Argo Group International Holdings Ltd (ARGO) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 4, 2004 Argonaut Group earnings conference call. At this time, all participants are in a listen only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Rod Sargent, Vice President of Marketing and Communications. Please proceed, sir.

Thank you. Good morning, everyone. Welcome to the Argonaut Group's 2004 fourth quarter and year end earnings conference call. My name is Rod Sargent, Vice President of Marketing Communications and Chief Marketing Officer for Argonaut Group.

With me today is Mark Watson, President and Chief Executive Officer and Mark Haushill, Senior Vice President and Chief Financial Officer. We are pleased to have this opportunity to discuss with you our results for the quarter and the year, as well as some of our ongoing initiatives.

Mark Watson will provide an overview of the Company's results from operations and Mark Haushill will provide an overview of the Company's financial results for the quarter. Please note. No earnings guidance will be provided during this call.

Before I turn the call over to Mark Watson, I'd like to inform you that this conference call is being recorded and that all participants presently are in listen only mode. Following management's discussions we will open up the conference call for your questions.

Let me also remind everyone that as a result of this call Argonaut Group management may make comments that reflect their intentions, beliefs, and expectations for the future. As a result, these forward-looking statements are subject to certain risk factors which could cause actual results to differ materially. These risk factors are listed in the Company's filings with the Securities and Exchange Commission including our Form 10-K and Form 8-K that the Company filed this morning, which contains the news release announcing 2004 fourth quarter and full year results.

Finally, Argonaut Group management may make references during this call to operating income, which is a non GAAP measurement of financial results. With that, I'd like to introduce our President and Chief Executive Officer, Mark Watson. Mark.

Thank you, Rod, and good morning.

I appreciate everyone joining us today for our report of 2004 fourth quarter and year end financial results. In just a few minutes, our CFO Mark Haushill will address the specifics of the fourth quarter before we open the call for your questions.

Ahead of that, I will address our overall results for 2004, highlight our segment performance, touch upon some balance sheet items, and review the market conditions in the niche areas where we operate. Overall, 2004 was a very productive and successful year for Argonaut Group.

I'm pleased to say we reached an important (technical difficulty) . Our continued focus on profitable underwriting helped us set new annual benchmarks and gross written, net written and earned premiums and we produced an annual combined ratio of less than 100, an important measurement to reach and maintain going forward.

Collectively, our business units turned in record gross written premiums exceeding 900 million and a combined ratio of 98.8 percent. For the year, Argonaut Group's book value increased 11.5 percent and is up almost 30 percent since 2002. These positive results were generated, irrespective of the cap losses we incurred from the hurricane activity during the third quarter, which totaled approximately $19.5 million.

We are pleased that each of our four business segments continued to make significant progress during the year. Specialty Commercial's integration of Grocers Insurance went as expected. For the year gross written premiums in this business segment were up 48 percent and factoring in the Grocers acquisition, we are now approaching critical mass for that business segment.

Our acquisition of Carreges (ph) last year helped our public entity segment increase its gross written premium by 40 percent and earned premium by 87 percent. Public Entity has now reached a point where its operating results are material to Argonaut Group's overall performance.

Our Excess & Surplus Lines segment produced another year of excellent results, despite the impact of the third quarter hurricane activity. E&S, again, was Argonaut Group's most profitable business segment, generating 37 million in operating income and a combined ratio of 94.8 percent. Exclusive of hurricane-related cap losses in the third quarter, our E&S segment's combined ratio would have been 90 percent for the year.

Finally, let me talk about risk management. Our objective was to generate a combined ratio of less than 100 by the end of 2004; and I am pleased to say we finally were able to deliver on that goal. For the fourth quarter, we reported a modest yet hardfought underwriting profit with the combined ratio of 99.8 percent. By any measure, these are significant achievements, given what this segment had to accomplish to get there.

I expect that the discipline instilled in Risk Management's underwriting process will continue to be a key factor in this segment's improved operating performance as we go forward.

Let me just spend a couple of minutes talking about our balance sheet. Argonaut Group's balance sheet remains strong, with approximately 3.1 billion in total assets at year end 2004. We remain comfortable with our trade reserves for A&E workers compensation and other loss reserves.

