AXIS Capital Holdings Ltd (AXS) 2009 Q1 法說會逐字稿

Hello and welcome to the Q1 2009 Axis Capital Holdings Ltd earnings conference call and webcast. 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 Linda Ventresca. Ms. Ventresca.

Thank you, Mickey. 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 first quarter ended March 31, 2009. Our earnings press release, financial supplement and quarterly 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 May 9th. 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 429424. 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 US 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 of 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 factor section in our most recent Form 10-K on file with the Securities and Exchange Commission. We undertake no obligation to update or revise publicly any forward-looking statements whether as a result of new information, future events or otherwise. In addition, this presentation contains information regarding operating income, which is a non-GAAP financial measure within the meaning of the US Federal securities laws. For a reconciliation of this item to the most directly comparable GAAP financial measure, please refer to our press release, which can be found on our website. With that, I'll now turn the call over to John.

Thank you, Linda, and good morning, everyone, and thank you for joining our call. I am pleased to report that we have delivered book value growth during this first quarter of 2009. Contributing to this improved performance relative to the last few quarters of 2008 was the very welcome stabilization in asset valuations for our fixed maturity portfolio and improvement in liquidity in the credit markets overall. This is the first quarter since the unprecedented events of the second half of last year that we have been able to report a total return on our investment portfolio that is at last moving toward positive territory. Included in our financial results this quarter are proactive reserving actions taken in the quarter. These are consistent with our actions in 2008, which we believe are prudent in the light of the continued global economic turn down -- downturn. Even with these actions, our combined ratio was 86.6%.

This underwriting result is very respectable -- is a very respectable result in light of the conservatism embedded in our underwriting and reserving philosophies, especially given our belief that in 2009 we are at the bottom of the earnings cycle across all lines. Now I would like to turn the call 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 bit more detail. David?

Thank you, John, and good morning, everyone. As John mentioned, we're pleased with our results for the quarter. Despite the challenges of the current economic environment, we were able to deliver an annualized return on equity of 11.6% for the quarter and a 2% increase in diluted book value per share to $26.35 at quarter end. Net income for the quarter was $116 million, or $0.78 per diluted share compared with $238 million or $1.48 per diluted share for the first quarter of 2008. Approximately 80% of the change in net income is attributable to year-over-year movements in net realized investments gains and losses and foreign exchange gains and losses. After-tax operating income, excluding foreign exchange gains, was $155 million or $1.04 per diluted share compared with $186 million or $1.16 per diluted share for the first quarter of 2008. Turning to our top-line, our consolidated gross premiums written were $1.3 billion, up 5% from the first quarter of 2008.

This growth was driven by our reinsurance segment, where we saw better opportunities for growth than we did in our insurance segment. Gross premiums written in our reinsurance segment were $1 billion this quarter, up 16% from the first quarter of last year. The increase was driven by significant rate increases on our US property catastrophe renewal business, together with attractive new business opportunities and increased share with our professional lines, liability and credit and bond reinsurance businesses. Gross premiums written in our insurance segment were $364 million, down 16% from the prior year quarter. The decrease was driven by a reduction in our credit and political risk business. We are not yet seeing the return of significant global lending and trade activity that we expect will create attractive opportunities for us.

In addition, we reduced our catastrophe exposure within our property lines of business this quarter, as well as rebalance the global property portfolio in our insurance segment. In the quarter, consolidated net premiums written and net premiums earned increased 6% and 1% respectively. This primarily reflects the impact of the previously mentioned increase in gross premiums written. Moving on to our underwriting results, total underwriting income for the quarter was $97 million compared with $139 million in the first quarter of 2008. Our combined ratio for the quarter was 86.6% versus 81.2% in the prior year quarter. The increase in the combined ratio was driven by an increase in our loss ratio from 54.9% in the first quarter of 2008 to 58.3% in this quarter. This was driven by higher accident year loss ratios relative to the same period last year. Our consolidated current accident year loss ratio for the quarter of 71% compares to 68.3% in the first quarter of 2008. There are a few items to note here.

