Argo Group International Holdings Ltd (ARGO) 2003 Q2 法說會逐字稿

Good day and welcome to the PXRE group conference call. Today's call is being recorded. At this time, for opening comments and introductions, I would like to turn the conference over to Mr. Pat Watson (ph).

Good morning everyone. PXRE Group Ltd. is pleased to host this conference call regarding the Company's results for the second quarter and six-month period ended June 30th, 2003, which were released yesterday evening.

Before we begin I would like to remind everyone that managements' comments in this conference call which are not based on historical 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's future results may 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, and 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 managements' remarks during this conference call are based on information and understandings that are believed accurate as of today's date, August 7th, 2003. Because of the time sensitive nature of this information it is PXRE's policy to limit the archived replay of this conference call webcast to a period of 30 days. The 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 those announcements I will turn the call over to Jerry Radke, chairman of PXRE.

Thank you. Good morning everyone, and thank you for participating in the PXRE quarterly call. I'm Jerry Radke, Chairman of PXRE, and with me today are Jeff Radke, our recently appointed CEO, and John Modin, our CFO. Jeff will talk about the outlook of the Company in a few moments, but first I would like to comment on the final quarter under my watch.

The results for the second quarter 2003 can only be described as bittersweet. On the one hand, our underwriting team has done an excellent job of producing and underwriting a top-quality book of our core catastrophe business. Second quarter net written premiums for the catastrophe business were up 127 percent, while net earned catastrophe premiums increased 73 percent over last year. This growth followed a year where our catastrophe business already tripled subsequent to 2001.

Underwriting profits for the second quarter and the first six months of the current year were up 26 percent and 30 percent respectively, before considering any prior year losses. Unfortunately, this is not the entire story. We had a number of unusual and/or late reported items affect the Company in the final month of the second quarter. The second quarter experienced $18.1 million of strengthening, mainly as a result of aviation and Exited Lines business.

First of all, the aviation account was hit by $6.5 million of losses from a large, late reported loss from a single insolvent client involving the 1998 SwissAir event, and a reduction in the remaining life of a series of satellites. Secondly, the direct casualty component of our Exited Lines developed another $6.4 million, despite our recent increases in reserves.

Finally, a number of old catastrophe losses resulted in net development of $3 million. All this activity occurred during the second quarter, and had a negative impact on an otherwise exceptional quarter. The annualized return on equity for the second quarter including this activity was 18.8 percent. I think it is important to note the underlying strength of our core catastrophe business, which continues to generate excellent results. Each passing quarter takes us further from the effects of the past, with the results influenced more and more by current activity.

At this time, I'd like to turn the meeting over to Jeff for commentary on the future.

During the second quarter we completed the move of all underwriting operations to Bermuda. We have also fully integrated a number of key underwriters to supplement our existing team. We continue to find opportunities to bring successful short-tail underwriters into the Company, and enjoy the attendant growth as they shift portions of the books they had written to PXRE.

Moving our existing team and the new additions to Bermuda has had a number of benefits in our view. The most important is our belief that this shift will allow us to continue to grow at a faster pace than the rest of the catastrophe market, as we gain increased access to our customers and producers. There is also increased financial efficiency as approximately 75 percent of our business is now written on Bermuda Reinsurance Company paper.

Reflecting these moves, we grew our cat and risk business at a faster than expected rate, showing a 73 percent increase over the prior year. Again, exceeding our internal targets. The largest growth was achieved in the direct catastrophe lines, both North American and international. As we have indicated in earlier calls, the line of business which has reduced in the most in our book is marine, where the terms and conditions remain in our view unacceptable.

From a geographic standpoint, the largest growth has occurred outside of North America. The market continues to present attractive pricing in most areas. We are seeing US direct catastrophe rates generally flat. There is sufficient capacity for virtually all programs at the correct price. On non-US business, direct catastrophe rates are also flat on average, with less pressure on our ability to grow as that market tries to replace capacity losses from various companies exiting the reinsurance business. We are also seeing several clients purchasing new top layers. This is also a source of growth for PXRE in the future.

As you know, a significant portion of our book is retrocessional coverage. Unlike the commodity-like direct catastrophe business, we have much more influence on the pricing and design of our retrocessional business. We continue to achieve modest price increases on many retro accounts, and terms and conditions remain favorable.

