AXIS Capital Holdings Ltd (AXS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2008 AXIS Capital Holdings Limited earnings conference call. My name is Erica and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Linda Ventresca, Investor Relations Officer. Please proceed.

Thank you, Erica. Good morning, ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter ended March 31, 2008. 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 for the investor information section of our website through May 23. An audio replay will also be available through May 9. 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 38608105.

With me on today's call are 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, evaluation 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 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 will now turn the call over to John.

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

I am pleased once again to announce that we have achieved our 10th consecutive quarter of record earnings for AXIS. We have earned $238 million in net income and delivered an annualized return on average common equity of 20% for the quarter. Our diluted book value per common share increased by 19% over the last 12 months and by 4% from year-end to nearly $30. These results were achieved despite the strong negative headwinds presented by a combination of unusually high levels of worldwide risk losses, cat losses, and unprecedented turbulence in the financial markets.

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

Thank you, John, and good morning everyone. As John mentioned, we are pleased with our results for the first quarter of 2008 which marked another quarter of record earnings against the comparable prior year period, our 10th in a row. Once again we have demonstrated the powerful earnings potential of the global AXIS franchise.

For the quarter, net income was $238 million, a 4% increase over the first quarter of 2007. Earnings per diluted share for the quarter of $1.48 compared to $1.37 per diluted share for the first quarter of 2007. After-tax operating income which excludes the impact of realized gains and losses on investments was $205 million or $1.28 per diluted share compared to $227 million or $1.37 per diluted share for the prior year quarter. These results translate to an impressive annualized return on average common equity for the quarter of 20%. Our quarter and diluted book value per share of nearly $30 has increased 19% over the last 12 months and 4% since year-end 2007.

Turning to our top line, our consolidated gross premiums written were $1.3 billion, down 3% from the first quarter of 2007. The competitive market conditions continued to present challenges this quarter although we were still able to identify good profit potential within our areas of focus.

Gross premiums written in our insurance segment were $435 million, relatively unchanged from the first quarter of last year. Competitive market conditions drove exposure reduction in a number of our property and casualty lines but this was offset by continued growth of our political risk business and renewal rights acquired with the purchase of Media/Pro late in the second quarter of 2007.

Gross premiums written in our reinsurance segment this quarter were $829 million, down 4% from the first quarter of 2007. When you consider the favorable impact of foreign exchange rate movements, this decline would have been approximately 9% and primarily reflected the effect of competitive market conditions in many lines and increased cedent retentions particularly in U. S. casualty reinsurance lines. The decline also relates to premium adjustments on prior year proportional and nonproportional treaties. In aggregate, these resulted in a negative impact of $11 million this quarter as compared with a positive impact of $12 million in the prior year quarter.

Consolidated net premiums written decreased 4% in the quarter reflecting the previously mentioned reductions in gross premiums written and additional reinsurance coverage purchased within our insurance segment. In line with these changes, net premiums earned were down 4% in the quarter.

Moving to our underwriting results, overall our combined ratio for the quarter was 81.2% which was comparable with the prior year quarter. Our consolidated underwriting income for the quarter was $139 million and included $62 million from our Insurance segment and $77 million from our Reinsurance segment.

Consolidated underwriting income was down 5% relative to the same quarter last year due to a reduced earning -- a reduced earned premium base, the impact of an unusually high level of individual property risk losses in the quarter, and increased staff costs relative to the same period last year. These factors were partially offset by higher levels of favorable prior period reserve development in our Insurance segment relative to last year.

In the quarter, our consolidated net favorable reserve development from prior periods was $88 million or 13.4 points. Of this amount, $55 million was from our insurance segment representing a positive impact of 18.2 points on the segment's loss ratio this quarter. This included $33 million of favorable reserve development from political risk business mostly written in our early years.

Our Reinsurance segment posted a $34 million in net favorable loss development representing a positive impact of 9.3 points on the segment's loss ratio. Aside from the favorable reserve development from our political risk line for which there are medium-tail characteristics, all other favorable reserve development this quarter is related to short-tail lines.

As always, we caution against comparing the level of reserve development amongst periods particularly given the varied maturity of our diverse lines of business. It is also difficult to compare accident year loss ratios for similar reasons.

