Aspen Insurance Holdings Ltd (AHL) 2003 Q4 法說會逐字稿

Welcome to the Aspen Insurance Holding's fourth-quarter and year-end 2003 financial results conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. I would now like to turn the call over to Mr. David Curtin (ph), General Counsel. Mr. Curtin, please go ahead, sir.

Thank you, good morning. Joining me are Chris O'Kane, our CEO; and Julian Cusack, our CFO.

Before we get underway, I would like to make the following remarks. This morning we issued our press release announcing Aspen's fourth quarter and full year 2003 financial results. This press release, as well as corresponding supplementary financial information, can be found on our web site at www.Aspen.BM (ph).

Now a word about forward-looking statements. This presentation may contain, and Aspen may from time to time make, written or oral forward-looking statements within the meaning of the U.S. federal securities laws. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not related solely to historical our current facts, and can be identified by the use of words such as expect intend, plan, believe, project, anticipate, seek, will, estimate, may, continue, and similar expressions of a future or forward-looking nature. All forward-looking statements rely on a number of the assumptions concerning future events that are subject to a number of uncertainties and other factors -- many of which are outside the Company's control. They could cause actual results to differ materially from such statements.

For a more detailed description of these uncertainties and other factors please see the risks factor section in Aspen's registration statement on form F-1 filed with the U.S. Securities and Exchange Commission (indiscernible) Company's initial public offering. Aspen undertakes no obligation to publicly update or revise any forward-looking statements, but (ph) as a result of new information, future events or otherwise. You're cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which they are made.

Finally, this presentation will contain non-GAAP financial measures which we believe are meaningful in evaluating the Company's performance. For detailed disclosure on GAAP financials, please refer to the supplementary financial data posted on the Aspen web site at www.aspen.BM. Now, I'd like to turn the call over to Chris O'Kane.

Thank you, David, good morning. Welcome to Aspen's fourth-quarter and year-end 2003 earnings conference call -- our first call a public Company. Having raised over $240 million from IPO last December.

We have some very positive results to share with you today. Among the highlights, we achieved a 16 percent operating ROE for 2003, and an annualized 23 percent operating ROE fourth quarter. Our long-term ROE target is in the mid to high teens, so we are extremely pleased with our full year ROE is within that range. This accomplishment, as well as overall performance, clearly demonstrates the inherent flexibility in our approach to the market, as well as our leadership position in key lines -- which enabled us to take advantage of strong market conditions wherever they exist.

But before I provide you with some of our financial highlights, I would first like to thank our investors for their continued support. For those investors who may not be so familiar with us, (indiscernible) I will spend a few minutes providing some background on us and our business.

Aspen is relatively new Company, having been founded in June 2002. We divide our business into insurance and reinsurance operation. Our reinsurance business, which we (indiscernible) on a global basis includes property, casualty and specialty reinsurance -- and is mainly written on the treaty (ph) basis. Our insurance business units include commercial property insurance and commercial liability insurance, to date, covering mainly risks situated in the UK.

We believe, in fact, that our UK insurance book is one of the things that makes Aspen standout among the other Bermuda-based insurers.

We like this line for two reasons. Firstly and very simply it is very highly profitable at the moment. And secondly, it provides great balance to our overall portfolio.

We have sent spent in considerable effort over the past year diversifying our Company by business, by class and by geography. We now have tremendous flexibility to pursue market opportunities where they arise. As we are constantly reviewing our exposures and are able to deploy capital quickly towards or away from market as conditions change.

Our extensive underwriting experience (indiscernible) latest rate management technology, and our financial security makes (ph) the leaders in many of the markets we serve. We believe that combination of flexibility and market leadership will enable us to deliver consistent high returns across title investors. And with that, let's discuss where we see opportunities unfolding in 2004.

(indiscernible) let me look at what we saw in the recent 1-1 renewals. As you know, January 1st is an important date for property and casualty treaty renewals, and (ph) less so for insurance business -- which tends to be much more evenly distributed for IPN (ph).

