Good morning, and welcome to the Q4 2017 AXIS Capital Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Linda Ventresca, Investor Relations. Please go ahead.

Thank you, Kate. And good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the fourth quarter and the year ended December 31, 2017. Our earnings press release and financial supplement were issued yesterday evening after the market closed. If you would like copies, please visit the Investor Information section of our website, www.axiscapital.com. We set aside an hour for today's call, which is also available as an audio webcast through the Investor Information section of our website. A replay of the teleconference will be available by dialing 877-344-7529 in the United States, and the international number 412-317-0088. The conference code for both replay dial-in numbers is 10115814. With me on today's call are Albert Benchimol, our President and CEO; and Pete Vogt, our CFO. Before I turn the call over to Albert, I will remind everyone that the statements made during this call, including the question-and-answer session, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set forth in AXIS' most recent report on Form 10-K, Form 10-Q and other documents on file with the SEC, as well as the additional risks identified in the cautionary note regarding forward-looking statements in our earnings press release issued on February 7, 2018. We undertake no obligation to update or revise publicly any forward-looking statements. In addition, this presentation may contain non-GAAP financial measures. Reconciliations are included in our earnings press release and financial supplement, which can be found on the Investor Information section of our website. With that, I'd like to turn the call over to Albert.

Thank you, Linda, and good morning everyone. Thanks for joining us today. I'm happy to welcome Peter Vogt, to his first call as our CFO having taken over from Joe Henry after his retirement at the end of 2017. Let me begin with some initial observations, after which Pete will run us through the details of the financial results, and then I'll come back and provide some comments on the market. 2017 was a year of two themes for AXIS. A challenging year in terms of market conditions and financial results, but a very strong year in terms of organizational development and the market positioning. Last night, we reported operating income of $20 million or $0.24 per diluted share for the quarter, at an operating loss of $265 million or $3.15 per diluted share for the full year. We finished the year with diluted book value per share of $53.88, a decrease of 7.5% from the prior year. The drivers of operating performance were the same in both the fourth quarter and the full year. The cumulative effect of ongoing price reductions, the Ogden rate change in the U.K., higher non-cat losses in property and a near-record catch year for the industry, including record California wildfires in the fourth quarter. Our book value was also impacted in the quarter by the change in the U.S. tax law, which caused us to write-down our deferred tax asset by $42 million or $0.50 per share. Before Pete walks you through the details of our financial results, which we recognized are more complicated in this quarter, as for the first time they include the operations of Novae and purchased GAAP assumptions. I do want to share a couple of observations to put these results in context. The reported figures mask a number of…

Thank you, Albert. And good morning, everyone. During the quarter, we generated a net loss of $38 million with an annualized ROE of negative 3.3%. Our operating income for the quarter was $20 million and annualized operating ROE of 1.7%. The drivers of the difference between our net loss and operating income for the quarter were the following items, not included in operating income. A tax expense of $42 million related to the revaluation of our net deferred tax asset associated with U.S. tax reform, and transaction and reorganization related expenses of $21 million, and FX losses, although these are partially offset by gains in the balance sheet. Of course, the quarter started with the closing of the acquisition of Novae on October 2, 2017, which means the full quarter of Novae results are included in this quarter's results, the first such quarter. A few items related to the acquisition as mentioned, before I walk through the various aspects of our results, including purchase accounting adjustments and the finality achieved with respect to Novae reserves for 2015 and prior years. The purchase price for Novae of $616.9 million was allocated to the assets acquired and liabilities assumed of Novae based on estimated fair values at the closing date. In our 8-K of January 29, we provided supplemental information on the historical results for Novae, as well as PGAAP adjustments. We identified purchased intangibles, including value of business acquired, VOBA and finite lived other intangible assets. VOBA represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction and was estimated at $208 million after-tax. Finite lived other intangible assets, primarily related to distribution networks were estimated at $107 million, after-tax. We also identified indefinite lived intangible assets related to Lloyd's…

