AXIS Capital Holdings Ltd (AXS) 2008 Q4 法說會逐字稿

Hello and welcome to the fourth quarter 2008 Axis Capital Holdings Limited earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Please note this conference is being recorded.

Now I would like to turn the conference over to Ms. Linda Ventresca, Investor Relations Director. Please go ahead.

Thank you, Andrew. 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 year ended December 31st, 2008. Our fourth quarter and full year 2008 earnings press release, our financial supplement and a new separate year end investment 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. An audio replay will also be available through February 20th. The toll free dial-in number for the replay is 877-344-7529 and the international number is 412-317-0088. The conference code for both replay dial-in numbers is 426761. 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 question-and-answer session which are not historical facts may be forward-looking statements within the meaning of the U.S. Federal Securities laws. Forward-looking statements contained in this presentation include but are not necessarily limited to information regarding our estimate of losses related to catastrophes and other loss events, general economic capital and credit market conditions, 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 model, 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 nonGAAP 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'd like to turn the call over to John.

Good morning, everyone and thank you for joining us. We are pleased and proud of our fourth quarter operating results. Both our Insurance and Reinsurance segments contributed to the strong underwriting results in the quarter. These results benefited from continued favorable prior period loss development and strong current accident year results. For 2008, net income was $351 million or $2.26 per diluted share. Return on average common equity for the year was 8.1%. We believe that this result is a good one for a Company with our business mix which is oriented towards short and medium-tail severity exposed lines. In 2008 we estimate that the insurance and reinsurance markets will digest over $60 billion in insured catastrophe, property and energy losses worldwide, for which we estimate Axis' market share of less than 1%.

This was also a period that presented the most competitive market conditions we have experienced since the formation of Axis, and importantly, throughout 2008. We have maintained our overall defensive underwriting posture. We are comfortable that any expected loss activity related to the global credit crisis is manageable and well within acceptable loss parameters for us in stressed conditions. We took proactive reserving actions throughout this year, including the fourth quarter, which we believe are prudent in light of the deteriorating financial market conditions and economic environment. The results of our investment portfolio in 2008 were not immune to the unprecedented and rapid decline in asset values globally, but the overall conservative nature of our investment portfolio and liquidity position has held us in good stead. Through the last several months, we have seen strong signals that our view regarding our reinsurance-led hard market is coming to fruition.

To summarize, the most capital intensive lines in both the insurance and reinsurance markets often cat-exposed lines are responding first and most significantly. Further, as we anticipated, the generally weaker managed insurance markets are lagging the reinsurance market. We continue to believe the insurance markets will begin to respond positively from the middle of this year onwards. The least responsive areas of the insurance markets tend to be less capital intensive and are constantly challenged by the competitive behavior of distressed market participants. We have not, cannot and will not abandon our underwriting and operational standards which in some areas means that we will continue to shrink our underwriting activity and our exposures. In most areas of our underwriting portfolio, we are in a very strong position to take advantage of any dislocations and ensuing opportunities and a continuing flight to quality.

Against the backdrop of these unprecedented adverse events, our fundamentals remain strong. Last Monday, S&P upgraded our financial strength ratings to A+, in recognition of the outstanding performance Axis has delivered since the formation of our Company. In its commentary, S&P noted our excellent insurance risk practices and strong overall enterprise risk management practices. These are the fundamentals of performance and capital preservation in our business. Against the backdrop of a world which is increasingly more discerning with respect to counterparty financial strength, the timing of this recognition is more than opportune. This positions us even more strongly to capitalize on opportunities which will crystallize as this transitional period progresses. We do, however, continue to emphasize the transitional nature of 2009. We believe it will take some time for rates to harden across the board and for such change to materially impact our bottom line in a number of lines.

Another factor to consider in 2009 is the adverse impact of substantially lower yields on investment income. Once this is a near term negative, it ultimately supports the need for the industry to continue to focus on pure underwriting profitability. Our market leading diversification by product and geography, together with our strong risk management framework will continue to serve us well in driving our profitability forward.

I have heard some of the commentary suggesting a contraction of insurance and reinsurance markets as a result of the global recession. On balance, I do not see this as a limiting factor for Axis and I don't see this hurting margins for our mix of business, in particular our excessive loss of GAAP. Despite a decline in overall industry premium volume, I believe that in the medium term, the reinsurance marketplace will represent a larger proportion of global insurance related premium volume. The consistency and strength of capital we have demonstrated should serve us well in capturing the benefits of this trend in our reinsurance business.

This market penetration thesis for Axis is not limited our reinsurance business. We have diligently built a global and diversified platform in both our Insurance and Reinsurance segments which has been fine tuned over the last seven years. We are better positioned today, especially in light of changing market conditions, to secure a much greater share throughout our broader spectrum of product, geography, distributional target market, whether it be small commercial, middle market or large account. We expect to do this with significantly less execution risk than companies which have only recently added lines of business to their mix and are really only equipped to provide capacity.

Our strategic initiatives over the last several years enhance our earnings quality by further mitigating volatility. As an example, volatility associated with large account business. We expect all of this to result in a significant positive repositioning of our global franchise, as market conditions and changes unfold over the next couple of years.