As we have discussed in previous calls, we have been incorporating more of our low own loss experience over time in the establishment of our current accident year loss ratios and this of course will have an impact on potential reserve development in the future. This impact to reserving was naturally introduced first in our lines characterized by short tail and rapid loss emergence. The approach and its effects have been extended over time to the longer tail lines and do have an impact on comparable period analyses.

This approach has affected the establishment of initial estimates of ultimate expected loss for all lines other than professional and other casualty lines. To date, we have not released reserves from professional and other casualty lines. That is to say with regard to these lines, we have not yet taken the view that we have enough operating experience to revise previous estimates of ultimate loss experience from business written in prior years.

For professional lines which have the shortest tail of our long-tail lines, we primarily participate in excess layers. This in our opinion warrants a more conservative approach. We began underwriting our initial portfolio of professional lines business in 2003 and now have almost five years of experience with respect to this business. Consequently we believe that we are approaching the point where we can begin to incorporate that experience into our reserving analysis.

Now I will discuss our current accident year loss ratios. Our overall accident year loss ratio for the quarter of 68.3% compares to 66.9% in the first quarter of 2007. There were a number of moving parts which I will discuss here. The increase in the overall accident year loss ratio relates to our insurance segment where the current accident year loss ratio increased 3.3 points to 71.4%. This increase was largely due to the impact of an usually high level of large individual risk losses worldwide in the quarter which by our current estimates exceed $3 billion for the market. These losses emanate from both cat and non-cat perils.

Our estimated net losses from these events in our Insurance segment were $25 million or 8.2 points. Aside from this in the Insurance segment, initial ultimate expected loss ratios for 2008 across our underwriting portfolio have trended upward relative to those in the same quarter last year to capture the impact of price deterioration in the marketplace. However, this trend was offset to a certain extent by the continued incorporation of our own positive underwriting experience rather than industry benchmarks in establishing our ultimate expected loss ratios.

Our Reinsurance segment current accident year loss ratio for the quarter was 65.6% compared with 65.9% in the first quarter of 2007. The prior year quarter absorbed net losses from windstorm Kyrill of approximately $29 million. Once again, our Reinsurance segment achieved a good result with even less exposure to the major risk losses and the cat events in this quarter which in total are likely to exceed $7 billion for the market. In the current quarter, the upward trend in the segment's initial ultimate expected loss ratios for 2008 introduced by business mix and pricing deterioration was somewhat offset by the incorporation of our own positive underwriting experience in the initial loss picks.

Turning to our G&A expenses, our total G&A ratio for the first quarter was 12%, an increase of 2.9 points over the same period in 2007. This was primarily due to the combined impact of a reduction in net premiums earned in the quarter and the cost of additional staff. As we have discussed previously, we have continued to build out our capabilities and operations and enhance our technology. We would anticipate that the current quarter G&A costs of approximately $80 million are more indicative of a normalized run rate for 2008. This of course takes into account incentive compensation at target level.

Moving onto our investment portfolio, our total cash and investments increased to $10.8 billion at March 31, 2008, up 3% for the quarter. This increase primarily related to net cash generated from operations of $324 million during the quarter. Our fixed income portfolio remains at high quality with a weighted average rating of AA+ and 91% of securities rated A- or better.

In the quarter, we focused on upgrading the quality of our portfolio and repositioning the high-grade fixed income portfolio to take advantage of dislocations in certain sectors of the fixed income markets like super senior commercial mortgage backed securities, corporate debt and auction rate municipal securities. We maintain high cash balances at 15% of our total cash and investments which will provide us with the flexibility to invest in sectors where we believe we are getting more than adequately compensated for the risks we are taking.

Now I will discuss in a bit more detail some of the quality points with respect to our portfolio. First with respect to subprime and Alt-A collateral, our exposure remains a negligible portion of our overall investment portfolio at $202 million or 2% of our portfolio, with the vast majority rated AAA for U. S. Government Agency Backed. Our managers remain cautious with respect to subprime and Alt-A exposure. Any securities held in these structured credit areas remain a very high quality.

During the quarter, there was further deterioration in pricing which resulted in an increase in our unrealized losses. However, these remain minimal in the context of the overall portfolio. For further detail with respect to mortgage and asset-backed holdings, I would encourage you to review our financial supplement for the quarter.

We have securities with credit enhancement from the traditional monoline insurers that totaled $291 million at March 31, 2008, down from $381 million at year end. This amount represents approximately 2.7% of our portfolio. The estimated underlying credit quality of these holdings without the guaranty is A+. Our managers own these securities because of the underlying fundamentals of the issuer and not the guarantor's support.

