AXIS Capital Holdings Ltd (AXS) 2010 Q1 法說會逐字稿

Good morning and welcome to the Q1 2010 AXIS Capital Holdings Limited conference call and webcast.

All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Linda Ventresca. Ms. Ventresca, the floor is yours, ma'am.

Thank you, Mike. Good morning, ladies and gentlemen. I am happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the quarter ended March 31, 2010.

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. A replay of the teleconference will be available by dialing 877-344-7529 in the US. The international number is 412-317-0088. The conference code for both replay dial-in numbers is 439424.

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 the 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, derivative contracts, policies, 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 models; and our expectations regarding pricing and other market conditions. These statements involve risks, uncertainties and assumptions which could cause actual results to differ materially from our expectations. For a discussion of these matters, please refer to the Risk Factors section in our most recent Form 10-K on file with the Securities and Exchange Commission. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, this presentation contains information regarding operating income, which is a non-GAAP financial measure within the meaning of the 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 would like to turn the call over to John.

Thank you, Linda, and good morning, everyone, and thank you for joining us.

By now, you will have seen our first-quarter results, which we view as strong. For the quarter, we reported net income available to common shareholders of $112 million, or $0.79 per share, as well as operating income of $96 million, or $0.67 per share. Our diluted book value per common share increased by 31% over the last 12 months and by nearly 3% from year-end, to $34.56. These results were achieved despite the challenges presented by a remarkably high level of worldwide cat losses for the first quarter of this calendar year.

The annualized return on average common equity for the first quarter of 2010 was just over 9%, and the annualized operating return on average common equity was 7.7%.

Our gross written premiums for the quarter were up approximately 8%, although this was not evenly distributed across the Company. Reinsurance rose approximately 10% within a comparatively stable reinsurance market, whereas prime insurance was up about 2%. Thus, we have always maintained we would turn away from business that does not meet our high standards for underwriting profitability, and we will write business which is capable of producing an appropriate balance of risk and reward. We will continue to take full advantage of good opportunities where we can find them.

Our consolidated combined ratio for the quarter, an important measure of profitability in our core Property and Casualty underwriting operations, was 98% and included estimated net losses of approximately $153 million from the Chilean earthquake, European windstorm Xynthia, the Australian storms, and the severe East Coast US winter storms. We are a major participant in the wholesale commercial P&C markets. As such, we expect to have exposure to catastrophes like these. We do view these events as normal events. However, the less normal part of the cat loss activity is the frequency that has occurred within this first quarter. Our prudent risk-management efforts have served us well, as we have produced good quarterly profitability despite the accumulated impact of these catastrophes on consolidated underwriting profitability for the quarter. This is a strong result for a business with an overall bias towards short-term lines. Further, our underwriting results for the quarter reflected the favorable impact of recovery from the global financial crisis, as we have returned to stability and more normal expectations for loss and credit related lines of business.

Finally, for the quarter, our investment portfolio delivered a total return of 1.8%, including net investment income of $105 million. We bought back $287 million of shares in the first quarter at an average valuation of 87% of average diluted book value per share for the period. Given the current insurance and reinsurance market outlook, we view buying back shares when they trade at this current range as an effective use of our excess capital.

With that, I will now turn the call over to David to discuss these financial results in more detail.

Thank you, John, and good morning, everyone.

As John mentioned, we are pleased with our results this quarter. Despite an unusually high level of catastrophe activity for a first quarter, we delivered an annualized operating return on average common equity of 7.7% for the quarter. Our diluted book value per share continues to increase, reaching an all-time high of $34.56.

Net income for the quarter was $112 million, or $0.79 per diluted share, compared with $116 million, or $0.78 per diluted share, for the first quarter of 2009.

Operating income, which excludes the impact of realized gains and losses on investments, was $96 million, or $0.67 per diluted share, compared with $156 million, or $1.05 per diluted share, for the first quarter of 2009.

Turning to our top line, our consolidated gross premiums written were $1.4 billion, up 8% from the first quarter of 2009. This was driven by our Reinsurance segment, where we saw select opportunities for growth. Gross premiums written in our Reinsurance segment were $1.1 billion this quarter, up 10% from the first quarter of last year. Excluding the impact of foreign exchange rate movements, gross premiums in the segment were up 8%. The increase was driven by new Latin American surety reinsurance business and select growth in European motor reinsurance business.

Our Property premiums also increased as a result of new business opportunities, as well as a shift in the renewal date for one significant treaty.

Partially offsetting these increases was a reduction in our liability reinsurance premium. This reduction was primarily due to the renewal date on a single pro rata treaty covering excess and umbrella business moving to the second quarter of 2010. We also saw a small decline in our catastrophe reinsurance premium, as we deliberately reduced our aggregate exposure to European windstorm.

