Arch Capital Group Ltd (ACGLO) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Arch Capital Group 2007 first-quarter earnings conference call. My name is Nicole and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

Before the company gets started with its update, management wants to first remind everyone that certain statements in today's press release and discussed on this call may constitute forward-looking statements under federal securities laws. These statements are based upon management's current assumptions and are subject to a number of risks and uncertainties. [Constitutionally], actual results may differ materially from those express or implied. For more information on these risks and other factors that may affect future performance, investors should review periodic reports that are filed by the Company with the SEC from time to time.

Additionally, certain statements contained in the call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company intends the forward-looking statements in the call to be subject to the Safe Harbor created thereby. Management also will make reference to some non-GAAP measures of financial performance. The reconciliation to GAAP and definition of operating income can be found in the Company's current report on Form 8-K furnished to the SEC yesterday which contains the Company's earnings press release and is available on the Company's web site. I would now like to turn the call over to Mr. Dinos Iordanou and John Vollaro. Please proceed.

Thank you, Nicole. Good morning everyone and welcome to our call. We had a very good quarter and it's always gratifying to start the year on a very positive note. Our operating earnings were $207 million, or $2.71 per share and our annual return on common equity for the quarter was a very good 24.7%. Our book value per share grew by 7% to $46.89. Cash flow from operations continues to be strong at $403 million for the quarter.

The contribution to our earnings from investment income continues to grow and now represents over half of pre-tax operating earnings. Our investable asset base is growing nicely and now stands at $9.5 billion. As a result, the stability of our earnings is high.

On capital management, we have initiated the previously announced share buyback program and we're off to a good start. John will get into more details on our financials in just a few minutes.

Before though I share some comments about current market conditions in general and how our two units -- insurance and reinsurance -- responded let me comment on a new operation we are starting. As you know from our recent press release we launched a new property facultative reinsurance operation. This unit will be led by Steve Franklin, a very experienced and well-respected industry veteran. We're extremely pleased that Steve chose to partner with us for this opportunity. The unit will be based in Farmington, Connecticut and will operate with branch offices across the United States and Canada.

Although technically written as a form of reinsurance, facultative reinsurance has many similarities to our specialty insurance business. As a matter of fact, the new operation will be located in our existing insurance group office locations where possible and will leverage the infrastructure we have built over the years. We view this business as a long-term opportunity that expands our specialty underwriting platform and will further diversify our book of business.

Now a few comments on the market. The market is drifting downwards with rates in most classes declining anywhere from 2% to 10%. The phenomenon we experienced in the fourth quarter of 2006 of more aggressive pricing occurring during the last month of the quarter continues in the first quarter of '07. Our rate and monitoring systems and our renewal retention measures confirm this aggressive behavior which we believe is the result of the efforts of certain competitors to meet volume targets.

From a pricing point of view on a policy basis, more lines of business are moving towards our 15% ROE hurdle rate than before. The only exception, major exception to the above, is cat-exposed property business in both of our insurance and reinsurance segments and in which we continue to achieve rate increases and potentially healthy returns.

Terms and conditions in general are holding. However, we started to see more requests to broaden terms and unfortunately in some cases we have seen certain markets responding by granting these coverage enhancements. As I have mentioned before, one constant holds true -- for most classes of business, the larger the premium, the greater the competitive forces. This applies not only to pricing but also to terms and conditions.

Our reinsurance group produced great returns. All of their lines of business performed well, and like cat activity, also aided their results. From an underwriting perspective, we continue to adjust our book of business, putting less emphasis on large account casualty business while we continue to take advantage of opportunities in other areas. We're very pleased with the 1/1 and 4/1 renewals in the property and property cat areas where we were able to expand our participations and achieve rate increases from the prior-year level. As a matter of fact, our large 4/1 national care contracts renewed with an average price increase of 10% and greater participation by us in each one of those contracts.

As a result of these changes, in our underwriting approach, our insurance group mix of business for the first quarter has shifted to 50% property and 50% all other, and on a trailing 12-month basis, was 42% property and 58% all other. As we have stated in prior calls, our exposure to business directly affected by the Florida legislative changes was minimal, and so far, the legislation has had a negligible impact on national programs. Based on all of the above noted actions, our reinsurance gross written premium for the quarter declined by 1% and our net written premium declined by 6%.

