Argo Group International Holdings Ltd (ARGO) 2006 Q1 法說會逐字稿

Good day and welcome everyone to the PXRE Group Ltd. first-quarter 2006 earnings 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, May 10, 2006. Because of the time sensitive nature of this information it is PXRE's policy to limit the archived replay up 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 morning. My comments this morning will address the risk remaining in our portfolio of reinsurance business and provide a status report on the review of the Company's strategic options. Bob will then comment on the financial statements. Measured by in-force premium, the portfolio has been reduced by approximately 65% since January 1st through cancellations or nonrenewals in the wake of the rating agency downgrades. Without ratings we are not able to meaningfully participate in the catastrophe reinsurance market and have chosen not to add to our risk on an ad hoc basis by writing additional exposure since the downgrade. We therefore expect premiums to continue to decline as additional cancellations and nonrenewals occur.

In assessing the impact of these cancellations and nonrenewals on our risk profile, the zonal aggregate exposures are a metric of the potential impact of the catastrophe on PXRE's balance sheet. Our maximum gross zonal exposure as of May 5th was $475 million. This is before reductions for traditional reinsurance and our catastrophe bonds. The appropriate reduction from these hedges is difficult to measure with certainty as they vary from zone to zone and in the case of the catastrophe bonds respond to a model portfolio rather than PXRE's actual portfolio.

One can compare this $475 million of gross zonal exposure against 2005 gross exposures of $1.2 billion in the U.S. Gulf zone at June 30th, 2005. We expect a further 20% reduction in this 475 after the expected nonrenewals of January 1st business.

While we have reduced the risk in our portfolio on an absolute and relative basis, investors should be aware that we continue to carry significant catastrophe risk against our capital. In addition to managing our portfolio of reinsurance we have also been focused on our previously announced process of reviewing strategic alternatives. The Board, with the assistance of Lazard, has been conducting a comprehensive review of PXRE's strategic options which is included both stand-alone alternatives and potential strategic transactions. To maximize value for shareholders, the Board has followed a broad but disciplined approach. The focus has not been on preserving PXRE's former monoline business model. Rather we are examining a range of alternatives to unlock the value of PXRE's platform, infrastructure and capital base minimizing execution risk and reducing volatility.

It is important to note that the review is ongoing and the timing of any potential transaction may reflect several factors. Such factors include the seasoning of PXRE's exposures to Katrina, Rita and Wilma as well as the expiration of in-force contracts over the remainder of 2006. All alternatives have been and will continue to be compared to the value of the runoff option. Due to the predominantly short tail nature of our liabilities, a PXRE runoff would likely be accomplished over a shorter timeframe than is the typical case in the industry.

Furthermore, we realized that buying back stock at our recent share price levels has the potential to be accretive to book value and the Board will be periodically reviewing whether share repurchases would be in the best long-term interest of shareholders. While we cannot predict what the outcome of our strategic process will be, in broad terms it could potentially include one or more of the following, a sale or merger of the Company; one or more acquisitions or mergers of smaller companies or strategic alliances that would allow PXRE to access diversifying lines of business and provide the necessary underwriting expertise to successfully manage such business; sale of certain subsidiaries or assets; or runoff and return of capital.

We will not be providing guidance for the balance of 2006 as our earned premium the largest determinant of our revenue and exposures remains highly variable due to cancellations which to a large extent are outside of our control.

Bob will now offer some further detail on the financials of the Company.

Thanks, Jeff. I'll discuss several items during my remarks including results for the quarter, the investment portfolio, some commentary on the remainder of the balance sheet, our dividend policy and I'll wrap up with some discussion of the status of pending litigation.

First the results for the quarter. Although as Jeff mentioned we have had a significant percentage of our 1106 in-force book of businesses terminate or nonrenew since the ratings downgrades, the timing of the terminations were in the latter half of the first quarter and into Q2 and accordingly in the quarter we had approximately $95.6 million of gross premium earned and $77.1 million of net premiums earned. It should be noted, however, that given the terminations and nonrenewals our net earned premiums during the remaining quarters of 2006 are expected to be substantially lower than they were at Q1.