Our investment portfolio produced mixed results in the first quarter. Our net investment income for the quarter was $86 million, a decline of 32% over the prior year quarter. The $86 million is comprised of higher investment income from our cash and fixed income investments of $124 million, up 20% over the prior year quarter which was more than offset by unrealized losses in our other investments portfolio.

Increases in investment income from cash and fixed income investments primarily related to higher investment balances as the earned portfolio yield remained constant at 4.9%. Investment unrealized losses from our other investment portfolio of $36 million compared with income of $25 million in the prior year quarter. The comparison of investment income between this quarter and the prior year quarter is difficult. We experienced exceptional performance in our alternative portfolio in the first quarter of 2007 which you may recall we cautioned against extrapolating forward. With this quarter's performance from the alternative portfolio, we would also caution against extrapolating the quarter's losses for the balance of the year as we expect improved performance going forward.

As we discussed on our last earnings call, 2008 has proven to be a challenging year for investments. Our contribution to net investment income from other investments has declined by $61 million from the same period last year. This was largely a result of declines in pricing in senior secured loans which affected the performance of our credit funds, and a selloff in equities which affected the performance of hedge funds and fund of funds.

The senior secured loan market experienced its worst performance in history, down 5.7% and our managers were not isolated from this selloff in the market. Our hedge fund performance was negative but in line with the performance of major hedge fund indices.

Before I move onto realized and unrealized gains, I would like to add a few additional comments on our other investments particularly as it relates to our accounting and reporting. Much of the performance in our other investments portfolio is impacted by market changes in the fair value of the underlying assets. We account for many of the investments in this portfolio on an equity method, however, as the underlying funds are accounted for at fair value, the equity method effectively means we are accounting for the investments on a fair value basis and changes in unrealized gains and losses are then recorded in net investment income.

As you well know, the unprecedented volatility in the financial markets has caused sharp movements in many asset classes this quarter and our investments were affected by this. In turn, significant declines in fair values this quarter resulted in unrealized losses with a number of our other investments which again are recorded as reductions to net investment income in the current period. We do expect these valuations to improve going forward and we believe these investments are money good.

Net realized gains for the quarter were $36 million and compared with negligible gains in the prior year quarter. These gains are net of $15 million in other than temporary impairment charges. The gains reflect the previously discussed repositioning of our high-grade fixed income portfolio. We expect this repositioning will benefit portfolio performance in future quarters.

Net unrealized gains in the investment portfolio decreased from $30 million to $4 million as widening credit spreads more than offset the effects of declining risk-free rates which caused prices to decline primarily in our corporate securities.

With respect to foreign exchange during the first quarter, strength in the euro resulted in foreign exchange gains of $20 million versus $2 million in the prior year quarter. We continue to actively manage our euro and sterling exposures.

Our interest expense for the quarter was $8 million in line with the prior quarter end but below the $15 million incurred in the prior year quarter. The reduction relative to the prior year reflects the termination of the $400 million repurchase agreement that was in place through the third quarter of 2007.

Returning to our balance sheet, our total net loss reserves stand at $4.4 billion and 71% of these net reserves are IBNR reserves. I am pleased to say our balance sheet is as strong as ever. Our shareholders equity at the end of March was $5.4 billion, an increase of 4% from year-end. Total capital to deploy in our globally diversified franchise now stands at nearly $6 billion.

Now I will turn the call back to John.

Thank you, David. I will now comment on some of the events in the quarter and more broadly on market conditions. Certainly the events of the quarter should serve as a healthy reminder to the industry that we are in a risk bearing business and that the current irresponsible competition focused in the insurance sector is absolutely irrational and unnecessary, even more so when one considers the backdrop of cumulative worldwide losses from individual risk losses and smaller cat events likely to produce insured losses of over $7 billion.

As David discussed in reviewing our insurance segment, we have estimated our net losses from worldwide risk losses at approximately $25 million. We are a major participant in the wholesale commercial P&C markets and as such, we expect to have exposure to large losses like these. We do view these events as normal events, however, the less normal part of the loss activity is the frequency that has occurred within the quarter.

Our prudent risk management efforts including our increased reinsurance purchasing activities over the last few years have served us well by a appropriately limiting the overall impact of frequency to our consolidated underwriting profitability. This has allowed us to reduce our net losses from risk losses in the quarter to less than 1% of market losses which we estimate exceed $3 billion, a performance I am very pleased with.