Gross premiums written in our Insurance segment were $373 million, up 2% from the prior-year quarter. The increase was driven by select US middle-market property opportunities and our energy line. These increases were partially offset by reduced aviation premiums due to a shift in renewal date for certain business to the second quarter of 2010. Further, a $12 million reduction in gross premiums written as part of a claims settlement on a prior-year credit and political risk policy more than offset premiums written in this line during the quarter.

In the quarter, consolidated net premiums written and net premiums earned increased 7% and 5%, respectively. This primarily reflects the impact of the previously mentioned increase in gross premiums written.

Total underwriting income for the quarter was $28 million, compared with $97 million in the first quarter of 2009. Our combined ratio for the quarter was 98.3% versus 86.6% in the prior-year quarter. The primary driver of the increase in our combined ratio was an increase in our current accident year loss ratio from 71% in the first quarter of 2009 to 79% this quarter.

There are a few items to consider here. An unprecedented frequency of natural catastrophe events in a first quarter has been the hallmark of 2010 to date, and this is reflected in our current accident year loss ratio.

The most significant loss event in the quarter was the 8.8 magnitude Chilean earthquake in February 2010. Our estimated net losses for this event are $100 million and are net of the impact of related reinstatement premiums of $6 million. This estimate is within our initial announced range of net loss estimates for this event. At the time we preannounced a range of net loss estimates for the Chile earthquake, we also provided a range of net loss estimates for European windstorm Xynthia, which represented a smaller industry loss event.

There were a few other small industry loss events during the quarter that were not included in our preannounced estimates. Collectively, in the quarter, we recognized $47 million of estimated net losses related to European windstorm Xynthia, Australian storms, and US winter storms.

Estimated net losses for Xynthia are within our initial preannounced range. The Australian storms were the most significant of the smaller events for us. The impact of reinstatement premiums in the quarter related to these smaller industry loss events were diminimus. In contrast, catastrophe losses in the first quarter of 2009 were far less significant than those in the first quarter of 2010.

The impact of the increased catastrophe activity in the quarter was largely contained within our Reinsurance segment, where the current accident year loss ratio increased to 89.5% for the first quarter of 2010, compared to 72.8% in the comparable period of 2009. The current accident year loss ratio in our Insurance segment declined from 68.4% for the first quarter of 2009 to 60.9% in the first quarter of 2010.

Partially offsetting the catastrophe-related increase in our current accident year loss ratio was a reduction in the expected loss ratio for our trade credit and bond reinsurance business. The 2009 accident year loss ratio on this line of business was elevated as a result of the impact of the global financial crisis.

In addition, our current accident year loss ratio in the quarter benefited from a reduced frequency and severity of individual risk losses in our property and energy insurance lines relative to the same period last year. The current accident year loss ratio also showed improvement relative to the same period last year as we continue to incorporate more of our own historical loss experience for short tail lines of business. The impact is a positive one because our actual loss experience has generally been better than we initially expected.

Finally, in recognition of the increasing maturity and credibility of our own historical loss experience for medium and long tail lines, we placed increased weight on our own historical loss experience when establishing our expected loss ratios for the 2010 accident year. As our historical loss experience has generally been lower than initially expected, this has led to lower expected loss ratios for the 2010 accident year. The impact of this change was most notable for our Professional Lines insurance and reinsurance businesses, where we also took into account the substantial recovery from the global financial crisis.

During the quarter, our estimate of net reserves from prior accident years continued to develop favorably with prior-year net reserves reduced by $81 million this quarter. Of this amount, $25 million was from our Insurance segment, representing a positive impact of 9.9 points on the segment's loss ratio. Our Reinsurance segment posted $56 million in net favorable prior-period reserve development, representing a positive impact of 12.8 points on that segment's loss ratio.

Over 60% of the net favorable reserve development this quarter was generated from our short tail lines. The balance was primarily from Professional Lines insurance and Reinsurance business for the 2006 and prior accident years.

Moving on to expenses, our acquisition cost ratio increased 1.4 points to 16.7% this quarter, relative to the prior-year quarter, largely driven by business mix changes and a nonrecurring adjustment for premium taxes.

Our G&A expense ratio for the quarter was 14.3%, 1.3 points higher than the comparable quarter of 2009 but down slightly from 14.6% for the fourth quarter of 2009. As I noted in the latter half of 2009, strategic initiatives, such as our new A&H division, have introduced some upward movement in this ratio. As we continue to invest in new initiatives, we would expect our G&A expense ratio to be near this level until our investments are fully leveraged from an operating perspective.

