AXIS Capital Holdings Ltd (AXS) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2007 AXIS Capital earnings conference call. My name is Torlicia and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms. Linda Ventresca, Director of Investor Relations.

Thank you, Torlicia. Good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter ended March 31, 2007. Our first-quarter earnings press release and financial supplement were issued yesterday evening after the market closed. If you would like copies, please visit the investor information section of our website, www.axiscapital.com.

We set aside an hour for today's call, which is also available as an audio webcast through the investor information section of our website through May 25. An audio replay will also be available through May 11. 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 37981334.

With me on today's call are Michael Butt, our Chairman; John Charman, CEO and President; and David Greenfield, our 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 Windstorm Kyrill, future growth prospects and financial results, evaluation of losses and loss reserves, investment strategies, impact in 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 calculated using the if converted method 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.

Well done and thank you, Linda. Good morning, ladies and gentlemen, and thank you for taking the time to join us this morning. I'm going to begin by making some opening remarks. Then I will turn the call over to David Greenfield to review our financial results. Following David's review, I would like to discuss current market conditions.

I am pleased to announce record earnings for AXIS Capital for the quarter ended March 31, 2007. We have earned $228 million in net income and delivered an annualized return on average common equity of 22.6% for the quarter. Our diluted book value per common share increased by 5% from year end to just over $25 despite overall pretax net losses from Windstorm Kyrill of $30 million. These record earnings were driven by our high-quality diverse underwriting portfolio as well as increased investment earnings.

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

Thanks, John, and good morning, everyone. As John mentioned, we are extremely pleased with our results for the first quarter of 2007. Our first-quarter results marked the sixth quarter in a row of record earnings against the comparable prior year period. This demonstrates the powerful earnings potential of the AXIS franchise.

For the quarter, net income was $228 million or $1.37 per share on a diluted basis, a 17% increase from the $195 million or $1.19 per diluted common share for the first quarter of 2006. After-tax operating income, which excludes the impact of realized gains and losses on investments, was $227 million or $1.37 per share on a diluted basis compared with $205 million or $1.25 per diluted common share for the first quarter of 2006. These results translate to an annualized return on average common equity for the quarter of 22.6% and diluted book value per share accretion for the quarter to 5%. For the twelve months ended March 31, 2007, our diluted book value per share accretion was 27%.

Turning to our top line, our consolidated gross premiums written were $1.3 billion, a 12% increase for the quarter. Most of this growth was attributable to our global reinsurance operations would had a successful January 1 renewal. When taking into account the favorable impact of exchange rate movements in our reinsurance segment, our consolidated gross premiums written were up 8%.

Gross premiums written in our insurance segment were flat. Reduced writings in the U.S. casualty business and our continued withdrawal from the aviation and terrorism lines due to competitive conditions were offset by growth in U.S. catastrophe exposed lines and in political risk business.

Gross premiums written in our reinsurance segment were up 19%, which included some benefit from exchange rate movements. The real driver for growth here was continued penetration of targeted business in the U.S. and European reinsurance markets.

We grew in the global property and U.S. liability areas and in our engineering line of business in Continental Europe, which we started late in 2006. This follows a very successful year focused on repositioning the catastrophe reinsurance portfolio. John will further discuss development of our reinsurance portfolio in his commentary on the business overall.

In line with gross premiums written, consolidated net premiums written rose 15% for the quarter to $1.1 billion. Consolidated net premiums earned grew 8% for the quarter. The slower growth in net premiums earned compared with the growth in net premiums written is attributable to the change in mix of earned business in our insurance segment. We have increased writings over the last year in the political risk line where the business generally earns out over a longer period of time.

Moving on to our combined ratio, for the quarter it was 80.7%, which compares with 79.5% in the same period last year. Our insurance segment combined ratio was 81.5%, up 11.3 points relative to the same period last year due to a lower level of favorable reserve development this quarter. Our reinsurance segment combined ratio was 76.8% as compared with 85.3% for the first quarter of 2006. This is down 8.5 points relative to the same period last year as we experienced favorable reserve development of 10 points in the segment this quarter.

Our overall net favorable reserve development was $66 million or 9.6 points in this quarter. Of this amount, $29 million was from our insurance segment, representing a positive impact of 9.1 points on the segment's loss ratio.

