Argo Group International Holdings Ltd (ARGO) 2003 Q1 法說會逐字稿

Good day and welcome to the PXRE group limited conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Pat Watson. Please go ahead, sir.

Good morning, everyone. PXRE is pleased to host this conference call regarding the company's results for the first quarter ended March 31, 2003, which were issued yesterday afternoon. Before we begin I would like to remind everyone that management's comments in this conference call which are not based on history facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks. It should be noted that PXRE future results might differ materially from those anticipated and discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the news release issued yesterday, in the group's annual report on Form 10(K) and in other filings with the Securities and Exchange Commission. We refer you to these sources for more information.

Lastly, I would like to point out that management's remarks during this conference call are based on information and understandings that are believed accurate as of today's date, May 8, 2003. Because of the time sensitive nature of this information it is PXRE's policy to limit the archive replay of this conference call webcast to a period of 30 days. This call is the property of PXRE. Any distribution, transmission, broadcast or rebroadcast of this call in any form without the express written consent of the company is prohibited.

With that announcement I will turn the call over to Jerry Radke, Chairman and CEO of PXRE. Good morning, Jerry.

Good morning, Pat, and good morning, everyone, and welcome to the PXRE quarterly call. I am Jerry Radke, the Chairman and CEO of PXRE, and with me today are Jeff Radke, the President and COO of PXRE and John Modin, ourCFO.

21 years ago last month, PXRE began doing business as a short tail specialist. Within that mandate, the company has continually probed for opportunities, looking at new ideas or offering old ideas in new ways. Some of our efforts were successful and some were not, but throughout it all our team built a company based on providing a service to our clients and brokers via prudent and timely underwriting decisions and the prompt payment of claims. Recently, PXRE has been augmenting its longstanding decision-making group with talented individuals possessing established records of success in the catastrophe and risk access business. This mixture of old and new will be taking the company forward.

Yesterday Jeff Radke was named CEO effective July 1 by the Board of Directors because of his knowledge of the reinsurance and financial markets his diversified backgrounds and his record of achievement at PXRE. I am confident that Jeff and our team will achieve the results consistent with investors' expectations.

As for me, I'm looking forward to a continued active role with Jeff and the management team as Chairman of the Board and also Chairman of the PXRE underwriting committees. In this role, I will be fully engaged and able to focus my intention on the part of the business that I have always enjoyed the most, the risk management and the selection process.

As you may recall, our underwriting committees are important since they review every major transaction accepted by PXRE. At the same time, given the seasonality of the underwriting cycle this change will allow me more flexibility than I currently have given the demands of the CEO position.

The first quarter has been eventful and it consists of continued growth in the business for the company and probably even more important to us and to you, is continued growth in profits. And at this point I'd like to turn the meeting over to Jeff and to John to comment on some of the specific developments during the quarter. Jeff?

Thanks, Jerry. Adding to Jerry's comments about the management changes, the board and all the employees of PXRE are confident that allowing Jerry to focus his full attention and experience on underwriting, the critical function of the company, will serve to enhance the growth and profitability of our portfolio. Given Jerry's continuing role as Chairman, it should not be surprising that the strategy of PXRE will not be affected by this management change. We intend to continue the largely completed process of returning PXRE to its origins as a transparent, pure play at short tail reinsurance market.

Turning to the quarter's results, we believe that the increasing strength of PXRE's franchise was exhibited in several ways. Most significant is the growth in the cat and risk business. At a 62% growth rate we exceeded our own internal targets. This growth was achieved by writing business with new clients as well as expanding our penetration with existing clients.

The second area to note is our general expenses as a percentage of net earned premium. Many of you will recall that in 2001 when we had the height of the expenses associated with the diversification efforts, this ratio was at 18%. This quarter we've managed to reduce the figure to 11%.

