AXIS Capital Holdings Ltd (AXS) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2006 AXIS Capital earnings conference call. My name is Menosha, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's conference. (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.

Thank you, Menosha. Good morning, ladies and gentlemen, I'm happy to welcome you to our conference call to discuss the financial results for as AXIS Capital for the quarter ended June 30, 2006. Our second 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 is also available as an audio webcast through the Investor Information section of our website through September 1. An audio replay will also be available through August 18. 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 122-1860.

With me on today's call are Michael Butt, AXIS Capital's Chairman; John Charman, CEO and President; and David Greenfield CFO. 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 fact 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 growth prospects and financial results, evaluation of losses and loss reserves, investment strategies, impact for 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 is non-GAAP financial information within the meaning of the U.S. federal securities laws. For reconciliation of these items to the most directly comparable GAAP measures, please refer to our press release issued last night which can be found on our website. With that, I will now turn the call over to John.

Thank you, Linda. Good morning, ladies and gentlemen, and thank you for taking the time to join us. I'm going to begin by making some opening remarks and then to review our financial results, I will turn the call over to David Greenfield who I am delighted to welcome to AXIS. Following David's review, I will discuss current market conditions and our exposures.

In the quarter we achieved $223.4 million in net income, yielding an annualized return on average common equity of 27.6%. We have achieved a 7.8% increase in diluted book value per share since the year end, despite the mark to market impact of rising interest rates. Relative to the same periods last year, net premiums were up 8% for the first half of the year and 33% for the quarter. Operating income was $232.2 million, up over 36% from the second quarter of last year. And operating earnings per diluted common share was $1.42, up 27% over the second quarter of 2005.

Our underwriting results were strong and healthy, with a combined ratio for the quarter of 78.3% and a combined ratio for the first half year of 78.9%. Increasingly our investment results are contributing to earnings with pretax net investment income up over 58% from the same quarter last year and up over 67% for the first half.

As I evaluate these results against the fundamental strength of the underwriting portfolio, I am particularly pleased. Following our tax bill positioning going into this year, we are achieving growth from better quality, better rated business while substantially reducing exposures and we are exactly where we set out to be.

I am delighted that we have been able to secure the service of David Greenfield. He is more than competent. He has already made a strong and positive impact within the Company. We get on the like a house on fire and he has a great future within this great company. With that, I will turn the call over to David to discuss our financial results in the quarter.

Thanks, John, and good morning, everyone. I would like to add to John's comments that I'm very excited about joining AXIS and about applying my industry and financial experience to further build on this great franchise. As I've just finished my first week here, but I am off to a good start. I have been looking forward to participating on this call with all of you and I look forward to working together with you.

As John mentioned, we're pleased with our result for the quarter, which produced an after-tax operating income of $232.2 million, or $1.42 per diluted share, a 36% increase from second quarter 2005 after-tax operating income of $170.9 million, or $1.12 per diluted share. Net income which includes realized losses and gains was $223.4 million, or $1.37 per diluted share and represents a 29% increase from the $172.8 million in the second quarter of 2005.

For the first half of 2006 after-tax operating income of $437.4 million, or $2.68 per diluted share, was up 35% from the $323.7 million, or $2.07 per diluted share in the first half of 2005. Net income for the first half was $418.6 million, or $2.56 per diluted share, and was up 29% from 2005's $324.6 million, or $2.07 per diluted share. These results include substantially increased investment income reflecting year-to-date combined ratio of 78.9% and translate to an annualized year-to-date ROE of 26.4%.

Turning to the business, we wrote gross premiums written almost $1 billion in the quarter are up almost 30% over last year's second quarter. Gross premiums written of $2.2 billion for the first half of 2006 were up 9.9% over 2005. Our opportunistic approach to both the insurance and reinsurance markets following the hurricane activity of 2005 has impacted the business flow between first and second quarter and, therefore, focusing on the six-month figures is important.

You'll note that our gross premiums in our insurance segment are up 22.7% in the quarter to $629.6 million and 13.2% for the first half to $1.07 billion. Focusing on the first half in the insurance segment, gross premium growth of 13% emanates principally from professional lines business where we added product capability and expanded geographic presence.

Catastrophe-exposed property and offshore energy lines which have experienced substantial price improvement following last year's hurricane activity and increased flows of political risk business. This growth in the insurance segment is offset by reductions in terrorism, war and aviation where we continue to walk away from inadequately priced business and primary casualty business where rates are softening in single digits.