As I mentioned in our last call, our annual analysis of asbestos and environmental liabilities concluded that our carried reserves were adequate. Argonaut Group had minimal adverse development in 2004. During the year, we eliminated our single largest asbestos exposure by settling the Western MacArthur litigation. Our survival ratio remains strong, relative to the industry, as a whole.

During 2004 we raised approximately 86 million through several trust preferred offerings and closed the year with a statutory surplus in excess of $.5 billion. We are pleased in 2004 to retain our favorable financial strength ratings, issued annually by both A-Invest (ph) and Standard & Poor's; and we continue to view our financial capacity as one of our core strengths.

Finally, I would like to comment briefly on what we're seeing in the marketplace as respects to our underwriting operations. As I have mentioned in the past, we are seeing pricing pressure being applied primarily by the major carriers in the larger accounts. Our niche markets, however, remain relatively unaffected by competitive pricing through year end, although we have seen some loosening of terms and conditions.

Let me talk about property markets first. For our E&S segment, since the hurricane -- I think the hurricanes in the third quarter -- prices have been pretty stable to down just a little bit. On the Specialty Commercial side, we are seeing stable pricing to accounts off 5 percent; and for Public Entity, pricing has remained pretty stable through the fourth quarter.

On the Casualty side, we are still getting slight rate increases on the E&S side; for Risk Management, rates are staying pretty stable. We are seeing some loosening in the marketplace of terms and conditions. A little bit more competition on the credit side. We have been able to stick to our guns for that business. On the Specialty Commercial side, we are still seeing some slight rate increases and I would define that as 5 percent. For Public Entity we are seeing pricing on the casualty side relatively stable.

In summary, I'd just like to say that I am encouraged by our fourth quarter and our 2004 results. We have completed a number of key initiatives during the year; and in some cases surpassed some very important goals that we set for ourselves and established new benchmarks which we can measure our future progress against.

As we enter 2005 with a little bit of optimism, we also recognize there is still a lot more work for us to do before we reach the level of performance our shareholders expect.

With that, I'd like Mark Haushill to discuss our results for the fourth quarter and address in more detail other items from our consolidated financial statements. We will then take your questions. Mark.

Thank you and good morning. I hope all of you had an opportunity to review the press release. The fourth quarter was positive on a number of fronts as Mark has mentioned. So I'll take you through the quarter in a little bit more detail.

For the quarter ended December 31st, 2004, our net income was 26.2 million or 84 cents per share on a fully diluted basis. These results compared to net income of 31 million for the quarter ended December 31st, 2003, or $1.10 per share on a fully diluted basis.

As in prior quarters, the financial results require some additional commentary. Pretax operating income for the fourth quarter of 2004 increased approximately 77 percent to 23.8 million, compared to 13.4 million for the same quarter last year. The increase was driven by underwriting income which, for the fourth quarter of 2004, totaled 8.8 million compared to 2.3 million a year ago.

As Mark noted all of our business segments produced an underwriting profit this quarter.

Gross written premiums for the quarter increased 13 percent to 220.2 million versus 194.7 million last year. The majority of the increase in gross written premium was from the Specialty Commercial segment and is mainly attributable to Grocers Insurance. However, no writeback was issued in the fourth quarter at 2003. The acquisition was just finalized at the end of 2003, therefore, 2003 does not have any premium from Grocers Insurance.

The consolidated combined ratio was 94.7 percent in the fourth quarter of 2004, compared to 98.4 percent for the same quarter of last year. The loss ratio improved significantly to 60.2 percent from 69.3 percent and was driven by a combination of improvements in our Risk Management and Excess & Surplus Lines. The Risk Management segment's loss ratio improved to 52.5 percent from 73.4 percent and Excess & Surplus Lines improved to 59.7 percent from 65.2 percent.

The expense ratio for the fourth quarter of 2004 increased to 34.5 percent from 29.2 percent in 2003. We curtailed our pension plan in the fourth quarter of last year, which reduced expenses by almost 4 million. Note also that the renewal rights acquisitions in the fourth quarter of 2003 have put some pressure on the 2004 expense ratio until the earned premium reflects the amount of business enforced.