Turning to market conditions, in our insurance segment all of our business lines are under extreme pricing pressure with only one notable exception. We are beginning to see some stabilization in the financial institution classes within our professional lines business. Large account property rate reduction demands start in the range of 20% to 50% with sub limits increasing but fortunately a limited degree of deductible erosion is occurring. For perspective in some cases Californian earthquake pricing is back to pre-2001 levels and competing capacity of between 1.5 times and 3 times that demanded, regularly exists for many property placements.

Offshore energy with significant cat exposure remains reasonably stable. However in some cases, pressure remains on terms and conditions with increases in wind sub limits being traded for price. U. S. casualty insurance business continues to see rate decline unabated. Rates for D&O business in the U. S. excluding financial institutions continues to decline driven by large reductions from primary underwriters. This deterioration is then flowing into the excess layers but fortunately on a mitigated basis.

Competition has increased dramatically across the board and naive new capacity is still coming into the market. Another common theme which history has repeated is that of admitted markets in the U. S. becoming increasingly aggressive on traditional, more complex surplus lines business.

In my view, the underwriting conditions prevailing throughout the insurance marketplace are similar to those entering the softest part of the trough that occurred between 1997 and 2001. Investors will no doubt painfully remember the substantial value destruction that occurred as a result of the undisciplined and unmonitored underwriting activity during this period. In my opinion, this really is a time for investors to strongly differentiate between underwriting businesses and revenue-generating businesses.

Moving onto sunnier climes, as we have noted for some time the reinsurance market remains relatively stable with small pockets of increasingly irrational behavior. Our Reinsurance portfolio continues to be more significantly impacted by cedents retaining more business. Importantly, we continue to demonstrate strong leadership through our non-renewals and declinations of new business, because of either pricing concerns or underlying portfolio concerns.

As you know, our first quarter is heavily influenced by our reinsurance portfolio in Continental Europe for which the vast majority of the business renews on the first of January each year. This portfolio was renewed at acceptable pricing and at levels of expected profitability not far off from last year. We were able to continue to grow there in the specialty lines credit and bond and engineering as we saw better opportunities in these lines than we did in catastrophe, property and motor reinsurance lines. Combined with our renewals in the U. S. and in the Bermuda-based property account, we expect this portfolio will continue to provide attractive returns for the year.

The April 1 property cat reinsurance renewals are not meaningful for us as our analysis indicates Asian business has historically not been attractively priced on an exposure adjusted basis, especially given the asset inflation that has occurred within the last decade. However, as a market commentator we have observed pricing in the larger markets like Japan down on the order of 10% to 15%. In our Reinsurance segment, the balance of the year for us will be dominated by activity in the U. S. marketplace.

On the property front, nonproportional property business which is our focus will be dominated by U. S. exposure. We expect reductions for this business through the balance of the year to be consistent with the 5% to 10% decreases experienced at the January 1 renewal. We do not sense desperation with respect to growth on the part of participants in the property reinsurance market and there is a reasonable level of resistance to further price reductions including resistance to commission increases.

We do feel a floor has been reached this year. Sidecars have gone away or are in run off. There is likely to be increasing property cat reinsurance demand from both the reduction of the Florida hurricane cat fund and from expansion of Florida depopulation initiatives. Since we are not heavily weighted towards Florida, we do not expect any major top-line impact for us. Rather for our portfolio, we expect to incrementally benefit from the impact of increased demand on cat pricing more broadly throughout the U. S.

Areas of debate are focused on terms and conditions. For example on the property front, items like coverage of foreign terror and increased hours clauses continue to feature in the debate.

Moving on, the greatest pressure we are experiencing in our Reinsurance segment is coming from our U. S. casualty reinsurance operations largely driven by the continuing trend of cedents to retain more of their own business.

In our U. S. general and specialty casualty lines, we insist on rate increases on accounts with unfavorable loss experience. But even these accounts are coming under greater competitive pressure. In the general casualty area, modest pricing pressure exists for most accounts. Market pressure is more intense on accounts with favorable loss experience and on standard loan workers' comp treaties.

In our specialty casualty reinsurance lines dominated by professional lines for our portfolio, some trends continued in the quarter while others appear to have run their course. Retentions have stabilized after trending up over the last three years and reinsurance pricing was down modestly.

