AXIS Capital Holdings Ltd (AXS) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 AXIS Capital earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Linda Ventresca, Investor Relations. Please proceed, Ma’am.

Thanks, Rachel. 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 quarter ended March 31, 2005. Our first quarter earnings press release and financial supplements were issued yesterday evening after the market closed. If you would like copies, please visit the investor information section of our website at 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 through May 26th. An audio replay will also be available from approximately 11:00 AM Eastern today through May 19th.

The toll-free dial in number for the replay is 888-286-8010 and the international number is 617-801-6888. The pass code for both replay dial-in numbers is 37176262. With me today in our Bermuda headquarters are John Charman, AXIS Capital’s CEO and President; Andrew Cook, CFO; and Michael Butt, our Chairman.

Before I turn the call over to John, I will remind everyone that statements made during this call including the Q&A session which are not historical facts, may be forward-looking statements within the meaning of the U.S. Federal Securities laws. Forward-looking statements contained in this presentation include information regarding our future growth prospects, financial results and investment strategies, and our expectations regarding pricing and other market conditions.

These statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from our expectations. For a discussion of these matters please refer to the risk factors section of our annual report on Form 10-K. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, this presentation contains information regarding net income, excluding investment and FX gains or losses and diluted book value per share which is non-GAAP financial information within the meaning of the U.S. Federal Securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measure, please refer to our financial supplement and our press release which can be found on our website. With that, I will turn the call over to John.

Thank you. Good morning, ladies and gentlemen and thank you for joining us. I am pleased to report that AXIS Capital’s first quarter of 2005 has produced excellent results. Our net income was $152m for the quarter. Net income excluding realized gains and foreign exchange losses, net of tax was $176m.

Gross premiums and net premiums were up a prudent 15 percent and 18 percent respectively. Net premiums earned were $626m up 33 percent over the same period last year. Our combined ratio was 78 percent and includes commendable current accident year results, $31m in losses from [windstorms] and favorable reserve development of $67m.

Total pre-tax investment income continued to increase and was $51.4m, up over 24 percent from the first quarter of last year. These exceptional results translate to an annualized return on average equity during the quarter of 19.6 percent. Our continuing diversified presence in both insurance and reinsurance is serving us well, and in each of our major businesses, we hold strong, defensible global franchises built now to deal with differing market cycles.

My view of the insurance and reinsurance marketplace has not changed substantially since I last spoke to you. Specifically, the global reinsurance marketplace currently remains much more disciplined than the primary marketplace. Certainly the primary marketplace is a vast and complex one, and with our size, diversity, consistency and recognized leadership capabilities, we are still afforded ample opportunity to carve out profitable positions and opportunistically enter classes that suit our D&A.

Broadly speaking, pricing in our access insurance segment is stable to declining for many classes. Terms and conditions, however, remain relatively attractive and there is still business for us to find where rate levels meet or exceed our return hurdles. That is why we have been able to write the premium we have. The 4 percent decline in gross premiums written in this segment speaks to our continuing conservative and disciplined posture in the primary insurance marketplace. In global insurance, gross premiums written declined by 16 percent. Setting aside the timing issues related to our less predictable political risk renewal patterns and aviation renewals, this is a clear demonstration of our focused underwriting discipline.

Absurdly competitive behavior in the property and on-shore energy classes have caused us to walk away from a lot of business. Large accounts and international property in particular have been the least rational and we continue to rebalance our global property portfolio away from these areas.

There are, by far, fewer opportunities to write properly rated, standalone terrorism business and again, we are declining on a daily basis accounts that don’t meet our criteria. Amidst the uncertainty regarding the renewal of [Tria], we have seen many, many carriers extend coverage way beyond the sunset of [Tria] for virtually no charge.

Declines in global insurance were partially offset by increased market penetration of our newer, London-based, European-wide D&O operation. Broadly speaking, for our London-based marketplace specialty business, we are currently defending the diverse portfolio we have built. First, by controlling exposures and carefully selecting the areas where we will maximize return; and second, by diligently and opportunistically purchasing reinsurance.

All is not however, lost. We are seeing some signs of life in terms of an increasingly positive offshore energy market. Within U.S. insurance, gross premiums written during the quarter increased 19 percent over the first quarter of last year. This is primarily due to our success in umbrella liability line of business where pricing has held up best relative to loss trends.