Investment income increased 5 million for the quarter-over-quarter to 18.5 million and was partially offset by $1 million increase in interest expense. There were no significant impairments in the portfolio.

Our net cash expense for the quarter was 0, because the tax expense of 8.9 million was offset by a reduction in the deferred tax valuation allowance of an equal amount. So in the fourth quarter of 2003, we reduced the valuation allowance by 20.9 million which resulted in a tax benefit of 16.2 million. As of December 31st, 2004, the valuation allowance is approximately $25 million.

For the year ended December 31st, 2004, our net income was 71.8 million or $2.33 per share on a fully diluted basis. These results compared to net income of 109 million for the year ended December 31st, 2003, or $4.40 per share on a fully diluted basis.

The 2003 financial results included realized gains on sales of investment and real estate of $113.6 million pretax. Our pretax operating income increased approximately 156 percent to 55.5 million compared to 21.7 million. The increase was driven by underwriting income which for the year totaled 1.4 million compared to an underwriting loss of 23.5 million a year ago, and by an $11.5 million increase in investment income.

Gross written premiums for the year increased 14.6 percent, just over 900 million versus 788 million a year ago. Excess & Surplus Lines grew almost 10 percent in 2004 while the Specialty Commercial and Public Entity segments grew 48 percent and 41 percent, respectively. The growth for both of these segments is primarily attributable to our renewal rights acquisitions in the fourth quarter of 2003. The Risk Management segment wrote 181 million in premium for the year which is about 16 million less than last year as we have exited nonstrategic products and focused the book to Casualty Risk Management business.

The consolidated combined ratio for 2004 was 99.8 percent compared to 104.2 percent in 2003. The loss ratio improved to 64.6 percent from 70.2 percent, including the net hurricane losses of approximately 19.5 million this year. Exclusive of the hurricane losses, the loss ratio was 61.6 percent. We are pleased with the performance in the loss ratio year-over-year and we had minimal adverse development during the year on prior year loss reserves.

As Mark mentioned, we updated the analysis completed last quarter with respect to our asbestos and environmental loss reserves, and concluded our carried reserves were adequate. In 2004, we settled some of our largest exposures related to both direct and assumed asbestos liabilities.

As a result, we expect the upper end of the range to decrease by approximately 50 million compared to last year; and this will be disclosed in the 10-K.

The expense ratio for the year ended 2004 was 35.2 percent compared to 33.9 percent a year ago. As I noted earlier, the decision to curtail our pension plan favorably affected the expense ratio in 2003. And there were (indiscernible) acquisitions increased expense ratio somewhat in 2004.

Investment income increased 21 percent year-over-year. Our total return for the fixed income portfolio was 3.93 percent as we continue to realign the portfolio. We are comfortable with both the duration and the quality of the portfolio and expect to complete the realignment in the first quarter of 2005. The portfolio is now approximately 1.8 billion versus 1.6 billion a year ago. The unrealized gain in the portfolio at the end of the year stood at 85 million pretax versus 98 million a year ago.

Shareholders equity is now 603.4 million compared to 539.2 million at the year end 2003.

Our leverage ratio as of December 31st, 2004, was approximately 16 percent and we are comfortable with that level.

We expect to file our 10-K in early March. That concludes our prepared remarks. Operator, we are prepared for questions.

(OPERATOR INSTRUCTIONS) Greg Peters of Raymond James.

Congratulations. I wanted to touch upon a couple of items and some of which you covered briefly in your opening comments. I think, Mark Haushill, you are talking about the top end of the asbestos range coming down 50 million. Is that correct?

Yes, Greg, that's correct.

When the numbers come out in the press release, where will Argonaut's reserves be within that range? If I recall correctly it was below the midpoint of the range before. Does this now push your reserve level up to the midpoint of the range or how will that look when we see it?

Greg, I would expect it to be about the same as where it was last year.

How are the recoverables on the asbestos and, specifically, Western MacArthur coming along? Have you had any difficulties in collecting on any of the payments you've made?

