Argo Group International Holdings Ltd (ARGO) 2007 Q1 法說會逐字稿

Good day, and welcome, everyone, to the PXRE Group Ltd. first quarter 2007 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 10K, and other filings with the SEC. We refer you to those sources for additional information.

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 9th, 2007. Because of the time sensitive nature of this information, it is PXRE's policy to limit the archive replay of this conference call to a period of 30 days.

The call is the property of PXRE. Any distribution, transmission, broadcast, or re-broadcast in any form without the express written consent of the Company is prohibited.

Finally, I must remind all participants on this call that Argonaut Group and its announced merger partner, PXRE, filed a preliminary joint proxy statement prospectus with the SEC last week. Accordingly, management will not be taking any questions today regarding the merger transaction, and we ask that you respect the request to avoid asking any questions involving the merger.

With those announcements complete, I will turn the call over to Jeff Radke.

Good morning. Thank you, Jamie. With Jamie's intro, you can imagine that my comments today will be very brief. Argonaut and PXRE have filed with the SEC the S4 and preliminary joint proxy statement. We have received limited comments from the SEC on this filing, and we are working to respond to them. We continue to expect to close the transaction in the third quarter.

The significant events for PXRE following the announcement of the merger agreement with Argonaut were the formation and rating of Peleus, our new Bermuda-based platform. The A- rating from AM Best makes Peleus an acceptable credit for most counterparties. Peleus has begun operations and is evaluating its underwriting opportunities.

Our team continues to work through the many steps necessary to finalize the merger with Argonaut, including the filing of all necessary governmental and regulatory filings. We believe we are on track and look forward to announcing the completion of the transaction.

From a risk perspective, let me remind you that PXRE has no material in force underwriting risk. We expect Peleus to start slowly in 2007. This should result in only moderate exposure during the second half of the year, as we build a controlled book of property catastrophe and other business.

I'll now ask Bob to walk us through the financial statements and the results for the quarter.

Sure. Thanks, Jeff. I'll talk about the results for the quarter and then provide some commentary on some of the various captions on the balance sheet.

As just mentioned by Jeff, given that we've got no meaningful in force business, we had virtually no assumed reinsurance premium written or earned during the quarter. Due to ceded reinsurance costs of approximately $3.2 million and $2 million of negative premium adjustments on prior year contracts, we had negative earned premiums of approximately $5.2 million in the quarter.

We had negative incurred losses during the quarter of $3.2 million, comprised entirely of favorable development on prior year loss reserves. Net investment income was $13.7 million for the quarter, and this was principally driven by an annualized invested asset return rate of 5.2% from our fixed income and short-term investment portfolio.

During the quarter, we recorded $1.8 million of other reinsurance related expense. This represents the expense from our second cat bond transaction, [A&W RE 2], which is accounted for as a derivative. The annual expense for this transaction is not expensed on a pro rata basis over the year, as mentioned in previous quarters. Rather, the quarterly expense is linked to the timing of the underlying exposure periods.

For 2007, we expect the expense from this transaction to be approximately $8.7 million. This amount of course assumes there are no loss recoveries under the transaction during the year.

Operating expenses were $11.8 million in the quarter, which were significantly higher than we would expect them to be in a normalized circumstance, due principally to merger-related costs of $3.8 million.

With respect to the investment portfolio, as of March 31st, our fixed income portfolio had a duration of 1.1 years, and overall was rated AAA. We have $570 million of our total fixed income portfolio in short-term investments.

With respect to the rest of the balance sheet, let me talk about loss reserves first. During the quarter, we paid approximately $129.3 million of net losses. Based on historical patterns as well as experience we have seen on KRW to date, we expect to have paid about 35% of the March 31st, 2007 loss reserves by the end of this year. There will be additional details about the expected payout of our loss reserves in our 10Q that will be filed later this week.

As of March 31st, we have paid $610.3 million in net claims from Katrina, Rita, and Wilma, which represents approximately 71% of our ultimate incurred losses for these events.

Of the $435.8 million of net loss reserves on our balance sheet as of March 31st, $344.3 million is case reserves, and $91.5 million is IBNR.

With respect to premium receivables, the balance at March 31st of $64.6 million includes approximately $47 million of contractually offset-able reinstatement of premiums due.

