AXIS Capital Holdings Ltd (AXS) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 AXIS Capital Holdings Ltd. earnings conference call. My name is Lacey 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 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 our host for today's call, Ms. Linda Ventresca, Investor Relations.

Thank you, Lacey. 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 year ended December 31, 2007. Our fourth quarter and full-year 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 Friday, February 29, 2008. An audio replay will also be available through Friday, February 15, 2008. The toll-free dial-in number for the replay is 888-286-8010. The international number is 617-801-6888. The pass code for both replay dial-in numbers is 83338412.

With me on today's call are Michael Butt, our Chairman, John Charman, our 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 Q&A session, which are not historical facts may be forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements contained in this presentation include, but are not necessarily limited to, information regarding our estimate of losses related to catastrophes and other loss events; future growth prospects and financial results; the valuation of losses and loss reserves; investment strategies; investment portfolio and market performance; 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 operating income, which is a non-GAAP financial measure within the meaning of the U.S. federal securities laws. For a reconciliation of this item to the most directly comparable GAAP financial measure, please refer to our press release and Form 8-K issued last night, which can be found on our website.

With that, I would now like to turn the call over to John.

Thank you, Linda, and good morning to you all. We are extremely pleased to report record results for the quarter and year-end -- year ended December 31, 2007. I am proud that our established high-quality global franchise in both the insurance and reinsurance markets has delivered over $1 billion in annual earnings in the six years since our inception. We believe this achievement is unparalleled in our sector.

For 2007, our overall gross premiums written was stable relative to the prior year. However, underlying these overall topline results were continuing, important underwriting portfolio management changes. These portfolio changes are and our acknowledged company expertise in managing them real-time become even more critical during soft market cycles.

Our return on average common shareholders' equity was 24.6%. Diluted book value per common share increased 23% in the last year to $28.79. At the same time, AXIS returned over $400 million of capital to shareholders through share repurchases and dividends. I believe these quality-based results are a significant achievement during a year characterized by being highly competitive and increasingly irrational in our global insurance business.

With that, I would like to turn the call over to David to discuss our financial results in more detail.

Thank you, John, and good morning, everyone. As John mentioned, we are extremely pleased with the quality of our results for the fourth quarter as well as for the year. 2007 marks a record year for AXIS. Our fourth-quarter results produced record net income against the comparable prior-year period, the ninth quarter in a row of such performance. Our full-year net income, which was more than $1 billion, is also the highest in our history.

On almost every measure, 2007 produced exceptionally-positive results for us. This consistent and record-breaking performance throughout 2007 demonstrates the powerful earnings potential of the global AXIS franchise.

For the quarter, net income was $306 million, a 9% increase over the fourth quarter of 2006. Earnings per diluted share for the quarter of $1.89 compared to $1.69 per diluted share for the fourth quarter of 2006. After-tax operating income, which excludes the impact of realized gains and losses on investments, was $296 million, a 4% increase from the prior-year quarter. Operating earnings per diluted share increased to $1.83 from $1.71 in the prior-year quarter.

For the full year of 2007, net income reached nearly $1.1 billion, a 14% increase over 2006. Earnings per diluted share of $6.41 compared -- for 2007 compared to $5.63 per diluted share for the prior year. After-tax operating income was also nearly $1.1 billion, an 11% increase from 2006. Operating earnings per diluted share in 2007 was $6.38 compared to $5.78 in 2006.

These results translate to an impressive annualized return on average common equity for the quarter of 26.9% and 24.6% for the full year. Our year-end diluted book value per share of $28.79 increased 23% over the last twelve months.

Given the conditions in the financial markets affecting the financial services sector, it is worth noting that at AXIS, our usual disciplined approach to risk is expected to result in minimal adverse experience from issues related to subprime and broader credit deterioration. This is the case on both the asset side and liabilities side of our balance sheet and we will further discuss these topics later on in the call.

Turning to premiums, our consolidated gross premiums written for the fourth quarter was $573 million compared with $714 million in last year's fourth quarter. For the full year, consolidated gross premiums written were $3.6 billion, similar to the prior year. Gross premiums written in our Insurance segment this quarter were $509 million and compared with $551 million in the fourth quarter of last year. This 8% reduction reflects substantially-increased competition and rate pressures across the majority of our insurance lines.