Our reinsurance segment contributed $37 million, which represented a positive impact of 10.1 points on the segment's loss ratio. All of the favorable reserve development continued to be related to short tail lines. As always, we caution against comparing the level of reserve development amongst periods. However we believe that our very high standard of conservative reserving for which we have used a consistent methodology every quarter since inception in all lines of business should be substantially considered in any evaluation of the overall quality of our results.

Our overall accident year loss ratio for the quarter of 66.9% compared with 66.2% in the first quarter of 2006. Our insurance segment accident year loss ratio was relatively flat at 68.1% and our reinsurance segment loss ratio was 65.9%, up 2.4 points. Our reinsurance segment's accident year loss ratio included almost 8 points for catastrophe losses related to Windstorm Kyrill in Continental Europe. In our announcement of February 1, we provided an initial estimated range of $40 million to $55 million for potential claims to AXIS related to Windstorm Kyrill. Our initial estimated range was based on a review of in-force contracts and preliminary loss information from clients.

Since that time, we have obtained much more detailed information from clients which has positively impacted our analysis of exposure in higher excess layers of reinsurance programs in particular. The latest information resulted in a reduction of our preliminary estimates to our current group estimate of pretax net losses of $30 million included in the quarter's results almost entirely attributable to our reinsurance segment.

On the whole, this loss is within our expectations of loss activity in our reinsurance segment for the year; however, it does present some upward bias in the accident year loss ratio for the reinsurance segment in the quarter. As the year progresses, we gain more certainty with respect to the occurrence of major catastrophe and large loss events for the year overall and our accident year loss ratios incorporate our experience in due course.

Our total cash and investments increased to just under $10 billion at March 31, 2007, up from $9.7 billion at year end. Net cash generated from operations was $305 million for the quarter which includes net loss payments of $268 million. Net losses paid for the quarter included $125 million related to KRW and bring our net total payments for these events to 79% of our estimated net losses.

Pretax net investment income increased 34% this quarter over the comparable 2006 period to $125.3 million and was up slightly relative to the fourth quarter of 2006. The increase is due to larger investment balances, higher yields on cash and fixed maturities, and continued significant contribution from our other investments portfolio.

Relative to the first quarter of last year, net investment income from cash and fixed maturity investments increased 25% to $100 million and net investment income from our other investments portfolio increased 89% to $25 million. The yield earned on our cash and fixed income portfolio increased to 4.9% from 4.5% in the same period last year in line with increases in short-term U.S. fixed income yields.

The other investments allocation produced a quarterly return of 1.8%; however, we continued to caution against extrapolating the income earned on the other investments portfolio in any one quarter over an extended period.

Net realized gains for the quarter were $301,000, as opposed to net realized losses of $10.9 million in the first quarter of 2006. While there were a number of events in the quarter that caused concerns in the financial markets such as those related to subprime mortgage exposure, our investment portfolio was not negatively impacted by these events. $80 million or less than 1% of our current portfolio is exposed to subprime mortgages and substantially all of this exposure is in AAA rated tranches, all of which have been relatively unaffected by this issue.

Our cash balances as a percentage of the overall portfolio were maintained during the quarter as the risk/return profile of short duration assets currently continues to be better than longer dated assets. Additionally we maintained 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. With a cash position representing 20% of our portfolio, we have the flexibility to quickly extend portfolio duration or allocate to other investment sectors should the opportunities arise.

In the first quarter, we began to reduce exposure to U.S. high yield credit through sales of certain positions in our other investment portfolio and we expect to continue to modestly reduce our exposure here over the next few quarters and shift areas where we see better relative value.

Changes in exchange rates primarily between sterling and euro versus the U.S. dollar had a positive effect on our net asset positions and resulted in $2.4 million in foreign exchange gains during the quarter, which compared with a $9.3 million gain in the 2006 quarter. Our interest expense for the quarter was $15 million, compared to $8 million in the first quarter of 2006. The increase was due to interest costs incurred on the $400 million repurchase agreement we entered into in December 2006 to fund our investment in the life settlement contracts portfolio.

Net losses reserves stand at $3.8 billion, of which $2.7 billion or 71% are IBNR reserves. I am pleased to say that overall our balance sheet is as strong as it has been since our inception more than five years ago. We finished the quarter with $4.6 billion in total shareholders equity and total capital of $5.1 billion.

