AXIS Capital Holdings Ltd (AXS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AXIS Capital fourth-quarter 2006 earnings conference call. My name is Carissa, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating 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 conference, Ms. Linda Ventresca, Investor Relations. Please proceed.

Thank you, Carissa, and good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter and the year ended December 31, 2006. Our fourth-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 March 9. An audio replay will also be available through February 16. The toll-free dial-in number for the replay is 888-286-8010 and the international dial-in number is 617-801-6888. The passcode for both replay dial-in numbers is 70380548.

With me on today's call are Michael Butt, 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 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, and Windstorm Kyrill, future growth 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 factors section in our most recent Form 10-K on file with the Securities and Exchange Commission. 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 operating income, which are non-GAAP financial measures within the meaning of the U.S. federal securities laws. For a reconciliation of these items to the most directly comparable GAAP financial measures, please refer to our press release and Form 8-K 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. Thank you for standing by time to join us this morning. I am going to begin by making some opening remarks. Then I will turn the call over to David Greenfield to review our financial result. Following David's review, I will discuss current market conditions.

I am extremely proud to announce these record earnings for AXIS Capital for the quarter and year ended December 31, 2006. We have earned $926 million in net income and delivered a return on average common equity of 26.7% for the year. Our diluted book value per common share increased by 25.2% to just over $24 from year-end 2005.

Only part of our success can be attributed to the benign Atlantic hurricane season. Our record earnings were also driven by a substantially increased pricing environment for many cat exposed lines of business; strong accident year results across our diverse global portfolio; and increased investment earnings.

Not readily apparent, of course, is the substantial repositioning of our overall book of business, which we commenced immediately after the major loss events of 2005. This is complete and has resulted in a substantial improvement in our risk-reward profile, as evidenced by the strength of our 2006 results.

I would like to briefly update you with respect to Windstorm Kyrill, which made headline news just under three weeks ago. As you know, we established a reinsurance presence in continental Europe late in 2003 and have had great success in developing a targeted and diverse reinsurance portfolio in this very conservative marketplace. The vast majority of our business here is excessive loss. In our press release of last week, we provided an estimated range of 40 to $55 million of potential claims to AXIS related to Windstorm Kyrill. Our estimated range is based on a review of in-force contracts and preliminary loss information from clients. It is still early days with respect to this storm, but we feel comfortable at this time that this will not represent a major loss for us.

With five years of substantial achievement behind us, we have recently announced a strategic reorganization of AXIS Insurance, to enhance our position as a global leader in specialty lines insurance business. This reorganization institutionalized the management practices that have been fundamental to making AXIS Insurance a leader in its markets. These practices allow us to extract the best opportunities in any area of expertise for AXIS across all geographies covered by our broad reach.

With that, I will turn the call over to David to discuss the financials in more detail.

Thank you, John, and good morning, everyone. As John mentioned, we are extremely pleased with our results for the fourth quarter and the 2006 year. For the year, net income was $925.8 million or $5.63 per share on a diluted basis. After-tax operating income, which excludes the impact of realized gains and losses on investments, was $949.8 million or $5.78 per share on a diluted basis.

For the fourth quarter, net income was $281 million or $1.69 per diluted share. After-tax operating income, which again excludes realized gains and losses on investments, was $284.3 million or $1.71 per diluted share. These results bring our full-year 2006 return on average common equity to an impressive 26.7% and diluted book value per share accretion for the year to 25.2%.

Comparisons of results for the quarter and the year to the same periods in 2005 is not directly meaningful, as prior-year operating results were significantly impacted by losses from Hurricanes Katrina, Rita, and Wilma.

While the focus of my comments will be on 2006, where helpful, I will highlight key differences between the 2006 and 2005 periods. For complete details on the impact of the KRW losses on our 2005 reported results, please refer to our financial supplement released last evening. Despite the challenging comparisons for 2005, our overall story for 2006 is an extraordinarily positive one.

Turning to our top line, our consolidated gross premiums written for 2006 were $3.6 billion, a 6% increase over the prior year. Taking into account the impact of reinstatement premiums we received following KRW, gross premiums written for the year would have increased approximately 9%. This result is impressive in the context of the repositioning of both our insurance and reinsurance portfolios throughout 2006.

Gross premiums written in our insurance segment were up 10% over 2005. This increase reflects growth in the following areas. Our catastrophe exposed lines of business, our political risk business, and our global professional lines book where we expanded our geographic reach as well as our targeted small to medium businesses. This growth was somewhat offset by our decisions to step back from aviation and terrorism business, which have come under continued heavy pricing pressure throughout the year.