Our insurance segment's current accident year loss ratio of 68.4% decreased 3 points from the prior year quarter driven by a lower frequency and severity of property risk losses. Partially offsetting this was claims activity on our credit and political risk insurance line of business this quarter. John will provide some additional color on this in his commentary on credit exposures from our underwriting activities. Our reinsurance segment's current accident year loss ratio increased 7.2 points to 72.8% predominantly reflecting our actions to ensure that we have prudently reserved in our trade credit and bond reinsurance book for the extreme effects of the global economic downturn. Our reinsurance segment's current year loss ratio was also impacted by catastrophe losses this quarter, including European windstorm Klaus and Australian bush fires.

During the quarter, our estimate of net reserves from prior accident years continued to develop favorably with prior year reserves reduced by $84 million this quarter. Of this amount, $36 million was from our insurance segment, representing a positive impact of 13 points on the segment's loss ratio. Our reinsurance segment posted $48 million in net favorable prior period reserve development representing a positive impact of 12.4 points on the segment's loss ratio. The majority of the net favorable reserve development this quarter was generated from our short tail lines. The balance was primarily from the accident years extending from 2003 through 2005 in our professional lines insurance and reinsurance businesses. We did add to prior period reserves in the quarter. Specifically, we added $32 million to our reserves related to trade credit and bond reinsurance for accident year 2008. This action was taken to prudently address updated information about accident year 2008 loss activity.

Meanwhile, on the earlier accident years for the same line, we recognized $17 million of net favorable reserve development as loss experience was better than expected for these years. Our accident -- excuse me, our acquisition costs increased 1 point to 15.3% this quarter relative to the prior year quarter largely reflecting changes in business mix. Also contributing to the increase were sliding scale commissions associated with favorable prior period reserve development incurred in our insurance -- our reinsurance segment. Our underwriting results in the quarter were negatively impacted by a $10 million reduction in the fair value of an insurance derivative contract related to a life settlements portfolio. This change in fair value 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% compared to 12% in the first quarter of 2008.

Our G&A costs of $87 million this quarter are in line with our previous comments. The increase quarter over quarter is largely attributable to our continued investment in IT and operational infrastructure. G&A costs this quarter represent an appropriate quarterly run rate for 2009, absent any performance-related compensation adjustment. Moving on to investment results, for the quarter we recorded $99 million of net investment income, a welcome increase of $14 million over the prior year quarter and significantly improved relative to the $26 million loss recorded in the fourth quarter of last year. Our fixed maturity investments produced $92 million of net investment income this quarter, a decline from $105 million in the prior year quarter, primarily due to lower interest rates and our deliberate maintenance of higher cash balances through much of the quarter.

This interest income decline was offset by net investment income produced by our other investments portfolio during the quarter of $7 million as compared with the $36 million loss from these assets in the first quarter of 2008. Improvement in the bank loan market, which contributed to positive performance from our credit funds, accounted for most of this increase from our other investments. As we stated during our last call, we believe these credit funds, which are primarily comprised of senior secured loans, have significant return potential from the current valuations. Our hedge fund investments also contributed positively to net investment income for the quarter, despite the general decline of global equity markets during the period. Net realized investment losses totaled $41 million in the quarter, inclusive of other than temporary impairment charges of $30 million. The OTTTI charge primarily relates to hybrid securities of European and US financial issuers.

We also recorded impairments on a small number of subprime and all day-related holdings. The remaining net realized investments losses were sales of financial corporate securities. In aggregate, total return from our investment portfolio was close to nil for the quarter. To summarize, net investment income of $99 million was offset by net realized losses of $41 million and an increase in net unrealized losses from available for sale securities of $59 million. The increase in net unrealized losses is primarily related to our holdings of medium-term notes, which were negatively impacted by the continued weakness in the Euro credit markets and hybrid securities of financial institutions. We reduced our cash positions reporting during last quarter's call from 17% to 13% of total cash and investments. Much of this reduction occurred towards the end of the quarter.