Let me answer that one, Greg. We haven't had any more difficulty or success collecting on any of our recoverables relating to A&E of this year than last year. Everything is a challenge. Initially we get paid. Sometimes we have to be in arbitration. We don't usually comment on any one thing; but I think that we can say, accurately, that this year has been just as challenging -- meaning 2004 has been just as challenging getting paid as 2003; but at the end of the day, we get paid.

On the other area of recoverables it's in I guess, just sort of arbitration so to speak, or it's certainly in the court system, is the Los Angeles Metropolitan Transit Authority recoverable. Where are you with at? It seems if I recall correctly from last year's filings, you thought you might have some visibility as we approach 2005 on how that might shape out?

We had thought at beginning at 2004, in fact, I think on perhaps even on this call a year ago that we would be in trial at the end of 2004 and, hopefully, then have some idea of where that was going to come out. During the course of the year, we have in days (ph) been a number of pretrial activities to try and get the court to adjudicate a number of the legal issues, prior to going to trial.

The judge ruled on those before the trial date back in -- I believe early October -- and I would like to get a lot of credit to our general counsel Byron LeFlore and his legal team. Most of -- I think just about every single thing was knocked out in our favor. And some of that is up on appeal. I believe some of that has been rejected by the appellate court. And I think that it is possible that we could have some resolution of that matter at some point in 2005.

I am more positive today than I was a year ago about how we will come out with that; but I would caution that and say that I am cautiously optimistic.

That's a fair assessment. In the context of that issue, you have a finite arrangement outstanding and I know S&P has put out some comments and both before and after this became an issue in the market. I thought maybe you could give us an update on that specific component as well?

There really hasn't been any change to -- you're referring to the adverse loss development cover that we put in place two years ago. The status of that contract really hasn't changed much. And as you know we dedicate over a page and a half in our 10-K every year to describing the arrangement and the purpose of that contract. It does cover us for adverse loss development for both asbestos and environmental exposure, as well as our workers compensation reserves, and any adverse change that may result from the L.A. Metrorail case that we were talking about just a minute ago. But to answer your question, specifically, there has really been very little change from one year to the next.

Is it fair to ask when you say there's been very little change. Has there been very little change in the amount of coverage that you are getting from that contract from last year to this year? Is that a fair question?

Mark, did we seed, what, maybe $1 million to it or -- ?

We seeded a little bit to it. It wasn't much. I'd say, $2 (ph) million, Greg, so your assessment is fair.

And you also said there was on a -- I think you were talking about it, on a consolidated basis minimal reserve development in the fourth quarter. I'm just curious. One of the perennial questions that you seem to always get relate with (indiscernible) asbestos would be the workers compensation component of your research structure. Do you have any color on how that sort of shaped up towards the end of this year?

I'm happy to tell you that we actually had some positive ad for -- some positive development for workers comp particularly at our Risk Management segment. It was just a few million dollars but positive nonetheless.

What accident years did that relate to? Do have any idea?

2001 to 2003.

Then I guess, operationally speaking, you are having the benefit of having come after a couple of, a number of other companies that have come out and talked about softening pricing and diminished premium written expectations for 2005. And I certainly appreciate the color you provided with respect to the pricing in your markets, which are many times different from these other guys. But as I looked towards the 2005 topline growth for your organization, what kind of numbers are you thinking about in terms of benchmarking your performance because I don't think there has been any recent renewal right transactions outstanding that would come and benefit for 2005. So I'm just trying to gauge what I should be thinking about there in terms of topline growth.

There will be some benefit in the first quarter of 2005 from the renewal rights' acquisitions that affected 2004. In terms of additional written premiums. Earned premium, of course, will have the benefit for most of the year. We have not announced any other renewal rights acquisitions although we are always looking and looking to build our businesses and build our market presence in those businesses that we are in. And I expect that we would continue that in 2005.

Having said that, I don't expect our organic growth to exceed 10 percent across the board.

So we should -- you say exceed so it is going to be something less than 10 percent organic.

I think depending upon the business segment it will be 5 to 15 percent.

That's a fair assessment. Congratulations, again, on a good quarter and a good year. Thanks for your answers too.

(OPERATOR INSTRUCTIONS) John Keefe of Ferris, Baker Watts.