There was a limited amount of catastrophe activity during the quarter. Alongside this, we experienced slightly favorable development on our December 31st, 2005 loss reserves in the amount of $2.6 million. There was no adverse development in our reserves for Katrina, Rita and Wilma. Accordingly, our loss and loss expenses of $17.8 million for the quarter consisted principally of IBNR booked against Q1 earned premium amounts offset by the $2.6 million of positive development just mentioned.

Net investment income was $17.9 million for the quarter and this was principally driven by an annualized invested asset return rate of 4.3% from our fixed-income portfolio and a return of 3.7% from our hedge fund portfolio during the quarter. During the quarter and as a result of uncertainties associated with our ongoing strategic alternative analysis, we recorded $3.8 million of other than temporary impairments on longer duration fixed-income securities that were held in our Bermuda operating company. This had no impact on overall shareholders equity or book value per share. The remaining $0.9 million of the total $4.7 million of realized losses represent traditional realized investment losses from the actual sale of securities.

During the quarter we recorded $3.7 million of other reinsurance related expense. This cost represents the quarterly expense for our second cat bond transaction A&W Re II, which we disclosed last quarter we were accounting for as a derivative. Given the transaction's derivative nature, the annual expense for this transaction is not expensed on a pro rata basis over the year rather the quarterly expense is linked to the timing of the underlying exposure periods. We expect to expense the annual cost including amortization of operating costs as follows for the remainder of 2006 -- in Q2, approximately 2.3 million; in Q3 approximately $4.8 million; and Q4, approximately $7.1 million. These amounts of course assume there are no loss recoveries under the A&W Re II transaction.

Operating expenses were higher in the quarter than originally budgeted and compared to the same period in the prior year principally due to legal and advisory costs.

Now to the investment portfolio. As of March 31st, 2006 our fixed-income portfolio had a duration of 1.3 years and overall was rated at AAA. As shown on the face of our balance sheet we had $623.1 million of our total fixed-income portfolio in short-term instruments. These investments have a duration of approximately one month. We have elected to keep such a large percentage of our fixed-income portfolio in short term to allow us to continue to meet the needs of our counterparties and to maximize our financial flexibility in the context of our strategic alternative review.

As communicated to you last quarter, in February of 2006 we executed redemption orders on our entire hedge fund portfolio. While we still have 145 million of hedge funds on our balance sheet as of March 31st, 2006, this date represents the last value date for many of our individual hedge fund investments. During the first quarter, we received approximately $9.1 million of net redemption proceeds from the hedge funds that were on the balance sheet as of year end and the period from April 1st until now we received another $88 million. We expect to receive at least 80% of the proceeds by July 31st, 2006 and the balance by March 31st 2007 or shortly thereafter. Pending the outcome of our strategic alternative review, we do not have any plans to reinvest in hedge fund assets.

Now some commentary on the balance sheet. With respect to loss reserves, during the quarter ended March 31st, 2006 we paid approximately $263.3 million of net losses with respect to the pay out of loss reserves based upon historical patterns we expect to have paid 39% of the March 31st, 2006 loss reserves by the end of this year and 65% of those by December 31st, 2007. As of March 31st, 2006 we have paid $216 million in net claims from Katrina, Rita and Wilma.

Now premiums receivables. The balance at March 31st, 2006 of $166 million is principally comprised of approximately $130 million of reinstatement premiums due on losses incurred. This asset contains little counterparty credit risk due to contractual offset clauses. The remainder of the balance relates to other premium receivables due to us in the normal course of business and we don't expect any material issues with respect to recoverability of these assets.

With respect to reinsurance recoverables on paid and unpaid losses, the balance stands at $82.5 million at March 31st, 2006, a decrease of $29.4 million since year end. Approximately 97% of these recoverables are either fully collateralized or reside with entities rated A- or higher by A.M. Best or S&P.

Some details of the other assets caption on the balance sheet, the balance of $64.8 million principally consists of the receivable in the amount of $23 million on a ceded deposit contract which is approximately 90% collateralized. The fair core value of the derivative asset for the A&W Re II transaction in the amount of $15 million, our investment in [Bar State] Properties which is the owner of the building we occupy in Bermuda of $8.5 million and other small balances. The details of the other liabilities caption, the balance of $60.6 million principally consists of the offsetting fair value liability for the A&W Re II transaction mentioned above that is included as a component of the other assets, [profit] commissions payable of $9 million unearned fee income on assumed deposit contracts and a series of other small balances.