Now let me turn to our insurance group. Our insurance group had also a good quarter with strong underwriting results and good returns, even though competition in many of our sectors increased a bit. On an absolute basis, current prices still allow us to achieve our return hurdles. However, at this stage of the cycle a more disciplined and selective underwriting approach is required. As a result of this approach, we focus more on and try to retain more of our renewal business which has progressively become a larger percentage of our premium volume. This progression actually started back in 2004, 2005 and it has continued in '06 and so far in 2007. During the first quarter, we achieved rate increases in property, professional liability and programs where all other sectors experienced rate declines in the range of 4% to 9%.

In the property area, rate increases were 10% for E&S property and 7% for global property, while offshore energy was up 6% and onshore energy was down 6%. In our program business, average rate increases were 1.5%, exactly the same as we experienced in the last quarter, and professional liability lines were up 2.4% for the quarter. In all of our other specialty lines, we saw rate reductions. Health care was down 9%, B&O and casualty each declined 8% and construction saw reductions in the 4% range.

In general, we were in a more challenging market where underwriting discipline will be paramount for future success.

Before I turn it over to John for a detailed discussion of our financials, let me update you on the level of our cat exposure. As we mentioned in prior calls, we would like to remind you that in determining the 1 in 250 event PML we include all exposures that we believe could accumulate in any given event, not just property exposures. As of April 1, 2007, our 1 in 250 PML from a single event expressed as a percentage of common equity was 16%. Because the effects of the Florida legislation were less than we anticipated, the tricounty area in Florida continues to be a peak zone with Northeast Wind and San Francisco Earthquake as our new next two significant events. John will get through our financials, and then we will come back to take your questions.

Thank you, Dinos, good morning everyone. From a financial standpoint, our first quarter results are an excellent start to the year with an annualized ROE approaching 25%. Now I'm going to briefly walk you through the key components of the financial results, starting with the top line.

Dinos has commented on premium volume, but there are a few additional items that are worth noting. On a trailing 12-month basis, premiums written by the insurance segment represented 62% of our gross volume and 56% of our net volume, while property business represented approximately 30% of consolidated net premiums written. On a consolidated basis, the ratio of net to gross written premium in the 2007 first quarter decreased to 72% from 75% in the 2006 quarter, primarily due to business ceded to Flatiron Re, a dedicated reinsurance vehicle as 2006 volume, the first period in which we began to cede to Flatiron Re, included business that accepted prior to January 1 2006, and therefore, was not applicable.

On a reported basis, we ceded $109 million of written premium to Flatiron Re in the 2007 quarter. Earned premiums ceded under this treaty is continuing to build and amounted to $66 million for the first quarter of 2007 in comparison with $18 million ceded during the 2006 quarter. The override in estimated profit commission recorded on this treaty with Flatiron are reflected as a reduction of the acquisition expenses of the reinsurance segment and improve the expense ratio of the reinsurance segment by 280 basis points in the 2007 quarter while the impact on earnings in the comparable 2006 period was negligible.

The consolidated combined ratio was 83.4% in the 2007 period, an improvement of 5 points over the comparable 2006 quarter. This improvement was primarily due to favorable development of prior-year reserves as well as to the continuation of excellent results in the property and marine business of the reinsurance segment. The outstanding underwriting results were achieved despite the impact of windstorm Kyrill for which we recorded an estimated loss net of reinstatement premiums of $11.4 million.

Favorable reserve development on a consolidated basis net of related adjustments to acquisition expenses totaled $43 million in the 2007 first quarter compared to adverse development of $6 million which primarily resulted from the 2005 and 2004 storm activity which we recorded in the first quarter of 2006. Development on prior-year catastrophic events was negligible in the 2007 first quarter. The favorable development in 2007 was primarily attributable to short-tail lines which accounted for two-thirds of this development with professional lines accounting for most of the balance. In general, we reported and paid claim activity across most lines of business remained at favorable levels and IB&R and ACRs represented more than more than 75% of quarter end loss reserves.

Turning to investment income, on a pre-tax basis, net investment income in the 2007 quarter was approximately $113 million, or $1.47 per share before interest expense and preferred dividends and $1.31 per share after deducting these items. Net investment income in 2007 was roughly 40% higher than the comparable 2006 amount and 5% higher on a sequential basis.

Substantial increase in investment income on a quarter-over-quarter basis was due to the continuation of significant growth in our investable assets and higher yields. In addition, investment income in the 2007 period benefited by $1.6 million, or approximately $0.02 per share from the mark-to-market of certain fixed-income investments that are accounted for in this manner because of the legal form of the investment vehicle. The growth in investment income on a sequential basis was primarily due to a higher level of investable assets. This growth was generated by strong cash flow from operations which amounted to $403 million for the 2007 quarter, a 12% increase on a sequential basis and a slight decrease in the comparable 2006 level. Net of share repurchases, which I will comment on in a moment, investable assets rose to approximately $9.5 billion at quarter end.