Gross premiums in our reinsurance segment are up 43.8% in the quarter to $365.8 million and up 6.8% for the first half to almost $1.1 billion. Again focusing on the first half, gross premiums are up largely due to increased penetration of the U.S. professional lines reinsurance marketplace, increased marketing efforts within our U.S. general liability and umbrella excess business and new engineering business in Continental Europe. The segment's first half gross premiums include upward adjustment premiums of approximately $44 million, principally from property reinsurance, compared with downward adjustments of approximately $7 million in the first half of last year.

Growth in the first half for the reinsurance segment was offset by $46 million in adverse exchange rate movements. Also the shift of property related premiums to catastrophe excess of loss business where margins were much more compelling than those for proportional business is reflected in these premium figures. You will recall that we held back cat aggregate in our reinsurance segment during the first quarter as cat pricing in many instances had not improved enough at that time. Cat pricing began to more meaningfully reflect the impact of increased expected losses and rating agency capital requirements as we headed into the second quarter.

We wrote more excess of loss catastrophe business in the second quarter of this year than in the same quarter of last year. Growth in this segment's catastrophe line in the second quarter of 25.6% demonstrates the impact of holding back capacity in the first quarter when cat premium declined relative to the comparable period in 2005. The 35.2% growth in the quarter over the comparable 2005 period in the property line, which includes risk excess of loss and pro rata business, came almost entirely from adjustment premiums.

Moving onto net premiums written in the first half consolidated net premiums written rose 8.1% to $1.81 billion from $1.68 billion for the comparable 2005 period. Slower growth in net premiums written as compared with gross premiums in the first half is largely explained by a decrease in the net to gross ratio in our global insurance subsegment of 3.7 percentage points, as compared with the same period last year. As a reminder, we purchased reinsurance here opportunistically throughout the year as long as we see real value in it.

Growth in consolidated net premiums earned in the first half of 5% over the comparable 2005 period to $1.31 billion is in line with growth and gross premiums earned of 5.9%. Growth in consolidated net premiums earned in the quarter of 8.8% over the same period last year is also broadly in line with growth in the consolidated premiums earned of 7.6% over the same period last year.

The consolidated combined ratio in the quarter was 78.3%, an increase of 3.8 points over the same period last year. This included a three point increase in the loss ratio to 54.8%, due to lower level of favorable reserve development this quarter over the second quarter of last year. The consolidated accident year combined ratio, which excludes prior period reserve development in the quarter, was 87.8%. This is in line with the consolidated accident year combined ratio of 86.3% in the same quarter last year.

Underwriting results in the quarter benefited from favorable reserve development of $64.5 million, which is a lower-level than that of the second quarter of last year. Favorable reserve development excluding Hurricanes Katrina, Rita and Wilma was $83.5 million, a 12.8% increase over the comparable 2005 amount and relates entirely to short tail lines from the 2002 through 2005 accident years.

Regarding KRW, adverse development this quarter was $19 million, a 1.8% increase over our estimate at March 31. Over the last six-month, KRW adverse development represents only a 5% increase relative to our year-end estimate. Our KRW total gross loss estimates for each of our segments have remained very stable since year-end. Changes in our net loss estimates have resulted primarily from changes in individual loss sizes, movements among storms, and the resulting impact on application of reinsurance.

For our reinsurance segment, the recent developments have been attributable to increased reserves on a limited number of cat aggregate policies. Of the total exposed limits, we have currently reserved almost 90% of these limits. Furthermore, the remaining limits in coverage apply only to Rita and relate to onshore property risks, therefore holding much less potential to deteriorate than Katrina and Wilma.

While our global insurance in U.S. insurance exposures have seen very little gross incurred development, these segments would in the event of a gross loss development benefit from meaningful remaining reinsurance coverage. This applies to all hurricanes in both segments with the exception of global insurance Katrina gross loss estimates which in any event have remained almost flat since year-end.

Our claims teams continue to be actively involved in resolving significant claims to the industry. They are constantly monitoring and realistically assessing any potential for deterioration across our various lines of business. They are key participants in a number of market groups and receive periodic updates regarding legal and regulatory changes that may affect AIXS and the market, so should any specific deterioration seem likely we'll be well placed to react quickly.

Finally, we are holding a $55 million gross IB&R and a $32 million net IB&R specifically established for KRW.

Moving onto the investment portfolio, total cash investments are now nearly $8.3 billion, an increase by 4% for the quarter and 7% from year-end. Cash from operations was $375 million for the quarter and $671 million for the first half, down $412 million and $856 million, respectively, in 2005. Loss payment for the 2004 and 2005 catastrophes account for substantially all of the reductions.

