Odyssey Re Holdings Corp. Q1 2008 Earnings Call Transcript

Odyssey Re Holdings Corp. (ORH)

Q1 2008 Earnings Call

May 2, 2008 10:00 am ET

Executives

Don Smith - General Counsel, Corporate Secretary

Andy Barnard - President, CEO

Scott Donovan - EVP, CFO

Analysts

Susan Spivak - Wachovia

Doug Mewhirter - Ferris Baker Watts

Amit Kumar - Fox-Pitt Kelton

Nicholas Schneider - Morris Schneider Management

Chuck Hamilton - FTN Midwest

Presentation

Operator

Good morning and welcome ladies and gentlemen to the Odyssey Re Holdings Corp first quarter 2008 conference call. At this time I'd like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers after the presentation. I would now like to turn the conference call over to Don Smith, General Counsel and Corporate Secretary. Please go ahead sir.

Don Smith

Thank you. Good morning. Odyssey Re's results will be discussed this morning by our President and Chief Executive Officer, Andy Barnard and by Scott Donovan, Executive Vice President and Chief Financial Officer of the company. The following discussion may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Some of these statements may relate to risks and uncertainties.

Actual results may be materially different from those contained in or suggested by such forward looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained in the company's filings with the Securities and Exchange Commission. Now Andy Barnard will open the discussion. Andy.

Andy Barnard

Thank you Don, good morning everyone. It is of course a pleasure to report a second consecutive quarter of record net income at Odyssey Re. Our reported book value now exceeds $40 a share, almost a 10% increase in the quarter. In fact our book value per share over the last 12 months has grown 40% an extraordinary performance attributable to the talent of our extraordinary investment team in Canada. In contrast to the good news from our investment activities, the underwriting side of the business continues to weaken pretty much across the board.

The insurance volume in the United States continues to drop significantly driven by declines in the casualty business. Our casualty treaty and facultative reinsurance volume has all closed to 30% compared to last years first quarter. The other classes of US reinsurance written out of our Americas division have to date in less effect of being casualty, though the trend is not favorable.

There continues to be movement on the part of some themes to increase their retention. But I would say the larger force driving the reduction and volume at Odyssey right now is the deterioration in the terms of trade, between underlying price reductions at the primary level and pressure at the reinsurance level for better returns. More and more business is becoming unpalatable.

The non-US reinsurance business written primarily through our EuroAsia division in Paris has been steadier so far and is benefited from appreciation of foreign currencies against the dollar. At April 1, we were largely satisfied with our renewals in Japan, where rate pressures were modest. In India and South Korea on the other hand we were disappointed and reduced our deployment of capacity accordingly.

On the insurance side, our international liability business written out of London continues to suffer significant rate pressure. Our core lines have approximately halved in volume over the last several years as we let business go to west cautious competitors. Partially offsetting these declines have been some new opportunities we've developed in the UK motor market and in the non-US medical malpractice business.

In our US insurance business our largest line, healthcare liability continues to shrink as prices continue to downward track. Our other core programs have held relatively steady with growth being recorded in the quarter due to our multi peril crop business. This quarter our combined ratio was modestly affected by increased frequency of mid-sized property risk losses and catastrophes.

During the last two years, loss activity has been generally benign. Should loss frequency revert to former higher levels, should rates, terms and conditions remain under present course, underwriting profitability increasingly challenged in the years ahead.

We intend to shrink our portfolio and increasingly avoid those classes of business attracting the fiercest competition. While our net premium volume is off only slightly this quarter, we expect the declines to steepen as we move throughout the year. Our best estimate at this juncture is that we will be off last year's net premium volume by up to 10% for all of 2008. So, let me finish by saying that here at Odyssey we like our total return model in all environments, but I would say we especially like it in these times.

Through our proven value-focused investing activities, we are confident we can continue to build shareholder value at an attractive rate despite the unfriendly conditions on the underwriting side of the business. We now have over $120 of investments per share. Over a quarter of our portfolio is in cash giving us great flexibility to take advantage of opportunities.

The increase in our cash position and the decline in short-term yields will mute our short-term investment income but over the longer term we expect our disciplined underwriting and value investing approach will lead to a continued track record of superior growth in book value.