Our shareholders equity as of March 31st, 2006 stands at $503.7 million combined with $167.1 million of trust preferred debt, we have a $671 million of total capital as of March 31st. Fully diluted book value per share as of March 31st, 2006 is $6.50. Fully diluted shares outstanding are approximately 77.5 million as of March 31st, 2006. This amount is comprised of issued shares outstanding of approximately 72.4 million and convertible preferred shares that convert to 5.1 million of common shares at the March 31st conversion price of $11.39.

With respect to our dividend policy, at yesterday's annual general meeting our shareholders approved a reallocation of capital between legal accounts, the result of which is that we now have the ability to pay dividends to our shareholders from our Bermuda holding company, PXRE Group Ltd. However, given the ongoing nature of our strategic alternative review the Board has elected to defer the resumption of common share dividends until our strategic process concludes.

Lastly, with respect to litigation. As of May 9, 2006, at least two class action lawsuits have been filed against PXRE Group Ltd. and certain of our officers on behalf of a purported class consisting of investors who purchased our publicly traded securities between July 28, 2005 and February 16, 2006. The allegations in both suits are substantially identical and are summarized in a recurrent report on Form 8-K that we filed with the SEC on May 5th. As I'm sure you will understand in light of the pendency of this litigation, we are not able to comment on the suits nor will we be able to answer any questions regarding such litigation.

That concludes my prepared remarks. With that, operator, could you please open the lines for questions? Thank you.

(OPERATOR INSTRUCTIONS) Dan Farrell, Fox-Pitt, Kelton.

Good morning. A couple of questions. Can you talk a little bit about the other expense line and any ability to reduce that and maybe just give us a little detail as to how much is compensation expense versus legal and other expenses there?

You're just talking about operating expenses, right?

Yes, operating expenses, yes.

Bob, not to interrupt. Feel free to add in at the end. But generally speaking we're a relatively thinly staffed company. I think we've got 58 employees?

Approximately at year end we've got less than 50 now.

So in the 50s in terms of number of employees. Our, what I would describe broadly describe as our finance staff is relatively thin on the ground and are without exception required to carry on the functions required of a public company. I see very little potential for reducing head count there given the responsibilities that that group has. We've seen in the past quarter a relatively significant reduction in the number of underwriters and of the underwriting support staff areas. Those reductions haven't flowed through in the first quarter. And given the employment contracts and the severance arrangements that many of those employees have, those reductions will show up partially in the second quarter but more in the third and fourth quarter.

I guess what I'm trying to direct you towards, Dan, is not expecting a big drop in that other expense line because most of it is driven by the fact that we're a public company required to perform those duties.

Okay. Just on the dividends. If and when you decide to start paying dividends, are the regulators either in Bermuda or the U.S. putting any restrictions on the amount that you could do or any hurdles that you have to reach to start paying dividends?

I think the principal restriction with respect to paying dividends out of the Bermuda holding company is the amount of money that we can dividend from the Bermuda operating company up to the Bermuda holding company. And as we disclosed in the 10-K, we're limited for 2006 to dividending approximately $161 million from the Bermuda operating company up to the Bermuda holding company without getting a special permission from the Bermuda monetary authority, the regulator for the Bermuda operating company.

Okay. And then just lastly, how much IBNR do you have against the KRW reserves as of the first quarter?

Dan, we've consistently declined to break our reserves out not just for KRW, for all the catastrophes based on IBNR case and paid. The reason being we think it gives a misleading impression because we receive loss notices from our customers which include IBNR. And it becomes a bit of a debate asked to whether on our books that should be considered case reserves or IBNR. Impossible in our view, impossible to answer clearly in a broad forum. We pretty consistently have declined to do that. Of the incurred loss, Bob did say that we've paid --

$216 million I think was the number.

And we know that the gross incurred loss which did not move this quarter substantially was about $1 billion, is that fair?

Right.

Okay. Thanks guys.

Ron Bobman, Capital Returns.

Good morning. On the 475 I think it's the maximum zonal exposure. I had a couple of questions. Is that Southeast U.S. that zone you are speaking to? And then could you tell us what the zonal exposure is by entity for your two carrier entities? And that's I guess I assume a one event. Is it a wrong assumption that with the reinstatement that the gross exposure for that particular zone would be 2X that number for multiple events? Thanks.