Before I turn the call back to John, I would like to review a few points regarding our capital. As we said during our earnings call in February, our 2007 plan contemplated deployment of our available capital and consequently we had no immediate plans to undertake any significant capital management initiatives. Our first-quarter results are consistent with our production plans and return expectations; however, for catastrophe exposed business, we are in somewhat higher excess positions due to higher client retentions. We believe this translates to a better risk/reward trade-off, but there is some increase in volatility of the portfolio associated with this positioning.

While overall premium volume growth may appear to be moderating against an increasing capital base, relative premium amounts amongst periods are not good proxies for measuring capital utilization. We continuously review our capital position against not only our current portfolio but also our expected portfolio at any given time. At this point, we can reasonably expect to deploy capital we generate at the returns that we require. If that changes, we will with consideration for rating agency view of capital adequacy consider alternatives to return what we deem excess to shareholders.

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

Thank you, David. I will begin with some discussion about first-quarter results, market conditions in our reinsurance segment, and then move on to a similar discussion on our insurance segment.

As a general comment, overall discipline throughout the reinsurance marketplace is being maintained, but we continue to experience increasing pricing pressure against the backdrop of our relatively loss-free environment. At January 1, approximately 18% of our reinsurance renewal book from 2006 was nonrenewed. The reasons for this were twofold. Firstly, we declined business which did not meet our strict criteria on renewal. And secondly, a number of cedants decided to retain more of their business net. Despite these two factors, we grew reinsurance gross premiums overall at the January 1 renewal date. Our growth primarily came from targeted new business as well as treaty structure change.

As mentioned earlier by David, growth was aided by the favorable impact of exchange rate movements. Approximately 20% or almost $170 million of our reinsurance portfolio bound and authorized at January 1 was new business to us and the majority of this was from the U.S. market. To remind you, we are still not a fully mature market in either the U.S. or Continental Europe. Therefore we do not often encounter counterparty concentration issues limiting our ability to pursue new well-priced business or, importantly, to expand participation in existing desirable business.

When business moves away from us due to pricing or higher retentions by an existing client, we still have ample ability to continue to develop our portfolio, replacing nonrenewed business with attractive new business while maintaining overall risk/reward portfolio goals. New business comes to us in our reinsurance segment as a result of our reputation as a consistent, strong technical and service oriented reinsurer with more than five years now of history.

Also our selective entry into new specialty areas like engineering in Continental Europe has contributed meaningfully. Nearly half of our reinsurance gross premiums written last year incepted in the first quarter. This weighting towards the first quarter is heavily influenced by our reinsurance portfolio in Continental Europe. The overwhelming majority of this business renews on January 1. This portfolio was renewed at acceptable pricing and at levels of expected profitability very similar to those of last year.

Combined with our renewals in the U.S. and in the Bermuda based property account, we expect this diversified portfolio will provide high-quality returns for the year.

The catastrophe reinsurance market at January 1 was both orderly and stable, as there was less uncertainty with respect to the magnitude and direction of exposure change underlying catastrophe exposed reinsurance business. As 2007 progresses, underlying exposure growth and experience continues to be dealt with appropriately and technically by the vast majority of the reinsurance market. Recently in the U.S. on national placements, we have seen margins above expected loss experience show some deterioration. But these margins still remain at very attractive levels overall. At this time we are seeing some increasing price pressure as well as greater coverage afforded for per risk business. However, our portfolio still remains balanced with appropriate terms and conditions being applied.

As stated previously, the expansion of the Florida hurricane cat fund is having little impact on our reinsurance business. Obviously some Florida businesses left the reinsurance market; however, opportunities are arising from the uncertainty with respect to clients' ability to collect from the funds and from the single occurrence limit aspect of the coverage provided. Cedants must address the potential for aggregate losses in excess of the coverage offered by the fund and are continuing to address this (technical difficulty) through the traditional reinsurance market.

At AXIS, our underwriters continue to bring value to the catastrophe market and to our shareholders through the application of our extremely strong technical capabilities to emerging issues. Of late we have been a leader in advocating for tighter limitations on inclusion of windfall assessment exposure in all catastrophe covers and explicitly consider this exposure in our analyses. At this time, we believe that not all participants in the market are exercising similar discipline.

