Argo Group International Holdings Ltd (ARGO) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2005 Argonaut Group earnings conference call. My name is Jean, I'll be your conference coordinator. [OPERATOR INSTRUCTIONS.] At this time, I'll turn the call over to your host, Mr. Mike Russell. Please go ahead, sir.

Thank you, Jean, and good morning. Welcome to Argonaut Group's 2005 second quarter earnings conference call. With me today is Mark Watson, President and Chief Executive Officer; and Mark Haushill, Senior Vice President, Treasurer, and Chief Financial Officer. We are pleased to have the opportunity to discuss with you the Company's results for the quarter, as well as some of its ongoing initiatives. Mark Watson will provide an overview of the Company's performance 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 would like to inform you that this conference call is being recorded and that all participants, presently, are in a listen-only mode. Following management's discussion, we will open up the conference call for questions. Let me remind everyone that as a result of this conference call, Argonaut Group management may make comments that reflect their intentions, beliefs and expectation 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 SEC, including Argonaut Group's Form 10-K and Form 8-K the Company filed this morning, which contains the news release announcing 2005 second quarter results. Finally, Argonaut Group management may make references during the call to operating income, which is a non-GAAP measurement of financial results.

With that, I would like to introduce our President and Chief Executive Officer, Mark Watson. Mark?

Thank you, Mike, and good morning. I appreciate you joining us today for our 2005 second quarter report. After my opening remarks, our Chief Financial Officer, Mark Haushill, will discuss the financial results of the second quarter in more detail before we open the call to questions.

The second quarter produced record numbers in several areas of our businesses. Underwriting profit was up more than 70% and gross written, net written, and earned premiums set new highs. I'm pleased that our premium growth was generated both organically and from our recent strategic activity within our E&S segment, which I'll talk more about later. Our overall combined ratio improved to 94.9%, compared to 96.7% in the second quarter a year ago. During the second quarter, our E&S segment produced a very respectable 88.7% combined ratio, notwithstanding our strategic activities in that segment. Our balance sheet remains strong, with assets of 3.2 billion.

During the quarter Standard & Poor's upgraded Argonaut Group's financial strength rating to A minus, and elevated the Company's counterpart credit rating to investment grade level. Also during the quarter A.M. Best affirmed our A rating. I might mention, we are proud of the positive ratings, for which our team has worked hard to earn, and while I'd like to see it a little bit higher, we're making progress. Each of our four segments produced improved operating profits over the comparable quarter in 2004 with, I would say, somewhat mixed premium performances, meaning some of segments have gone up and some have come down slightly with some competitive pressure, but we've been able to keep our margins across the board. And let me review each in a little bit more detail.

Once again, our E&S segment turned in a very strong performance, both in terms of premium growth and increased profitability. Our top line -- our gross written premium grew by 42%, to approximately $157 million for the second quarter. Let me talk about where those improvements came from. First, we finally got our renewal rights acquisition of the Fireman's Fund Interstate business in Denver off the ground. This ought to give us a very strong presence in the Rocky Mountain area, and in addition to adding to our geographic presence, it really broadens our distribution network and our product portfolio in some of the key markets and product lines that we've been focused on. It gives us a third office. It gives us a chance to bring in more talent without competing for that talent in some very populated areas like Richmond and Scottsdale where our E&S operations are primarily headquartered.

Also, we added $11 million in additional gross written premium from our second E&S operation that we started, which we call Argonaut Specialty. That finally got going in earnest at the beginning of the second quarter, and we're, frankly, very pleased with the rate in which our operation has ramped up. And I think that, given Argonaut Specialty's focus on slightly larger accounts through very select producer relationships that we'll have a very good complement to our existing E&S business over the long run.

Our Select Market segment delivered another consistent and positive performance as well. We had higher gross written premium, net written premium, and earned premium for Select Markets, as well as strong underwriting and operating profits. Select Markets now, in the second quarter, has become the group's second largest business segment, again, we think this is a good place to be. It's smaller accounts, and that's where we've been allocating our capital. Gross written premium for the quarter grew to $58 million. Again, remember that Select Markets is the industry leader in a number of small niche markets, including independent grocery stores, dry cleaners, mining operations, and other smaller commercial businesses and institutions.