These reallocated funds were invested in US Government and agency debt holdings, US agency mortgage backed securities, and corporate issues with FDIC guarantees. We will continue to maintain a conservative portfolio, which remains well diversified, highly liquid, high quality, and short duration. Our investment grade fixed maturity portfolio has a current duration of 2.4 years, with an average quality of AA-plus. In light of current conditions, over half of our investable assets are in cash and US Treasury and agency obligations. Going forward, we're continuing to shift our fixed maturity portfolio towards US Government guaranteed issues and US agency pass-throughs. At the moment, we are maintaining our modest exposure to hedge funds and long-only equity strategies and are monitoring opportunities in the event we choose to increase our exposure in these areas.

For additional information on our investment portfolio, we have provided an investment supplement which is available on our website. With respect to foreign exchange, during the quarter changes in exchange rates and changes in net currency exposure resulted in negligible gains compared to net gains of $20 million in the prior year quarter. Our capital resources and liquidity remain very strong. Cash flows from operations this quarter was $245 million. We remained strongly capitalized for the risks we hold and the risks we are targeting. Total capitalization at March 31, 2009 was $5 billion, including $500 million of long-term debt and $500 million of preferred equity. Common shareholders equity increased $32 million to $4 billion during the quarter. In our quarterly financial supplement, we have updated information about PMLs as of August 1st for the access group at various return periods for peak industry Vinay Misquith zones. We have also provided estimates of industry losses at these return periods.

The only significant change of note relates to the industry losses for Japanese earthquake and wind, which change as a result of vendor model refinement. With that, I would like to turn the call back to John.

Thank you, David. Before I move on to my forward-looking comments, I would like to further update you on elements of our underwriting portfolio currently affected by the credit crisis and the global economic downturn. These are professional lines insurance and reinsurance, trade credit and bond reinsurance, and credit and political risk insurance. First, I would like to specifically discuss loss activity in the various impacted lines. In professional lines insurance and reinsurance, we continue to believe the 2007 and 2008 years will be the most heavily impacted by the subprime and credit crisis. We have consistently taken prudent reserving actions since the onset of the crisis, culminating in what we believe to be among the strongest reserve positions in the industry for the 2007 and 2008 years.

In trade credit and bond reinsurance, we recognize that the global economic downturn has persisted through this first part of 2009 and that the risk management actions taken by our cedents to manage their way through the unfolding credit crisis may take some time to have full effect. For the most part, loss activity has been characterized by high frequency, not high severity. Based on our ongoing monitoring, we believe large customers have been well monitored by the trade credit insurance and broad brush measures have been taken to target the high loss frequency experienced with small to middle size customers. By now you [likeliable] (inaudible) an extensive press coverage about measures trade credit insurers have taken to mitigate exposure emanating from the credit crisis and global economic downturn.

We fully expect these measures, as well as complimentary government support, to gain full traction in mitigating potential future loss. We ultimately expect a positive inflection point late in 2009. In the meantime, we are taking prudent reserving actions with respect to 2008 and reserving the 2009 accident year at approximately twice the level of incurred losses observed in the 2004 through 2006 period. Moving on to our political risk and credit insurance line, we have received only three notifications of loss in the first quarter of 2009. One of these notices relates to a transaction rated by a major rating agency and has been deemed by that agency, by our insured bank, and by us to have high prospects for recovery. Although we expect the other two notices to result favorably later in the year, we nevertheless have conservatively reserved these cases in the quarter based on relatively unfavorable possible outcomes. And finally, we remain comfortable with the reserves we established for the 2008 claims activity that I discussed during our last earnings call. The overall performance of this portfolio thus far is good.

In summary, we have received no new information or claims activity that has caused us to materially change our view that any net losses resulting from the credit crunch or general deterioration in the economic environment are within expected annual earnings. Stepping back, we have also analyzed extremely stress scenarios across our credit and political risk insurance portfolio, as well as our trade credit and bond reinsurance portfolio. These stress scenarios assume extreme correlation amongst countries and economically or politically linked regions. They also assume higher defaults and lower recovery rates than those experienced in the past. As we have already noted, the fact that trade credit insurers take significant measures to mitigate downside during these types of stress situations, coupled with the small scale of our trade credit reinsurance business relative to our overall portfolio means that the trade credit and bond reinsurance portfolio is not a significant loss driver to our overall expected results.