I will start with what we believe will drive our business lines in 2004, and then discuss some new developments.

While the marketplace is changing for different business lines, the overall market environment remains very encouraging. Particularly in casualty reinsurance and in UK liability business, which are areas that we have leadership positions in.

Our initial portfolio of the Company comprised 28 percent casualty, and 2003 regret to 40 percent (indiscernible) premiums. In 2004 we expect the overall casualty portion of our account to grow to around 44 percent. It's a great time to a Company that's devoting substantial part of its overall business to casualty, because the environment is now so exceptionally favorable.

Casualty reinsurance has from the start been a core area of expertise for Aspen. With the exception of a small (indiscernible) account written in the U.S., our casualty reinsurance business is generated by two separate teams based in our London office. The first of these is our international team, meaning that their mandate covers the world outside the U.S., although in practice, the weight of their exposures is spread across the UK, Europe and Australia.

This team was with Aspen from the start, and it's a long and distinguished track record. Rates in this class increased by 26 percent in 2002 (indiscernible) 2003 had an increase by further 10 percent this year to date.

The second of our casualty reinsurance teams joined us into January 2003, and had (ph) equally strong record in writing U.S. treaty business profitably in the London markets -- which is no small feat.

In our view, the key to success in this notoriously difficult class is to be highly selective regarding coverage types, and the nature and location of fees. We estimate that rates in the classes we are concerned rose by nearly 30 percent in 2003 and have written by a further 22 percent this year to date.

Our ability to capture significant demands for casualty business demonstrates our flexibility to respond to favorable market conditions. We believe this trend will continue to favor us into 2004, and position us to achieve our long-term return targets for shareholders.

Turning now to property insurance, I can again report a strong start of the year. Even though we anticipate that property reinsurance rates will fall this year by about 7 percent, we managed to renew our 1-1 book of business with the same level of rate adequacy as before, benefiting from our strong focus in complex risks would (ph) confirmed higher margins and (indiscernible) terms, and are currently subject to less competition in some more mainstream areas.

We saw pleasing resilience in the catastrophe account driven in part by the acceptance of the RMS model 4.3. Most (ph) markets and by similar phenomenon in Europe with EQE (ph). Price adequacy for (indiscernible) business fell a little bit, but within the parameters we expected. In addition, our security and (indiscernible) have been helpful in retaining (ph) for us preferential signings.

On a written basis, property catastrophe excessive (ph) loss represents about 16 percent of our business in 2003 on a written basis. We believe that percentage will fall to around 14 percent in 2004, as we will continue to focus on the strong casualty reinsurance lines and on our insurance businesses.

In our UK insurance business we're expecting continued strong overall performance. We had anticipated that UK liability rates would have peaked by this stage, but this has not, in fact, been the case. Rates in our book of business are actually up 8 percent year to date, and we continue to see a good number of opportunities in this area.

Our property insurance business also remains strong. In 2003, our property insurance was highly profitable with combined ratios for the quarter and the year of 60 percent and 69 percent, respectively. We are expecting continued profitability for this business as rates continue to remain adequate.

Finally let me comment on new areas of growth. We are moving, beginning with the improvement of our Connecticut-based team, to write property reinsurance in the U.S. -- which we help will develop about $40 million of gross written premiums in 2004 with much greater potential thereafter.

We have also established opportunity in New Jersey to write casualty facultative reinsurance risks -- mainly in the workers comp and (indiscernible) lines. But we discontinued the automobile facultative line we wrote (indiscernible).

Our casualty facultative premium, 2004, could reach about $35 million.

In addition, we have for 2004 moved property recession underwriting operation to Bermuda, and also expect a modest increase in other reinsurance underwriting directly out of Bermuda following injection of $150 million of additional capital into the Company following the IPO.