Gross premiums written in our reinsurance segment were flat when comparing 2006 to 2005; but when taking into account the impact of the reinstatement premiums I previously mentioned, gross premiums written were up 8% for the year. This increase was a substantial achievement given the recalibration of our portfolio to an even higher layers, therefore significantly reducing our potential for loss in catastrophic events like those of 2004 and 2005.

The top-line trends in the fourth quarter track the trends for the year overall. Gross premiums written and our insurance segment were up almost 17% for the quarter and were only slightly increased in our reinsurance segment. However, taking into account the impact of reinstatements, gross premiums written were up almost 24% for the quarter in our reinsurance segment. This increase was largely due to the movement of a treaty renewal from the third quarter to the fourth quarter of 2006.

Consolidated net premiums written rose 12% in the year to nearly $3 billion from $2.7 billion in 2005. Our net premium growth is explained by the major recalibration of our global insurance portfolio as well as the reduction in our ceded reinsurance spend. As you know, we buy reinsurance for this portfolio on an opportunistic basis, and deliberately ceded less premium in 2006 because we recognized there would be little real value extraction from buying reinsurance. Of course, we are constantly testing the markets and reassessing our position.

Moving on to our combined ratio, for the quarter it was 73.7%, and for the year it was 77.3%. These combined ratios reflect very strong accident year results and include net favorable loss reserve development.

For the fourth quarter, net favorable development was $34.4 million or 5 percentage points. For the full year, it was $216.5 million or 8 percentage points on the combined ratio.

During the fourth quarter, we did experience $14 million in adverse KRW development. At this point, we have paid almost 68% of our estimated net losses related to these storms.

You will note a reduction in the accident year loss ratio for the quarter in our segments relative to the first three quarters of 2006. By year end, obviously, we have more certainty with respect to the outcome of major catastrophic loss events; and our accident year loss ratios incorporate the benefit of this experience.

As always, we caution against comparing the level of reserve development amongst periods. We maintain the same high standard of conservative reserving using a consistent methodology every quarter, including this one. We have been able to report net favorable loss development every quarter and in each segment since the first quarter of 2003. Over that same period we have not released reserves related to any of our longer-tail business which we commenced writing in 2003. This type of business, principally professional lines, now represents approximately 40% of our gross premiums.

As we noted last quarter, with regard to G&A expenses, much of the difference between comparable periods in 2005 and 2006 can be explained by actions taken during 2005 following the hurricane losses. Our compensation policy ties incentive compensation to operating results; and in response to lower profitability in 2005 we recorded lower incentive compensation costs in the last half of 2005. Given our improved operating results in 2006, we have a higher accrual for the year.

Moving on to the investment portfolio, total cash and investments stood at $9.7 billion and has increased by 24.5% since the end of 2005. Net cash generated from operations was $1.6 billion for the year, and that includes net loss payments of $613 million related to KRW claims.

We continue to believe that the risk-return profile of short-duration assets is currently better than longer-dated assets. Therefore, during the quarter we continued to allocate the majority of our positive cash flows into short-duration instruments, primarily money market instruments. We estimate our overall duration at 2.4 years including operating cash and other investments. Currently, we believe U.S. interest rates will remain flat during the remainder of 2007. Our significant cash position, at 20% of total cash and investments, provides us with flexibility to quickly extend portfolio duration should the opportunity arise.

Pretax net investment income increased 56% this quarter over the comparable 2005 period to $123.1 million. The increase is due both to larger investment balances and higher yields, including significant contribution from our other investments portfolio. This portfolio produced investment income of $23.9 million during the fourth quarter, compared to $6.3 million in the fourth quarter of 2005. The 2006 year pretax net investment income of $407 million increased by 59% over the comparable 2005 period, also for the reasons noted previously.

The yields earned on our fixed income portfolio increased from 4.0% to 4.9% over the period, in line with increases in U.S. fixed income yields. The other investments portfolio produced income of $46.3 million for the 2006 year, compared to $17 million for 2005. These results demonstrate the return potential of this portfolio over a longer period of time despite the less stable earnings pattern.

Because of the period-to-period volatility, we continue to caution against extrapolating the income earned on the other investments portfolio in any one quarter over an extended period. Our allocations to other investments have produced a return for the year of approximately 8%, which is in line with our return expectations for these investments.

Net realized losses for 2006 were $25.7 million, principally from portfolio activity in the first half of the year.