Finally, the company's effective tax rate is approximately 6%. We've captured the lion's share of the benefits of our Bermuda domicile through the expanding of our Bermuda underwriting platform. Significant, another significant event for the quarter including the termination of P-1, which we released an 8(K) about. You will recall that we set up this facility to take advantage of our expected ability to write more property catastrophe business in our peak zones than we would prefer to carry with our current capital base. To give P-1 some diversification in their portfolio, aviation and risk excess business was also included. During the January 1 renewals, we were successful in writing the additional property catastrophe business that we wanted to write for our own account, but the additional peak zone exposures that we intended to cede to P-1 were not written. This left P-1 in an unbalanced position. It was clear from the outset that P-1 was taking the risk of how much and which types of business we would be able to right. But their portfolio, which ended up being largely aviation and risk excess business, did not possess the anticipated balance. While this business is well priced, the lack of spread in their portfolio meant that a large amount of their capital was being used and the expected returns were significantly lower than anticipated.

At the same time from PXRE's perspective we were ceding essentially only the business which diversifies our portfolio, the non-property cap business. After some discussion it became clear to all parties that both sides would be best served by terminating the agreement back to inception. From P-1's perspective, they were able to avoid tying up capital for two years at what they perceived to be lower returns. PXRE, on the other hand, will be able to retain the entire four quarters of premium associated with these contracts and be responsible for all the losses associated with these contracts. As the agreement was executed in April of 2003, we are even more comfortable with this exchange knowing that the first quarter was absent from significant risk excess and aviation losses. Also critical in our decision was the fact that the business in the P-1 portfolio does not correlate strongly with our existing portfolio.

Turning to the market conditions, the market, the reinsurance market continues to present attractive pricing in our view in most areas. The trouble spots are unchanged from the last time with spoke. We see property risk excess business as being the class of business, which we most frequently decline due to price. After years with significant increases on the catastrophe side, rates have largely leveled off. We have not seen any deterioration of rate levels in key regions. The renewals at April 1 and early discussions about July 1 renewals seem to indicate that the current pricing levels are remaining firm. Earlier I mentioned that we exceeded our internal growth targets for cat and risk during the first quarter irrespective of the P-1 computation. I can tell you today that early indications point to our exceeding these internal targets once again in the second quarter.

As you know, the first quarter exhibited lower than anticipated catastrophe activity. Our loss ratio for the quarter was 38.8%, and this was the primary driver for our net income for the quarter exceeding the guidance we provided you in February. Our cat and risk loss ratio was 14.2%, well below historical expectations. The loss ratio for finite was 71.5%. Finite was higher than expected as a result of increasing our loss ratio estimate on one loss portfolio transaction and the classification of a renewal contract as a deposit as the low underwriting risk did not qualify the transaction for reinsurance accounting. This means that inflows and outflows on this business are not included in premiums and losses. If this business had had sufficient risk to qualify as reinsurance the loss ratio for the segment would have been approximately 64.9.

Exited line premium in the quarter was $2m. This premium reflects mainly premium adjustments on expired contracts that just took time to work through the system, and also reinstatement premiums. This quarter, the direct casualty book performed in line with actuarial expectations, with the exception of one contract. We took a conservative view of this one difficult account and booked the majority of the remaining limit in losses.

To try and give you a sense of perspective on our exited lines, we have cumulatively earned premium of $336m incurred $308m of losses since inception. Of this total $206m of the loss is paid, $56m is case reserves. The balance, $44m, or 14%, remains as IBNR. This portfolio of business is maturing to the point where the amount of reliance on actuarial techniques is decreasing. As a result, managements' confidence in the reserve levels is increasing.

As we look towards the balance of 2003 we have indicated that the P-1 cancellation should be accretive to earnings, but net of tax, the benefit falls within the guidance range of four to 425 as already provided. As we do not feel it is appropriate to increase guidance based on one quarter of favorable catastrophe activity our guidance for 2003 remains unchanged. Obviously, the growth in the cat and risk being larger than expected bode well for the year, assuming the long-term loss ratio for that business is experienced. The other piece of information is that it is clear that our finite premium will be well below expectations due to the classification of that contract, but margins should remain unchanged.