In the U. S. reinsurance marketplace, major terms have not materially eroded and we are comfortable that while we do see some improvements for cedents and more requests for such improvements, the marketplace is not showing signs of a materially softening market.

Stepping back for a moment, we expect the balance of the year to feature continued competition particularly in the insurance marketplace. As a result of this, we expect our premium volume to be down as we continue to reduce our exposure and presence in unattractive areas and we see less business satisfying our underwriting criteria. We have been very defensive in our insurance segment over the last 18 months and expect to remain so for the foreseeable future.

As for our Reinsurance operations, we expect reasonable normality in the performance of our Reinsurance segment for the balance of the year. Overall, we are confident that we have maintained a high-quality, diversified underwriting portfolio that will continue to generate significantly positive cash flow and underwriting profits. The game plan for us is to try to maintain margin in difficult trading conditions.

Certainly we are not immune to financial market forces and we have seen the impact of the re-pricing of risk in our results this quarter. The fundamentals underlying our investments remain sound. While financial market conditions may impact quarterly investment returns, we can assure you that we are maintaining an appropriately conservative posture with respect to our investment portfolio and that we do not expect to sacrifice continued book value growth over time.

We continue to rigorously monitor the impact of subprime issues and other credit issues on both our underwriting and investment portfolios and remain comfortable with our identified exposures. While somewhat impacted by a reduction in our net premiums earned, the increase in our expense ratio for the quarter also reflects our incubation of major initiatives in our select markets division of our Insurance segment. This division is focused on addressing small and middle market specialty business.

To achieve success in this endeavor, we need to achieve speed to market with our products and services, enhance communications with intermediaries and clients, and efficiencies in business processes to allocate capital to activities that have a high return to risk ratio. These requirements naturally place greater stress on infrastructure with the potential to increase the level of exposure to operational risk.

To mitigate these risks, we are investing heavily in technology at the leading edge of industry processing practices. We are also retooling business processes with a view towards ensuring that our greatest asset, our people, can perform optimally.

What I would like you to take away with you today is that we remain focused on superior underwriting. We are equally focused on driving efficiencies. We are conservatively positioned in all areas and we are more than well-positioned to benefit from any improvement in market conditions.

And finally on a personal note, I am pleased to report that since our last earnings call I have agreed to extend my contract with the Company through to 2013. As you know, my heart and soul belong to the Company that I founded shortly after 9/11 and my commitment to AXIS is absolute.

Regarding (technical difficulty) the difficult market conditions and with that I would like to quote Winston Churchill. "Without market discipline and management oversight, the insurance industry is like a flock of sheep without a shepherd and without innovation and high standards, it is a corpse." However I want to assure you that I a more than confident that my colleagues and I are up to the challenge. We are all healthy, vibrant, challenging, and kicking tires where we need to. We are determined to continue to accrete book value over time and to outperform our peers.

With that, I would like to open the lines for questions.

(OPERATOR INSTRUCTIONS). Susan Spivak, Wachovia.

Good morning, everybody. John, the superior underwriting results really speak for themselves and I think the ROE on an operating basis is still excellent. I think what puzzles me is that at these levels there just wasn't any share repurchase and historically I know you have been very opportunistic with capital. So if you are not buying back your shares, I just want to get into your head and see what are the opportunities that you are looking at? And just taking that a bit further, if AXIS were likely to make an acquisition going forward, do you think -- you know -- could you rank whether it would be Bermuda-based, U.S.-based or UK or on the continental? That is my question for John.

For David, you seemed a little bit more cautionary about the reserve releases going forward. Should we be worried that the comparisons are going to be a little bit tougher next year? That is on what you have currently been releasing. And then going forward on the specialty and professional lines, could you just review with us what percentage or how much of your reserves are in those lines?

And then finally on the technology investments, is it significant that we should be incorporating that into your expense ratio? Sorry, I know that was a lot.

That was a long breath. Well good morning again, Susan, and thank you for your questions. As far as the share repurchase question is concerned, I think that it is very appropriate with market conditions with the dislocation and potential continuing dislocations we have progressed through this year that we believe we should hold our capital and who knows what opportunities might present themselves. We don't have a fixed view where those opportunities might come from but we want to be in the best possible position to take advantage of them and we are. David?

