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Allied World Assurance Holdings, Ltd. (NYSE:AWH)

Q4 2008 Earnings Call

February 6, 2009 8:30 am ET

Executives

Keith Lennox - Investor Relations Officer

Scott Carmilani - President and Chief Executive Officer

Joan Dillard - Chief Financial Officer

John Gauthier - Chief Investment Officer

Analysts

Ian Gutterman - Adage Capital 

Matthew Heimermann - JP Morgan

Dean Evans – KBW

Operator

(Operator Instructions) Welcome to the Fourth Quarter 2008 Allied World Assurance Company Earnings Conference Call. I would now like to turn the presentation over to your host for today's call, Mr. Keith Lennox, Investor Relations Officer.

Keith Lennox - Investor Relations Officer

Welcome to Allied World's fourth quarter and full year 2008 earnings conference call. Our earnings press release and financial supplements were issued last night after the market closed. If you’d like copies of either, please visit the Investor Relations section of our website at www.awac.com. Today's call will also be available through February 20th on our website and as a teleconference replay. The dial-in information for this replay is included in our earnings press release.

Our speakers this morning include Scott Carmilani, Allied World's President and Chief Executive Officer, Joan Dillard, the company's Chief Financial Officer, and John Gauthier, the company’s Chief Investment Officer. Also with us to assist with questions are several members of our management team.

I will remind everyone that statements made during today's call including the question and answer session, which are not historical facts, may be forward looking statements within the meaning of the US Federal Security Laws. Forward looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as may, should, estimate, anticipate, intend, believe, predict, potential or words of similar importance generally involving forward looking statements.

These forward looking statements are based upon the company's current plans or expectations, and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions, and the company's future financial condition and results. The uncertainties and risks include, but are not limited to those disclosed in the company's filings with the Securities and Exchange Commission.

As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward looking statements made by or on behalf of the company today. Additionally, forward looking statements speak only of the date they are made and the company assumes no obligation to update or revise any of them in light of new information, future events or otherwise.

Finally, during the call, management will discuss information regarding operating income, diluted book value per common share and annualized return on average shareholders equity, which are non-GAAP measures within the meaning of the US Federal Security laws. For more information and a reconciliation of these measures to the most directly comparable GAAP financial measures please refer to our earnings press release which was issued last night and is available on our website.

With that complete I can turn the call over to Scott.

Scott Carmilani

This has been quite a turbulent year in our business. The industry is very competitive with significant price declines. Two major cat events in the property market coupled with meaningful up ticks in launch frequency in the general property market. A major financial crisis that exposed significant overleveraging with invest in collateral with corresponding significant decreases in insured balance sheets.

All of this added up to seasonal in credit and capital markets and in turn makes the ability of insurer balance sheets most difficult if not impossible. This has led to the significant impairment of some of our major insurance carriers and competitors and a downgrading pressure from major rating agencies.

Given the circumstances and the market we’ve been in I’m pleased to report on our results for the quarter and for the year and speak on how we’ve performed during these difficult economic times. I’d first like to point out that in spite of the cat losses the investment portfolio impairments and the significant late year cash acquisition our shareholder equity has grown by almost $200 million to $2.4 billion at this years end.

Our diluted book value has grown by over 8% and Allied World’s operating ROE for the year has comparable impressive 20%. These positives have been fueled by solid underwriting results from this years and prior years and have been reflected in our operating performance, our reserve releases and stable investment income. I believe these results are a testament to our company’s business model and the risk management control for both our underwriting and our investment portfolio.

Our investment portfolio as is important to us today as our underwriting portfolio when it comes to risk management and the management and protection of our capital. We’ve made significant strides and multiple strides in this area throughout the year. As you know, we’ve hired a Chief Underwriting Officer, John Gauthier, who will be speaking later today on the portfolio.