Now, let me turn the call over to Odyssey's Chief Financial Officer, Scott Donovan. Scott?

Scott Donovan

Thank you, Andy and good morning. As Andy said, our first quarter results represent a second consecutive quarter of record earnings for Odyssey Re with pre-tax income of $384 million, resulting in after-tax income of 249 million. During the quarter, our book value per share increased by 9.6% or $3.54 per share to $40.32 per share. Over the last 12 months our book value per share increased 39.7%.

After tax operating income for the first quarter was $39 million or $0.57 per share compared to $55 million or $0.77 per share in the first quarter of 2007. Operating earnings declined in the quarter due to lower investment income reduced underwriting margins and certain adverse foreign exchange movements recognized through operating income.

Net income for the quarter was $249million or $3.63 per share compared to net income of $87 million or $1.20 per share in the first quarter of last year. The increase in net income was primarily due to substantial investment gains resulting largely from our derivative positions and sales of fixed income securities.

Net income this quarter included a foreign exchange net gain of $13 million after tax, principally resulting from the strengthening of the Euro versus the US dollar. This gain was comprised of a $4 million or $0.06 per share operating loss, which was more than offset by foreign exchange investment realized gains of $17 million or $0.26 per share.

Additionally, unrealized foreign exchange gains increased by $24 million $0.36 per share. Together the income statement and unrealized foreign exchange gains for the quarter contributed $0.56 per share to the change in book value.

Looking at premium activity for the first quarter 2008 compared to 2007, gross premiums written were $578 million for the quarter, an increase of 2%. Our insurance business increased 20% while our reinsurance business declined 6%.

Gross premiums increased on our London market division by 26% and our Euro Asia division by 10% and in our US insurance division by 2%. These increases were substantially offset by a decrease in our America's Division of 13%.

The continued weakening of the US dollar had an impact on our reported premium volume. Excluding the impact the foreign exchange rate movements, premiums would have decreased by approximately 1%.

During the first quarter our net premiums written declined 1.6% and net premiums earned declined 5.1%. These declines are attributable to an increase in the amount of business ceded. Our retention ratio in the first quarter declined to 90% from 93% in our first quarter 2007. This is consistent with the relative growth in our insurance operations where we see larger portions of our gross premiums. For the full year we expect that our net premiums may decline by as much as 10%.

In terms of premium composition, 53% of our gross premium was derived from non-US markets compared to 47% in the first quarter of 2007. This was the first quarter in which our non-US business exceeded our US business.

Regarding product mix, 53% of our business in the quarter was in casualty lines, 38% was in property, and 9% in marine, aviation, surety and other specialty classes. Insurance continues to grow as a percentage of the volume now representing 33% versus 28% a year ago.

For the quarter our combined ratio was 98.4% versus 96.3% in the first quarter 2007. Included in the combined ratio for quarter is the $37 million or 7.2 points of current year cat losses. Those losses included windstorm Emma at $12.5 million, the Australian flood at $11.8 million and the snow storms in China at $10 million. The combined ratio also reflects $10 million or 2 points attributable to higher frequency of current year non-catastrophe large risk losses.

Prior period lost development impacted the quarter's combined ratio favorably by $4 million or 0.7 points. This compares to total net adverse development of $6 million or 1.1 points in the first quarter of 2007.

During the quarter the expense ratio increased 1.4 points compared to the first quarter 2007. While there was upward pressure on fee commissions, other underwriting expenses were relatively flat.

Looking to our four operating divisions. In the Americas, we experienced a decline of 13% in gross premiums written during the quarter compared to last year, reflecting difficult market conditions across the US reinsurance market. Casualty gross premiums declined by $37 million or 29%, while other markets segments were fairly stable. The Americas combined ratio for the quarter was 99.9%, which included 5.9 points from current year catastrophe losses and 2.9 points from adverse loss development, including 2 points from asbestos.

We are continuing to reserve current year DNO at high levels in expectation of increased loss activity associated with the ongoing turmoil in the financial sector.

In EuroAsia, our gross premiums written for the quarter increased 10%, primarily due to favorable foreign exchange rate movements. On a constant foreign exchange rate basis, the change in gross premiums written would have been negligible. The combined ratio for the quarter was 103.3% which included 16.9 points from current year catastrophe losses, 3.2 points from adverse loss development mostly related to property losses and 2.8 points from a higher frequency of current year non-catastrophe large risk losses.