We expected business to continue, and increasingly -- I am sorry -- to contribute an increasingly important part of the overall operation in the future. The majority of our property reinsurance business will however continue to be written in London where we are perceived as an influential leader.

We also established our (indiscernible) operation -- Aspen specialty -- before the IPO. But this wrote very little business in 2003. (indiscernible) Where we expected to book strongly 2004.

Overall, we expected decisions might develop gross written premiums in excess of $100 million. Stayed (ph) approximately 35 percent casualty and 65 percent property.

Finally, it's worth mentioning -- we're very pleased that many talented underwritings want to come and work with us, and our ability to offer locations in London, Bermuda and in eastern part United States is an enormous advantage.

With that, I'd turn the call over to Julian to provide additional details on our financial results and our outlook for 2004.

Thank you Chris, and I would like to first of all echo Chris's comments -- that our overall performance, we believe, was very strong.

While we're still building up our business, we believe that in the fourth quarter, we have begun to show the kind of performance Aspen is capable of achieving going forward.

As Aspen matures, quarterly earnings continue to improve, as evidenced by our 2003 operating income of $153 million -- which is -- one-third of which came in the fourth quarter, where we earned $54 million from operations.

Another measure, by which we may judge the increasing maturity of our earnings, is the ratio of net earned premium to net written premium. Which on a cumulative basis has advanced from 56 percent at the end of the third quarter of 2003, to 74 percent at the end of the fourth quarter 2003 -- with no significant change in underwriting margin.

As a final instructory (ph) comment, before I review our results in more detail, it's important to note that we are, as Chris has said, a relatively new Company, having commenced underwriting activity in June 2002. As a result, comparisons between the fourth quarter of 2003 and the fourth quarter of 2002 are less helpful than they will become in the future.

We will therefore concentrate on reviewing the fourth quarter results and full year results, and the commentary for each of our business segments. And I will close with a few highlights in respect to key balance sheet items and our preliminary thoughts about our outlook for 2004.

First of also, our overall highlights regarding the consolidated results. The fourth quarter capped (ph) (indiscernible) performance for Aspen, and as I said, begins to show the future potential performance of our business.

Operating income in the fourth quarter was 54 million, or 87 (ph) cents per share. This compares to operating income of just 9 million or 24 cents per share in fourth quarter 2002.

For the full year 2003, operating income totaled 153 million or $2.57 cents per share.

Net income for the full year of 2000 (ph) was 152 million, or $2.56 per share.

Gross premiums written for the full year 2003 were $1.3 billion -- (indiscernible) just 375 (ph) million for 2002. Gross written premium in the quarter were 145 million representing 11 percent of the written premium for the year. This reflects the pronounced seasonality of our reinsurance business, in which we expect to write over 50 percent of the business in the first quarter, and over 70 percent in the first half of the year. By comparison, inception dates for our insurance business are more evenly distributed over the year and the reinsurance. Which will mean that as the balance between the two segments -- insurance versus reinsurance -- changes, so may the overall distribution of written premium, quarter by quarter.

For the year, our net premiums represent 84 percent of gross -- indicating that we exceeded reinsurance premiums of over $200 million. Approximately 80 (ph) million of the seeded represents proportional (ph) sessions, of which our shareholder Montpellier (ph) is the main recipient.

Most of the rest goes on (indiscernible) protection of property reinsurance accounts, from which we do not expect, at this time, to make any material recoveries in respect to (indiscernible) year 2003, simply because there have not been any catastrophe events of sufficient scale during last year.

But we do know from our long experience in the business that the current run of (indiscernible) in actual catastrophe activity is unlikely to last. We plan our business based on analysis of our current and forward exposures.

That having been said, (indiscernible) increases, we will review our (indiscernible) cover, and may, on a need-lease (ph) basis, retain more risk.

Our overall loss ratio was 53 percent for the year, as (ph) 56 percent for the quarter. As previously reported, there was a modest release of reserves in the first nine months of 2003, from the 2002 action (ph) year, equipment to around 1.1 percentage points on net balanced premium for the year.

