AXIS Capital Holdings Ltd (AXS) 2006 Q1 法說會逐字稿

Good day Ladies and Gentlemen and welcome to the First Quarter AXIS Capital Holdings Limited Earnings Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today’s call, Linda Ventresca, head of Investor Relations. Please proceed.

Thank you, Sharon. Good morning Ladies and Gentlemen. I am happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter ended March 31st, 2006. Our first quarter earnings press release and financial supplement were issued yesterday evening, after the market closed. If you would like copies, please visit the Investor Information section of our website, www.axiscapital.com. We set aside an hour for today’s call, which also available as an audio web cast through the Investor Information section of our website, through May 26th. An audio replay will also be available 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 72752201.

With me today in our Bermuda headquarters are Michael Butt, AXIS Capital’s Chairman and John Charman, CEO and President. Before I turn the call over to John, I will remind everyone that statements made during this call, including the question and answer 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 estimate of losses related to Hurricanes Katrina, Rita and Wilma, future gross prospects and financial results, evaluation of losses and loss reserves, investment strategies, impact to the marketplace with respect to changes in pricing models 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 Factor section of our most recent registration statement 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 diluted book value per common share and net income excluding investment gains and losses, net of tax, which are non-GAAP financials [inaudible] within the meaning of the U.S. Federal Securities laws. For a reconciliation of these items for the most directly comparable GAAP financial measures, please refer to our press release issued last night, which again can be found on our website.

With that, I’ll now turn the call over to John.

Thank you, Linda. Good morning Ladies and Gentlemen and thank you for joining us. As I have told you before, AXIS Capital emerged from 2005 with a strong balance sheet and even stronger fundamental risk management practices. Since KRW, we have effective managed our underwriting resources and capital to strategically position ourselves to take advantage of we see as material, positive market opportunities that are developing as we speak.

First, I will report on our strong financial results for the first quarter. And then secondly, I will outline how we will utilize our high standards of client service and underwriting talents to maximize the opportunities that are presenting themselves.

In the quarter, we achieved $195.2 million in net income, yielding an annualized return on average common equity of 25.4%. Net income, excluding investment gains and losses, net of tax, was $205.2 million or $1.25 per diluted common share. This compares with $152.7 million or $0.95 per diluted common share in the first quarter of 2005.

Full converted book value grew by nearly 3% during the quarter to $19.72 per share, despite the rising interest rate environment in the quarter. Under [inaudible] the performance in the quarter, were both excellent underwriting results and investment results. The combined ratio for the quarter was a strong 79.5% and reflected low large loss activity, as well as $61 million in favorable development of prior year of reserves, for short tail lines only.

Our annualized effective investment yield for the quarter was 5.1% and pretax investment income increased by 61% over the same quarter last year. Consolidated premiums were down 3% on a gross basis and 7% on a net basis. Gross premiums would have been flat, were it not for unfavorable foreign exchange movements.

Our consolidated combined ratio at 79.5% was basically unchanged, relative to the same quarter last year. Our consolidated accident year loss ratio of 66.2% was also similar relative to the same quarter in 2005, but included some changes in segmental accident year loss ratios, which I will highlight later.

Favorable prior period reserve development from short tail lines, more than offset increased net loss estimates from Hurricanes Katrina, Rita and Wilma of $35 million, which was an increase of approximately 3%. Based upon the latest information available to us, we redistributed KRW reserves between segments.

Let me briefly discuss the activity in the quarter for each of our segments.

Total gross premiums in our insurance segment were roughly flat. Total insurance segment net premiums written were $275 million in the quarter, down approximately 7% from the first quarter of 2005. Our insurance segment represented approximately 28% of consolidated net premiums written in the quarter.

The U.S. insurance subsegment experienced an increase in gross premiums, up 28.4% due to growth in our property lines of business. And in specialty [inaudible] areas of our professional insurance business, such as our media pro business.

This increase in U.S. insurance was offset by a 16.9% decline in gross premiums written in our global insurance subsegment. Short tail lines, other than off short energy and catastrophe exposed U.S. property generally continued to experience pricing pressure from competition seeking to diversity away from peak catastrophe exposed business. We continue to walk away from poorly priced business. In particular, we significantly reduced the level of terrorism war risk at aviation business written in the current quarter.

Gross premiums written also declined in our marine book, due to delayed renewals, non-renewals and one-time accounts written in the first quarter of 2005 and not repeated in the first quarter of 2006. Gross premiums in our political risk line of business declined primarily due to the cancellation of a significant multi-year contract written in 2005. I should take this moment to remind you, as we’ve discussed before, that the timing of deals coming into the marketplace for political risk business is both unpredictable and lumpy.