Thank you, Pete. Let me spend a few minutes going into the details of the market and recent price changes we've seen across our business. As we expected, the market responded positively to the substantial cat losses and deteriorating profitability in other lines. Pricing started picking up in October and accelerated through December, which was the strongest month of the year, with insurance pricing averaging 3.5% in that month. Not surprisingly, lines of markets that were the most affected saw the strongest price action. The average insurance rate increase for the fourth quarter approached 3%. It was strongest in our U.S. division where we achieved average increases of 6.9% overall with solid double-digit increases in E&S property and increases approaching 6% in casualty. In our International insurance division headquartered in London, the average rate change for the fourth quarter was 3.3%, but the range was very wide. Including double-digit increases in cat exposed property and onshore renewable energy, down to modest declines in aviation and terrorism. On average, in London, specialty lines achieved rate increases of 4.3%, while professional lines were up 2.2%. Our U.S. and Bermuda professional lines division was close to flat with two-thirds of the premium renewing flat to up and the remaining still had modest declines. As in recent quarters, primary layers achieved price increases, while pricing softened as coverages moved up the tower reflecting recent loss experience. The positive market momentum continued into January across our insurance book, where we renewed over $600 million of insurance premium, including both legacy Novae and AXIS books, at average rate increases of 4.1%. The reinsurance markets also experienced broad improvement. As you've heard elsewhere, in the 1:1 cat renewals, we generally observed pricing in the flat to up 5% range in loss-free accounts, and 5% to 15% in…

We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Kai Pan of Morgan Stanley. Please go ahead.

Thank you and good morning. So my first question, Albert, is on the pricing commentary. And it looks – can you talk a bit more about the market dynamics in both traditional as well as alternative market? And what give you confidence, the momentum it can continue?

Well, certainly, if you look at the last four quarters, what you will see is that the rate of decline that we were experiencing in the first, second and third quarters of 2017 was already improving. I'm not saying we had increases, but the rates of decline were smaller and smaller as we were going through it. And essentially what we were seeing was the market already starting to respond to what is obvious to all of us, which is that the business was simply not profitable enough and we needed to get paid more. 2017 fourth quarter, I believe, was the cats where the momentum to really push everybody into thinking we need to do something. And we started seeing that in the fourth quarter. And as I mentioned, we started seeing a little bit more improvement into the first quarter. So our position has been that we're certainly not anticipating hard markets like we've had in the past, I think there’s just too much capacity for that, especially in the cat world. But I believe that there is a real recognition in the industry that we need to get back to acceptable profitability. And given where the pricing is now, I think we need to see some more. It's not going to be 10%, 15%, 20%, 25%, that’s not what we’re talking about. But what we're talking about is I think that we need to continue to see, in some cases, mid-single digits, in some cases higher. But I believe there is a recognition by brokers, by companies and by insurance companies if that needs to happen. The impact of the alternative capital in my mind is to dampen the increase, in particular, on the cat business. I think that January 1 certainly answered all of the questions about the sustainability of alternative capital. It's there, it reloaded, it increased its desired price, but certainly not by doubling it. And so I think we're seeing a new normal with regard to alternative capital and catastrophe, in particular. I think that this is likely the environment that we're going to continue seeing through 2018.

Great. As the pricing actually is improving gradually, but you’re still continue to pulling back on the property underwriting, especially if you look at PML is reduced by 20%. And could you talk about your philosophy behind that? And would that impact your overall businesses mix that would be making your like underlying combined ratio or even higher going forward?

That’s a fair question. I think that we have been working on our property and property cat book for a number of years now, reducing the overall exposure. So if you look at PMLs, in general, they are a multiyear reduction in PMLs. I would like to split our property strategy, if you would, in two; one is in the property book in the insurance and the other is in the cat. I think the property book in the insurance is one where we've been working very hard to change the nature of that book, to improve the profitability of that book and to reposition it. And one of the issues that you will see in 2017 is increases in the experience and property, but a large part of that loss comes from business as we've identified earlier then we exited at the beginning of 2017. So a lot of the negative experience that we had in 2017 is actually down to discontinued property lines, which will have a significantly lower impact in 2018. We believe that with regards to the insurance book that we will actually be able to improve our overall underwriting results and our overall underwriting, not just for property, but for insurance in general, with regards to a change in our approach to property. So I think that's in a good place now and will continue to improve as we apply our new tools and approach the pricing and construction to the rest of the book. I think with regards to reinsurance. That's one where we are taking our cat exposure down overall. And I think there you are right, to the extent that you are writing less cat premium in a non-cat year, you're not going to do as well as somebody who writes more cat premiums. But we believe that overall we will end up with a portfolio that will have better ROEs. Let's be honest. Where the world is right now with the alternative markets driving the price for cat, cat is no longer offering insurers strong double-digit returns. And so, we have to make sure that we allocate our capital appropriately for the risk and returns that are provided by the cat business.