John, would you please comment on the financial statement?

Thanks, Jeff, and good morning, everyone. I am going to discuss how Jerry and Jeff's comments impact our consolidated financial statements. As you can see, we have additional underwriting information by line of business in this quarters press release which should increase the transparency of our segments and overall financial results. Our net income was 23.6 million in the first quarter of 2003. The highest quarterly net income in the company's 21-year history. During 2002, our first quarter net income was 18.2 million, so our quarter on quarter increase was 30%. Our annualized return on equity for the first quarter of '03 was 21.9%. Excluding the exited line segment from our results, our 2003 first quarter net income would have increased to 29.4 million and the return on equity would have improved to 27.5%.

Our better than expected premium growth in 2003 is due primarily to our core line, catastrophe and risk excess which for the most parent is comprised of catastrophe per risk, marine and aviation reinsurance and assumed retro session. It is this business that best defines PXRE today and it is the focus of almost all of our underwriting efforts. Net earned premium in this line increased 62% from 37.3 million in the first quarter of 2002 to 60.6 million this quarter, reflecting continued increases in price and diversified exposures. The price increases emanate from increased rates and, in many instances, improved terms and conditions, which allow us to write additional business.

The growth in the first quarter of 2003 is even more impress impressive considering that 2002 net earned premium growth was 73%. The two-year compound annual [inaudible] in our most important segment was 68%. Offsetting the growth in our core lines was a reduction in exit lines premium of 8.6 million during the quarter. We earned 2.2 million of this premium this quarter and much of it was from premium adjustments on expired exposures, so we do not expect additional significant premium here. Although finite net earned premium increased during the quarter the more important signal is the decrease in finite net written premium. This is somewhat misleading. Volume has really been steady but we have, at Jeff mentioned, improved our terms related to certain treaties which has the effect of causing these treaties to fail the accounting risk transfer tax and as such the premiums and losses are not reflected on the income statement.

Our expected margins from new finite business remain consistent with prior periods but they will be reflected in fee income as opposed to premiums and losses. This fits with our opportunistic underwriting style related to this business, anyway. A portion of the income we earned resembles a structuring fee and the risk we retain is typically minimal.

Net investment income increased from 4.1 million in the first quarter of '02 to 5.5 million this quarter. The increase in attributable to the overall increase in investment assets from 528 million at March 31, '02, to 816 million at March 31, 2003. This increase is due primarily to the 141 million in proceeds from the preferred stock issuance in April of 2002 and 175 million in cash flow from operations during the trailing four quarters. Fixed income book yields and hedge funds returns were lower this quarter compared to last. Hedge fund return decreased from 2.4% to 2% from quarter to quarter. On an annualized basis, hedge fund returns this quarter were 8.2%.

Most insurers invest a portion of their assets in equities. We believe a better risk-adjusted return can be earned by prudently managed hedge funds, our long-term chose of an other than fixed income investment strategy. Our quarterly return of 2% compares favorably with other insurer's investments strategies such as an S&P 500 portfolio which was down 3.6% for the quarter. Our hedge fund returns have been positive in every quarter other than one during the last 24 quarters.

Fee income remained level from quarter to quarter. We earned fee income on some of our finite transaction as well as on over rides on quota share retro sessions. Our loss ratio was 38.8% compared to 29.1% in the first quarter of 2002. This loss ratio would have been 29.4% if exited line segments premiums and losses were excluded from the calculation. Net paid losses were 20 million during the first quarter of '03 versus 33 million in the comparable prior period. The expense ratio for the quarter was 32.9%. Variable acquisition costs such as commission and brokerage as a percentage of net earned premium were 22.1% and its somewhat fixed operating cost ratio was 10.8%. The comparable amounts in the first quarter of 2002 were 19% and 15% respectively. Included in commission and brokerage this quarter is $4m of charges related to fees associated with P-1. The commission and brokerage ratio without such fees would have been 17%.