For the London market division, gross premiums written increased 26% for the quarter compared to the first quarter of 2007. The increase primarily relates to our insurance business which benefited from our initiatives in the motor and medical malpractice lines. London market had a combined ratio of 89.8% for the first quarter which included 5.5 points from a higher frequency of current year non-catastrophe large risk losses and 13.4% of favorable loss development. The favorable development in insurance business relates to liability lines, while in reinsurance business the favorable development relates to property and other short tail lines of business.

Our US insurance division gross premiums written increased 2% in the quarter. We experienced increases in several newly intercepted programs while reflecting a decline in our health care segment. The divisions combined ratio of 94.8% during the quarter included 1.6 points from higher current year property losses and a benefit of 3.2 points from favorable loss development.

Investment income net of expenses for the first quarter was $73 million pre-tax which represents a decrease of 10% from the first quarter 2007. The decrease is mainly attributable to the lower interest rate environment impacting our large cash position, as well as lower income from our equity investees in the quarter. Net investment gains in the quarter were $323 million pre-tax or $3.06 per share after-tax compared to $48 million pre-tax or $0.43 per share after-tax in the first quarter of 2007.

During the quarter we sold $1 billion notional amount of credit default swaps for proceeds of $237 million. These sales exceeded the associated year end carrying value by $53 million. We also reflected a mark-to-market gain of $114 million on our remaining positions. Our total return swaps on the S&P 500 contributed $75 million in gains in the quarter, and we realized $73 million of gains from the sale of fixed maturities. These gains were partially offset by other than temporary impairments of $41 million.

As of March 31, 2008 the carrying value of CDS portfolio was $239 million, with the notional amount of $4.1 billion. The average term to maturity was 3.3 years. Since the end of the quarter through April 25, the value of the CDS portfolio has declined by approximately $72 million pre-tax and the notional amount remains unchanged. As a reminder credit default swaps may be extremely volatile. Market value and their liquidity may vary dramatically, either up or down in short periods and their ultimate value will therefore only be known upon their disposition. Operating cash flow for the quarter was $107 million compared to $102 million in the first quarter of 2007.

Now, turning your attention to certain balance sheet line items. Total invested assets were $8.1 billion at March 31, 2008, an increase of 4% over year-end 2007, vested assets to shareholders' equity currently stands at 2.9:1 and our investment portfolio now equals $120 per share. Cash and short-term investments of $2.4 billion represent approximately 29% of total invested assets.

Equities including equity investees were $1 billion, representing 13% of the portfolio. The value of our equity portfolio significantly protected by our S&P swaps and individual short sales. Our fixed income portfolio which is primarily US government securities was valued at $4.3 billion as of March 31^st. 92% of this portfolio is rated AAA with only a minimal amount of securities rated below investment grade. During the quarter, our after-tax unrealized gain position decreased by $30 million to $59 million. The change was primarily attributable to the decline in value of our common stock portfolio and the recognition of realized gains in our fixed income portfolio.

Finally, with respect to capital management, our debt-to-capital ratio at March 31^st was approximately 15% which is well below our acceptable levels. During the quarter, we purchased approximately 2.1 million shares of our common stock or 3% of our outstanding shares at December 31^st 2007, at a cost of approximately $78 million.

Subsequent to March 31st, 2008, we purchased an additional 1.1 million shares, this brings the total amount of shares purchased to approximately 5.8 million at a cost of approximately $212 million, which equates to an average purchase price of $36.38 per share. On March 18th, 2008 following an updated review of our capital position, our board authorized an increase in our previously announced share repurchase program by an additional $200 million to a total authorization of $400 million.

Let me now turn the call over to Dana for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go first to Susan Spivak with Wachovia.

Susan Spivak - Wachovia

Good morning everyone. I was just in terms of the share repurchase on the authorization could you refresh my memory as to be exact percentage now that Fairfax owned and whether there is an option for you, I know you don't want to go, have that ownership go above a certain level, so is there an option for you to repurchase shares or is that something you would consider directly from Fairfax?