In the fourth quarter, we further diversified our investments by adding exposure to a life settlement contracts portfolio through the purchase of a $400 million note. This investment was financed through a repurchase agreement. Exposure to this asset class will result in a return profile that has low correlation with the returns from our existing investments and meets are expected return hurdles for our non-fixed income investments.

We had $7.1 million in foreign exchange gains during the quarter and $32.5 million in foreign exchange gains for the year. These gains were primarily a result of movement in the exchange rates between Sterling and euro versus the U.S. dollar.

Overall, our balance sheet is as strong is it has been since our inception more than five years ago. Net loss reserves stand at $3.7 billion. Setting aside the impact of KRW loss reserves, 76% of these net loss reserves are IBNR reserves.

We finished the year with $4.4 billion in total shareholders equity and diluted book value per share of $24.02, a 25.2% increase over the last 12 months.

I would like to now recap other fourth-quarter activities related to capital. We announced a 10% increase in our quarterly dividend in December. We have increased our dividend every year since we began paying dividends. We also renewed our share purchase authorization, which was in place for two years before and was about to expire. We believe our return on average common equity for the year of 26.7% clearly demonstrates our ongoing ability to effectively deploy shareholders capital. We're constantly evaluating our capital base in light of our short- and long-term business plans, as well as rating objectives.

Certainly we are considering the potential impact of market changes, including the recent Florida legislation, amongst other items, on our capital utilization overall. At this time, we have no plans to undertake a major capital management initiative.

Finally, I would like you to know that we expect to make some modifications to our financial reporting with our next earnings release. These will reflect the organizational management changes resulting from our recently announced strategic reorganization in AXIS Insurance. As a preview, reporting for the global insurance and U.S. insurance subsegments will no longer be presented separately, thus reflecting our management of lines of business across geographies. The reporting for our reinsurance segment will remain unchanged.

We intend to release a pro forma financial supplement that will provide historical insurance segment results based on the updated reporting, in order to facilitate comparative analyses between periods going forward.

With that, I would like to return the call to John to discuss our view on current market conditions.

Thank you, David, and that was 10 minutes without drawing breath. Ladies and gentlemen, as you know, the first of January represents a critical renewal date for our reinsurance business. These 2007 renewals progressed as expected and we are pleased with the portfolio that we assembled at the first of January.

As a general comment, the overall discipline throughout the reinsurance marketplace was maintained. We continue to experience the ongoing trend of greater risk and retention appetite in the industry, bringing to bear modest price reductions.

For property catastrophe business, major buyers dropped lower layers in favor of larger limits at the upper end of their programs. Whilst for casualty reinsurance business, cedants tended to retain more business. Critically, we have not seen major slippage in either terms or conditions.

As we thought, rates were up substantially for U.S. catastrophe exposed reinsurance business relative to the first of January 2006, as an element of catch-up to midyear 2006 levels took place. The supply-demand imbalance evident at midyear 2006 renewals further corrected. Cat outside of the U.S. was [off] in the 5 to 10% range for our book.

Reinsurance renewals in Continental Europe were characterized by an abundance of capacity. But as a well-respected and established market, we held our own and were able to continue to broaden our portfolio there.

In our insurance business, the first quarter is typically less eventful. In some lines of business, like catastrophe exposed property and energy business, current rate levels continue to produce returns above historic levels. In areas where the competition has been much more aggressive, such as terrorism and aviation, we are maintaining our extremely cautious and defensive posture. Other lines such as primary casualty, umbrella, and professional lines, still contain good profit potential, but bear much closer scrutiny.

We're satisfied that our breadth of product as well as our geographic and client diversity within these lines provides us ample opportunity to target risks with the appropriate risk-reward profile.

I would like to briefly discuss the recent Florida legislation. This legislation expands insurers' access to Florida's Hurricane Catastrophe Fund and effectively disintermediates some amount of residential property, catastrophe reinsurance premiums currently placed in the private reinsurance marketplace.

While Floridians may benefit from lower premiums in the short term, taking this severe risk out of the reinsurance market and concentrating it onto the state's balance sheet we believe is an extremely dangerous proposition for all parties involved. Events like the tornadoes a few days ago in Florida are a timely reminder of the reality of risk and costs that we expect Floridians will bear.

As you know, our reinsurance book is composed primarily of excess of loss business. Our U.S. property reinsurance book is primarily composed of commercial exposures, not residential exposures. We have no exposure from proportional residential reinsurance contracts in Florida. Therefore, the most immediate impact for us is the disintermediation of Florida-specific residential property cat reinsurance premiums.