Sure. Let me first say the 475 is our largest zone which today happens to be the Southeast United States. Again I'd just underscore the fact that our zonal exposures are going to depend heavily on cancellations and nonrenewals which aren't necessarily in our control so that could change. But as of May 5th the 475 was the Southeast.

Also you're correct that sort of adds up the exposures we believe we have in that zone to any one event. The vast majority but not all of the contracts that are currently in force provide a reinstatement limit. So theoretically the 475, the exposure to the second event would be roughly 2X that. Again that 475 is before reductions for traditional reinsurance most of which includes reinstatement limits as well. And it's before the catastrophe bonds in the context of your question, most notably A&W Re II specifically addresses our exposure to a second event. Did I skip any of the subparts of that question, Ron?

No, but the last part was the exposure, the 475 exposure by your two entities, how is that split between limited and U.S.?

I think the best way to answer that question is the following. The U.S. company writes very little third-party catastrophe business or any other kind of business at this point in time. Its predominate exposure comes from intercompany reinsurance is where near New Jersey reinsures Bermuda. And where is that contract now Bob?

I believe we disclosed at year-end there's $100 million limit that intercompany contract.

So if you view 475 as what we believe to be the zonal -- the maximum aggregate exposure in the zone that would almost certainly sort of eat up the disclosed $100 million limit of that intercompany reinsurance. Again a caution that that intercompany reinsurance is subject to change throughout the year. It's subject to regulatory approvals. But the last disclosed limit was $100 million.

Okay, I think I got it. Thanks.

(OPERATOR INSTRUCTIONS) [Aviva Schneider], SilverPoint Capital.

Good morning. Could you please speak a little bit to your U.S. sub and your plans to continue paying dividends on that preferred securities that are issued by that sub for the rest of 2006?

Yes, I think you are making reference to the trust preferred debt that was issued out of our U.S. holding company in 1997. As of right now, we have no intention -- we have intention to make the interest payments on that trust preferred debt.

Thank you.

[Aidan DeBrunner] at Morgan Stanley.

Hi Jeff. Hi Bob. Thanks very much for that update. Can you just go through again the zonal exposure the $475 million? Are you saying that you've got 1 million -- you've got 1 billion in reserves and loss expenses at the moment on the book. And you are saying of that billion you've got or are you -- how does the 475 fit into that 1 billion on the balance sheet at the moment?

Those are unrelated numbers actually. The balance sheet number is we're speaking of loss reserves. And the 475 is a prospective exposure number with respect to exposure we have on the books going forward.

Okay. What you're saying then that you would have a reinstatement limit of twice that? I think that is what the other --

I guess if you imagined a Southeast event probably but not necessarily a hurricane large enough to exhaust all the aggregate limits we sell in that zone, each event could cause we believe a maximum of $475 million. And most but not all of our contracts provide two limits, the second we call a reinstatement limit. So on a gross basis before the cap ons, before traditional reinsurance you could be looking at approximately 2 times the 475.

Okay. Then you must have done the next size as well? I'm looking at how much then you don't see recover from reinsurance and how much of the bond, the catastrophe bonds would kick in. What would your actual net exposure be were those two events to happen?

Well, I think because it's variable and the reason the traditional reinsurance is variable is because the amount of reinsurance we buy by zone differs. And because the catastrophe bonds respond to a model portfolio as opposed to PXRE's actual portfolio, we're much more comfortable sort of putting out the 475 as a gross exposure. Investors know that under A&W I we could collect up to $300 million. Investors know that under A&W II designed for the second event, we could collect up to $250 million. If the particular event against the model portfolio resulted in full collections from those two catastrophe bonds you can do the subtraction. We wanted to underscore that there is uncertainty in terms of our portfolio versus the model portfolio.

That is very helpful, Jeff. Thanks very much.

Dave McGowan, Citigroup.

Good morning, guys. If I understood you correctly you said you were thinking about or would think about share repurchase contacts that would be potentially accretive to shareholder value. Other parts of the cap structure too could potentially be repurchased to be accretive to shareholder value or book value. Is that part of the equation as you go through the strategic planning process?