Turning to the other segments, finite risk premiums were 13.4 million with a combined ratio of 113.5. This ratio is higher than expected, due to an increase in reserves on one contract. We have not taken on any new clients in this segment, preferring to renew the few, low-risk accounts we currently write. Other Lines premium was 2.8 million, an increase of 115 percent, with a loss ratio of 60.1 percent. This segment has become so small that it has very little impact on the Company. Finally, Exited Lines premium was 2.1 million in the quarter, reflecting mainly premium adjustments on expired contracts and some reinstatement premiums. Loss development on Exited Lines drove the total incurred losses to 6.4 million for the segment.

Given the results for the quarter, we remain comfortable with our 2003 earnings guidance of 4 to 425 per fully diluted share. Finally, I'd like to say a few words about our shelf registration statement. I'd like to clarify that we have no present intention to offer any security under the shelf registration statement in the near-term. Given the time involved in the securities registration process, this shelf will allow us to maximize the Company's financial flexibility in the future. We continue to enhance our capital base and support our current growth through retained earnings and the issuance of trust preferred securities.

John will provide more detail on these securities. John?

Good morning everyone, and welcome to our second quarter 2003 conference call. I'm going to review three main topics this morning. First, a summary of our financial results for the second quarter, as well as key balance sheet metrics as of June 30th. Second, additional detail related to our loss reserves, including Exited Lines; and finally, a few brief comments on our 2003 guidance.

Our net income increased 13 percent from 19 million in the second of quarter 2002 to 21.5 million in this quarter. Our annualized return on equity for the quarter was 18.8 percent. The combined ratio was 81.1 percent versus 65.1 percent in the same period last year. Excluding the Exited Lines segment from our results, our 2003 second quarter net income would have increased to 26.2 million, the return on equity would have improved to 23.2 percent, and the combined ratio would have decreased to 74.7 percent.

On an overall basis, our net written premium grew 180 percent and our net earned premium grew 84 percent from quarter-to-quarter. This growth is due primarily to our core line, Catastrophe and Risk Excess. As Jerry mentioned, net written premium in this segment increased 127 percent from 22.6 million in the second quarter of 2002, to 51.3 million this quarter. Reflecting continued increases in rates and additional diversified exposures. The rate increases, as Jeff mentioned, relates to both actual price increases and improved terms and conditions.

Net earned premium in the Catastrophe and Risk Excess segment increased 73 percent from 38 million in the second quarter of 2002, to 65.8 million this quarter. The net earned premium in this line was only 18.6 million in the second quarter of 2001, so the 2003 growth was on top of 104 percent growth in 2002.

Our loss ratio for the Cat and Risk Excess segment was 42.7 percent compared to 21 percent in the second quarter of 2002. Included in the incurred losses during the quarter were minor losses related to the Midwest storms, cat 88 and 88 (ph). Most of the 5 billion in industry losses incurred during the quarter appears to have been absorbed by primary layers. As Jerry mentioned earlier, the segment's quarterly results included development from past accident years, related primarily to aerospace losses.

The commission and brokerage ratio of 9.4 percent for the second quarter related to the Cat and Risk Excess segment is on the low-end of our targeted range of 9 to 12 percent. For our student (ph) business, acquisition (ph) cost would be about 10 percent, all related to brokerage. Seeding (ph) commissions are fee income on at work quota share (ph) arrangements which serve to bring the overall ratio down, whereas seeded excess of loss reinsurance arrangements would increase the ratio, and these contracts do not physically contain seeding commissions.

The finite loss ratio and commission and brokerage ratio was 70.3 percent and 43 percent respectively, and we incurred an underwriting loss of 1.8 million during the quarter. The loss is attributable to one contract in which we increased reserves by $2.2 million. The net premium earned during the quarter is almost entirely related to the runoff of finite deals entered into prior to 2003. Most of the contracts entered into this year did not pass the accounting risk transfer tax, and as such they are accounted for as deposits, which means that the premiums and losses are not reflected in the income statement.

The reason that these transactions are not accounted for as reinsurance are the narrow range of the potential outcomes, and the low probability of PXRE incurring a significant loss. These are the types of finite deals we like. We maintain a small group of core clients for which we expect to earn fees and underwriting margins for approximately 3 to $5 million per year.