He’s enhanced the oversight and our review process of our alternative investments. We’ve reduced the exposure to alternatives by redeeming some of our hedge fund positions. We’ve installed rigorous oversight of our securities lending program and with the acquisition of Darwin added over $600 million to our investment portfolio which is also added to our high quality municipal bond position. We’ve diversified our fixed income portfolio managers from one to three and we’ve managed our correlations across the portfolio and in conjunction with our underwriting business.

I’d also like to point out that you’ll see in our filings as we promised a disclosure schedule of our investment portfolio holdings is included with the financial supplement that went out last night.

Turning to our insurance and reinsurance portfolio, the quarter saw a continuation of the weakest price and rate environment we’ve seen since virtually our inception. We’ve responded from a portfolio management point of view by setting minimum rate thresholds for marginal business, AKA walk away prices, and tightening our pricing model. This resulted in some changes to our mix of business both from an insurance versus reinsurance point of view as well as in our insurance portfolio.

I’ll give you some specifics and the numbers in a moment but I want to continue to go through the changes we’ve made in the face of the industry woes. As we’ve talked about before, during the year we strengthened our resources and expanded our product and service capabilities. In the US we’ve built our branch offices in Atlanta and Southern California both in L.A. and Costa Mesa. We’ve selectively added over 40 senior professionals and executives from some of our troubled competitors.

We’ve acquired and integrated Darwin Pro, a specialty casualty and healthcare insurer. We’re already beginning to capitalize on our combined strengths and it’s starting to pay dividend. We’ve established the US Tree reinsurance earlier in the year and it’s been fully functional since late in the spring of 2008. On the international side we’ve opened branch offices in Zug, Switzerland, are launching a branch in Hong Kong. These operational improvements are an important investment to Allied World’s future and positions us well to take advantage of the current and emerging opportunities.

How does all this translate into our results? As I stated earlier despite the events of the past year our equity grew by $200 million to $2.4 billion and the book value grew by over 8%. The company was able to generate and ROE in excess of 20% this year. Fourth quarter operating results were a record for the company and I should also mentioned again that we’ve already reaped some benefits from our Darwin acquisition.

On a full year operating basis our income was $455 million. With the acquisition of Darwin our cash and invested assets have grown in excess of $6.9 billion and we’ve meaningfully expanded our capital base to in excess of $2.9 billion for the year.

Now allow me to give you some specifics on our underwriting results. Our reported gross premiums and net premiums for the quarter were up 19% versus fourth quarter 2007. We’ve had significant increased in our casualty insurance portfolio segment from a quarter to quarter basis, much of it coming from our US insurance businesses. Darwin produced almost $70 million of premiums from the time the acquisition closed in late October to year end. Absent Darwin premiums in the US are still up an impressive 64% as a direct result of the actions we’ve taken to build out the rest of our US platform.

Commission activity is up significantly in the US and we’re beginning to capitalize on some of the insurance market dislocations. These increases are being offset by the reductions we’ve pursued in both our property insurance business and our reinsurance lines of business where we’ve walked away from business that went below our acceptable rates four terms.

Let me give you an idea of the general rate picture as it was at year end and finish with some specifics. Although the events of 2008 still have not led to a full blown hard market, indications are continuing to trend positive and we’re starting to see some encouraging rate increases in a few instances and at least flattening in many others. We are managing our business accordingly. We anticipate that we’ll see further improvement in the pricing and conditions as we move forward throughout the year.

In the property insurance business we reduced our written portfolio for the quarter as we continued to price risk properly or walk away if prices remain inadequate relative to the exposures in coverage accordingly. In total, our property segment was down $20 million or 30%, energy alone counted for half that number.

In the reinsurance business we believe that that market’s at an inflection point. Generally we’ve pulled back some of our capacity in the areas that aren’t meeting our margin hurdles. In general, reinsurance so far have been unable to secure meaningful rate or term improvements from our view and our renewed book in the quarter is down 40% because of it. There was further deterioration to that portfolio due to lower premium adjustments and reverse premium adjustments as seeing companies themselves some shrinkage.