The average pre-tax yield of the portfolio in the 2007 quarter was 4.91%. This represented an increase of 62 basis points over the comparable 2006 yield while on a sequential basis the yield was basically unchanged. The increase in investment yield on a quarter-over-quarter basis primarily resulted from the higher interest rate levels as the portfolio's average credit quality remained a Triple-A. In addition, in general, we continue to minimize our exposure to other forms of spread risk based on our view of current financial market conditions. During the quarter, the duration of the portfolio essentially remains unchanged at approximately 3.3 years. The portfolio continues to be comprised primarily of high-quality fixed-income securities with essentially no investments in hedge or private equity funds.

Our income tax provision applicable to operating income was 4.6 for the 2007 quarter. We presently expect that our annual effective tax rate on operating income for all of 2007 will fall within a range of 4% to 6%.

Turning to the balance sheet, it continued to strengthen as total capital increased approximately to $4.1 billion with debt and hybrids representing 15% of total capital. During the month of March, which is when we initiated our share repurchase program, we repurchased roughly 683,000 common at an average price of $65.14. Because of the timing of the repurchases, they had no impact on EPS for the quarter. However, these repurchases reduced book value per share by approximately $0.17 at March 31 2007. Through April 25th, we repurchased an additional 223,000 shares, bringing total repurchases to date to 906,000 shares and the total expended under the repurchase authorization to $60 million.

In summary, our 2007 first quarter operating results represented an ROE of 24.7% on average capital and book value per share, adjusting for the effects of the share repurchase, rose at a 28% annualized rate to approximately $47.00 per share at quarter end.

Nicole, we're ready for questions.

(OPERATOR INSTRUCTIONS). Vinay Misquith, Credit Suisse.

Nice quarter. On the FAC business, when is it going to start operations, and how much roughly do you expect in the premiums for this year and next year?

We're going to start operations as soon as they are ready, probably in the next few weeks. There is some infrastructure things we need to do, etc., and they're in the process of doing that.

On volume, we don't run the Company on premium volume. We do run the Company though on margins and profitability. But let me talk a little bit about FAC business to give you some idea as to what will happen over time. First and foremost, we got into this business because it fits well with everything else we do. Second, when you look at economics of this business, it's very similar to the economics of the rest of our specialty business. Usually you will get somewhere between $2.5 million and $3 million of revenue per employee, which is if you see our staff on the specialty business, we have about 900 employees and we do $2.6 billion. It's the same kind of ratios. So, our marching orders to Steve is -- hire quality individuals, make sure that they come to work and they apply their knowledge, abilities and intellect in the fashion that we are accustomed. And over time, the metrics, they're going to work for us. So there's no premium volume requirements, we're not even trying to guess and predict, the market conditions will determine that. But on a steady-state, and it might take several quarters for us to get there, usually that kind of business will generate somewhere between $2.5 million and $3 million per employee in revenue.

How many employees do you expect to have in this operation?

It's up to Steve. It's as many as he can dutifully deploy in the marketplace. Early on, we'll probably start with a few in each branch. We're going to be in several branches, and from then on, we will see how the activity goes and how the reception of the marketplace is for this facility. But it might surprise you, Vinay, but that's the way we run the Company. We don't try to put undue pressure on our people and just focus just on revenue. We look at every aspect of the operation and we try to get it right.

I think it's a good thing, Dinos. The second question was about Florida. Many reinsurers have said Florida may not be as bad as they expected it to be, but we have heard from some brokers that we're seeing some canceled rewrite premiums, and also that Citizens is getting more competitive on the commercial-residential properties. And I'm just curious, from your perspective, how much of that business do you write, and have you seen much canceled rewrite premiums?

Two separate questions, and let me start with your reinsurance question. For us, and as I said in my prepared remarks, both 1/1 and 4/1, they were pretty satisfying. As we said in the last quarter's call, in the fourth quarter of '06, our personal lines cat exposure to stand-alone companies in Florida was minimal. I believe it was about $12.5 million, $13 million in premiums. So just the fact that -- and all of that is pretty much coming up in the 6/1-7/1 time frame. A lot of our Florida exposure comes from commercial contracts and it comes also from national contracts. And as I have said, we renew most of what we wanted to renew. We increased participation on those and we got an average of 10% increase for 4/1 and a bigger increase on 1/1 on a year-over-year basis. So we felt that it was a very successful season for us in the cat area.