Turning to our investment portfolio, in aggregate, the total return on our cash and invested assets for the quarter was 1.8%. This was comprised of net investment income of $105 million, a positive change in net unrealized gains and losses of $80 million, and net realized gains of $16 million. The total return was driven by a stable interest rate market, continued contraction in yield spreads for many fixed income sectors, and for the underlying loans within our credit fund investments. Additionally, a positive equity market benefited our hedge funds and equity holdings. Our net unrealized gains at quarter end stood at $159 million.

Net investment income of $105 million for the quarter represented a 5% increase year-over-year. The impact of the general decline in yields during the past 12 months was offset by higher average invested assets, further narrowing of credit spreads, and positive returns on higher average hedge fund investments.

Our cash and fixed maturity portfolio produced $93 million of net investment income this quarter, comparable to the prior-year quarter. Improved returns on our other investment portfolios were the primary driver of the net investment income increase, contributing $16 million to net investment income in the first quarter of 2010, compared to $7 million in the comparable 2009 period. In comparison to the fourth quarter of 2009, net investment income decreased $14 million in the current quarter.

Again, returns on our other investments were the primary driver of this variance. These contributed $25 million in the fourth quarter of 2009, compared to $16 million in the first quarter of 2010.

Net realized investment gains totaled $16 million in the quarter in comparison to net realized losses of $41 million in the first quarter of 2009. The 2009 balance emanated largely from other-than-temporary impairment charges, whereas OTTI charges were only $6 million for the first quarter of 2010.

Our fixed maturity investment portfolio, which represents 80% of total cash and invested assets, remains well diversified with a weighted average credit quality of AA. The duration of our fixed maturity portfolio was maintained at approximately three years.

At the end of the quarter, we held cash and cash equivalent balances of $1.5 billion, or 12% of total cash and invested assets. This includes proceeds from our recent senior notes issuance that will be deployed to asset classes with higher returns going forward.

With respect to foreign exchange, during the quarter, changes in exchange rates resulted in foreign exchange gains of $8 million, compared to negligible gains in the prior-year quarter. The gains in the current quarter were largely associated with the reduced US dollar equivalent of our Euro and sterling-denominated net liability balances following the depreciation of those currencies in the quarter.

In late March, we took advantage of the favorable interest rate environment by raising $500 million of additional capital for a ten-year term through a senior note issuance. These notes bear interest at 5.875% and will mature on June 1, 2020 unless we exercise our option for early redemption.

Our total capitalization at March 31, 2010 was $6.4 billion, including $1 billion of long-term debt and $500 million of preferred equity. Our financial flexibility remains strong with a debt to total capital ratio of 15.6%, a debt and preferred to total capital ratio of 23.5%, and total capital in excess of rating agency requirements. We remain strongly capitalized for the risks we hold and the risks we are targeting and continue to prioritize deployment of capital in underwriting opportunities.

Our capital management approach balances the obvious rating agency and regulatory capital requirements with plans for reinvestment in our business and opportunistic capital requirements. Importantly, it's also considered on a long-term basis.

We were presented with an excellent opportunity to introduce additional debt capital into our capital structure at a very attractive after-tax cost.

We also purchased 9.6 million shares of common stock in the open market for $287 million during the quarter at 87% of average diluted book value per share for the quarter. Subsequent to the end of the quarter and through December 23, we repurchased a further 1.9 million shares of common stock for $60 million. We believe these capital-management activities are in the best interest of our shareholders at this time, particularly given current depressed valuations. We currently have approximately $194 million of remaining authorization for common share repurchases.

In our quarterly financial supplement, we have updated information with respect to our group PMLs and associated estimates of industry losses as of April 1 at various return periods. We remain within our tolerance levels for these risks. Our European wind aggregates continued to decrease this quarter due to planned reductions, partly in response to a deteriorating rate environment. Our Japanese windstorm and earthquake aggregates also reduced due to reduced lines on a few large reinsurance treaties.

To summarize, we believe we are well positioned to take advantage of opportunities that may arise as the global economy continues to recover. In our view, we are in an excellent financial position with ample capital for the risks we hold, and we are well placed to fund any targeted growth activities or new opportunities.

With that, I will turn the call back to John.

Thank you, David.

Certainly, the major loss events of the quarter should serve as a healthy reminder to the industry that erosion of market pricing is not sustainable at its current level, even more so when one considers looming inflationary pressures coupled with investment income declines. Unfortunately, I do not anticipate this reality being recognized before the year-end, absent a major catalyst for change.

As you know, our first quarter is heavily influenced by the activity of our Reinsurance portfolio. The vast majority of our Reinsurance business in Continental Europe, which represents about one-third of AXIS Re's annual premium volume, renews on January 1 each year. This portfolio was renewed at acceptable pricing and at levels of expected profitability not dissimilar to last year.