Offsetting the growth in our core line was a planned reduction in Exited Lines earned premium of $4.6 million. We earned $2.1 million of Exited Lines premium this quarter, and much of it was from premium adjustments on expired exposures. Our net underwriting loss for the segment was $4.9 million and this was primarily attributable to adverse development on the Direct Casualty business. I will have some comments later related to reserves, and more specifically Exited Lines.

On an overall basis for all segments, net paid losses were 24.6 million during the second quarter of 2003, versus 33.7 million in the comparable prior period. Net investment income for the second quarter of 2003 increased 2 percent to 8.6 million, from 8.4 million in the second quarter of '02, primarily as the result of a $4.5 million increase in income from hedge funds, as well as an increase in the average invested balance due to 214 million of cash flows from operations during the trailing four quarters.

Offsetting these increases was a decrease in the book yield of fixed maturity and short and short-term investment portfolios from 4.2 percent during the second quarter of 2002 to 3.6 percent during this quarter.

In addition, there were two non-recurring transactions in the second quarter of 2002 that resulted in $4.5 million of net investment income. Investment income related to our hedge fund portfolio increased to 5.3 million in the second quarter of 2003, from .8 million in the second quarter 2002. Investment in hedge funds produced a return of 4.7 percent for the second quarter of '03, compared with .8 percent in the comparable prior period. On an annualized basis, hedge fund returns this quarter were 20.2 percent. Of course we do not expect necessarily the remaining quarters of 2003 to be this strong.

Net investment income also increased sequentially 3.1 million from the prior quarter, and this was also due to the increase in hedge fund income. Operating expenses increased from $6.2 million in the second quarter of 2002 to 9.9 million this quarter. A sequential comparison is probably more appropriate here, as we incurred 9.2 million during the first quarter of 2003. In the current quarter, we incurred $1.2 million relating to the retirement of Jerry Radke, mainly due to the accelerated vesting of restricted shares.

Our run rate on operating expenses for the remaining quarters of 2003 should remain somewhat consistent with the first quarter of this year. The platform in Bermuda is more expansive than it is in the US, but the difference is negligible when compared to the operating advantages in Bermuda.

Interest expense remained fairly level from period to period, but the underlying components of the debt have changed. In June 30th 2002, our total debt obligations of 130 million were comprised of 95 million of trust preferreds and $35 million of bank debt. This year, after closing on two trust preferred transactions this quarter, we have 127 million of trust preferred obligations as of June 30th. The after-tax cost of these obligations is 6.45 percent, and will remain constant until May 2008, at which time a callable portion converts to floating.

The proceeds of these newly issued trust preferred securities were used to increase the capital of our Bermuda reinsurance subsidiary, PXRE Reinsurance Limited. Essentially, we replaced the bank debt with capital that is more permanent, less expansive, and contains fewer covenants.

Our effective tax rate for the quarter was 2 percent versus 13.4 percent for the comparable period last year. Due to the adverse development occurring predominantly in our US subsidiary, our estimate of the 2003 effective tax rate was reduced from 6 percent to 4 percent. As a result, we were versed a portion of the provision recorded in the first quarter, resulting in 2 percent for the second quarter standalone. We expect the rate to be approximately 4 percent for the third and fourth quarters of 2003.

The reason for the overall decline, as well as the rate less than the statutory rate, is due to the development of our underwriting platform in Bermuda and the increase in the intercompany quota share.

Related to investments, our strategy is to maintain a conservative fixed income and alternative investment portfolios. The main component of this alternative investment strategy is a fund to fund hedge fund. At June 30th 2003, 110.5 million, or 12.9 percent of our total investments was allocated to hedge funds. This allocation compares to 15.8 percent one year ago, and 13.7 percent one quarter ago.

The hedge funds are invested in 21 different strategies, and they are run by 17 different managers, and are part of a fund to fund approach controlled by the same manager over the past six years. The hedge funds are also relatively liquid for these types of alternative asset classes. Should we decide to monetize them, almost half can be accomplished in the current quarter, and practically the entire remaining balance can be liquidated in the quarter thereafter. In short, we're never more than six months away from turning the hedge funds into cash.

Our fixed income portfolio, including short-term investments, has a duration of 2.7 years and an average credit rating of AA. We continue our aversions to interest rate and credit risks, which have helped us preserve capital during this recent increase in interest rates. Only .1 percent of our fixed income portfolio is invested in securities with less than investment-grade ratings. PXRE's book value per share on a fully diluted basis increased by 3 percent during the quarter from $20.76 at March 31st, to $21.32 at June 30th.