Our insurance segment reported a combined ratio of 70.2% for the quarter, compared to 63.1% in the first quarter of 2005. This was a result of an increase in the segment’s net loss and loss expense ratio from 42.6% to 48.4% for the quarter. The insurance segment experienced favorable prior period reserve development from short tail lines of $65.9 million in the quarter. This included a decrease in our KRW estimates for the segment. The insurance segment [inaudible] year loss ratio increased from 62% to 69%. This was largely attributable to an increase in the global insurance accident year loss ratio. In the first quarter of 2005, our historical experienced, combined with our analysis of available reinsurance cover, suggested the probability of re-coverage in our reinsurance program were incurred but not yet reported losses.

Following the hurricane events of the third and fourth quarters of last year and given the market uncertainties surrounding them, in the first quarter of 2006 we prudently took no credit for [inaudible] recoveries on the global insurance excessive loss program. Another feature in this higher loss ratio is the change in underlying business mix. We have more professional lines business, which was counterbalanced, as well by [inaudible] aviation portfolio.

Our reinsurance segment represents an approximately 72% of consolidated net premiums written in the quarter. Total reinsurance net premiums written were $717 million on the quarter, down approximately 7% from the first quarter of 2005. This was largely due to a year-on-year unfavorable foreign exchange movement, stemming from our continental European reinsurance operations. You may recall around 90% of the continental European reinsurance operations at the first of January are at the first of January. Excluding the impact of unfavorable exchange movements, gross premiums for the reinsurance segment would have been flat. As we discussed during our last call, prior to the first of January renewal date, we’ve recalibrated our internal catastrophe models for increased severity, frequency and capital requirements. These changes were made in advance of anticipated material changes in commercial models. We then simultaneously restructured our participation in all affected programs. Business which did not meet our advance requirements were declined. This led to a meaningful reduction in our catastrophe business. This reduction was offset by growth experience in other lines, including our liability and new engineering reinsurance lines of business.

Our reinsurance segment reported a combined ratio of 85.3%, compared to 90.8% in the first quarter of 2005. The reduction was primarily due to a reduction in the accident year net loss ratio driven by limited catastrophe activity in the first quarter of 2006 compared to the first quarter of 2005, which don’t forget included windstorm Erwin.

Our reinsurance segment experienced adverse period prior reserve development of $4.8 million or 1.6 percentage points. This was driven by an increase in our KRW estimates, which outweighed otherwise favorable development in the segment.

In the first quarter of 2005, we experienced favorable development of $4.5 million or 1.5 percentage points.

Turning to investments, our total cash in investments increased this quarter by $213 million to $8 billion, primarily due to cash flow from operations, offset by movements in unrealized losses. Operating cash flow in the quarter was strong at $296 million, but less than that in the same quarter last year as the payment of claims related to the 2005 catastrophes began to weigh on our cash flow. We do expect this pressure to continue through the balance of the year and also expect this will be somewhat offset by reinsurance collects, further interest rate increases and contributions from our alternative asset classes.

I’ll go into some detail now on investment performance.

Total pretax investment income on our investment portfolio for the quarter was $83 million, up 61% over the first quarter of 2005 and up 22% over the fourth quarter. This included $94 million in net investment income and $11 million in realized losses. The increase is due to a larger invested asset base and higher yield, as well as a larger contribution from other investments. As we have weighted our portfolio to be concentrated in the short end of the yield curve, our net investment income benefited from the 225 basis point increases in the Fed funds rate this quarter. However, as intermediate and longer term rates increased, we did experience a $57 million movement in the unrealized loss position of the portfolio during the quarter. Our short duration portfolio, other investments focusing on floating rate instruments and significant cash holdings mitigated the impact of these increases to our capital base.

Although there has been significant movement upwards in U.S. interest rates, we believe that there may be more to come and remain defensively positioned in anticipation of additional increases.

As we have noted on previous calls, it is likely that cash will outperform intermediate fixed income in 2006 and as such, we have continued to focus on shorter maturity investments and others that will outperform as short term rates rise.

Our [inaudible] to other investments increased to $544 million at the 31st of March, 2006 and contributed significantly this quarter by adding $13 million to the quarter’s net investment income. This contribution is attributed to the positive performance of our fund to fund investments and our exposure to senior secured loans. These investments outperformed our high-grade, fixed income portfolios by approximately 230 basis points during the quarter. We continue to seek to diversify away from U.S. dollar denominated high-grade fixed income. Therefore, we expect investments in these areas to gradually increase as we find opportunities that meet our criteria and risk tolerances at this state of our development.

During the quarter, we experienced net foreign exchange gains of $9.3 million. Overall during the quarter, the Euro and Sterling slightly increased against the U.S. dollar. The gain for the quarter represents the frictional costs of trading in and holding balances in long U.S. dollars.

Now, I will wrap up with a discussion regarding the management of our exposures and our participation in the marketplace.