The general and administrative expense ratio of 10.8% for the quarter is about in line with what we expect for the entire year. We have been successful to date in spreading somewhat minor increases in operating costs over large increases in premiums. This operating leverage allows a significant portion of our growth to flow to the bottom line.

Operating expenses increased from 8.9 million in the first quarter of 2002 to 9.2 million this quarter. The cost that we incurred related to the relocation of underwriters from our New Jersey office to Bermuda is the main reason for this increase. Interest expense increased to $2.3m for the three months ended March 31, 2003, from .7 million in the comparable period. Following the repayment of $20m on March 31 under the bank loan, an interest rate swap previously accounted for as a hedge for the cash flows associated with this loan was no longer effective. Consequently, $1.3m has been charged as interest expense in the quarter. This charge did not impact stockholders' equity since it was previously recorded as a component of other comprehensive income.

In addition, the partial repayment of the loan resulted in the write-off of $200,000 of debt amortization cost during the quarter. Interest expense on our trust preferred obligation has declined slightly from 2002 to 2003 due to the buy back of about $5m of these securities during 2002. However, in the next quarter there will be an increase in trust-preferred liabilities and related interest expense. On April 25 of this year we priced on $17.5m in trust preferred securities. The interest rate for the first five years of the 30-year obligation is fixed at 7.35%. It becomes a LIBOR based rate at the end of year 5 but at that point the obligation is callable with no penalty. We expect this transaction to close next week and we'll use the net proceeds to pay down the remaining $10m of bank debt and contribute the balance to PXRE Reinsurance Limited, our Bermuda based reinsurance subsidiary. Essentially we are replacing our bank debt with more permanent ratings agency friendly hybrid capital. As we do for our underlying reinsurance business, we view financing opportunistically. We believe that the cost of this trust preferred transaction is lower than other readily available for purposes of capital.

Our effective tax rate for the quarter was 6% versus 22% for the comparable period. The development of our underwriting platform in Bermuda combined with an increase in the intercompany quota share percentage have resulted in the preponderance of pretax income being recorded offshore during this first quarter. With expect this to continue on a go forward basis.

Related to investments, our strategy is to maintain a conservative fixed income and alternative investment portfolios. The main components of this alternative investment strategy is a fund of funds hedge fund. At March 31, 2003, 111 million, or 14% of our total investments, was allocated to hedge funds. This allocation compares to 16% one year ago and 15% one quarter ago. The hedge funds are invested in 20 different strategies and are run by 15 different managers and are part of a funds of funds approach controlled by the same manager over the past six years.

I would like to point out also the relative liquidity that we have related to our hedge fund investments as compared to typical hedge funds or private equity investments. Should we decide to monetize these hedge funds almost half of them can be accomplished in the current quarter and practically the entire remaining balance can be liquidated in the quarter thereafter. In short, we are never more than six months away from turning the hedge funds into cash.

Our fixed income portfolio including shorter-term investments has a duration of 2.3 years and an average credit rate of AAA. Only .1% of our fixed income portfolio is invested in securities with less than investment grade ratings. During the quarter the balance of total reinsurance receivables decreased $33.5m, or 14%, a reflection of continued prompt payment from our retrocessionaires. PXRE's book value per share on a fully diluted basis increased by 2.1% during the quarter from $20.33 at December 31, 2002, to $20.76 at March 31, 2003.

This concludes our prepared remarks.

Thank you, sir. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are on a speakerphone please be sure that your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we'll take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question. And wheel pause for just a moment to give everyone an opportunity to signal for questions.

We'll take our first question from [Mike Pallet] of Fox Pitt Kelton. Please go ahead

Good morning.

Good morning.