Great. Last one, if I may, on tax reform. You've ceded about 20% to your offshore ceding and how do you change that program and because you said you’ll see no material impact to it to your overall effective tax rate going forward?

Pete, why don’t you take that?

Hi, Kai, this is Peter. If you look at our book of business, today we're about over $6 billion in premium, about $2 billion of that's coming out of North America. And as you note, about half of that was ceded to – was ceded offshore in 2017. What we have done is canceled those quota-share treaties and so now all $2 billion of that premium will stay in North America. We don't see a real impact to our ongoing tax rate, because the billion dollar, one, we’re starting about 15% of our overall portfolio. So it's not a substantial. It's an important part of our operations, but not the majority of our operations. But I would also tell you that, the half of the business that was staying in the U.S. now has reduced tax rate from 35% to 21%, and so the business that’s staying there will achieve a lower tax rate. And we don't expect that overall when we aggregate it all up, we'll see a material impact in our tax on a go-forward basis.

Is 4% still a good run rate?

We don’t like to give a forecast on a go forward, but I would say we should be consistent to what we've seen in the past.

That’s great. Thank you so much.

The next question is from Elyse Greenspan of Wells Fargo. Please go ahead.

Hi, good morning, thank you. First couple of questions, following up on some of the market commentary, how much did your business potentially grow by on the reinsurance side at January 1? And from the commentary that I've been hearing in the market, it seems like part of the reason that people think momentum might continue in June and July is because of multiyear coverage of potentially having gone up for renewal. How big of a portion of AXIS book is multiyear coverage? And you share that view, I guess, that business, either written on a multiyear or some business that's not coming up until June or July, do you think that we'd be able to see the same level of price increases as we saw in January 1?

So that’s multiple questions. Let me deal with one at a time. I think with regards to the reinsurance book overall, I think if you look at it year-over-year, the first thing that we do is we look at the expiring treaties, we’re adjusting for FX, which obviously given the weakening of the U.S. dollar in the last 12 months, that was a little bit more than in the prior year. But in U.S. dollars, I would say that we had expiring premium about $1.5 billion and we renewed about $1.5 billion. So there was a fair amount of movement in our books. There were cancellations in non-renewals. We increased our share in sum, we decreased in others. We had some new business. But the net of it all is approximately a flat book year-over-year. With regards to pricing, as we go forward. I would say two things. One is, we didn't see as a percentage as much increase because most of the book that was renewed in January 1 was essentially European and with less experience. The books that you're going to see in April and May, June are going to be more cat explosive. By definition you'll see more of those 10%, 15% plus increases coming through simply because that's consistent with what we saw in January 1, but with the appropriate mix. I take your point on multiyear treaties, but I would say the following on multiyear treaties. If you look at pricing in cat, in particular, where we are now given where the rates are, we're probably somewhere in late 2015, early 2016 pricing, right? So it's not like we’ve made a huge recovery yet. I still believe that there should be more to go. But if you had a treaty that was priced in 2014…

Okay, that is helpful. In terms of some of the purchase accounting adjustments, as we think about 2018, you guys talked about a $33 million benefit going through acquisition cost in the segment level. Is that something that we'll see come through as a benefit also in 2018?

Hi Elyse, this is Pete. Yes, we will see a benefit to the acquisition costs come through – through 2018. It will be a little bit lower because we wrote that $209 million of the Novae back-off when we closed its balance sheet on October 2. So we'll see a number come through. It won't be that the exact number. It's going earn off in relation to their unearned premium reserve at that point, but we will see a benefit come through there. So we will keep you in mind with that as we go through the year, but we will see our acquisition cost ratio be a little under, what I would call a, normal run rate through the year. Now, I'll say that offsetting that, the VOBA, which we disclosed a couple of weeks ago of $171 million amortization in 2018, will also show that running off each quarter. I'll tell you that the VOBA, we do expect to amortize about 65% of that in the first half of the year, probably split evenly between the quarters with a little bit more in the first quarter and the other 35% running off in the second half of the year, with again a little bit more in the third quarter than the fourth quarter.