Since our last earnings call, we announced the acquisition of Dexter and MGA in Australia focused on professional lines and the recruitment of an industry leader for or recently established international accident and health insurance business. We welcome to Axis our new colleagues in Australia, led by Tony Wheatley and Chris DiSipio, the leader of our new NH business.

Now I'd like to turn-- I would like to turn the call over to David who will discuss the financial results for the quarter. Following David's review of our financial results, I will discuss some underwriting portfolio items and market conditions in a little bit more detail. Thank you.

Thank you, John and good morning, everyone. Despite the challenging industry market conditions experienced for much of 2008, a rise in the frequency of large losses, the third most costly catastrophe in recorded history and the extreme volatility in the financial markets, we generated underwriting profits and produced an annualized return on average common equity of 13% for the fourth quarter and 8% for the year. This result continues to reflect the diversity and strength of our global underwriting operations but has also been significantly and adversely impacted by the extreme volatility of the global financial markets in the second half of 2008. At the end of it we demonstrated our strength, stability and profitability in one of the most difficult years in history.

Net income for the quarter was $131 million or $0.88 per diluted share compared with $306 million or $1.89 per diluted share for the fourth quarter of 2007. After-tax operating income, which excludes the impact of realized gains and losses on investments, was $163 million or $1.09 per diluted share compared with $296 million or $1.83 per diluted share for the fourth quarter of 2007. The decline in net income this quarter is primarily related to $138 million of mark-to-market losses coming from our investments in credit funds and to a lesser extent hedge funds.

For the full year, net income was $351 million or $2.26 per diluted share compared with $1.1 billion or $6.41 per diluted share for 2007. After-tax operating income was $436 million or $2.81 per diluted share compared with a $1.1 billion or $6.38 per diluted common share for 2007. The reduction in our net income this year was primarily due to estimated net losses from Hurricanes Ike and Gustav of $408 million together with $221 million of mark-to-market losses from the previously mentioned investments in credit and hedge funds. Diluted book value per share declined 10% over the year to $25.79 at December 31st, 2008. This was primarily driven by the global decline in asset values in the second half of 2008.

Let me turn to underwriting results for the quarter beginning with our top line. Consolidated gross premiums written were $527 million for the fourth quarter, down 8% from the prior year quarter, while for the full year gross premiums written were $3.4 billion, down 6% from last year. These reductions primarily emanate from our Insurance segment where gross premiums written this quarter were down 12% to $449 million over the prior year quarter. Disciplined and focused underwriting amid competitive market conditions continued to drive down exposure in a number of our property and casualty lines. In addition, our credit and political risk premiums were down this quarter reflecting a reduction in available transactions as capital flows slowed in the midst of the ongoing global financial crisis. These reductions were partially offset by growth in our professional lines of business arising from new and attractive opportunities in the financial institutions sector and improved pricing on renewal business.

Gross premiums written in our Insurance segment for the full year of 2008 were $1.8 billion down 10% from 2007. Gross premiums written in our Reinsurance segment was $78 million this quarter compared with $64 million in the prior year quarter. The fourth quarter is not a major renewal period in our Reinsurance segment. For the full year, gross premiums written in our Reinsurance segment were $1.5 billion similar to the prior year.

Consolidated net premiums written decreased 12% in the quarter and 7% for the full year due to reductions in gross premiums written, the purchase of additional reinsurance coverage and changes in business mix. Consolidated net premiums earned were down 2% for the quarter and for the full year reflecting period-to-period changes in net premiums written and business mix.

Total underwriting income for the quarter was $216 million up 4% over the same quarter of last year and included $97 million from our Insurance segment and $119 million from our Reinsurance segment. Our combined ratio for the quarter was 67.6% down 3.2 points from the prior year quarter. The reduction primarily stems from a lower loss ratio in our Reinsurance segment this quarter driven by a higher level of prior period net favorable reserve development. Total underwriting income for the full year of 2008 was $307 million down $431 million or 58% from prior year. This reduction was driven by estimated net losses from Hurricanes Ike and Gustav of $408 million. I would like to emphasize that our overall estimate for these cat events is unchanged from the third quarter.

Our consolidated current accident year loss ratio for 2008 was 77.7% or 62.5% excluding Hurricanes Ike and Gustav compared to 62.4% for 2007. Our business continued to generate strong underwriting profitability this year, even against the back drop of these cats and increased loss activity on our property lines which primarily occurred in the first half of the year. Our loss ratios continue to be favorably impacted by the incorporation of more of our own loss experience relative to the prior year. This introduces some complexities and comparable period analysis; however, the bottom line is that we remain prudent and consistent in our approach to reserving and our embedded process systematically captures the impact of the deteriorating price environment as well as changes in exposure and loss trends.

Net favorable prior period reserve development in the fourth quarter of 2008 was $125 million or 19 points. Of this amount, $60 million was from our Insurance segment representing a positive impact of 20.5 points on the fourth quarters loss ratio. Our Reinsurance segment posted $65 million in net favorable prior period loss development representing a positive impact of 17.8 points on the segments fourth quarter loss ratio. The majority of the favorable loss reserve development in this period was generated from our short tail lines. The balance was primarily from the 2003 and 2004 accident years for our professional lines Reinsurance business. As I've discussed last quarter, we are now prudently incorporating our own loss experience into our reserving analysis on certain of our claims made professional lines of business which have the shortest tail of the long tail lines we write at Axis.