For the full year, gross premiums written in our Insurance segment of $2 billion were comparable with 2006. Although market conditions in 2007 were increasingly competitive, we balanced the impact of this with a further broadening of our underwriting distribution operations this year.

Gross premiums written in our Reinsurance segment were $64 million in the quarter, down 61% from the fourth quarter of last year. The vast majority of the reduction in gross premiums written this quarter was primarily due to a continuing trend towards cedants retaining more business and a property-proportional treaty written in the fourth quarter of 2006 with a 16-month term. For the full year, gross premiums written in our Reinsurance segment were $1.6 billion, which was approximately 1% higher than the prior year.

Consolidated net premiums written decreased 32% in the quarter. This decrease was due to the reduction in gross premiums written in the quarter, the purchase of additional reinsurance coverage on a number of business lines within our Insurance segment, and the change in the mix of business towards lines with higher levels of seeded premium. Year-to-date, net premiums written were down 4% with the same seeded premium trends in the quarter also impacting the full year. In line with our period-to period changes in net premiums written and mix, consolidated net premiums earned were down approximately 3% in the quarter and up 1% year-over-year.

Moving to our underwriting results, our consolidated underwriting income for the quarter of $207 million was up 5% relative to the same quarter last year. Consolidated underwriting income was evenly split with $105 million from our Insurance segment and three -- or $102 million from our Reinsurance segment. Our combined ratio for the quarter was 70.8%, a 2.9-point reduction from the prior-year quarter.

Our consolidated underwriting income for the full year of $738 million was up 9% over 2006. Again, our two underwriting platforms produced equal shares of underwriting income -- $374 million from our Insurance segment and $364 million from our Reinsurance segment. Our combined ratio for 2007 full year of 75.3% was also down two points when compared to 2006. Our underwriting income in the fourth quarter and for the full year of 2007 benefited from strong current-year underwriting results, low levels of major loss events, and continued favorable loss development from prior periods. These underwriting results are even more credible when you consider the solidity of our current-year loss picks and the strength of our internal price monitoring system against the market conditions we faced.

Our net favorable prior-period reserve development in the fourth quarter of 2007 was $92 million, or 13.7 points. Of this amount, $71 million was from our Insurance segment, representing a positive impact of 24.2 points on the segment's fourth quarter loss ratio. Our Reinsurance segment posted $21 million in favorable loss development, representing a positive impact of 5.6 points on the segment's fourth quarter loss ratio. All of the favorable reserve development in this period is related only to short-tail lines. As always, we caution against comparing the level of reserve development amongst periods.

I would like to remind you that our approach to quarterly reserving remains disciplined and conservative. This has been consistent since our inception.

Turning to our current accident year loss ratios, our overall accident year loss ratio for the fourth quarter of 57.1% compares to 52.8% in the same quarter last year. This brings our overall 2007 accident year loss ratio to 62.4%, compared with 61% in 2006. Our loss ratios in both years reflect below average catastrophe activity and low levels of attritional loss experience.

Our Insurance segment current accident year loss ratio for the quarter was 58.8%, 8.8 points higher than the fourth quarter of 2006. As I discussed during our third-quarter call, we modified our development trends on catastrophe-exposed short-tail lines to incorporate some of our favorable loss experience at an earlier stage than we had in prior years. This modification, which impacts the comparability of both the third and fourth quarters' standalone ratios, does not impact the comparison of our 2007 full-year accident year loss ratios with the prior year's ratios.

Our Reinsurance segment current accident year loss ratio for the quarter was 55.9% compared to 55.4% in the fourth quarter of 2006. Our 2007 accident year loss ratio in our Reinsurance segment was 62.8%, a slight increase from 60.3% in 2006. The increase was mainly a function of changes in business mix with more longer-tail reinsurance lines in the mix, which generally have a higher expected loss ratio compared to our other lines.