Let me talk for a minute about Risk Management and our Public Entity segments. While both finished the second quarter with improved operating results, our focus on profitable underwriting really caused us to let go some business for competitive pressures. As you've heard us say in the past, we're more focused right now on underwriting profitability and keeping our margin, but that has led to some pressure on the top line. But given our diverse product mix within the group now, I think we can afford to focus more on margin than on top line. And, as you hopefully saw in our earnings announcement, operating income for both segments improved during the quarter. Risk Management improved from $4.5 million to $7.7 million quarter-over-quarter. And for Public Entity, the second quarter operating income improved to $2.1 million, from just under $1 million a year ago.

Let me conclude my remarks by commenting on the current market conditions a little bit more broadly. While a general softening of rates continues this year with larger accounts being impacted the most, that dynamic continues to bode well for our specialty operations, the majority of which serve niche markets comprised of small- to mid-sized businesses. During the second quarter, rates in our two largest segments, Select Markets and E&S, were relatively flat overall. And as a result, we continue to see ample opportunity in this part of the market cycle to grow and generate positive returns, particularly as we continue our transition to more of a smaller niche player.

Now, I'd like to turn the call over to Mark Haushill, our Chief Financial Officer, and let him talk more specifically about the financial results for the quarter.

Thank you, Mark. Good morning. I hope all of you had an opportunity to review the press release. As Mark mentioned, the second quarter of 2005 produced positive results, and I'll take you through the financial results for the quarter and the year-to-date in a little bit more detail.

For the quarter ended June 30th, 2005, our net income was $23.7 million, or $0.76 per share on a fully-diluted basis. These results compare to net income of $17.9 million for the quarter ended June 30th, 2004, or $0.58 a share on a fully-diluted basis. Our net income this quarter, versus the comparable quarter of a year ago, increased 32%, and was driven by increased underwriting profitability, as well as investment income. I'll talk more to each of those components in the course of my prepared comments.

Pretax income from operations for the second quarter of 2005 increased approximately 32% as well, to $24.2 million, compared to $18.4 million for the same quarter of last year. The increase was driven by a 71% increase in underwriting income, to $8.7 million for the quarter, from $5.1 million in the same three months ended June 30, 2004. The underwriting performance improved in all four segments, as Mark mentioned, with Excess and Surplus Lines producing an 88.7% combined ratio. Pretax income from operations also benefited from a 25% increase in investment income this quarter, compared to the same quarter of 2004. And I'll discuss cash flow in the portfolio a little bit later.

Gross written premiums for the quarter increased 20%, to $264.9 million, versus $221.6 million last year. As Mark mentioned, the majority of the increase in gross written premium was from the Excess and Surplus Line segment, and is attributable to the renewal rights acquisitions we discussed last quarter in Argonaut Specialty. The renewal rights acquisition in Denver contributed about $33 million in gross written premium for the quarter. The consolidated combined ratio was 94.9% for the quarter, compared to 96.7% for the same quarter of last year. The loss ratio improved to 58.4%, from 61.3%. It was driven by improved loss ratios across all segments of our business.

For the quarter we experienced favorable development of $6.9 million on prior accident years, which was primarily driven by the Risk Management and Excess and Surplus Lines segment. The favorable development does include a $2 million adjustment to our estimate of ultimate losses in our Excess and Surplus Line segment related to the hurricanes last year. Our 10-Q will discuss this in more detail.

The expense ratio for the quarter increased to 36.5%, from 35.4% in the second quarter of 2004. As we discussed last quarter and in previous quarters, the expense ratio experiences pressure when we integrate renewal rights acquisitions, as the premium earned is not reflective of the amount of business in force. Investment income increased $4 million this quarter, compared to the same quarter of last year, and totaled $19.7 million. The increase is due to positive cash flow, higher interest rates, and the issuance of $46 million in trust preferred securities in the last half of 2004.