Our Insurance segments current accident year loss ratio for the quarter was 58.1% comparable with 58.8% in the fourth quarter of 2007. Our Reinsurance segments current accident year loss ratio increased 6.7 points to 62.6% compared with the fourth quarter of 2007. The increase reflects higher attrition loss activities from our property lines this quarter together with reserving actions taken to address the impact of the deteriorating global credit environment in our trade credit and bond Reinsurance business.

Finally during the quarter we recorded a $20 million reduction in the fair value of an insurance derivative contract related to a life settlements portfolio. This is recorded as part of other insurance related income in our Insurance segment.

Turning to our G&A expenses, our G&A ratio was 13.3% compared to 13.9% in the fourth quarter of 2007. Our G&A costs of $87 million this quarter were in line with our expectations as noted during our last earnings call.

Moving on to investment results, in the quarter, we recorded net investment losses of $26 million compared to net investment income of $125 million in the fourth quarter of 2007. Our fixed maturity investment portfolio produced $110 million of investment income this quarter, an increase of 5% over the prior year quarter; however, this was more than offset by an increase in mark-to-market losses of $142 million from our other investments portfolio primarily related to investments in credit funds and hedge funds. Total net investment income declined $236 million year-over-year, also primarily due to mark-to-market losses from our credit and hedge funds. We are invested in credit funds that primarily focus on the bank loan market which was under extreme pressure during the last half of 2008. The funds investments are primarily in senior secured obligations which we believe have significant return potential from current compressed valuations. We view our hedge fund exposure as an equity alternative with less volatility than direct equity investments. Our hedge fund investments have in fact outperformed equity indices for 2008.

Net realized losses totaled $33 million in the quarter and $85 million for the year. Net realized losses for the year included other than temporary impairment charges of $78 million. Our impairment review process is a rigorous qualitative and quantitative approach. We identified securities for review based on credit quality, relative health of industry sector, yield analysis, security performance and topical issues. We also identify securities through an aging and severity review. For identified securities we prepare a fundamental analysis at the security level. For 2008, our OTTI charge includes $46 million on securities that have what we view as true credit impairment issues and $32 million from securities that we judge to be unlikely to recover to cost.

In aggregate, our investment portfolios experienced a negative 5.4% total return for the year. The component parts of our total return for 2008 were net investment income of $247 million, net realized losses of $85 million, and the change in net unrealized losses of $743 million. The increase in unrealized losses is primarily related to the dramatic increase in credit spreads for most sectors of the fixed income market during the second half of 2008. Despite the decline in U.S. Treasury rates during the quarter and the positive benefit to our holdings of government debt, these benefits were eclipsed by the historic spread widening which occurred particularly in the U.S. and Euro credit markets. This is best illustrated by reference to index spreads on corporate securities which have risen to all-time highs. In many cases, these credit spreads were two to three times higher than what we saw in 2002.

Also, CMBS and ABS spreads have widened to levels five to six times historical averages. Approximately 15% of the increase in net unrealized losses this year was foreign exchange related following the strengthening of the U.S. dollar against our major foreign denominated investments.

We continue to undertake actions to derisk our investment portfolio. Specifically we increased our cash and cash equivalents balance by over $400 million in the quarter while substantially reducing our exposure to municipal securities within our fixed maturity investment portfolio. We have exposure to financials-- we have reduced exposure to financials and emphasized issues within this sector with government support. We will continue to maintain a conservative and appropriate overall investment portfolio and monitor opportunities to take advantage of depressed valuation in select areas of the market. As I mentioned last quarter we're currently winding down our securities lending program with securities on loan at December 31st, 2008 of $406 million compared to $848 million at the same time last year.

To assist in your analysis of our investment portfolio we are providing a separate year end investment supplement which you can find in the investor information section of our website. This additional supplement provides further detail for each of the major asset classes in our investment portfolio. Our overall portfolio remains well diversified, liquid, high quality and of short duration. Our investment grades fixed maturity investment portfolio has a current duration of 2.5 years with an average quality of AA+.

I would like to briefly discuss exposures to hybrid securities of European financial institutions which have recently received attention. The current market value of this type of security, which is primarily found underlying medium term notes we own, is approximately $151 million. In order of rank in the capital structure with the highest first, almost one half of these are in lower tier 2 securities and the other half are in upper tier 2 and Tier 1 securities. The exposure is diversified amongst countries with $55 million in current market value from UK financial institutions. The largest individual issuer in our portfolio is HSBC with a current market value of $11 million. All issuers were current on principal and interest payments as of year end.

Going forward we are continuing to shift our fixed maturity portfolio towards U.S. agency mortgage backed securities and corporate issues with government backing. We are also maintaining higher cash levels in view of the continued deterioration of global economic fundamentals. Although we will forego some yield in maintaining higher cash balances, we protect the portfolio from increases in interest rates and expect to be able to take advantage of attractive investment opportunities in hedge funds and long equity strategies as the year unfolds.

