Argo Group International Holdings Ltd (ARGO) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to the PXRE Group Ltd. fourth quarter 2005 earning results conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Jamie Tully. Please go ahead, sir.

Thank you. Representing the Company today are Jeff Radke, President and Chief Executive Officer, and Bob Myron, the Company’s Chief Financial Officer.

Before Jeff begins, I will read the following safe harbor statement. Statements made during the conference call that 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 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 PXRE’s annual report on Form 10-K and other filings with the SEC. We refer you to those sources for additional information. Lastly, I would like to point out that the remarks made during the conference call are based on information and understandings that are believed to be accurate as of today’s date, February 23, 2006.

Because of the time sensitive nature of this information, it is PXRE’s policy to limit the archived replay of this conference call to a period of 30 days. The call is the property of PXRE. Any distribution, transmission, broadcast or rebroadcast in any form without the express written consent of the Company is prohibited. With those announcements complete, I’ll turn the call over to Jeff Radke.

Thank you, Jamie. Good afternoon. On this call, I’ll review the impact of the 2005 storms on PXRE’s book value. Then I will discuss the region’s further development; why we believe that our current estimate for reserves are adequate to cover our ultimate liabilities relating to the 2005 hurricanes. I’ll also review our risk management program and the steps we have taken to reduce the risks in our reinsurance portfolio. Finally, I’ll discuss our decision to explore strategic alternatives for the Company.

As you saw in our release, we expect to report a net loss before convertible preferred shared dividends of $446.5 million for the fourth quarter of 2005, primarily as a result of losses from Hurricane Katrina, Rita and Wilma, with a projected $80-plus billion in industry-wide insured cat losses from these storms. We all know that 2005 was a very unusual year in terms of the size and scope of the industry loss. The combination of wind and extensive flooding damage from Hurricane Katrina significantly increased the difficulty of estimating ultimate losses from the storms. Many in the industry have increased their loss estimates as mature data continues to flow in for these events. PXRE was not immune from this. All that said, we are extremely disappointed with our results.

We had shareholders’ equity of $465.3 million as of December 31, 2006. And, on a fully diluted basis, the book value per share was $6.01. Thus, despite the recent rating agency actions, we remain financially sound.

On the most general level, our fourth quarter loss development arose out of the loss estimates provided to us by our clients, particularly those in our retrocessional and cat on direct and facultative business lines, which are predominantly made up of [inaudible] clients. As you all know, as a catastrophe and retrocessional re-insurer, we are heavily dependent upon the estimates of our clients to develop our own loss estimates, and the information came in slowly. In the aftermath of Katrina, Rita and Wilma, we developed our loss estimates based on a combination of top-down modeling that incorporated a combination of proprietary and third-party catastrophe models supplemented by a contract-by-contract review of affected contracts and discussions with our clients. Unfortunately, when we developed our estimates, we had limited actual claims notices, and a number of those that we did receive were precautionary loss notices that did not include any estimate of the loss. As a result, our previous loss estimates had to be more heavily reliant on catastrophe modeling, underwriting judgment and our own on-the-ground contact than actual claims notices and other hard data.

Many of our clients have substantially increased their prior loss estimates or provided us with claims notices that exceeded the loss expectations that we had based on our modeling and underwriting review. Our clients have cited several factors behind the development, including the overall difficulty in adjusting claims related to the storms and coverage uncertainty surrounding flooding. However, the most significant issue has been slow-reporting and unexpected loss in retro and cat on direct and facultative business lines.

Retro represented approximately 30% of our 2005 premium base, while D&F represents 7%. Despite this, approximately 75% of the increase in our Katrina loss estimate is attributable to our retro and D&F business, where our clients have much less visibility on underlying exposures than in our other lines of business. An obvious question would be why we believe that our latest loss estimates are sufficient and that there’s not more to come. The best way to address that is to focus on Katrina alone and then on Rita and Wilma.