Our analysis supports our position that in extreme downside scenarios, we do not expect net losses from our credit and political risk insurance portfolio to exceed annual earnings. This portfolio is catastrophe-like in its loss characteristics, but when put into the context of our overall business, we believe that natural perils risk remains by far our main exposure for extreme events. Now I will provide an overview of the underwriting markets. For sometime we have said that any hardening in the market would initially be led by the reinsurance market. We continue to believe that there will be a broad hardening and at this point we are participating in a sustained improvement across the reinsurance market. We are experiencing a stabilizing insurance market. However, the biggest question remains one of timing of pricing recovery across our business lines. We believe the lag in the insurance sector is not likely to continue beyond this year-end for many reasons, which I will cover later.

Demand for reinsurance is strong and in our opinion, our position in the reinsurance marketplace is advancing, as reinsurance buyers are recognizing the relative strength and consistency of access as a reinsurance partner. This is beneficial as the reinsurance market more broadly continues to show discipline with terms and conditions remaining firm. On a positive note, market intelligence suggests that certain start-up operations with ambitious business plans are not receiving broad support from the reinsurance market. Reporting from our cedents indicates that the rate of decline in insurance pricing has slowed and in the case of property business, pricing is increasing. Stronger, more professional cedents are targeting and writing the business that is migrating away from troubled insurance carriers. The gradually shifting landscape in the insurance markets is an important structural dynamic we expect will accrue most immediately to the benefit of the reinsurance market and in time to the benefit of the industry overall.

Rates in both the property and casualty excess of loss reinsurance lines in which we participate are attractive. As we have noted in the past, we have a strong bias towards writing reinsurance business on an excessive loss basis. We believe this generally offers better margin for the risk assumed than proportional reinsurance business. However, we still look for opportunities in proportional reinsurance business, particularly with good quality, well run specialty insurance companies who require continuity in their reinsurance purchasing as an important capital source. At this time, with the exception of a few lines, we do not believe margins in proportional reinsurance business, in particular first dollar proportional reinsurance business, are compelling enough that our overall bias in excess re would move away from excessive loss reinsurance business. This has implications only when comparing top-line growth amongst reinsurers.

As we indicated last quarter, we believe we are achieving margin expansion in Axis Re overall during 2009. As discussed in our last earnings call in property, the line of business we are -- I'm sorry, forgive me. In property, the line of business where prices increased meaningfully to attractive levels is property catastrophe reinsurance. Meanwhile, non-catastrophe property reinsurance pricing is generally stable. But property catastrophe reinsurance business, we believe that the pricing at midyear renewals, which are heavily influenced by [Pete Winzens] in the US, will be as attractive, if not more attractive than the pricing that cleared the market at midyear renewals following the active 2005 hurricane season. Unlike the period following the 2005 hurricane season, there is strong evidence that price is increasing for the California earthquake peril.

Various market dynamics support sustained hardening, including the negative impact of changes in exchange rates on Lloyd's capacity, the lack of new entrants and sources of CAT capacity in the capital markets demanding rates of return much higher than those demanded in 2006. Also, reforms to the Florida hurricane CAT funds temporary increase in coverage limits, otherwise known as TICL, could boost the amount significantly for increased limits of indemnity from the traditional reinsurance market at midyear. Recognizing all of this, cedents needing certainty are coming to the market much earlier to secure CAT coverage. Overall, our risk appetite in targeted business in the property reinsurance line remains unchanged. We remain extremely cautious about providing reinsurance coverage for cedents who could have solvency issues following a major shock loss.

This represents one of the primary reasons we are not a significant reinsurer of Florida only property reinsurance business. Our property catastrophe reinsurance portfolio remains biased toward national carriers and super-regional carriers, who we believe are more strongly capitalized and therefore more resilient. Moving on to the insurance marketplace, more volatile loss effected lines, such as those with CAT exposure and financial institution business, are experience rate increases. Other commercial lines are flat or continue to decline, albeit rate decline has slowed materially relative to 2008. Financial institutions D&O is the only line that assume rates directly and positively impacted by the economic turmoil. Commercial D&O is under the most pressure in the primary end lower layers, where there's no shortage of markets available to compete for business moving away from troubled carriers. It feels a bit like the land grab before the peace treaty is signed.