In total for the quarter we’re down about 70% year over year on a quarter basis for the reinsurance portfolio. That dramatically changes our mix. We continue to work under the expectation that the tree casualty lines will see improvement during 2009 as the cycle hardens and terms firm up. It’s difficult to predict the timing and the size of these increases at this time. We’re monitoring it very closely and keeping our capacity at the ready.

Here are some of the rate changes by specifics with underlying businesses to help. Healthcare we’re seeing still further rate deterioration in the tune of about 9%. Professional liability we’re seeing an average rate increase of about 7% when you look at the entire book of business with wide variances like classes in account. As an example, our increases in our excess D&O accounts and large account areas is up about 18%, some of the smaller accounts not so much so.

In general casualty we are seeing some flattening but still minus 3% to 6% as a whole. In general property its averaging low single digit increases but our European property book which was actually up about 17% for the quarter. Energy being anomaly there is up about 25% on rates but on a seriously declining book of business for us as we believe that market needs much more.

I will conclude my remarks today by noting that with the investments we’ve made we entered 2009 with expanded product offerings and geographic reach as well as an enhanced service capability. We believe that we’re very well positioned in this market to take advantage of the current and emerging opportunities.

I’m going to turn the call over now to Joan with some detail financial highlights

Joan Dillard

As Scott just discussed Allied World has produced very strong results for the fourth quarter and for the entire year. Operating income for the quarter was a record $141.1 million. We reported operating income of $455 million for the full year which compares with $476 million in 2007. On a diluted per share basis operating income per share was $2.80 for the quarter and $8.90 for the full year despite storm activity.

This is higher then our 2007 diluted operating income per share of $7.64 driven by our capital management actions at the end of 2007 when we acquired 19.4% of our outstanding shares from AIG and reduced the overall number of shares outstanding this year.

For the fourth quarter 2008 and the entire year, our results significantly benefited from favorable loss development. In the fourth quarter we recognized $90.3 million of positive prior year development versus $36 million in the fourth quarter 2007. This quarter’s releases by segment include $15.6 million from Property, $63.8 million from the Casualty segment including $11.3 million from Darwin, and $10.9 million from the reinsurance segment.

For the full year 2008 we recognized $280.1 million in positive reserve development with about 60% coming from our Casualty line both the direct and the reinsurance sides. The net favorable development resulted from better than expected loss activity in most of our prior loss years. It’s important to recall here that in our early years we established our reserves for our casualty lines of business largely by using industry average loss ratios.

As time passes we continue to place greater emphasis on the Bornhuetter-Ferguson method which better reflects our own experience. During the quarter we incurred an additional $35.5 million in catastrophe losses above our previous estimates. The footprint and the severity of Hurricane Ike was greater than we and in fact many in the industry had expected. By all estimates it will be the third most costly national catastrophe ever in the US.

As a result, we’ve revised our previous estimate upward by $37 million for the Ike loss. Additionally, we’ve increased our estimate of Hurricane Gustav by $4.7 million. All in, Hurricanes Ike and Gustav losses totaled $113.3 million which represented actually less than 4% of our total June 2008 capital. We believe this reflects our strong risk management and frankly our conservative approach when it comes to managing our property cat accumulations.

To that end I can also report that during the quarter we released $6.3 million in reserves related to the second quarter events of the Apache Pipeline explosion in Australia and the Midwest storms. Loss activity reported for these events was less than we had previously anticipated.

The company’s investment results for the quarter were satisfactory. The overall results are a combination of the realized losses that we see on the income statement and the unrealized gains that run through the balance sheet. We discussed this in a similar fashion last quarter as you might recall. While the realized losses on the income statement were $120 million for the fourth quarter 2008 they were more than offset by $125 million in a net increase in unrealized gains for the quarter that ran through the balance sheet.