For Katrina, we have reserved $771 million out of the $1.2 billion of aggregate limits on programs we wrote in 2005 with Gulf exposure. The remaining $408 million of aggregate limits can be broken down into two categories. First, $254 million in aggregate limits relating to programs for which the client has not submitted a claims notice related to Katrina or has affirmatively advised us that they do not expect our contract to have a Katrina loss. The second category is $154 million in reserve catastrophe limits on layers of programs with known Katrina involvement. Based on the claims notices received from our clients and our underwriting judgment, we do not currently expect that these layers will be impacted by Katrina losses. Most importantly, I’d like to stress that our retro and D&F books are reserved at 97% of aggregate limit for both books.

Rita and Wilma present a different challenge. Percent of total limits are really not applicable, given the smaller relative size of these events. For both events, we have taken a cautious view of all loss information, formally or informally advised to us; and we believe the reserves for these events are appropriate.

Finally, we engaged a nationally recognized actuarial firm to perform a reserve review on all of our reserves. They concluded that our reserves were actuarially reasonable, and their point estimate was slightly below the loss reserves we have booked as of December 31, 2005. Given the fact that we have gathered significantly more information about our loss exposure and that, historically, hurricane loss estimates are more certain after six months than are such estimates after three months, we believe that our reserves are adequate. Reserving for catastrophes, however, is an inherently uncertain process, and I refer you to our SEC filings for a fuller discussion concerning the risks and uncertainties relating to loss reserves.

Another obvious question is what lessons can we learn from the increase in our Katrina loss to adjust our risk management approach? While our per-even risk management largely held up, despite the unique nature of 2005, we did exceed the cumulative exposure we had told shareholders and the rating agencies to expect. With regard to Katrina, the loss exceeded our estimated per-event PML. This was caused by the confluence of a variety of factors, including the scope of un-modeled commercial flood damages, exposure creep on certain accounts where the original underwriting information did not indicate Gulf exposures and flood losses to D&F treaties on wind resistant structures that we normally would not assume would suffer a significant loss from wind storm. One lesson for us, which we have addressed, was our exposure to frequency. We have become more aggressive in managing our frequency risk in conjunction with the severity risk.

The risk profile of our reinsurance portfolio as of January 1 was reduced as compared to 2005. While rates are up, net exposure in our major zones as of January 1, 2006 was down over 30%, measured on the basis of net aggregate zonal exposure. These changes reflect both improved market conditions and the significant steps we have taken to improve our risk profile. Specifically, as of January 1, we had reduced our gross aggregates in our key zones by approximately $200 million for a first and second event. We increased our net reinsurance protection for both a first and second event. We entered into a $300 million collateralized reinsurance agreement, which will protect PXRE from extreme catastrophe losses arising from hurricanes in the eastern and Gulf coasts of the United States, wind storms in northern Europe and earthquakes in California over the next five years. Finally, we entered into a unique second agreement that will provide $250 million of collateralized transaction-- collateralized reinsurance coverage for PXRE for second-event losses arising from a variety of natural disasters.

We will be closely monitoring our risk profile in the coming weeks and months in light of potential cancellations arising as a result of the rating agency downgrade of the Company. Last week’s actions by the rating agencies will have an impact on our ability to retain some of the business we signed during the January renewal period. It will also affect our ability to renew additional business and to write new business. We believe we will be able to retain a portion of the business we renewed at January 1, 2006 and to continue working with our clients and brokers going forward without ratings in the A range. As of today, less than 7.5% of our contracts in force on January 1 have advised us that they are canceling their contracts. Again, we will closely monitor these cancellations’ impact on our risk profile.

As noted above, given the difficulty of operating with a rating below the A level, we are reviewing whether to continue to pursue a monoline property catastrophe strategy. We are also exploring a broad range of strategic alternatives. Our board’s primary objective is to determine the strategy that will best maximize shareholder value. The board has not made any determinations on our strategic alternatives at this time. An obvious area of concern following the downgrade is the Company’s exposure to debt covenants and the strain on the liquidity resources of the Company. We are in a good position on both of these fronts, as Bob Myron will discuss. Bob?

Thanks, Jeff. So that we’ll have more time for questions, I’m going to limit my comments to a discussion about our current liquidity and compliance with our debt covenants, as Jeff mentioned.