Susan, I may need some help because you rattled through a number of questions there but let me first take the one on the reserve releases. I wouldn't say that my tone or approach to the reserve releases has changed to any of the comments that I've previously made to you and others about incorporating reserve releases in future performance. What I was merely trying to do was continue along a path of explaining that as we grow and as we continue to develop our business, we are beginning to incorporate more and more of our own experience into our reserving estimates and that will by definition impact the reserving process in terms of the accuracy and also in terms of future releases that could potentially occur. So that was really more an exercise in trying to show the development of our reserving processes as we continue to grow our business.

So just more of what you said on most of the conference calls about the (inaudible)?

Yes, a little deeper because we are doing a little more in corporation of our own data and we want to make sure that you are all aware of that but essentially the same message as before.

And on the second -- multiple speakers -- professional lines.

Yes, I didn't get exactly what you were asking us. Can you repeat that one?

Just what percentage of your total reserves now are in those specialty and professional lines? It seems to me that you indicated that now that five years have passed we could start to see some releases from those lines.

Well I think first of all with regard to releases from those lines, keep in mind that the five years back those lines were relatively small in the context of our overall business. But certainly the earlier years we are going to look at coming up soon but the more activity in those lines have been in the last several years which we still have some more time to let mature. In terms of the percentage of reserves along the areas you asked about in the specialty professional lines, you know it is roughly one-third of the total reserve balance is in that area.

Susan, you can remember that on the Insurance side we brought in Jack Kuhn tune and his great team of 53 other people at the end of the first quarter of '03, and then secondly, Mike Morrill -- the majority of Mike Morrill's business in '03 actually was professional lines reinsurance.

Okay. And then just the technology investment, should we be incorporating a rising expense ratio for that, or is that just part of ongoing business expense?

I was just going to say, I was just going to remind you in my earlier remarks, I mentioned that I think a useful run rate for the rest of '08 is about $80 million, give or take a little bit. We are making our technology investments as we need to within the context of that overall estimate, if you will.

But it is critical to us, Susan, because we have to invest for the future, and we are substantially positioning ourselves not only for our select markets growth, but also generally throughout the Company, generally throughout the Company to optimize our efficiency, productivity and our capability.

And then if I could just follow up, one more. John, any change in the reinsurance purchases on the insurance book? Are you starting to buy even more?

Yes.

Can you give us a number on where -- (multiple speakers)?

I said to you at the last quarter that I never understand why underwriting businesses retain more in soft cycles, and we will see how this -- I have never done that. I have always done the opposite, and we will see how it works through. So we remain very opportunistic. We remain very demanding with our reinsurers, and we will get through the rest of the year.

All right. I will let the rest of the line go. I'm sure you have a lot more. Thanks, guys.

Josh Shanker, Citigroup.

Good morning. In terms of sort of philosophical change, I'm trying to understand. One thing that David said, that you started writing professional lines liability back in '03. It is earlier than I thought. At that time on these conference calls and even in the prospectus, it is clear that you were a fairly vocal critic of long-tail business. What sort of change about long-tail business over the year that has made you more comfortable, or maybe I have misread your comments in the past?

Well, I think you have misread my comments in the past, Josh, with the greatest respect, because I said many, many times in those early years that I, after the appalling underwriting results out of the professional lines markets from the underwriting that took place between '97 and 2001, which essentially was more about financial guarantee that indemnity policies. The whole of that suite of products was completely rewritten and re-judged by the market in 2002, and we took advantage of that in 2003 by bringing in, as I said, Jack Kuhn and 50 of his great people in the spring of '03.

We did that because, quite frankly, there had been a sea change in the way that those products were being written and delivered and priced. And in my view and I said it at the time and I have been very consistent about it since, I believe that those products to be more medium tail in their characteristics than long tail. I continue to be very conservative and AXIS continues to be very conservative in its long-tail casualty underwriting.

Very good. And the other question I had with regard to M&A and I am not speculating that you are thinking of an M&A transaction but in general about philosophy, is it better to buy companies in the soft market when valuations are low but you need to dig harder on their balance sheets or better to buy companies in a better pricing market when balance sheets appear solid but the prices are more expensive?

Well you buy companies when opportunity presents itself and that can be on either side of your two scenarios. But we would only look to those sort of acquisitions to materially enhance our franchise and our earnings power.

And in terms of other ways of returning capital, you know you may be right now share repurchase is in the most comfortable. What are your thoughts on increasing the dividend?