Now it is true when you get to the insurance side, especially on the E&S, that some clients try to cancel and rewrite in order for them to take advantage of maybe cheaper pricing as has been mandated by the Florida Legislature. But we do not have a big part of that business, and Citizens is not yet a significant factor on the commercial side. It's more in the personal lines side. So the comments you're hearing are probably true, but for Arch, it didn't have much of an effect.

Sure, and if I may, one last question. I know it's late but when the market starts to soften and you see premiums going to the standard market and rate declines would be -- I believe much more than 10% and you're seeing in your business sort of 0% to 10%. I'm just curious how you're seeing lower rate declines than what I would have normally thought when the marketing's softening on the E&S side.

We didn't say we see slower rate declines. I will assure you that some of the business that we lose, we lose in some cases for a greater than 10% rate decline. The rate increases or rate declines that I go through in our calls is on our retained business . So in essence, it's the Arch performance, they're our underwriting department's performance around the country. We don't believe it's helpful for us to be commenting on rate declines on business we lose. We let that be the worry of our competitors who take that

Alright, thank you very much.

Jay Gelb, Lehman Brothers.

I was hoping you could touch base on the Bermuda tax issue that we've been hearing a little bit more rumblings around recently?

It's a complicated issue and there are people that believe that Bermuda companies have an advantage. But you've got to look at it from a lot of different perspectives. The first perspective is, the reinsurance world is a global world and efficient use of capital usually helps the consumer. I'm sure when the debate starts and they look at the facts of what not only Bermudian companies, but German or Swiss or Irish companies do, they actually bring efficient use of capital to the U.S. market, especially on the reinsurance side. So that's one issue that needs to be addressed.

Second, a lot of the business, and I believe V.J. Dowling in his IBNR publication said that the total reinsurance to affiliates, it was about $10 billion. And when you look at that number, a lot of it is reinsurance to reinsurance. And companies don't have to maintain their reinsurance operations in the U.S. So at some point in time, if it becomes not cost effective to maintain those operations in the U.S., you can easily move them offshore because you can do the reinsurance business from any part of the world. That will cause jobs in the U.S. So it's not as simple as the issue that has been proclaimed some of our competitors that the Bermuda companies that take an advantage of a tax jurisdiction. We bring efficient use of capital to the market, it helps the consumer and in some cases the way we have structured our operations, it also creates jobs in the U.S. A change might affect all of that, but we don't believe so far based on the information we have from our lobbyists and in Washington that they're interested in a wholesale change.

Third, there already exists under the Treasury rules existing law that deals with intercompany transactions. We do pay an excise tax and we do pay a transfer pricing tax when we reinsure with affiliates. So there is an existing structure, so I don't know change in the legislature is necessary.

Thank you on that. Secondly, I was wondering if you could touch base on where you see the reserve releases coming from and whether you've -- the 2004 and 2005 accident years, particularly on long-tail, we started seeing loss reserve releases from that from other companies and I'm wondering what your experience has been so far on that as well.

We look at different lines of business in different quarters. This quarter -- let me separate that for you, Jay. On the reinsurance side, we look at pretty much all of our major contracts all the time and we have had over the past several quarters relatively modest releases. We tend to be cautious about how much credibility we put on data and we want to make sure the data is credible before we make a decision. This quarter, the focus was more on the short-tail lines and most of the development came out of the short-tail lines. On the medium-term, the professional lines and the other, the releases were mostly from accident years 2002 to 2004. There weren't a lot, but that's the years where we're beginning to get greater credibility. Now we have sort of a schedule on the insurance side and next quarter we will be looking at more of the longer-tail lines; we didn't really take a hard look at them there this quarter. So whatever the data tells us, that's what we'll do, but we have been cautious about releasing reserves from years where we still have fairly incomplete data.

Okay, and then finally John, in terms of the buyback, you have a very big authorization out there and this is your first time going back in the market. How should we think about tactically how you plan to essentially affect the buyback? Was it hurricane season, seasonality, things like that?

Well, we have been -- what we did do, remember, we instituted -- we announced a buyback at the very end of February and we actually began sort of end of the first week in March. So over the two months, including a period when we were in a quiet period, we were able to buy back 450,000 shares a month on average. I cannot predict for you whether it's going to continue to happen. All of those shares were purchased from the public, none of it was purchased from our private equity investors. So we will continue to buy because, again, remember what the premise of this was which we've seen in the first quarter. We're generating excess capital so in the first quarter, our operating earnings were in excess of $200 million and we bought back to date $60 million so we've generated additional excess capital. Second quarter, if the results are comparable, we will generate again additional excess capital. So we're prepared to continue buying as we approach the hurricane season.