As of December 31, 2005, our fixed income portfolio had a duration of 1.7 years and was rated AA+. As of today, on the Group-wide basis, we have approximately $930 million of fixed income, short term securities and cash that are held free and clear; that is, they are not encumbered or pledged to any other parties. Currently, we are in the process of reallocating a significant portion of these securities from our fixed income portfolio to our short term and cash equivalent portfolio to further improve our liquidity position and thus shorter our overall duration to a level even lower than it is now.

Specifically, as of yesterday, and in our Bermuda operating company, we have sold $426 million of our fixed income portfolio and plan to sell an additional $180 million of securities in the next few days. The Bermuda company, as many of you know, is where we write most of our business and is also where we have most of our losses from the hurricanes this past fall. The proceeds of these sales will be invested in cash equivalents.

Also, as of late last week, we executed redemption orders on our entire Group-wide hedge fund portfolio, which totaled $148 million. Given the terms of the underlying redemption provisions of these funds, we expect to receive in excess of 50% of the cash proceeds of these investments by the end of April 2006, approximately 80% by the end of July 2006 and nearly 100% at year from now.

As of December 31, 2005, our loss reserve liabilities have a total duration of approximately 1.7 years. Given all these components, we’ve done a detailed liquidity analysis that incorporates expected payouts for the loss reserves, any contractual collateral requirements that may exist and premium refunds we might have to pay to cedants in the near term, if they terminate their coverages with us, along with other operational expenditures. The end result is that we believe we have sufficient liquidity and meet the currently foreseen needs of all of our counter parties in 2006.

With respect to debt and credit facilities, both our trust-preferred securities as well as our letter of credit facilities do not include any rating triggers or financial net worth provisions, so we are not in breach of any covenants under any of these agreements.

That concludes my prepared remarks. With that, we will now take any questions.

[OPERATOR INSTRUCTIONS]. We will take our first question from Charles Gates with Credit Suisse. Please go ahead.

Good afternoon. What happened with the trust-preferreds? What assets backed them? As these obligations reside in the United States, do they have a claim against the Bermuda holding company?

They do not have a claim against the Bermuda holding company. The counterpart for them is PXRE Corporation, which is our U.S.-based holding company.

So, what assets back them, sir?

The assets are backed by the assets underlying the U.S. holding company, which was PXRE Reinsurance Company, principally our U.S. operating subsidiary.

What would you expect to happen to those securities?

We expect to continue to pay the interest on those trust-preferred securities.

Bob, last Thursday night, I thought that you said to us that essentially 50% of our business has rating triggers, and 25% of it is contingent on the maintenance of an A- rating. That’s what I thought you said. 25% of the total. In your news release that you guys sent out at 9:00 last night, you indicated that 75% of our reinsurance clients have the right to cancel their programs. Could you compare and contrast and speak to where-- it appears I got it wrong.

Sure. Let me go first on that point. The 50% in terms of what we communicated to you was the number that was disclosed in our 2004 10-K. With respect to the 75%, that’s resulted from a detailed contract-by-contract review of the in-force book, 14 months after that fact - after the date that the 50% related to.

I’d just echo Bob’s comments. The difference there, Charlie, is the previous 10-K disclosure and then we updated that disclosure annually immediately following the downgrade. It resulted in a move.

What is the statutory capital of the U.S. and Bermuda units? I’m looking for both numbers.

That’s actually not information we’re going to disclose at this time.

It will be in the 10-K, Charlie.

I guess the other question would be to the extent that potentially 75% of your business goes away, to what extent can you cancel the catastrophe bonds?

The catastrophe bonds aren’t cancelable in a purely legalistic fashion. There may or may not be the ability for us to effectively sell that coverage on, Charlie. But, no promises can be made. Additionally, we’re looking into and have not made any conclusions as to what the costs of essentially breaking those catastrophe bonds would be. Having said all of that, we’re going to have a fair amount of exposure, we believe, in 2006. And, for 2006, at least, we’ll expect to be happy we have those catastrophe bonds to provide a hedge against the risk.

I believe two days ago on the Aspen conference call, Chris [O’Kane] went through how they had some program with Company. He went through where he was assessing to what extent Company could obtain collateral with regard to that. How does that work?