Our 2002 business continues to run off very satisfactorily, but we have not felt it appropriate to make any further releases during the fourth quarter.

The expense ratio was 23 percent for the quarter, and 25 percent for the year. The annual expense ratio includes 1 percentage point, attributable to the expensing of employee options under fares (ph) 1,2,3. The impact of expensing options in the fourth quarter was around not (ph) 0.4 percent and this is likely to remain constant until further options or issues.

Because the expense ratio is based on net earned premiums, it reflects the level of reinsurance premiums ceded (ph) as well as levels of brokerage and operating expenses. This, as we shall see, means that it significantly higher, the property reinsurance lines, than elsewhere.

Although the written expense ratio has reduced in the fourth quarter, we do not see this as a significant continuing trend. And indeed, we're likely to be further increases in operating expenses in dollar terms as we continue to build the business.

We have generated investment income of $30 million in the year, in which our total liquid assets doubled from 932 million at the end of 2002, to 1.8 billion at the end of 2003 -- requiring us to invest significant sums of money during a very volatile bond market.

The overall duration of our invested portfolio, excluding money market deposits, at the end of January 2004 was 1.6 years. Our overall duration, including cash, has increased from one year at September 30, 2003, to 1.2 years at the end of January '04. We expect this to continue to trend upwards during 2004, but we remain cautious in expectation of rising interest rates.

I would now like to turn to the individual 5 lines of business, and the results for which you can find in the financial supplement, which has been posted on our web site. I will start with the reinsurance segment and deal with property reinsurance, casualty reinsurance and specialty reinsurance in turn.

So starting with property reinsurance, which is our largest line of business -- and, just remind you, it's written on both the treaty and the facultative business, but with the treaty accounting for the majority of (indiscernible) this line in 2003 and the entirety (ph) going forward.

Our facultative property reinsurance in premiums in 2003 came from the binding authority given to a subsidiary of the Wayneson (ph) group, which is formed well, but has not been renewed for 2004. This facility generated some 41 million of gross written premium in 2003 -- only $10 million net of proportional sessions.

Risk excess (ph) treated (ph) business contributed 46 percent of our property treaty reinsurance business in '03, with catastrophe excess also contributing 46 percent, and the (indiscernible) contributing 8 percent.

In 2003, gross written premiums for property reinsurance totaled 558 million, up from 108 million hundred -- 118 million for the 2002 start up period. Our significant growth in premiums reflects the very attractive rating environment, growth cats (ph) and success (ph) lines, and our success in renewing our inherited portfolio during 2002 and 2003. We do not, however, expect significant growth in this class going into 2004.

Our 2003 combined ratio for property reinsurance was 70 percent for the year and 72 percent for the quarter. Natural catastrophe events in the year included tornadoes in the Mid-West, (indiscernible) and Isabel -- and in the fourth quarter, the California brushfires. Together, our provisions for these losses amount to some $36 million -- or 12 percentage point parts, up 35 percent loss ratio for the year. The this is less than our estimate of the annual average expected net cost of catastrophe's based on moving our 2003 exposures. And over a period of time, we would expect the average combined ratio for (indiscernible) accounts to move within the range of 75 percent to 85 percent, absent very major events in any one year.

As I commented earlier, the expense ratio for this property reinsurance class protects a relatively high spend on retrocessional protection -- which is intended to dampen the upwards (ph) volatility in the loss ratio. Without this protection, both expense ratio and the loss ratio would end up being about 10 percentage points less than they are. But, with the potential for (indiscernible) volatility in earnings for our shareholders.

I'll move now to casualty reinsurance -- which is our second-largest business, based on gross premiums written. For the full year 2003, gross premiums written for casualty reinsurance were 292 million, and we anticipate further growth in 2004 driven by rate increases in new business opportunities.