Okay and then as we think about 2019, I guess just because of the PGAAP adjustments, the acquisition ratios were booked higher because you won't see the benefit come to you.

When we get to 2019, and we are looking year-over-year, it will look higher because by then we will get it to what I’ll call a run rate state, which is why I think what we’ll do is continue to give you some guidance as we go through the quarter's this year and what a real as is acquisition cost run rate is.

Okay, that is great, and then at the start of the call, you guys mentioned kind of reaffirming and if not more positive about the Novae deal than when you announced. I know you have pointed to some level of accretion figures in year one and year two. Could that take into account the potential at this point there is probably some lower level of investment income due to the reserve to close deal or is maybe the higher expenses offsetting that? I'm just trying to think through the modeling impact of the Reinsurance to Close as well as the higher expenses as we think about 2018.

Yes Elyse. I think that when we look at Novae overall, we really do believe today that we're going to get better than we actually projected both strategically and financially and let me give you a few insights on that one. So we’ve now been kind of inside the doors of Novae since July of 2017. And I can tell you that we have found absolutely no negatives. One of the things that people are always concerned is once you get inside, we have found no negatives, in fact the staff is very strong. We've been able to build a great team, which is the best of both. And I feel very good about that. One of the things that we model of course is we are going to loose some business. I can tell you that to-date we haven’t lost any real business and we’ve maintained control of substantially all of our renewals. I want to be clear. Some of those renewals we chose not to renew for all the right reasons, but it was really under our control. Secondly, I would say that when we did our projections, we thought this was going to be a flattish year for pricing, and we're now looking at mid-single digits pricing. So I would say that the pricing assumptions are better than we originally modeled. The synergies, as we've pointed out, we thought would be about $50 million. We think now they are going to be about $60 million, so that's a positive. And with regard to the RITC Elyse , you're absolutely right. We are thinking that the transfer of the premium probably makes for low single-digit investment income offset, but when you think about what that means in terms of finality on the reserve and reducing reserve risk, we think that was a good trade for us. So net, net you're right, probably the higher synergies and the investment income kind of close to offset each other and everything else is a net positive.

Okay, great. Thank you very much. I appreciate the color.

No problem.

The next question is from Josh Shanker of Deutsche Bank. Please go ahead.

Yes, thank you. Albert you talked about the increases in the motor book and that how that book has now reached pricing adequacy. To what extent are you maintaining our business in lines that are not currently at pricing adequacy, because you believe over the longer term they will be adequate as pricing evolves to a proper view.

Josh I am sorry, I just wanted to make sure I properly understand your question. Are you asking essentially about staying in certain lines, but temporarily reducing premium. I’m not sure I understand.

You are staying in certain lines even though they are inadequate because you have a longer term view that they won’t be inadequate for ever.

Okay, well, that’s a fair question. I think as you can see, there is a normal amount of attempting to stay in market and not to be ruled by the immediate market, but really take a look at what is it going to look like over the medium to long term. And of course, part of what we do as good insurers and reinsurers, is if we believe that a business is good longer term, but not currently, we manage down by either reducing our exposure temporarily or by buying more insurance are a number of things. But there are times when you look at a market and importantly you look at your own position in that market and you say, am I going to be a winner in this market, are we going to generate strong and consistent profitability long term? And if you realize that that market is not going to do that for you, you’ve got to take the tough actions. And I would say that over the last three years, we have done a number of these actions. And let me go through a few of them. You, of course, recall that we got out of the Australian market when we realized that we didn't have the scale to succeed in that market. We got out of the Canadian retail property market. We just announced last year that we were getting out of the retail property and retail casualty markets in the U.S. because we felt, we had much more firepower and more potential in the E&S and wholesale markets. We announced in December that after many years of losses for the market in onshore energy, we weren't seeing the kind of progress that we wanted to see, so we were reducing that. So I think…

Do any of those lines, currently have pricing that’s below adequate level of returns, but you're more – comes from longer term will resolve that?