Our total premium directly from Florida personal lines cat covers is approximately $20 million, which renews in the second quarter. The expansion of the Cat Fund may cause some reduction in property cat reinsurance premiums for larger commercial line carriers. But we currently estimate this amount to be about $10 million of premium to us. As you can see, the most tangible top-line impact on our reinsurance book is very limited at less than 2% of total reinsurance premiums.

We will, of course, be meeting with clients in the upcoming weeks and months as we continue to analyze the broader ramifications of this legislation. But it is early days, yet.

Moving on to our insurance business, Florida exposure is primarily of the catastrophe exposed commercial property variety. To date, the residual market insurer in Florida, Citizens Insurance, have not been able to offer multiperil coverage, including commercial nonresidential risk. This changed with the new legislation. However, Citizens is not required to submit a plan of operation for issuing this type of coverage until March 1. We believe Citizens is not equipped to make an immediate impact in the underwriting and servicing of these broader property coverages.

As some in Florida have stated, the legislation authorizing Citizens' expansion is a skeleton without a body. We remain cautiously optimistic about our ability to continue to source business in this marketplace.

Substantial growth in the capital for the industry, resulting in short-term oversupply, combined with the recent developments in Florida, will accentuate any softening in the marketplace. We believe that this will have more of an effect on lines of business outside of cat exposed property business. However, there are influences which could curb the most egregious cyclical competitive behavior.

Firstly, the new capital to the reinsurance industry since 2001 is substantially more disciplined than that committed in years prior to 2001. It is also capital which is substantially deployed to catastrophe exposed business. It is committed to a very technical subscription marketplace, which relies on both sophisticated modeling tools and risk management practices and, importantly, where pricing is based upon exposure.

Second, the trend towards retaining more business on the part of primary companies is a mitigating factor. This promotes sound financial alignment between cedants and reinsurers. Primary companies have greater incentive to maintain underwriting discipline as they manage their higher net exposures.

The factors leading to the adverse excesses of the late '90s are a long way off. And, fortunately, I have yet to see any signs of us reaching the cliff's edge.

At this point, we are extremely pleased with the diversification that we have deliberately built since day one. We know that it's difficult for the rest of the market to quickly and efficiently redeploy capital in specialist areas of the insurance business. We feel good about our strong presence in both the insurance and reinsurance ends of the business as well as the diversity within each of these businesses.

Entering 2007, our focus remains on continuing the expansion and diversification of our portfolio by product, distribution, and territory. We remain absolutely focused on profitability and feel comfortable about our underwriting portfolio. This portfolio continues to generate healthy underwriting profitability ratios across all product lines -- property, casualty, professional lines -- and across all geographies in which we have a presence.

Given the high quality of our global portfolio, absent major catastrophe losses, we expect 2007 results to be very positive and to continue to produce meaningful book value growth in line with our excellent performance since inception. Just to remind you, even taking into account the unprecedented insured losses of 2004 and 2005, inception to date we at AXIS have produced nearly 17% in average return on common equity, and paid meaningful dividends along the way. With that, I would like to open the lines for questions.

(OPERATOR INSTRUCTIONS) Matt Heimermann of JPMorgan.

A couple quick questions. First, with regards to Kyrill, can you just give us a sense of how early it is in terms of client discussions and clients actually getting their arms around what the loss is there?

Yes. I think that as each day goes past, we are becoming more and more comfortable with the information that we are receiving from both the broker distribution network as well as our cedants. So we're very comfortable, as I said in the script, about the numbers that we have put up.

Okay, I guess that's fair.

It really has -- the amount of information that tends to come out of these major incidents, following the hurricane activity in '04 and '05, has improved dramatically. I think that companies, underwriting businesses, the broker distribution network, as well as cedants are much better geared nowadays to providing better and more speedy information.

Okay. I guess to ask it maybe a little bit differently, to wrap this up, is just -- how much more time do you think before your confidence is plus or minus a small percentage around your number?

We have put in a range, and we are extremely comfortable about that range now.

Okay. Then, on Florida, I guess, one of the things I am trying to get my arms around is what the incremental pressure on pricing may be, and in what lines it may be affected. You talked about your book being more commercial lines. To what extent do you think we will see pressure either in commercial lines reinsurance or perhaps even Gulf energy where there might be overlap in the zones?