We have continued to allocate our positive cash flows into short duration and floating rate securities, such as cash and funds investing in senior secured loans. As interest rates have risen, these securities have outperformed intermediate and longer duration fixed income. Additionally, we have modestly increased our exposure to hedge funds in 2006 through new investments made in funds of funds. Our allocations to other investments have reduced to six-month return of 3.5%.

Our overall duration is 2.6 years including operating cash and other investments. We have ample flexibility to extend portfolio duration at the appropriate time, given our quarter end net cash position of 19.5% of total cash and investments. At this time, we believe this opportunity will arrive sooner rather than later.

Our pretax net investment income increased in the quarter over the comparable period 2005 period by 58% to $91.7 million. This increase is due to larger investment balances, higher yields, and increased contribution from other investments. We have benefited from rate increases over the past 18 months as our large cash positions immediately earned higher income with each 25 basis point increase in the Fed funds rate.

Our increased allocation other investments resulted in investment income of $5.5 million during the quarter, compared to $3.1 million in the same quarter of 2005. Realized losses for the quarter were $9.7 million, reflecting portfolio turnover in a rising interest rate environment. For the first half of 2006 our pretax net investment income increased by 67.2% over the comparable 2005 period to $185.2 million, also for the reasons noted previously. The yield earned on our fixed-income portfolio increased from 3.9% to 4.6% over the period, in line with increases in U.S. fixed income yields.

The allocation to other investments produced income of $18.9 million for the first half of 2006, compared to $4.2 million for the comparable 2005 period. While we expect to earn higher returns from these investments, they tend to have less stable earnings pattern and we would caution against extrapolating this income over an extended period. Realized losses for the first half of 2006 were $20.7 million, again reflecting portfolio turnover in a rising interest rate environment.

We had $18.9 million and $28.2 million in foreign exchange gains during the quarter and year-to-date respectively. These gains were primarily a result of appreciation in the exchange rate between sterling and euro versus the U.S. dollar. While we attempt to minimize the impact of foreign exchange movements on our income, we do maintain exposure to sterling and euro from business written and assets held in those currencies.

Returning to the balance sheet our total net reserves stand at $3.4 billion. Excluding KRW, 81% of these net reserves are IB&R reserves. Total shareholders' equity increased 8.7% to $3.8 billion since year-end, despite an increase in net unrealized losses of $90 million. Diluted book value per common share increased by 7.8% during the quarter to $20.68 and total capital to deploy in our franchise stands at $4.3 billion. With that, I would like to turn the call back to John to discuss our current market conditions as well as risk management at AXIS.

Well done, David. All in one breath as well. Ladies and gentlemen, I would like to open by discussing what we're seeing in our reinsurance business. As you know by now, the property catastrophe market in the U.S. has experienced dramatically increased pricing and reduced capacity for wind exposed regions. This has come about as a result of improved catastrophe models reflecting the expectation of higher losses going forward, as well as rating agency model changes and their immediate impact on capital.

Despite the slow response at the market at the first of January renewals, the property cat market during the second quarter generally demonstrated more strongly the tightening and improvement required to compensate for increased expected loss and capital requirements. While Northeast and Southeast wind materially hardened, California earthquake and Gulf wind pricing, particularly in Texas, left us disappointed. Our current view is that cat pricing will continue to harden through to the first of January '07 renewals. These renewals will reflect both higher pricing and the anticipated continuing shortage of cat capacity regardless of loss activity during this hurricane season.

Following the first of July renewal date, our property cat portfolio is pretty much in place. However, we still have capacity to participate in shortfalls or second or third event covers for example if the additional pricing is attractive enough. The most dramatic impact in our property cat business was seen at the first of July and, therefore, is not reflected in the figures for Q1 or Q2, but we will begin earning in Q3.

For our casualty and professional lines treaty reinsurance business, we are benefiting from a rating environment which is stabilized at attractive levels. There has been some marginal downward pressure on better performing accounts, but most intended to renew at or near expiring. Accounts with deteriorating loss experience renewed at higher prices and/or with more restrictive terms and conditions.

With the exception of one account, we have only lost casualty reinsurance business where we felt the terms didn't make economic sense for us to continue to participate. We have been able to grow our business in these lines for a few simple reasons. First, our rating and balance sheet strength has presented us with good opportunity as the flight to quality has regained momentum following the 2005 hurricane season. Secondly, we are still not quite as mature a market as many of our competitors and have been having success this year in increasing our participations on desirable accounts and broadening our marketing activity to obtain targeted new business.

Now, I will move onto our insurance business and I will start with the property area. With respect to the underlying portfolio in both our global insurance subsegment and our U.S. insurance subsegment, we began to address the concept of increased expected loss early on, with our own internal adjustments, addressing higher frequency and severity. Growth in both quarters has consistently come from substantial pricing improvements for U.S. natural perils exposure.