I didn’t hear, nor did I read, Mr. O’Kane’s comments. So, I’m going to have to answer that question in a general sort of industry sense. Is that okay, Charlie?

Sure.

Typically, although not always, United States-based cedants have a provision in their contract which calls for incurred losses to be collateralized by alien; i.e., non-U.S. reinsurers, with either an acceptable trust account or a letter of credit. Additionally, London market business of various types occasionally, although with much less pervasiveness-- occasionally calls for collateral requirements to support, again, incurred losses. When I say incurred, I should answer more carefully. It’s really outstanding losses; i.e., it excludes IB&R. The theme here is that the London business-- that provision is far less pervasive than in the U.S.

Charlie, this is Bob Myron. I want to come back to you on the statutory capital question. We just-- We do actually have estimates of those numbers. I just want to caveat that these are estimates. The Bermuda company’s statutory capital is approximately $530 million, and the U.S. company’s statutory capital is approximately $128 million. Both of those numbers are as of December 31, 2005.

My final question; then I’ll let somebody else ask questions. I heard the commentary about what portion of the aggregate limits had been penetrated specific to Katrina. Is there any comfort that you can give with regard to Rita and Wilma?

No. Not on the basis of aggregate limits. As you know, Charlie, most-- the vast majority of our contracts that we sell provide a limit and then an additional or reinstatement limit. The size of Rita and Wilma from an industry perspective was small enough that neither of those losses would be expected to make anything close to the same percent of aggregate limit loss as Katrina. So, I don’t-- The reason I don’t know the number is there’s no comfort there. You can’t use limits to give you comfort on those smaller losses.

What firm opined on the adequacy of the reserves?

I don’t think that’s public, and I think our agreement with them is not to release their name. They’re a nationally recognized actuarial firm.

Thank you.

We will take our next question from Dan Farrell with Fox-Pitt Kelton. Please go ahead.

Hi. Good afternoon. Can you just try and talk a little bit more about your Wilma estimate, if you can? I know you can’t really relate it to aggregate limits. But, can you talk about the methodology going into assessing the loss? Are you using more a model approach, or are you getting enough information from cedants at this point on reported losses? What percentage of your information is going into that? How far along are we? Do you feel that you have comfort in that number?

Dan, clearly, just by the calendar, Wilma is the newest and therefore, I guess, in some ways the most uncertain of the three storms to estimate. We are now at the point where we have received a large amount of client loss information. We are relatively less reliant on sort of industry loss or catastrophe modeling estimates. However, we’re a long way from being done. You wouldn’t expect-- Let me say it a different way. We expect in the coming months there to be a fair amount of movement in our clients’ estimates up from now ‘til ultimate for Wilma. We booked the amount that we feel is appropriate above the client estimates to date. One fact that you might find helpful is if you take our Wilma estimate and divide it by the latest industry loss estimate, you’ll find that that ratio is substantially higher than the ratio that you saw in the 2004 hurricanes. That can be explained one of two ways. Either we changed our market share, which I don’t believe we did, or it speaks to a higher level of conservatism or at least a higher level of reserve relative to the industry loss than we actually saw in ’04. Remember, those losses for PXRE have been pretty steady.

Okay. And just my next question. In terms of the timing here for recognizing the increase in the loss estimates, did the outside actuarial review play a large impact in that? Did that provide information that you may not have seen, or was it sort of a current process, I guess?

I think there were two things that occurred. First of all, when we said that the information was slow, we really mean slow. December-- It started January right into February. Then, the outside actuary, which the company placed a lot of value on their input-- their report was finalized relatively recently - seven days ago-- roughly seven days ago. So, it was a combination of the two things.

Okay. Can you give us any more color as to the conversations you’re having with clients? I know you mentioned-- I think the number was 7.5% have indicated they’re going to cancel. Any additional color you can provide for those that haven’t yet made a decision or initial feedback?

There’s a lot of color. Unfortunately-- no; not like that. Unfortunately, it’s all over the map. We’ve heard from several customers that they would appreciate it if we were to collateralize the unearned premium reserve. They would not feel it appropriate to cancel. We’ve heard from other customers who make their own determinations on reinsurance security rather than rely, at least exclusively, on the rating agencies. We’ve heard from another group of clients that have agreed to wait to make a decision to see the results of our strategic review. Some of the customers we just haven’t heard from. So, I guess that’s the gamut.