In the liability reinsurance lines we underwrite, we are more than aware of any deterioration in pricing by product line in the primary market cedant by cedant. We priced accordingly and we believe we are more than adequately compensated at this time with the renewal reinsurance terms and conditions that we are able to achieve.

Moving on to a discussion of our insurance business, the first quarter is typically less eventful from a business production standpoint and we will begin to see more renewal activity in the second and third quarters. In some lines of business like catastrophe exposed property and energy business, rate increases have moderated but current rate levels continue to produce returns above historic levels.

In areas where the competition has been much more aggressive such as terrorism, aviation, and non-U.S. property, we are maintaining our extremely cautious and defensive posture. In lines such as primary casualty, umbrella, and professional lines, we have seen even more pricing pressure in the last two months. These lines still contain good profit potential but bear even closer scrutiny. Throughout all of these lines, our risk selection capabilities and overall execution strategy become even more critical.

Historically we have demonstrated our capability to hold our own in this type of competitive environment. Overall we expect the benign loss environment experienced by the industry of late to continue to accentuate softening in the marketplace. However, the factors leading to the adverse excesses of the late '90s, including broad use of multiyear policies, wider coverage, and heavily discounted premiums, have not yet appeared in any meaningful way.

We feel (technical difficulty) about our strong presence in both the insurance and reinsurance ends of the business as well as the diversity within each of these businesses. Our substantial presence and reputation in both segments will continue to serve us well in this competitive environment.

As I explained during our last earnings call, given the high-quality of our global portfolio absent major catastrophic 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.

We continue to evaluate our capital on a regular basis and if we believe we're generating capital in excess of our longer-term franchise goals, we will consider alternatives for greater return of capital to our shareholders. We believe opportunities are available within a reasonable period of time to deploy the capital we generate. Also at this time, rating agencies are constantly moving the bar for the industry; therefore we are maintaining a prudent view with respect to our capital.

On the topic of longer-term franchise goals, I do want to discuss our planned acquisition of the assets and operations of Media/Pro announced during this quarter which we expect to close imminently. This acquisition represents a significant step in the deliberate continued build out of our franchise in businesses which are better insulated from the vagaries of the PNC marketplace.

Media/Pro is a long-standing, high-quality, full-service managing general underwriter with operations in the U.S., Canada, and the UK. It is also an acknowledged market leader in the specialty areas it addresses. Professional liability lines written by Media/Pro include media liability insurance, cyber technology insurance, and miscellaneous professional liability insurance. AXIS has been Media/Pro's exclusive carrier for several of its E&O liability programs for over two years and we know the company and its management well.

Our premium volume generated from the Media/Pro relationship in 2006 was approximately $55 million and we now have renewal rights to the broader portfolio which represents approximately an additional $70 million of annual premium. More importantly, we have acquired a franchise which has historically been very effective in attracting and retaining specialty business from the small to medium enterprise segment of the market. This acquisition represents a critical step in developing the select markets division of AXIS Insurance. We will continue to actively seek opportunities like this as we are firm believers in patiently and diligently building our global specialty franchise.

Against a backdrop of an intensely competitive industry, we have consistently demonstrated that we are an intelligent first mover willing to pull back from business lines where the risk/reward trade-off is no longer sensible. We have also demonstrated that we are more than capable of growing our business in attractive areas which continue to enhance our overall risk/reward profile. We remain focused on increasing profit potential in new areas for us by entering with a business model which delivers our strong underwriting skill sets to the business at hand, simultaneously reduces associated operating costs, and minimizes integration/execution risk.

In conclusion, I would ask you to focus on the earnings power inherent in our franchise, as evidenced by our excellent performance since inception. We expect earnings throughout 2007 to continue to benefit from our high-quality underwriting portfolio which is as strong as ever, as well as our investment earnings on the back of our continued strong cash flows. Against this powerful backdrop, we continue to strive for an even higher quality of earnings with our deliberate and diligent efforts in areas like our select division.

Finally, we are holding an investor day in New York City on June 7. We look forward to introducing you to our management team and discussing our global operations and strategy. This event will be webcast. For further details, please contact Linda Ventresca. With that, I would like to open the lines for questions.

(OPERATOR INSTRUCTIONS) Matthew Heimermann, JPMorgan.