Since we began our exposure reduction plan in our insurance operation, RMS 6.0 has been introduced and we immediately implemented an even more aggressive exposure reduction plan. We have reduced aggregate exposures by nonrenewing inadequately priced business and reducing limits. Going into the third quarter, it would appear that RMS 6.0 has not been universally embraced by competitors of our primary operations. Therefore, market conditions are not as appropriate as they ought to be but we are fine with that for the time being.

For example in our U.S. insurance operations, we have declined at the first of July renewals date more property business than we initially would have thought necessary a few months ago as the pricing for this business in the primary marketplace in many instances was still not adequate. We believe that many primary companies still have not digested the impact of the increased cost of their recent reinsurance renewals.

Consequently, we believe that these companies will have to move quickly to reflect in their base rates where possible not only the reality of RMS 6.0 but also increase reinsurance costs. This is where participation in the excess and surplus lines market has great advantage. We expect momentum here to build slowly through the third quarter, but importantly more strongly into the fourth quarter. Again, we are strategically positioning ourselves by taking into account the rapidly changing dynamics of the market.

Our excess and surplus lines insurance operations certainly have the ability to work any related reinsurance costs into their base rates. As the year progresses, we would not be aggregate constrained because of our early and substantial actions to restructure our property portfolio. We expect the opposite will be the case for much of our competition.

Currently international property business is under severe pricing pressure as competitors attempt to diversify away from U.S. natural perils at seemingly any cost. We would expect to see opportunities in this area going forward when the global property marketplace embraces a more balanced and professional approach to portfolio management.

With respect to offshore energy business in the Gulf, we continue to see rate increases of up to 300% to 400% against the backdrop of substantially reduced line sizes, higher deductibles, higher business interruption waiting periods, and overall substantially reduced natural peril exposures. Outside of the Gulf we are seeing rate increases for these exposures in the order of 15% to 25%, with loss affected accounts significantly higher.

Moving onto other lines in our insurance segment, we still see many areas of the aviation market under continuing significant pressure and you will recall that we walked away from a substantial amount of this business in the fourth quarter of 2005. In aviation war business, large account pricing is down in the neighborhood of 10% and smaller accounts in excess of that. Rating for terrorism business in major metropolitan areas in North America is stable, while international business has been under more pressure. Accordingly, we have rebalanced this portfolio to take this into account.

We continue to attract a good deal flow of high-quality political risk business. The nature of our current portfolio, as well as experience today, is demonstrating that our risk selection has been strong. The timing of such transactions is somewhat lumpy and unpredictable throughout the year, and quarter-to-quarter volume comparisons are not particularly meaningful.

For our commercial D&O book in London, rate reductions are in the low single digits. In the capacity-driven, high excess Bermuda D&O book, we're seeing rate reductions of up to 5% as well as an appetite on the part of major corporations to buy increased limits. Pricing in our professional lines book in the U.S., which includes both E&O and D&O business, has generally been flat and remains at attractive levels.

This has also been the case in our casualty and umbrella lines. Overall, we continue to see normal competitive behavior in the nonproperty areas of our U.S. insurance business. Whilst there has been downward pressure in broader segments of the market, we have been able to hold the line in our more selective niche areas. We are targeting specialized business largely insulated from the downward pressure introduced by expansion of appetite on the part of standard commercial carriers.

Now I would like to share some commentary with respect to current exposures and risk management. To begin with, I will talk about our reinsurance and insurance segment separately. In our reinsurance business, you're well aware that we were of the opinion that cat pricing did not harden enough at the first of January of this year and therefore we deliberately held back capacity. Through the first of July renewals we have written in our reinsurance segment roughly the same amount of cat excess of loss premium as we had by this time last year.

However, the profile of a portfolio this year is substantially more attractive than last year's portfolio. Our average attachment point is up considerably from what it was last year, repositioning us further away from smaller cat events such as Rita. The cat exposure in our risk excess of loss book is down even without considering the significant reduction in the underlying coverage both with respect to limit exposed and natural perils coverage.

We have also reduced property proportional business in the U.S. by more than 50% as of this type of business currently presents much less compelling margins than catastrophe excess of loss business does. All of this is against the backdrop of the underlying portfolio improvements that have taken place, resulting in less exposure being ceded to contracts than in prior years. Overall, we have substantially deployed capacity in the Southeast where our reinsurance business without overbalancing the portfolio to U.S. wind. We continue to have ample capacity available globally.