Our combined ratio for the full year 2003 was 93 percent, made up of the loss ratio of 73 percent and an expense ratio of 20 percent. The 92 percent of our reserves of this class, casualty reinsurance, comprises IDNR (ph). Based on current market rates and conditions, we consider that the combined ratio in the high 80s or low 90s should continue to be achievable. When conditions soften, we will not hesitate, however, to cut this account right back. But (indiscernible) that is definitely not where we see ourselves at this moment in time.

Moving now to the final part of the property reinsurance segment -- this is our specialty reinsurance line of business. This comprises two parts -- the first part is specialty reinsurance risks, namely rated to marine and aviation exposures written on excessive loss basis. This has run extremely well in 2003, with actually no major loss events having occurred in these classes. Their (ph) normal year, this will be quite a volatile area of our business.

The premium for this first part of the account in 2003 was $51 million on a written basis, and which is expected to grow moderately in 2004.

Most of the balance of our specialty reinsurance business in 2003 consisted of exposures of a varied nature -- marine and aviation property liability and other exposures coming to us via a co-chair of Langsing (ph) 20-20 -- Lloyd's (ph). This quote (ph) of sharing income was an important part of our business in our start-up year, and in 2003, we wrote the further 7.5 percent qualifying quote (ph) share of (indiscernible) which generated some $80 million as written premiums.

We have decided, however, not to continue this arrangement into the 2004 underwriting year. For, the business written in 2002 and 2003 is running extremely well, and will contribute -- will continue to contribute to earned premiums well into this year.

The combined ratio for specialty accounts in 2003 of 81 percent reflects 55 percent from specialty excess lost for the insurance business -- this is lower than the likely long-term run rate for that line, and around 90 percent for the syndicate business.

I'd like to turn now to the insurance segment, which during 2003 consisted of commercial, property and liability business -- both written in the UK domestic markets, principally.

Last year, we added property and casualty service lines written in the U.S. (indiscernible) specialty, which has operations based in Boston. But this did not contribute materially to the 2003 premium or income. We've also started writing worldwide direct and facultative property business -- no longer (ph) in operation -- and this will also be reported under its heading in the future.

Starting with commercial property insurance -- gross premiums here were 82 million, and as Chris has mentioned, this turned in very satisfactory ratios of 69 percent for the year, a 60 percent for the quarter. In the absence of major risk or catastrophe losses to the account. Not surprising, this UK market is now becoming a little more competitive. And any growth under this overall heading is likely to come from our new U.S. business -- although worldwide DNS (ph) business, where in our target markets, certainly within the U.S. (indiscernible) that our competition less pronounced.

Turning now to commercial liability insurance, this is the larger of our two sectors -- subsectors in insurance, with gross premiums written of 223 million for the year, and 60 million for the quarter. Rates increased in this market by over 20 cents between 2002 and 2003, we will be pleased if the combined ratio in this account remains in 80s.

I'd now like to touch briefly on some highlights demonstrating our financial strength.

Cash flow from operations was $637 (ph) million for 2003, and as I've already mentioned, cash and invested assets at the end of the year stood at 1.8 billion versus 932 million at the end of the preceding year -- reflecting our strong operating cash flow and net proceeds of over 246 million from the IPO.

Shareholders equity at the end of the year was just under $1.3 billion, or $18.40 per share on a diluted basis -- up 19 percent from $15.40 at the beginning of the year.

Our debt to total surplus plus debt at the end of 2003 stood at 3 percent, giving us the flexibility to increase our capital to better issuance if need be. Subject to the agreement of the board, we proposed to initiate a small quarterly dividend payment of 3 cents per share as previously discussed in the IPO prospectus from (indiscernible) 2004. And we will continue to be vigilant with respect to managing the capital entrusted to us by shareholders at each stage of the insurance cycle -- although at this time, we look forward with confidence of further growth in our business in 2004.