With respect to foreign exchange, during the fourth quarter, changes in exchange rates and changes in net currency exposure resulted in foreign exchange gains of $22 million compared to negligible gains in the prior year quarter. The gain in the quarter was driven by the revaluation of our Euro and Sterling foreign denominated net loss reserves. In terms of book value impact, foreign change was largely neutral in the quarter with unrealized foreign exchange losses on our investment portfolio which are recorded through our other comprehensive income offsetting the income statement gains.

We continue to generate strong operating cash flows of $297 million in the quarter and $1.5 billion for the year. In fact, we've generated this level of operating cash flows for each of the last five years. Market and liquidity persisting throughout the U.S. and other financial markets this year has had minimal impact on the liquidity of our own investment portfolio which includes over $5.5 billion of cash, cash equivalents and U.S. government and agency backed securities. Most of our securities have traded in highly liquid markets, so there is significant liquidity available to us from our investment portfolio. We actively manage and monitor the liquidity and asset duration of our portfolio to meet anticipated cash flow needs.

Our debt-to-capital ratios compare favorably with those of our peer group and are significantly below thresholds indicated by all of our rating agencies. Our business is supported by a $1.5 billion credit facility, the terms of which provide for direct borrowings of up to $500 million on an unsecured basis. As of December 31st, 2008, there was no debt outstanding under this facility and we were in compliance with all covenants. Our operating companies could provide over $1 billion of additional dividends to our holding Company if needed. Our capital resources and liquidity remain very strong. We are well capitalized relative to rating agency requirements. And as John noted earlier, S&P raised our financial strength rating to A+ just last week.

This quarter we've added a page in our financial supplement to provide PMLs for the Axis Group at various return periods for peak industry natural peril cat zones and natural perils as well as estimates of industry losses at these return periods. We set limits on the levels of cat exposure the Company may underwrite in a number of ways but the most important way is by monitoring and controlling our PMLs at multiple points along the loss distribution curve.

In summary we believe that we are extremely well positioned to address the opportunities and challenges that will be presented over the coming year. With that, I will turn the call back to John.

Thank you, David. As you know during 2008, the world's financial markets, our industry and we at Axis have all experienced an unprecedented confluence of events. All of these events were adverse with respect to financial results for the year. Our long held views regarding correlation of risk were torn apart and the global financial markets were faced with a stark reality in this brave new world that at the extreme, everything is correlated. Even in the face of this unprecedented confluence of events, our industry has demonstrated remarkable resilience and I expect we'll continue to perform well relative to other sectors within the broader financial services industry.

While this is true for the industry, there is still points of differentiation. Axis has once again differentiated itself as having a very well managed and well understood portfolio of underwriting risks. Our estimates of net losses from Hurricanes Gustav and Ike remain unchanged relative to our estimates at the end of the third quarter. This is the direct result of deliberate risk management decisions and actions taken well in advance at the onset of the hurricane season. Our diversified business model is equipped to absorb losses in stressed conditions. The current global credit crisis and deteriorating economic environment represents a stressed scenario for some areas of our underwriting portfolio. David has already discussed our investment portfolio as well as liquidity and capital resources.

Before I move on to my forward-looking comments, I would like to briefly discuss elements of our underwriting portfolio affected by the credit crisis and the deteriorating economic environment. We have continuously and thoroughly reviewed our professional lines, credit and bond reinsurance, and credit and political risk insurance lines in light of these events and believe that our exposure to the credit crisis in all of these lines has been prudently addressed in our financial results. As we have pointed out in previous earnings call discussions, excuse me, we began addressing the credit crisis through our reserving in early 2007. Our overall professional liability business in our Insurance segment, which is diversified well beyond financial institutions business, is reserved to an estimated combined ratio of 113% for accident year 2007 and 103% for accident year 2008. Our professional lines Reinsurance business, also diversified well beyond financial institutions, is reserved to an estimated combined ratio of 108% for accident years 2007 and 2008.

These are prudent combined ratios, not only in the light of the notifications and claims we have received as well as accounts identified with potential exposure but also in light of the higher attachment points and relatively low net limits typical for our portfolio areas of exposure. For our exposed D&O insurance coverages, our average net limit is approximately $6 million and our average attachment point is $117 million. For our exposed (inaudible) coverages, our average net limit is approximately $7 million and our average attachment point is $164 million. Similarly, we have reviewed exposure in our Reinsurance segment and believe that we are prudently reserved given that our average individual reinsured exposures, or our share of a full limit reinsured loss for one client, are under $1 million.

I also want to provide some preliminary information with respect to the highly publicized Madhoff ponzi scheme. Based on information received to date in our Insurance segment which includes 11 precautionary notifications, our assessment is that any claims that do flow to Axis from this event will be limited in number and contained within our loss base. Firstly, we do not insure any Madhoff entities. D&O risk would appear to be limited unless there are third party insolvencies resulting from this issue. The majority of claims from the event are likely to fall under E&O policies and are likely to come from investors who relied on the due diligence and recommendations of advisors including commercial banks, asset managers, private banks and fund-to-funds. These E&O limits are generally smaller than D&O limits and these E&O matters will be very complex and difficult to unravel with respect to the duties of the various advisors duties. We expect prime risk to be limited unless employees of our insureds are found to have benefited for example, illegally in the form of kickbacks instead of management fees.