Okay. Just one last question. If a larger portion-- Let’s pick a hypothetical number. If 50% decide to cancel, can you kind of walk us through the balance sheet impact - the changes in unearned premium, the impact to your [DAC] asset on the balance sheet and other areas like that?

Bob was about to dive in. I’ll give a cautionary note first. The only way to answer that question is to assume kind of proportional characteristics across the business that cancels versus the rest of our book. So, I guess what-- In your hypothetical, we’d be canceling 50% of the in-force book at January 1. Is that right, Dan?

Yes; that was the question.

Sure. I think in terms of the 12/31 balance sheet, those cancellations won’t have any impact at all that will have any impact on-- would have any impact on shareholders’ equity per se because if we have a receivable up that’s not going to be realized, the offset of that would be from unearned premiums. So, it’s a perspective issue only in terms of the shareholders’ equity, given that it’s related to termination of unexpired future coverage.

It’s not a DAC issue either.

That’s correct.

The acquisition costs that were capitalized wouldn’t have to be written down?

No, because it’s principally brokerage commissions which would be returned pro rata.

Okay. Fair enough. Thanks, guys.

We will take our next question from Scott Cohen with [Servaris] Investments. Please go ahead.

Hi, guys. I was wondering if you can explain how the capital historically has gone from Bermuda down into PXRE Corporation, the U.S. company. Has it been through capital contributions in the inner company notes? Anything you can explain kind of the mechanism for servicing the debt there?

You’re talking about servicing the debt in PXRE Corporation?

Yes - the [inaudible] trust-preferred.

Right. Well, our Bermuda operating company is the ultimate owner of the U.S. holding company, and we have the ability to downstream money through investments in subsidiaries directly from our Bermuda operating subsidiary into the U.S. holding company.

So, it’s barely been capital contributions?

It could be capital contributions or loans.

Does the U.S. company have any other obligations besides the sub-debt back up to the Bermuda company that are debt obligations or that are company payables?

Nothing of any significance. No.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. We will take our next question from Ron Bobbin with Capital Returns Investments. Please go ahead.

Hi, Jeff. I just had a couple of questions. On the figures cited for the total retro limits sold, I guess relating to Katrina, the number I think you said was $1.2 billion. Did I hear that right?

The number was right. But, that’s all aggregate limits for all lines of business.

Okay. So, it wasn’t just retro.

No.

The current reserve balance for Katrina, all lines of business, is 770.

771.

771. Okay. Okay. Then, what you said was for those two particular lines of business, retro and direct and facultative, you were at 97% of aggregate limits, which is some subset of that $1.2 billion.

Correct. Right. The reason we separated out those two lines of business is because they were the source of approximately 75% of the movement on Katrina.

Okay. So, what would that number, 97, have been before you made this recent increase?

The retro, to the best of my recollection, was at 65% of total insured value or aggregate, and the cat-- the cat on direct and fac. was reserved somewhere lower than that - not dramatically lower.

Yes. So, I guess, the question where I was going was earlier, in the wake of the Katrina storm, you had said that the Company was pretty close to limit with respect to the reserves - the incurred losses on Katrina for the retro book. Did you--? Does 65% really mean pretty close to limit?

I would say 65% isn’t-- I wouldn’t characterize that as pretty close to limit. I think what I said in the wake of the Katrina loss is that the programs that had a retro loss were largely viewed as total losses. So, the aggregate remaining was on programs that didn’t have a loss. I think I-- Obviously, I don’t know if I recollect the conversation exactly. But, the observation that I was making is that for programs with clear involvement, we weren’t assuming that it went kind of halfway through the program on average. We were assuming that if a program was involved, it was totaled, on average.

Yes. My last question. With respect to the U.S. entity, is there--? It’s unfortunate, but is there a growing tax asset here in the form of an NOL?

Yes. There’s a relatively substantial net operating loss. I think as we disclosed in the press release, we’ve had to record a rather substantial valuation allowance against that [inaudible] down to a level of, as mentioned, $6.3 million, which now we expect to receive in cash next year in tax refunds.