The most significant areas of growth were our new Latin American surety business within our trade credit and bond reinsurance lines and the motor reinsurance lines of business where opportunities were presented in select countries.

Approximately 15% of our European Reinsurance business renews after January 1. As the year progresses, we are expecting more downward pressure than we saw at the beginning of the year. At January 1 renewal, property cat reinsurance business continued to be attractively priced but the expectation of increased competitive pressure in Europe prompted us to rebalance our worldwide cat portfolio.

In North America, any price reductions at the January 1 renewal did not materially alter expected margins. Property cat reinsurance remains one of the most professionally priced lines of business in the market. The April 1 property cat reinsurance renewals, which are dominated by Japanese renewals, came off about 5%, bringing them back to last year's pricing. Much of this business was already quoted by the time of the earthquake in Chile. Hence, any market resistance to price reductions was muted. We have yet to see a material impact from this event on pricing, although we may see some firming in smaller exposure zones as the year progresses.

The two major Australian storms have generated backup covers to replace exhausted cat limits. Smaller and more vulnerable companies have purchased these covers at higher prices.

The next significant renewal for major cedents with Australian exposure is the July 1 renewal. Our expectation is that the market will react with some combination of higher pricing and higher attachment points.

In our Reinsurance segment, the balance of the year will be dominated by activity in the US marketplace. Property Reinsurance treaties in the US are expected to see continued modest deterioration from the pricing level of the January 1 renewal. We do not expect this to have a material impact on expected margins. (inaudible) to naturally pushing for more favorable terms and conditions but only marginal changes are being granted.

Regrettably, third-party reinsurance business in the US, namely professional lines and other casualty reinsurance lines, are not reacting to reductions in investment income or early signs of inflation as we might expect. Terms and conditions are, for the most part, renewing as expiring. However, constraints imposed by reinsurers with respect to controlling utilization of limits are under some pressure from Cedents, who are coping with a challenging and competitive insurance marketplace.

The insurance marketplace, which had stabilized in the first half of 2009, continued on a track of gradual and increasing competition. Primary casualty lines, which are not a significant feature for us, remain an outlier with the greatest price reductions.

Generally, terms and conditions, as well as breadth of coverage, remain stable with terms of trade holding firm. Great change across our insurance portfolio during the first quarter was marginally negative versus a marginally positive change across the portfolio in the fourth quarter of 2009.

Because of differences in mix of business between the two sequential quarters, the rate changes are not directly comparable. However, the trend is negative across most insurance lines and we expect to see a continuation of this negative trend through the balance of the year, absent a major catalyst.

Against a backdrop of a competitive market underwriting -- sorry, excuse me -- against the backdrop of a competitive market, underwriting outperformance remains paramount, and we expect to continue to outperform. We remain focused on accessing as many diversifying risks as possible to evaluate. We have invested steadily over the years in ensuring we have the people and tools to identify and execute on the opportunities which may be available. We have been and will remain extremely cautious with respect to primary casualty business.

Our single largest investment over the last year has been in the buildout of a major new specialization in Global Accident and Health. Towards the end of the first quarter, we launched our A&H insurance operations in the US, and we expect good trading activity from this new business as we progress towards 2011.

Stepping back for a moment, we expect the balance of the year to feature continued competition, particularly in the insurance marketplace. Activity in our Insurance segment is less predictable given the variable rate of competition in the Insurance marketplace.

The Reinsurance marketplace has exhibited a reasonably sensible and professional level of competition. At the beginning of the year, our Reinsurance operations still benefited from a handful of meaningful dislocation opportunities. However, I would like to say, though, that I believe we are better prepared to compete for quality, well rated business in the global marketplace than at any previous time in our history. Regardless of where our premium volume ends up for the year, we are confident that they are maintaining a high-quality diversified, underwriting portfolio and we will continue to generate significantly positive cash flow and market-leading underwriting profits.

With that, I will open the call up to questions. Thank you.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Vinay Misquith, Credit Suisse.

Good morning. Could you help us understand what your exposure is to the Transocean rig sinking?

Yes. We are involved with Transocean as the contractor. Transocean was the contractor, the BP and then some subsidiary investors called Anadarko and [Lowex] were involved with the package which we expect we've had a 25-year relationship with Transocean. They are an excellent contractor and had a very good record.

So we are involved in the fiscal damage. We are involved in things like (inaudible) labor remove (inaudible) and commission liability as well as some contingent operators' actual expense. Then that comes under the package policy. Then there's an excess liabilities policy which we write.

The total indemnity on the assessed liability policies is around $700 million. But that is made up of a number of different layers. We have our participation on a layer of $150 million, excess of $50 million.

So today you have a whole bunch of different interests, which are normal within a package policy for a drilling contractor, and with specified coverage. Then either excess of those amounts or other coverages are borne directly by the owners of the well, of the operation which are BP, Anadarko [Anadarko] and [Mowex]. We have reinsurance that is fully applicable for it.