The second topic I want to touch upon is loss reserves. Our net loss reserves at June 30th 2003 are 278 million, of which 102 million represents loss reserves on exited lines. Of the exited lines total, 58.4 million is case reserves, and 43 percent represents IBNR (ph). The line of business within Exited Lines with the most volatility around ultimate losses is the direct general liability. This line contributed 36.2 million, or 48 percent of the total inception to date direct casualty net earned premium of 76.1 million.

During the quarter, we increased the cumulative loss ratio on this line to 130 percent. This resulted in $7.8 million of additional reserves. Furthermore, 13.5 million, or 18 percent of total direct casualty earned premium represents structured treaties that are booked almost to policy limits. In total, these two buckets, one booked at 130 percent loss ratio and another booked almost to policy limits represent two-thirds of the total direct book.

Finally, related to guidance, we're maintaining the original range of $4 to $4.25 per share for the 2003 net income. So far, the adverse development recognized during 2003 has been offset by a lower 2003 accident year loss ratio, which is the reason we continue to remain in this range. Assuming normalized loss activity for the remainder of the year, we project earnings per share to fall within the original guidance of $4 to $4.25.

As Jeff mentioned, we filed the universal shelf registration statement in late May of this year. We are currently under review in the registration process, so we cannot comment on the shelf itself. I would note, however, that we have no present intention to offer any securities under the shelf in the near term.

This concludes our prepared remarks, so we can now open the question-and-answer session.

Jim Wolf (ph), RBC Capital Markets.

A couple questions on the statutory numbers you put out. Could you give us some details on the changes in the statutory surplus. First the decrease at PXRE, and then the significant increase you show from March to June on PXRE Limited.

The decrease in the US company's surplus is primarily related from 457 million to about 423, related to dividends that were paid during the quarter. From PXRE Reinsurance Company, ultimately to Group and ultimately contributed to the Bermuda subsidiary. In addition, there was -- we recapitalized one of our holding companies to include the investment in the US company in Reinsurance Limited. You will note there's a footnote down below, footnote 4, before intercompany eliminations.

So the increase in the reinsurance limited is due to three things. One, the external capital rate during the quarter from the trust preferred of about $33 million. Two, internal capital from net income. And three, the dividends from the reinsurance company. Actually, and also the increase from the contribution of the holding company, half the holding company, to Reinsurance Limited.

I'm a little bit lost on the contribution of the holding company. What amount was contributed to PXRE Limited, and is that PXRE -- is a portion of it now PXRE that is owned by PXRE Limited?

A portion of PXRE Barbados is now owned by PXRE Reinsurance Limited.

Where had that been held previously?

To jump in with a clarifying comment, PXRE Barbados owns PXRE Reinsurance Company. And that had previously been held at the group level, so Group owned all Barbados, Barbados owned all of Reinsurance Company.

Okay.

The amount of the investment is about $125 million included in the 311. So surplus without that investment is approximately 175 million.

Richard Fiery (ph), Delphi Management.

I missed part of the beginning of the call. Did you discuss rates at all, and what kind of rate increases you're seeing?

I did. What I said is essentially on the direct catastrophe business, in the US and outside the US, we're seeing on average flat rates, year-on-year, at the July 1 renewals. Sometimes you'll see increases, but it seems like just as often there are slight decreases. That's obviously exposure adjusted. However, on the retrocessional business, the picture is a little stronger, we're seeing far more rate increases then anything else.

You said they were modest increases. Is that in the mid single digits?

Yes.

Also, looking at your income statement, actually if you look at pretax, you guys were actually down a little bit. I know that you've got some of these legacies affecting your results, but are you doing anything to diversify your risk further or change your underwriting standards to make sure that your pretax is up in the future?

I think what I would say is we changed our underwriting standards pretty dramatically. The business that caused this quarter, and has caused in previous quarters, the difficulty is all called Exited Lines, because we exited them. So yes, I think that the Company has taken pretty dramatic steps to get back to its core, which is the short-tail volatility lines. The ones that you see performing well.

Should we expect to see the results of those new standards anytime soon?