Moving onto our insurance business, we have benefited from our proactive and real-time risk management, allowing us to substantially restructure the property portfolio. This gave us a good degree of flexibility in our approach to the property reinsurance renewal protecting our U.S. insurance business. We have successfully completed this renewal in the last few weeks.

In this renewal repurchased cat reinsurance of this year for the same dollar limit as last year and increased our retentions at the bottom of the program to roughly $100 million this year, from around $50 million last year. We believe this represents a conservative reinsurance purchase relative to prior years, particularly in light of our substantial aggregate reductions in the underlying portfolio.

To give you a sense for what this means for the consolidated portfolio, we have updated the exercise of modeling the storms of 2004 and 2005 against our consolidated in force portfolio, including business written on the first of July with the benefit of our new reinsurance programs. For the 2004 events, mindful of the frequency characteristics of the 2004 hurricane season, our net losses were reduced by about 20%. However, for the more severe 2005 KRW events, the reduction moves to well over 50%.

We understand that the analysis for the 2005 events in particular could be distorted due to the impact of flood losses. Accordingly, we think it is important to mention that our underwriting decisions are being framed even more carefully with an even better understanding of the flood element within a composite policy. So we feel comfortable about these numbers.

We have consistently maintained that we are prepared to expose around 25% of total capital for major event, one with a probability of one in 250 years. Utilizing the very latest models and taking into account our portfolio at the 1st of July, as well as our current reinsurance program, we are comfortable that we are within these bounds for U.S. wind and for California earthquake.

We have also prudently dropped annual aggregate exposure through offshore energy business in the Gulf of Mexico to around the $100 million mark. We believe the risk return profile of our current portfolio is materially better than any we have had since inception.

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 expect good growth overall for the year to come through increasing pricing, rather than material exposure growth in the property areas, targeted marketing and risk selection and even broader international acceptability and recognition of our security. Before we open the lines to questions, I would like to turn the call over to our Chairman Michael Butt for a few brief words.

Thank you, John. As you say before we hand over for questions, I'd just like to make a comment on the news release late last week regarding the judgment in John's divorce proceedings and his intention to appeal the decision. As always, and as you indeed have just heard, John remains very active in the daily operations of the Company and is totally committed to the Company, its shareholders, as well as the strategy that we have developed. The Board and I remain fully supportive of John in his role as the CEO.

I am sure that you will understand that it is not appropriate for the Company to comment on any personal legal matters. Therefore, we will not comment any further on John's divorce proceedings on this call. With that, I would like to ask the operator to open the lines for questions. Thank you, John, over to you and David.

(OPERATOR INSTRUCTIONS). Matthew Heimermann, JPMorgan.

A couple of questions. First, in the reinsurance segment, can you give us a sense of how much of the growth was U.S. or North America versus international?

Most of the growth was U.S. as we have said, and you have to remember that we are a specialist niche underwriter in our reinsurance of U.S. business.

We have benefited enormously from our rating and our balance sheet strength. As I said, the flight to quality which people tend to dismiss easily still continues strongly. We are not a generalist. And we are not a big proportional reinsurer. You know, from the onset of our reinsurance business, we are predominantly an excess of loss underwriter so we have been able to continue to carve out specialty reinsurance business, niche business, that is attractive to us and does not fall within the generalist business that the broader reinsurance U.S. reinsurance companies have.

The other -- two other quick questions. Thanks for the details on the U.S. program. Were there any other significant changes to the balance of the reinsurance protection for the Company?

No.

And then I don't know if you have done this or not, but it sounds like you are within the 25% PML under 6.0, can you give us a sense of what the book likes on the old model, just to give us an order of magnitude, how big a difference all the terms and conditions and price etc. make?

Completely different portfolio, so we've just completely recalibrated the business. It's not meaningful.

Appreciate it. Thank you.

Jay Cohen, Merrill Lynch.

Just a couple of clarifications, I guess. The $44 million upward adjustments in premiums, what did that relate to?

David, do you want to take that? He has taken another breath so he can actually speak now. But he's going to be on the line for another half an hour.

That generally relates to adjustment premiums on the reinsurance business for contracts that were written, where the initial premiums are estimated and then adjustment premiums come in during the course of contract.

Okay.

Primarily reinsurance.

And then the shift from proportional to excess of loss, that would have hurt the premium comparisons, correct?

We actually -- we have never been a big proportional underwriter, don't forget. So what we're saying is that what little proportional business we have, we reduced by half. So I wouldn't get too hung up on it.

And then as you look towards 2007, assuming that there is no major catastrophe experience and you suggested the property market would harden, what would you expect to see from other parts of the business, John?