Turning to our G&A expenses, our total G&A ratio for the full year was 11.1%, an increase of 1.1 points from 2006. The increase was primarily due to cost of additional staff over the past year.

Turning now to our investment portfolio, our total cash investments increased to $10.5 billion at December 31, 2007, up 2% for the quarter and 8% from the previous year end. Net cash generated from operations was $295 million for the quarter and $1.6 billion for the entire year. Our fixed income portfolio remains of high quality, with a weighted average rating of AA-plus and 91% of our securities are rated A- or better. The amount for which collateral comprises subprime or Alt-A mortgages is a negligible portion of our overall investment portfolio at $211 million, or only 2%. The significant majority of these securities are rated AAA or are U.S. government agency-backed. As a result the higher interest in this area, we added increased disclosure in our financial supplement as it relates to mortgage and asset-backed holdings, including further detail on subprime and Alt-A exposure. I encourage you to review this disclosure for further detail.

As you'll see, our exposure to structured credit remains of very high-quality. This is further evidenced by the relatively small unrealized and realized losses we've experienced in this area.

Our exposure to traditional monoline insurers primarily emanates from our municipal bond holdings. We have securities with credit enhancement from the traditional monoline insurers that total $381 million at December 31, 2007. This amount represents approximately 4% of our portfolio. The estimated underlying credit quality of these holdings, without the guarantee, is A-plus. We do not believe the insurance is necessary to own these securities. The unrealized losses associated with these securities at year-end were $2.4 million.

Our net investment income for the quarter was $125 million, a 2% increase over the 2006 quarter. We generated net investment income of $483 million in 2007, up 19% year-over-year. These increases were due to larger investment balances and higher yields on cash and fixed maturities. We expect that 2008 will represent a challenging year for investments, but we remain optimistic that our strong positive cash flow will continue to be the main driver of growth in investment income.

During the quarter, our net investment income from alternatives, or other investments, declined by $20 million from the same period last year, primarily as a result of the challenging quarter for credit-related strategies. This decline was due to continued repricing of risk in the capital markets and the lack of liquidity in virtually all fixed income markets. This negatively impacted the performance in the quarter for our credit funds and, to a lesser extent, our hedge funds. We believe this repricing of risk will provide us with significant opportunities in a number of areas in the upcoming months. Our high level of cash balances will allow us the flexibility to opportunistically investment where we continue to believe we will be more than adequately compensated for the risks we are taking.

Moving on, net realized gains for the quarter were $11 million, as compared with the net realized losses of $3 million in the fourth quarter of 2006. Net realized gains for the year were $5 million, as compared with $26 million of net realized losses for 2006.

With respect foreign exchange, strength in the euro offsets by weakness in sterling exchange rates resulted in a slight foreign exchange gain in the fourth quarter. This compares with $7 million in foreign exchange gains in the prior-year quarter. For the year, we had $17 million in foreign exchange gains, compared to $33 million in gains during 2006.

Our interest expense for the quarter was $8 million, which was similar to the expense in the prior-year quarter. Our interest expense for the fourth quarter of this year, as compared with each of the previous three quarters in 2007, was significantly lower. This reduction reflects the termination of the $400 million repurchase agreement, which was in place through the first three quarters of 2007.

Interest expense for 2007 was $51 million, compared to $33 million in 2006. The year-over-year increase also primarily reflects the impact of the repurchase agreement, which I mentioned is now terminated.

Turning now to our balance sheet, it is as strong as it has been in our history. At year end, our total net loss reserves stand at $4.2 billion and 71% of these net reserves are IBNR reserves.

We finished the year with $5.2 billion in total shareholders equity, an increase of 17% over December 31, 2006. (technical difficulty) with respect to capital management. We announced in December that our Board of Directors approved a 10% increase in our quarterly dividend. We have increased our dividend every year since we began paying dividends in 2003.

Also during the fourth quarter, we are able to repurchase 3.2 million of our common shares at a total cost of $125 million. For all of 2007, we were able to repurchase 8.2 million shares for $305 million. In December, our Board approved a new share repurchase authorization of up to $400 million of our common shares, which is set to expire on December 31, 2009. We also have $95 million of authorized share repurchases left from our 2006 plan, which will expire at the end of 2008. We will continued actively manage our capital position and evaluate opportunities as they arise.