We are obviously not looking to do -- we are going to be conscious of the fact that the hurricane season can bring volatility, but by doing it the way we're doing it, I think we are positioned. If we need to adjust, we can adjust it and we still will have ample capital.

But, clearly, after the hurricane season you can be a bit more aggressive because you have more visibility about year-end earnings, etc. But even at the rate we're going now, about $60 million a quarter, you thought about authorization, it's $1 billion, and we just got started. You multiply eight quarters by $60 million, that's $480 million. So we are not -- we are on a good start and we will continue to do it on that basis.

Great, thanks very much.

Stephen Labbe, Langen McAlenney.

I was curious if you could update us on your line of thinking with Flatiron and whether or not you think that will be extended into 2008.

You know our agreement. Flatiron agreement, they've been good partners, I think we're being good partners to them, it's a two-year agreement and it comes to an end at year end this year. They do have a unilateral option to extend for a year if they're in a deficit position. Not knowing what the season will bring, we cannot predict that, but things look very positive based on the performance of last year that the likelihood of that happening will be very, very slim.

Having said that, in October and November, we'll set down with our partners. We're going to look at what the prospects are for the following year, where the market is, what the demand is, what their needs are and then we're going to make a reasonable decision. And it can have a lot of different outcomes, from maintaining it as is to reducing their share but those discussions are premature to be had now. We have to go through the season, we have to see where the marketplace is, what the demand is, and then we'll have those discussions in the October-November timeframe.

Okay, great, thanks.

Adam Klauber, CCW.

When you look at your reserves, could you give us a ballpark of how much is short-tail versus how much is the longer-tail?

In total, it probably looks -- the mix of business right now across the group is about 70% non-property/30% property. Of the 70% non-property, not all of that is totally long-tail. But I suspect because the shorter-tail business (MULTIPLE SPEAKERS) doesn't carry a lot of reserves, it's more -- it's probably something like 80% medium and long-tail and the other, the balance in the short tail.

Okay, thank you. As far as the claim frequency trends in some of the longer-tail lines of business -- professional, professional liability, some of the other E&S type businesses -- has frequency stayed -- has frequency of claims stayed pretty favorable over the last six to 12 months?

The frequency has been stable but it has been better than expected. And also, paid loss activity has been better than expected. Having said that, we're still a young company -- five years out, we use a lot of different methodologies in establishing reserves -- paid incurred, Bornhuetter-Ferguson method, etc. -- and we have a lot of people looking at them at all times. We have PWC, we have Tillinghast for the Company, we have the operating unit, so we're pretty comfortable with our reserves. And also, we're not anxious to be celebrating wins before the data supports those wins. So we'll be a little more cautious. As we develop more data and better data and more credibility, you will see that reflected in our numbers.

The one area obviously where frequency has gone way down is in the D&O area, which everyone knows, but that's obviously a highly volatile line and the frequency on that can move around on you pretty quickly.

And one final question. What going into this wind season, what's your appetite to write more property E&S, given that the market may be softening? And also along with that, have you already locked down your reinsurance program through your primary E&S book?

Yes, our reinsurance program, they're all in place. Our cat program is January 1 and some components at 4/1 is all in place. But our appetite has not changed. As you saw, in essence, we have the same aggregate PMLs that we had about a quarter ago or two quarters ago. It's less as a percent of equity, common equity capital, because our common equity goes up, and we went from 17% down to 16%.

We continue to not change our views. We feel reinsurance is a better place to play, you know, that sector. We allocate $4.00 dollars of PML for every dollar where PML goes to insurance, so that is the way we've been allocating the aggregate PMLs to the units. And then we have confidence in our underwriters to make sure that they utilize those PMLs where their return per PML dollar is the best. And that's the way we have been running our property portfolio in general for the last five years.

Our approach and our philosophy has not changed. Our numbers have changed significantly because we are responding to market conditions. And in some cases, we find the market to be more favorable to us and we'll shift to those sectors, and in other cases, we don't.

Now on your E&S question, I think what the last year, year-and-a-half had allowed us to do is to have a more balanced portfolio for the property business in a lot of territories that in the past we were unable to utilize all of our aggregate PMLs; for example, the Carolinas or Northeast, etc. So I think today we have more of a balanced book and that is why our aggregate PML in the higher zone hasn't gone up where our premium volume has gone up. And the reason our premium volume is coming up is because we are having broader penetration in territories that we were under utilizing PML.