Within the realized loss of $120 million we recognized $18.8 million in gains from the sales of securities, $38.2 million in losses resulting from the mark to market of our alternative investment portfolio as well as $100.6 million of losses from OTTI (other than temporary impairment). As a reminder, we take a prospective view of OTTI rather than a retrospective view of where and how long the security has been trading in the past.

When any security is trading in an unrealized loss position and our investment manager retains the discretion to sell that security we recognize OTTI, even if it might be say a treasury security that loses value because of a rise in interest rates. When we do intend to hold a security to recovery or maturity the change in market value is reflected as a change in AOCI (accumulated other comprehensive income) a component of shareholder equity on the balance sheet. Currently approximately 40% of our portfolio falls into this category.

As you look at our alternative investment balances you might be comparing the current balance of $48.6 million to the third quarter end balance of $167.7 million. We have fully redeemed the AIG select fund and are in the process of redeeming the Goldman Sachs multi strategy fixed fund. We’ve received a partial redemption of multi strategy fixed and will receive the remainder in the early part of 2009.

To summarize that difference since quarter three, $84.7 million of the decline resulted from the redemption. As I mentioned before, $38.2 million of the decline resulted from the mark to market adjustment.

Net investment income for the quarter is $82.6 million versus $75.2 million for the fourth quarter of 2007. The primary reason for the quarterly increase was a December dividend of $7.9 million from our high yield bond fund which had typically been received in January of every year. For the full year ended December 31, 2008, net investment income was $308.8 million an increase of 3.6% over the $297.9 million of net investment income for the year ended December 31, 2007.

Our book yield for 2008 was 4.7% and the portfolio duration is 3.3 years. This quarter, in addition to the investment information provided in our financial supplement, we’ve released an additional Schedule D style disclosure where we’re providing a listing of all our fixed income and equity securities.

This morning I’m also pleased to introduce John Gauthier, our Chief Investment Officer, and I’ve asked him to provide some additional color on our investment portfolio.

John Gauthier

Given the investment environment we faced during all of 2008 and continuing into 2009, we thought it important to provide some incremental disclosures regarding our portfolio. As outlined on pages 16 and 17 of the financial supplement you will note that our portfolio had the following characteristics as of year end.

First, investment grade fixed income investments count for 98% of the portfolio value. Within that fixed income portfolio over 80% of the securities are AAA rated and approximately 40% are held in a combination of cash, treasuries, agencies or other government related securities. The average credit rating on our portfolio is AA+. Among the major spread sectors approximately 30% of our portfolio $2.1 billion is invested in mortgage backed securities.

Importantly, of that, $1.4 billion, two thirds of our mortgages or 20% of our portfolio is held in securities backed by US agencies. Approximately $470 million or 7% of our portfolio is held in commercial mortgage backed securities and all but one small piece is rated AAA and less than 1% of the overall portfolio is invested in 2007 and 2008 vintages. Again, we provide detailed vintage statistics and credit metrics on page 16 of the supplement.

We also won approximately $230 million or 3% of the portfolio in non-agency residential mortgage backed securities. These holding are predominantly supported by prime borrowers and once again page 16 of the supplement provides additional vintage statistics and credit metrics. We own $1.5 million of sub-prime and $14 million in Alt-A mortgage backed securities.

The other large spread sector exposure is in corporate bond which make up approximately 20% of our portfolio. You will note that 14.5% or almost $1 billion is invested in financial corporate bonds. Of that, you should note that approximately $290 million is invested in corporate bonds backed by FDIC guarantees issued late last year.

Our largest corporate positions are again outlined on page 16 and I will note that we only have two positions which represent greater than 1% of our portfolio. Only 2.3% of our portfolio is being held in asset backed securities and again predominantly rated AAA. As Scott mentioned earlier, in part due to the Darwin acquisition, our municipal bond portfolio has grown to 5.4% of the portfolio overall. The average rating for those holdings is AAA.