Total capital to deploy in our globally-diversified franchise now stands at $5.7 billion. We believe our return on average common equity for the year of 24.6% more than demonstrates our ongoing ability to effectively deploy shareholders' capital.

Now I'll turn the call back to John.

Thank you, David. I would now like to spend some time discussing the market conditions. I will start with the reinsurance market. 2008 treaty reinsurance renewals are progressing as expected and we're pleased with the quality, diversity, and the balance of the portfolio that we reassembled at the first of January. Typically, approximately one-half of our treaty reinsurance premium is expected to renew during our first quarter.

We have not yet finalized all the treaty reinsurance business we expect to bind in this quarter. However, we can provide some preliminary indications based on what we have quoted and bound since the first of January. It is currently our expectation that the first-quarter treaty reinsurance renewals will represent a modest decline in premium as measured against premium expiring during the quarter. Generally, the reinsurance market could be characterized as remaining stable, with small pockets of irrational behavior. This behavior tends to be demonstrated by relatively new entrants to the marketplace, who appear to be desperate to make their premium budgets regardless of margin.

Our reinsurance portfolio continues to be impacted by cedants retaining more business. Importantly, we demonstrated strong leadership through our non-renewals and declinatures of new business because of either pricing concerns or underlying portfolio concerns. We have worked hard at maintaining a balanced, high-quality portfolio.

I will begin my more specific commentary on the reinsurance market with a discussion of various areas of the global property reinsurance market and then move onto the other areas of reinsurance. As expected, modest catastrophe claims for the reinsurance market lead to decreases in the margins for property reinsurance in most, if not all, geographic regions. However, overall returns are above acceptable levels, with major U.S. perils at the high end.

Generally speaking, capacity purchases, net of any exposure changes, were flat. However, in Europe, the premium savings there lead to increased capacity purchasing by cedants.

Retentions increased in the fair risk market for regional and super-regional companies in the U.S. and there were some retention increases for catastrophe business in Europe. Programs involving smaller companies, as well as the more discreet peril zones throughout the world, were characterized by more aggressive competition. Europe, Latin America, South America, and Asia felt the influence of the direct reinsurance market, as those companies sought to expand their marketshares almost regardless of cost in these already competitively-priced areas.

Overall, proportional property treaty margins were under pressure. We have reacted accordingly by reducing dramatically our activity in this area over the last year or so.

In the U.S. non-proportional property market, lower layers with more relative premiums suffered greater price competition. Softening in terms and conditions was pressed by brokers early on, but, at the end of the day, only resulted in a slight broadening in the hours clauses from 72 hours to 96 hours for hurricane activity. California wildfires were unfortunately seen as a nonevent despite some attritional cat losses being presented.

Non-proportional property placements in continental Europe suffered more competition than the UK market, where reductions were curbed by the impact of the UK floods. Many regional German companies with poor experience from the Kyrill windstorm faced increased pricing to reflect their loss experience. Competition increased significantly in other lines of business in continental Europe, but the focus on renewals was price and not terms and conditions. On an exposure-adjusted basis, rates were down five to 10%. While we've witnessed many more aggressive quotes than before, we do not believe any single competitor demonstrated consistently-foolish behavior across the broad spectrum of product lines.

In continental Europe, we're continuing to grow in the specialty lines, credit and bond, and engineering as we see better opportunities in these lines than we do in catastrophe, property, and motor reinsurance lines. In our U.S. general and specialty casualty lines, pricing pressure continues and increased ceding commissions are continuing to be sought on most accounts. Rate increases are still achievable on accounts with unfavorable loss experience, but even these accounts are now under greater competitive pressure.

As we have noted for some time, we are witnessing much more aggressive competition in the primary insurance marketplace than we are in the reinsurance marketplace.