Cash flow from operations improved $43.7 million for the quarter ended June 30, 2005, compared to the same three months of 2004, and is due, basically, to three factors -- first, improved underwriting results that we've talked about; secondly, an alternative minimum tax refund received this year; and, lastly, during the second quarter last year, we settled a Western MacArthur lawsuit for approximately $29.8 million, and that negatively impacted cash flow in that quarter. Interest expenses increased this year, as interest rates have risen, coupled with the fact that we had issued the trust preferred securities last year. Our net tax expense for the quarter was essentially $0, because tax expense of $8 million was offset by a reduction in the deferred tax valuation allowance. During the quarter we reduced the valuation allowance by $8.1 million, and at June 30, 2005, the valuation allowance is approximately $8 million.

For the six months ended June 30, 2005 our net income was $49.7 million, or $1.59 a share on a fully-diluted basis. These results compare to net income of $36.2 million for the six months ended June 30, 2004, or $1.18 per share on a fully-diluted basis. Pre-tax income from operations for the six months of 2005 increased approximately 38%, to $47.3 million, compared to $34.2 million in the same six months of 2004, again, the increase being driven by underwriting income, which for the six months ended, totaled $15.8 million, compared to $8.3 million a year ago, and by a $9.1 million increase in investment income.

Gross written premiums year-to-date increased 11.8%, to $471.6 million, versus $421.7 million for the six months ended last year. Excess and Surplus Lines grew almost 23%, while Select Markets grew approximately 16%. The consolidated combined ratio for the first half of 2005 was 95.3%, compared to 97.3% in 2004. The loss ratio improved to 59.1%, from 61.9%, again, with each segment improving year-over-year for the six-month period. Year-to-date, we've seen favorable developments relative to prior-year loss reserves of approximately $12 million. The majority of that development was in the E&S segment and in Risk Management segment, and, again, our Q will have some additional details on that.

The expense ratio for the six months ended June 30, 2005 was 36.2%, compared to 35.4% in the same six months of 2004. As I noted earlier, the renewal rights acquisition and Argonaut Specialty commencing operations, put some pressure on the expense ratio for the first six months of 2005. Investment income increased 30% for the first six months of 2005 compared to 2004, due to the factors I noted previously in the quarterly overview. Our annualized pre-tax yield on the fixed income portfolio was about 4%. We're comfortable with both the duration and the quality of the portfolio, and have now completed our realignment of the portfolio. The portfolio is now approximately $1.9 billion, and it increased 6% in the first six months of 2005. The unrealized gain in the portfolio at June 30, 2005 stood at $82 million, versus $84 million at year end. The numbers I just cited, relative to the unrealized gains in the portfolio, are not tax affected.

Shareholders' equity is now $658 million, compared to $603 million at year end 2004, and represents an increase of 9%. Fully-diluted book value has increased accordingly, to $21.23 a share at June 30th, 2005, from $19.68 per share at December 31st, 2004. Our leverage ratio, as of June 30th, 2005, was approximately 15%. We're very comfortable at that level. Recall, our leverage consists primarily -- or consists of variable-rate trust preferred securities aggregating $113.5 million, and is therefore subject to interest rate volatility.

That concludes our prepared remarks. Operator, we're ready for questions.

Thank you. [OPERATOR INSTRUCTIONS.] We'll take our first question from Mr. Greg Peters of Raymond James & Associates. Please go ahead, sir.

Good morning, congratulations on a good quarter.

Thank you.

I had a couple of questions. First, just a big picture question. Given what -- to me was a surprise result in terms of top line. In the Excess and Surplus Lines business, I thought maybe you could take this opportunity to provide a little bit more color on -- on exactly what you're picking up through the renewal rights acquisition of Fireman's Fund, and speak to how it's changing the profile, either in terms of average premium or policy limits or whatever measures you're look at in terms of changing the profile of your total E&S book of business.