Couple of questions. First, Mark, it seems that with strong profitability from the Risk Management segment are you in a position now to unwind on the valuation allowance and unlock some of the equity that resides in that account?

John, I'm not real sure of your question but let me see if I can answer it. To the extent that our results in 2005 are consistent with our expectations, the valuation allowance will be reduced regularly throughout the year. I'm not so sure it's directly attributable to Risk Management. It's more directly related to our performance as a whole.

Having said that, wouldn't you expect, Mark, that by the end of 2005 we would probably have reduced substantial portion of the remaining valuation allowance?

Yes.

That would be a direct credit to equity. Correct?

That is correct.

My second question is, can you talk about the year-over-year decline in written premiums in the Public Entity segment?

Yes, I can talk to that. First of all the fourth quarter for Public Entity is typically not a large volume quarter. In terms of gross. I think, are you asking about the net? The decrease in the net?

Yes.

We canceled a policy in the fourth quarter that we had written in the third quarter. In addition to that, we had purchased some (indiscernible) reinsurance on some business that we had written in the third quarter. So you are getting somewhat of an anomaly with respect to net quarter-over-quarter. If that answers your question.

Thank you very much. Excellent quarter.

Stephen Petersen of Cochran, Corona Securities.

Mine are rather quick. There seemed to be a bit of a sequential pickup in that written premium growth in E&S maybe a bit ahead of certain of my expectations. Where there any particular things going on there? A large account here or there that may have driven that number?

No, it's a pretty diverse book. All fairly small accounts, Stephen, and I don't think there is any one thing. It's kind of going at a fairly steady pace, to be honest.

I want to kind of pick up on Greg's question a little bit, in terms of Risk Management. The margin that we saw, the bit of underwriting margin that we saw in the fourth quarter, do we feel at this point that that is sustainable? Or was there something in there that may push that back above 100 percent as we have until 2005?

I don't think the guys at Risk Management really want to see that go over 100 because I don't think they want to see me, but -- do I think it'll go back over 100? Maybe by a couple of percentage points from one quarter to the next. But it's also equally likely to go down by another couple of percentage points each quarter.

The goal is not to get to just below 100 and coast. The goal is to get below 100 by the into the year and keep going down. My expectation is that the combined ratio of Risk Management will be in line with the other business segments and that's the low to mid-90s.

Remind me. At the end of the third quarter you weren't quite as optimistic that you would get there, maybe this quickly. Didn't that result kind of come in a bit ahead of expectations in the fourth quarter?

Yes, and no. At the end of the third quarter I wasn't quite sure how we would execute in the marketplace in the fourth quarter and our Risk Management team did a very good job in the fourth quarter and you are seeing the results of that.

Then one last quick question. In terms of premium retentions heading into 2005. Any major significant changes in terms of the amount of premium you are retaining or the amount of risk you are retaining in any of the major reporting segments?

That's a very good question. A lot of that depends on the pricing environment on the reinsurance side. Our plan was to continue increasing our net retentions and buying less reinsurance. But as pricing is coming down the reinsurance site -- particularly Property and even Casualty a bit -- it's making us rethink our buying decisions of how much we keep net. So I can't really answer that right now. It's just -- it's going to be a see how we go over the course of the year strategy.

When do your major treaties come up?

Our major Casualty treaties renewed Oct. 1 and January 1 and Property is primarily on May 1.

Mark Lane of William Blair.

With the continued improvement margins in the business looking more predictable on a relative basis, why are are you not providing '05 EPS guidance?

It has been our Company policy since I can remember not to provide guidance; and we have had a long discussion. Our Board has had a long discussion and has concluded that that is not something we want to do at this time.

Because of what? What reason?

There's still a lot of volatility and we would rather let the numbers speak for themselves.

Then, back on the Risk Management. So you had mentioned that there was minimal adverse development for the year but it sounds like there was some favorable development in the fourth quarter. So, was there any other favorable development besides within Risk Management in any of the other segments? E&S, specifically?

No.

Have you gotten paid from Aquitas (ph) on the Western MacArthur plane?

I think I answered that question earlier when we were talking about reinsurance recoverables.