We are a major participant in the offshore energy marketplace as you know. We have a retention of around about $8 million, give or take a bit, and we have an initial gross estimate of around $60 million, but that is going to be based on a market loss of around $800 million.

Let me understand this correctly. You said that the gross loss may be around $60 million but your net retention would be around $8 million because you have some reinsurance on this. Is that correct?

Yes, we have a lot of reinsurance coverage that is applicable to this type of exposure, and we don't expect, even on a worst-case basis, to breach our Reinsurance limits.

Okay, good rate, so the $8 million can reasonably be expected be pay your maximum loss on this -- okay, that's great.

Yes, and -- but don't forget that we're looking at a major loss here. We are looking at a major loss of around about $800 million, give or take a bit, at the end of the day when you add in all of these different coverages.

Sure, so --

But it's going to be very interesting, because it is well spread through the market, through the offshore energy market.

Vinay You do you expect it to have a positive impact on pricing?

Yes.

Okay, that's great.

The second question was on the expenses, especially on the primary insurance side. I believe David mentioned there were some one-time premium taxes applied -- of [recalls]. So if could you just help me understand that?

Secondly, I believe you also said that you expect the level of expenses for the Company as a whole to remain flat over the next few quarters. Could you just expand on that, please?

Sure, Vinay. Good morning also.

On the first item, we had sort of a one-time item related to premium taxes that was rather small but it did affect the ratio slightly, which is what I commented on it. Obviously, we don't expect that to continue or be in effect through the rest of the year. That affected acquisition costs.

On the G&A front, I think I've been talking about this now for several quarters. We spent a good part of last year building A&H and building investments in our infrastructure. So as John mentioned in his comments, we have now announced obviously our A&H business is in business. They are beginning to write business, albeit at a low level in 2010, but those expenses and the build up of that business, the people associated with it, have been trickling into our expense numbers throughout the course of 2009. They will be there in 2010 as we start to ramp that business up.

But I think -- so the final point, as I said in my comments, I think we are at a level where we will stabilize that expense number for the rest of the year. I don't think we'll see -- you won't see any increases in that number for these items.

Thank you.

Terry Shu, Pioneer Investments.

A comment on your outlook for profitability on an accident year basis -- you talked about your renewals and what you expect, gradual, continued gradual pressure on rates that you said that overall the business you've written, the profitability has basically hung in there.

You also went through, in the beginning, explaining why the accident year loss ratio in the first quarter was lower. I think you talked about using your own experience and also the reduced frequency and severity in the individual risk area and last year, you saw the reinsurance loss ratio being elevated by the credit crisis. I caught them right?

Yes.

So when you add all of that up, looking at this year and next as you earn out the premiums written and barring extraordinary cats, can we say that the profitability, the underlying accident year loss ratio, is a good kind of guide for your profitability? Can we kind of extrapolate that?

Well, I wish it would be, but I can't comment like that but you know, we --

In a broad sense, in a very, very broad sense.

I think what our figures clearly show is actually the excellence in our -- the consistent excellence in our underwriting performance. Bearing in mind we are a largely short to medium tail business, we have substantially reduced -- not that we had a large participation in casualty business in any case. You've heard me banging on for the last three or four years about the excessive and absurd competition that has been thrown at that marketplace.

I think, absent major losses, there's no reason to believe that our excellent underwriting performance shouldn't continue for the next two or three years. We are working even harder to try to make sure that we maximize whatever opportunity we can, wherever we can find it globally, in whatever product lines that we are currently deploying our capital to.

Thank you. I ask this because I don't think there is a -- am I correct -- a general appreciation of the fact that your underlying profitability is higher because of the mix of business that you talk about.

I would agree with that comment, Terry.

Thank you.

Matthew Heimermann, JPMorgan.

Good morning, everybody. A couple of questions -- first, David, I was curious if you could give us, similar to what you've done in prior quarters, just the loss ratio picks for the trade credit, reinsurance, political risk and then the D&O line and Insurance and Reinsurance just so we can kind of contrast that with what we have been seeing prior, as we think about the loss ratio.

Right. You are asking for the first quarter of '10, right?

Yes.

Okay, and I think I've given this out in combined ratio (inaudible).

I think you are correct, yes.

-- which I have. So just starting with the Professional Lines area, in the Insurance space, we are at 88% for the first quarter, for the combined ratio, and on the Reinsurance side still a bit elevated at 107%.

Then on the Reinsurance credit and bond, as I commented in my remarks, that's come down substantially but still a little high in the quarter but y at 98%. Again, these are just first-quarter numbers. We have a full year of premium to earn.