Well Josh, we just increased our dividend, our Board increased our dividend last December just a quarter ago so they do consider that during their Board meetings and I am sure that they will consider that again this year. But I wouldn't expect a dividend increase any time soon in the next few quarters. We have been tracking to a dividend change once a year more or less.

And what about perhaps a special after the hurricane season?

Well we have got a lot of other things. You know, as I said, we really don't know what is going to happen through the rest of this year. There is extraordinary competition throughout the underwriting businesses. There is great volatility throughout the investment community and out of that may come lots of opportunity for us. So we are not going to commit ourselves to any forward thinking in that respect.

Very good. Well good luck to you.

Matthew Heimermann, JPMorgan.

Hi. Good morning, everyone. A couple of quick questions. Would you be willing to discuss what the gross loss looked like in the Insurance segment just to give us sense of how that Reinsurance is helping?

You said you had two questions, what was the second?

I was going to go one at a time. Second question is I was curious if you could talk about whether or not there were any or you are planning any significant changes to just the cat XOL program this year. And then I lied, I have a third.

The other question was in the fourth quarter you talked about there was a contract written in the fourth quarter of '06 with a 60-month term and I wanted to ask whether or not that renewed this quarter or that was a second quarter thing. I couldn't tell based looking on the numbers.

I will take the first and the third. In terms of the gross losses on those events, we are roughly about a little over $100 million is the number there, Matt. So on that one I can cover you. And then on the third comment on the reinsurance contract that you are referring to that we mentioned last quarter, we did renew that contract this quarter and it is in the reinsurance figures.

Okay, perfect. Thank you.

And then we are in the -- as you have very carefully noted -- that we are in the process of renewing our property reinsurance renewals and my previous comments apply as much to what is going on at the moment as what we will continue to do throughout the rest of this year.

Okay, that's helpful. Thank you very much.

(OPERATOR INSTRUCTIONS). Vinay Misquith, Credit Suisse.

Hi. Good morning. Two questions, and sorry to just beat a dead horse but John, on the acquisition front, just philosophically would you be looking more outside the U. S. and Asia or would something within the U. S. on the primary insurance side be more attractive to you?

Well, there are two ends of the spectrum out there that we have continued -- we have said before rather like Media/Pro, we are searching very hard to try to find smaller opportunities that create strategic advantage for us and we will go wherever we need to. And our focus is as much in Asia and the emerging markets as it is quite frankly in the more mature markets of the U.S.

Then at other end of the spectrum it has to be an opportunity that would be strategic and would materially enhance not only our franchise capability but also earnings capability and continue to diversify the products we sell.

Fair enough. Second question is for David. David, on the Reinsurance segment if you exclude the loss catastrophes in the [first] quarter of '07, your accident year loss ratio was about 58.1. This quarter it is about 65.7 so there seems to be a 7 point increase in the accident year loss ratio ex-cat. Just wondering whether you had some loss catastrophes in the Reinsurance segment this quarter?

Well, a couple of things. I mean, first of all when you are comparing to a year ago, we had Kyrill in the first quarter of '07 and then secondly, I would tell you in the current quarter, as I mentioned in my comments, we did see some normal events if you will in this quarter that affected us but nothing of significance on any one event that we would comment on specifically. So there was some loss activity this year just not at a single event loss level like a Kyrill event.

Sure, fair enough. Thank you.

Ian Gutterman, Adage Capital.

A couple of questions. First, the large individual risk loss in the quarter you mentioned obviously the frequency risk higher than usual. I was wondering if -- how much of that is truly random and how much of that might be something secular just given from what I notice a lot of them were commodity related and we know just given inflation, the commodity demand that a lot of these factories and mines and so forth are running a lot harder than they used to and maybe are more accident prone. Do you think that is a trend and we should expect higher losses in that segment in the future? And has the industry figure that out from an underwriting standpoint?

I think you have raised an interesting point because the market I believe is behind the curve in dealing with the increased commodity prices and the way that as you quite rightly say that these companies are working even harder to make sure they maximize their output to take advantage of those pricing circumstances. It certainly has very substantially heightened our awareness of the increased risks involved as a result of the activities in the commodities field.

I am not sure that that is a lesson that has probably been broadly learned around our competitors but certainly for us, that we are extraordinarily more sensitive to the impact of those ever-increasing commodity prices and perhaps a lessening in risk management in order to meet increased profitability from those individual companies. So we are taking it very seriously and we don't know whether it is going to be a trend but we are very sensitive to it. And that is why again, that you know we would look very carefully at the Reinsurance market to try and help us as part of our risk management.