As we’ve told you before, we began to proactively address very early on in the post-Katrina environment our prospects for improved expected returns on equity in all of our catastrophe exposed lines of business, to recognize increased frequency and severity assumptions, as well as capital requirements. We made material adjustments in our models and analyses ahead of the market. This was done across both our insurance and reinsurance segments. The overwhelming majority of our catastrophe exposed business lies in the U.S. ENS markets, the London wholesale market and the reinsurance marketplace. Although these areas of the market have the ability to respond quickly and decisively to this new capacity constrained rating environment, we do not believe that the primary market responded as strongly as it should have done on the first of January. The first quarter though, is certainly not the most meaningful production quarter for our insurance segment.

Since December, we have focused on diligently managing down our exposures on a predetermined, risk by risk basis. This is enabling us to reallocate freed up aggregate to the best and most attractive opportunities at the more critical and later renewal dates.

We have undertaken the exercise to conservatively model the storms of 2004 and 2005 against our current consolidated enforce portfolio. We have incorporated all of our adjustments, made in advance of the model vendor releases and included a conservative evaluation of non-model perils. With these assumptions, we estimate that our gross losses for these storms would have reduced by in excess of one-third with a 2005 year showing relatively larger reductions than the 2004 year. We have consistently maintained that we are prepared to expose around 25% of total capital in a major event, one with a probability of 1 in 250 years.

Utilizing our new enhanced modeling capability and assumptions, we are already materially within these bounds for U.S. wind. We have also prudently dropped annual aggregate exposure to offshore energy business in the Gulf of Mexico to around the $150 million mark. We continue to evaluate capital allocation in light of the extraordinary opportunities that we expect will be presented to us in the months ahead.

Across both our insurance and reinsurance businesses, [inaudible] pricing in the U.S., particularly for wind and included offshore exposures, is much more appropriate and we expect that trend to continue for the foreseeable future. Pricing for the earthquake peril has lagged back as the windstorm peril in terms of reactions to revise risk management methodologies and heighten capital requirements. But it is now clearly showing signs of tightening and improvement and moving in our direction.

Our full year business plan anticipated a dramatic mid-year market dislocation occurring. It would appear that we were right. Our peers will face issues ranging from convergence of model changes to new fundamentally enhanced rating agency tests. As we have discussed already, AXIS has addressed these issues. Consequently, we believe that the market, having to face these substantial challenges creates individual underwriting opportunities for AXIS. We are in a position to fully exploit improving market conditions in the balance of the year, as they arise.

I’d now like to move away from the headline discussion about [inaudible] pricing to other areas of the business, which regrettably have reacted more slowly to the structural shift underway in the marketplace, but show positive momentum, nonetheless, particularly in the U.S. As an example, non-cat exposed property business is reacting positively, but rating levels have not yet improved as meaningfully as we would like at this point. Market forces are at work, however, to change this.

Overall, we continue to see normal competitive behavior in many segments of our liability business in the U.S. The downward pressures which have been mounting in these areas, as we enter the year, seem to be subsiding. And we would generally characterize these lines for us professional lines and umbrella as stabilizing. We are keeping a close watch on the primary casualty insurance line of business, where pricing is under the most pressure. It’s all about the blocking and tackling of risk selection at this point, in these lines of business. And as you’ve heard me say time and time again, we take it risk by risk and day by day.

Our U.S. casualty reinsurance business has stabilized above our target levels, much like our casualty insurance businesses. If constriction of supply is as severe as it’s being talked about in the market, then there’s more opportunity for positive rate movement mid-year, particularly when financial security and [inaudible] ability become ever more sensitive issues. We continue to expect that the developing increased capital requirements, coupled with a better, more realistic determination of risk, could reverse, or at the very least, sustain the current behavior of larger, primary companies and retain more business in the wake of their perception of increased profitability coming their way.

During the first quarter, the overwhelming majority of our continental European reinsurance book renewed. The 2005 hurricanes did not have a material impact on renewals or pricing there. We are now gradually seeing encouraging, but inclusive signs that cat pricing in continental Europe is improving. In other areas, including credit and bond of [inaudible] business, competition has increased by pricing still meets or exceeds our requirements. We have been very, very selective about the risks and the markets in which we choose to participate and this is serving us well in the region.

As an update to our discussion last quarter regarding renewal of reinsurance that we purchase for our property business in the U.S., we are in the process of currently placing this renewal. And as we are currently enacted discussions with our traditional reinsurance trading partners, it would be inappropriate to comment on the current status of our negotiations regarding pricing, terms and conditions. A final reinsurance program will reflect an economic decision consistent with our overall risk tolerances and return goals. However, I am able to say that I am still comfortable that any increased reinsurance costs and retentions will be contained within our budgeted outwards reinsurance costs for the year.