With the competition focused on primary and lower excess layers, we believe the higher excess layers are able to maintain better pricing. We are seeing a similar effect in casualty, with excess casualty relatively more attractive than primary casualty. Certain property insurance classes demonstrating accelerated improvement in pricing through the end of the first quarter. This was particularly true of the 14,000 North American CAT exposed placements. Non-US property insurance business continues to disappoint. This seems to be driven by diversification of markets away from peak CAT zones. While offshore energy pricing continues to improve, clients with strong balance sheets are buying less windstorm covering the Gulf of Mexico and the energy industry's construction activity has abated with the reduction in the price of oil. We view the most optimistic case at this time in the insurance segment as hardening across all lines towards the end of the summer.

Importantly, insurance carriers have significantly diminished ability to hide behind the fig leaf of investment returns and favorable prior year reserved development. They are also facing significantly higher risk retentions. More than ever now, perspective returns to shareholders will depend on real underwriting profits being made. With this in mind, we would like to emphasize, as we did last quarter, the transitional nature of 2009. As you can see in this quarter's results, substantially lower yields are pressuring investment income. Whilst this is a near-term negative, it ultimately supports the need for the industry to continue to focus on pure underwriting profitability. Any resolution of fundamental structural issues in the insurance markets, namely government involvement in the provision of cheap capacity on an unmonitored basis, will go a long way towards allowing efficient and appropriate market behavior.

There are indications at least some of this may be addressed in the near-term and we believe this must happen to insure healthy, transparent insurance marketplace. We would like to remind you that we remain broadly defensive throughout our underwriting and investment activities. Whilst we have seen the green root chutes of recovery, we do not believe the risk reward characteristics have sufficiently swung in our favor to mobilize ourselves for a full offensive. We believe by year-end our market leading diversification by product and geography, together with our strong underwriting skills and risk management framework, will be fully mobilized to deliver high quality outperformance. Now I would like to open the lines for questions.

(Operator Instructions) Our first question comes from Matthew Heimermann of JPMorgan.

Hi, good morning, everybody.

Good morning, Matt.

Good morning. Question on the political risk side. As we just -- just going forward with respect to how we should think about underwriting margins in that segment, is it fair to say that really at this point it would be specific project-related defaults or slowdowns that really is going to drive volatility in the loss ratio rather than general increases in provisions for reserves?

The -- if you are talking about future activity, you know that we have been very conservative -- as the market has slowed substantially in producing project finance activity in the emerging market, so have we. And quite frankly, what we wanted to do was to step back a little bit and because there's an entire repricing of credit taking place globally. And what we wanted to do was to make sure that the very valuable product that we put into those markets was repriced accordingly. So we're waiting for the activity to pick up. We thought it would probably be picking up by the end of the first quarter. It's showing signs, but spotty signs, but it's not there yet.

But we're very comfortable about being able to take advantage in that area once that activity comes through. In terms of the loss activity, we have a very substantial unearned premium on this portfolio. And so the first quarter's always a very difficult quarter for an insurance business because a Company like ours has not a huge amount of premium volume going through in the first quarter and it tends to normalize as we go through the rest of the year. But I'm very comfortable with where we stand with our provisions and I think we've been very prudent and we should be at times of great economic distress globally.

All right. Just to summarize, I think I maybe could have asked the question better. But it is just -- .

I probably could have answered it better.

No, no, you answered it better than I asked it. It sounds -- on the reserve side, it sounds like it would be severity around specific claims that would drive variance in reserves going forward rather than, rather than anything else?

Definitely.

Okay.

Yes.

And then with respect to the premium, I guess -- I understand its link to loss activity and you think that potentially second half you could see activity go up and you could start writing business again. I mean would the opportunity be so dramatic that you would be comfortable ramping this business back up to kind of the premium levels you saw in '07? Just trying to get a gauge of when business -- when opportunities do come back, just how significant that is?