Then the political risk has also come down from last year but still a bit elevated as we are settling out some claims, and that's at 131% for the quarter.

Okay, that's helpful. Thank you for that.

I guess another question just related to the loss ratio, I guess, as you are incorporating your own experience into your loss ratio picks, given that the market fundamentally is different today from a pricing standpoint, are there -- are we at a point where building in too much of your good experience potentially creates some risk going forward?

No, no. Well, of course there is risk in everything, but let me answer that. I guess you again have heard me bang on over the last five years about the solidity of our price monitoring process and the weakness that is embedded in the rest of the industry where a lot of these companies will not even try to price-monitor new business that they're taking in.

We have a very exhaustive process that is throughout the Company, throughout both sides of our underwriting business. That is very robust about capturing real information, about real changes within individual risk, and also the experience of those risks. So, I believe we are now eight years old, and we have growing experience in those lines of business.

Then think about the weighting of our portfolio, which is still, for the vast majority, in the short to medium tail lines. I think it's a perfectly natural thing to do and a very appropriate thing to do because I think our numbers show the strength of the underwriting behind them.

Is one way to I guess reiterate the comment you are making is that, as you make this shift, you kind of view the risk as you don't have -- the risk as -- the downside risk is you don't have the development you've had in the past, but you still feel like there is a margin of error within the pick themselves? Is that a reasonable way to think about it?

We still like to think we are conservatively reserved. We haven't changed our view. I think what we may be doing is finding that we may be at variance with some of the other market sectors, that's all, as we're going forward.

Okay, that's helpful. I guess one last one if I may? Just with respect to the Professional Lines premiums in the quarter, I think you said there was a variance for liability reinsurance in the quarter, so I just wanted to know whether or not there were any conclusions to draw from the insurance side of Professional Lines still going up while the Reinsurance is starting to go down.

I am sorry, Matt, I'm going to have to -- can you repeat that for me? I'm sorry.

I didn't know if there was an underwriting conclusion to be drawn from the standpoint that I think insurance Professional liability ratings were up 6%, Reinsurance was down 6%. I don't believe that you mentioned, in your opening comments, that was subject to any of the renewal date changes.

Yes (multiple speakers)

So there might be nothing; I just figured that out.

Yes. I think I wouldn't take anything away from that. I think the businesses are performing well, and I think some of the renewal date movements are probably jumbling up those ratios a little bit.

Okay, thank you.

Before you go, I do want to come back to the ratio I gave you on political risk, just to be clear about that, because that number, taken on its own, is a little bit high. But I just want to remind you in my remarks when I made that comment about the $12 million of premium related to credit and political risk, so there's very little premium in the quarter related to that line of business. And so when you look at that combined ratio, it is higher, but there's very little revenue against that.

What is the unearned premium lost on the political risk side?

It is about $339 million, in that range.

Okay, thanks again.

Ian Gutterman, Adage Capital.

I guess, just to follow up on that accident-year questions, John, can you clarify the -- or David -- the benefit from your low individual risk losses, because there's obviously a lot of moving parts as far as credit crisis picks? Obviously, it should be coming down after a few years and mix of business and using more of your experience -- there's a lot of things that are hard for us to tease out, but I was wondering if you could help us. How much lower than normal were those individual risk losses that maybe that will revert the other way going forward?

I think, Ian, that you would (inaudible) because you've heard us say in previous quarters that we expected the activity relating from the financial crisis to have impacted our '07 going into the crisis, '08 and '09 years. We strongly believe there was substantial improvement in '10, so you would expect us to reflect that in the way that we are looking at our loss base.

Yes. Well, so I agree with that; I expected that part. But I'm trying to figure out how much of the improvement in this quarter was reflecting those issues, and how much was the lack of individual risk events this quarter. I'm trying to see if I can try to parse those two out. Do you understand what I'm saying?

I understand there might even be further improvement going forward as the credit crisis ceases, but there will probably be some offset as individual risks normalize. Is that fair?

I think there's a lot of moving parts to that, Ian, as you said, so it's very difficult to zero in on any particular number. I mean, I think the lack of risk losses was positive for us in the quarter, and there are a lot of things in the quarter that were also positive that I commented on. I think I would leave it at that.

But I -- we are back to the run rate where we would normally look to be in.

Okay, well that's why I was wondering, because I was actually looking the last time, in reinsurance at least, the last time you were at these type of accident years, ex-cat was the first half of '07. So it would almost imply that all of the credit crisis drag is gone. You know what I mean? Pricing has gone down cumulatively in that time, so I would have though there would be a drag from that. So I guess I was surprised we got all the way back, but maybe some of that is the lack of loss events.

Okay, thank you.