With respect to reinsurance recoverables, these stand at $37.8 million at March 31st, and approximately 93% of these recoverables are either fully collateralized or reside within [inaudible] rated A- or higher by AM Best or S&P.

The other asset balance of $39.2 million principally consists of the fair value of the derivative asset for the A&W RE 2 transaction in the amount of about $16 million, our investment in the building we occupy in Bermuda of $7.8 million, and other small balances.

With respect to other liabilities, the balance of $38 million principally consists of the offsetting fair value liability for the A&W RE transaction, contingent commissions payable of $7.3 million, $2.1 million of accrued interest expense on trust preferred debt, and other small balances.

I want to note that we booked an accrual in the amount of $1.2 million as of March 31st for the convertible preferred share dividend, that otherwise would have been due as of the end of the quarter. However, under the terms of the voting agreement entered in between PXRE and the convertible preferred shareholders in March of 2007, this amount will not be due if the merger is consummated, and accordingly, such accrual will be reversed in the quarter that the merger closes.

Our shareholders' equity is $490.3 million as of March 31st, 2007. Fully diluted book value per share as of that same date is $6.30. Fully diluted shares outstanding are approximately 77.8 million as of March 31st, 2007. This amount is comprised of issued shares outstanding of approximately 72.6 million and convertible preferred shares that convert to 5.2 million common shares at the March 31st, 2007 conversion price of $11.18.

However, as previously announced, this conversion price will adjust downward to $6.24 upon consummation of the merger.

Statutory surplus of Peleus Reinsurance Limited was approximately $213.8 million as of March 31st, 2007. The surplus of Reinsurance Limited was approximately $394.1 million as of the same date. And lastly, the surplus of PXRE Reinsurance Company was approximately $138.3 million as of March 31st, 2007.

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

[Operator Instructions] And we'll go ahead and take your question from Felice Gelman with SuNOVA Capital.

Can you just -- you mentioned a very tiny little bit about what Peleus Re would be doing. Can you give us a little bit more color? Do you think that you'll be able to begin underwriting for the 6/1 renewals? Or is it more likely the 7/1 renewals? How are you thinking about -- how are you thinking about diversifying or focusing your risk? Where do you think the opportunities are for you?

I think for the balance of 2007, most of our time and attention is going to be focused in the property reinsurance arena, the catastrophe and risk excess business. While I expect and hope that there will be some June 1st business written, the vast majority of the business we do write will occur at 7/1 for two reasons. A, it's a bigger -- it's a much more significant renewal period, but also, the process of getting on customers' approved lists, etcetera, etcetera, takes time. So we feel much more confident that we'll have achieved that by 7/1, rather than 6/1.

Okay. And any thoughts on your geographic focus or diversification?

I want to be careful about -- I want to be careful to differentiate Peleus's overall sort of plans versus what's going to happen in '07. By virtue of starting late, we will be -- we expect that we will be heavily US dominated in our portfolio. That's at least as much a function of what kind of business renews in the middle of the year as anything else.

Going forward, I would expect Peleus will have a broadly diversified -- geographically speaking, a broadly diversified portfolio of risk. What that means is the US is certainly the largest zone, but it sort of tracks insured value, which tracks GDP.

Okay. Thanks.

Sure.

And next we'll take a question from [Aidan Debrenner] with Morgan Stanley.

Hi, Jeff. Hi, Bob.

Good morning.

Good morning.

Just, Bob, to say the number again with regards -- the '05 reserves have now been paid down [accumulatively] -- I thought you said 71%.

Yes. That's 71%. Correct. Of the total KRW ultimate loss amount.

Yes. Is that the -- is that more than you would have expected at this point? It jumped up a lot, because you were at what, 57% at Q4, at the end of last year?

At 12/31/06, you're saying?

Yes.

No. To be honest with you, Aidan, that number, in terms of what we paid in the quarter on KRW, we kind of came along right in line with what we expected. And our expectation was based upon historical payout patterns on these events.

Okay. Thank you.

Okay.

And at this time, it appears we have no further questions. Mr. Radke, is there anything further you wanted to add?

Just thank you very much for your time. We look forward to keeping you advised as to the progress we're making on the transaction. Thank you very much.

And that does conclude our conference. Again, thank you all for your participation today. We do hope you enjoy the rest of your day.