we look forward everyone wants to know what are we going to do forward, and where we go from here.

Well, we are very focused right now on executing our initiatives. Execution will be the key to our success. We will focus on servicing and branding our existing client base for the diversifying products and geography. Executing risk management which is our business in volatile times we expect volatile times in the near term and probably in the mid term. That doesn’t scare us. It gives us caution, it gives us pause. We make sure we use all the tools that we have on our disposure, and use our brain to be good underwriters.

An earlier question for a gentleman in Goldman Sachs, how we make our ROEs, well we beat our loss stakes by 10% and if we can do that we get our double digit ROEs back. If we don’t or a major event exists we struggle through that for time until interest rates and investment yields come back. We’ve been able to, as Marshall pointed out, beat those loss stakes very consistently and we will be very focused on it as we move forward both by geography, product and segment of our business. And I want to thank you all for coming today and look forward to seeing you on our future calls and future meetings in due time. Thank you.

Jack Sennott

If we’ve got one or two questions to close, we would be happy to answer them and if not we will appreciate your patience for being here for four, four and a half hours. So, anybody have a question before we finish up? And that’s all from Allied World for today. All right, thank you again.

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