A couple of questions. First, you had a pretty good explanation for what was driving the growth in liability. I was hoping you could give us a flavor in terms of the types of clients where you're seeing increased penetration or new business growth as well as excess of loss or pro rata?

(technical difficulty) second one?

Oh, the second one is gong to be in terms of -- you obviously have with the Media/Pro acquisition been involved in M&A. It seems like chatter at least in the press is picking up. So I was just curious how your M&A activity might change the competitive landscape in terms of the businesses that you focus on?

And then the third question, David, is if you could just quantify the interest income associated with the life settlements relative to the increased interest costs.

Yes, in terms of our liability growth, it was within the regional and specialty businesses in the U.S. and we have very experienced people. We have very good reputations. I have said to you time and time again, we are very proactive in sourcing business and executing transactions. We are very active in marketing to our client base and our client base wants to use us and we're not a mature marketplace as we said. So we're still growing into those portfolios.

With regard to the M&A activity, were you talking about the industry or the (inaudible) companies? What --?

Industry broadly, so that could include global reinsurance, U.S. insurance, or even London markets.

We tend to continuously scout the landscape but it is very difficult to find synergies and real shareholder value, quite honestly. There are a lot of very good investor -- investment banking friends constantly turning up and talking to us. But at the end of the day, we look to finding businesses like Media/Pro and Media/Pro have got over 20 years of experience; first-class management; first-class operational strategy; first-class reputation; and those are the sort of businesses where we may have a trading relationship with them already as we did with Media/Pro. And we're very happy to try and persuade their management to actually join the AXIS family.

We will use that as an extremely good platform to grow that portfolio, so we're looking for that type of business arrangement. We're not looking to take tail risk and we won't do that because we have great regard for the strength of our balance sheet and the cleanliness of it that's contained within it. And that is a big hindrance to a lot of the M&A that may be wanting to take place out there as well, but we're going to continue to search for Media/Pro type opportunities. We're very focused in the lines of business we want to search in and we know the people we'd like to team up with and we will continue to do more of it.

David, do you want to do the life insurance?

Sure, Matt, on the life settlement contract, I think if you look at the other investments portfolio in total our targeted return is around 8% and the life contract similarly meets that return. So over the life of it, we're looking at about a 8% yield on the asset side and the liability side it's about a 6% rate. So we're looking at about a 200 point spread between the two.

(multiple speakers) I was just going to ask what the duration of that life settlement contract is? (multiple speakers)

I think it's up to -- I'm sorry -- go ahead.

I was just going to say, should I just assumed that in perpetuity relative to how far I run my model out or --?

Yes, it is about -- I think we're looking at about 10-year life but obviously it has affected lots of underlying factors. And I think the other thing just to maintain for you is we do account for the asset side on a fair value basis, so there are always fluctuations quarter-to-quarter in that overall return.

Okay.

And Matt, I just want to go back to the M&A side as well that the industry M&A activity doesn't really affect us and in fact it would be very helpful to us if some of our competitors actually merged with each other because two and two never equals four. And it would take away some of the weaker competition from the marketplace and provide greater solidity and strength. So I hope that these weaker players do actually get together.

I appreciate it. Thank you.

Alain Karaoglan, Deutsche Bank.

Good morning. I have a couple of questions, John. Are you surprised by the discipline that seems to be followed by the property/casualty company in this environment? What are your thoughts going forward? Is that going to continue?

The second question relates to loss cost trends. Have they been better than what you have --? Obviously you have had reserve releases so they are better-than-expected. What are your thoughts on that front as well?

And the other question for David, just a clarification on the life settlements. Does the investment income -- does the revenue side come through the investment income line? You mention that the alternative investments were 1.8 points but we should not extrapolate. Did I hear that correctly? Because if I annualize that, that's 7% per year. That doesn't seem excessive to me, so if you could clarify what you meant by that?

Okay. I'm glad you stopped to pause for breath but perhaps if you could just repeat the first part of that question.

Sure. Are you surprised by the discipline that is exhibited on the property/casualty companies because the environment (multiple speakers).

I'm not surprised because three years ago we were very much out of step with the rest of the marketplace in the fact that we felt there were better opportunities for continuing sustainable growth in the reinsurance marketplace than on the primary side and I think that has been proven to be the case. You have a much more limited marketplace. It does not tend to be as affected from a competitive standpoint from weaker outliers in the reinsurance sector in the primary market and its seems that the primary market, the strength of the brokers in a much less technically driven marketplace, they are able to use much weaker competitors to drive pricing downwards than the reinsurance market.