So I interpret that as being a challenging environment, no?

It's in process.

How about net investment income? Was there something unusual in that investment income that explains a 15 percent sequential increase in that investment income?

A couple of things. You may recall, we have a subsidiary, a real estate subsidiary, which is where we report that income. It was a couple hundred thousand maybe almost .5 million of an increase in the quarter. I don't expect that to continue so that is one reason for the anomaly.

Our invested assets are probably up about 85 million quarter-over-quarter. And then there was a small change in some derivative investments that we had of about $900,000. So that would get you about 2.2 of the increase.

Last quick one would be, just to clarify the Public Entity business. One of the reasons for the decline was that, maybe I misunderstood this, but you wrote an account in the third quarter. You bound (ph) an account and then you nonrenewed it in the fourth quarter?

We canceled it in the fourth quarter, Mark.

For what particular -- was it a pretty large account?

It was a fairly large account, yes.

Bijan Moazami of Friedman Billings Ramsey.

I'm interested to find out about the retention ratios at Colony. I want to know that, as the market is softening, how Colony is effective? As the premium volume is moving back from the E&S market into admitted market.

Our renewal rate really isn't changing too much. It is down slightly but keep in mind the renewal rate for an E&S broker business is not that high in the first place and I define that as in the 50 to maybe 60 percent range.

I'm actually, Mark, not interested in renewal rate. I want to know how the opportunity is changing.

I was just about to get to that. Actually, our submission count all through 2004 continued to increase and is still increasing. So we are getting more opportunities today, ironically, than we were a year ago. Now we are all fighting for them. When I say we, I mean our Company and our competitors. But we are getting a lot more opportunities to quote business today than we were a year ago.

Why is that? Why you think it would be the case because (technical difficulty) was suggesting for instance that the retention rates were dropping significantly.

Well, I don't know that we are necessarily in the same -- even though we're both E&S companies I don't think we'd necessarily compete for the same business. So that perhaps could explain part of it. Also I think that as we continue to grow year-over-year, our marketplace presence continues to increase. And I think that that has allowed us to increase our submission activity.

But as I said, just because the submissions are going up doesn't mean we are necessarily having the same percentage success. We are having to fight pretty hard for the business.

Thank you. Congratulations. Great quarter.

Kenneth Billingsley of BB&T.

I have a question on your Specialty Commercial Lines. The combined ratios up, with the loss ratio and expense ratio both up. Is a lot of that change due to a change in the mix of business?

Ken, are you looking at the quarter? Or are you looking at year-over-year?

I'm looking at the quarter, specifically.

The Specialty Commercial expense ratio has been up a little bit this year, primarily, as I mentioned earlier due to renewal right steel. The earned premium isn't quite as critical mass or at an enforced level.

Also I think we had a couple of accounting benefits at the end of last year that drove down the expense ratio slightly.

At the end of the year -- that's correct -- at the end of the year, Ken, we typically review all of our accruals. Whether it be assessments, boards, bureaus whatever it is and true them up. Second entry, funds, etc. and true them up to what we fully expect and what we've been billed. So I really look more to the expense ratio year-over-year than I do for the quarter, albeit up in Specialty Commercial, again, primarily being driven by the renewal rights deal.

So it's more of the 2003 is a little bit lower and probably -- just on a quarter to quarter basis? On an LTM basis, it's performing in line?

Yes.

And getting back to retentions. Seems like some of the other peers, their retentions are up and yours are actually down again. Is that just from these renewal rights and as they are going to start earning through in the future and you talked about your plans that you may actually even -- you'd planned on increasing retentions but that that is going to change. Is there a business mix change here that you have a competitive advantage there?

I don't recall saying that our retentions for Specialty Commercial were down.

In general, not Specialty Commercial.

Well in general, I think our retention level has remained pretty flat. The only place it's down slightly is on the E&S side. But, again, that is just down slightly. I think most of our retention levels have been pretty constant.

Looks like retention ratios in '03 are about 75 percent and in '04 were 74 percent, when a lot of (indiscernible) peers, this number actually increased. I was just trying to get an idea of what you're -- how you're able to do that? And what your plans were, going forward?