If you are asking all of our lines delivering target ROEs today, the answer is no. But we're working on those both through pricing actions, portfolio construction and other efforts to get them to where they need to be. And if they are not, we will take additional action whether that's either further underwriting actions or exits. But we will take care of that as we move forward.

Okay, thank you for all your answers and good luck with all the changes.

Thank you.

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

Thanks, just a couple of brief modeling questions. First of all, did the reinsurance includes arrangements have any impact on underwriting profits in the fourth quarter?

No, it didn't, Meyer. It was actually all pushed back to the opening balance sheet.

Okay, perfect. And second, historically, the excise tax on premiums that were ceded offshore from the U.S., were those imported in the tax line or in one of the expense categories?

It's in the acquisition expense line.

Okay. And then – go ahead…

We put expenses that are tied to – variable expenses tied to variable volumes are associated with the acquisition expense.

Right, no, I'm not suggesting that it's an appropriate. I just wanted to know what is…

No, no.

In the model, and then third, just broadly speaking, we’ve heard some sort of inconsistent rhetoric about accelerating loss trends in some casualty lines and I was wondering if you could talk about what you’re seeing?

I think certainly the most obvious places have been in commercial auto. And certainly, we've seen that too. You may recall, Meyer, we are not very aggressive on commercial auto. It's a very small part of our book. In fact, we reinsured, I think to 90%. So whatever adverse we've seen on commercial auto has not had a material impact on us. And it's also been the part of the casualty market that has accelerated the most in pricing. So that's happening. I think what you'll see just to give you an even broader answer, is that there is certainly appropriate levels of concern around casualty. I mean, we've got social inflation going on. We got a lot of – as a market, a lot of limits in casualty. We're seeing increased class actions on the professional lines side. And so those are the kinds of factors that are making people recognize that we need better pricing in those markets. And that's what's been driving pricing in the casualty markets. I'll tell you that in fact, in 2017, we did not grow as much as we thought we would in casualty because, although we saw pricing increases. We did not think they were adequate for the rates that we – for the loss trends that we were seeing. And so in fact, we slowed down our growth in casualty growth because we didn't get the pricing increases that we thought we should get. That's improving a little bit now, but I can say that 2017 took action. And with regards to D&O and E&O, you're also starting to see some increases in the primary layers reflecting the loss activity that we're talking about here.

Great, thank you very much. That was very helpful.

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

Thank you, I guess for Peter. Two questions, one is can you talk about the new money yield you're seeing out there relative to your portfolio yield?

Yes, hey, Jay. It’s Peter. Right now we're seeing our new money is getting invested, a slightly higher yield than we have on the overall book yield, our new money yield is about 2.7% and the overall book yield is about 2.5%.

That's finally a good comparison.

Yes, yes, we agree with that.

Secondly, amortization of intangibles, there’s a lot of moving pieces and I did miss some of cost, so I apologize if you answered this. But can you actually give us a sense about the quarterly pattern will be over the next couple of years for this amortization.

Yes, probably we did talk about it a little earlier, Jay but that's okay. I think, the part of the amortization is going to be VOBA. It was in the fourth quarter, it was $50 million of the $53 million. So we think about the VOBA. If you look at the disclosures we gave out couple of weeks ago we expect a $171 million of that to amortize in 2018. And I really think we'll see probably about 65% of that in the first half of the year, Jay.

Actually I didn't catch that, sorry. Beyond the VOBA, I guess, the other intangibles, the amortizations will be relatively small?

Yes, actually if you go back to the disclosures we put out on the 29th on Page 6 of the disclosures. We actually give it by year breakdown for the other ones, and they are pretty small because they amortize over such a long period.

Got it, that’s helpful.

Okay.

Thanks.

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

Thank you, operator, and thank you, everyone, for joining us. As Pete said, 2017 was a year with a lot of moving parts. But what I feel very good about is that we entered the year with an integrated company with Novae and the rest of our operations. I think we started to see some of the benefits of our underwriting actions in 2017, in terms of being able to demonstrate that our technical ratios, ex-property were actually coming down even in the face of reduced pricing. I think that we are entering 2018 with a very strong sense of purpose and improved market position and the sense that we can truly make progress and deliver on our improved shareholder return. So I look forward to reporting to you on that in future quarters. Thank you for joining us.

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