I appreciate the additional disclosure and have a couple of questions. My first question has to do with the reserve strengthening in the quarter for the run off-line. I think you gave us the pieces to calculate it but maybe you can provide some more clarity. What was the adverse reserve development in this segment? And then secondarily if you could provide some more comment on that, on the one casualty claim, or the one casualty program that you increased your reserves from?

How about if we do it in reverse order? I will provide some color about on the one contract that wasn't behaving as expected. It's a proportional contract where, as often happens in the reinsurance market, the quarterly reports came late and we received two quarters at the same time and the loss experience was worse than actuarial projections would have suggested. We booked, I don't have the number immediately to hand, we booked the preponderance of the, of our total development came on that account. I think the remaining limit on that account is something like $3.8m.

That's right. So the total adverse development in the quarter, Mike, was $13m, and of that about half of that was related to exited lines and most of that number was related to this specific treaty Jeff mentioned.

And the other 6 or the other $7m, roughly where was that coming from?

About half of it in finite and the other half in cat and risk excess.

In your exit lines, do you have a break out of the actual level of reserves between the Lloyd syndicate business and the direct reinsurance? And can you comment on where the risk for potential further adverse development is? And maybe you can comment on the tails of the two businesses because my sense is that there's a difference between the payment patterns and the loss reserves risks available in those two different portfolios.

Sure. First of all I would say that the Lloyds figures are publicly available, so I don't think this is necessarily additional disclosure but it does make all of your lives easier to give it to you. And then I will comment on the different characteristics before we give you the actual numbers from John. The Lloyds, the business written in Lloyds was largely property business. There was some accident and health business written in there. The results of that business were disappointing but it is extremely shorttailed. In fact, most of that business the market terms are that losses cannot be reported after 18 months after the ends of the contract. So we feel pretty good about the Lloyds number. In fact, we haven't had development out of Lloyds for quite sometime.

When did you write your last contract in that business?

We stopped underwriting new business in September of 2000.

Thanks.

The number for Lloyds is.

$19m of total reserves which is about 6 million of IBNR and 13 are [inaudible].

Okay.

So the balance, I don't know if you want me to repeat the numbers, Mike, but I'm not going to try to subtract on the fly.

That's right, the balances is in the casualty?

Right.

And can you comment on the nature of the tail of that direct reinsurance book and where you stand on that?

Again, the exposures, which we wrote, were primary and typically the first million dollars of excess liability policies. Most of our clients were smaller insurance companies. Historically and typically that meant that your tail was shorter, you didn't have run away severity issues causing uncertainty. I think in retrospect and this is with the clarity of hindsight, I think that our problem on that business was a relatively simple one in that it was all price. We don't have terrible engineer [inaudible] changes of interpretation like many of the big insurance companies have. Our problem is that we wrote a lot of that business where our clients were under pricing. The tail, typically again, using the past as a guide, the tail of that business should be at most three to five to seven years, right. That question is hard to answer because different people mean different things of the most of your losses should be in, known and probably paid in seven years, certainly. I think the statistics I gave about how much is paid and how much remains as IBNR kind of points us to that. Lloyds does not change the numbers all that much as you can tell from John's number.

Okay.

Where is the risk? I think the risk is from that book stopping behaving like we expect. This quarter it did, except for this one contract. The one contract has a limit, which isn't too far away. The risk clearly, Mike, is each -- XYZ mutual who was our typical client doesn't make the papers when they increase loss reserves, AIG does and Chubb. But there's a similar trickle down. As the insurance companies as an industry realize that that they have their reserves set incorrectly and they make a major change in their expectations, it eventually filters down to us and I think that's the risk.

Has there been any change in the actuarial range that you all have talked about in the past related to that business?

Yeah, the changes. One of the things which appears a little odd is the amounts, dollar amounts don't change significantly. And if you think about it, it makes sense because you're applying the actuarial range on a smaller and smaller base. As more and more of this is paid and put to bed or case reserved and almost put to bed, you have a smaller base. But as uncertainty increases the confidence, the width of the confidence interval increases. And the way that the math is worked out is the range is updated each quarter and it doesn't change all that significantly.