Ultimately it would be. I guess when you consider the exposures that we were just talking about for to the reinsurance risk in our portfolio and the Board considers the practical amount of funds available for repurchases, you don't get past equity, you don't get to the second-best alternatives. And equity to our way of thinking seems to be the most likely opportunity to maximize that accretion to book value.

Understand. And going back to the previous discussion on the reinstatement exposure. I want to make sure that I understand that to the extent there is a single event that essentially would eat through your 475 maximum zonal and then we had another large second event, are you saying that the gross on the second large event would be 2 times the 475 or would be another approximately 475?

Thank you for asking the question because obviously I was unclear. The maximum first event loss that we would expect is $475 million. The second event if it was equally large, much larger than any event that has occurred in history, we would expect approximately 475 again.

Okay. I'm glad I asked the question as well.

Right. And again, just a clarifying comment, most but not all of the contracts we sell provide two limits so that 475 would likely be slightly reduced but directionally think in terms of the 475 each for the first and second.

Right. And in addition to the cat bonds which cover you for two events, I think I understood you to say that most of your inward reinsurance also has a reinstatement limit?

Correct. We've spent enough time on this question but previously disclosed numbers that might be useful for listeners to think about, in Katrina, our gross loss was $771 million. And that was relative to our maximum zonal exposure in the Gulf at $630 million of $1.2 billion. Okay? So you can kind of get a sense of the size of the event we are talking about that would exhaust completely the gross zonal exposures.

In one word, big.

Yes. Two words, very big.

Okay. Thanks a lot for the clarification.

Not at all.

Jay Weinstein, Oak Forest.

Good morning. [Colin] briefly asked the question about the subordinated debt. My question was more along the lines of what is the status of that and the different sort of strategic alternatives whether it be a runoff or mergers and acquisitions, how would you sort of see the treatment of the debt in those scenarios?

I think like I said before the previous question, as of right now we have every intention of making the coupon payments on all of the subordinated debt that we have that is outstanding. It's something that we disclosed but I think it's useful to just mention in the call is that the $100 million of trust preferred debt issued out of the U.S. holding company in 1997 that is callable at 104 and change in February 1, 2007. And the rest of the debt, trust preferred debt that was issued out of the Bermuda holding company in 2003 is callable either at par or at a slight premium in 2008 in various states. And we've got a footnote in the 10-K that describes all of that. So we have the ability to obviously to call that debt in various scenarios.

One of the other gentlemen talked about I guess and he's probably referring to these sort of securities when he talked about other capital structure buy backs. I just wanted to make sure I understood what you said which is basically that I believe these bonds are trading somewhere in the 80s, I'm not exact exactly sure of the price. But pretty much the Board's review is that it probably was not worth the issue of buying them at those prices versus the equity?

Correct. Versus the equity at price levels that we've seen recently given that we are going to have a finite amount of financial resources to buy back any security. The discussions that the Board undertook, the implication was that given our limited resources if we're going to do any buy back given relative recent price histories, equity was seen as the bigger opportunity.

Can you kind of speak generally about the obvious conflict between the resources for bondholders and shareholders in the buyback scenario?

I guess what I would say is that there are because we're an insurance, a regulated insurance company or many of our operating -- all of our significant operating subsidiaries are regulated. I think to a large extent the extreme cases of a theoretical conflict don't come into play due to those regulatory constraints. Bob talked about dividend capacity. And that is going to limit how much of these financial resources can come out of the operating companies up to the holding company and potentially out to security holders whether they be bond or equity holders.

My recollection is something around $170 million I think to the holding company for shareholders, that is obviously a lot a money. I assume that that's not going to happen -- I'm guessing that won't happen. But I think that was the number that was talked about.

That might be -- I think you rounded up just for the sake of clarity. But you are right, it is a lot of money. I guess what we would say is again the amount of funds that the Board feels comfortable disbursing out of the Company is viewed in conjunction with the reinsurance risk that we've just been talking about also in conjunction with what our other strategic alternatives are. And if I could again, I think we've now talked enough about buying back securities that it's worth clarifying that the Board has not decided to do a share buyback. We just wanted to highlight it as an option.

I understand. Any timeline for the review of strategic options? Is there -- obviously you've been undergoing it for a while and nobody would begrudge you a couple of more months. Do you have any sort of timeline in mind anyway?