Before I conclude my commentary, as in the last quarter, I want to remind you once again not to assign too much significance to growth in any particular quarter. We still assign high probability to growth overall for the year and expect this to come largely through pricing, rather than material exposure growth, relative to last year.

Going forward, we continue to expect that market hardening will strengthen throughout 2006 and impact the insurance and reinsurance markets more broadly. Our balance sheet and capital position remain strong and every one of our major business stands to gain in the ensuing 12 to 36 months. Our absolute focus remains on building book value meaningfully over the long term.

My remaining comment applies to staffing. Over the last few months we have substantially enhanced the service capabilities of our support functions through a number of key new appointments, including the appointment of Rick Gieryn to the General Counsel position and David Greenfield to the CFO position. AXIS is entering into the next critical stage in its development. The skill sets of our executives must and will continue to keep pace with the demands of our valuable, global underwriting business. With these key management appointments, I believe we will have positioned ourselves appropriately.

Sharon, we would like to open the line for questions and answers, please.

Thank you. [OPERATOR INSTRUCTIONS] And your first question will come from the line of Matthew Heimermann from JPMorgan. Please proceed.

Good morning, everyone. The first question was on the global insurance segment, your decision to raise the [inaudible] number to reflect no credit for IB&R recoveries. Is that something that we can expect [inaudible] can expect going forward? And I just was wondering what drove that decision? Is it something you’re seeing with regards to your relationships with reinsurers or, I guess, why such a cautious view?

Well, we’re naturally cautious, Matthew, as you know. But let me just give you some -- firstly, if you actually look at our global insurance business, our global insurance accident year loss ratio has seen minimal actual loss activity this quarter. And that’s extremely important. And in terms of the way that we have looked at the KRW, KRW losses still remain relatively unpaid. And there’s no incident that has made us actually take a more conservative approach. But we believe that with all the market uncertainties surrounding KRW, it was prudent for us to take a more conservative approach on reinsurance recoveries that may be effective against our IB&R. And as [inaudible] the page developed through the course of this year, we’ll revisit that. But I don’t really want you to read anything materially into it.

And then, you have to think that at the 71 for an accident year net loss ratio, 53 points of that was IB&R related. So, I think that we have a history of being prudent. And as the year develops, we will continue to watch those developments and adjust accordingly.

As far as the specific issues that have driven up the net loss ratios in Q1, you’ve also got the change in business mix, which is affecting it, as well. We’ve taken more FI and FIS business and you know that we’ve pulled out of aviation, a lot of our aviation business in November. And so, that’s resulted in a more conservative stance, because it’s assuming less visibility over loss activity in some of our product lines. And we also revised some of our view on marine [inaudible], rec marine and MGA business, where we have maintained a conservative stance in those areas.

Okay. That makes sense. So, as the data develops, that’s something you’ll revisit. In the reinsurance segment, when you talk about restructuring the portfolio, were there any material changes to the way in which you’re taking risk? I guess specifically, contract form or type?

Well, I think it’s fair to say because I’ve watched a lot of my peers comment about how quickly they reacted to KRW. We found ourselves very lonely in our reinsurance cat underwriting business at the yearend because we had materially changed, as I’ve said in my script, our assumptions and completely revisited on a risk by risk basis, the underwriting that was going to take place at 1/1 through the first quarter. So, the market actually was slow at the first of January, on the reinsurance side. So move in our direction. So, we shared a great deal of cat exposure. We also shared a great deal of pro rata business because it would be illogical for us to have changed our modeling assumptions and knowing that we were ahead of the market to then renew pro rata business of a market that hadn’t increased their modeling assumptions.

So, as far as our position on the reinsurance side, when one was concerned, we did shed a lot of business, specifically to position ourselves for the middle of this year. And as I said in my comments, that we believe there is a significant capacity crunch coming and we are in extremely good shape to be able to take advantage of it. But nonetheless, we did underwrite business, albeit in a reviews level, but it was business that met our new criteria and because of the new exposure information data that was coming through, we were naturally moving up programs, but still essentially maintaining substantial rate on lines, but based on the new data.

Okay. And then, if you have the data handy, just give us a sense in terms of mixed, excess of loss versus pro rata this quarter versus the same quarter last year?

Well, I’ll get Linda Ventresca, if you don’t mind. Because I’m like Captain Cook who normally has these figures at hand, I’m actually trying to -- but if I can get Linda Ventresca to answer, [inaudible] that would be great.

Appreciate it.

I’ll follow up with you after the call.

Yes, that’s fine. Thanks.

Thanks a lot.

And your next question will come from the line of [Rene Mitcliff] from Credit Suisse. Please proceed.

Hi, good morning. You mentioned that on a gross basis, I believe, you losses in ’05 would be one-third the losses this year. Do you have the number, on a net basis, how much it would be?