Despite large attritional loss experience in the last few months, the aviation market has not yet moved on pricing and continues with premium reductions on an exposure-adjusted basis of 20 to 30%. Against the backdrop of spiraling exposure increases, the aviation market defies logic. Underwriters recognized that 2007 was unprofitable, but they appear unwilling or unable to either stabilize or increase pricing in their sector.

Aviation, war, and terrorism business also continued to be under significant irrational and unmonitored pricing pressure. As you know, we have already substantially reduced our activity in these areas.

Pricing is under increased pressure in the global property insurance marketplace, with California earthquake pricing softer than wind pricing. In the U.S. surplus lines property segment, we are witnessing aggressive pricing in all property market segments, with larger accounts attracting a broader audience of carriers. And general accounts are still meeting our pricing threshold despite the severe market downswing at this time. This pricing pressure is, of course, against historically-high price levels in this area.

In the U.S. retail property marketplace, we're seeing even greater pressure on terms and conditions, including increased sub limits and lower deductibles. This increasing trend will continue to drive us into and even more market-defensive position. We will also increase our purchasing of equally-competitive facultative reinsurance opportunities to defend our margins.

In offshore energy, we are witnessing modest reductions in rates, terms, and conditions. Business interruption waiting period and wind sub limits are importantly holding firm. Price pressure is greater for non-Gulf-of-Mexico-exposed business.

In the casualty areas, competition is continuing unabated. In the excess and surplus casualty market, large accounts are experiencing intense rate pressure. The [admitted] market is now generally pricing this business at 40 to 50% less than the surplus lines market.

In the surplus lines umbrella market, we are also witnessing some softening, but nowhere near the extent that we're seeing in the primary casualty segment. Rate declines on our umbrella portfolio are running in the range of 10 to 12.5%. However, it is not uncommon to see rate reductions in the broader market of greater than 15%. Again, we are proactively managing this segment and have been very defensive in this area over the last six months and we expect to remain so for the foreseeable future.

Moving to our highly-diversified professional lines insurance business, and by that I mean by range of product, weighted towards the SME business, and located globally. In the commercial segment, we continue to see rate deterioration, though not at the rates seen in early 2007. Primary rate decreases are averaging under 10% and excess carriers are seeing 10 to 15% rate decreases depending on the class. Domestic carriers are becoming more aggressive in their offerings of capacity and rate, even attacking capacity-driven placements typically written in the Bermuda market.

The financial institutions business, we have witnessed some moderation in competition, driven by credit market turbulence. For our European professional lines portfolio, larger D&O accounts are exhibiting modest reductions in the five to 10% range. The small to mid-sized commercial D&O here is under more pressure due to the historically-favorable claims experience in this segment.

Regarding the impact of the recent crisis in the financial markets, we continue to closely monitor potential exposures across our enterprise and we believe these remain limited. On the underwriting front, particularly in the financial institutions area, we are comfortable at this time that any exposure we have will be more than manageable. As we have seen with other market events, total limits purchased will be a key driver of insured losses. Subprime lenders typically did not purchase large limits. This group is expected to bear the brunt of litigation, but companies that have substantial balance sheet exposed to subprime mortgages are also at risk. The large moneycenter banks, we primarily participated on a side-A-only basis, with significantly-higher attachment points. With the capital infusions over the last few weeks, we believe risks associated with these side-A policies have been significantly mitigated.

Another area of interest has been companies that have subprime exposure in their investment portfolios. With respect to this area, we believe that the subprime event will represent a defense cost issue and, therefore, mostly impact primary and lower layers of account. We're not meaningfully involved in these areas.

Whilst it is premature to comment on E&O exposure related to predatory lending, we do feel comfortable that this is manageable. Large moneycenter banks generally self-insure E&O and smaller lenders and intermediaries typically purchase low single-digit net limits.

With regard to our professional lines reinsurance business, we also do not believe the subprime issues will materially affect our D&O portfolio or other professional liability book of business in an adverse way. We base this on the following reasons -- we do not currently have significant exposure to large, complex financial institutions business and we have very limited exposure to primary D&O or E&O writers of Fortune 500 accounts. However, given the uncertainty and premature stage of loss emergence for some areas of professional lines expected to be affected by the subprime event, our 2007 loss picks for our insurance and reinsurance professional lines contain extra provisions for potential exposure. These reserves were established following a thorough review of all of our contracts.