Well that's a pretty broader question, Jay, but I'll tell you what I'm -- and I bang on about this, as you know. But I find it very difficult to understand why there is so much very appropriate focus on U.S. natural perils, cat perils and what the models are now telling us and how much better the new models are. And yet the same businesses that are responding aggressively to these changes in the U.S. appear to be pretty neutral about the same sort of catastrophe perils that are there in Europe and Asia. And so the reality of pricing for cat in Europe and Asia generally in my view is substantially underpriced.

And so what I am hoping is that sooner or later that these guys will understand that this is a global issue and is not peculiar to the U.S. and I think that it would do our industry a great amount of good to better understand the catastrophe exposures that are being accepted freely throughout Europe and the U.S. by a great deal -- by a large number of our competitors without properly pricing that element of the exposure. I think that the rest of the product lines non-cat product lines will be stable for the year-end.

Thanks for the comments.

Adam Klauber, CCW.

The accident year loss ratio or combined ratio was pretty stable year-to-year, but it seems like you are writing a good chunk of property business that has got much higher rates which seems to suggest that should be more profitable. Could you, I guess, give us an idea why if you're writing more profitable business the accident year loss ratio is staying pretty stable?

I think I would say that we are writing some -- a longer tail business to -- in the changes, so we're getting a little bit of a changing business mix from aviation. So I think you'll find that it will take a little bit of time before we will see the benefit of the pricing come through the premium earning next half of the year.

I think the reality is, as David is saying, the portfolio mix affects the lost mix obviously, the combined loss mix that we eventually had going forward for the year. But at the end of the day, you are right, the pricing for that property business is much more favorable and continues to be favorable, but we try to pick our spots. We're very light on it for the first quarter of the year and at last year end. And we accelerate when we see the opportunity there. But it is the risk reward at that business is much, much better today than it has been for a long, long time.

Thank you. A follow-up question. On the investment strategy I know you're pretty conservative. You may have mentioned it, but what is your duration again, and what type of situation would you look for to actually extend that duration, to get a little more aggressive on the yield?

I think we're looking at obviously the economic environment right now and certainly there is a meeting this afternoon that will be of great interest to us and I think that --.

I have got $10 on it.

-- as to which way that's going to go. I believe we said the duration was 2.6 years at the moment, including the cash position 3.3% if you just remove the cash out -- sorry 3.3 years if you remove cash. And I think you have -- we'll have to watch the markets today and over the next several months as to what we're going to do with our duration.

But we're well positioned to react.

Do you think there is more of a bias that the duration will lengthen over the next 12 months, or is it just tough to tolerate right now?

I think I wouldn't want to be committed to a point here, but I think it is likely that the duration will expand in time.

And finely, it seemed like there was pretty good growth in some lines such as marine and political risk.

The marina is essentially -- sorry, the marina is essentially offshore energy.

Okay.

So don't get carried away with the marine on account is any more favorable and has been for a long while.

That answers that question. What about on the political risk side? I thought that was softening a little.

No, political risk business -- it's a very limited marketplace. Very few people have the skills sets to properly participate in that market. We have been -- I have been underwriting political risk business for over 20 years. I have a very small team that is very close. We spent a great deal of time and I am heavily involved as with John Gressier and two other senior people in every single deal that is being transacted within that portfolio. And I sign off on every single deal within that portfolio.

Risk selection is critical. The relationship we have with our distribution network is critical, and our consistency of approach is critical to us as well. So that is why the deal flows are a bit lumpy. We can work on this stuff from anything from 3 to 15 months. And when it pops out, we're very happy about it.

But we are well within the realms of our business plan, but we actually spend a great deal of time and effort looking at the global macroeconomic situation as well as the geopolitical issues, their result. So there's a lot of effort that goes into it, but it is a very valuable part of our portfolio, highly specialized, highly overseen and highly scrutinized.

Vinay Misquith, Credit Suisse.

Good earnings this quarter. I am curious what percentage of your premium growth came from exposure change versus just pure rate increases, especially in the property and cat segment?

As I said, I think that it is very difficult to qualify, but the reality is we have substantially reduced our cat exposures. We have substantially increased the premium take the dollar of exposure we are accepting. That is the real key. And it is multiples of what it was in the last quarter of '05. As I said, the risk reward on that business -- I have been in this business for thirty-five years now, and the risk reward for that business is the best I've seen it in my career.

That's interesting. I think you also mentioned that in the Gulf exposures on the primary insurance side, you were not seeing as strong rate increases on the property side as you would have thought.

That was really Texas specific, but we like to bitch about those sorts of things. It was a limited geographic area, and we tend to be a little bit ahead of the market in certain areas if you don't mind me saying so.