I didn’t quite catch what you said.

In ’06, I believe you said that the ’05 hurricane losses would not be one-third on a gross basis because you’ve taken steps to reduce your risk profile. Do you have the number on a net basis?

Yes. I’m sorry, but I think I’m going to ask them to actually come back on that one.

Sure, no problem.

Yes. Sorry. Excuse me, I don’t have it. We may be able to by the time you finish. Have you got another question?

Yes, sir. We understand that the reinsurance pricing is increasing in loss affected areas. Are you starting to see price improvement on the primary insurance side, too?

On the primary insurance side, that obviously on any cat related business, there’s been significant change. And again, just as I have made my comments about Bill Fischer with his cat reinsurance book being substantially ahead of the market, at the yearend, our primary insurance guys were in exactly the same position. And so, we let go a substantial amount of business going into 31-12, as well as into the first quarter, because the market had just not moved in our direction. But mostly that’s positioning and we freed up an awful lot of aggregate, which can be used at much higher returns. And that’s the real key to it. Because, as I said, the first quarter is not a big quarter for our primary business. So, by freeing up a lot of capacity at the end of last year and going into this year, we are able to get a much better return on the capacity we’re putting out into cat related business, going into the middle of the year and towards the end of the year.

One last question. Could you color as to why the growth in the U.S. was so strong? Would that be because you expanded some programs here in the U.S. last year, in the middle of last year?

Well, I think that we’ve grown in our FI and FIS professional lines business, noncommercial. Those are [inaudible] businesses. But as well as that we’d like to think we have a very efficient underwriting operation in the U.S. and our hit rate has not changed at all. We’ve certainly been more efficient in actually seeing a much greater volume of business. And so naturally, the float would increase on the back of increased pricing.

Bill Fischer has just passed me a note in answer to your first question. But it’s close to the same.

Thank you.

Okay. Thank you.

And your next question will come from the line of Adam Klauber from CCW. Please proceed.

Good morning. You’ve mentioned you expect the conditions in the primary market to be good and there [inaudible] more business, [inaudible] later in the year then. When would [inaudible] end we saw this quarter? What about on the reinsurance side? What are your views of the Florida market going into the July 1 renewal season?

As I said, there’s a huge capacity crunch. It’s been building really over the last 60 to 70 days. It’s going to be a very difficulty renewal season. I think reinsurance businesses are acutely aware of the need to look at the capacity that they’re putting into the market and the more appropriate returns they should be expecting for the risk that is being taken. Because the quality of the base we’re getting is so much more enhanced. And then if you look at the increased modeling assumptions, showing the reality and the severity of the risk, I think it’s going to be a very difficulty, but very rewarding, I hope, mid year for the reinsurance market. And it’s not just Florida. It’s all coastal wind exposed areas. But the market is being very disciplined. It’s taken, if you don’t mind me saying so, four of five months to really begin to find a greater consensus as to the levels of rating that are going to required for capital to be used in those regions. It’s a much more disciplined marketplace. I think it’s much more realistic and I think it’s much more appropriate from a shareholders point of view in terms of the potential rewards and earnings that come out of it.

Within the Florida market, if I understand correctly, reinsurers either provide protection above the fund or below the fund. Do you have any appetite to write below the fund on a reinsurance basis?

Not really.

Okay.

There’s a broad enough selection for us to participate in the alpha levels. That lower level, I’m not necessarily sure whether the risk reward is sufficient. All that glistens doesn’t necessarily mean gold in our business, Adam, as you know.

Also, in the London market, obviously we’ve seen pretty intense competition in some of the mix [inaudible] aviation war. Do you see any into that or is that just getting more competitive?

You know, you’ve heard me over the last quarter about how astounded I was that we were the only underwriting business that largely withdrew from the aviation market, the whole market. Because the reported reductions, which were just rate reductions, were actually no where near the reality of pricing reductions. Because if you take -- and we will look at exposure. That’s how we look at risk. If you actually look at the exposure that the airline [inaudible] underwrites were faced with at the first of November and then look at the pricing reductions that they gave off that increase exposure, the reductions in that market were between 30% and 50%. Now, to a certain extent, that’s completely irrational to me as an underwriter. You cannot change pricing in one year, to that extent, especially the industry was sitting there thinking, and knowing, that the three hurricanes were going to cause significant capital erosion. And so, to give that cash away was just nonsensical. A week before the renewals came to the market, the market was expecting effect to a 5% increase in pricing on those businesses and the market caved, for some unknown reason. But I am surprised that that nobody really has picked up on that. But the real issue is the fact that the primary underwriters did not get a break from their reinsurance marketplace. You know, if you go into the aviation reinsurance market, you do not get cheap reinsurance. So, there wasn’t a significant weakening, price weakening on the reinsurance that was applicable to that business. So, these guys are just eroding their net margin even more. And they’re just hoping, if you don’t mind me saying so, that there won’t be any losses. But the attritional losses in the aviation market normally are around $1 billion and you’re now looking at a market income of just under $1.5 billion. And you think if the Airbus 380 coming on board with $4 billion of liability and the whole value, it just is inconceivable that a market can be comfortable with that level of premiums for the risk it’s assuming. Sorry to [inaudible] with that, but I just -- and it’s going to be what it’s going to be. But we are not going to trade -- I’m not here to subsidize -- AXIS is not here to subsidize commercial industry. Because I believe that’s what you’re doing at those pricing levels.