I'd like to close by offering the following outlook in terms of performance prospects for 2004. First of all, we continue to target a return on equity in the middle to high teens. We expect an increase in consolidated gross written premiums '03 to '04 in the range -- 10 percent, 20 percent -- with the uncertainty reflecting the pace at which newer developments, such as the U.S. service lines and reinsurance businesses, will develop.

Net written premium growth is likely to be at a similar level.

Our combined ratio will reflect our current strategy of diversifying the business further in favor of casualty, as opposed to property, and insurance as opposed to reinsurance. With an overall outcome likely within the range -- 75 percent to 85 percent, barring major catastrophe claims.

We expect investment income to continue to rise, driven by positive cash flow and incremental yield from a combination of lengthening duration, a little more product risk, and, in due course, increasing interest rates.

Finally, you will have noticed that our consolidated tax rate has fallen from 28.6 percent for the first nine months of the year to 26.4 percent for the full year. This trend should accelerate the (indiscernible) IPO we had expanded our capital business in Bermuda, and this should continue to drive down the consolidated tax rates, (indiscernible) pivotal to underwriting investment and income -- (indiscernible) 25 percent and 23 percent respectively.

With that, I would like to turn the call over to questions.

(OPERATOR INSTRUCTIONS) Charles Gates, Credit Suisse First Boston.

Hi, good morning -- two questions. My first question. Could you elaborate on how trading conditions have changed in the roughly two and half months since the Company has become public?

Charlie, would you like me to take that question immediately, or do you want to get the second question?

My second question -- I believe the indicated the amount of casualty reserves which were (indiscernible) would you have that for the total loss reserves of the organization?

Okay, well, I will leave question two for Julian and I will do trading conditions in two and a half months.

Casualty lines, I would say, have gone from strength to strength. On insurance side, which (indiscernible) UK, as I said, in the preferred strip we thought the market had probably peaked, in fact rates are about 8 percent higher. There's no noticeable deterioration in terms of conditions there. On the reinsurance lines -- those are both really excessive (ph) loss casualty reinsurance. On the international non-U.S. side about up about 10 percent 1-1, and on the U.S. side of about 22 percent year-to-date. And that's pretty good news to report.

Property, I guess, would have been in the area where we thought some bad news might emerge. And property reinsurance account, we handled our own -- basically, rate adequacy and property reinsurance is unchanged at 1-1 from the same period of last year. I think that's fair to say -- that is in our booklet business. The trend in market is downwards. And as I said earlier, I think overall rates are going to fall by about 7 percent in property reinsurance for the year. We have just been able to insulate us (indiscernible) so far.

On the property insurance side, most of our exposure is in the UK, and on the bigger risk there we are seeing some competition. They don't form a big part of our book, and the going to form a smaller part of our book going forward. I think that probably deals with your question one, I'll hand over to Julian to speak on reserves.

Good morning, Charles, as to second question, is the 66 percent -- that's the percentage of our hopeful reserve at the end of the year that comprises IDNR.

My one follow-up question, I think, Chris, you indicated that in the property coverages that you were writing, you didn't see the same possible weakness you saw elsewhere in the market. Could you elaborate on that, sir?

Of course, Charlie. As we know the world is a big place, and as you look around it the buying requirements vary. I would say the firmest part of the property market is where the buying requirements is very large. Now that either means it's dominated by Florida Hurricane or California Earthquake or perhaps it relates to the reinsurance of very large risks that require the whole of the world market.

On the other hand, smaller exposure areas -- notably the smaller territories around the world in Asia, South America, Middle East and to some extent Europe, here the (indiscernible) amount of the equation is different, the buying (indiscernible) are relatively small and there we saw quite a lot more competition. I would say in continental Europe, for example, property catastrophe rates probably fell by between 10 and 15 percent. My (indiscernible) of course is -- because of the way we treated risks and build our portfolio, we deemphasize the areas where the rates are less favorable. And so in our portfolio, we actually managed maintain the same level of the rate accuracy (ph). Does that help?