2/1 to 7/1, I think in your prepared remarks you said that you declined more business than you thought you would. Is that a small decline on the margin and with the rate increases on the book of business that have offset the amount of business that you declined on 7/1 in the insurance business in the U.S.?

Well, you know that we think strategically about our portfolio, not just go from risk to risk. With the latest model that we have and the latest data that we have, we have a very strong belief about what the level of rating should be, and we are prepared to sit it out over a quarter and just wait for rates to actually reach the levels that we believe we need for the exposure we are taking on.

But the overlay is the fact that those rates will continue to move strongly through the last six months of this year. When and how we penetrate, well, we will have to wait and see. But we are not prepared just as we did in the first quarter of this year, we are not prepared to be in the marketplace and use our capacity more cheaply than we need to.

That's fair. On the global insurance side, are you seeing some more opportunities terrorism and war insurance because of the Mideast crisis?

No. I am afraid that it's another thing about my age. The reality is that the softness in a lot of the markets that are writing that business, markets that do not understand the complexity of risk and the exposure that they are accepting, and a lot of that business has now just slipped into portfolios, which are not being clearly identified.

We, because we have historically been a global leader of those product lines, are very careful about how we take on that business, how we identify it, how we actually put out our capacity, and what price we insist upon to take that exposure.

We have been unhappy about the competition. You know you would expect me to say senseless, but it normally is, for that sort of international terrorism business. So we -- the whole portfolio management of our Company, we can recalibrate our portfolio pretty quickly and we have done and that is why we've been much happier with the domestic terrorism price than the international. So we have actually walked away from a lot of business and we will continue to do so.

And as far as the aviation war business is concerned, once we had a bump in premium this quarter, it was adjustment premium. It wasn't us taking on more new business. In fact, it has been the opposite. We have been shedding that business. We believe the rates are just not acceptable.

And one last question. I guess this is for David Greenfield. On the reserves I saw on page 18 to page 20, your case reserves seem to have come down in office segments, and I am just curious as to why that happened?

I'm sorry, on which page, 18?

Page 18, 19 and 20. The reported case reserves in each segment have come down; you have a negative number for that. I am just curious as to why that would be.

I mean that is being driven primarily by paid reserves on the KRW losses.

That's fair. Thank you very much.

Josh Shankar, Citigroup.

Congratulations on an excellent quarter. My first question regards the results for this quarter were especially good, given the fact that favorable development contributed less to this quarter's results than they had in previous quarters. Is there something different going on with reserving, given the new mix of business or --

Not in the slightest.

Not in the slightest.

We adopt a very consistent approach to reserving.

So is there anything necessarily that you can attribute to the drop-off in favorable development?

We might actually be underwriting a little bit better, but these things move around a bit, but it comes back down to the portfolio.

And in terms of going into the hurricane season here, is there any reserving for potential losses going into the season that is being held back?

No, there wouldn't be any. I mean we wouldn't hold reserves for those events in the future.

Okay. Very good. And then finally in terms of the growth opportunities that you're citing or at least the market outlook going forward, given the fact that Europe is sort of behind the United States in terms of the correct pricing, do you expect the weakness to be particularly seen in the reinsurance side or on the insurance side or both and they are sort of feeding into each other?

I think it is on both sides and that is where -- we on both have primary operations in our reinsurance operations. Internationally are very specialized and as far as Karl Mayr and his reinsurance team in Zurich are concerned, they are very niche underwriting, so they will pick and choose. If your generalist in Europe, you're going to be much more affected.

And in terms of your peers, do you think they -- potentially the reinsurance peers might be getting more disciplined, or everyone is still just sitting on the sidelines and not really looking which way the wind is blowing?

Well, the CEOs keep talking the talk, but I'm not sure I see it actually on a practical basis. They are good at the talk the talk, though.

Sure. Well, thank you very much.

Dan Farrell, FPK.

Most of my questions were answered, but just one thing. Last quarter when you said you ran through the '04 and '05 storms with your portfolio, you said that the losses would be roughly one-third less I think, and this quarter you broke it out with 20% for '04 and 50% for '05. It seems like that is still roughly in line with what you said in the first quarter, even with the growth. And I just wanted to make sure that I am thinking about that correctly.

Yes.

Yes.

That's good. That answers my question. Thanks, guys.

Alain Karaoglan of Deutsche Bank.

Two questions. The first one --

Can you speak up a bit, sorry, excuse me?

Hello?

Yes. Can you speak up a little bit because it's very faint?

Through July you mentioned that the renewal on the property catastrophe reinsurance, you wrote the same as last year. What were you referring to, premiums or exposures or contracts?

We were talking about premium volume.