John, could you?

At year-end the exited line range was $10 million below, $11 million above, and total range was 16 below and 17 above.

And you just strengthened by $7 million. So has that range now narrowed or?

I guess what I'm saying, Mike, is if you strengthen by seven you now have a smaller base, true, but the range comes from the uncertainty factor around your pick so now you have a new pick and you apply your uncertainty factors. The way they do it isn't subtraction, it's not like you had a range of 11, and you booked seven so now it must be four.

Gotcha.

It's sort of like option pricing. You have a volatility associated with the loss reserves and you apply that volatility to your new pick.

Okay. I just have two other questions. If you could comment on second quarter cat experience in light of some of the events that have occurred here in the States? And finally can you comment a little bit on your reinsurance recoverable balance, the credit quality of that asset? It looked like you had some pretty material payments in the quarter.

Sure. In terms of the second quarter, the most significant activity was obviously the tornadoes in the midwest. I'll start this with the premise that it's very early days yet. However, we don't have major, major exposures in the areas hit. We've researched our largest Kansas commitments and none of those companies belief that they were involved at this point. We've received no indication of significant involvement. Again, it's early days. My guess and my estimate is that we will have some loss from these winds storms and it won't be significant.

Okay. And the reinsurance recoverable?

Yeah, I've noted in my remarks, the balance went down during the quarter. And just to show how, why we believe that we do not believe the reinsurance receivable balance is a problem on our BS is that of the total 203 million for paids and unpaids, six reinsurers make up 78% of that total and of the six, three of them, five of them. I'm sorry, are rated double A. or above and one of them is not rated. However, its receivable balance is fully collateralized.

That one is obviously [inaudible]. So I guess 78% of the balance is with well-rated and or collateralized people, collateralized reinsurers. We don't perceive that to be a major risk area. Part of the reason it's not a major risk area is we are going to be collecting property claims from these people, right, which is certainly faster and often much easier.

Right. Okay. Great. Thanks very much.

We'll go next to [Bill Brodrose] of York Capital. Please go ahead.

Hi, guys, its [Bill Brodose]. I think all of my questions ha.

I've been answered with regard to my second question, actually, could you comment on the other 22% of your recoverable book? I am just curious as to color and what you are doing about it. I know you basically addressed the question but for the worrywarts out there.

You are not necessarily agreeing to put yourself in that camp but [inaudible]

So the other 22% is comprised of many smaller balances from a diversified book of reinsurers, we are not having any difficult collecting balances right now but for a really minor subset of the total for which we establish an allowance for doubtful accounts in accordance with GAAP. So we believe that any potential balances would be that, that we don't collect would be offset by our allowance.

Okay. So you think the allowance right now is adequate?

Yes.

And fairly stable.

That is the case. Now, part of the reason that the balances today are kind of high based on our historical numbers is we coming out of '99 and 2001 which were big loss years and which our recessionaries ended up owing us a fair amount of money. So the allowance might have floated up, the percentage is certainly either down or in line with history.

Gotcha. Okay. Thanks.

Sure.

At this time I'd like to remind the audience that if you would like to ask a question or if you have a follow-up question, please press star one to signal. And we'll take our next question from [Greg Latin] of City Group. Please go ahead.

Good morning. On the cat and risk it was up 62%, and what was the impact of foreign currency in the quarter on premiums and on losses and on earnings?

The impact is minimal, Greg. We hedge our exposure to foreign currencies and we use assets to do so as opposed to derivatives. But we basically have a policy of whatever reserves we have by foreign currencies we hold an equal amount of assets in a foreign denominated bond, for example. So our policy is to balance our foreign exchange exposures with an approximately equal asset and liabilities. Therefore, changes in FX really are a wash in our P&L.

The other thing I'd say, Greg, is the vast majority of our premiums are collected in dollars. Even the international business, a lot of it is collected in dollars.