Okay, I guess that's [a cut]. Just my other one, just as far as your capital capacity, how do you think about what's your governing restraint at this point as far as excess capital? Is it PML, or is it premiums? Is it reserve-to-surplus? What you're gating factor as far as how you think about your capacity?

Yes, it's mostly going to be rating agencies, as I said in my commentary, and then followed behind by perhaps looking more into the future at what regulatory changes come down the pike. But it's always rating agencies is a first stop.

Right. I guess what I mean by that is, when you run the rating-agency models, sort of what's the first thing you hit as far as -- basically what constraint is the one that produces the lowest excess capital? Is it reserves? Is it PML? Is it something else?

Well, I'm not going to get into those level of details this morning, Ian, but all of those things obviously factor into an analysis that we will go through, as well as our rating agencies will use.

But I think it's important we said we would take a long-term view as well, which you expect us to do.

Very fair. And then just the last one real quick, the motor business you grew in Europe, can you talk a little bit about what that was? Usually, I don't think of that being a very attractive line, but I was wondering maybe what improved there.

I think there were some select opportunities in a limited number of geographic locations. You are really looking at a balance because we exited -- we moved away from some French major business, and we had opportunities elsewhere in Europe, notably the UK.

Okay, was it XOL or [Portager].

A bit of both.

A bit of both. Okay, thank you.

(Operator Instructions). Beth Malone, Wunderlich Securities.

Could you talk -- is there any impact from the Icelandic volcano on either aviation or in general do you think?

No, in short. (laughter) No, we don't expect there to be any.

Okay, thank you.

[Michelle Bufray], Putnam Investments.

I just wanted to clarify the Transocean rig loss estimate. I had read somewhere that the total market loss estimate would be $1.6 billion since the rig loss is a total loss of about $600 million, and there could be liability losses of $1 billion. I just wonder if you can come up with how you came up with your $800 million loss estimate.

Well, we come up with it after 35 years of experience, I suppose, is the easy answer, as an initial loss when there isn't any real information. So forgive me for saying that. But your $1.6 billion may be simplistically just a sum of all of the different coverages that Transocean and the owners have at their disposal.

What we've done is to really look initially at the coverages and see the one that we believe. For instance, we know that the rig sank away from the well and the pipelines and the local infrastructure on the seabed, so there is a very good likelihood, A, that there's no third-party damage to all of that other subsea equipment. But secondly, there's a very high likelihood that they won't -- the owners will not have to remove the wreck. So there are lots of moving parts out there, if you'll forgive me saying so, but it's just our initial view about where the likely number will settle at. But as I said earlier, between where we believe our loss will fall in our worst estimate, we are still well within our reinsurance coverage.

Okay. Just to clarify in terms of the liability, is that environmental cleanup liability? Are you able to --

Well, you have the pollution liabilities borne by the owners, not the contractor; they are borne, as I understand it, they are borne by BP, the Anadarko and Murex.

Okay, because they didn't own -- buy any reinsurance on it, is that right?

Yes, they do. Well, BP don't. BP have been self-insured since 1987, regrettably, although in this case I am happy, as you would expect me to be. But certainly the Japanese company buys coverage, which has been in the market for a long time, but it is not significant and will not be material, I think, to the market for that Japanese portion of the ownership. So you could probably say it is largely self-insured.

Dan Theriault, Portales Partners.

I was a little surprised at the piece of the share repurchase in the first quarter, given the high level of abnormal cat activity. I guess I would like to speak to that. I'm wondering if that philosophy is going to be extended to the remaining authorization.

Well, I think whilst I will say something first and then David can chip in and put his (inaudible) worth in, but you know, yes, of course there is an abnormally high level of cat activity. Whether it's $16 billion or $18 billion at the end of the day, it's going to take a while to work out. But you know, our financial stability was very strong, our underwriting profitability was good, and our market shares were probably below where we would have expected them overall. I think we were quite surprised that our share price was not where it should have been. So it was a great opportunity for us. I think we managed everything appropriately, as we said earlier, from an underwriting standpoint, so it was a good opportunity for us.

I would just add, timing-wise, to that part of your question, we have a track record of repurchases in this part of the year. You won't see that sort of activity out of us during the middle part of this year. If you look at our track record, we tend not to do a lot in what I will call the bigger risk area of the year when we are in the hurricane season, in the US windstorm season. So I think, as John said, it was a good opportunity for us to access our shares at a good discount and we took advantage of it.

John Charman Yes.

I agree.

Good, get the share price up, then! (laughter)

Sam Hoffman, Lincoln Square Capital. Mr. Hoffman, your line may be muted, sir.

I actually have three questions. The first is can you comment on your decision to reserve about $150 million for the catastrophes in the quarter? Was it further development on the storms, or conservatism? What is your level of confidence in that estimate?