And since the pricing is significantly higher not just on catastrophe but on property business, I assume most of the business that you wrote at higher rates hasn't flowed through yet to premiums earned. How do you -- what you do with the loss bits? Do you reflect the rate increases or do you still take the stakes that you had before?

I think we are still earning the premium from the '05 year coming through and so those loss picks are still holding as we have them and as the new premium comes in, we will establish -- expect the loss ratios for that premium as we go through. So you'll start to see blended rates going forward, but at this point you are still seeing some or a lot of the '05 premium coming through.

Okay. So going forward the expected -- John mentioned that the risk return is a lot more attractive so going forward as we earn that new premium, the return ought to be more attractive.

We have said that the margin expansion has been evident over the last four months and we continue to make sure that that is our goal through the rest of the year.

Ian Gutterman, Adage Capital.

I was hoping you could update us on the issue on the last call with the combined ratio in the insurance segment where I guess it was higher than we were thinking because you didn't take some of the IB&R on your reinsurance treaty. Did that affect you two at all, and I assume that issue is done now, that you've done the July renewal.

David can hardly wait.

Thank you, John. I think I would start off by saying that establishing the reinsurance recoverables in the first quarter were done on a conservative basis until we can see where the KRW estimates were going to end up over time. In the second quarter the estimates have been updated and the fully reflected all the expected recovery in the financial statements this quarter. So I guess I would summarize by saying it has been addressed.

Does that mean over the first half, it played out normal or just a little bit higher Q1, lower Q2? Or is it still conservative for the first half as a whole?

Over the six months I would say I'd look at it over the six months, it's fine.

That's what I thought. Again it's an issue for the rest of year because we're on the new treaty, is that right?

That's correct.

(OPERATOR INSTRUCTIONS). Ron Bobman, Capital Returns.

Thanks for taking my call. John, I believe last year the insurance book benefited from some amount of risk attaching reinsurance treaties. And if I am right -- if I am right, I'm wondering if that form of reinsurance treaty as it was sort of offered in the marketplace and purchased by AXIS last year, is in the market this year and makes up part of your cover this year as well.

That's a good question, Ron, because the reinsurance for any reinsurer to buy risk attaching has been extremely difficult, so we actually switched our program for U.S. insurance from risk attaching to losses occurring. So that means there is a pretty substantial runoff of that '05 protection for going through the rest of this calendar year and into the next year. But we don't consider it to be material.

Just so I understand when you talk about -- I think you -- if I got it quickly enough, you bought a like amount of cover for the insurance book, but your attachment went from 50 million to 100 million. When you talk about a like amount of cover being purchased, does it take into account the favorable form attributes of the risk attaching treaty that you had last year and what you now tell us don't have this year?

Well, our portfolio has been completely readjusted and recalibrated, so that we bought the same amount of dollar protection that we had last year, but we believe it actually at the very worst gives us similar protection to last year but in the changed portfolio could be better.

Net? I guess net and gross.

You have to factor in the increased retention, of course, but we can factor that. All of the increased retention and the pricing that we're paying for our reinsurers, naturally we flow-through to the pricing of the underlying product and, of course, we're staying ahead of that which we are because of our margin expansion. We are in good shape.

And just so I know, from the marketplace perspective those risk attaching reinsurance treaties are few and far between as far as being able to be purchased this year, or are they just nonexistent?

I suspect they are fewer and far between because that is the way the reinsurance market has moved. There has been a dramatic shift by the reinsurance market in evaluating their exposure to cat business. I think it is healthy for the industry and I think it will force the primary underwriters if they are not doing so already to run their underlying portfolios much more profitably and identify their underlying exposures much better. So it's good for the industry.

Marc Serafin, Morgan Stanley.

I was wondering if you could just give a quick update on paid claims from last year's hurricanes. Maybe give a sense for what your time horizon is for these claims to pay out over the next few quarters?

You'll have to give me one second, Marc, and I'll get you some numbers. But I think we are expecting the claims will pick up in the second half of year. So paid claims through June 30 is $635 million. And that compared with 336 at the end of the first quarter.

That will conclude our question-and-answer session. I would like to turn the call over to Ms. Ventresca for closing comments.

We have at this point run over the allotted hour. Therefore we will close the call at this time for questions, as Menosha has just mentioned. Please feel free to dial us on our Investor Relations line 441-297-9513. With that, I am sure John will have some closing comments.

Absolutely, Linda. Thank you very much. I just want to say thank you all again for taking the time to listen to us. We are very happy with a quarter as we've said. Business is strong. The fundamentals are healthy. And we very much look forward to trading through the rest of this year. But thank you again for taking the time to listen to us. Look forward to speaking to you next time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.