I'm sure there are plenty of people out there that would like to see a lot of pressure being applied to the technical rating that the market has adjusted to for the exposures they're taking on. As I have made absolutely clear, that I have great faith in the ability of the reinsurance marketplace, which remains stable, to properly assess exposure and to properly price it. I think that stability will remain through the rest of this year.

Would you agree that those are the right lines to watch in terms of just as bellwethers for whether or not that discipline is playing out?

Well, certainly those lines tend to be at the forefront of people's attention. But at the end of the day, the relevance of those lines to us, we have demonstrated the income streams we had; and I don't necessarily consider them to be bellwethers for the rest of our portfolio, nor the reinsurance portfolio as a whole for the industry.

Okay, fair enough. Then the last thing was just on the alternatives, David. If you could, could you just give us a sense of what you, on an annual basis, might plan for the alternatives to return? The alternative portfolio to return?

As I said in the comments, we tend to target around an 8% return. But again, that could be choppy by quarters. And we're still building out that portfolio, so. But I think what I said was about 8% on that.

Okay, I missed that. Then what do you think a speed limit or hard stop might be in terms of percentage of the portfolio? I think you are at about 12% now, if my math is right.

I don't think we have a percentage at this point. But you can be sure we are not going to grow it significantly in relation to the rest of the portfolio.

Okay, thanks much.

Jay Cohen of Merrill Lynch.

A couple of questions. The first is, could you just give us a bit more color on the political risk market? There is not a lot of companies that actually do that. So I'm personally a little less familiar with it. I would like for you to just give us some color around that, given that you are growing there.

Then secondly, some other companies have given us some pretty detailed information related to their January renewals. I am wondering if you can share with us as much as you can, and you are comfortable with, maybe some of the numbers around how January looked. If not that, maybe at least some qualitative comments.

Well, I will do the first one; and I will let David prattle on about the second one. The political risk market, I have personally been involved in those lines of business for something just over 25 years. Interestingly, the team of experts that we have at AXIS have worked with me closely for at least 15 years.

Essentially, traditional political risk business can be categorized as equity business, lenders business, or sovereign default business. As I said, we have established substantive relationships with a very limited number of international banks where we derive and source a lot of this business from, as well as the traditional marketplace.

What I want to get across to you, Jay, is the fact that this is not something new. We have been practicing this and evolving our relationships, just as the capital markets have evolved in their lending positions over the last 10 years on a global basis. It's very much business as usual for us.

But it's a very valuable source of income. It is highly specialized. We have extensive peer review procedures on this line of business that we have had from the very first day we started to do it, which involves me downwards. It is a very important part of our overall business.

Assuming the general market conditions there are reasonably good given the growth?

Yes, we wouldn't be writing it unless they were reasonably good. But at the end of the day, it is a highly specialist business. There is a lot of due diligence that is undertaken on the individual deals. We're very focused about who we want to do business with, where we want to do it, and how we want to do it. We are extremely disciplined in our approach to that business, and that is why we have been able to have long-term, strategic relationships with a limited number of banks to provide us [with] distribution.

Don't forget, it's a very lumpy business, though. Because we can be doing a number of deals each quarter, and they can vary in size. But as I said, the lead-in time to bring these deals to market can be quite long.

Great, and then the January question?

Yes, Jay, I think I would say across all our geographies we have had very good success. Pricing in structures increased moderately. We had some good churn in the portfolio. I think in terms of renewals, we had about an 80% renewal rate on our gross premiums written; and then we filled up the remaining 20% with some good new business, which I think you could describe as pretty healthy for us in terms of our portfolio development.

Thanks, David.

Kevin O'Donoghue of Banc of America Securities.

Just first of all real quick to follow up on Jay's question, I am wondering if you could tell us what geographies you might be exposed to in your political risk business; and what kind of event would trigger a loss there?

Let me just go back to what I said. And I didn't answer part of Jay's question, which I didn't realize until he got off the line. But there are very few businesses globally that actually have the expertise or the standing or the capital to underwrite these highly specialist lines of business. It is a global portfolio. As an underwriting team, we extract huge amounts of information from a number of different sources about not only the -- because a lot of this is sovereign default, essentially, underlying the risk. So we spend a great deal of time sourcing information from various interests to allow us to take a daily view on which countries that we are prepared to look at these risks to be sited.

Historically, we have taken a very proactive view. I will just take Venezuela, for instance. That when President Chavez was elected, we substantially downscaled our involvement in that particular country. We would not wish to be involved in anything at the front end, so to speak, in countries like that, because quite frankly the industries that produce revenue, especially the extraction stuff, tend to be the first ones that will be confiscated, or some form of government intervention takes place.