I think our plan going forward, again, it will depend upon the marketplace but I don't see our retention ratios changing that much up or down over the next year.

I mean, we're talking about 1 percentage point.

My last question on the investment income, you'd said 2.2 million of that -- was that of the 18.5 million? It was not -- you're not expecting that to be repeatable?

About 1.5 million is not repeatable, Ken.

Of the 18.5. Correct?

Yes.

Greg Peters of Raymond James.

I had a couple of follow-ups if you don't mind. First of all, we've seen a number of other companies that had exposure to the third quarter hurricanes of last year come out and revise their estimates and I don't think you have really indicated during the course of the call that there has been much change. I don't think you even specifically addressed it. But I'm curious about that and maybe you could provide some color on how much of your reserve for those events have been paid out so far, etc.?

Greg, actually, I don't recall off the top of my head how much has been paid. But the 19.5 that we recorded at the end of the third quarter is still holding. Right, Mark?

In fact, it may be a little more than we need but it's too early. In our opinion, it is too early to tell, and we certainly (indiscernible) be looking to adjust our reserves downward at this point.

When do you expect that is going to be entirely paid out? Is that going to happen, say, over the next six months or is this a process that could extend for a year or longer?

I would think it is going to go through at least through the end of this year.

I was also curious, given the successful capital raising (ph) that you did last year, specifically, as it relates to the trust preferred securities and I think you highlighted where your capital or surplus that is in the insurance companies, where that stands right now. I am just curious about what the board's view and what management's view is towards shareholder dividends, etc. And maybe you might tie that in with just a snapshot of where we are on a risk-based capital ratio, etc.?

Let me answer the first one. As I think I have said publicly before, shareholder dividend is something that we said we'd would revisit in the second quarter of 2005. That's next quarter. Or I guess, technically, that's two quarters from now. And I expect that we will be revisiting that discussion in the second quarter of 2005. But I think that that is probably the right time to talk about it. As respects risk-based capital or statutory risk-based capital, we are still going through the calculations but we would expect it to be well above the 200 threshold that we have talked about on other calls. But we won't have that number finalized for another several weeks.

Well Mark, given the fact that you raised a substantial amount of not only trust-preferred capital but -- if you want to call it that -- and equity capital, where are we from a capital perspective? Do you anticipate the need for additional capital or having to go to the public markets in 2005 or do you think at this point where we are in the cycle that you are adequately capitalized or how would you characterize that?

Given what we have on our plate right now, I'm very comfortable with our capital position.

I don't want to say absolutely because you don't know what opportunity is going to present you of the course of the year but given where we are today, I'm very comfortable with our capital position and the ability of us to write the business that we plan to write this year relative to that capital.

This is Mark. In the 10-K, we will discuss how much capital we have contributed to each of these subsidiaries.

Thank you for those answers. I guessed one or two cleanup questions. Can you just remind me and I know you answered this question on the third quarter call and I think the answer -- I think I remember what the answer is -- but just could you remind me what your exposure was, if any, to the PSA situation and the contingent commission situation that relates to the large brokers?

We have not signed any PSAs with any of the large brokers.

And then from a contingent commissions standpoint?

Well, I mean we have contingent commission agreements across the board just as everyone else does. They are, in some cases, related to production and in other cases related to profitability -- usually profitability.

The final topic that I was hoping you might cover would be the Trenwick (ph) recoverable. Last time we checked, I think was on the third quarter conference call, you said they continue to be current in paying down their recoverable. What is the latest update on that as it relates to the end of the fourth quarter? And could we see the gross recoverable actually come down when we see the numbers come out in the statutories for 2004?

Greg, let me answer the second part. I don't think you'll see a significant decrease in the amount due us from Trenwick year-over-year. Realize, schedule us is how we allocate (indiscernible) is an art not a science but I wouldn't expect that to decrease significantly.

And yes we are current in being paid.

Ladies and gentlemen, this does conclude your question and answer session. I would now like to turn the conference back to your host for today's call, Mr. Rod Sargent.

Thank you all. I'd like to also thank Mr. Watson and Mr. Haushill and thank all of you for your calls and your questions this morning. And we look forward to discussing next quarter at that time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.