Other areas of topical interest obviously include Tier 1 capital bonds and hybrids. We’re happy to report that less than 1% of our portfolio was invested in these security types. We own no CLOs, we own no CDOs, we have no CDS exposure and we have no swap counter party exposure. The markets remain extremely volatile and we are well aware of the risks in any large portfolio. While our portfolio is not without risk we feel very comfortable with the way the portfolio is currently positioned.

Joan Dillard

Moving on to our operating expenses there was an increase of $18.2 million in the quarter resulting in an operating expense ratio of 18.5% or 5.3 points higher than the 3.2% operating ratio in the fourth quarter last year. This increase resulted primarily from the addition of Darwin’s expenses of $11.8 million and from the additional expenses incurred with the build out of our US platform including compensation expense for new hires.

On a full year basis the company’s operating expense ratio was 26.8% or 4.3 points greater than the 2007 expense ratio of 22.5% but that’s consistent with the expectation that we shared with you at the beginning of the year.

Shifting for a moment to the Darwin acquisition, we recorded total goodwill and intangible assets related to the acquisition of $320 million. This is split into approximately $264 million in goodwill and $56 million in intangible assets. Of the $56 million in intangible assets, $48 million is amortizable and will be amortized over approximately 14 years. For the period October 20, 2008, to December 31, 2008, Darwin contributed gross premiums written of $68.9 million and underwriting income of about $14 million. These results are included in our Casualty segment.

In closing, despite all the catastrophe events of 2008 we’ve increased our capital position and book value per share. Our shareholder equity is up to $2.4 billion and our total capital is $2.9 billion as of the end of the year. In November, we borrowed $243.7 million under our credit facility and that was designed to preserve and ensure our financial flexibility in the wake of the uncertainty that we were experiencing in the credit market. We intend to repay this loan at its maturity which is February 23, 2009.

Let me turn the call back to Scott for some final comments.

Scott Carmilani

We remain extremely pleased with our company’s overall financial strength and its condition. The combination of our expansion efforts in 2008 combined with our strong balance sheet, ratings and excellent liquidity give a significant advantage and position us well during these, what look to be unprecedented times in our industry.

With that let’s turn it back to the operator and be happy to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ian Gutterman - Adage Capital 

Ian Gutterman - Adage Capital 

Can you give me the cats broken down by property, risk reinsurance and the paid losses?

Joan Dillard

The ’08 cats there were actually several on the, would you like it by storm?

Ian Gutterman - Adage Capital 

By storm or in summary, I’m trying to get property versus reinsurance.

Joan Dillard

On the quarter the property direct was $22 million and the reinsurance piece was $13.5 million, that was the additions that we made in the quarter. If we looked at the year to date on the total cats the property piece was $90.7 million and the reinsurance piece was about $23 million.

Ian Gutterman - Adage Capital 

Do you have the paid losses for the quarter?

Joan Dillard

Paid losses total.

Ian Gutterman - Adage Capital 

Or even for the year, either one.

Joan Dillard

For the year, the total paid for the year was $474 million and there was a cat piece of that which was $77 million. On the quarter $166 million and the cat piece of that $35 million.

Ian Gutterman - Adage Capital 

On the pricing environment first, prop cat I think you talked before about needing something like 50% price increases to grow your cap up, should I assume based on your commentary that your capital trunk at one, one.

Scott Carmilani

That’s a good assumption.

Ian Gutterman - Adage Capital 

Anything else you can tell us about one, one where you grew?

Scott Carmilani

We’re still growing in the US casualty business. It’s uncharacteristic and early for us to say what January ended up but we had a healthy January mostly driven by the rate environment in the excess professional liability book that we write out of Bermuda and the US casualty book that is part of Darwin and part of our general US portfolio. I can tell you what it’s not being driven from is the reinsurance business and the property business, the same mix issues that we’ve seen in the fourth quarter continued on in the first quarter.