Andy Barnard

Hi Susan, this is Andy. As of the end of the first quarter Fairfax was at about 63%, would have crept up modestly from that with our activity since that time and we do not have an explicit auction as you put it with Fairfax, such as you described. Clearly we take into account what's the appropriate level of public ownership and flow that we wish to keep out there and that's the consideration as we go forward. But at the present time we are quite comfortable where things stand and clearly it's very advantageous for us to be retiring shares at these prices.

Susan Spivak - Wachovia

Sure. And Andy if you could follow up -- you did give some details on the competitive market side, given your extensive experience in this industry, is there a period of time that you might compare what you are currently same to? And then also, where is some of the rational competition coming from? Would you say its newer markets or is it from some of the more established players who have the bigger balance sheets and can ride this through with lower prices?

Andy Barnard

Susan, I think -- perhaps a contrast to what other people have said, I think that today we would be more akin to the let's say 95-96 period. I think there is a likelihood that we will see things deteriorate much more significantly from this point because there still is considerable downward price pressure, meaning that there is excess capacity and there is hunger of business in the market place. So, I think that the short-term prospects are of concern in terms of how much worse things can get and in particular in the casualty lines which as you know were, that is the place where usually the most long-term damage gets created. So, that is of concern I think. It will take some time for it to turn around, because it's no as though anyone out there is recognizing negative results at this point in time. So, I think there is more to go in the soft market, I don't think we are at a trough.

I think that in terms of the second part of your question, where does the competition come from? I think the reality is that we have much bigger balance sheets, although, of course there is the question the extent to which the asset issues that exist may shrink the size of some of those balance sheets, but generally speaking they are a much bigger players. There is the ability to, so called weather the storm, maintain market share and wait for things to turn around and that's the sort of psychology that causes these to persist longer than is desirable in the long run.

I wouldn't point the finger in any particular area and obviously not at any particular company, buy I think as a general characterization, because balance sheets are much larger today. I do think that there is more willingness to hang in there and I think that what we are seeing Susan is particularly in casualty and in some of the tougher lines, but also on the individual risk property business there just seems to almost be an acceleration by deterioration right now and that may, if it keeps accelerating it may accelerate the time it turns around too, but that really would be what I have to say on that subject.

Susan Spivak - Wachovia

Right. And then maybe follow up Andy on this you and I have discussed this issue before and I just wanted to get an update on how you feel about not having the Bermuda holding company structures that something that perhaps you would explore looking into an M&A opportunity in the future to gain that [I say] advantage if you think it's an advantage or not.

Andy Barnard

Sure, I mean that's something that is subject that we think about often and of course there are no shortage of ideas that are presented to us that would enable Odyssey to change it's tax status I think that our reaction to that of course is that as a full tax payer Odyssey in terms of certainly book value performance has done just about as well as anyone in Bermuda.

So, we have a perspective that we have done quite fine. The way we are currently structured and therefore we don't feel the sort of urgency to make a change. At the same time I think the landscape out there with respect to taxes, there are more questions being asked about the tax advantages and the way those tax advantages are achieved by Offshore companies and so the prospect of some reduction of that advantage on that end I think it's higher today than it may have been in the past and on the other side I think there is a greater likelihood that you may see corporate tax belief in the United States. We've even some prominent Democrats to advocate that, not just John McCain.

So, I think our perspective right now is that we are doing quite fine the way we are. We do which is not to say that we don't examine this issue both in terms of the overall operations as well as selected parts of our operations, but I wouldn't want to suggest that there was something eminent with respect to the structure of our tax domicile.

Susan Spivak - Wachovia

Thank you very much Andy.

Andy Barnard

Okay.

Operator

We will take our next question from Doug Mewhirter with Ferris Baker Watts.

Doug Mewhirter - Ferris Baker Watts

Hi, good morning. I have just two questions. One was; the first one was, the other expense line seemed unusually high. Was there anything to that? Were there any bonuses or stock compensation or something that you accrued this quarter that might have pumped that number up?

Scott Donovan

Actually, it's Scott. I had mentioned that we have recorded other income expense charge related to FX of around $7.8 million, so when you look at the difference between quarter-over-quarter that would account for the difference.

Doug Mewhirter - Ferris Baker Watts

Okay. That's of the forex charge, okay.