Okay. The next question is, were there any covenants violated or what is your cushion there, or how much is the conversion price go lower as a result of the adverse development.

Does it pertain to the entire development or a portion of it?

It pertains to, if you look back at the publicly filed agreement, it pertains to all development. However, the adjustment of the conversion price is capped or, for the continuing lines, the exited lines are not capped, the continuing lines are capped. The conversion price that is contained in our contained in our press release.

$14.97. Greg, there are no covenants that we have violated on our debt or any of our obligations.

And in terms of cushion or room I guess the best way to not worry about bank covenants is to pay it down. And I think we've got, A., plenty of room on all the financial covenants and, B., we are planning to pay down the debt.

Yeah, next week the bank debt will be extinguished. The [inaudible] proceeds portion of those we'll use to pay off Wachovia.

And then lastly just thinking about the $4 to $4.25 guidance. Is there anything helping you get there that you did not contemplate in your initially established guidance? Something serving to benefit you outside of the underwriting because we know in the underwriting part we have some better weather in the first quarter, but there's just a lot of moving parts. I mean, there's a 50-cent reserve hit, you have maybe 15 cents per share per share benefit from the commutation, the tax rate moved in your favor I don't know if that's what you contemplated then your investment returns were lower than your target. So if you can kind of walk through if anything is serving to benefit you and how you feel about the guidance.

I think before I turn it over for more specific comment from John, I guess what I'd say is other than underwriting, if we can just look at underwriting for a second, were we have the P-1 commutation which is positive above guidance. We appear to have growth in excess of what we anticipated. We had a first quarter with benign weather and we had adverse development, which is bad news. When you roll that together coupled with, I think, a planned dramatic reduction in our tax rate, and I think we would disagree with what you said about investments. For the quarter they were sort of what we expected. Obviously it's not going to be 25% of what we expect for the whole year.

Our investment returns are in line with our forecasting model and our tax rate is also. On the last call I think we said less than 10% effective tax rate. And the 6% that we booked in the first quarter would be a good proxy for the run rate for the year.

And all that stuff nets out to a net positive expectation, but the positive expectation is contained. And when you do the math I think you'll come to the conclusion that it's just contained, but it's contained within the range that we provided, a four to 425.

So a net positive balancing it all out?

Yes.

One more question pops up that I have here. This P-1 recommutation, what specifically occurred in terms of taking it back? Did you just have some, you were planning for maybe something very robust? What kind of expectational changes occurred on the cat side? You established that outlet because you thought things were going to just be very positive on the upside and it didn't. Was there anything you could point toward qualitatively or certain contracts that maybe not have come through or was it pricing?

I think our thought process, Greg. It was going to be awfully expensive to not have it in place if those opportunities were available, right? So we viewed it as sort of the time and expense of setting up P-1 was really securing an option for us to take advantage. Of those opportunities if they presented themselves, and we thought they were going to. Why didn't they? I believe they didn't, not because of pricing but because of line size. I know that Jerry said in the last call and other people have said that the competition in today's market is for size of line or allocation rather than price. There were a couple of specific contracts where our clients surprised us the way they purchased reinsurance or renewal. I suppose if you wanted to point the finger at where did the expectations deviate from reality, those I guess two cases where the clients bought significantly less cover in the open market than we expected, account for most of the shortfall.

So they secured less protection, that was the factor more than they boxed you out and you got a smaller participation in the reinsurance panel?

Well, in those cases and I'm trying to think whether extrapolation is dangerous. In those two cases, what happened was our percentage allocation of the placed reinsurance went way up and the dollar amount, the total dollar amount placed went way down.

Okay.