This is also due to our continued build-out of our U.S. underwriting operations as evidenced by asset management activity being up well over 20 percent and our opportunistic expansion into attractive and complementary new classes, particularly within our professional lines operation.

In the P&C lines in the U.S., rates were broadly flat to down, the most severe declines in the mid to high teens were in U.S. retail property business which is generally not that exposed. We are encouraged by the deceleration in renewal rate declines for the D&O line of business and the cat exposed D&S property line of business.

Indeed, in Florida, we are witnessing loss-free accounts renewing as expiring. In public D&O, pricing pressure was evident in the excess layers last year, and this pressure has now affected the primary layers. Once we had to walk away from a significant amount of professional lines insurance business, new opportunities are available to us and this has been by design on our part from the start. We have always offered a very broad portfolio of specialty products and professional lines that we deliberately structure solutions across industry sectors, ownership structures and on both the primary and excess spaces to provide us with the diversities to ride out competitive cycles.

Moving on to our reinsurance business, as I stated last quarter we remain quite satisfied with the overall professional behavior and technical approach of the marketplace, which is trying to maintain profitability in most areas. Gross premiums were up in our reinsurance segment 29 percent to $769m, largely driven by our increased penetration across a number of reinsurance lines in continental Europe. Globally, reinsurance pricing was in line with our expectations. There was moderate price softening, particularly in short [fail] lines, but for AXIS with its market acceptability, there was plenty of business which we expect will generate returns commensurate with the risk.

Terms and conditions held up well across the board. In the U.S., casualty reinsurance rates are, for the most part, keeping up with loss trends. Some casualty reinsurance lines in the U.S. are beginning to look less attractive for us. For example, specialty [bank], which are now viewed as overly competitive. Other reinsurance lines in the U.S. which we have, for the most part we have stayed away from. And those include excess workers’ compensation, private passenger and commercial auto exposure, Fortune 500 excess and umbrella business, and surety. We have not been interested in writing these lines to date, because they do not meet our underwriting criteria and do not generate the returns we are seeking in our portfolio. In the U.S., many primary companies substantially increased their retentions, particularly for non-cat exposed lines of business.

In Continental Europe, the first quarter represented the second major renewal date for our dedicated team of 25 based in Zurich. During the quarter, our underwriters in Continental Europe achieved greater market penetration in core specialty lines and geographies, and took advantage of special opportunities arising from market acceptance issues. Rates did moderately soften in many lines, but terms and conditions were firm and prices were at technically adequate levels.

Throughout our reinsurance segment, much line our insurance segment, we continue to concentrate on excessive loss business and specialty lines of business. Examples of areas where we are growing our book of business include U.S. general liability reinsurance, property [per] risk in the U.S. where we can generate sufficient return in the context of our overall portfolio. Property per risk and motor excessive loss business in Europe and property pro rata for industrial and commercial insurance with proven track records in Europe.

Although the April 1st renewal date is a less critical one for AXIS, it is the major renewal date for Asian business where rates, in our opinion, remain around satisfactory levels and we continue to have very limited involvement there. With respect to upcoming cat renewal business, it is our expectation that U.S. cat will continue to gradually soften, but Florida is likely to be the only exception. While the tone with respect to Florida feels positive to underwrite now, it is still early days.

For AXIS it is my expectations that our scope will continue to moderate through 2005 in many areas of our business as it has during this first quarter. This will be counterbalanced by our continuing expansion of product lines. We are diligently keeping abreast of the potentially fundamental changes in progress in the marketplace and the range of potential outcomes can only benefit a global, diverse financially strong company like ours. I believe these changes will substantially level the playing field and move the business practices of the industry positively in our direction.

We continue to maintain the highest underwriting standards and to provide consistency and good service to our clients and intermediaries despite this generally undisciplined marketplace. We focus singularly on being well-rewarded for taking on real risk.

Before I turn the call over to Andrew, I would like to give you a very brief update with respect to our internal investigation. The investigation is, at long last, nearing completion and has uncovered no evidence indicating that we engaged in [PID] rigging, fictitious our inflated quotes or related matters, or positioning direct insurance on the placement of reinsurance. Thank you, and with that I will turn the call over to Andrew Cook.

Thanks, John and good morning everyone. Before we discuss the financial results for the quarter, I wanted to review the changes we made in our financial reporting. As of January 2005, we are reporting two underwriting segments, insurance and reinsurance, and a corporate segment to better reflect the organizational management changes made in conjunction with our strategic realignment.