Most of what's driving the change in our top line for E&S, or I should say, most of the non-organic growth is driven out of the renewal rights acquisition from Interstate. Most of that business, Greg, looks very much like the business that we were already writing through Colony, which is why we were interested in picking up the book. A lot of it is smaller binding authority account business. The average premium is slightly larger. The average premium for our book prior to this acquisition for the small binding authority business was about $2,500. The average for this book is closer to $4,500.

The policy limits, though, aren't materially different. About two-thirds of this book that we're looking at is transportation related. The other third is what they referred to as, kind of, multi-line which are, really, the smaller general liability and property coverages that are really the backbone of the small binding authority business at Colony. Of the transportation business, a substantial portion of that is what we refer to as garage business, which we were already in before. Again, that's part of our interest in the book of business.

So, the only real change in the profile of our E&S business going forward is a slightly larger emphasis, or slightly larger product offering, on the transportation side. But again, all small-account driven. And while we've picked up some new producers along the way, there was also a fair amount of producer overlap. And so now we're expanding our product offerings to those distribution parties.

In the transportation component of this, is it a lot of liability? Or is there some -- a property component, or can you give me further color there?

Well, it is mainly liability-driven. I'll tell you what it's not. It is not long-haul trucking. It's small -- it's small fleets of trucks that sometimes are attached to other business policies that we write. It's car dealerships. There's not as much moving wheels in this as you might think. Again, it's very reflective of a lot of the business that we're already writing at Colony to begin with.

Okay. That's fair enough. And then I ask you about this virtually every conference call. And I'm sure you look forward to the day when you no longer have to answer this question. But I thought you might provide us with an update on the Trenwick recoverable and/or the Los Angeles Metropolitan Transit Authority recoverable? I think in the first quarter conference call, you expressed some optimism that you might get one of them resolved this year. Where are we with those?

Well, I thought about putting that in my opening remarks, but then you couldn't ask the question. We have made some progress on both fronts. And I think it's very likely that we will have a settlement on the L.A. Metro Rail before the end of the year. In fact, I think it's likely that it will happen sometime during the third quarter. I think it's also very likely that we will commute all of our balances with Trenwick before the end of this year. We are working with them, but I think at this point, it's premature to try and guess what those outcomes will be. Clearly, we wouldn't do it if we didn't think it was in the best interest of the Company. But I think that we will get those resolved this year, and I think that that will have a positive effect on the Company.

When you speak about a prospective resolution or commutation with Trenwick, should I -- should we presume that this is going to be like other typical commutations, where there is a near-term hit to earnings because of the present value of the reserves, and then a positive back end, if you will, hit or benefit to investment income?

Well, that's usually the case in a commutation. I suspect that will happen here, but I think it's really premature to try and speculate on what the numbers would be. What I'd rather do is, assuming that we conclude this prior to the end of this quarter or next quarter, I think we would issue an announcement so that everyone could see the financial impact, positive or negative.

Okay. That's fair enough. And then -- and I know you talked a little bit about the competitive markets and the willingness to exercise underwriting discipline with respect to the Public Entity and the Risk Management areas. But as you were talking about it, I actually pulled up some of the news releases, and there seems to have been a lot of press releases coming from Trident about new associations, new employment, new people brought on board, and stuff, a new association with the Public Entities of America. And I'm just curious how I should -- given the slew of press announcements that have come out of that subsidiary, I'm wondering how I should read that in the context of what's happened here this quarter?

Well, I think I might have expressed the pricing environment more strongly than I should have. The pricing environment in Public Entity hasn't changed that dramatically. I think, for the year, rates are down across the board for Public Entity in the mid-single-digit range. What we've seen are more entrants into the marketplace. And we've seen more aggressive pressure with some of our distribution partners and -- or I should say, distribution agents who we thought were partners that are far more focused on price than they are on being our partner. And so as we realign our distribution platform, I think that is probably having more of an effect on our top line and Public Entity than, actually, the pricing environment. So, what you're seeing with a lot of the initiatives that we've announced are a re-investment in our distribution platform, which, I believe, will start paying dividends later this year, in the form of either a flat top line or, perhaps, some growth in our top line in the second half of the year.