So we're very deliberate and very calculating in the way that we would look at individual countries. Even with the meltdown, financial meltdown, in Argentina, that we were not affected by that. Or even before that, if you go back to Indonesia many years ago, we were very, very careful constructing our portfolio in Indonesia to try to make sure that the companies we were involved in were not necessarily Marcos-invested companies, which were subsequently unraveled by government.

So it is a highly specialized business, it takes a lot of work, but we have been doing it a long time.

Okay, and then just one other question. I realize I might be asking you to speculate a bit here. But you talked about your confidence in the reinsurance markets not being willing to price certain risks below a certain rate.

But in the case that risks are priced at the right rate but the programs are significantly oversubscribed, where do you suppose that all of this additional capital that could be said to be in the industry now is going to go, if it is not going to competitively chase after business through price?

The capital suppliers will do what they will. But at the end of the day, we established AXIS to become one of the leading global insurance and reinsurance businesses. An important part of our mission statement was that our business had to be sustainable, and of value, and to be able to produce consistently good underwriting profitability.

We are an underwriting business. There may be businesses out there that are extraordinarily short-term in their nature, ill-disciplined in their underwriting, badly managed, and I would expect the investment community to differentiate with those quickly and pull their capital quickly from those.

Okay, thanks very much.

I just wanted -- you asked about -- I just wanted to go back to the political risk. If you're looking at aggregation, actually the amount of exposure will follow the economic activity in many cases that is taking place in countries like Brazil and China.

A key as well is the sort of risk that we're taking within those countries. So whilst we may have aggregation in those countries, reflecting the scale of their economies, we are extremely careful about the type of risk we are taking within those economies.

Vinay Misquith of Credit Suisse.

Could you provide us with some color on your growth initiatives and how we should look at growth in the future, considering the market softening? I believe, John, in your prepared remarks, you said that you expect to continue your expansion and diversification by product and geography. Do you -- could you add some color on whether you could generate more business from your existing platform and how you plan to do that?

Well, I think it is always difficult for people to understand how we can grow businesses even moderately during hurricane [prevalent] times. But because of the breadth of the diversity that we have in both businesses, both the primary business and the reinsurance business, and because we have skilled senior management that are international in their outlook and experience, we are able to source new business opportunities, substantially within the existing lines of business that we currently undertake.

But the same time, it is a bit like a pot of minestrone. At the end of the day, we are growing as well as shrinking. As we grow our business we are also shrinking our business, as we have demonstrated quite clearly, in aviation and terrorism. It's been interesting that over the last three months, one of the two major European reinsurers has followed our lead in those particular marketplaces.

We believe that there is still opportunity on a global basis for us to source good, high-quality business with people that actually want to do business with us during the course of this year. So I am not as pessimistic as many in the market will be over the expectations we have and our ability to find good profitable business.

Thanks. In Europe, I believe you mentioned, that even though pricing and competition was increasing, pricing was softening a bit, you managed to increase your exposure. Was there a reason why the European cedants has chosen AXIS?

I think it is, because I think you have heard me talk many, many times before about how different the European marketplace is. It is much more of an established marketplace with traditional relationships that mean a great deal to ceding companies.

We had a wonderful window of opportunity at the end of 2003 when we established our reinsurance business there. We found some extraordinarily capable people, Europeans, to run that business. We now have nearly 50 people in Zürich. We are very much an acceptable part of the traditional reinsurance marketplace through Europe.

We have, as each year has progressed, been able to expand the cedant network that we have as well as increase the lines of business we have with those cedants. It is a long, slow process, but it's a very determined and very focused approach that we have with them. And touch wood, it has paid off; and I expect it to continue to do so.

That's great. Finally on capital management, I believe in the prepared remarks maybe David was saying that you don't plan any significant transaction in the near term. Yet the share authorization was, I think, increased to $400 million. Could you provide us with information as to when you think might be the right time for you to start to buy back your stock should the market conditions deteriorate further?

I think a couple of things, I guess, a couple of questions you have wrapped up in there. One, in terms of the increase in the size of the program, that was really coincident with the increase in the size of the organization. So it just seemed reasonable to address that at the same time as we renewed it.

With regard to buying back stock or any other sort of capital management initiatives, as I said we look at this very actively. It is not lost on us in terms of market opportunities and things. We will at the appropriate time do what we think is necessary. But as I said in my remarks, right now we feel that we are satisfied where we are with our '07 business plan, and we're not intending to do anything at this point.