The insurance segment is further divided into global insurance and U.S. insurance. Within the insurance segment, we made some changes to our reporting for global insurance. Specifically, we have expanded the disclosure of specialty lines within global insurance by separately disclosing terrorism and war and political risk. Also, given the risk management of our energy lines, they have been reclassified. Specifically, onshore energy has been grouped with property and offshore energy has been grouped with our marine lines.

I will now turn to our financial results. Excluding the impact of unrealized gains and losses, our diluted book value per share at March 31 2005 of $19.98 increased 10 over the past 12 months. This accretion during the year includes the impact of cats last year. Our net income of $151.8m for the quarter was 9 percent less than that of the first quarter of 2004. This was driven by a $30m variance due to a swing in foreign exchange and investment gains which worked against us and interest expansion in the quarter which we did not have last year.

Excluding foreign exchange and investment gains and losses, net of tax, net income was $175.7m, 10.6 percent higher than the comparable figure in the first quarter of last year. This increase was driven by increased underwriting profit and investment income.

Consolidated gross premiums written at $1.2b were up 14.8 percent from the first quarter of 2004. Gross premiums written in our reinsurance segment increased by 29 percent, while gross premiums written in our insurance segment declined by 4 percent. Growth in our U.S. insurance operations, particularly in our liability lines, largely offset the decline in our global insurance operations. These declines resulted from the irregularity of political risk renewals and the impact of walking away from business in an increasingly competitive marketplace.

Growth in our reinsurance operations was almost entirely due to increased penetration of the reinsurance marketplace in continental Europe. Total net premiums earned for the quarter were $626m, a 33 percent increase over the first quarter of 2004. This increase reflects the strong growth in our underwriting business throughout 2003 and 2004.

With respect to consolidated underwriting results, our combined ratio for the quarter was 78.3 percent as compared with 72.5 percent in the same period last year. The increase was primarily due to an increase in the accident year loss ratio of 11.6 percentage points. This accident year loss ratio increase was due to a number of factors including $31m in losses from Hurricane [Irwin], a change in the mix of business, a recognition of the deterioration in the pricing environment and other large European property losses which impacted global insurance.

Two items of note offset this increase. First, we experienced net favorable reserve development in the quarter of $67.8m from short-tail lines, $62.3m in favorable development came from insurance and $4.6m in favorable development came from our reinsurance segment. We should note that this level of reserve release correlates with the significant growth we experienced in our [inaudible] short-tail global insurance and property cat businesses from inception throughout 2003 and the accompanying favorable loss experienced.

Secondly, our aviation, war and terrorism lines of business, we have sufficient experience to categorize these as, for the most part, as rapid visibility lines. In the absence of a major loss event, this approach favorably impacts our current accident year loss ratios in global insurance. Should a major event occur, we will apply a conservative reserving philosophy upon a loss in much the same way we would in the event of a major catastrophe.

With respect to our acquisition cost ratio, we saw an uptick in the ratio of 2.5 percentage points, primarily due to the changing business mix. With respect to PSAs, there continues to be business that was written last year which is being earned this calendar year and associated expense amortized with it. We have not entered into any new PSAs this year. Given the uncertainty in the marketplace with respect to broker compensation, it is too early to quantify what the impact of development on this front might be going forward. However, at the moment, our all-in acquisition costs remain stable, in line with our expectations for our current portfolio.

Our G&A ratio remains relatively flat at 8.7 percent for this quarter and compared with 8.9 percent in the first quarter of 2004. Total cash and invested assets at the end of the quarter remained relatively flat at about $6b. Strong cash flow from operations of $445m were primarily offset by our $350m share repurchase. Total pre-tax income on our investment portfolio for the quarter was $51.4m, up 24 percent over the first quarter of 2004 and included $52.8m in net investment income and $1.4m in net realized losses. This increase was primarily due to increased invested assets and was also the result of an increased EOP.

Since our portfolio is concentrated in the short end of the yield curve, our yield has increased but our portfolio has also experienced price erosion. Therefore, we ended the quarter with an unrealized loss of $49.4m. Since the end of the quarter, this unrealized loss position has already begun to reverse as the three-year U.S. Treasury has rallied 20 basis points since quarter end. We continue to believe that our short duration portfolio, other investments focusing on floating rate instruments and cash holdings led the downside to our capital base during periods of market volatility.