As I said, the reinsurance play is much more technically driven, I believe much better managed, much better focused, better diversified, and is very consistent -- sorry excuse me -- I'm getting over a cold -- much more consistent in its approach to a global portfolio. It is a very dynamic market. I think the primary market you've heard me criticize time and time again which is still largely too [Dickensian] and Chief Executives are still far too divorced from the daily operations of their businesses in that marketplace.

So we will continue to drive our reinsurance business very selectively. Our portfolio is fundamentally different from the other major reinsurance companies because they are heavily weighted towards pro rata business in their reinsurance portfolios. From the outset, we chose to be predominantly, the vast majority of our business is excessive loss business, which we have been able to continue to grow as cedants have retained more business and moved away from proportional reinsurance to affecting excessive loss reinsurance. We believe it is much more stable. It suits our business model. We believe we have much greater control over the portfolio and it gives us a lot more flexibility.

I'll leave the other questions for David to answer, sorry.

Sure, Alain, on the loss cost question, in a number of lines our loss cost trends are very, very good and I just don't think we can speak for the industry overall. It is probably too early to comment on the long-term trends relative to prospective pricing that we have.

On your question about the life settlement and the other investments portfolio, I would view my comments on the extrapolation is more of a health warning than anything else. I think the returns this quarter were good, but I think if you look at the returns over a longer period of time, they do jump around. So while I think when you were modeling you want to be cautious about not modeling any one particular quarter over a longer period of time come and that is really the purpose of those comments.

And you did say 1.8 points in this quarter?

Right.

Okay.

That is the return in the quarter and I think you also were asking the income on the life bond is in the investment income line.

Thank you very much.

Adam Klauber, CCW.

Coming to July 1, maybe if you could be a little bit more granular where you see the potential opportunity this year compared to last year? I guess number one, do you favor reinsurance over primary or primary over reinsurance?

Number two on the reinsurance and given the changes in Florida, I know you haven't been -- you weren't huge though last year -- but given the changes in Florida, are you interested in purchasing Florida at all? Will you play above the fund, below the fund? And if you're not going to play in Florida on the reinsurance side, do you like the E&S market given that there is a lot more demand over there?

Okay, I think I addressed in my prepared remarks where I thought the market was going and I -- what is happening is as primary underwriting businesses adjusted their underlying portfolios to the new models that came out during '06, I think that the reinsurance market was feeling its way through '06, which is the best way that I can --.

I think the underlying data that we are now getting from cedants will help us to more efficiently measure the underlying cat risk within their portfolios and we will be able to price it I think more consistently through '07. That means that the pricing is going to move around a bit. Some will go up and some will come down but I believe it is going to be technically driven. It will be exposure driven. And I think as cedants produce much better information, they should be in credit for the quality of the underlying data that the underwriters need to assess risk and price it.

So we believe that we will continue to be able to trade appropriately and strongly in the cat related lines for 1/'07 on the reinsurance side. And we will not put our capacity out, whether it is Florida or California or northeast coast, unless we can get our adequate pricing. We just will not do it. We will sit on our hands. But I do not expect that to happen judging by the market conditions that we're seeing at the moment.

With regard to the primary side, and this is where we like being a primary on a reinsurance company because we are portfolio managers. I have always said to you that what we can do on a daily basis is to flow capital into the different parts of our business where we see the best opportunities and because we have a management that is so embedded in the daily underwriting process, we can portfolio manage efficiently our portfolio on a daily basis and that is what we will do.

So we expect to see continuing opportunity in Florida on our E&S side, but again, that we have high standards of requirements for underlying data and pricing and there's plenty of business out there for us to participate in. So I am pretty comfortable about that from 1/'07. Does that get to your question?

Yes, that helps. Thank you, John.

Kevin O'Donoghue, Banc of America Securities.

A couple of quick questions. You really touched on this in your last answer come but I am just wondering your reinsurance segment saw substantially stronger growth than your insurance segment this quarter and I'm wondering if there is anything that we should take away from that in terms of the relative adequacy of rates or terms and conditions of one segment versus the other?