I think that we do not have an artificial sort of deadline or timeline set. The Board feels like the maximum value that PXRE has is in its infrastructure, its capital structure -- or sorry its capital base -- the things I mentioned in our remarks. And for many potential counterparties, that value may well be enhanced as the reserves are more seasoned and as the catastrophe risk expires or runs off. I guess the way I'd answer it is twofold, a, no artificial deadline in the sense that within reason the options available to the Company and the value of those options may increase over time because of at least those two considerations.

Okay, that makes some sense. And just my last question, sorry to take up so much of your time.

Not at all.

Just to clarify because there's been a lot of discussion about the gross zonal numbers etc., etc. But those numbers will and let's just work on the assumption that nothing happens between now in June 30. So after June 30th on the next conference call those numbers will change quite dramatically because of the premium decline? Is that correct?

Those numbers will change quite dramatically largely because July 1st is a significant renewal date for us and the rest of the reinsurance industry. We would expect, sorry that is a question I can answer definitively. Currently the Board does not intend to renew even if we were able to, that book that comes up for renewal of July 1st. So taking into account just that change, so not potential cancellations which are outside of our control, just the nonrenewing July 1st book, we would expect a 20%, approximately a 20% reduction in that 475 number.

Okay. So we will just keep our fingers crossed for the next fifty days or whatever.

Correct.

All right, thank you.

[Paula Fetterman], First Albany.

Good morning. I was hoping that I could take the conversation into a slightly different direction and go back to the exited lines and see if you could share with us how much you have remaining in liability reserves for the exited lines? And how long you think the runoff for those lines might be as well as whether all of those reserves are in the U.S. operating company or whether it is shared between Bermuda and the U.S. company?

Paula, thanks for the question. Let me see if I can knock off your points. Maybe in reverse order because that is how I am remembering them. The exited lines are pretty much entirely in the U.S. operating company. We will include some disclosure in the 10-Q that is going to get filed later today with respect to the performance of those exited lines during the quarter. Also there is a breakout in the MD&A section of the 10-Q that will disclose the loss reserves by cat and risk versus exited lines. And there is also information in the sort of commitment and future obligations table that shows what the payout of our loss reserves will be sort of on an aggregate basis. We have not broken out and don't disclose the expected payout of the exited lines reserves on their own.

I think a fair thing to say about those exited lines is that in the last several quarters we have seen a pretty significant decrease in any kind of volatility associated with the performance of those reserves. And that is not surprising given that the majority of that stuff was last written at the latest date in 2001.

The other thing I think we can say is when the relative balances come out, what you'll see is that the exited lines at least to date haven't been experiencing reductions that are dramatically different than a payout pattern you'd expect for that medium tail liability business. I'm right, there were no significant commutations in the quarter?

That is correct.

So what you are seeing Paula, is sort of the standard runoff for a relatively low risk liability portfolio.

Okay. Was there any change in reserves of the exited lines in the quarter?

I'm sure there was.

Like I said I think you'll be able to compare --

I mean adverse or positive development. Because you referred --

There was a small adverse change this quarter, right?

That is correct.

And Paula, as we've talked about in the past we have -- once a portfolio this small, this seasoned, you are setting reserves based on industry and company specific factors and actuarial formulas. You almost always have small changes up or down each and every quarter. And I think this quarter it was marginally up so adverse change.

Okay. I may have missed it but where you mentioned I think in part of the beginning of your speech that there was a small positive change in reserves for the quarter, where did that come out of?

Well, given what we just said about exited that it was a small adverse change. The positive change came from our cat lines and the cat and risk lines other then Katrina, Rita and Wilma where there was no significant movement.

Okay. And if I could just one more question. Is the U.S. company now that they have a little bit more slightly more profits on their books, do they still have negative unearned surplus as of the end of the quarter?

Yes, they do.

And do you have some range of you could give us as to where that is?

I think that what is fair to say, Paula, is the amount as of 12/31 is in the yellow blank. We disclose the increase in the statutory surplus -- I'll just give you the numbers because they are in the public disclosures. But the 12/31 surplus number was 126.9; the March 31st surplus number is 129.2 as disclosed in yesterday's release. The increase is principally due to net income in that entity. So the unassigned surplus deficit in surplus will decrease by the amount of that net income in effect.

Okay. And does the U.S. company still maintain a quota share portion of all of the cat risk that you are putting on the books in the Bermuda company?