But, I’m sorry; the 48 was as of September. I think it was 48 was as of September 30. Now, with this reserve increase, what order of magnitude is this unreserved--?

The valuation allowance is approximately $51 million now, as of December 31.

Ron, the way to reconcile that relatively modest change is that the United States company’s exposure to Katrina, Rita and Wilma largely was through an intercompany reinsurance agreement, which had been either exhausted or nearly exhausted at 9/30; hence a modest increase between 9/30 and 12/31.

Okay. Understood. Thank you.

We will take our next question from Gary Johnson with Alliance. Please go ahead.

Good afternoon. I had several questions. Let me start out with the last issue that you were discussing. I’m not quite sure I understand the relationship. You mentioned the downgrade of the Company’s ratings below A- level and the relationship to the income tax recoverable. Could you explain that?

Sure. Happy to. What we basically have to be able to do to demonstrate that we have a deferred tax asset, sort of a realizable deferred tax asset, which is almost entirely in the form of net operating loss carry forwards, we’re going to have to be able to have income in our United States company that will be able to offset that net operating loss in future periods. We need to be able to show that we can use that NOL against income. Because of the potential impact of the ratings downgrade on the profitability of our U.S. company, we had to record a valuation allowance against the majority of that deferred tax asset. Does that make sense?

Okay. Yes. A couple of other things, and then I’ll put someone else - go forward. With respect to reallocating share premium funds to the contributed surplus or paid-in capital to the retainer and if you need shareholder approval, how can they make that allocation?

How can they make the allocation?

Yes. That’s simply going to be a bookkeeping entry?

It’s just a bookkeeping entry. Basically those-- share premium and contributed surplus are just legal distinctions of Bermuda law, basically components of our paid-in capital. So, all it is is a bookkeeping entry of an allocation between those two. There are no other implications of doing that. How the share premium account comes about is when we sell shares - the difference between the par value and the ultimate proceeds received automatically [inaudible].

Right.

Bermuda law requires a shareholder vote to actually reallocate those amounts to contributed surplus.

Okay. Into-- So, that would be the equivalent of retained earnings account?

It’s actually not the equivalent of retained earnings. It’s just a category in Bermuda law about capital amount.

Okay. Let me ask; on the statutory surplus, it looks like a fairly comfortable amount. Do you have within that statutory surplus an unassigned surplus that is in deficit that would prevent the operating companies from dividending up to the holding company?

Yes. There’s actually-- The U.S. company does not have the ability in the near term to actually declare dividends from itself, obviously, up to the U.S. holding company. However, the Bermuda operating company, as I mentioned earlier, owns ultimately all the U.S. entities; and it has the ability to send a very significant amount of money downstream, either in the form of loans or capital contributions into the U.S. entities. As I mentioned, it’s a number of hundreds of millions of dollars before we would be out of compliance with any of our ratios in Bermuda.

Okay. On the ratings front, the A- rating from A.M. Best. I imagine that’s a fairly critical rating, as important or more important than the S&P and Moody’s ratings?

Certainly in the insurance or reinsurance world, it’s as important as the S&P ratings.

What would--? What are your expectations on re-establishing those ratings, with an eye towards writing new business and preserving the existing book and the existing in-force business that you have? Do you have a timeline? Was this something that you’d like to do over the next 6 months or 12 months?

I don’t-- We don’t have a firm timeline upon which we expect PXRE to be rated A- or better by either of the agencies. As I said, one of the primary reasons for this strategic review is to analyze the value in various alternatives which may, we hope, achieve the basis for PXRE’s franchise to be-- for PXRE’s franchise to be inside an A- or better rated vehicle to allow us to fully capitalize on the market opportunities.

Go ahead.

I should say at this point that I would expect-- In fact, I can say it stronger than that; right, Bob? The rating agencies have confirmed that the ratings that they most recently gave us were predicated on the notion that we are going to raise a significant amount of equity capital because the board felt it was inappropriate to raise that significant amount of capital without a clear direction in terms-- without clear certainty that it would achieve an A- or better rating. I would expect in the very near term you to see press releases from both of the rating agencies reacting negatively to the fact that we have decided not to raise that equity capital at this point in time. I frankly am not sure exactly what their rating action will be, but, as I said, I would expect we’ll see what it is relatively quickly.