It is difficult, Kevin, because both portfolios of business have different flows throughout the year. As you know, our first quarter on the primary side is probably our weakest quarter so you'll have to take that into account and then you've got to get into the underlying mix of that first quarter business on the primary side. And as you know, we were the frontrunner in terms of two years ago withdrawing substantially from the aviation marketplace. We have been withdrawing substantially from the terrorism marketplace over the last 18 months both because of what we consider to be irrational and unsupervised competition.

We have also in the last three months been quietly withdrawing from a lot of our marine business because we believe that the marine business has shown the same sort of senseless characteristics from a pricing standpoint that are evident in the aviation and terrorism markets.

So coming back down to that business mix, and we've said on the -- conversely on the reinsurance side, about 90% of our European reinsurance business incepts at January 1. Half of our total reinsurance business we get in the first quarter and then you have to look within those portfolios at the different underlying productlines.

So I am not reading -- I expect insurance portfolio probably to be flatfish as we progress through the year but within that, it is -- I always say to my colleagues, it's a bit like my mother's minestrone. Our vegetables change on a daily basis and that is our job and we think we're pretty good at it. But what we have to do is make sure the flavor at the end of the day is acceptable to our shareholders and that is what we do and we think we're pretty good.

But there is going to be a lot of portfolio mixing on the primary side as we get through this year but we are still pretty comfortable about our position on the primary side. We have good execution. We have good intelligence in the marketplace. We know where the business is. We know who has got it. We know when it is coming to market and we get our deals. The rest of the market, well buyer beware.

Okay, on that marine that you mentioned, you said you're quietly pulling out. Is that more on like the hull and cargo side or the energy side?

It's the marine hull largely. You know I worked for a shipowner back in the early '80s for five years and the trouble is with the marine hull market which is an international marketplace, the brokers, which they are capable of doing, are slowly commoditizing that business. They are far too strong in comparison to the underwriting businesses that are underwriting that. The underwriters who are responsible for underwriting that portfolio, in my view, are inexperienced. They have no fundamental understanding of what rating needs to be applied to a global productline in order to withstand not only the attritional losses but the very regular, major occurrences.

Bearing in mind I started off my career in 1971 as a marine underwriter. I pulled my hair out at the way that that market is underwriting and being supervised. But let them get on with it and they will show the inevitable losses. I can assure you they're going to be there.

Okay, then just one other quick thing if I might. Citizens in commercial coverage on Florida, I think last quarter you seemed a bit skeptical that the expansion of that facility was going to have an impact. Has that in fact turned out to be true at least to date or how do you see Citizens affecting that market?

It is as we thought it would be and they're actually being very restrained.

Okay, thanks very much.

Vinay Misquith, Credit Suisse.

Some of your peers have decided to reduce their exposure to reinsurance because they don't trust the underwriting decisions of the primary insurers in the softening market. How would you contrast that with your decision to increase your reinsurance writings and how are you protecting yourselves from softer underwriting conditions on the primary insurance side, especially given that I think you mentioned 20% of your business is new business?

As I said, firstly you have to distinguish between companies that are saying they're reducing their writings or that business is just not available to them anymore on the reinsurance side. And don't forget that we, when we established our reinsurance business back in '01, we said that we were going to be an excessive loss underwriter with a limited amount of pro rata. The traditional reinsurance business in the marketplace relies heavily on pro rata business.

That has become less attractive from a buying point of view over the last five to six years and so those traditional reinsurers have seen their core business essentially just fall away. They have yet to react quickly enough to the emergence of the excessive loss reinsurance marketplace, which suits us and they are struggling to rebalance their portfolio. We are not. We were deliberately positioned there from day one. We have the people, the skill sets to be able to do that.

With regard to your question about how do we deal with underlying deterioration in the underlying portfolios, this is where it helps us enormously being an insurance business that is very capable of understanding day-to-day movements in the individual productlines upwards or downwards and being able to decide our flows of capital onto the reinsurance side.

We know which cedants are acting responsibly in the primary market. We know the quality of their data. And we will real-time price in in our own pricing what we believe the strength or the weakness is in those cedants' portfolios. We have a unique insight and because of the connectability we have between our underwriters, not in an improper way but from a market intelligence point of view, that we are able to be more proactive in our assessment of the underlying cedants' portfolio, the quality of it, and the price of it that we are able to maintain our margin and we will continue to expand our portfolio in a very deliberate and focused way.