Was there -- you say distribution partners. Was there one or two in particular that were troublesome, or is it a group of them that were presenting problems for you?

It was primarily one in the Southeast that is focused on acquiring a substantial number of brokers to keep their earnings going, or at least that would be my speculation. But I'm not going to say anymore.

Thank you, very much for your answers.

And we'll take our next question from John Keefe with Ferris, Baker Watts. Please go ahead, sir.

Yes, good morning, Mark and Mark, and excellent quarter. I've got a couple of questions about the Excess Surplus Lines operation. With respect to Denver, Mark, are there any timing issues? Are there any seasonal issues in terms of premium renewals?

Well, there aren't really any seasonal issues. It looks like a lot like our organic book in Colony. The timing issue and, perhaps something I should have said in answering Greg Peters' question a minute ago, recall that I've said repeatedly that whenever we enter into a renewal rights acquisition, there's a timing lag between written premium and earned premium. And, of course, when we hire a number of employees along with one of these acquisitions, we don't necessarily have enough revenue to cover the expense on day one. In fact, while the expense ratio was a 30.5% for the quarter, that's a little higher than it would otherwise have been. The effects of both the Denver renewal rights acquisition and the start-up of Argonaut Specialty increased our expense ratio by about 1.5 points, or to say it differently, our expense ratio right now is running at about a 29%, excluding some of the strategic activities.

Yes. I see, Mark. With that $33 million number -- of course, written premiums coming out of Denver -- is that a pretty good number to use on a go-forward basis?

Well, I'll tell you what, market's kind of all over the place right now. But I think that if the market conditions remain fairly stable for the next nine months, that that's probably a fairly good indication of where we'll be for the next few quarters, in terms of additional growth coming out of our Denver office. If I was going to hedge and be a little conservative, I think it might drop down to $20 or $25 million. But I do think we'll see appreciable growth over the next few quarters.

As I recall, subject premiums were approximately $200 million.

That's correct. And I think what I said on our last call, sorry, I may have said it since then. But of that, typically, we budget to write about 50% of the business, which would be $100 million. Again, we didn't start this until the second quarter. So, that's about $75 million for this year.

Right. Mark, with regard to the new Argonaut Specialty operation in New York, it looks like pretty good production numbers. Do you anticipate that ramping up as well? And could you also give us some color or feel for the types of risks that Argonaut Specialty is writing and what Kevin Brooks and his crew are looking for? And what they're not looking for?

Sure. I think that we'll see a little bit more ramp up. We're not trying to write a lot of business, but rather, we're trying to write profitable business. So, I don't think you'll see too much more premium growth out of Argonaut Specialty. Our focus there is to write slightly larger accounts than what we're writing at Colony. And one of the things that Dale Pilkington, the President of Colony, and I recognized a couple of years ago -- or I should say a year ago -- is that we've got a really good distribution platform for the fairly small accounts. And while we write some larger accounts through Colony, it's a little bit different underwriting process and a little bit different distribution platform.

And so the thought was to hire Kevin Brooks and see if we couldn't attract some very talented underwriters that were focused on this next size up, with a little bit different distribution platform. While Colony primarily underwrites through independent wholesalers, a number of the distribution partners of Argonaut Specialty are some of the larger national wholesalers. As far as account size or risk appetite, the policy limits aren't really that much different than at Colony. They're typically $1 million or less for the primary casualty, and, then, property depends on the size risk. But the average premium there is, again, it's not that much bigger than Colony.

It's $25,000, on average, for casualty. It's $25,000 for property, and probably $75,000 for -- excuse me, $25,000 for excess casualty, and $75,000 for general liability. So, it's not that much more than what we're doing at Colony. It's just that next step up.

Okay. Very good, thank you.

And, John, this is Mark Haushill. I do think that business has a little bit more seasonality to it with respect to January 1 and July 1 renewals. So, you may see a little bit more premium in the third quarter.

Understood. Thanks.

[OPERATOR INSTRUCTIONS.] We'll take a question from Mark Finkelstein with Cochran, Caronia. Please go ahead.