Finally we have generally avoided fund-to-fund and private banking business in Europe which have been impacted rather more significantly. Our preliminary review of our professional lines Reinsurance exposure also reveals that exposure to Madhoff is likely to be contained within our loss base.

Moving on from professional lines to credit exposures in our underwriting portfolio, I will start with a discussion of our trade credit and bond business in Europe. We have been taken prudent reserving actions with respect to this business since early 2008 in recognition of an increase in insolvencies. Our estimated combined ratio for this reinsurance line now stands at a prudent 107% for 2007 and 113% for 2008. I have heard some of the commentary around this line of business and do want to highlight that there are points of differentiation amongst reinsurance-- reinsurer portfolios, particularly in terms of breadth of product, spectrum and geography.

First, on the product front, we don't specifically reinsure products closer to the financial markets like political risk and bank trade finance. We underwrite some of these risks on a risk-by-risk basis in our Insurance segment, so our trade credit reinsurance book is focused on covering trade credit insurers who can turnover their risk portfolios in around 60 days on average. Second, our credit reinsurance portfolio is dominated by reinsurance of the three largest trade credit insurers who are diversified with exposures predominantly in western economies and are under weight in Spain. Because of this diversification and our view of the outlook for the Spanish credit and bond insurance marketplace, we had only a small share of the heavy loss activity in Spain that occurred in 2007 and 2008.

Finally, I want to spend some time on our political risk and credit exposures in Axis Insurance. I am aware that questions have been asked about the specific products that we offer here. I am going to share a brief overview of these lines and discuss activity in 2008 which should give you a flavor for the risks here and at the same time, highlight the principals of our underwriting. In our Insurance segment, we provide traditional political risk insurance coverages, sovereign default insurance coverage and credit insurance. Sovereign default insurance is a relatively straightforward concept and the traditional political risk coverages basically provide protection against sovereign actions resulting in impairment across border investments for banks and corporations known as CEND coverages. Our credit coverage is primarily for lenders seeking to mitigate the risk of non-payment from their borrowers in emerging markets. This product represents more than 50% of our enforced portfolio of traditional political risk, sovereign default insurance and emerging market credit insurance.

For the credit insurance contracts, it is necessary for the buyer of the insurance, most often a bank, to hold an insured asset, most often an underlying loan, in order to claim compensation under the insurance contract. The vast majority of the credit insurance provided is for single name illiquid risks primarily in the form of senior and secured bank loans that can be individually analyzed and underwritten. As part of this underwriting process, our rigorous evaluation of the credit worthiness and reputation of the (inaudible) is critical and forms the corner stone of the underwriting process, in addition of course the viability of the use of the loan. We insist that our clients retain a significant share of each transaction that we insure.

A key driver of the underwriting analysis is the assessment of recovery in the event of default, so the strength of the collateral and the enforceability of rights to the collateral are paramount. Again, I want to emphasize that our products are insurance products. Our contracts normally contain warranties, representations, exclusions and waiting periods. We strictly avoid insurance for structured finance products defined by pools of risks and insurance for synthetic products that will expose us to mark-to-market losses. Our portfolio is subject to the usual concentration and aggregation limits. Our Senior Management regularly reviews credit-related insured exposures at an aggregate level as well as by country, region, industry segment and counterparty. Analysis by region allows us to address and understand our potential exposure to cross boarder contagion which is generally seen as the cat scenario in this line of business. As a general comment, our experience in 2008 has been within our expectations, the traditional political risks, sovereign default insurance and credit insurance.

I will now share with you some additional information about our experience in 2008. The notices received in 2008 number eight in all, seven notices of default and one political risk notice. Of these, only three are expected to result in net losses to Axis and we are fully reserved for these expected net losses. To give you an indication of our net exposure from these three losses, the average net case reserve for these three is $9.5 million. These net case reserves reflect conservative estimates of recovery and if there are higher recoveries, the ultimate net losses could be lower. The other notices for which we do not expect a net loss reflect the strength of our underwriting principals. They were either entirely resolved due to receipt of collateral or restructuring or are well on their way to being resolved.

Once we are obviously at heightened risk because of the global financial crisis, our portfolio continues to perform well and within expectations but could deteriorate if the global economy experiences a further substantial decline. Our current levels of general IBNR for the political risk, sovereign default insurance and credit insurance portfolio make up approximately 75% of total reserves for these lines.

Now, I will move on to a brief discussion of our experience at the first of January renewals in our Reinsurance segment and the market conditions facing both our Insurance and Reinsurance businesses. Starting with Reinsurance. With the exception of the most capital intensive Reinsurance lines like property cat, there was a tendency to globally-- there was a tendency globally to renew programs with good underwriting experience and expiring structures with little marginal change in terms and conditions. In most renewals, expiring markets maintain market share with some exceptions involving concerns over the financial strength of certain reinsurers. We expect this trend to continue in 2009 and we expect to continue to strategically benefit from it. At the first of January renewal, we estimate our Axis re-underwriting year premiums were up 11% over the expiring amounts.