As discussed by David, on the asset side of our balance sheet, our current assessment of our investment portfolio indicates that we have minimal exposure to subprime or credit issues, including those associated with insurance enhancement from traditional monoline insurers. At this time, we do not have liquidity issues. We do not have write-downs. We are generating significantly-positive cash flow. This powerful representation of financial strength and stability is rate at the moment in the broader financial services sector. And it is a backdrop against which we believe AXIS can continue to outperform.

AXIS is and will continue to be a risk taking business. Our success relies on smart, diligent people cooperating in a relatively-flat hierarchy that encourages all AXIS professionals to proactively challenge one another. As a result, we execute early and quickly on good opportunities and we retrench quickly from business when the landscape gets too crowded. This may mean pulling back from business that appears profitable, but where we consider the risk/reward balances moved away for our targets.

AXIS will continue to differentiate itself from our competitors over the next year, regardless of market conditions. For example, just look at our seven senior underwriters. We have over 200 years of embedded experience and high-quality, consistent track records. This distinguishing feature of the AXIS underwriting team has been successfully tried and tested through industry cycle after industry cycle. These embedded cultural attributes lie at the very heart of our landmark billion dollar year. Despite a continued softening environments, we remain fully committed to continue on our path of outperformance.

At this time, I would like to open the line for questions.

(OPERATOR INSTRUCTIONS) Susan Spivak, Wachovia.

I was hoping you could give us an idea of what you think the Berkshire Hathaway Swiss Re deal will mean for the reinsurance market. Does that take available premium out of the market? Second if you could just follow-up on how much higher are your loss picks going to be in 2008 for that financial institutions business? That would be great.

Well, I think I can't really comment on the detail of the Berkshire Hathaway/Swiss Re deal, but it will be interesting to see whether both end up on the winning side or somebody is overstated the quality of and the earnings that are going to results from that. But I don't see it to be detrimental to the reinsurance business. It's helpful to Swiss Re at this moment in time to free up capital and it's helpful to Berkshire to access that high-quality portfolio. But I don't see it detrimental to the reinsurance business globally at all.

With regards to our loss picks, David, do you want to --?

Yes, Susan, on the D&O type coverage, a lot of that is claims-made business, so we don't anticipate a large increase in '08 loss picks for things that are occurring in '07. But, in effect, we will monitor our loss picks throughout the year and continue to reserve conservatively, as I've said.

Susan, as I said in my comments, that we a have very diversified professional lines portfolio, which is weighted more towards the SME areas, so that has actually performed pretty well.

John, it just seems as if every call we are on there is no one with any major exposure to the subprime D&O crisis, and so in your opinion, where do you think all the exposure lies?

Well, I think, Susan, you've been around not quite as long as I have. You will have to understand there are some businesses that are a little bit better at understanding their true exposures than others, let alone managing them. But I leave that to the audience to decide and differentiate between the companies that are involved in these businesses.

Well, thank you. Also thanks for the great detail on the markets. That's very helpful.

Vinay Misquith, Credit Suisse.

You have already made a decision to pull back on some of your lines of business, which I think is a good one. Can you provide us with some idea as to what your return hurdles are when you're writing new and existing business? And how you look at the trade-off's between writing existing business at slightly lower margins, though still profitable, versus buying back your stock.

Yes, I didn't catch the very early part of your first question, but, Vinay, I think we are the most diversified of the class of '01 in Bermuda and we deliberately set out from the onset of that -- the foundation of our company to create that diversification by product and by geographic location globally. That stands us an extremely good stead during soft market plays. Because of the way that we have constructed our company and our people and the way that we make sure that we are an integrated business, we are able to be a lot more efficient and focused in our underwriting activity than a lot of the more-cumbersome businesses in our industry.

I have said time and time again, there is not another senior management team in the industry that is as deeply embedded in the day-to-day underwriting activity of the Company and portfolio managers throughout the Company on a daily basis. And we're not jumping into new lines of business.