Not a quota share but they do provide an excess of loss layer which ends up covering all of the catastrophe risk written by the Bermuda company. So it is not on a quarter share basis but they do participate in the risk.

Okay. But above the Bermuda company?

Well, above the Bermuda company is sort of a dangerous comment. Above a deductible.

Okay.

Right?

Okay, thank you. I appreciate that.

Michael Gatto, SilverPoint Capital.

Hi. I have a question. On the $100 million that the U.S. entity or reinsurers for Bermuda, was it disclosed how much that intercompany payment was for that reinsurance?

That payment that -- the one that you're making reference is a prospective limit that is going forward. There has been no payment under that contract yet.

No, I understand that. But Bermuda must have paid the U.S. for taking on that risk?

Yes, we haven't made disclosure of the premium so to speak that was paid for that. But we have a requirement to ensure that that premium is an arm's length amount basically.

And approved by the Department of Insurance of Connecticut.

That is correct.

And does that get disclosed eventually in a regulatory filing?

I'm quite sure that in one of the schedules in the statutory filing you'll be able to see how much PXRE reinsurance limited ceded PXRE Reinsurance Corporation.

Okay, thank you. That was my question.

Ron Bobman, Capital Returns.

Hi. I was curious to know and maybe it's qualitative, but I guess there is some degree of basis risk between the A&W reinsurance purchases and what the book looks like now. If you could describe that I'd appreciate it. Then somewhat related, is it conceivable or likely with the nonrenewals on July 1 of the trailing book and maybe some pending cancellations of the 1106 book, is it conceivable that you become sort of net short cat risk in a particular zone? And if you sort of get my concept, could you comment on it?

I do. I'll do it in reverse order, as Bob made popular. What I'd say is under A&W I, which is a reinsurance transaction, what I mean by that is I'm contrasting it with A&W II which is a derivative transaction. A&W I's reinsurance is a contract of indemnity meaning we can't be net short anywhere.

Okay, understood.

It's conceivable that we could end up net short under A&W II because it is a derivative and doesn't have a requirement for the payment to be an indemnity payment. Hopefully that dispenses with the second part of the question. The first part of the question, I am going to answer it qualitatively.

I'm sorry, before you move on. How about the likelihood, so we have a meaningful storm in Florida so sort of A&W II goes live, the second event protection. Where do see the book at that point in time -- are you then net short in Florida? Do you expect to be net short in Florida if A&W II I'll call it goes live?

Here is my thought process. If we are at 475 now, we expect an approximately 20% reduction. I think that gets you to about 380, somewhere around there. 380. If there is an event even close to this mega event that blows out the zonal aggregate limit I can't imagine anyone would cancel. The reason I'm answering it this way is to be sure it's clear how many guesses and suppositions are involved in the answer. So no one new cancels, we would have approximately $380 million of exposure in A&W II's $250 million in size. So I think ending up net short is unlikely.

Okay. Thanks.

In terms of the basis risk. I guess what I would say is I think qualitatively I think of the basis risk not as a complete miss or a complete hit. I think of the risk as not collecting the full $300 million that we might expect should one of these mega-catastrophes happen because our portfolio has been sort of put together for us by the actions, the uncoordinated actions of our customers. I think it's extraordinarily remote that we have a loss where we would have expected a full recovery and we get no recovery. But investors and yourself should be mindful of the fact that I wouldn't be surprised if we had a loss where we would have expected say a partial collection, $150 million from A&W I. And yet our actual portfolio has a sufficient mismatch with the model portfolio that we don't have a collection.

Got you.

Okay?

Yes.

I would just like to make one -- include one additional disclosure on this call and this has to do with the intercompany excess of loss contract whereby the U.S. operating company reinsurers the Bermuda operating company. We did just receive actually a letter yesterday from the State of Connecticut approving a revision to that contract. The limit of the contract has been reduced from $100 million to $40 million and the annual premium is $7 million per annum with affect from April 1st 2006. So that is a revision obviously to what was disclosed in our 10-K, the previously in force contract that was in effect for January 1st, 2006.

And there are no further questions at this time.

Thank you all for your participation. We will be updating you as developments warrant it and occur. Thank you very much.

That does conclude today's conference call, ladies and gentlemen. Thank you for your participation. You may disconnect at this time.