Obviously, when we book our loss reserves, we book -- management books our best estimate. So the answer that I would say to you is no. You should not see the past polluting the current periods any longer. Having said that, I think you have to be cognizant of the fact that setting reserves is an inherently difficult process. We're also setting reserves on casualty lines for accident years that have proved very difficult for the industry. If you sort of think back to several much bigger companies, and the reserve additions that they have taken, not for asbestosis or environmental reserves, but just to get their general liability reserves right -- I think we're suffering from some of the same challenges that they face.

One last thing. You mentioned casualty, what percent of your book is casualty right now?

We had $2 million of premium that was earned from the old years. We don't write any of that business currently.

Paul Futterman (ph), First Albany.

I'm having a little bit of trouble with the statutory changes. What were the dividends paid from PXRE Reinsurance?

There were dividends paid during the quarter of approximately $40 million from the US company to Bermuda. Ultimately to Reinsurance Limited.

Is the plan as you move the business to the Bermuda company to take more dividends out from that entity?

Yes. Long-term, the plan is to have the appropriate capital and the appropriate spot to support each company's operations. So as I said, we're focusing more and more of our underwriting on the Bermuda company. So it would be logical for that dividend process to continue.

Did you give us an idea how much cash there is at the holding company?

It's not a material amount. Most of the cash invested assets are in the reinsurance subsidiaries.

Ron Bobman (ph), Capital Returns LP.

I've got a general question. There's a typhoon, I visited this weather site on the web, I think it's pronounced Etau. And I'm wondering in general; A, is that a typhoon that you currently watch closely from a catastrophe risk exposure, a typhoon in that portion of the world, given its current size. Is that a significant risk to tax-free reinsurers as a whole, or is it not a meaningful threat to those of you who write cat covers.

A typhoon of significant size and significant strength could well be a concern to us and the market in general. What's very difficult to know it is where it's going to hit. Just like a hurricane, very strong hurricanes can cause little or no injured damage, depending on where they ultimately go. You almost have to wait, watch the strength, and watch the storm path that it ultimately takes, and sort of overlay that against insured values to get a sense. I think it's too early to do that.

I guess as far as storm activity right now, is it fair to say it's the number one storm that everyone would be watching? Because the current strength and the range of -- approaching Japan is -- there's a significant insured base there, presumably, fairly developed country, and the strength is pretty significant.

So yes, it is the largest thing that's out there. I guess my point was, it's headed towards Japan, is clearly -- what raises concerns. But even within Japan, where it actually makes landfall makes a huge difference in the ultimate insured losses. And I think if you look at that dispersion of where the landfall might occur, or the predicted path --

It's quite wide.

Right. It's so wide, I think as a self-preservation strategy, most catastrophe reinsurers don't start paying attention until that path gets a little narrower.

Thanks a lot.

Hardin Bathia (ph).

A follow-up question that I could better understand of the loss reserves development, and the strengthening you took in the quarter. If I think back over the last few quarters, I think you had commented previously that your expectation was comfort with your reserve position. And yet, you had to strengthen again. I'm trying to get a sense for your level of confidence in levels going forward.

Since it's a general question, I'll try to address it. You're quite right, obviously, that the past quarters have seen this development; and at the end of each quarter, I tell you that this is our best estimate, and each quarter that passes increases our certainty. And then three months later, I'm on the phone talking about more adverse development.

Again, the things that are in our favor -- and then I'm going to talk about the things that are not in our favor -- the things that are in our favor is that the book of business, as John described, is booked at a relatively high loss ratio. 133 is industry -- relative to the industry, we believe that's a high loss ratio. Most of the book that's been causing the difficulty is in this one area that I'm talking about, that's booked at the high loss ratio. Right? Again, we get the benefit -- or we get some benefit from being three months further out.

And the last thing I'd say is, as that loss ratio at which you're booked, you've got the thing booked, keeps going up. You're -- at least I feel like you're starting to address, and you're starting to be able to bake in the experience of our original clients. I think it was two quarters ago, you might remember me saying that as our insurance clients that we wrote reinsurance for, as they come to terms with the appropriate levels of reserves on their original policies that they sold, as they change their mind, as they take their reserve charges, etc., there's a trickle down effect as that flows through to our book.

I think most of the industry, the insurance industry, has sort of gotten their arms around what has been an incredibly difficult series of accident years. '99, 2000, 2001. So that's in our favor, too. Let me tell you what's not in our favor, because -- to paint a balanced picture I have to do that. Frequency and severity of the general liability claims, during those accident years, differed substantially from the accident years that preceded them.