Thank you very much.

Meyer Shields, Stifel Nicolaus.

We have heard a lot of reinsurers talk about how rates are declining and retentions are declining at the same time because I think the primary companies want to show growth and hold onto more profitable business.

You mean increasing, correct?

No, I mean that the retention levels of the primary companies are increasing -- yes -- sorry, I misspoke. How do you see those two trends playing out? In other words, will retentions only rise when it doesn't make sense for the reinsurers?

Well, listen, the reinsurance purchases are done for many different reasons. Don't forget, we're on both sides of that equation. Were a reinsurer, we're also an insurer. Insurance companies buy reinsurance for three main reasons. One is to be a form of capital. If the balance sheet is not enough to sustain what they see through the front door, they have two offload some to reinsurers and usually we love those transactions because usually the most expensive sort of capital is reinsurance. Second is, companies buy reinsurance to protect their writings on vertical and horizontal accumulations, and that business we always like because through thick and thin, soft cycle or hard cycle, it's always a need for them to buy that. And then the last part is, the reinsurance board, because they think they can arbitrage and improve their results because in the exchange with a reinsurer they're not on the same economic terms. And we run as fast as we can and as far as we can from transactions of that nature. So if we feel we have been arbitraged, at the reinsurer, we would not do that transaction. On the other hand, if we are an insurance company and we feel the economics are in our favor, we're going to purchase that reinsurance.

So when the market turns, you're starting to see some of that, and that is why we have been responding to the reinsurance. You've seen we're writing more in the property and property cat area and we're writing less on the liability area of because as -- the trends have not really started to change significantly but we're seeing some pressure. They're asking for more ceding commission. So if you're asking for more ceding commission, that means the economics are not equal, and we like partnerships. We have this old philosophy -- if they lose a dollar, we want to lose a dollar, and if they make a dollar we want to make a dollar. We don't want to have an equation that says, they lose a dollar and we lose $3, and we make a dollar when they make $3. So that is the thought process that we have, both in purchasing and we have a different way of buying versus when we are selling. And that has been our approach from day one. So as the market turns, you will see, and I've said it before, if the market really gets extremely aggressive, you will see our reinsurance volume to be a lesser part of the mix of business that we have. And it's for the right reasons.

That's very helpful. Turning to property cat, if you to compare rate levels at 1/1 and 4/1 to last year's mid-year rate levels, is it basically flat?

I'm sorry, you talking about just the cat area, or in general?

No, just the cat.

Well, the cat is -- in January -- this is for our book of business. In the January year-over-year, we had about somewhere between 15% and 20% rate movement upwards compared to a year ago, and for April we've got about 10%. Still, I think the January and April of this year, they're probably below the June and July by somewhere between 10% and 15%. So the highest level of pricing was June-July of a year ago. Now we're in the process in the next two months to see where the market is going to go, vis-a-vis those kind of placements. We believe that there will be slight reductions from the high level but I won't know. There is more capacity, there is more availability; I think pricing will adjust a bit downwards. But we are hoping for pricing to still be attractive. Of course we're only going to know when we see the transactions and then we will make our underwriting decisions based on what we see.

Okay, thank you very much.

Adam [Gillespie], Goldman, Sachs.

Thank you. My question pertains to your stock buyback program. Specifically when you were talking about it earlier, you used as an example doing eight quarters of about $60 million a piece to accomplish roughly $480 million of stock buyback over I guess a two-year period. Looking at some of your competitors, they have elected to issue hybrid debt to let's say speed up their share buyback processes. Would you consider that as opposed to more of a drip-feed approach that it looks like you're currently planning?

First, I don't think availability cash is the driver of us doing a share buyback. We are trying to return in an efficient and effective way excess capital to our shareholders. Don't forget -- depending -- and we've said that before -- depending where our share price is, we have not taken off the table the issue of a special dividend. So at the end of the day, we believe our approach -- and I don't want you to infer that we're going to be doing $60 million a quarter. We're just trying to say that we got to a good start. $60 million per month early on is not a bad outcome even with a large authorization of $1 billion. So we will examine the share buyback based on the opportunities we see in the marketplace, where the season is depending -- if it's before or after the cat season, and we'll probably accelerate or decelerate or change the form of how we return capital based on a lot of factors. Having said that, where our balance sheet is today, I don't feel a need for us to issue hybrid to buy back our shares.