Let me do that first, so please don't ask all three at once.

So, as we would normally do, we look to the different cats that have occurred. As I said, you're talking about industry ranges of between $16 billion and $18 billion, which is a hell of a lot of money.

Because of the nature of certainly the Chilean earthquake, there isn't another a lot of firm information that has come out even to date, but what we do is we do a ground-up exercise where we would look at our total exposures. We then look at where those exposures are, whether they are primary local companies. We then look at whether they are national companies, and then we look at whether we are reinsuring international companies with part of their business in Chile. Then we make appropriate judgments based on our experience as well as direct contact with all the cedents on a very regular basis.

So I would like to think we've been very conservative in our estimates for the combined cats that have occurred in the first quarter. Sam, if that answers your question?

Sam, but if I could, because I want to make sure, based on your commentary, when we preannounce the losses, we only preannounce losses related to the Chilean earthquake and then the smaller windstorm Xynthia. So the $150 million total losses for the quarter isn't directly comparable to that preannouncement, if that's what you were trying to do.

For Chile, we are in the range that we announced, and the same for Xynthia, and then you have to add the other (multiple speakers).

We haven't moved our numbers at all.

Right.

Okay. A second question is, you ended the quarter with $1.5 billion of cash, and presumably a significant amount of that coming from the debt offering. Can you talk about your plans to deploy that cash?

Sure, yes. It's just, it's a function of where the quarter landed. We raised that money very late in March, Sam. By the time it got into the Company, we were right on top of the quarter end. So as I said in my comments, we are going to take that cash and redeploy it into higher earning assets in our invested assets portfolios. That's ongoing in the month of April.

Okay. Finally, we estimate, making an assumption for how much earnings you made on that cash, that the yields on your fixed income portfolio, excluding the cash, declined by about 20 to 25 basis points in the quarter. So, can you comment on that, and whether you expect that to persist going forward?

Well, we don't expect the 20 basis point decrease to persist going forward every quarter, but I think we've seen a drop in rates over the course of the last year. We think book rates at this point are probably stabilizing, given the commentary I made earlier. I think there might be still some good news left in perhaps spreads, as I commented on, but I think the book yield, where we are at now, is probably going to be around where the rates will be going forward (multiple speakers).

So your new money rate is about equal to your portfolio yield in fixed income?

Yes, in the range.

Actually, there was one more item. Did you comment on aviation with their nonrenewal, or was that shifted into the second quarter?

Yes, it really wasn't material in terms of numbers. It was a contract that just shifted dates, that's all.

Okay, thank you.

Matthew Heimermann, JPMorgan.

Hopefully just a quick one. Just with respect to Chile, can you give us a sense of what the -- do you have a sense of total limits exposed? In other words, what the worst case would be and whether or not there is any quota share within that, or uncapped quota share I should say?

One thing that's important to understand, Matt, with the Chilean loss is that people naturally are concerned about deteriorating numbers. I think that the people who are most at risk for that deterioration of the pro rata guys, the pro rata treaty underwriters, which we're not. We are sort of the excess loss underwriters. So your question in terms of -- sorry, I forgot where you were going with it --

I was just curious if -- relative to the $150 million or $125 million, sorry, which is the high end of the range I believe for Chile that it gave, I guess how does that correspond to worst-case?

Well, I'm not sure what the Chilean worst case is, if you don't mind me saying so, as an industry loss. We've seen ranges of between $3 billion and $8.5 billion, so I really believe, of course, if we totaled up all of our limits, then it would be a very different matter, but we don't believe that's the case. We've been extremely conservative in looking at the local covers, where we have just fully reserved everything on limits exposed.

Then the broader regional covers we've looked at individually; we've spoken to the cedents; we've got our own information through. We've reserved around about 70% of those limits in full.

So the third plant, if you'll forgive me saying so, is the international companies got some of this regional exposure. We know those clients well. They are professional reinsurers. They tend to have their portfolios more centered around Santiago than where the loss actually occurred. I think we have been very conservative on looking at the erosion of those layers.

So I am pretty comfortable, and I'd hate to -- but I am pretty comfortable of where we are. As I say, we don't write pro rata because that's where the deterioration comes, if it comes, is going to happen.

Okay, but I guess just to ask this a different way then, so if the industry loss ends up being $10 billion, not $8.5 billion, is your $1.25 billion technically has some room to move, then?

I think there's comfort within the totality of our CAT reserves for the quarter.

Okay, thanks.

It appears that we have no further questions at this time. I will hand the conference back over to management for any closing remarks.

Well, it just remains for me to thank everybody for taking the time to hear us this morning and we look forward to talking to you in three months time. Take care.

Thank you, everyone, for your time. The conference has now concluded. At this time, you may disconnect your lines. Thank you.