Okay. With respect to liquidity facilities, these run to the holding company, essentially-- those that you already outlined in your remarks, Bob?

We don’t have any sort of debt facilities, so to speak, in terms of ability to draw down. We just-- As mentioned, we have the trust-preferred debt that is outstanding - $100 million of U.S. holding company; $67 million is at the Bermuda holding company. Then we’ve got letter of credit facilities, which are basically facilities where we post collateral fixed income securities in order to issue letters of credit to cedants who require collateral from us, for statutory reasons principally - U.S. statutory reasons.

Do you feel that those dollar amounts of the letters of credit are sufficient?

Yes. We have a significant amount, in excess of $400 million of available capacity in those letter of credit facilities.

Okay. Thank you.

We will take our next question from Jimmy Levin with Dune Capital. Please go ahead.

Hi. Can you hear me?

Yes.

I’m reading from your past S-3 the comments about the potential for a termination fee you’d have to pay if clients cancel business. Can you give a little more color on how that works or how that fee is calculated?

Generally speaking, I think the most typical reinsurance contract would have quarterly premium payments. So, if that particular contract had a premium of $100 for PXRE’s share, they would have paid-- they would have owed us $25 on January 1, and by now we probably have received it. It depends on the terms of the particular contract, and there is wide variation. However, the most common provision of those special termination clauses would call for whatever unearned premium remains at the point of termination or special termination to be returned to the customer. So, I very cleverly picked an example which makes me divide difficult numbers. But, if they canceled at the end of February, one-third of the $25 they have paid us would be due back to the client.

Okay. That helps. Thanks.

We’ll take our next question from Greg [Lippin] with [Seranet] Capital. Please go ahead.

Hi. Most of my questions were answered. I stepped away. You must have answered what percentage of the premium base represents the clients that have advised you of cancellation so far?

Both numbers, contract count and premium base, are below 7.5%.

Okay; we don’t just take your top seven clients. Then, just your conversations-- they’re on the order of those that are staying with you that while your rating is sitting just below the A category, but perhaps if it falls further, do you think they’re going to take a second look? I don’t know if you can give color on kind of the way the discussions are developing from just below A to a little bit further away.

First of all, I think a cautionary note is worth a little bit of time here. I believe, and perhaps I’m wrong-- I haven’t asked an attorney about this. I believe that a customer can change their mind at any point in time, assuming that whatever trigger gave them the right to cancel still exists. So, the only reason I bring that up is the conversations to date, when customers have elected not to utilize or not to invoke their rights to terminate the contracts, could change at any point in time. This is just an opinion or a feeling. The customers that so far have elected to stay with us have elected to stay with us on the basis of the strength of the capital position versus the net risk in the reinsurance portfolio. I believe that once you’re below A-, I wouldn’t expect strong or thematic action on the part of customers. But, that’s just an assumption.

Okay. So, this is not like a tiering thought process. It’s just once you’re below that cliff, then you’re in the next category and that’s it.

That’s my impression, but PXRE and I have never been through this. We can’t even rely on historical precedent.

Got you. Thanks for your views.

We will take our next question from Fred Shaw [Ravani] with Lynchfield Capital. Please go ahead.

Hi. It’s actually Chad Yonker here instead of Fred. Question. I’m not even sure if you’ve seen this yet because it came out right before the call started. But, Standard & Poor’s did reduce your ratings to BBB-. I was wondering-- I guess you answered it partly with the last question of what additional challenges that would provide. But, if you could also talk about-- You talked about you’ve had conversations with some of your clients, and some have decided to stick with you for now. Can you tell us what percentage of the clients you have not had the conversations with who have not indicated what they’re going to do?

I wouldn’t even want to guess. It’s not-- Between all the underwriters at PXRE, I would guess that we’ve had conversations about more than half of the contracts on our books. I feel comfortable in making that estimate. Beyond that-- Any more precision than that, I just don’t know. I’m sorry.