Scott Donovan

Exactly

Doug Mewhirter - Ferris Baker Watts

That makes sense. My second question is, regarding your current asset allocation which has roughly a quarter of your investments in cash. How much of that is a conscious, I guess strategic decision and how much of that is more of a timing decision considering, you recently sold a large chunk of bonds and you also have been cashing in some of your credit default swaps. Is that, do you intend to invest a portion of that cash into larger lived or may be more risky assets, or is it more of the fact where you want to hold the cash, because that's where you stand on the risks spectrum kind of balance out, may be some of the volatility in your other part of your portfolio?

Scott Donovan

Yeah, it's Scott again. I think you summed up well why we are, where we are. As I mentioned, we had some significant fixed maturity sales. They generated over $1.350 billion in proceeds and as you mentioned this, while the sale of the CDS's which generated another round number $250 million of cash. So, for the quarter, just from sales alone, we generated about $1.6 billion plus in cash.

We have since reinvested about $850 million of that in longer-term government bonds and about $100 million in additional equity positions. The remaining balance in the short term is there primarily obviously for liquidity purposes but also to continue to remain in optimistic position in terms of future investment opportunities that may present themselves. So, there is a combination of liquidity as well as opportunity.

Doug Mewhirter - Ferris Baker Watts

Okay, thanks. That's all my questions.

Scott Donovan

Okay.

Operator

We will go next to Amit Kumar with Fox-Pitt Kelton.

Amit Kumar - Fox-Pitt Kelton

Amit Kumar. Thanks. Just I guess going back to the growth in London markets and I apologize I missed some of your comments because there are several calls at the same time. Could you just maybe give some more color on where that growth came from? I guess it came from NewIine. Maybe in terms of specific niches which might have generated that growth? Thanks.

Andy Barnard

Sure, Amit. As we mentioned, there are two specific areas that that growth is aided from. One is the motor market in UK which is related to a transaction really that we entered into in mid-2007 and so you are seeing it on a quarter-to-quarter basis for the first time. This quarter versus the first quarter of '07 and as well we have had an initiative to write medical malpractice business outside of the United States and we generated some premium growth in that particular class in the, now that's being reflected in our first quarter comparative for new line, but it is all coming out of the Lloyd's syndicate.

Amit Kumar - Fox-Pitt Kelton

Okay. That's helpful and I guess just going back to the guidance our net premiums being down 10%. I guess, if I look at Q1, that would mean that the rest of the quarters on an average have to be down close to 14%, 15%. And I guess some of it might be some sort of timing issue, right, Q1 and the rest of the quarters?

Scott Donovan

Yeah, well I think that it will relate to what transpires largely in the America's reinsurance division for the balance of the year, where we are striking a very cautious posture. And that we'll relate to our insurance businesses, both in London and the United States, and actions that we take during the balance of the year to restrict activity to the extent we see continued rate erosion.

And of course, it also relates to some extent to the amount of reinsurance we purchase in our insurance operations. We have increased the purchase of reinsurance and that is something that will continue to reflect itself in our net premiums. So in terms of reducing our net premiums, so I think, between those various considerations, that we're comfortable offering 10% as perhaps an out of boundary.

The seasonality in our business really largely relates to the EuroAsia Division which has virtually all of its business for the full year at this point locked in. What would affect that on a reported basis going forward, of course, could be some change in exchange rates. As we mentioned, the growth that we've shown in EuroAsia has been really driven by the appreciation of foreign currencies against the dollar, and if that were to change, it would reflect itself in lower reported premiums going forward.

Amit Kumar - Fox-Pitt Kelton

That's helpful. And I guess final question, were there any new developments in terms of subprime E&O and D&O in terms of new claims or putting aside more reserves, did anything change?

Andy Barnard

Yeah, we added modestly to our E&O reserves in the quarter over our normal carried picks that we have for the class to give us a little extra provision with respect to credit crunch driven claims and that was 6 million in this particular quarter. I think last quarter we added 10 million. So, we start from reasonably high pick loss ratio, which is approximately 70% for the class of business which we have been holding, so we are adding on top of that.

We are monitoring the incidence of class actions and that is one of the inputs into our decision. I don't think that we're any different than anyone else out there in the reinsurance world that writes, we don't have a concentration either in the class or within the class in areas that are particularly hard hit by the class of business.