And in general I think what I would say is over the past two years, PXRE has really done a great job. And the underwriters have done a great job isn't taking those relatively small lines from a difficult part of the cycle and significantly expanding our involvement with the clients we had and expanding our involvement with new clients. I think that as a percentage of the pie, these statistics are very difficult so I will just give you a sense. I think that PXRE has dramatically increased their market share, slice of the pie, whatever you want to say, over the past two years. It's sort of in a way a backhanded compliment. One of the ways to grow in a market where price isn't going through the roof any more is by being relatively small in the beginning, right? PXRE in 2003 and in 2004 feels like they have opportunities to grow organically in the catastrophe business that we are currently in. Because we are not a behemoth yet. So, again, it is an advantage from starting at a small base following the World Trade Center. You can continue to grow, continue to gain market share without being boxed out because you've got two big an allocation avenue particular clients cat company.

I think another thing that I'd add is you've got, notwithstanding the new Bermuda capacity that came in after 911, you've got relatively fewer providers of cover on the lands scape. And effectively the clients are very, very directed to place business with the largest number of the markets that they can commensurate with good security. And I think PXRE benefits from that from one point or another because there are some large groups that commands huge amounts of capacity. But that amount of capacity is controlled by essentially one underwriting decision group. And I think most buyers want some diversification so they are not too beholden to one particular area as much as they were with Lloyds when Lloyds fell out of fashion and people began to move business out of Lloyds. So we actually benefit from that as PXRE as opposed to being a negative where we have business taken from us.

Okay. Good color. Thanks.

And we'll take our next question from [Scott [Summer] of FAB Capital Management. Please go ahead.

Hi, Jerry, Jeff, how are you? Quick question for you just on I think, I think I've got most of my questions answered going through your guidance adjustments. On the question before last, but could you just comment a little bit more on the reserve strengthening in the non-casualty lines, the finite and the core, in the core cat business? And can you comment a little bit on, out of the strengthening and the $4 million charge for P-1, what in your mind is really kind of a non-recurring? I know it's a dangerous word because we've had a lot of recurring bad developments particularly on the casualty. But if you sort of take your best guess of what is sort of a normal amount of adverse to have and then also if you could address the fees so we can model on a go forward basis. Thanks.

I think without being evasive, I think you asked an impossible question and let me expand a little. How much adverse develop do we expect? None. We have picked our best estimate on our loss reserves in each area. As you quite rightly point out, we've had development especially on the exited casualty business several quarters over the past, say, eight or ten quarters. So what I would say is, acknowledging that our financial statements contain our best estimate for the loss reserves, I think the issue is where to focus for risk. And just to reiterate something that I said earlier, I think the areas to focus for risk is in the exited IBNR. That number which stands, which stands at $44m, is the sum total of most of the uncertainty of the reserves on our BS. When we look at the finite risk development that you identified specifically, it's very contained. It's one treaty. It was a loss portfolio transfer.

We may have made public comment on an earnings call. I know we've said this to the rating agencies. We did one loss portfolio earnings transfer very early on in the finite department. We haven't done one since. Part of the problem with loss portfolio transfers is almost by definition almost any loss you get is adverse development, right, because it's all retrospective. Having said that, there's a limit, there's a cap. You know sort of what your worse case is. And, frankly, we got some information on a very complicated contract that made it look like the results were not, were going worse than we expected. So we took the opportunity to increase reserves to, again, what we felt was our best estimate. I don't feel like in dollar terms there is a big exposure on the finite side. I think you should focus your worry and your modeling on the $44 million of IBNR remaining on the exited lines. So given the constraints we had I hope I provided some benefit to you there.

Fair enough. And the $4 million P-1 formation termination expenses, is that sort of a one time?

Yeah, Scott, it is.

Terrific. Thank you.

It appears there are no further questions at this time. Mr. Radke, would you like me to turn the conference back over to you for any additional or closing remarks?

Yes, please.

Thank you, sir. Please go ahead.

I'd just like to take this opportunity again to thank all of you for listening and look forward to hopefully reporting continued increasing results next quarter. Thank you, all.

Thank you.

That does conclude today's conference. We thank you for your participation and you may disconnect at this time.