Okay. Could you then give us a framework around which we can hope to hear more about what your clients are deciding to do? Is it going to be a weekly update, a monthly update? How is that process going to unfold?

First of all, I don’t think that we want to commit to sort of a straight periodic update system. We will advise shareholders when there’s material information that affects the results of the Company going forward. I don’t think I can answer that more specifically than that, other than to say it won’t be a weekly call or a bi-weekly call.

Can you tell us what you would consider to be a meaningful number, at least to talk about if it does happen?

I would have to get the advice of outside advisors before I would speculate as to what number is appropriate to be viewed as meaningful. Sorry.

Okay; thanks.

We will take our next question from Craig [Carlozzi] with Mass Capital. Please go ahead.

Yes. Hi. I just wanted to become clear on one point. Did you say that you do not have any intercompany reinsurance support agreements between the U.S. and the Bermuda subs? Is that correct?

We don’t have any intercompany reinsurance that goes from the U.S. company to Bermuda. That’s correct. There actually is-- Sorry. There is intercompany reinsurance where the U.S. company supports the Bermuda company.

Right, but not the other way around.

Right.

Okay. Thank you very much.

We will take a follow-up question from Charles Gates with Credit Suisse. Please go ahead.

Hi. Did you, or one of you, say that $100 million of the trust-preferreds were in the U.S. holding company and $67 in Bermuda?

That’s correct. Yes.

Okay. There was my first question. My second-- I think-- Maybe I misunderstood. But, I think, Jeff, in reviewing the strategic alternatives said that he thought that perhaps PXRE could end up being part of a larger or a better rated entity. Wouldn’t the concern on the part of the better rated entity be the adequacy or appropriateness of loss reserves?

A couple of comments. (A) that’s one of a myriad of options that the board is actively exploring. And, I think it’s reasonable to say that one of the concerns of anyone in thinking about buying PXRE or PXRE Group would be the adequacy of loss reserves. I think that’s impossible to disagree with, Charlie.

Did the loss of John Modin have any impact on the way data was shared?

No.

And, the final question. How did it work between February 16 and February 22? How did commutation agreements contribute to a growth in the loss reserve?

Of the ceded reinsurance contracts that we purchase, all are highly manuscript contracts - really one-off deals, carefully negotiated and structured. In two contracts that we had on our books, and only two, we agreed to give certain cancellation provisions to the reinsurer in the event of various happenings. Between those two time periods, Charlie, we had the downgrade. In that period, two of the contracts became cancelable under their own individual terms, and the way the commutation and cancellation worked is it resulted in our net loss increasing and our ceded premium decreasing, which was a net negative impact.

My final question. Jeff, in response to the question about strategic alternatives, you had said that one possibility was PXRE becoming part of a larger entity. Is there any way--? You also said that, I believe, it wasn’t the intention to do or attempt to do any kind of financing today because of concern that you could ever get back to the A- Best rating. Is there any way that you can share what other strategic alternatives might be?

I’d be afraid of missing something off the laundry list, and listeners to the call inferring meaning from that. I guess what I would say, Charlie, which is perhaps not a satisfying answer - but an accurate one, is that the board is working with Lazard to develop all the options that it has before it selects a course of action.

Thank you.

[OPERATOR INSTRUCTIONS]. And, we will go to Gary Johnson with Alliance. Please go ahead.

Hi, guys. I have one follow-up question. It’s regarding a disclosure in the 8-K. There was a mention of two large policy cancellations. Did you put dollar numbers on those? Secondly, were these due to non-renewals-- earlier non-renewals or the recent developments disclosure with respect to the hurricanes?

We didn’t put dollar amounts on those. We didn’t put dollar amounts on those contracts, and the terminations and commutations were the result of developments between the 16th and the 20-whatever that we were referencing. I’m sorry; I can’t remember the exact date.

Okay. Thank you.

This will conclude the question and answer session for today. Mr. Radke, I will turn the conference back over to you.

Ladies and gentlemen, clearly a difficult quarter and a difficult year. Thank you for your time, and we will be talking to you again in the coming quarter. Thank you very much.

Ladies and gentlemen, this will conclude today’s conference call. We do thank you for your participation, and you may disconnect at this time.