I have always said to you about the strategic importance of having a good insurance business and a very sound reinsurance business and the connectability between the two.

Would it be fair to assume that since you are largely an excessive loss player you would not really be following the fortunes of the primary insurer largely?

Yes, absolutely. We can choose exactly where we want to come in within the program, whether we would like to come in at a higher level or whether we are comfortable to come in at the middle or towards the lower end and that is cedant by cedant, reputation by reputation.

Okay, that's great. (multiple speakers) And on the acquisitions front, looking at the Media/Pro acquisition, it appears that you're looking for small specialty writers. Would that be fair? Should I be surprised if one day I see the news and you're buying another Bermudan player?

Well I am not sure there is a small specialty Bermudan player actually. But as I said, I find it very difficult to actually look at synergy that can be created, because most businesses are diversified. Some are much stronger than other players. We look to acquire businesses that we currently either do not have within our portfolio, but we still have the overlying skill sets. We're not going to take businesses in that we can't control, understand, and grow.

So we're looking for very specialist areas within our existing portfolios that currently do not fit our portfolio and that is why I was banging on last quarter about having very good technology, introducing real good technology to these businesses, and making them international businesses with a much stronger franchise than their very good national franchise that already exists.

Thank you.

Jake Cohen, Merrill Lynch.

Two questions. The first is, I forget who mentioned it but when you were talking about the reinsurance growth, one of the issues you brought up was changing some treaty structures and I'm wondering what that means?

The second one is your own sort of reinsurance retention, your net to gross, should we expect that to change much going forward?

Okay, I was just writing down your question. In terms of the growth in structure change within the existing portfolio, it is part of a renewal process that cedants are constantly trying to fine-tune their outward ceded business to gain maximum benefit. And obviously one of the skill sets we have is making sure that we model that and are able to calculate the value of those growth and structure changes which is implicit in our rating structure.

So that is a reasonably strong part of what happens on a renewal portfolio and we actually do understand and can put values to those specific growth and structure changes. And then of course you have your new business but it is an inherent part of our renewal process. Then secondly, on our outwards treaty (inaudible) failure, we are renewing our property, parts of our property outwards treaty at the moment. What we have done is that we have consolidated our buying that we reported some time ago onto a global basis to bring greater efficiency, greater buying power to bear in out outwards reinsurance purchasing and we would expect to have some reasonably favorable development in that.

Bill Wilt, Morgan Stanley.

Just one numbers question at this point. Or if you could discuss the earnings pattern for political risk insurance and just characterize it broadly vis- -vis more typical insurance products. That would be helpful, thanks.

Let me characterize what we -- David can pick up the second part. Our book is heavily oriented towards confiscation, expropriation, nationalization, deprivation, and sovereign default. That is almost 75% of our in force business. You know that we have characterized CEND and programs, cover multinationals investing overseas and buying protection against confiscation by a host nation.

Sovereign default obviously provides coverage for nonpayment of loans to sovereign or subsovereign states. We also provide protection on a structured credit base transactions where lenders seek to mitigate some of the nonpayment risk of their borrowers. But the one thing I want to emphasize to you, Bill, is that I have personally been transacting this business for 30 years. We have a specialized group of individuals that includes me, if I can be nice to myself; there are four of us with over 80 years of experience in aggregate in this type of business. John Gressier is a part of that and he has over 20 years in business. We have two other very capable individuals.

This is a part of our business that has the greatest amount of peer review and signoff of any of the businesses that we undertake at AXIS. We've been transacting this business for a long, long time. It is a very disciplined, a very focused approach with a limited number of key producers that we have had long-standing relationships with and it has always been a very complementary part of our portfolio.

Do you want to take the duration, David?

Bill, I think it is important to recognize that the exposure periods obviously go greater than a year on the sort of business that John was describing. On average, though, I would say the amortization period of the premium is about five to six years.

That is low in the marketplace. We deliberately keep that in that range.

That is helpful. Thank you very much.

Ladies and gentlemen, this now concludes our Q&A session. I would now like to turn the call back over to Mr. John Charman for any final remarks.

Thank you. Once again, thank you, ladies and gentlemen, for taking the time to listen to us. We have had a great quarter. We expect to continue to do so for the rest of this year. So thank you very much.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.