Ian Gutterman - Adage Capital 

From a pricing perspective it seems maybe not a rate adequate perspective but at least a directional pricing. Outside of professional liability it would seem that a lot of those casualty lines maybe didn’t see too much pricing. Is it a little too early to be growing those, are you better off waiting six months and turning it up once things get harder. How do you think about whether those are adequate today if we didn’t quite get enough price yet?

Scott Carmilani

In the areas where we are growing even though rates have flattened or modestly still declined are areas where we still see good margins and in some cases exceptional margins. The healthcare book is still very strong portfolio from a growth perspective from our view and from a profitability perspective.

Ian Gutterman - Adage Capital 

On the excess professional liability can you talk at all about was there any difference in your appetite for backing someone like [inaudible] who’s a healthier lead versus some of the other leads who maybe aren’t in the best financial position. How do you approach those differently?

Scott Carmilani

I’m assuming you’re asking me if we refuse to sit behind any underlying carriers the way I’ve heard that happen in some cases in the market. We have not taken that position as a company. On the casualty side facultatively we’ve backed off a few of those positions. Where we’re in excess carrier, pure excess carrier our limits stand in its position and we have not backed some of those carriers.

If we were going to assume or be willing to assume the primary position we might have a different view but in a lot of those tougher businesses we like the position we’re at where the average attachments were well north of $100 million. We’re not dictating to folks like GM and Boeing who their primary carriers are.

Ian Gutterman - Adage Capital 

That’s up at that high you don’t have drop down risk. What about risks that some of those organizations that used to be pretty tough on their claims maybe are down the line when the claim comes in are maybe more looking to please their clients to retain their business and they don’t fight the claims as hard below you and then they start reaching their layer where they wouldn’t have in the past. Is there risk of that?

Scott Carmilani

There’s always a risk of that. You’re talking of a primary carrier tendering limits without.

Ian Gutterman - Adage Capital 

Maybe they’re not going to defend it as hard maybe as they would in the past because they want to make the clients happy because they’re losing their book of business.

Scott Carmilani

Yes, I could see that happening maybe in some property business but I can tell you in the casualty business that’s not been prevalent and all.

Ian Gutterman - Adage Capital 

Can you give any update on the hiring you’ve done and specifically from AIG with Kevin leaving Lexington has that created opportunities for you to bring people in. I know you lost one person to him but I assume you probably hired a lot more than that.

Scott Carmilani

I did mention earlier in the call that we’ve hired about 40 folks this year. I know there’s been a lot of press about who’s hired how many folks from different firms. Rather than exactly attacking any of our competitors I can tell you that we’ve hired at least 40 people in 2008 and a few more in 2009. We’re over 40 at this point.

Ian Gutterman - Adage Capital 

Any thoughts on the switch re-announcement yesterday what that might mean for reinsurance going forward?

Scott Carmilani

I think the switch re-announcement even before the announcement the issues that are facing the industry that we see from some of our competitors like XL and AIG where they might have big capacity exposure to an individual risk and clients wanting to reduce that exposure or further spread it across different carriers.

We’re starting to see that in Europe as well so international pre-reinsurance where our clients are starting to look at the accumulations and the concentrations they’ve got with the bigger carriers has started to become much more under scrutiny. The announcement that you are referring to from yesterday was will only serve to further accelerate that.

Operator

Your next question comes from Matthew Heimermann - JP Morgan

Matthew Heimermann - JP Morgan

With respect to reinsurance your own buying for next year, my thought process is that obviously reinsurance comps are going up, you’ve got Darwin which is arguably a lower volatility book of earnings for you and the property book looks like it probably isn’t growing as a percent of total mix. On a net basis does that mean you might be less reliant on reinsurance next year than you were this year?

Scott Carmilani

It’s important to note that the structures of the reinsurance within the Darwin portfolio are handled very differently then they were in the Allied World portfolio. The Allied World portfolio had a lot of quarter share treaty business and the Darwin portfolio was structured in XOL type format so very different pricing and very different effect.