Yes, sir, it did. Thank you.

Mathew Heimmerman, Goldman Sachs.

Good morning, everybody. I have a couple numbers questions and a couple big picture questions.

You mentioned that you've seen a lot of talent who are necessarily (ph) willing to work in your platforms. Could you talk about some areas of the market in your business that you either have or are planning on having, that you would like to add staff?

Secondly, more on the numbers side, could you just talk a little bit about what your targeted reinvestment rates on the portfolio and what the older (ph) majority is today?

And also, I didn't get all your tax rate questions, or tax rate comments in your outlook. If you could just go over those again?

And then finally -- was there in the specialty reinsurance, was anything unusual in the quarter that drove the disparity in the quarter expense ratio versus the year, and is that related to the quota share or the ongoing business? Thanks.

Okay, Mathew, it seems to me -- and this is Chris speaking -- that I should take the first of those questions, and probably Chilean will deal with the other three.

In the first (indiscernible) -- areas plans for growth -- I think it's actually much better if I report achievements rather than intentions. Our view is that there are certain areas of business -- marine business, especially marine liability business. We're also looking at directors and officers business in the UK, though not in the US. To some extent -- personal accident business. These are areas where we think the margins are acceptable, but we're not actually present there yet. Our decision to actually get into those will depend in identifying and hiring the right teams people. And we're talking to a lot of teams of people at the moment, but I really don't want us to count chickens to early by actually firmly committing that we will be in any of those areas for sure in the next three to six months.

A quick follow-up -- how big a premium opportunity do you think potentially those areas could be, if all went your way?

You need to put that, I think, in a timeframe context -- I think, on a written basis, I would be pleased if we achieved more than $100 million of new premium from new areas on a written basis in the remainder of '04. But some of those areas, I think, in a sort of two to three year period have the potential to become quite sizable in useful businesses. Shall we move across to the numbers. Julian, I think the first was positive reinvestment rate.

Matt, I think that on the investment portfolio, the duration and maturity analysis has not changed significantly from the position I disclosed in the IPO prospectus. By reinvestment rates, I assume you mean the yields at which we are investing new money -- is that what you're --?

Correct.

We are investing at around the sort of 0.5 year duration point in treasuries and other high yield, high security investments. So I guess maybe in 2.2 -- that sort of level at the moment.

And then -- what you talked about potentially expending duration and taking a little bit more credit risks, are you going to allocate more to corporates at this point? Which is pretty low -- or is it going to be a similar mix?

I would anticipate that there may be a modest increase in the allocation of corporate (indiscernible) that's correct, yes.

Alright that's good -- and then the tax and expense ratio?

Can you just repeat the question (indiscernible)?

I just did not catch all your comments in your '04 outlook, so I just wondering if you could go over those again?

My -- yes. The position on the tax rate is this. We expect it to fall further. I gave the facts the performance 28.6 (ph) percent at the end of September 2003 to 26.4 percent at the end of the year. And that we expect it to fall further towards around 25 percent on underwriting income, and 23 percent on investment income going into '04.

I think your final question was regarding the expense ratio in the specificity insurance segment, is that correct?

That is correct.

That is unusually low. And that is feature of the syndicate qualifying (indiscernible) share that's just not (indiscernible) the ongoing specialty reinsurance business that we reported on that heading in future.

Alain Karaoglan, of Deutsche Bank.

Good morning, a couple of just clarifying questions. Julian, in terms of shares outstanding going forward on a weighted -- on a diluted basis, what should we expect with that? I just want to make sure we do the math properly.

I think that that number will be similar to the number of (indiscernible) shares at the end of the year, which is shown in the supplements and is around 70.9 million.

You give the yields on the investment -- or the new yield on new money. What was it on the existing portfolio?

The overall yield for the year was 2.1 percent.

