This was driven by a 5.5% return for the quarter in the alternative portfolio. The firm had a very strong quarterly performance. But these returns are largely driven by market opportunities and accordingly can be uneven over the course of the year. While performance was strong across the entire alternative portfolio, the results also reflected notable performance by several managers who had anticipated the problems in the sub prime market. Net income from investment manager affiliates was $37 million, and resulted from excellent investment performance by number of our affiliate managers in Q42006.

The operating expenses in the first quarter were $280 million, in line with expectations on an annualized basis.

The increase of $19 million on the year-ago quarter is largely driven by a call for compensation based programs, the effects of a higher employee base as the firm invests in various new business initiatives, and the impact of foreign exchange from Euro and sterling expense base. The foreign exchange loss of $24 million was booked this quarter in reinsurance segment. This arises from changes in estimated currency splits in business assumed from several Lloyd’s syndicates.

The effective tax rate for the quarter was 11.5%, within the expected range of 10% to 13%.

The firm successfully executed a billion dollar preferred share transaction in the quarter.

The ongoing share buy back program has resulted in repurchases of approximately 3.2 million shares or $220 million as of March 31st. The remaining balance under our current share repurchase authorization is $608 million.

The firm quarter produced an exceptional operating ROE of 22.4%.

This increased book value by $1.83 per ordinary share or 3.4% after the impact of share repurchases and investments mark-to-market. On a year-over-year basis, XL’s book value per ordinary share grew by $10.72, or 24.2%.

Performance Analysis of Segments

Insurance

The year on year comparisons are impacted by the firm’s successful risk management efforts and both gross premiums written and net premiums earned were essentially flat year over year. Price decreases generally in the low to mid single digit range for most of the firm’s products were largely offset by a strong global economy and favorable currency rate movement in Europe.

Gross premiums written in specialty businesses were down due to withdrawal from the ICAT business and the decline in U.S. D&O premium. Year-over-year comparisons for aviation were particularly impacted by markedly softer market conditions and a timing change which boosted first quarter 2006 premiums. In contrast, gross premiums written in global risk business have increased, primarily driven by long-term agreements or LTAs, with selected clients particularly in Europe. Where current market conditions are attractive, LTAs are an effective client retention tool but one that must be used in conjunction with disciplined underwriting. Net premiums written were up over the same quarter last year due to changes in seeded reinsurance programs and some one-time favorable seeded adjustments, driven by reduced Cat exposure. The firm’s professional unit continued its strong performance. U.S. pricing for public D&O business decreased by a little less than 10%. But the firm has seen flat to modest increases in its design and select books and European D&O book is holding up better than expected.

On the loss side, claim trends continue to trend positively with U.S. professional book seeing particularly good trends in both severity and frequency and casualty line experiencing favorable development. Despite market pressures, XL’s customer retention continues to be strong in the first quarter. While the company actively seeks new business, especially in its targeted growth areas, it continues to hold new business to standards no lower than its renewals. The firm was able to do this because its clients see it as a strategic partner. The firm is much more than the offshore provider of excess capacity that it was 10 years ago. The global network diverse portfolio of products and services and proven underwriting expertise enable the company to lead programs and to manage its customer relationships effectively. The firm believes that this differentiation is part of what drives XL’s market leadership position.

Reinsurance

In reinsurance, significant capacity continues to be available at the right price but market is also demonstrating discipline. In the first quarter, the firm saw rates moving much as discussed in previous call. Pricing for the Asian renewal April 1 was typically down about 5%. The company continues to take a conservative view of what is a competitive environment in that region. Adjusting for timing differences, this segment’s net premium written is down 11% over the same quarter last year. Part of the reduction is where this pricing has caused the firm to step back from certain renewals which failed to meet the required hurdle rates. It is also in part due to our reinsurance clients increasing their risk retentions. This is not an unusual situation in this stage of the market cycle and has several positive factors associated with it. This includes being evidence that seeding companies are eating more of their own cooking and will therefore have to exercise strong underwriting discipline. It also moves the catastrophe exposure profile away from attritional risk, and so together these factors can indicate continued strengthening in risk adjusted shareholder returns.

Life and Financial Lines Segments

Both performed very strongly in the first quarter, contributing a total of $80 million. The weather and energy winter portfolio had an outstanding performance for the second year running. Life operations continued to grow in the quarter as the firm modestly developed its book of single premium annuities and expanded the volume of its regular premium treaties. At the beginning of the year, the firm moved responsibility for its European life, accident and health book from reinsurance operations to life operations. Combining this with the overall life team enables the company to access greater opportunities in Continental Europe and as a result the unit did well during the January renewals. Overall, while market conditions continued to put pressure on top line, the firm does see other growth opportunities mostly in the insurance segment, which it believes will build on the success it had in 2006. The firm will maximize its ability to achieve profitable growth by leveraging its operational platform while building out its capabilities teams and product offerings in chosen markets.

Key questions and answers from the first quarter fiscal 2007 earnings call conducted by XL Capital Inc. on April 25, 2007.

Matthew Heimermann (JP Morgan): In the affiliate income, can you give a sense how much of the gains in the quarter are generally mark-to-market versus realized?

Sara Street: There’s $190 million for the affiliate gains. The majority of these earnings were mark-to-market gains in the quarter and reflect the change in the net asset value of the underlying funds. This is also the case with our private investment portfolio. The U.S. GAAP requires the general partners to use fair value accounting. The value appears in underlying investment they’re required to markup those investments.