I think, we have shown over our five-year history that the underwriters we have and the management we have are more capable of better sourcing business because of our diversified business platform than a lot of our competitors. That is why we are comfortable about '07.

That's great. Thank you.

Alain Karaoglan of Deutsche Bank.

A few questions. The first one, have you made any changes to your purchase of reinsurance for your insurance business for 2007? How should we think of that for '07 versus '06?

The second question is, in terms of the storm Kyrill, you mentioned that it is not that meaningful for the Company in the overall. Were you talking, thinking about it from a full-year point of view, from a quarter point of view? Or should we take from it that this is part of the attritional losses? Then I have a couple of other questions.

Let me deal with the reinsurance question first. The bulk of our reinsurance purchasing is on the U.S. side for our U.S. insurance business, or what was our U.S. insurance business. That program essentially renews in April and May. As we have moved, as David said earlier about the strategic restructuring of our insurance business, we are moving towards more global programs.

But the one thing I do say to you is the fact that, just as we did last year, if we see no value or little value in terms of the reinsurance coverage that we are able to source in the marketplace, and as long as we are satisfied about the pricing and the terms and conditions of the underlying portfolio that we have accepted, that either needs to be protected or not, we will make reinsurance buying judgments on that portfolio on a daily basis. That is how that I have always run my businesses. David, do you want to deal with (multiple speakers)?

On your other question about Kyrill, the range that we put out of 40 to $55 million, clearly on an annual basis we would view that as obviously less significant. Particularly as you look at the '06 results. But you have to keep in mind that there is some element of claims in this business.

I think if you look at it on a first-quarter basis, it will be a large event. That is why we put a press release out. But we don't think it is significant to our overall results either for the quarter or for the year.

Okay. David, in terms of you mentioned that there was a reinsurance treaty that essentially was renewed in the fourth quarter versus the third quarter. Could you quantify that for us? Going forward, do we think that is going to be a fourth-quarter treaty, or it just happened this year that it got delayed?

I think that, A, we don't comment on individual lines of business, on individual pieces of business, Alain. But nonetheless, it was a reasonably substantive treaty. You can imagine there has been a lot of restructuring post KRW. I think that the particular cedant was restructuring out of that. I would expect it to probably remain where it is now.

But that is up to the cedant at the end of the day. But you would expect that sort of stuff to happen posts major events like KRW.

The last question is again on capital management and share buyback. You guys have been extremely diligent in utilizing the capital and producing very good returns on that capital. But your return last year was 25% growth in book value, the premium was 9%. I am not sure what the growth expectations are for this year.

Isn't the most attractive portfolio to buy your stock today, given where it is trading? I am not sure why you can't do both, given that the returns that you're generating, buying stock and grow your business and diversifying it?

I think, as I tried to say, of course we have room for financial leverage in our current balance sheet. We are looking at a range of things, as I said earlier. But I think we feel at this time with our plan that no transaction, no activity today, not buying stock is the best alternative and the best course for our shareholders and for our business.

I think, Alain, you can make that judgment as we go through this year. But we never say never. As David said, we're constantly reassessing the position.

Thank you very much.

Bill Wilt of Morgan Stanley.

A couple of questions. One is numbers. In the global insurance segment there was a $19 million increase in bad debt, essentially. Could you describe the circumstances that arose?

Bill, can I just correct you? Bad debt provision.

Provision against reinsurance recoverables.

Yes, thank you, there is a fundamental difference between bad debt and bad debt provision.

Fair enough.

Thank you.

But new this quarter; so could you just describe the circumstances that gave rise to that?

Yes, I think the size of our reinsurance recoverables is obviously related to the events of last year. We did take a look at it from an accounting perspective overall. We applied some broad credit metrics; and we considered essential coverage issues in the overall portfolio; and we just felt it was prudent to increase the provision at this time.

So it was a general provision as opposed to a provision related to one cedant or one specific issue?

Yes.

Okay, fair enough. I believe in the opening remarks, a passing reference was made to rating objectives -- credit rating objectives. Could you just to revisit your thoughts and expectations, plans, for the upcoming year or 18 months, vis-a-vis the credit rating agencies?

Sure, we certainly are happy with our position. We're going to go through those meetings with the rating agencies this spring. We think we have a strong organization. We think we should see some differentiation for that. But we haven't seen ultimately where the ultimate rating agency models will put us. But I think that we're very strongly going to look at the rating in the springtime.

Is there an active effort on the part of AXIS management to attain a higher credit rating? Or are you content with the rating that you have?