We believe U.S. interest rates at the short end of the yield curve will continue to rise and that it is highly likely that cash will outperform intermediate fixed income during 2005 on a total return basis. With this in mind, we will focus on the shorter maturity investments and others that will out-perform as short rates rise, including cash and cash equivalents, floating rate notes and CLOs.

During the quarter we experienced net foreign exchange losses of $23.4m. The majority of this loss was due to the revaluation of euro-denominated premium receivable balance. The [inaudible] all-time high at the start of this year, when we write the majority of our euro-denominated reinsurance contracts and accordingly, generated premium receivables. As we have revalued our balances as of quarter end, foreign exchange movement in future quarters should be less noticeable, particularly if the euro remains in a stable position as it has since quarter end.

In addition, we are long the euro as we build balances in this currency to meet our expected liabilities. We believe that over time we will reach a net neutral position with respect to matching our invested assets and their expected losses.

On the capital management front, we repurchased 12.8m shares of common stock from certain of our initial investors for $350m in February. This represented 9.4 percent of our total capital at year end. We believe that we have the capital we need to execute our business plan for the balance of the year. This is based on our current view of the marketplace and our believe that we are on track to deliver strong returns on that capital.

That concludes our prepared remarks and we will now take questions from those on the call.

Thank you, sir. (Operator instructions) Joshua Shanker; Smith Barney.

Good morning, everyone.

good morning, Josh.

Good morning. Three data points that I am trying to connect together. First, we hear that primary insurers are having high retentions right now. The second, a number of your peers say that the European market is deteriorating much more quickly than the U.S. market; and finally, looking at your favorable development, we see favorable development looking in 2003 and 2004 coming in insurance lines, not reinsurance lines.

Those three things being said, can you give me some color around the reinsurance business that you are writing today that can give me some more comfort? The strong growth in Europe is being written at adequate levels? Just correct me of certain misperceptions I might have about the market right now.

Well I am not sure you have misperceptions, what you are talking is a range of different views. But in terms of, you are right about the higher retentions within the U.S. that you mentioned at the beginning. That’s why we find it illogical that primary carriers are actually having such aggressive pricing within many of the product lines that we see within the U.S. and internationally, because we have believed now for two years that the primary carriers are eroding their net margin because they have not been able to make their margin up from what has been a more disciplined reinsurance marketplace.

As far as the European marketplace is concerned, our view is the fact that it has been more towards the stable side than displaying the characteristics of some of the U.S. markets competitive edge. So I am not quite sure that I would agree with some of the other comments that have been made. Andrew, do you want to talk about the reserves?

Good morning, Josh. On the reserve front, I think that the main point to bear in mind is between insurance and reinsurance. We obviously have much more direct contact with our clients on the insurance side and can reach certainty with respect to the levels of reserves on a much faster basis. So that inherently means on the reinsurance side, the timing of the information to us is a little more delayed as we had to be a bit more conservative with our loss ratio picks and as when we can actually determine the rates we’ve got in those reserves.

And Josh, if you don’t mind me saying so, if you go back to our European strategy, you know, we very carefully chose the people that we cited in Zurich with specific skill sets as well as substantive industry contacts and these are very experienced people. We said when we set up our European reinsurance operation that we intend to take full advantage of the diversification that was taking place within European portfolios. We have done that. We are not competing aggressively on price or by conditions, we are actually growing our business because people seem to actually want to do business with us, they trust us, they trust our long-term strategy, they trust our capital and so our view is that in fact it is a very good market for us, and will continue to be so.

And that being said, when you look at the growth in reinsurance, if we had a rank or to describe the type of growth, is it in terms of [contract caps], in terms of contract size or is there some rate in there as well?

Well I think you have to – Josh, we decided probably around – but forgive me – but we decided nearly 18 months ago that we believe that there would be greater opportunities in the near term, and the near term between three and four years, from the reinsurance sector because it was much more disciplined. We felt that security would become much more questioned; capital would be much more important; management approach would be of greater consideration. All of these things, we felt that there was a much greater opportunity for us to grow our business in the reinsurance sector globally than there was in the near-term in the insurance sector because of the excessive pricing competition and stupidity that it displayed throughout that class on a daily basis.

So whilst we are still growing our product lines on the insurance side and are therefore able, because of the diversity we have globally, to move around and seek opportunities, we really do believe the emphasis on our business will be reinsurance. We have been counter to what most of the rest of the industry has been saying. But we will let the figures speak for themselves.