Hi. Good morning. Couple of quick questions. A lot have actually been covered. But just wanted to know, in terms of the renewals that came up on the Interstate business, what has been your level of success in renewing, based on one quarter of data?

Well, I would say right now, that we're writing slightly more than we expected to. Whether that will continue for the next three quarters as we go through the whole book, I don't know. But right now, we're doing a little bit better than I thought we would.

Okay. Perfect. And, then, just a couple follow-up questions on Argonaut Specialty. Understand, kind of, the account sizes. But in terms of the actual specific classes of business that you're writing, transportation, et cetera, is it essentially a look-alike to Colony with just larger account sizes, or are you moving into different areas?

Well, that's a tough question to answer, Mark because the E&S area is so broad. A lot of what we're writing mirrors what we're doing at Colony, except that it's slightly larger. But there are also some new classes of business, as well. I would say that it's more of a one-off operation than we are trying to just focus on any one class of business.

Okay. And, then, I mean, just going back and, kind of, call it history, you typically reinsured a fair amount of new business, kind of, in new areas, i.e. -- a la Public Entity. And just looking at the reinsurance ratios in the E&S business, it looks like they’re relatively consistent -- actually retention might have even went up a little bit on a sequential quarter basis in both Interstate and Argonaut Specialty. Can you just add a little bit of color on how you think about reinsurance with those two new businesses?

Keep in mind, right -- you're right, we do think about reinsurance a lot when we're starting new operations. Fortunately, we're substantially larger today than we were when we started our last operation in terms of amount of premium written at the group level. And so, some of the earnings volatility issues that we worried about when we started Public Entity don't exist today, in part because of the success of growing our core E&S operations and other parts of the group. So, we have not entered into a quota share for the lower layers like we did when we started Public Entity. And, in fact, we're taking the same amount of risk on an excess of loss basis as we did with Colony, for both the start-up of Argonaut Specialty and our transportation business.

Okay. And, then, just a final question on specialty. You wrote $11 million in the quarter, it sounds like. I guess, how big do you see that book coming in 2005? If you have any ideas around that?

Well, that's a really good question. I'm not sure how much faster we can ramp up. The problem right now we have with Argonaut Specialty is not risk selection or getting good submissions in the door, but rather, having enough people to handle the business. Frankly, there are more producers that would like appointments with Argonaut Specialty than Kevin Brooks and his team has the bandwidth to give out at this point. So, I would say that our top-line growth is, right now, a function of how quickly we can add additional staff to support the demand for our products, than the competition in the marketplace.

Okay. And, then, just a technical question for Mark. What was the book value per share ex-FASB 115? You can follow up with me if you want.

Yes, I'll follow up with you on that. I just don't want to do math on the phone.

Okay. Perfect. Thanks, guys. Nice quarter.

Thank you.

We'll take a follow-up question from Mr. Greg Peters of Raymond James & Associates.

Yes. A couple cleanup things. And I apologize, you may have covered one or two of these in your preceding comments. First of all, reserves in the quarter. Any releases or net additions? And, maybe, you could give us an update year-to-date, too?

What I mentioned before in my comments, Greg, there was about $6.9 million of favorable development during the quarter.

Okay.

Some of that being driven by a re-estimate of our ultimate losses in the E&S segment relative to the hurricanes.

From last year.

Right.

Yes, I guess, for last year. We've seen favorable development in the Select Market segment somewhat. And, specifically, in the Risk Management segment for the six months. So, just to summarize, there's a little over $12 million of favorable development for the year, and about $6.9 million for the quarter, virtually across all segments, but the primary drivers being E&S and Risk Management. Does that answer your question?

Yes. What were the quarter and year-to-date comps for last year? In terms of reserve additions and/or releases? Do you have that number? We can take that off-line.

I can follow up. I'm fairly confident it was flat or slightly negative last year.

Okay.

Just very slightly, like, less than a million.

Okay. And, I guess, generally, big picture item, have you obviously, your reserves are coming down for prior years. Where are your loss picks this year relative to where they were last year across each of your business units? Have you -- are they a little bit higher this year? Or what's your viewpoint in reserving on the current accident year?