I think that the rating agencies have been adjusting their outlook for the industry as a whole over the last 18 months. We consider ourselves well positioned, and it will be interesting to see how the rating agencies look at our financial stability in the spring.

But we are a strong Company. We have got a strong balance sheet, and we have strong underwriting, and we have excellent enterprise risk management. So I would expect them to take that fully into account just as they do with every other company.

Yes. My Chairman just said -- or should.

Very helpful. Thank you.

Josh Shanker of Citigroup.

Congratulations on a great quarter. I heard in the opening comments discussions about that we should not be looking at reserve developments on a quarter-to-quarter basis. But on both an absolute basis and a loss ratio impact basis, there is clearly a trend over the last three years this (technical difficulty) the lightest quarter in terms of favorable development you have experienced.

I understand you don't want us to extrapolate anything from it; but it becomes difficult. Is there anything going on? Does David have a different view on reserves? Where is the trend over a three-year period, where we peaked out in the middle of last -- of 2005, and now it's coming down to an end? Thinking about reserve releases going forward, what can we get from this?

Well, firstly, to answer the corporate question is the fact that our reserving methodology is unchanged from inception. But David, you can give --.

Yes, I think I made those comments earlier. We're very consistent in our methodology and its application. I think, Josh, beyond just looking at the numbers you have to look at the timing of the businesses in the portfolio. As we get to be a more mature Company -- and we have a ways to go with that -- we will have more of our own experience to incorporate in numbers; and you would expect reserve releases to decline over time.

That is not necessarily the reason that drives the fourth quarter of '06. But ultimately, I don't think there is a trend line here that one should look at. We reserve each quarter on the same methodology and on a consistent basis.

Would you expect a reversion to the mean from what we have seen previous quarters? Would you expect that currently your view of reserves is adequate and you would not expect reserve releases?

Well, I wouldn't tell you that I expect reserve releases in any future period. But what I would just say again, going back to my remarks, we have different portfolios in the Company. There are the short-term portfolios we act on more quickly; longer-term portfolios, as I commented on, we will act on on a longer-term basis.

But the underlying principle and fundamental, Josh, is the fact that we as a Company reserve conservatively and appropriately. (multiple speakers) continue to do that.

All right, very good. Finally, if you had to put a band, I guess, around 80% of your business or something like this, is there a fundamental difference, do you believe, in the average tail length of your business at the end of last year versus the end of 2004?

Sorry. Just say that again. The average tail length, did you say?

Of the majority of your business.

I don't think so. That if you look at the majority of our deemed longer-tail business it is still professional lines business. I don't -- I still regard that as a sort of a middle-term tail. So I wouldn't say there has been a material change.

Okay, very good. Thank you.

Josh Smith of TIAA-CREF.

A quick one on the KRW development. Is that net, netted again, the $34 million favorable development? Was it $50 million favorable and $14 million KRW?

Yes, it is.

The $48 million is; okay. Can you give us a little more detail on the $400 million life settlement contract you have entered? Or how that is going to work, how it is going to flow through?

It will be in our other investments portfolio. If your question is more around the accounting, we carry it (multiple speakers).

No, no, that's fine. So that is -- okay, it is something else [in] your investments. Then on the Florida issue, I realize that you have next to no exposure on the residential side. But can you just quantify how much exposure you have on the commercial side, to the extent that Citizens is able to get up and running? How much on both the reinsurance and the insurance side you have in terms of premium exposed there?

I have said to you what the reinsurance exposure was, which is pretty minimal. On the insurance side, it is difficult to really quantify, because you have national accounts, and it's difficult to really understand how those national accounts would be affected, because some have minimal Florida exposure.

But just as we said, that the overall exposure to our reinsurance portfolio is under 2% of our reinsurance underwritings, I think that for the Company as a whole, if I was to gauge it, including our reinsurance exposures, it would be under 2% for the exposure of our current underwriting portfolio.

Right, and finally, can you quantify the --?

So it's pretty minimal.

Got you. Could you quantify the current year reserve releases from the attritional true-up in the fourth quarter, how much that lowered the fourth-quarter loss ratio?

We don't have that number. We don't look at it in that way and we don't disclose that.

Okay, thanks a lot. Good quarter.

That was your final question. I would like to turn it back over to Linda Ventresca for closing remarks.

At this time we have gone over the hour allocated for the call. If you have further questions please do call us on the investor relations line at 441-405-2727.

Thank you once again, ladies and gentlemen. We look forward to speaking to you again at the end of the first quarter. Thank you.

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