thank you. And one last question. You’ve obviously done a lot of catastrophe management, reducing your loss exposures. Could you give us an idea on a percentage basis how much you’ve cut down your lines in reinsurance versus insurance wind expose [inaudible] business?

I actually don’t have the number. But all I can say to you is it is significant in terms of where -- we have set on base, the primary and the reinsurance side, we set ourselves targets to reduce our aggregates by about one-third to 40% by the first of July and we are well on track to achieve. And as I say, that gives us extremely good positioning in terms of being able to opportunistically trade in the market for the next several months.

Thank you very much.

Thank you. And your next question will come from the line of Dan Johnson from Citadel Investments. Please proceed.

Good morning. Thank you for taking my questions. To lower your aggregates by, let’s just call it one-third, at a time when the model outputs is going up significantly, you’d have to obviously do some meaningful exposure reduction underneath that. Can you give us a little bit of color about what’s going on with the Gulf region P&L and exposures that you’re looking to take for this wind season versus last season, in light of what could be sort of 100% sort of upward model adjustments?

The reality is that just -- Bill Fischer can probably answer a bit more technically than I can. But the reality from my point of view is the fact you’re right. But if you look at the new modeling that’s taking place and the exposure assumptions that we had last year and this year, it probably has increased by at least 100%, in terms of exposure. So, for us to reduce our P&L or aggregate exposure to that region by 30% to 40%, you can see we have had to completely restructure our portfolio and we’ve been very diligent in that. Bill, I don’t know if you --.

Dan, I would say that that 100% over is your compounding and things that, as respects to reinsurance portfolio, don’t 100% add up to changing P&L. And the frequency changes, in particular, are not necessarily additive for an excess of loss reinsurance account. In our book, our 250 year P&L’s we’ve been modeling since late fall, along side non-model change and model change and at a 250 year level, the modifications of the portfolio are around 15% to 20%. At lower return periods, 30%, maybe 35%. So, it’s not really 100% change to an excess of loss reinsurance account because those changes don’t all move into the excess portion of the cover. So, that’s not entirely accurate. It’s more accurate for a ground up change in exposure.

The accurate if you [inaudible].

[Inaudible] on the insurance side.

And that’s on an excessive loss book.

So, as it respects to the Gulf and anywhere else frankly, we’re demanding to be paid for model change and the de-leveraging that we’re being faced with in the [inaudible] season. And that’s what we’re trying to do. And I think if you make your normal visits down there and speak to the marketplace about who’s pushing the hardest to try to get that done, I think you’ll find our name amongst that list of players.

Great. So, does that impact the appetite for providing quota share for take out companies? I don’t recall how much of your business --.

We don’t have a lot of that and that’s 100% it does. I mean, if we have any appetite for proportion, it would be related to surplus lines players who are only marketed can effectively change rate instantly and they are doing so, our people as well as others. In the personal lines marketplace, by the nature of the filings and the approvals that have to go on, simply can’t keep pace with that. I think the regulators, certainly in Florida and other locations are reacting to that and allowing insurance costs to be passed on, much more readily than they have in the past. But it’d be a poor use of our capital, at this point, to allocate to proportional reinsurance contracts for lines of business in particular, that have rate regulations that are not keeping pace with the change in pricing in the environment that we’re operating in right now.

Great. Sort of a real quick numbers question. The $66 million development, any chance to be able to split that between the global and the U.S.?

Yes. Let me have a look. $51 million was from global and $15 million was from the U.S.

Great. And finally, the last question, just going back on the issue of taking credit or not taking credit for recoverables. AT the end of the fourth quarter, you gave us a listing of your top reinsurers and in fact then it was Suisse, Montpelier and Hanover were the top three. Is there any reason why that sort of percentage listing, the way you gave it to us there -- I mean, wouldn’t we apply that or expect to apply that to IB&R as it turned into actual case reserves over time?

I really come back to the fact that I think because the three hurricanes had such an extraordinary impact on the industry’s financials, that we felt that it was just appropriate to not, at this stage, take credit for those potential recoveries. We believe there will be reinsurance recoveries against the IB&R, but we’re not comfortable, at this moment, formulating them.