Our loss picks have really not changed much this year over last, Greg, and in 2004 has developed favorably. And indications are that what we're booking to currently is sufficient.

Okay.

Yes, our -- the rates that we're using today are -- for the first quarter they were slightly up in most of our lines of business and now they're flat to slightly down. So for the first half of the year, we're pretty much flat compared year-over-year.

Okay. That's okay. Also, switching gears, going back to the E&S. I think I've seen some filings of another E&S company that is in the process of going public and taking on those new responsibilities. And I think some of the managers of that particular company used to work at Colony or some of your subsidiaries. And I was wondering if you've seen any impact of as they've developed their business plan on your business.

No. The biggest factor that we've had has been the admitted players coming back into the E&S market place.

Okay. So, this particular company has not had any success at taking your producers or anything of that nature?

Well, they're in business and they're a competitor, just like every other E&S operation, and that's probably all I'd like to say.

That's fair enough. And then just a cleanup question. Asbestos. Are you going through an annual review process that will be completed by the end of this year? I mean, are you doing an annual review this year? Or has there been -- was there any development on the asbestos front in the second quarter? Can you just give us some color there, please?

We did not -- Greg, we did not see any development in the second quarter. We continue the same process that we've been doing for the last several years, which is to look at our asbestos and environmental reserves thoroughly twice a year. We look at them really hard at the end of the second quarter, which we're in the process of doing right now. And then we report the results of that study upon the conclusion. Sometimes that's slightly before we report the third quarter results, or sometimes it's in concert with the end of the third quarter. And then at the end of the year, we go back and true it up to make sure that there hasn't been any material change.

Okay. Great. Thanks for clarification there.

We'll take our next question from Mark Finkelstein from Cochran, Caronia. Please go ahead.

Hi. Just a quick follow-up. Kind of back to the reserving question. How should we think about how you're setting loss picks on Specialty and Interstate, given that they're new businesses? And, I guess, I'm just thinking about, kind of, the 89% E&S combined ratio. Should we expect that to increase as all else held at equal, based on higher loss picks on those two businesses?

Well, I don't think we'll see higher loss picks on the Denver business. Again, it's very reflective of the business that we're already writing. And remember, while this is new business to Argonaut, it's not new business, in the sense that this book has been together for awhile and has a fair amount of actuarial data. And that had a lot to do with why we were interested in the business. I think you've probably heard me say before, Mark, that one of the interesting -- or one of the opportunities in a renewal rights transaction is you get to look at a whole lot of business and pick the business you like most. And usually that's the business that looks the most likes yours. And it tends to perform more like your renewal business than new business would coming on your books.

Right.

As for Argonaut Specialty, again, we're not straying too far from what we were doing in Colony, but on average, the accounts are slightly larger. I think you will see us take a fairly conservative view on loss picks. But given the size of the book, relative to the E&S book as a whole, I don't think you're going to see the overall combined ratio for E&S change, certainly on the loss side.

Okay. That answers my question. Thank you.

Mark, this is Mark Haushill. It's about $1.70 a share, is the unrealized gain on book value.

Okay. Perfect. Thank you.

And I see no other questions at this time. I'll turn the call back over to Mr. Mark Watson, Chief Executive Officer, for closing remarks.

Thank you. I would like to just say a couple of other comments in closing. First, I'd like to thank our employees for turning in another great quarter. I really appreciate all of their hard work and effort. And I'd like to think that we can anticipate the same for the remainder of 2005. Like everyone else in this sector, we continue to assess and react to the direction of the markets we serve, and we'll continue to pursue opportunities that provide our shareholders with consistent, predictable revenue growth and profitability over the long-term. And while the last couple of years aren't necessarily a trend, we have become a little bit more predictable in how we're running our business. We're very focused on bottom-line performance, and we are very focused on keeping that discipline as the marketplace changes over the next few quarters. And again, I thank everyone for participating on the call today.

Ladies and gentlemen, thank you for joining us on the call. You may now disconnect.