We just think its very early days, its going to take a long-time for the liability consequences of the credit crunch to work its way through the liability insurance business and so we think its prudent as we go along here to just put some additional funding in to those reserve lines as and then keep a track of how it develops.

Amit Kumar - Fox-Pitt Kelton

And may be if you could refresh, I thought you mentioned that this was a maybe a $50 million book in Q4 with 70% side A or something like that?

Andy Barnard

No, its not, $50 million was the number last year that we had talked about in terms of yearend premium base that we were looking at, now we are about $60 million of effected premium that we look at and in terms of the claim activity, its almost 50:50 side A and in non-side A.

Amit Kumar - Fox-Pitt Kelton

Okay. So $16 million to-date on a $60 million base?

Andy Barnard

That's very right.

Scott Donovan

In addition to what we're currently funding on that?

Amit Kumar - Fox-Pitt Kelton

I am sorry what do you mean by that currently funding?

Scott Donovan

In addition to what the current loss fix-off for that business just to begin with.

Amit Kumar - Fox-Pitt Kelton

Okay, got you. Okay, thanks much.

Scott Donovan

Yeah.

Operator

(Operator Instructions) We'll go next to Nicholas Schneider with Morris Schneider Management

Nicholas Schneider - Morris Schneider Management

Congratulations on another great quarter gentlemen, and particularly in the growth in your insurance business.

Scott Donovan

Thank you.

Nicholas Schneider - Morris Schneider Management

You have mentioned that you are buying some longer term government bonds. Could you give me some idea of how far out you are willing to go at this point?

Scott Donovan

Nicholas, it's Scott. The purchase that we've made primarily are US governments with maturities somewhere around the 20 year mark.

Nicholas Schneider - Morris Schneider Management

And has this moved your overall duration significantly from the end of the year?

Scott Donovan

Yes, Nicholas it has when you look at just the fixed maturities were now at about 8.5 duration.

Nicholas Schneider - Morris Schneider Management

Okay. And with moving the duration of like that obviously your liabilities can match, but is there any concern or discussion with him and also with respect to inflation and it seems like the prospect of deflation is pretty well covered. Is your, are the credit default SWAPs partially hedging some inflation, or do you have the strategy there?

Scott Donovan

Those are great questions that are being debated when the quarter was in power and we were more humble in terms of how we are going to prognosticate about inflation, deflation. We do think as a general pieces that the credit crunch will continue to have an impact on the economy much of which is yet to be felt and that the prospect for particularly in the treasury sector on the longer end of the curve where they are to be further downward pressure on rates is real. In the short end of course we know interest rates have been pushed way, way down and so we feel a bit more comfortable given that general piece is moving further out on the yield curve.

Nicholas Schneider - Morris Schneider Management

Okay. That makes sense. As far as, obviously, you have so much cash on hand that you can make some opportunistic investments regardless of your overall macro stands. Is there any been discussion certainly buying back your stock is incredibly attractive at these discounts of book value. Is that the preference and is Hamblin Watsa making that decision or is that something your board is making?

Andy Barnard

That' something our board is making and at Odyssey Re Holdings and we've been very happy and comfortable purchasing back at the level that we have been. Kindly goes without saying that we think the shares represent amazing value given where they trade relative to our performance and how we build out the company. So that continues to be our perspective.

Nicholas Schneider - Morris Schneider Management

Well, it's quite an opportunity. Beyond your own shares, have you been sort of dipping your toes in the water as far as high yield or historically in some of the places where you have picked up a lot of investment gains in down environment?

Andy Barnard

Well, we are always and particularly, of course, our investment advisors Hamblin Watsa are looking across the landscape at opportunities constantly. We think that as we are continuing turmoil, depending on what happens with the stock market. We think that for value investors that, we would expect to see an increase in opportunities in the months and years ahead, but we don't get real specific as to what we are thinking about in terms of investment positions as a policy matter.

Nicholas Schneider - Morris Schneider Management

Okay. Well, again, thank you very much. Looking forward to the next quarter.

Andy Barnard

Very good. Thanks for your question.

Operator

We'll take our next question from Chuck Hamilton with FTN Midwest.