We are, right now, in the process of combining the views to that. Most of those treaties come up in the spring and summer where that would be affected. We are going to be taking a very close look at it and we’ve got a team of folks that are, I wouldn’t say solely dedicated to that but very much focused on that.

Matthew Heimermann - JP Morgan

On the casualty side then do you think more likely stay the same or actually decrease or increase if you had to guess?

Scott Carmilani

In terms of the growth versus the net?

Matthew Heimermann - JP Morgan

Yes.

Scott Carmilani

It’s really too hard to tell. Darwin bought their treaties for a different reason then we need today but we have to look at the economics and the ultimate benefits to the organization and what it means. It is true that its less volatile business then we’ve been traditionally doing. We are doing a lot more commercial business in the US in general. We’re looking at all components thereof. What’s likely to happen is the treaties will be split between what we do in Bermuda and the US where historically we’ve combined them for size. I they’re a legitimate size in both cases now.

Matthew Heimermann - JP Morgan

On the loss ratio it looked like sequentially the loss ratio and cash got a lot better and I wanted to check. I’m assuming that’s mix but I wanted to make sure there wasn’t anything else on the number?

Joan Dillard

That’s a good call. It is mix. As you know the Darwin book of business was more small to midsize accounts, primary that actually would run at fairly favorable loss ratio. When we mix that with our book of business in the higher layers where we had a somewhat higher loss ratio pick that lower volatility business combined with our business just business mix gave us a lower accident year loss ratio sequentially as you mentioned.

Matthew Heimermann - JP Morgan

You talked about the energy trends still not being what you want. Some of the folks I’ve spoken to US, London, maybe had a similar view to you at the beginning of the year but their expectation is once you get to second, third quarter renewals actually signs are looking a lot better. Should we take your view right now is conservatism or pessimism is what I’m asking?

Scott Carmilani

A little of both. I don’t think its conservatism, I think I’m a little pessimistic the rates that the folks in that business are getting today while much better then they were six months ago are still not enough. I do believe they’ll be better in the spring and in the summer I think they’ll be a lot better, I think they need to be a lot better. We may have a different view of it then.

Matthew Heimermann - JP Morgan

Would your comments vary offshore versus onshore, is there likely to be any mix change there based on what you see today?

Scott Carmilani

There could be and the pure reason for that is offshore doesn’t pay for a contingent business interruption insurance the way onshore does. There is a risk spread in the commodity pricing that’s not being priced in the property market that needs to be in order to make that worth doing on the onshore business.

Operator

Your next question comes from Dean Evans – KBW

Dean Evans – KBW

I was first wondering from the hires that come from troubled competitors what type of premium volume expectations do you have to come out of that or if you’re not comfortable giving that how big were they’re books at their previous employers?

Scott Carmilani

What I will say is we’ve hand selected all these guys and gals. We know them well, I respect them very well. They know exactly what they’re here to do and we’re well on our way to doing it.

Dean Evans – KBW

What was the PML level as of the end of the fourth quarter heading into the first quarter?

Scott Carmilani

Our PML was up about 10% toward the end of the year but it’s roughly around 270. It’s still caped at below 10% of our equity.

Dean Evans – KBW

With regard to hedge fund position they’re down now to about 1% of the investment portfolio. What are your thoughts on that or intentions as far as keeping that position or trimming it further?

Joan Dillard

It’s actually a little bit less than 1% of the portfolio. I guess I’d explain it this way, we’re not afraid of the sector per se. We do see that they’ve been battered in the second half of last year but with quality firms and quality managers we still think there are opportunities out there and we’re still considering future investment in the sector.

Operator

I’m showing you don’t have any further question at this moment. I would now like to turn the call over to Mr. Scott Carmilani for closing remarks.

Scott Carmilani

Thank you everyone. We look forward to talking to you again in May as we put out our first quarter results. Have a great weekend.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect, have a great day.

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Source: Allied World Assurance Holdings, Ltd. Q4 2008 Earnings Call Transcript
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