And -- if I could go back to the expense ratio, if you look at each of the segments expense ratios there is a significant difference between the fourth quarter expense ratio, and the full year expense ratio. And on the reinsurance side, the ratio seems significantly lower and on the insurance side it seems to be higher. Could you go into reasons behind that?

The fall in the property reinsurance ratio really relates to the fact that we're doing this ratio on the net earned premium. So, it reflects the expensing of the retro reinsurance premiums. Which on a straight line basis over 12 months. So when you go into the fourth quarter, that is bit being spread over a larger amount of gross premium and therefore the ratio sort of (indiscernible) comes down. That's the main think acting there in property reinsurance.

And in the insurance segment -- ratios -- there is nothing particularly significant going on there, other than rate changes in business mix. And as we moved forward in the year, we have had to increase our operating expenses, preparing, for example, for the expansion of the business into the U.S.

Because if I look at the fourth quarter commercial liability ratio, the expense ratio in the fourth quarter is 5.7 points higher than the full year number. Is that due to the business mix?

Again, partly, I think it's partly due to business mix. And I can't really point to any particular factors behind that at this time.

Ken Zuckerberg, Stadia Capital.

Actually, it's Ken Zuckerberg of Stadia capital. Good morning, everyone. In terms of the outlook for operating cash flow -- recognizing there are some changes that you're making in the investment portfolio, Julian, could you just clarify what we should expect on a go forward basis?

I think that any changes in the investment portfolio will be evolutionary and so I wouldn't expected it to be dramatic.

The high level for the 2003 -- were there any unusual items, positive or negative, within those figures?

Within the investment figures?

Sorry, within the operating cash flow figures?

No, no unusual figures, no.

Craig Algend, satellite asset management.

(inaudible) I don't have a question, thank you.

Richard Frierie, Delphi Management.

Yes, good morning. You talked about the 2004 premium growth, and I'm wondering if you just expand a little bit more on where it is coming from -- if it's new business, old clients adding more business? And are you entering any new geographies that haven't talked about yet?

Sure, Richard, I'm happy to do that, but I'm afraid the answer is -- it's a little bit of everything you mentioned.

I would say, a lot of the growth are coming in the casualty lines. Some of that is actually simply driven by rate increases. As I said earlier -- 12 percent (indiscernible) 10 percent more rates in the casualty international, and 22 percent more rates in the U.S. Now, that's feeling growth and that's a major contributor.

We're also doing a little more business in Bermuda -- that's genuinely new to us. That's property reinsurance in the main, a little casualty reinsurance. And of course, I have talked to you about the guys in Connecticut -- team of seven, who are going to be underwriting property reinsurance for us. This will have a sort of risk excess (indiscernible) Rodda (ph) more regional Company flavor rather than, sort of, the bigger (indiscernible).

So new business comes through a little -- I don't have it in my hands that split between rate increases and planned new accounts. But it's a little of everything you said -- there is not nothing we're counting on in our numbers that I can report to you that we haven't already mentioned.

Also, in terms of big incidents recently -- you mentioned the California wildfires, and tornadoes in the Midwest. And wondering -- were you exposed to those -- I think there was an explosion in Algeria and an energy explosion in Canada, and then floods in South France -- does that impact you at all?

I don't think there is anything meaningful in the South France for us nor from Canada. However, we do have some numbers on the -- which (indiscernible) again -- you said Algeria?

Yes, Algeria -- their natural gas explosion there?

We had reserved about $9 million for that.

You at this time, gentlemen, there are no further questions. I'd like to turn the floor back over to Mr. O'Kane for any closing comments.

I will just clarify that the lost (indiscernible) -- the date of loss side is 2004 -- actually doesn't relate to our '03 figures. So, I wanted to thank you all for joining us today, and very much look forward to updating you (technical difficulty) quarter on our progress. Thank you, goodbye.

Thank you for your participation, that does conclude this morning's teleconference. You may disconnect your lines at this time and have a great day. Thank you