Well, Matt, I've always said this is a very important part of our business. It's a very important part of a very diversified portfolio. Everybody's very sensitive to it at this moment in time. I just remind you that since we started writing this business back in 2002, our loss ratio is under 15% and the loss activity you would naturally expect to occur in an unprecedented global economic meltdown. But I think we have demonstrated with the diversity of the portfolio we have in the credit and political business that we've managed that very well and we will continue to do so and I would expect us to benefit strongly from an upturn in trade activity.

Okay. That's helpful. Thank you. Just one other, if I could, just with respect to the insurance segment with continued reductions in the property side, is that -- is that -- I guess, at what point would -- would you feel better about risk/reward in -- in the insurance segment? I get that it makes more sense to use aggregate in the reinsurance segment at this point. But how -- do you see an inflection point for that business as well?

We de-risked the insurance side, Matt, from a cap point of view because the risk/reward we just don't see as getting there yet. And I think there is a lot of underwriting businesses are deluding themselves if they are loading up. We believe that will change, but we don't see it certainly before the first of July. Not to the level that we believe that we require for the sort of returns that we need. We have not moved capital to our reinsurance business. We've held our reinsurance P&Ls to the same level. But we believe, as I said in my commentary, that we're able to get much better risk/reward margin on our reinsurance side than we're currently seeing on the insurance side and we're seeing margin expansion, just to remind you, on the reinsurance side. The primary side will get there, but I don't believe it will get there before 17 and this is not a year to throw margin away.

Fair enough. Thank you very much, John.

Thank you.

Thank you. Our next question comes from Josh Shanker of Citi.

Good morning.

Hi, Josh.

Good morning.

Thank you. Looking -- you might have saw that I'm not as yet sold on the hard market situation and I was trying to figure out, at what point does the industry's capital start getting used and to what extent do you think that the markets would allow capital to be raised to scuttle that situation?

Well, firstly, let me deal with your point about you're not sold on the hard market. There's always differing views of what is a hard market, what constitutes a hard market and at what levels. But let me tell you, after three years of a soft market, we're in a hardening market substantially. And even on the primary insurance side over the last four or five weeks, there has been significant hardening across a number of lines. But it still has a long way to go, but you know that we've maintained that the reinsurance side has hardened. It did at the year-end and it will continue to harden through this year. If you are talking about real use of any surplus capital that's left in the industry, I think inevitable it will be shown next year.

And in giving your -- would you -- do you believe that you have enough capital now that given your projections you would not want to raise capital given that opportunity?

We have a very sufficient amount of capital to undertake the underwriting activity that we want to.

And in -- .

If we see an extraordinary situation, Josh, because these things you never really know what's around the corner, but we -- our balance sheet is in great shape. Our reserves are really strong, very conservative. We're on top of our underwriting both in the insurance side and the reinsurance side. It's been a very frustrating three years sitting back and waiting for this moment, but if -- if the opportunity becomes exponentially greater, then we could go out and raise capital and we're in a position to be able to do so because our debt to equity ratio is good, it's light. The balance sheet's strong. We're well regarded and we'd put it to good use, but only if we saw an extraordinary opportunity.

And for the industry, not Axis in particular, stripping out extraordinary CAT, how many years do you think the industry would post an underwriting loss forward before we get back up to a general level of underwriting profitability?

Well, I think it will be a pretty short-term situation. The well must be running dry for a lot of these guys, Josh, if you don't mind me saying so.

Okay. Well, I appreciate your insight.

Thank you.

Thank you. Our next question comes from Vinay Misquith of Credit Suisse.

Hi, good morning.

Hi, Vinay, good morning to you.

On the credit and bond insurance, just a follow-up to Matt's question actually. Do you expect that your loss bakes for the rest of this year will be on the high side as you own the premiums on that business? Because of the -- .

I think that -- I'm very com -- as I said, Vinay, I'm very comfortable about the reserving actions we're taking. We're very close to our cedents. We like their business. We know their business. We took a strategic decision because we have been very cautious with that business in the growth of our European reinsurance portfolio and there was -- which I think will show a unique opportunity for us and maybe one or two other reinsurers to have a much more strategic relationship with the three major credit and bond insurers, which we took. And I'm very comfortable with our reserving position in the light of a global downturn. And I'm also very comfortable about the actions that these people have taken.