What we are doing is using our expertise, but maybe moving around, moving away from the big-ticket premium numbers where there seems to be this senseless competition, and having to dig lower and deeper within those business activities to find places where we can make our earnings. That takes a lot of energy. It takes a lot of experience. It takes a lot of extra work, but that is what I think we've achieved during 2007.

Because if you will remember, I started saying from the early part of the second quarter that the competition was increasing a pace, and was becoming irrational in insurance markets. And that is what we've witnessed. But I think if there's one thing we are good at, we are acknowledged as being able to ride these soft market cycles, protect our earnings, protect our portfolios. We are equipped -- if you'd have said this to me six years ago about the sort of soft market cycle, we would have collapsed our underwriting activity by 20% or 30%.

I think because of the diversity and the technology we have and the experience we have in the global position we occupy, our soft market play is pretty well flat to down 10% as opposed to what it would have been six years ago.

Now, it means to say that the difference between where we would've been six years ago in our income and we are today, it may be that that balance is not quite as profitable as the core business, but still -- we expect it to be extremely profitable. And that is a unique feature that I think of the change that has occurred over the last five or six years at AXIS.

Sure, that's fair. Are you still finding some small niche growth opportunities like the Media/Pro acquisition that you can use to grow your business in the future?

Absolutely, and we're investing heavily in the technology that allows us to take maximum advantage of those opportunities. But as I said, we're not going into businesses that we don't already have the experience and capability of. What we're doing is looking at a broader activity within them.

Sure. One last clarification. I saw that you had growth in the professional lines and casualty insurance. Would that have been from the Media/Pro acquisition?

Yes. As I said, we've been defensive on all the other stuff through 2007.

Sure, that's great. Thank you.

(OPERATOR INSTRUCTIONS) Matthew Heimermann, JPMorgan.

A couple questions. First, was there any incentive comp impact on the G&A in the quarter? If so, how much?

There was some impact on it, Matt. We normally don't disclose the actual amount.

Just in thinking about it year-over-year, was it comparable with the year-ago quarter?

Yes, it was.

Okay. The other question I had was it looked like your paid to incurred ratios rose, both on a gross and net basis in 4Q, and I just was curious as to what on the paid side was driving that.

Just -- we were just continuing to settle the KRW claims. I think -- well, I know we are up over 80% now of settled on the KRW claims, and we did settle some in the fourth quarter that drove that number up a bit.

Okay, and that was on the insurance side, correct?

Yes.

Okay, and then I guess just with respect, John, on the reinsurance purchasing, can you talk a little bit about kind of -- it clearly looks like short tail lines where you're buying most of this back, but are you basically just trying to at this point limit the volatility of the outcome? Is that the right way to think about what you're doing?

Well, I think we are buying not only on the short tail side, but that's where the bulk of the spend is because that's where most of the activity is. But we are continuing to buy using facultative markets on top of our quota share arrangements on the casualty side as well.

But as I said in the last quarter, I can never understand companies that retain a lot more business during soft market cycles, because historically I don't think that's been a very good idea. What we do is to use the reinsurance market more effectively and more efficiently to defend our margins and to make sure that we have a balance -- as balanced a portfolio going into 2008 as we can. It is part of our portfolio management.

I guess is there -- just in terms of thinking about on the property side, at least, your cat exposure, whether we talked in PML or maybe standard deviation of expected loss, is the net effect of these purchases that year-on-year that shouldn't be increasing, it's relatively stable or are buying enough that actually on the margin, the risk in your portfolio is actually falling?

Think that on our reinsurance, our main reinsurance program protecting our property portfolio, attached in May of last year. And I think that, whilst we were combating the competitive nature of our property insurance business, we also maintain our margin by actually demanding that our reinsurers recognize the quality of our underlying portfolio and the strength of our underwriting procedures and gave us sufficient recognition that we could underwrite through the rest of '07 and into 2008, protecting our margins. If that's an indication.

No, that's fair. Then I guess one last numbers question the 16-month reinsurance contract that incepted a year ago, was that a one-off deal or is that something that potentially is going to come up for renewal either in the first quarter or second quarter, I guess depending on when it incepted?