Overall, we were up 16% in terms of currency adjusted premium with margins up on balance year-over-year. We expect some other activity in the quarter that will impact top line for this segment but the first of January generally gives a good indication of our competitive positioning. Driving the growth for us were our credit and bond Reinsurance business in Continental Europe and our U.S. Professional Liability and General Casualty Reinsurance business. We were able to gain strategic share on attractive treaties due to concerns over the financial strength of distressed reinsurers, particularly for U.S. casualty reinsurance business. The credit and bond reinsurance market in Continental Europe experienced significant dislocation at renewal and we were able to consolidate our position at pricing and terms we believe to be fair and advantageous given the market conditions.

These cedants have a proven track record of being able to detach from the economic environment, and as you have seen from global press reports, they have been executing on all of the top measures to mitigate loss potential in a deteriorating economic environment. We believe that their globalization and increasing technological sophistication positions their portfolios with an acceptable loss parameters. They have substantially increased their retentions over the last several years which strongly supports financial alignment with reinsurers. We believe that we're in a particularly good position to address the dislocation as we had a relatively small book going into renewal as opposed to the leading market deference and importantly, we were not heavily exposed to geographic areas like Spain which have been hit the hardest by losses.

Outside of the U.S. , European and Caribbean property cat placements were up approximately 5% but all other non-U.S. geographies were down. The U.S. property cat market however showed strong increases that gained significant momentum as the renewal season wore on. Small regional covers with no loss experience renewed flat to modestly up. Larger regional and super regional placements saw increases closer to 10% and more if loss affected. Nationwide placements or placements with heavier Southeast exposures were up 15% to 20% and even more in some cases. We believe several of these major placements were not fully subscribed. The number of shortfall covers and private placements that seem to abandon the market was a very good indication of relative market discipline and a lack of new capacity. We firmly believe that rates will continue to strengthen in peak zones as we head into the Spring.

Since the first of January, we have seen upward movement on U.S. earthquake driven property cat treaties. This is an encouraging sign that the outlook bias in price is not limited to the wind peril. Continued dislocations in the Florida market are likely to add even more upward pressure on pricing for Florida exposed risk. Overall, Axis property cat reinsurance premium was relatively stable as at the first of January. However, we reduced our exposure to European wind storm due to the less attractive risk reward profile relative to other peak zones, and to a lesser extent, the movement in exchange rates. More broadly we are also attaching higher in a number of programs.

For our Insurance segment, the first quarter is less significant in terms of production. However, I would like to share a few observations with you. The market continues to soften in a number of classes although the rate at which this occurs has slowed considerably. Terms and conditions as well as breadth of coverage generally remains stable with terms of trade holding firm. We continue to see some markets fight for market share with the most aggressive behavior in our view coming from distressed insurers. Some new markets or, sorry, some new markets or markets that have increased their appetite for certain lines of business are also exhibiting aggressive behavior. Clients are focusing intensely on insurer financial strength and we've been able to address this proactively. Cat exposed property lines are seeing more positive change. We started to see the quantum of rate reductions in property reduced through October and November and stabilize through December and now we are beginning to see growing pressure for rate increases. We expect this momentum increase as we head into the key March 1st and April 1st property renewals.

A number of key competitors appear to be reducing critical cat exposure which will have further positive impact on the market. Offshore energy is also hardening due to the impact of Hurricane Ike. Non Gulf of Mexico exposure has seen price increases in the range of 15% to 20%. There have not yet been any Gulf of Mexico renewals of note but we are fully expecting significant improvement there. We intend to capitalize on this change with the same laser focused discipline and risk management that delivered our performance for our offshore energy portfolio in Hurricane Ike.

In D&O, the environment remains competitive. However, we are seeing a fair share of opportunities due to dislocation of business formally placed with certain distressed insurers. In a number of instances we are asked to move down layers to replace questionable security. We are uniquely qualified and positioned to take advantage of these opportunities. In the financial institutions class, rates in the fourth quarter continue to increase and we expect those to continue throughout 2009. The bulk of rate increases are in the D&O and E&O lines. The ancillary lines such as employers practice liability, pension and crime remain stable. Capacity has been reduced by all insurers of these lines, making it difficult for brokers to fill larger programs. Our ability to become more relevant in the D&O and E&O lines afford us increased opportunity to further balance our portfolio with preferred ancillary lines such as financial fidelity.

Axis is perceived as a leader that is defined by consistency, financial strength and high service capability. This coupled with the significant dislocation in the marketplace has resulted in the dramatic change in our competitive position in professional lines. In the casualty lines, after breach stabilization in the marketplace in October and November, we have seen aggressive competition return driven by distressed insurers. We have not pursued writing new business in these lines for some time unless it has been particularly compelling. We fully expect this competition to abate gradually as the impact of rising reinsurance costs take effect and as clients move business away from distressed insurers.