Thank you, a very thorough answer. That is kind of what I was hoping you would say. The other question is to push you a little bit on how soft the market is and some of those insurance lines you mentioned and being as bad as the bottom of the last soft market. I guess where I struggle trying to understand that comment is last time when we saw those, we saw you know loss ratios, not combined ratios, loss ratios in some of those lines well north of 100 maybe 150, 200. I mean are you suggesting that loss ratios in parts of the industry are priced at over 100 at this point because it doesn't seem like anyone --

As I said that I tend to be a little bit more aggressive in my remarks than most other CEOs mainly because they are so detached from their underwriting businesses that they have got no idea about the reality of what is taking place on the ground floor. I don't think that what happened was during that last cycle, if you remember, you had absurd underwriting competition that created enormous value destruction between 1997 and 2001. And that is occurring today without a shadow of a doubt.

The fact that Lloyd's can give $1 billion of terrorism capacity to a Middle Eastern entity that is 100 miles from Iran for under $700,000 of premium and that is all written within that particular marketplace. I am not having a go at them specifically; I am just using some examples. The fact that a major U. S. property casualty business will offer a 50% reduction in price if it is allowed to write 100% of the business so it can cede it to its reinsurers and try to take overrides on it, that sort of behavior I see increasingly more and more on a daily basis.

But go back to the last -- go back to the last -- and we navigate that. We are on top of our game day in and day out throughout -- we just step back and let them go kill themselves. But the reality is back in 1997 to 2001, you had similar underwriting behavior and a lack of management oversight. The difference between that period and this period you have to remember there was a reemergence of latent liability issues. Asbestos suddenly reared its ugly head again and compounded the soft market conditions heavily and started to place great strain on the solvency of companies.

And then of course thirdly, you had the appalling tragedy of the World Trade Center which was unmodeled and unexpected and $50 billion. So we are only facing in reality I think one of those three pressure points. So I don't expect extremes of loss pick movement unless there are major losses, unless there are major catastrophe losses occurring at the same time. And I have a wonderful expression called Sod's Law and that can normally take place when you least expect it.

So what I believe will happen is the fact that this year will show continued deterioration, steady deterioration of loss picks for these companies that are not underwriting in the marketplace and are revenue-generating and I think it is going to be important to pick that sort of stuff up.

Okay, great. Very thorough answer. I appreciate it.

Alain Karaoglan, Banc of America Securities.

Good morning. Two questions. Thank you for the clarification on Ian's question and if I may just ask you to add some -- are we focusing essentially your comments mostly on large accounts more than smaller and middle-market accounts? Because also if in 1997 to 2001 the reinsurance market was extremely competitive and facilitating a lot of insurance companies' underwriting and this time around you seem to think the reinsurance market is relatively stable. Would that be --?

That's what I -- Alain, I have not understood the financials of many companies that I see that demonstrate on the insurance side that weak underwriting activity which was what I was concentrating on because I have said over the last 18 months that the reinsurance market has remained pretty stable and has not given margin to the primary insurers to allow them to give the sort of margin off that they are giving. And so I would have expected their loss picks to begin to reflect much earlier than they have yet to show. So I am equally as puzzled as you should be.

Okay. Now a follow-up question to the accident year loss ratio. I think, David, you mentioned that I believe in Insurance that the accident year loss ratio increased by 3.3 points versus last year and that the sort of large losses caused 8.2 points in this quarter. So does that mean that your loss picks are 5 points lower than they were last year? Or this is too simplified the math that I am doing?

Yes, my initial reaction would be that you are a little too simplified but I don't have -- like I said, I don't have all that in front of me to follow where you were coming from.

We can take that off call I think rather than fluster around.

Okay.

Yes, I mean in brief it is going to be driven by the comments I made about using our own experience in loss ratio, initial expected loss ratio is also going to be impacted by price deterioration but to reconcile those numbers forward, we can take that off line.

Okay. Thank you very much.

There are no further questions. I would now like to turn the call over to John Charman for closing remarks.

Well thank you again, ladies and gentlemen, for taking the time to listen to us. I hope that you get a sense of where we are. I hope you will get a sense of where we are going to be the next quarter and where we are going to be for the rest of the year. But thank you again for taking the time to listen to us.

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