Just [inaudible] to that, Josh, real quickly is from a logistical standpoint, back to your question, it is a combination of two things. We certainly have increased our contract count, following on from John’s comments about our market acceptance in Europe, but also we have been able to increase our line sizes as well, which is a further testament to our acceptance in the European marketplace.

But it is still a valid line structure, so in fact that we have been building towards getting that balanced line structure throughout our portfolio, and that is very difficult in Europe, to get market penetration. But we’ve done it.

Very good. Well, congratulations on the quarter.

Thank you.

Ron Bobman; Capital Returns.

It is Ron Bobman. I have a quick question for you.

Hello, Ron.

Hi. On your insurance business, for the brokers who have sworn off contingents as far as sort of, you know, post 01/01/05 what has your response been to their presumed approach to you, to sort of recast the commission structure to presumably one that is a little larger off flat commission based? Or any sort of broader –

I think that, Ron, we’ve had a pretty consistent approach to acquisition costs in totality and PSAs were just one part of those acquisition costs. We always looked at the totality of our acquisition costs and one of the fundamental parts of our business was the fact that we always wish to mitigate them, obviously.

What we have been doing since last September is continuing to drive acquisition costs down on a risk by risk basis, and was three of the major brokers have ceased to use PSAs. We still are doing a lot of business with them. We are seeing increased volume from them and we are negotiating acquisition costs individually. That is how we see the near term panning out.

Do you view that you’re getting sort of any less –

Sorry, on another issue, in fact because of the transparency that is now being forced onto [states] insurance and reinsurance business that there is much greater competition between brokers, which is actually helping to counterbalance any view they might have towards increasing acquisition costs. They are in a market that is fiercely competitive.

Do you feel that you are getting any less – you know, you pay for service, you pay for value deliver. In the sense that you are unable to compensate a broker by virtue of aggregate volume or aggregate underwriting profits over a period of time. Do you feel that, in that regard, that you are unable or you are getting less value for the amount paid?

Not in the slightest, because you’ve got to remember our business model, and a lot of other specialty underwriting business lines are predicated on outsourcing marketing, distribution to the brokering community. The fact is that perhaps one could look at the brokering community, especially some of the larger ones, that have had essentially a pretty old-fashioned legacy infrastructure that may not be applicable to the same role in a fiercely competitive global marketplace, and it may be that if their revenue base is not sustainable going forward they will have to address their infrastructure rather than actually look to the market to continue to fund an infrastructure that is no longer relevant. It needs to be modernized.

I look at it in a different way, Ron. But we have very, very good relationships with our broker friends and we’ve actually found it to be, if you look at our policy count being well up over 20 percent, the proof of the pudding is in the eating. We are not going out there and buying that business. It is freeing up a lot of business. I think it is very positive for the market.

For the underwriters. Thanks a lot.

I think – yes, thank you.

Adam Klauber; Cochran, Caronia.

Good morning.

Hi, Adam.

The political risk and terrorism and war premiums were obviously down. Could you talk about what has happened to rates and are terms and conditions softening in those markets also?

I will let our deposit underwriter, Andrew, speak in a minute. But political risk, it is not an issue about raising it is just a matter of deal flow, and that is why I am sure you see it replicated throughout the industry. It gets lumpy, and it is lumpy – you can’t tell when these deals come through, so you can skip a quarter, you can have a light quarter and then have a heavy quarter. So it is very difficult to normalize the political risk business. But we are in that business, we like it, I’ve been involved in that business for over 30 years. We like to think we are one of the leading global markets in that business with key relationships with producers and there is not – we don’t think we see a lot of pricing pressure on that business, but it is a highly skilled business to be in.

Terrorism and war, any man and his dog seems to be participating in that, and I am afraid the excessive competition that we see displayed throughout the bigger ticket commercial property lines is being displayed in the same way through the terrorism and war markets, mostly from the usual culprit, and I am not allowed to name the companies, but Lloyd’s is certainly at the forefront of a lot of that stuff still on the short sell lines.

We will not take those risks unless they can be priced adequately, because there is real risk there. And again, I have been underwriting that business nearly 30-odd years again, and it needs to be handled carefully, it needs to be set aside and you need to have good people running those aggregates. But we will not take that business in unless we can get appropriate pricing.

Okay. Follow-up question, in some of the areas, some of the lines of growth such as motor, liability and the reinsurance and property, can you discuss which countries particularly are you growing in? And in the motor, is that more of a property or liability book of business?