In conclusion, despite the enormity of the challenges of 2008 and those that we face in 2009, I am happy that the inherent strength of Axis has been confirmed and it's relative position in the market thus substantially improved. I believe our Company will benefit strongly from positive differentiation in these demanding times. This will help us to deliver the return our shareholders expect over time. Now, I would like to open the lines for questions. Thank

(Operator Instructions) Our first question comes from Josh Shanker of Citi. Please go ahead.

Thank you, good morning, congratulations on the quarter in some tough times.

Good morning, Josh.

Good morning to you, a couple of questions. The first one was your comfort and not being concerned about the recessions impact on the hard market for insurance. Particularly, I was wondering in terms of if you look at most companies of renewals they were not as aggressive as your own, which might suggest you have some stronger appetite in capital comfort than your competitors, but too if you could focus a little bit on going into detail about what the market fears about the recession and why you don't think it's going to be a key issue, I would appreciate that?

Can I just answer that before you go on to your second point?

Of course.

I'm not sure that we've demonstrated that we were aggressive in our insurance lines. We have stated throughout that we've actually been extremely defensive, and you only have to look at the reductions in our property lines, for instance, and areas within our professional lines. And so I think we've actually been the opposite to being aggressive. I think we've capitalized on opportunistic situations but overall, we've been extremely defensive in that quarter and we'll wait and see how the market reacts.

I've only seen one simple statistic. Your-- the expiring premium how much you've renewed it for is considerably higher than some of your peers.

But if you actually look at the-- our renewal premium, we're actually down on a lot of our renewable premium as a portfolio. So and as I said, I-- but let me just be clear about this, our portfolio has been extremely defensive on the insurance underwriting in the last quarter.

Very good.

I'm happy to talk about the recessions impact on the insurance portfolio, which is bound to have an impact because the industrial companies are suffering greatly from the recession globally and we'll be cutting back their-- [fee] scaling their activity. But at the same time as that is that the insurance marketplace, which is significantly underpriced, an awful lot of the specialty insurance products is going to have to move pricing upwards materially to recover some of the ground they've lost over the last three years. And secondly, and equally importantly, is the fact that there's a material reduction in capacity-- of capital and capacity available by insurers to write this business, which again is going to force pricing increase.

But enough to offset the decline in policy count?

Yeah.

Okay. And then the other quick question-- go ahead. The other quick question I had was in the political risk you gave an example of your case reserves for the few cases that you have at average reserve of $9.5 million. I was wondering if you could give some equivalency to what the net limits would be for those cases?

No, I won't.

Okay, thank you.

We don't talk about individual policies, thank you.

The next question comes from Ian Gutterman of Adage Capital. Please go ahead.

Hi, guys.

Hi, Ian good morning.

Good morning to you, John. First just a quick numbers question. The bank loans I guess are down to about $100 million. Do you have what the par is on that? I'm trying to figure out how much the cumulative marks have been over the year?

Yeah, those are through credit fund investments that we've made. So I don't have the par. Those are our valuations in those funds.

Okay. Well I'm just trying to get a sense of how much, how much that's flowing through as negative investment income for the year, just trying to get a sense of if things recover how much that would unwind?

Well, yeah. I mean I think that's a difficult answer and we're not necessarily projecting forward substantial recoveries. It's all going to be dependent on how the markets go, so I couldn't give you a definitive answer on that point, Ian.

Okay. John, just a couple questions on the Reinsurance side. The first is the largest reinsurer in the world may very well have a rating down grade which will put them at the same rating as you guys are given your upgrade. Can you just talk about what opportunities that creates to be at the same rating as to what's rate potentially for you going forward?

Well, [Swissary] is a fine underwriting company, let me make that point, regardless of the near term issues. But in any situation where you have a market leader having those sort of issues, there are bound to be opportunities for quality companies like Axis, and as I tried to say through my commentary, there is an increasing flight to quality taking place. People are beginning to be extremely concerned, much more concerned about counterparty credit and we expect to benefit or continue to benefit through 2009.

Do you have any concerns that they might react the way AIG has by cutting prices to keep business or do you think possibly the presence of Buffet--

I don't have any-- my comment about [Swissary] being a fine underwriting, reinsurance underwriting business stand and I expect them to continue to demonstrate that.

That's fair enough. And then just I guess I have maybe a similar question to Josh's from the reinsurance side. I guess given that pricing really only improved in the cat areas, why grow double-digits on the reinsurance at 1-1, why not do a strategy?

Well because Ian, Ian if you don't mind me saying so, just look at the numbers. The fourth quarter is not a big reinsurance number.

No I'm sorry, I meant for 1-1, you said on 1-1 you renewed, I think it was up 11%.

Well because again, because you're looking at-- what you're doing is putting together all of the reinsurance marketplace. There was specific opportunities for us with high quality cedants, with high quality business, for us to increase our market position because of the flight to quality that I've just mentioned as well as the reallocation that did take place of shares within the marketplace and Axis materially benefited from it. It wasn't a matter of us being competitive at all. It's us actually getting a much better market share of the highest quality business available in the market.

Okay, so basically even though pricing necessarily go up, you're getting essentially better, a better quality of underwriting so it should-- for the same price it should produce a better loss ratio over time?

Yeah, we have a much better quality portfolio going into 2009 than we had coming out of 2008.