Adam, it's just as much a function of being able to get the shares as anything else. It's not from a financing standpoint, it's a question of when you're in the market every day, there are rules under which you're operating and there's so much stock you can get. As Dinos said, when we get further down the road and we can assess what the rate is and whether or not we can achieve the goal we set out, which was roughly $500 million a year for two years, then there are other forms if necessary that we can use to accelerate the process.

Okay. And then another question actually just on your business strategy. I'm impressed actually that you have increased your weighting, if you like, towards property and property cat because many of your competitors it seems to me anyway have elected to diversify further into casualty and away from property. So what do you think you are seeing in the property markets that is different from what they are seeing as they continue to lower proportion of their book that's property?

I don't think they're seeing anything different than we're seeing, but when you do things on balance, and I think we had a balanced portfolio and we were not overextended in any one sector, it allows you to have the flexibility to increase a bit on one where rates they are more attractive and reducing in areas where rates are not as attractive. So it's, again, it's the old story, if you have a good meal and you don't eat too much of it, you don't get indigestion; you are allowed to have a little more when it's tasting very good. And that's where we are right now.

At 10 minutes to noon, that's a good analogy. Thanks.

Tom Cholnoky, Goldman Sachs.

Most of my question have been answered, but I just wanted to go back to the stock buyback, John. I was curious when I read your press release that you actually referred to the dilution, book value dilution -- I have never seen companies actually do that -- which kind of raises the question of how sensitive you are. And I think you alluded to this, but I'm going to it a little bit further to the actual share price, because it seems to me that you potentially could reach a limit where obviously as your multiple, if, God willing, that expands, more and more buybacks will slow down your book value growth. And I just wanted to make sure or maybe where you are in that whole issue of stock price sensitivity and buyback.

Sure, and as we have said before, the issue is really a function of return and multiple, and therefore effectively that translates into what the repayment period is once you buy the shares back. We haven't changed our view. What we said is, certainly anywhere around 150% of book value we think -- and again, there's no -- no one should draw a bright line in the sand. Is 149 versus 151 isn't important, it's (MULTIPLE SPEAKERS) around that number. We believe that it's best for shareholders around that valuation to buy back stock as opposed to doing a special dividend.

You're above that now, though. (MULTIPLE SPEAKERS).

We're slightly above it, but it doesn't change the equation enough to change our view. Now if the stock -- obviously, if the stock gets to two times book or gets to 1.9, that is a whole different ball game. So it's really going to depend on where the multiple goes. If that happens, then we have to give consideration to other means of returning the capital.

Ian Gutterman, Adage Capital.

First question for Dinos. You talked about, I think a couple of other companies did too, terms and conditions starting to loosen up a little bit. Can you just give some examples of where you're seeing that and what kind of terms we're talking about?

On the reinsurance side, you're seeing a couple of trends. One, on the quota share contracts, they're looking for a little more ceding commission, so that changes the economics, that's a change. Also, we're starting to see more companies bunching things together which -- and trying to buy excess of loss, so in essence, trying to retain a lot more of their premium and get the additional protection through excess of lost contracts, and that's a more difficult game for a reinsurance perspective. At the end of the day, you have to get a lot of things right to have -- share the same kind of economics with a cedant. So that's what was happening on the reinsurance side.

On the insurance side, you're starting to see it. You're seeing clauses in excess and umbrella requests to get incidental professional liability thrown in, you're getting requests for employment practices liability to be thrown in, excess contracts where in the whole market, they buy all of those through separate individual policies. So, we have seen the introduction of batch clauses on accounts that they have significant products liability exposures, etc. They're nibbling here and there and at the end of the day, and I'm glad to say, our underwriters have been very disciplined. We do a lot of underwriting audits, we actually -- even though we trust our guys around the field, we also go and do underwriting audits because to improve the trust, you have to verify and our verification process, that gives us more confidence in trusting our people further.

Good answer. To the extent let's say in that umbrella where you're starting to throw things in, when that primary insurer comes up for their reinsurance renewal later this year or next January 1, is the reinsurance market savvy enough yet to figure out if the primary added new terms, or is the reinsurer going to get taken along for a ride on that?

The reinsurance market is behaving well. I think -- I don't see nonsensical stuff going around. I don't see wild cowboys out there and none of that. Yes, it's more competitive and prudent underwriters will take the same and cede slightly different from -- and have a different -- they don't see green as red. It might be a shade of green and you might differ on that, and that's what the competitive landscape is today, but that can change. I don't know. Our guys are telling us that they still like the business. As a matter of fact, the insurance market in the first quarter based on our expectations in the fourth quarter of '06, is actually a little bit better than what we thought. We thought it would drift more than it actually drifted, but it has drifted a bit.