And don't forget, Vinay, these guys have got a lot of skin in the game. It's not as if they are reinsuring the vast majority of their business. They have a lot of retained business here. They have a very strong vested interest, as much as we do, in getting this matter sorted out quickly, getting it addressed, getting it repriced, getting the treaty conditions changed in our favor. The risk/reward has come back in our favor. So I feel pretty comfortable in spite of all the doom and gloom that is around out there.

Fair enough. My question -- . Sorry. My question was actually more based on was the -- was the reserving action this quarter sort of a true up or do you expect this higher run rate, say, until the end of this year and then next year that to fall off because of the actions taken by the primary insurers to increase pricing and to reduce risk?

Yes, I think, Vinay, this is David. I mean I think if you're looking at our historical loss ratio across the entire Company or the entire businesses, we tend to reserve earlier in the year at higher loss ratios and they drop off as the year matures. That would be consistent with this line of business as well. However, in the environment that we're dealing with and the market conditions that are out there, I wouldn't use this year as a year to apply our prior experience to it. And I think as we've said in our comments and as John has elaborated on, we've been highly conservative or prudent in the way we're reserving this line and I don't think that I would anticipate changes in that approach for the rest of the year.

Fair enough. And, David, looking at the net investment income, the yield really topped off quite significantly this quarter was the last quarter. Do you anticipate changing your mix of assets in the future? And do you expect this low level of yield to last for the next few quarters or do you expect it to go up maybe later this year or early next year?

Yes, couple things here just to comment on. First of all, the yield is down, as I said in my remarks. If you look at what occurred within the quarter, we held a very substantial amount of cash into the end of '08 and through much of the first quarter. And the yields on cash dropped significantly, as you know, over the last six -- six or eight months and that drove down the yield to a degree. In addition, we have invested in very safe, if you will, investments, government guaranteed issues, FDIC backed issues, so our current philosophy has been to -- to look for the safe areas of the market, which have a slightly lower yield at the moment, but we do generate very significant amounts of cash flow. We are looking at the portfolio very regularly and I wouldn't say that we'll continue the same approach throughout the rest of the year or we wouldn't look at other opportunities. So I think this could be pressure on the -- I would say there will be pressure on the investment income returns throughout the year, as we've said, but we are going to look for whatever opportunities the market will have for yield improvement.

Fair enough. John, one last question, if I may. Just to follow up to Josh's question, why do you think that the market has not significantly hardened in primary insurances yet? And secondly, if pricing were to rise 5%, would that really lead to margin expansion because loss cost trends are also rising in the 5% area?

Well, I -- the -- you've heard me when I pulled my hair out about the primary markets, so I think are actually less well managed than the reinsurance businesses. They are less focused. Their management tends to be more distant and tends to rely on actuarial driven numbers to manage their business, whereas we at access are completely the opposite business model. We're down in the coal phase every day and throughout all of our product lines. Secondly, it's even more interesting that the primary market hasn't reacted because as I've been saying now for a year, the reinsurance market has not softened in the same way that the primary market has and so the margin erosion in a lot of these primary underwriting businesses must be significantly greater than they are reporting and I strongly stand by that. I just think that there's a lag between the management of these primary businesses getting any reserve redundancy out of their books, flushing any credits they can find. My instinct tells me it's happening now.

The well is pretty dry and we, as I said earlier to Josh, over the last four or five weeks, we've started to see indications more broadly about changing underwriting behavior, especially when you consider those underwriting businesses that allow their underwriters to take into account investment returns as part of their pricing strategy, especially on the longer tail businesses. You have -- we've never allowed our underwriters to do that, as you know. Our underwriters have to make underwriting profits. Those underwriting models that incorporated investment returns, again have to be fundamentally changed, for obvious reasons. So I'm pretty comfortable about the second half of this year actually on the primary side. It will be a bit spotty, but it's going to happen.

Okay. Thank you.

Thank you.