Well motor is excessive loss business, predominantly. But –well Andrew, you –

On the motor business, Adam, it goes back to the comments you made during the call and some of John’s remarks during the Q&A, it is throughout Europe but our exposure for the most part is coming from France and the U.K. and to a lesser extent, Germany. As John said, we do write a couple of quota share contracts, but the vast majority of our motor premium is coming to us on an excess of loss basis. It does, as you said, it covers property damage but there also is a liability component to some of our contracts.

And I think it is very important, Adam, to – there is a lot of smoke being blown about the major business in Europe, but there are lots of legacy players who fundamentally mis-position themselves between the mid-90’s through to the early part of this decade, and they have since substantially been increasing losses emerging from those underwriting years. That business has been re-rated, it has been repositioned and we, because we are not a legacy player, have been able to take advantage of it. We are not having to deal with ever-increasing back year deterioration, but we had strict underwriting guidelines with technical results that we require, and we have been quite comfortable with that business.

Thank you very much.

Thanks, Adam.

Susan Spivac; Wachovia.

Good morning. John, I was hoping you could go into –

Susan, good morning. I hope the babe is well.

Can you hear me?

Yes, I do, and I hope the babe is well.

Oh, thank you. Thank you. I am a little tired, but the baby is doing great. I was hoping you could go into more of the – you talked about the competition in the global insurance, with the excessive pricing, the stupidity, what pockets of the market is it coming from, because at the same time we are seeing this excessive pricing, undisciplined market, there is discipline in the reinsurance market, so it is obviously not being supported by the reinsurers. So I am just wondering, is it coming from the London players, from other Bermuda writers, from the Europeans, the domestic markets. Where is this coming from?

I think actually the Bermudian market pretty well has been the most disciplined market of all the international markets, oddly enough. I think it has shown that it will walk away from business, wherever it may occur, if it is not priced adequately. They have a much more technical approach to it. I think if you have heard me bang on now for over two years, and I am not allowed because Mr. [Newhouse] will shoot me if I start naming individual companies, if you know Mr. [Newhouse] you know what he will do. So there is no point. It is the same sort of legacy players that sweep up in the last month of each quarter and will take anything. You know, this is not a gross exaggeration. They seem to be able to take anything regardless of what pricing models they appear to have, at any price, just to make their numbers.

Lloyds, because it is fundamentally [inaudible] account, is capable of doing the same sort of thing. So it is the usual stuff based on [inaudible]. But as I said, I can only reiterate that Michael Butt and I have said time and time again that we expect this cycle to be a much shorter cycle than historically because the normal tendencies of a softening market actually start with a soft reinsurance marketplace. Therefore, the primary carriers take their margin out of the softened reinsurance rate to them, which is their primary rates.

This time around, it has been very different. There has been excessive pricing competition amongst the primary carriers where they have not been able to take their margin out of their reinsurers, and in fact their reinsurers have been strengthening in certain product lines over the last three or four months. So you’ve got this complete disconnect between the primary carriers at the front end, dramatically reducing their pricing of a lot of their product lines, but they are taking it out of their net margins. The CEOs don’t seem to understand it. But I hope they actually – they are going to find out fairly shortly, because it is going to come winging through on their financials.

John, that is very helpful. I am just wondering, Andrew, is there any way you could help us out with the fluctuations in the foreign exchange line? It just seems like had you not had that this year your earnings would have been so much higher than what we were anticipating.

Sure, Susan. I mean, at the end of the day it gets down to one primary factor. January 1st is the main renewal date for our contracts denominated in euros. I think the quantum of that was in excess of €230m. The euro was at an all-time high on the first of January when we created our reinsurance balances, or reinsured balances receivables. The general discussion in the marketplace at that time was for continued weakening in the U.S. dollar but unfortunately, a bit of a rally in the U.S. and the dollar did strengthen about 5 percent. So that, for the most part, is where it is coming from. It is really a one-off situation at the start of the year. Obviously, our receivable balance is now our – we capped that at $1.30 and as I said in the call, the euro has been fairly stable since quarter end.

The other point, on a more forward-looking standpoint is we are long the euro. We spent a lot of time at the start of the year with our actuaries to ensure we had the right amount of invested assets on hand to meet our expected liabilities in Europe, what you will also find is that the earning patterns in Europe, it is taking more time for us to build up loss reserves, but we do believe by the end of the year we should be in a situation where our asset balances effectively offset our liabilities. So the foreign exchange line with respect to the euro should become more of a noise level item.