And the other part of that question is, obviously, we could not speak for what everybody else does, but we do underwriting audits and when they do underwriting audits and we do a lot of them, they delve into the files. And when you're in the files, you're not just looking to pricing, you're looking at what's going on with terms and conditions and it's something that reinsurers should be able to pick up. Whether they act on it or not, that depends on each individual reinsurer.

Thank you. I guess the other question is for John. On the prior period, I guess I was just looking back over the last -- this last quarter then back the past couple of years. It seems the releases have been predominately reinsurance and very little insurance and I guess I'm just wondering why there was some --.

The primary reason for that is that most of the releases have come on the short-tail lines and we wrote -- most of our short-tail lines are written into reinsurance operations.

And there's a second reason to that, Ian. On our large reinsurance contracts, even though we might have been on for only two or three or four years, we do have a look-back view to that portfolio for 10 or 15 because the ceding company gives us that information as part of our underwriting process, so in essence you have a better chance of utilizing not only your own data, which might be only two or three or four years, depending on when you got on that treaty, but also the performance of that portfolio going back maybe 10 or 15 years from the cedant. So I think those are the two main reasons and with insurance we have to be patient and over time it will be what it will be.

That makes a lot of sense, and then just last question. On the repurchase, I guess I'm just trying to think about your philosophy as far as, one, it's a little bit harder for you guys to do than maybe some bigger companies just because of their liquidity in the stock, and you still have the founders so I assume over time will want to get out. Does it make more sense to rather than trying to make a big impact on the market to go and see if these guys are willing to sort of do a private negotiated buyback, and that way, you could do something with more size?

We didn't take that off the table, but for a big amount, I think I'd rather wait until after the hurricane season.

And, again, really it takes two to tango, so they have to be willing to part with the stock. But we definitely have not ruled out that that wouldn't be part of the whole equation.

I guess I'm just thinking, it's been one of the things you've been talking about is liquidity in the stock and obviously public market repurchases only make that problem more difficult.

We're definitely aware that obviously that has that impact, and clearly it would be our hopes that over time that some of the stock will come not from the public market.

The other thing I was thinking about on that is, does it make sense to start considering initiating or not a special dividend but a regular dividend as a way to return capital, and that way you don't have to deal with the liquidity constraints?

We're thinking about that all the time. It's always under discussion. But again, if think about this business, you can institute a small dividend but it doesn't return a lot of capital. Now where the price is today, obviously if we're going to allocate amounts, we'd still rather buy the stock back than it in a form of dividend. But it's definitely not off the table.

Thanks guys.

Brian Meredith, UBS.

Two questions for you. John, first one, looking at your paid to incurred loss ratio this quarter, I guess except for the 4Q '05 where there were obviously the hurricanes and stuff, it's about highest it has ever been, at 65%. Was there anything unusual in this quarter and should we expect that level to kind of continue going forward here?

There wasn't anything unusual. Bear in mind that the loss ratio would be, because of all of the factors we had, including the fact that property is a bigger percentage now and the loss ratio overall has come in a little bit, but the book is maturing, we're being disciplined on underwriting side, so essentially exposure is staying reasonably flat. But you would expect, it's still -- in our case, the paid to incur is still pretty low relative to a lot of other people, but you would expect as the Company continues the maturation process, that that number should continue to inch up.

Great. The second question is, you have done two transactions I guess in the last six months. You got the workers' comp and the facultative deal. I'm wondering if, given where we're heading into a soft market now, are you seeing a pickup in activity of MGAs and some of these smaller companies looking for possible partners out there?

Yes, there are more people looking for those opportunities, including us. If we find good specialty underwriting units, MGUs, etc., that fit with our profile, we have an interest and I'm sure you have seen others. Other companies have done transactions in the marketplace. But it's not unusual to see that kind of an acceleration in the market that organic growth is going to be more difficult to come by.

On the other side too, the supply of them -- are more MGAs looking to sell now?

We didn't see, I don't know, we were not in that sector looking aggressively to have a judgment if it's more or less, but there are some that are interested in selling.

Again, for the reasons Dinos mentioned, it would not be surprising at this stage of the cycle that you would seem more of them thinking about the process, the sale process.

Great, thank you.

Thank you, everybody, and we're looking to talking with you in the next quarter. Have a good day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, good day.