That makes actuarial methods, which inherently rely on some version of the past is a good predictor of the future -- when you say that fundamentally the game changed with the court system, etc., that adds uncertainty, that adds risk. I think investors, and certainly we and our actuaries are cognizant of that risk when we set those reserves. And should be cognizant of those risks. So that's about the best I can do.

Does your forward -- your comfort with the previous guidance for the year anticipates that there is no further adverse development that you would be required to take? I assume that's what it means.

Yes.

Greg Levin (ph), CitiGroup.

I just want to get a handle on the continuing line and our short tail that are experiencing loss development still, and the chances of further slippage. Just assessing how unique it is versus systematic (ph) in the book. These -- where do they stem from, are these from backup covers, are they high lever cat XOLs (ph), if you can touch on that. This is when you referred to SwissAir, and what was the other one --

I'll go through it. A big chunk of the continuing lines development came from the SwissAir crash, as Jerry said. What we had there was an insolvent client, which we reinsured in 1998, who for some reason chose not to inform us that they had a loss under their original aviation policies, sufficient to hit our layers, until June. I suppose the good news is we owed them that money a long time ago, and they didn't collect it. But somehow, the adverse development doesn't feel like it's worth the flow. I don't know how you address those situations.

Our past history shows that large aviation claims, once they are settled through the court system, etc. -- everyone has a pretty good sense of what their original insurance obligations were than reinsurance, and then retrocessional business. We have not seen movement on that crash in a while. However, when you have a client who doesn't do the rational economic self-interest thing, and does not collect -- does not inform you of a claim or collect the money, you run the risk of being surprised there. I think it's fair to say that's kind of a one-off.

Another big chunk of development came from satellites, where the expected life of a given class of satellites was reduced. The Hughes 702 satellite. There, the situation is kind of interesting, in that the engineers start to detect a problem, they go through a series of technological attempts to work around the problem. Ultimately if those attempts are unsuccessful, and the expected future life of the satellite is reduced, there's an insurance claim.

So in that particular circumstance, what has been happening is after a few years in orbit, the problem is identified, people work on it, the engineers work on finding a solution to the problem, and then once it becomes clear that -- once it appears clear that there isn't a technological workaround, and there is going to be a reduction in the useful life, then the insurance -- the insurance side of the equation comes into play. We have looked at our entire satellite portfolio, and we're not aware of significant exposure of this kind that isn't reflected in our reserves today.

So I don't think that there's the potential for any significant number to come out of the satellite side of things. The other thing that helps us is the policy years that have this loss, the life coverage of the satellite, was five years long. So in other words, once it was launched, our clients, and therefore we were on the hook for the following five years, that has been reduced now, that's launch plus one year. So obviously certainty dramatically increases there.

When isolating the continuing line, it sounds like you're pretty comfortable. But are there any disputes going on that can result in adverse decisions, or thresholds getting close to being penetrated, things like ILWs (ph) or something that you're watching, or things -- (multiple speakers)

When you've been writing business for a long time, we've got four situations where if industry loss warranties are breached, one way or the other, if it goes above or below 500 million, for example, where we will either collect reinsurance or we might have to pay additional claims. We are relatively comfortable with where all those situations sit. So we watch them closely, we're not on the cusp of any. Except we're on the cusp of collecting some reinsurance premium, which isn't reflected in our books. That would be a nice surprise if it occurred, rather than a problem.

The average of those ILWs, the bias is favorable for PXRE.

I'm not sure what you mean, but just be safe I will say that we sell a heck of a lot more coverage than we buy. So if you assume that the industry loss -- the industry loss estimates all increased by 300 percent or something like that, we'd be a net loser. I don't think that's a very meaningful statement, but it's true. I think the one ILW where we're close, we would be in better shape.

Mike Howlett, Foxx Pitt Kelton.

Firstly, what are the triggers -- just on the prior question on these ILWs, what are the triggers on these things, or at least the ones you're looking, what's the potential maximum exposure?

I obviously did a bad job answering that question. I guess what I'm saying is, if you have been in business since '82, you're going to have five or six situations where, if old property cat or old aviation events get bigger, you're going to win or lose some amount of money. If there was one big event that was of any significant size, we would disclose it. There isn't. It's just a hodgepodge of stuff.