Chuck Hamilton - FTN Midwest

Hi, good morning everyone, congratulations. Three questions for you this morning. I think, Scott, maybe the first one is for you, is in terms of net investment income in prior quarters you have provided us with some degree of guidance of the overall portfolio of return. I think, past quarters may be about 4% to 4.5%.

Clearly, we saw a significant drop this quarter. Can you give us a little more information, a little more color perhaps on maybe the common stocks that are holding equity and the low return on the cash portfolio?

Scott Donovan

First let me just say by the return on the average invested assets for the first quarter is 3.7% net of expenses. I have been thinking long and hard in terms of what guidance to provide on this call as to what I would expect the yield to be moving forward. Obviously, with the large cash position, short-term position it's difficult for me to project what that's going to play out. We saw it rather not give you an estimate.

In terms of the equity investees that has to do with the affiliated stocks that is down two reasons, one is, you will recall we sold Hub last year in June, so we are obviously not getting any income from that holdings any longer and then we are left with two other equity investees again that are affiliated that we did not record any income on versus first quarter last year when we recorded around $5 million. So, I think that's more timing than anything else, Chuck.

Chuck Hamilton - FTN Midwest

Okay. Second, maybe Andy this is for you, is in terms of the lower retentions, I think Americas and EuroAsia are holding their own, or may be even ticked up a bit in terms of the amount of business you retain out of your gross premiums, but London and the United States, both US insurance both came down significantly. Is that more reflection of the new programs you got with the amount malpractice in London and also the US for the agri business or is it really question of timing or opportunity that the reinsurance is cheap at this point it makes more sense to offload the risk than it is to retain it?

Andy Barnard

I wouldn't necessarily say it's because the reinsurance is cheap. First of all with the respect to the reinsurance operations of the company there when you buy reinsurances, its called retro session, and it's a -- that's a very, very limited. And on, not a user friendly markets particularly for casualty line. So we just, we never, we typically keep net what we do on a reinsurance basis with just a very modest retro session purchases.

On the insurance side there is, as you mentioned the agri business, those are very high built in amount of reinsurance that goes federal government that has influenced our ceded, the volume of our ceded business. And then as a general proposition, we have been, we have added some additional reinsurance purchases, much of that on a portional basis, elsewhere through our insurance operations as we think it just make sense to in this marketplace to be prudent in terms of our net risk position and I want to call it a cheap reinsurance, but its just another form of hedge in terms of managing our overall net risk position.

Chuck Hamilton - FTN Midwest

Perhaps a little further on that Andy, do you believe its, may be more prudent as you add new programs to cede more than it would be on your material programs where you might have better understanding the loss?

Andy Barnard

That's always a consideration when we look at the purchase of reinsurance. It's when before we have our own track record by definition, really there is more uncertainty and that would be a consideration causing us to think more seriously about purchasing some reinsurance on new programs, so, yes, I guess.

Chuck Hamilton - FTN Midwest

Great. And my last question. It really deals with the expense ratio. I think Scott you mentioned that it's just picked up 1.4% to 29.5% this quarter and in particular US insurance came up 4 percentage points to almost 30% while Americas came up nearly 3 points. Can you give us a little more explanation on what were the main drivers and whether that's a continuing trend or maybe a quarter specific issue?

Scott Donovan

Yeah, Chuck, let me address the US insurance pick first. That had to do primarily with -- to do with profit share commissions. As I mentioned, we released some reserves at the US insurance group this quarter. That release makes its way into profit share calculations and as a result an increase was made to the profit share accruals.

So, that addresses the US insurance. And then at the Americas, it's primarily driven from the reduction in the earned premium. And Chuck, as I mentioned, our operating expenses have been relatively flat, in fact they have actually gone down slightly quarter-over-quarter. So, the big increase in the US insurance -- I mean in Americas would be earned premium plus there is a slight uptake in the fee commission that we are paying as well.

Chuck Hamilton - FTN Midwest

Okay, great. Thank you very much for your answers.

Operator

And it appears we have no further questions at this time. This does conclude today's conference call. If you wish to access the replay for this call, you may do so by dialing 888-203-1112 domestic or 719-457-0820 international with an ID of 7860174.

This concludes our conference call for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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