Fair enough. Thanks for taking --.

I think we are being prudent. This ain’t a real big technical deal about it. But it just -- the scale of the losses, as well as the continuing uncertainty within some of them, and I think it’s prudent for us to be conservative, going into the early part of this year, until we’ve got better data going through. I know that is the claim as the [inaudible] develops.

I mean, the estimates --

Hey, it’s only 20%.

But the incurred seem to be -- I mean the industry seems to be able to handle the incurred, as they are to date. Would you anticipate that the incurreds are going up?

Well, they’re moving around a bit, if you don’t mind me saying so. We’ve had some movement between our primary and our reinsurance businesses. So, it’s still pretty dynamic within those numbers. The gross number has not moved at all. And our net number has hardly moved. So, you know, I think that -- but within those numbers, there is a lot of movement and there are some complex claims issues being addressed. So, it does lend itself to be improving.

Thank you very much.

You know, we’re comfortable about the level of our reserves, allocated to KRW and we’re pleased that they seemed to have stabilized. But still there is movement within.

Okay. Thanks.

Thanks.

And your next question will come from the line of Alain Karaoglan from Deutsche Bank. Please proceed.

Good morning. Congratulations on a very good quarter. John, is there a possibility -- can you believe there’s a very capacity shortage that’s coming, due to a conversation of factors. Is there a possibility that the capacity is so tight and the price becomes so expensive that some of the clients may choose not to buy coverage and hope, in the same way as the aviation market, and this way it doesn’t translate into premiums?

Well, that’s always -- yes, but at the end of the day they have to deal with rating agencies and they have to look at cat adequacy and there’s a trade off. But let’s not get carried away about the scale of the pricing increases. What the market is doing is probably moving back to pricing that is appropriate. And as Bill was saying earlier, the underlying [ceedence] are either in two positions. They’re either surface lines people or they’re carriers of the domicile in Florida that actually are stuck in terms of their ability to increase price and reposition their portfolio. But self-insurance is always something that is going to be considered. But I actually don’t believe there is going to be a substantial shift to self-insurance or much, much greater -- you may see a greater retention. But at the end of the day, the companies will still buy more because they forget the models have shown much greater exposure. And so, there’s a trade off. They will have to naturally increase their retentions. But at the end of the day, their spend is going to significantly increase into the market as well, because they need to cover their exposure.

Okay.

They’re not different from us. They need to measure the risk in the same way that we do.

On the European reinsurance front, John, do you see over the next 12 months -- a lot of people have complained about the pricing not moving much there. Do you see over the next 12 months, has the model become more [inaudible]? You said five months for the U.S. market to get in the right range. Do you foresee that market improving over the next 12 months?

Well, I think you have to look at the mix of business. But I think if you’ll heavily pro rata, you’re going to have a different movement in markets than -- well, don’t forget, most of our business, the vast majority [inaudible] loss and then we tend to be -- we’re not generalist. We’re quite specialist in our approach, whether it’s French motor or credit and bond or engineering business. We’re a lot more specialists so we don’t have, what I would consider to be the conventional breadth of some of the major European reinsurance players. What surprises me about Europe is that they do seem to march to their own drum beat. And I would have hoped that they will be subjected to the same capital allocation issues that are occurring in the U.S. and in Bermuda. And we know that there are model changes and it should actually lead to increases in pricing. But the major European reinsurance companies are not prone to moving at the same pace, shall we say, as we are over there.

Great.

I don’t consider it to be appropriate [inaudible]. But there’s not a great deal we can do about it because they’re giants. But we move around them.

Thank you very much.

Thank you. And your next question will come from the line of Ron Bobman from Capital Returns.

My question has been answered. My questions were answered. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] And your next question will come from the line of Bill Wilt from Morgan Stanley. Please proceed.

Good morning. Hi there. On this tactical decision to withhold capacity for the June and July ’06 renewals, can you contrast how the capacity that you have available today for the ’06 renewals compares to the amount of capacity that you had available at the same time last year?

Are you talking about going into the last six months of the year or what are you --?

Going into the last six months of the year. You made it very -- as you’ve described, a very clear, tactical decision to withhold some of your capacity, to not fill up some of your aggregates and the January renewals that you had last --?

You know I said, Bill, that the way that I’ve always look at exposing our capital base is to use that 25%, give or take a bit, number. And I think we have significant mileage from where we will be at the first of July through to that number. And we have been very deliberate. We were ahead of the curve from the rest of the market and we will take advantage of it, as long as the pricing continues to strengthen and we believe it’s appropriate the risk reward for our shareholders can be met.

That’s very helpful and is there a way to contrast your position today, kind of visa vie that P&L to last year at the same time?

Well, the reality [inaudible] and while I think is much reduced.

That’s helpful. Thank you.