Thank you.

Our next question comes from Brian Meredith of UBS.

Yes, good morning. Couple questions.

Good morning.

Good morning. Couple questions here. First, John, can you talk about how much do you think the economy is actually impacting the softening market? And by that I mean customers more willing to accept potentially lower credit quality for a lower price right now and do you think if the economy improves, maybe that will have a positive impact on pricing, as companies can afford to pay for better credit quality?

Can I just answer that one first because otherwise I'll forget all of your questions. Our industry is pretty -- I've always said, it's completely contra cyclical. In all the years, I've been in it now for 38 years. And throughout the cycles and I've worked for a ship owner back in my much younger days and more rebellious days and so I was used to buying insurance on the other side. And at a time when the global economy is -- tends to gloom, our businesses within the primary insurance markets tend to underprice and overcompete. It's just something that traditionally has happened. And then as we get ourselves into trouble as an industry with low returns, we are forced then to set about of repricing, a broad repricing of our product lines at a time when the global industry tends to be going into some sort of recession or downturn.

And of course there's an impact in the fact that there are a number of clients who have obviously had a very substantive six-year run of high profitability may be covenant light because they are debt-free or they have reduced their debts and so they are reliance on insurance products is lessened. But that works its way through balance sheets because risk is risk and losses occur and these guys think that they can run it against the cash on their balance sheets. Within a year or two, they are back fully buying because they have used a lot of their cash and I think the insurance marketplace is still the most efficient use of selling risk into and the most price sensitive, too. So I don't agree. Sure, there's a lot of short-term action being taken by finance directors not risk managers. The risk managers in a lot of these Fortune 1000 businesses are recommending coverage to be purchased.

The finance directors, because they are on tight budgets against declining revenues, are actually reducing some of their buying. But that's more than offset by, frankly, by the market repricing. And having been around for a long, long time, I know what historic pricing is all about and the margin that the market needs to make up, even from 2002 levels, is very substantial. And it's across the board. So there will be more than a compensating impact by a hardening market against the backdrop of a declining demand.

Great. And -- .

Does that get to where you were going?

Yes, that was a great answer. Thank you. One other quick follow-up here on the political risk business. Perhaps, John, without getting specific, you could kind of describe a claim on the political risk business, what a typical claim would be and why you've said a number of cases in some of these claims that you've had you believe you'll have a favorable outcome to them. Why do you believe that.

Well, because that's our history and that's our experience, proven experience. When we -- when we underwrite these types of individual risks, we are very cautious that the front end in working with our banking partners to make sure that there's an economic viability to the project. That these are sort of project finance structures in the emerging markets. So there has to be strong viability and we do -- we take a great deal of care with the due diligence that we go into when we're actually assessing risk. And I like to think Axis is well known throughout the industry for its risk selection and the quality of its underwriting and we have as good a quality of underwriting in that line of business as we have every other line of business. We've been writing this business for year after year for 25 years in different guises.

Don't forget that also that we insist that our banking partners have substantial skin in the game alongside us. So we're not -- they are not shedding their risk to us. We are partnering with them. We also are involved in senior secured positions w Where we have highly collateralized positions. Now, the value of that collateral, the liquidity of it may change during extreme circumstances, but at the end of the day we have significant ability to recover the amount of insurance. We're providing an insurance policy, don't forget, that we can recover and I come back to our experience and the fact that we have proven time and time again that we're able to recover and renegotiate. It's not only a matter of recovery, because it's a matter of renegotiating some of these situations, and we're at the table during those renegotiations as well. So we're not being presented with fair accompli. It's very difficult because each one of these transactions is different.

It stands on its own two feet and it is extremely well underwritten. I've talked myself blue in the face because we've been going on about the political risk business quite appropriately for probably a year now, but I would hope that we have demonstrated that this is a very carefully run business and it's a very valuable business to us as a Company.

Thank you.

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

Well, thank you for taking the time. I know you've had a very busy 24 hours with a number of other earnings calls, but we very much appreciate you coming along and listening to us. And I'll just remind you that I'm very upbeat and my tone is extremely positive. Thank you very much.

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