Okay, got it because I guess I was just thinking if this is a broader base turn than the post Katrina turn and therefore it would have a lot more opportunities as the year progresses. I just want to make sure you're comfortable that you have plenty of capital to take advantage of that as the year progresses.

Absolutely.

Okay, very good. Thank you.

Thanks, Ian.

The next question comes from Vinay Misquith of Credit Suisse. Please go ahead.

Hi, good morning. (Inaudible).

Good morning, Vinay.

You've done a great job of really expanding in detail the credit insurance book. If I may, we keep hearing headlines in the market so what should we be really worried about after we hear some news in the market about your primary insurance, credit insurance book?

Well, I think I gave you comfort, Vinay. I'm (inaudible) these underwriting businesses. I'm comfortable about it. I am deeply involved on a very regular basis along with my senior colleagues in monitoring that portfolio as well as the underwriting of that portfolio which has been the case since we started Axis. We have seven years of Axis experience which has been extremely favorable. We have 25 years of previous experience which is extremely favorable. I'm not sure what else I can say to you, Vinay apart from the fact I'm comfortable, the Company is comfortable and we're in good shape.

Okay, that's great. The second point is I noticed you've written a lot more professional liability primary insurance and reinsurance this quarter and I believe you also mentioned that you increased your market share on your credit and bond business. Would that be just purely because competitors are dialing back? If you could add some more color to that as to how you see more opportunities where the market is dialing back?

I've already addressed the reinsurance side. The reinsurance side I think I addressed in my previous comments about the fact there's a flight to quality and we're able to access better business, better reinsurance business as cedants look more closely at the underlying security of their reinsurers. I think that naturally, as we've said over the last couple of quarters, the financial institution business has moved ahead strongly in terms of being repriced and so we've benefited from that. We are, as a general comment throughout our professional lines business, we're benefiting from the diversity that we've been putting into that portfolio now for the last three or four years, so it's coming from all sorts of different areas. It's not just financial institutions which we remain reasonably conservative about.

Fair enough, and one final question on the stock repurchases. I noticed you did buyback some stock this quarter. What are your plans for the future, especially if you believe that the market is going to get higher in the second half of this year or early into 2010?

Vinay, I think just on that point, a couple things. If you may recall from the last quarter, I made the commentary that we were suspending our repurchase program, this was back in October, for 2009 and as of today I would say that's still the position we're in. Those repurchases that occurred last quarter actually occurred very early in the fourth quarter and they were carried out under an automatic program, a 10B5 program or whatever it was. So once that was completed we essentially suspended repurchases indefinitely at this point.

That's great. Thank you.

You're welcome.

I see that there is time for just one more question. That question comes from Josh Smith of TIAA-CREF. Please go ahead.

Thanks for taking the question. A couple of quick ones.

Good morning, Josh.

Good morning, John. First a comment and then a question. If we can get a little more disclosure in the future, you've done a great job giving us color on the political trade credit risk, but maybe in future Investor Day if we can get those types of risk by geography a little more detail there, that's a request for future disclosure. A question I have is on the Ike, excuse me your PMLs, you give your detailed PMLs and Ike turned out to be 55% of the 1 in 50 event versus the industry loss being less than 30%. Was Ike an outlier or was that related to the Texas windstorm or did Ike fall within your expectations?

Ike was within our expectations, as we said, immediately after the hurricane had hit and I'm pleased about the fact that we modeled as we expected. The loss was as we expected and it didn't move.

Okay. As far as your reinsurance recoverables, three out of the top four recently downgraded. Did that have any impact on your comfort on recovering those or are you still as comfortable as you were before those downgrades?

Well I-- we're sensitive about any reinsurance recoverable and we will continuously monitor the performance of those underlying reinsurers, but obviously we're looking very closely at it.

I guess my last question would be back to investments. You mentioned that most of your over 96% of your AAA's are super senior but then, I think it was on CMBS, but the subordination was 26% or so, typically I think of subordination of super seniors being closer to 30%. Can you give me a range of just what a junior AAA is versus a senior AAA?

You're talking about within our-- you're talking about within our portfolio, I don't-- I wouldn't have that with me here, Josh, but we can get back to you on that question.

Okay, thanks a lot.

At this time I would like to turn the conference back over to John Charman for any closing remarks.

Thank you. I just wanted to-- before I sign off I just want to make one final comment about Josh Shanker's question at the beginning which I'd like to elaborate on as I thought more carefully about it over the last five or 10 minutes. On our insurance portfolio, the way I would categorize it is the fact that you've heard me say over the last two to three years that we've been extremely defensive because of the aggressive market competition throughout pretty well all of our product lines throughout the specialty area. I would regard us as being materially under weight through a lot of those product lines, deliberately so because we have withdrawn from large numbers of accounts because of pricing or conditions. So even though the world is slipping into global recession, but the fact is that because of the scale of our underweighting throughout an awful lot of those portfolios, we have a very major opportunity as pricing moves back into our favor and risk reward moves strongly back into our favor to benefit substantially from that.

But thank you again for taking the time to listen to us and we look forward to reporting to you our first quarter results. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.