And your next question will come from the line of Jay Cohen from Merrill Lynch. Please proceed.

Good morning. A question on the investment side. The other invested asset, can you talk about what the actual return was for those assets in the quarter? I’m just trying to get a sense of what was maybe somewhat unusual for that of the quarter.

I’ve got Roger Thompson here who is not expecting to answer, but I will get him to answer. Roger?

I -- it was about -- non-annualized, Jay, it was about 300 basis points.

That’s probably not too far off what you might have expected?

Non-annualized.

Okay.

It was about 3%.

Right.

Is that okay?

That’s great. Thank you.

Well, it was a lot quicker than I would have answered it. Anybody else?

And your next question will come from the line of Mr. Sam Hoffman from Adeock. Please proceed.

Good morning.

Hi, Sam.

How are you?

I’m good. Thank you.

I wanted to clarify a couple of comments from before. The fact that you chose not to grow premiums in this quarter and actually reduce your property and capacity reinsurance in favor of casualty and professional lines, does that reflect higher rating agency capital requirements primarily? Or are you mainly keeping your [inaudible] for July 1st?

Completely and totally about positioning ourselves, being very proactive with our portfolio. You know, we portfolio manage on a daily basis. Strategically we took a position that because of the capacity that we identify would happen and we took that decision in November of last year. That that capacity crunch was likely to happen in the middle of this year. We wanted to be in the very best possible position for our shareholders to be able to take advantage of it.

Okay. And how close are you to the limits of your capacity in the various regions as of now? And how much capital do you have in excess to write at July 1st? And is it possible that you would chose to raise more capital?

We have enough mileage between now and the end of the year.

Is it possible that you would choose to raise more capital?

We have sufficient capital at this moment and time.

Okay. And my last question is, on your reinsurance business you booked a loss ratio of 65%. Were there any major losses in the quarter?

No.

And so why was your loss ratio so much higher than many of your competitors?

No. Well, I can’t speak for my competitors, I’m afraid.

Okay. Thank you.

Thank you, Mr. Hoffman. And your next question will come from the line of [Ian Gutterman] from Adage Capital. Please proceed.

Hi, John. Can I ask you to --?

Hi, Ian. Good morning.

Hi, how are you? Can I ask to clarify the [accident], year end Global Insurance one more time? I think I misunderstood part of the explanation. I guess where I’m confused is, if you’re concerned about recoverables from KRW, why does that impact your view of the [action] year going forward? Shouldn’t that be an increase in your recoverable provision for the ’05 losses instead?

I can ask Clare Moran to give you a detail.

Hi. See, what happens in the reinsurance program that we have when we’re [inaudible] also provides protection in 2006. So, what we’re doing is looking at the reinsurance protection saying with the movement that we’re seeing in KRW at the moment, we don’t think it’s prudent to take any more recoveries on those reinsurance programs. But obviously this could well change as we see [inaudible] storms coming across.

Okay. So, they’re multi-year coverage, is that it?

Not multi-year coverage, but they don’t impact 1/1. They [inaudible] March 1st.

Okay.

[Inaudible]. Okay. That makes sense. Thanks.

Thank you. And your next question will come from the line of Mr. Josh Smith, PIAA. Please proceed.

Just a quick question. How you doing? A quick question regarding a lot of the -- there’s been a lot of talk about the hardening markets and a lot of potential growth is predicated on that continuing. What happens --?

Well, it’s not just on -- sorry, forgive me, Josh. It’s not just on that. You’ve got to remember that I say time and time again, that we are globally diversified, as well as product line diversified business, both primary and reinsurance. So, while everybody is focusing in on the kicker, [inaudible] comes through increased cat pricing, we are continue to build out our diversified platform. And we find opportunities throughout our portfolio to continue to build our book.

No, I understand but let’s say that cat pricing does pull back and in fact, all pricing does pull back. Would you be in a position where you were actually -- I know there was a question about you having to raise capital. Would you be in a position where you actually had excess capital and would you be looking to turn any of that back?

That’s just impossible for cat pricing to pull back for the foreseeable future, let’s deal with that. We believe that within [inaudible] modeling, not only for cat. I think there’s a much greater management attention to underwriting taking place globally. And that is going to spread into the non-cat lines. Slowly, much more slowly than cat, but it’s happening. And so, what we see is an increase in pricing for those non-cat lines, but on a much more moderated basis.

Okay. Thank you.

Thank you. Ladies and gentlemen, this concludes the question and answer session. I would now like to turn the call over to your host, Mr. John Charman for closing remarks.

Thank you, everybody for being so kind to me this morning and I thank my colleagues for helping me. And we look forward to trading very strongly in the second quarter. And we look forward to the rest of the year. Thank you.

Thank you for your participation in today’s conference. You may now disconnect. Have a good day.