That's a renewable contract.

Okay, and what is the dollar number and in what quarter will that renew? Or is it up for renewal?

I think it's reasonable. It was reasonable and it will come up shortly.

Okay, I appreciate it. Thank you.

Alain Karaoglan, Banc of America.

A couple questions. In terms of the reserve releases -- and I may have missed it, but could you -- I know you mentioned short-tail lines of business -- could you tell us which years they related to? And you mentioned something about the comparability of the third and fourth quarter and full year to last year. Could you repeat -- could you clarify what you meant by that? And I assume on casualty lines, you still have the policy of not releasing reserves at least five years after you've written the business.

Yes, let me answer that second questions, most emphatically, because people tend to forget when they are comparing us with our competitors or our peer group that we have only released short tail lines since our inception. But, David, do you want to --?

Yes, on your earlier questions, Alain, the releases come from a number of different years. On the insurance side, they come from earlier years, 2003/2004 period. And on the reinsurance side, they came from more recent years. But the areas that we're releasing reserves are where we just haven't seen the claim development that we anticipated, particularly at lines like property, aviation, and marine.

You were right -- going back to the casualty reserving -- that we said that we would not review our cash to reserves until they were five years after we had underwritten the business, because it was a new line of business for us. So that is a correct statement.

Okay.

And the other comment on your question was related to the current accident year. What I was explaining is that, if you recall from the third quarter, we indicated that we had given more weight to the current accident year experience in the third-quarter than we had done in previous years. So what is not comparable is the third and fourth quarters to the prior year of on standalone basis, but when you look at the full year, essentially they are comparable.

Okay, the other question relates to the G&A expenses, which, as a percentage of premiums, have spiked up significantly this quarter. How should we think about it on a percentage basis? Will the full- year amount be more relevant or even the full year amount because of Media/Pro is a little bit overstated? In this quarter, for example, in your insurance business, your G&A was 19.7% of premiums.

Right, if you -- well, as I said earlier, when you look at the quarter on a stand-alone basis, there are some additional compensation costs in this quarter that don't come in earlier quarters during the year. We don't necessarily look at it on a percentage basis. We do have increased costs, as I mentioned in my remarks, for staff that has been added. That comes from Media/Pro as well as other staff we have added over the course of the year, so the G&A line will go up because of those things and they'll carry into 2008. If you're looking at it on a dollars basis, I would just have you look more at the third-quarter figure in terms of a run rate that I think we will see in '08 for our G&A cost.

You know that we acquired a large number of people through the acquisition of Media/Pro, but also it is a company we have invested deliberately and heavily in senior people over the last 12 to 18 months, as well as increased technologies spend. And it is a substantial investment which we believe is a sound investment, which we will see returns of in the future.

Great, thank you very much and congratulations on a great year.

(OPERATOR INSTRUCTIONS) Josh Smith, TIAA-CREF.

I'm not sure if you got a chance to see Travelers' presentation, which I thought was very effective with respect to the professional liability exposures. They gave us some notices of potential claims. They referenced a reinsurance cover that would limit the aggregates for a given year. Would you consider disclosures like that in the future?

Well, I think, if you don't mind us saying so, Josh, they have a completely different portfolio than ours. I think you have to be mindful of that. I'm not necessarily sure it is as relevant to our -- and I'm not ducking the issue, I'm just telling about the relevance of it to our financials. I'd don't think believe it's as relevant to us. If you take out U.S. financial institutions book, for instance, our average gross underwriting limit was $9 million and our average attachments point was over $75 million.

Are there any aggregate reinsurance covers on that book?

Sorry?

Are there any --?

No, I think you're dealing with completely different portfolios and different exposures.

Those two numbers you gave are very helpful. Thank you.

This concludes the Q&A session of today's call. I will now turn the call back over to John Charman for closing remarks.

That's very kind and, once again, thank you, ladies and gentlemen. As I said, this is a landmark in the history of the Company in that we've been able to produce during some very challenging market conditions over $1 billion worth of net income. We look forward to continuing to outperform the market in 2008. Thank you for your attention.

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