I just want to be clear at this point, it's not a -- it's something that's obviously out there, but it's not a material issue as the loss ratio going forward.

We would have never brought it up except in addressing the (indiscernible) question.

I just wanted to provide some clarification. Second, on the adverse development in the exited lines, can you provide us with a little more information if you can (ph) -- the accident years, the percentage of the reserves that you have up there in IBNR (ph) versus case, maybe if you can give us a sense of your paids and your incurreds on those businesses, some of that data if you have it available I'd certainly interested to be in the clear.

I think a lot of this, John will be reiterating what he said. But I know it hard sometimes to keep (multiple speakers)

I apologize, I didn't get it.

All I'm doing is stalling for John to find his place.

On the exited lines, IBNR is 43 million; total reserves are 102. So IBNR is about 42 percent of the total.

Where do you guys stand on -- I don't know if you have it by accident year, you're paids versus you're incurreds, and kind of what detail --

I don't have it by accident year. However the accident years we're discussing are primarily '98 through 2000. Three years.

And can you --

I could, on the general liability, which I think I mentioned is the most contentious subset of the exited, the reserves -- case reserves are about 30 million, and IBNR is about 21. Paid to reported on that subset is about 20 percent. Also, remember that's -- also, this is where we have loss ratio booked at 130, it's the riskiest line, and it's the line where we -- it's also the most significant of the direct casualty. The remaining lines within direct casualty are behaving themselves. So this quarter with the actions this quarter to get to a loss ratio of 130, we believe that that will take care of most of the developments, subject to Jeff's comments on the inherent uncertainty about loss reserves in general.

The other thing I would say, because I think it's useful or important. We're worried about general liability because we didn't write E&O, D&O, the professional lines that perhaps get more press because there's more blood in the water from them. So that's why we spent so much time on GL. Because that's the worst of what we wrote.

20 percent paid to reported, that would imply that this is a pretty long tail (ph) business, this'll be around for a good period of time longer, is that a fair characterization?

It's low layer general liability business, which most people would say has a meaningful settlement period of 7 to 10 years, I guess. I guess obviously, it follows just through the math, that having 20 percent paid compared to reported means that we have a fair amount of loss reserves. I don't think -- I think in the grand scheme of things, for a casualty business, this is relatively short. It's primary plus a million. Usually it's just primary.

Finally, the satellite and aviation portfolios, what's the size of those books, either from a premium of exposure prospective?

They are about --

About 30 million of annual premium.

In the cat and risk.

Within that segment.

Bill Varatos (ph), York Capital.

John, I should spend some time off line just to make sure I understand the corporate structure. And I think I understood the capital movements, but to cut through it all, as a holding company shareholder, should I be regarding my stat book as 423 million? In other words, the 311, is that owned by the PXRE Reinsurance Company and therefore it's double counting?

If you eliminate intercompany (ph), the total surplus is about $600 million. There's about $175 million of investment and subsidiary in Reinsurance Limited. Group Ltd. is the registrant, Group Ltd. owns Reinsurance Limited, and it also owns PXRE Reinsurance Barbados Ltd., which in turn owns the US holding company. So the 423 is the US surplus, 311 is the reinsurance limited surplus before intercompany eliminations. After those intercompany eliminations, surplus in Bermuda is about 175, 180 million. So the 423 plus the 180 is your 600 of group surplus.

So in essence, the market value at the company right now on a fully diluted basis is less than 70 percent of stat book.

Yes, if you don't eliminate intercompany and the preferred -- the market value of the Company, how do you compute that?

I was just doing 23 million shares times roughly 18. In other words, (multiple speakers)

I guess that's right. But significant (multiple speakers) preferred --

Debt capitalization too.

I'm just looking at your -- okay.

Because stat includes contributed proceeds (multiple speakers)

That is not that much different from our total cat.

You're total cat, your enterprise. (multiple speakers) At the holding company. And secondly, what is -- following this quarter what is now the convert -- convertible preferred strike price?

Its $14.64.

Okay, great. Thanks very much.

At this time there are no other questions. I'd like to turn the conference back to Jeff Radke for any additional or closing remarks.

Thank you all for participating in the conference call. We hope to be back to you with continued good results in the following quarter. And hopefully we will not have the past cloudy -- the strong results that we're generating from our current business. Thank you all.

This will conclude today's conference call. We thank you for your participation, and you may disconnect at this time.