Okay, that is great. Thank you very much, everyone.

Thanks, Susan.

Nick Pirsos; Sandler O'Neill.

Good morning.

Hi, Nick.

With the increase in the reinsurance book, how does management think about catastrophe management in terms of acceptable maximum losses or quarterly earnings volatility and how should we think about the $31m [Irwin] losses, Andrew stated, as within expectations?

I think that you look at Irwin, which was we reckon about a $1.5b market loss, so I think that, you know, within market share I think that is – I don’t like losses, but you know, if you don’t get losses you don’t get business. So that was within expectations. As we said, actually, the growth in our reinsurance business is coming about because we are actually diversifying our product lines. It is not compounding aggregate. We have very strict allocations of capital to our aggregates and we monitor them on a daily basis throughout the company as a whole, so we are not pushing the envelope for growth by forcing out our aggregates to that extent. It is coming out of diversity of products.

One thing that we have spent a lot of time over the last 12 months that the senior underwriters were forced to put up with Michael Butt and myself had been on a large number of market interests throughout Europe, and this year concentrating on Europe and the U.S. to try to really push the envelope in terms of our relationships with clients and bringing about greater diversity of business, as well as strong enough participation with core clients.

So we are marketing heavily, and it is a good time for us to do that with all of the uncertainty that seems to be emerging in the industry. We have a very good and very consistent approach to the business.

Great, thanks for the help.

Hani Sabai; Viking Global.

Thank you. Just a couple of questions. Just looking at –

Hi, Hani.

-- into 2006, I mean assuming prices continue to sort of moderate as they have been at the same level, maybe you can just comment about the fact that if you are expanding to new lines, what sort of growth you might expect then. Maybe you can just point on that first.

Well, we can’t. All we are doing is that we have said what our strategy is, which is continuing to emphasis reinsurance business because we think the market opportunities are better there in the near term. We said in the insurance lines that a lot of the successive rate competition, we don’t believe that can continue for much longer, but we are just going to take each day as it comes. We enter the market each day and what we have to achieve every day in the markets, we have to maximize our penetration in whatever good business is out there. I don’t care where it is, who has got it, and when it is up.

But the job that we have as underwriters globally is to maximize that penetration and we concentrate on that everyday. That will mean it is going to shift around a bit over the next 18 months, and quite appropriately. But that is what being in a fiercely competitive marketplace is all about. We will go where the money is.

Maybe just with regard to how you view your returns, I mean clearly you have very high returns at the moment. Going again into 2006, [inaudible] the rates, you would be looking probably at returns much closer to technical returns. How do you view your dilution of your returns down to technical and do you have a positive or – are you happy going into [inaudible] return or would you rather keep –

We are going to continue to dig deep into whatever product lines. I don’t think we can answer that question, because all I can say to you is we are quite careful about our forward-looking statements and the fact that we will go wherever we believe the profitable business is. We have the diversity of product lines, we have the diversity of geographic locations to enable us to do so.

Okay.

You know, as we clearly stated before what we aim to achieve is a return on equity through the cycles and nothing will deflect us from that. We just have to [inaudible].

Okay, thank you. And just finally with regard to your capital position, I guess the comment was that you have adequate capital for your plans for this year. No talk of further buybacks or anything on that front.

As we noted in our last call, we have $150m allocation that has been approved by the board and we have that at our disposal should we see an opportunity to deploy it.

Do you continue to have some extra capital lever?

I think as I said on the call, we believe our capital base is where it needs to be for our business plans for the balance of the year.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Dan Farrell; Fox Pitt Kelton.

Thank you, good morning. Most of my questions have been answered, but just one quick thing. I think last quarter you said you were increasing your exposure to hedge fund investments. Can you tell us where that stood at the end of the quarter? Did that have any meaningful impact on your investment yield in the quarter?

We are up to $50m at the end of the quarter on a fund to fund investment. Although the fund did exceed the benchmark for the quarter, given the timing of our entry into the fund it did not have a meaningful impact on the quarter.

Okay, great. Thanks, guys.

Thanks, Dan.

Thank you. Ladies and gentlemen, at this time there are no further questions. I would like to turn it back to the management team for any closing remarks.

Well thank you again, everybody. We appreciate you taking the time to listen to us. I am glad you can bear it quarter after quarter. We look forward to next quarter’s earnings call. Thank you again.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude your presentation and you may now disconnect.